Many individuals are involved in operating

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2 ERISA fiduciaries: A case law update Many individuals are involved in operating a qualified plan. Some are considered fiduciaries and others act under the direction of a fiduciary. This is an important distinction that all plan sponsors should understand. A couple of recent cases shed some light on who is and isn t a fiduciary. Defining a fiduciary Under ERISA, a person is a qualified plan fiduciary to the extent that person: 1. Exercises any discretionary authority or discretionary control over management of the plan or exercises any authority or control over management or disposition of its assets, 2. Renders direct or indirect investment advice for a fee or other compensation with respect to any plan money or other property, or has any authority or responsibility to do so, or 3. Has any discretionary authority over or discretionary responsibility for the plan s administration. Individuals who perform functions within guidelines established by the fiduciaries aren t considered plan fiduciaries themselves. Functions performed by nonfiduciaries might include maintaining participant employment records, explaining plan provisions to new participants, preparing plan reports, or processing claims. duty, claiming that the company had control over the revenue sharing the company received from the mutual funds offered in the 401(k) plan and thus was a fiduciary. Out of about 7,500 mutual funds on the market, the defendant s investment platform offered approximately 400 funds to its retirement plan customers. Each retirement plan sponsor, including the plaintiff, decided which of these 400 funds to offer to its employees. Participants then chose how to invest their individual dollars in the plan. Both state insurance law and ERISA required the defendant to separate retirement contributions from other assets. Thus, the defendant deposited the participants contributions into a separate account it owned and controlled. The defendant used the funds in the separate account to invest in the mutual funds selected by the plan participants and then it credited the investment proceeds back to the participants. According to the court, management or disposition of assets under ERISA s first criterion for being a fiduciary doesn t include a separate requirement of discretionary authority or control. ERISA states 2 Financial services provider In Leimkuehler v. American United Life Insurance Company, the U.S. 7th Circuit Court of Appeals had to decide whether a financial services provider was an ERISA fiduciary when it negotiated or received revenue sharing payments. The plaintiff (the plan trustee) sued the insurance company for breach of fiduciary

3 that an entity is a fiduciary only to the extent it exercises its authority or control. The U.S. Supreme Court has interpreted this as requiring that an entity exercise authority or control with respect to the action at issue in the suit to be liable as a fiduciary. Thus, in Leimkuehler, the defendant s control over the separate account would support a finding of fiduciary status only if the plaintiff s claims for breach of fiduciary duty arose from the defendant s handling of the separate account. However, the court found that the plaintiff couldn t show that the defendant had mismanaged the account. The plaintiff also contended that the insurance company acted as fiduciary because it had the authority to delete or substitute any of the 400 funds on their platform. However, the fact that the plan sponsor was the one to select the roster of investments actually offered to the participants ultimately led to the court s decision that the defendant wasn t acting as a fiduciary, and thus the court found in the defendant s favor. Company officers International Painters and Allied Trades Industry Pension Fund v. Clayton B. Obersheimer, Inc. addressed whether officers of a plan sponsor were plan fiduciaries. The plaintiffs were the pension fund and the fund s administrator. The fund covered participants whose employers contributed to the pension fund under labor agreements. The defendants were the officers of the collectively bargained companies whose employees were covered under the pension fund. According to the plaintiffs, the defendants, in their roles as officers of the company, exercised control and authority over the contributions (plan assets) until they were properly remitted to the pension fund, and were, therefore, ERISA fiduciaries. Specifically, the plaintiffs argued that, by delaying payment of their mandatory contributions, the defendants exercised discretionary control over the plan assets and became plan fiduciaries. Under ERISA, the Department of Labor (DOL) is responsible for defining plan assets. DOL regulations state that the Secretary of Labor may define plan assets in its regulations. While the regulations define Named vs. de facto fiduciaries Although most plans have multiple fiduciaries, every plan must have at least one. Plan documents can specifically name the plan s fiduciaries. A named fiduciary might be the employer sponsoring the plan or a committee composed of the company s officers. Named fiduciaries can also be outside service providers that manage the plan assets. Express designation as a fiduciary isn t necessary if a person s actions establish de facto fiduciary status. For example, courts have found de facto fiduciary status when a third-party administrator exercised authority over the disposition and management of plan assets and when a person had power over plan withdrawals. However, an individual s status as an officer alone doesn t make that person an ERISA fiduciary. Regardless of position, each person (or entity), acting in the capacity of plan fiduciary, has the ultimate responsibility for plan operation that is consistent with the best interests of each plan participant and beneficiary. certain types of plan assets, they don t contain a general definition of plan assets or define when employer contributions become plan assets. A number of cases have found that employer contributions aren t considered plan assets until after they ve been paid, but the trust agreement governing the plan in International Painters stated that unpaid contributions were plan assets while still unpaid. However, the court ruled in the defendants favor. None of the plan documents submitted by the plaintiffs specifically designated the officers as fiduciaries, and none of the defendants actions demonstrated how the officers exercised discretionary authority or control over the plan assets. In addition, the court found that an employer isn t automatically a fiduciary when it breaches an agreement to make employer contributions. Avoid personal liability Plan fiduciaries must follow strict standards of conduct set forth in ERISA. While the courts ruled that the defendants in these cases were not acting as fiduciaries, it s important to remember that plan fiduciaries may be subject to personal liability for failure to meet ERISA standards. 3

