Employee Benefits Alert - Summer 2011

New Nondiscrimination Rules for Insured Health Plans – Good News & Bad News

First, the good news. In Notice 2011-1, the IRS announced an indefinite postponement of the new nondiscrimination requirements for employer sponsored insured group health plans. Implementation will be pushed back until after the IRS issues final regulations under the Patient Protection and Affordable Care Act (the PPACA), aka Obama-Care, which will follow the issuance of proposed or interim final rules and a public comment period.

The bad news is that, once implemented, the new nondiscrimination requirements will significantly change the landscape for employer sponsored group health plans. Until this change, employers have been allowed to offer more valuable health insurance coverage to their executive and/or highly compensated employees than that provided to rank and file employees, including paying higher premium subsidies. Once the nondiscrimination requirement becomes effective, insured health plans will be prohibited from discriminating in favor of highly compensated individuals with regard to eligibility to participate or with regard to the type and extent of benefits provided under the plan.

Employers who currently offer health plans that extend only to owners, executives or other key employees, or who provide employer contributions to any highly compensated individual higher than those that are extended to rank-and-file employees, may find themselves in violation of the nondiscrimination requirement.

Employers with any doubts about their health plans’ grandfathered status should act sooner rather than later to determine if any changes to their existing arrangements will be necessary in order to comply with the nondiscrimination rules.

Again, the good news is that the IRS announced that implementation of the Obama-Care health plan nondiscrimination requirement would be postponed indefinitely, pending issuance of regulation under the new law. Stay tuned for future developments.

DOL Finalizes Disclosure Requirements for Fiduciaries of Participant-Directed Individual Account Plans

On October 20, 2010, the U.S. Department of Labor (DOL) issued long-awaited final regulations under the Employee Retirement Income Security Act of 1974 (ERISA) setting forth new fiduciary obligations regarding disclosure of plan fees and expenses to participants and beneficiaries in participant-directed individual account plans, such as 401(k) plans.

The regulations go into effect on January 1, 2012 (for calendar year plans), and compliance with the regulations is mandatory for all participant-directed plans (other than IRAs, SEPs, and SIMPLEs). The first of the required disclosures must be made by the 60th day of the applicable plan year.

The regulations require two categories of fee-related disclosures:

  • General plan information: These disclosures cover plan-specific information relating to plan investment options and expenses, including identification of all plan investment alternatives, a description of any brokerage windows or similar arrangements, a list of general plan administrative expenses, and a list of any individual expenses (such as fees to process a loan or QDRO request) that are not reflected in the investment alternatives themselves.
  • Specific investment information: These disclosures cover fees and performance data of each investment alternative available under the plan (excluding brokerage window arrangements). Specific fee and performance data is required to be listed in a comparative format showing an annual percentage and dollar amount of fees for a $1,000 investment. These disclosures should be provided to new participants as part of their enrollment materials, and must be re-distributed on at least an annual basis.

The disclosures can be made as part of the Summary Plan Description or as a separate mailing, and in some cases may be provided through electronic format such as e-mail or intranet. Additionally, statements disclosing actual individual expenses charged to each account must be provided on a quarterly basis.

The DOL has included form disclosures that plan sponsors should generally want to emulate as closely as possible, so drafting the forms will not be a difficult process. Obtaining the necessary information from the investment providers may take time, however. Plan sponsors should begin preparing now in order to be positioned to provide initial disclosures by the beginning of the 2012 plan year.

Guidance on In-Plan Roth Rollovers

On November 26, 2010, the IRS issued guidance on how plan participants can make in-plan rollovers from a 401(k) or 403(b) plan (non-Roth account) to a designated Roth account in the same plan—an option added by the Small Business Jobs Act of 2010 [H.R. 5297]. This guidance includes a requirement that employers who wish to allow in-plan Roth conversions must adopt a plan amendment to that effect no later than December 31, 2011.

Amendment to Plans

In order to effectuate this new option, existing plans will need to be amended to specifically allow in-plan Roth conversions.

  • 401(k) plans have until the last day of the year in which the amendment is effective or December 31, 2011, whichever is later.
  • Safe harbor 401(k) plans have until the later of the day prior to the first day of the plan year in which the safe harbor plan provisions are effective or December 31, 2011.
  • 403(b) plans have until the later of the plan’s remedial amendment period or the last day of the first plan year in which the amendment is effective.
  • 457(b) government plans may adopt amendments to include a designated Roth account after December 31, 2010, and then allow in-plan Roth rollovers.

