Craig J. Bellanger, Acting Director, Employee Plans Examinations, IRS, made the opening presentation to NIPA’s 2010 annual forum & expo in Las Vegas in May. One item that quickly got the attention of his audience was news of an IRS random mailing to the sponsors of 1,200 401(k) plans. Those mailings, he said, will be designed to collect compliance information that presumably will lead to more focused IRS audits of retirement plans. As a side note, the IRS recently announced an audit program focusing on executive pay and unrelated business income at 30 colleges and universities. These audits follow a similar random mailing to 400 of these organizations. Plan sponsors should approach the 401(k) mailing cautiously.

Bellanger confirmed that the letters should go out toward the end of May and that plan sponsors receiving them were being asked to respond voluntarily – though it is being called an enforcement program. That is, the mailing does not technically constitute an audit nor is it a notice of an impending audit and, theoretically, a sponsor could ignore the mailing. However, he suggested that the IRS would like all recipients to “volunteer” a response.

We just reviewed the questionnaire -- some 46 pages. Except for sponsors that have sophisticated in-house administration, the plan’s third-party administration firm should be involved in responding. You can expect with almost full certainty that incorrectly answering some questions will result in prompt follow up by the IRS. Those responses will be sent to the IRS via the internet with each recipient receiving a personal identification number (PIN) to use when filling out the questionnaire online. We were told the recipients will have 90 days to complete the form following receipt, and if necessary can ask for an extension. Remember, this is all voluntary, right?

Some of the questions that were on the questionnaire are what you might expect to see where the IRS is measuring regulatory compliance. One such question is “8b. Enter the number of employees excluded from participation because of age and service requirements for each plan year listed below. If the answer is zero, insert ‘0’.” A similar compliance question is “8g. Enter the number of participants who made elective deferrals for each plan year listed below. If the answer is zero, insert ‘0’.”

However some questions are subjective, such as “10. In your opinion, how much impact does each factor have on participation levels in the 401(k) Plan? Using the scale below, enter the number corresponding to the level of importance on the line next to each factor listed below: (0 = No Opinion, 1 = No Impact, 3 = Moderate Impact, 5 = Great Impact).” The factors to be classified were: “age of employee, compensation level of employee, matching contribution, communication of the plan terms and options, business conditions, lack of employee control over investments, and access to funds during employment (e.g. loans, hardship distributions, and in-service distributions).”

One wonders where the IRS is going with responses from 10 and similar questions. Is there a “wrong” answer that could lead to further follow up? Probably not.

Here is another unusual question: “12. How frequently are participants allowed to change their deferral elections?” This might be linked to compliance with an ERISA 404(c) compliance issue, which is in DOL’s jurisdiction. Technically, the ability to change deferral amounts is different than the ability to change investments, which must be at least quarterly for 404(c) participant direction of investment.

One of the comments that Bellanger made during his presentation was that if the client found a problem with past compliance while they were filling out the questionnaire, then they ought to pursue correction under the IRS correction program known as EPCRS, and do it quickly. Because the receipt of this letter is not a notification of an impending audit, the plan is eligible to file under EPCRS even if the answer to the question indicates a violation. That correction should be completed with the 90-day period following receipt. With the response being via the internet, the IRS will be able to assess the responses very quickly.

As we noted above, most plan sponsors will need to engage a service provider to help complete the questionnaire. There are several questions similar to the following question that require some research. That is, you will not be able to just pull the information from the Form 5500. Here is one such question: “15b. Complete the table below for matching contributions. If the answer is zero, insert ‘0’.

2006 2007 2008

• Total dollar amount of elective deferrals discretionary match was made on
• Total dollar amount of discretionary match made to the Plan
• Total number of participants who received a discretionary match
• Total dollar amount of compensation of participants who received a discretionary match
• Total dollar amount of elective deferrals fixed match was made on
• Total dollar amount of fixed match made to the Plan
• Total number of participants who received a fixed match.”

Plan service providers will need to develop the appropriate response when a client calls upon receiving one of the letters. If the employer is hesitant on responding to this “voluntary notice,” you will need to prepare for your response. Anecdotally, we spoke with a TPA whose clients were “lucky” enough to receive one of the previous random IRS questionnaires on plan documents two years ago. The TPA stated that most of the plan sponsors did not understand why they were selected. Apparently, most thought that the TPA “messed-up” on their return and that had somehow triggered the mailing. All of the responses needed to be handled by the TPA and took a considerable amount of time for the TPA’s staff to complete. We didn’t ask if those services were billed to the client, but implicit from the conversation was that they were not billed.

As we go to press, we note that the House has passed a bill setting the stage for fee disclosures. The bill, The American Jobs and Closing Tax Loopholes Act (H.R. 4213), also includes a temporary easing of certain pension funding requirements and had previously been passed by the Senate. The House bill contains certain modifications to the Senate bill so it will need to be returned to the Senate for a reconciliation vote. The House-approved bill amends the Tax Code and ERISA to increase the disclosures that must be provided to plan administrators and to the plan’s participants.