4 Upcoming compliance deadlines: COMPLIANCE ALERT 2/28 Deadline for filing paper 2013 Form 1099 with IRS (electronic filing deadline is April 1) 3/15* Deadline for making corrective distribution for failed 2013 actual deferral percentage (ADP) and actual contribution percentage (ACP) tests without 10% excise tax penalty 3/17** Deadline for filing 2013 corporate tax return and making contributions eligible for deductibility without extension 4/15 Deadline for corrective distribution of (g) excess deferral failures 4/15 Deadline for filing 2013 individual and/or partnership tax returns and making contributions eligible for deductibility * Although March 15 is a Saturday, the IRS generally hasn t extended this date in past years. ** This date reflects an extension of the normal deadline, which falls over the weekend this year. How much is too much? Salary deferrals in multiple retirement plans 4 When employees change employers, they may be eligible to defer compensation in more than one qualified retirement plan. The IRS sets the individual limit employees may defer as pretax or Roth contributions each calendar year to all of their employer-sponsored plans. But the specific rules vary a bit depending on the type of plan. The basic rules The IRS aggregates the deferral amount for employees who participate in more than one of the following: K 401(k) plans, K 403(b) plans, K Savings Incentive Match Plans for Employees of small employers (SIMPLEs), and K Salary Reduction Simplified Employee Pension plans (SARSEPs). In 2014, the cumulative limit for contributions to these plans is $17,500. Participants age 50 or older may contribute an additional $5,500 catch-up, for a total of $23,000. For example, Jane is under age 50 and defers $3,000 in pretax and Roth contributions to Company A s 401(k) plan in Jane terminates employment with Company A and starts working for Company B. At Company B, she starts deferring to her new employer s 401(k) plan. The maximum that Jane may defer to that plan in 2014 is $14,500 the $17,500 limit reduced by the $3,000 that she already deferred to Company A s 401(k) plan in (Note that the limits for contributing to SIMPLEs specifically are lower: $12,000, with a $2,500 catch-up.) 403(b) plans 403(b) plans have distinct rules for catch-up contributions. If an employee participates in a 401(k) plan and a 403(b) plan and the 403(b) plan document doesn t allow for catch-up contributions,