Tax Issues

In-plan Roth rollovers will not be subject to the 10% additional tax on early distributions under Code § 72(t). Additionally, an in-plan Roth direct rollover will not be subject to the mandatory 20% withholding under Code § 3405(c).

A special recapture rule will apply when a plan distributes a part of the in-plan Roth rollover within five taxable years of the rollover, thus making the distribution subject to the 10% additional tax on early distributions under Code § 72(t) unless an exception to this tax applies or the distribution is allocable to a nontaxable portion of the in-plan Roth rollover.

The advantage of an in-plan Roth rollover is that a participant in an employer sponsored 401(k) or other qualified plan can establish a Roth account and continue to utilize the plan’s investment options and electronic platform, etc., without having to take an in-service withdrawal and establish a separate Roth-IRA. In-plan Roth rollovers, for those plans that offer them, have the advantage of convenience and simplicity for the participant.

Practical Issues

Although the Small Business Jobs Act allows an employer sponsoring a 401(k) or other qualified plan to amend its plan to add an in-plan Roth rollover feature now, implementation of such feature might be delayed due to the abilities of the plan’s record-keeper and administrator. The Small Business Jobs Act left a lot of gaps in providing for the nuts and bolts of how this new rollover feature will operate. IRS Notice 2010-84 helped fill in these gaps; however, there may still remain a delay in implementation of in-plan Roth rollovers.

ERISA Fiduciary Redefined

The Department of Labor (DOL) issued a proposed regulation in November 2010 that would change the definition of fiduciary under ERISA. The proposed regulation impacts: (1) traditional financial advisors, such as stock brokers and money managers, etc.; and (2) valuation consultants for ESOPs.

The DOL’s rule redefining fiduciary under ERISA § 3(21)(A) carries implications for 401(k) plans. Under the old definition there is a five-part test for determining if an advisor is giving investment advice and, thus, qualifying as a fiduciary.

However, the new rule has a more inclusive definition of investment advice, therefore expanding the pool of advisors to a plan which will now be fiduciaries. Instead of having to meet all five elements of the former test, now an advisor must only satisfy one of the types of advice to be considered a fiduciary (while also still receiving a fee).

An advisor will be rendering investment advice whenever he or she:

  • Gives advice or recommendations as to management of securities or other property; or
  • Gives advice not only to the plan, but to a plan participant or beneficiary; or
  • Gives appraisals or valuations of plan assets or property; or
  • Is an investment advisor, as defined by the Investment Advisors Act of 1940.

These categories are to be applied liberally as the DOL intends broad coverage to create more ERISA fiduciaries.

Along with the elimination of the requirement that the advice must be given on a regular basis, the new rule would eliminate the requirement of a mutual understanding between the parties that the advice given will serve as a primary basis for plan investment decisions. Therefore, an advisor sending a proposal to a 401(k) plan trustee will now be providing investment advice. These sorts of communications will subject advisors to ERISA fiduciary liability even if the advisors have no intention of providing the materials as a basis for investment decisions.

The DOL’s rule also exposes ESOP valuators to potential liability as ERISA fiduciaries. The proposed regulation would redefine the definition of investment advice under 29 CFR 2510.3-21(c) and, thus, expand the definition of fiduciary.

The rule reverses 35 years of DOL policy that valuators of ESOP stock were not fiduciaries to the ESOP. Particularly, the new rule extends the definition of investment advice to specifically include a valuation of closely-held employer securities which an ESOP is required to obtain annually in addition to valuation appraisals and fairness opinions conducted during ESOP transactions.

Now, ESOP valuators would be fiduciaries to the ESOP—just as the ESOP trustee—and, thus, subject to ERISA fiduciary duties and liabilities. Most notably, this extension of liability exposes ESOP valuators and their opinions to potential lawsuits for losses sustained by a plan due to violations of ERISA. All of the effects of this proposed rule are unclear. The effective date of the new regulation, as it relates to ESOP valuation consultants, has been delayed indefinitely.

In sum, under this new DOL rule, if issued in its current form, ESOP valuators providing valuations and fairness opinions will be considered ERISA fiduciaries and subject to fiduciary duties and liability. Additionally, advisors to 401(k) plans that traditionally were outside of the definition of providing investment advice will now be considered fiduciaries to the plan under ERISA and, thus, subject to ERISA fiduciary liability for any sort of advice given to the plan or plan beneficiary. ERISA plaintiffs’ attorneys will be happy with this new regulation.

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances.


The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2017.

Search News