5 the participant can still contribute the maximum of $23,000. Some 403(b) plans also have what is known as a 15-year catch-up contribution. This increases the individual limit by up to another $3,000, if the participant works for the same employer for 15 years. For example, if the participant is age 50 or older in 2014 and participates in both a 401(k) and a 403(b) plan, he or she may contribute $23,000 in total to both plans, plus an additional $3,000 to the 403(b) plan. The plan document must provide for this additional catch-up, however. Note that the 15-year catch-up is separate from the age-50+ catch-up. If the 403(b) plan allows both types of catch-up contributions and the employee is eligible the IRS considers contributions above the annual limit to have been made first under the 15-year catch-up. 457(b) plans 457(b) retirement plans are available to certain state and local governments and tax-exempt nongovernmental entities. If a participant is eligible to defer to a 457(b) plan, the basic annual limit isn t reduced by contributions made to any other type of retirement plan. So, for example, employees participating in both a 457(b) plan and a 401(k) or 403(b) plan may contribute up to $17,500 to each plan in 2014 subject to plan rules for a total of $35,000. Governmental 457(b) plans can allow catch-up contributions up to the $23,000 limit in However, tax-exempt organization 457(b) plans can t allow catch-up contributions. But for both governmental and tax-exempt organization 457(b) plans, participants may apply for a special catch-up arrangement when they re within three calendar years of normal retirement age. The additional deferrals must be made within the last three calendar years preceding the year of normal retirement age set by the plan. Lower limits Some retirement plans may set a contribution limit that s less than the IRS limit. Although not common, some employers choose to do this to help them comply with nondiscrimination rules. If an employee participates in more than one plan with a lower limit, this may also reduce his or her total limit below the IRS limit. For example, Joe is over age 50 and participates in two 401(k) plans. Each plan limits salary deferrals to the lesser of $5,000 or 100% of eligible compensation. Joe s eligible compensation is $12,000 for each plan, and under IRS rules Joe can defer $23,000 for 2014 ($17,500 plus the $5,500 catch-up limit). However, Joe may only contribute $5,000 to each plan because the plans have set lower deferral limits. Consequences of overcontributing If a participant exceeds the individual limit for a calendar year and the plan administrator doesn t return the excess by April 15 of the following year, the participant may be subject to double taxation. Participants are responsible for keeping track of their deferral amounts and letting the administrator know if they have exceeded the limit. The excess amount is first taxed in the year the participant deferred it, and it s taxed again when the participant receives a distribution. One big sum Employees are on the move more and more. The odds that one of your employees has made contributions to another qualified plan are high. Make sure you understand the rules so you re ready to answer questions about just how much is too much. 5

6 Retirement plan spousal beneficiary designations IRS ends automatic revocations on legal separation Plan sponsors have to deal with change-ofbeneficiary forms many times. In some cases, those changes are made because the participant is either legally separated or divorced. And for plans that have automatic revocation provisions, the IRS has clarified that these provisions can t be triggered by legal separation. The clarification Qualified preretirement survivor annuity (QPSA) rules require qualified retirement plans to provide a written statement to participants explaining that the plan will distribute at least 50% (100% for profit sharing plans) of the death benefit to a deceased participant s surviving spouse. This spousal benefit is mandatory unless it s been waived by the participant with his or her spouse s consent. According to the IRS, although a legally separated participant can waive the spousal death benefit without spousal consent, a plan s automatic revocation language, by itself, doesn t satisfy the waiver rules. Sometimes plan documents contain language automatically revoking spousal beneficiary designations when a participant becomes legally separated or divorces. The IRS has clarified that legal separation only eliminates the requirement that a participant obtain spousal consent to waive the spousal death benefit and name another beneficiary. Unless the participant actually waives the death benefit and designates another beneficiary, the spousal death benefit must still be distributed to the separated spouse. According to the IRS, although a legally separated participant can waive the spousal death benefit without spousal consent, a plan s automatic revocation language, by itself, doesn t satisfy the waiver rules. Therefore, under the QPSA rules, language that attempts to automatically revoke a spousal beneficiary designation has no effect on the legally separated spouse s rights to death benefits. As a result of this clarification, the IRS will no longer allow preapproved plans to include language automatically revoking a spousal beneficiary designation on legal separation. For individually designed plans with this language, it must be 6

7 deleted or participants must be notified that it doesn t change a legally separated spouse s right to QPSA death benefits. What about divorced participants? Plan documents can continue to provide for automatic revocation of spousal beneficiary designations upon divorce. The next steps Review your plan document and summary plan description for correct language and make any necessary amendments. Check your participant beneficiary forms and update them as needed. Then review administrative procedures to make sure everyone involved in the process is aware that the spousal beneficiary designation can t be automatically revoked for a legally separated spouse. Finally, notify legally separated participants that they must waive the spousal benefit and name another beneficiary, or the spousal benefit will still be paid to the separated spouse should the participant die before the divorce is final vs retirement plan limits Type of limitation 2013 limit 2014 limit Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $ 17,500 $ 17,500 Annual benefit for defined benefit plans $ 205,000 $210,000 Contributions to defined contribution plans $ 51,000 $ 52,000 Contributions to SIMPLEs $ 12,000 $ 12,000 Contributions to IRAs $ 5,500 $ 5,500 Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $ 5,500 $ 5,500 Catch-up contributions to SIMPLEs $ 2,500 $ 2,500 Catch-up contributions to IRAs $ 1,000 $ 1,000 Compensation for benefit purposes for qualified plans and SEPs $ 255,000 $260,000 Minimum compensation for SEP coverage $ 550 $ 550 Highly compensated employee threshold $ 115,000 $115,000 This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use EBUfm14 7