Under the yet-to-be-enacted legislation, service providers to 401(k) and other defined contribution plans would be required to provide a written statement to the plan administrator describing the services to be provided and the total annual revenue to be collected by the service provider in connection with those services. These amounts are to be disclosed, either in dollar amounts or as a formula, and are to be provided before entering into any contract with the plan. The disclosures are to be provided annually thereafter, however, service providers with contracts less than $5,000 in the aggregate would be exempt from these disclosures.

We will have to wait until the bill gets final approval before reporting on it fully, however it is interesting to note that the new fee disclosures would be allocated among three classes of revenue:

• administration and recordkeeping services,
• investment management, and
• other services.

The House-approved bill also directs the Secretary of Labor to develop safe harbors and other guidance on the allocation of revenue among the categories.

This legislation is being pushed by Congress while the DOL works on its own proposed financial disclosures which appeared to be more encompassing. The DOL disclosures were expected by the end of May, but were not issued. These DOL regulations were developed under ERISA 408(b)(2) where penalties for noncompliance would result in the receipt of any revenues by the service provider treated as a prohibited transaction.

Apparently the mutual fund industry is not in support of the House legislation, and was prepared for the DOL regulation. Those regulations will likely be delayed as the DOL awaits for the possible enactment of the proposed legislation. Leaders in the mutual fund industry are reported to have commented that they really just want to get these issues put to rest, so that they can move on to other pressing items. Apparently, that’s not going to happen for some time.

The proposed legislation may have less onerous disclosures but the enacted provisions would apply to plans not impacted by any changes under ERISA 408(b)(2) – it would apply to non-ERISA plans such as local and state government retirement plans, including non-ERISA 403(b) and participant-directed 457 plans.

According to a posting on a TPA forum maintained by Datair, a pension software company, there may be some chicanery in solicitations of investment reviews. The post said that one employer had received a telephone call purporting to be from the Department of Labor, with a caller ID showing that the call originated from Washington, D.C. The caller said that the DOL wanted to do a 30-minute interview regarding the client’s benefit plan and investments. The caller said that the DOL “caller” wanted to do an investment review, as this is required “every two years.”  Another poster to the Datair site noted that several clients had received these calls, and a couple had recorded them.

One poster explained that this type of call is a marketing call intended to collect data regarding plan investments. The data is either sold to brokers or used for a follow-up call to set up an appointment for an investment review. Of course, the goal of this activity is to change the plan’s investment advisor and/or to move the plan to another investment vendor. Although the caller never expressly says that he or she is with the DOL, there is a strong suggestion that there is affiliation with the DOL. It is not clear whether the DOL is aware of this marketing effort using a purported connection to the Department, but we are not aware of any DOL statements regarding this type of information gathering.

Everyone should know that ERISA requires a written plan document. Most people know that the plan document must identify the persons who have authority to amend the plan and provide a procedure for amending the plan. What few people may know is that not following those procedures can invalidate an amendment. That was demonstrated in a recent case [Overby v. National Assoc. of Letter Carriers, et al.] where the court held that a failure to follow the procedure mandated by the plan will render an attempted amendment “inoperative.” This case involves the definition of a “surviving spouse” in a defined benefit plan, so the precise nature of the amendment is not particularly relevant to a 401(k) plan, but the primary holding of the court applies to all ERISA plans.

In the late 1990s, the plan informed Mr. Overby, a participant, that his spouse would not be eligible to receive benefits as a surviving spouse pursuant to an amendment purportedly adopted in 1985. Mr. Overby sued, arguing that the plan had not followed its procedure for amending the plan. This plan document contained a three-step process for such an amendment, with the trustees first submitting the proposed amendment to actuaries for an evaluation and estimate of its cost. The trustees then had to adopt the proposed amendment followed by the union’s executive council approving it. The district court determined that, based on the evidence before it, the trustees had not met the first requirement of an actuarial review. Accordingly, the court held that the proposed amendment “had not been validly adopted.” 

On appeal, the union challenged the finding that the actuarial review had not occurred and argued that the district court had erred in its conclusion that this failure invalidated the amendment, even if that failure occurred. The Court of Appeals for the D.C. Circuit disagreed with both of the union’s assertions. The Appeals Court found the burden on proving the first point to be “a daunting task,” and the court declined to overturn it. On the second point, the union argued that a “procedural irregularity” in the adoption of an amendment should not invalidate the amendment unless there is evidence of bad faith regarding the amendment procedure, active concealment of the amendment itself, or the plaintiff’s detrimental reliance on the plan’s procedures. The appellate court disagreed, noting that the Supreme Court has stated that whatever “level of specificity” a company chooses to include in its plan document, “it is bound to that level.”  The court also noted that virtually all of the appellate circuits have adopted this view; and, as a result, it declined to follow the one appellate case that held that bad faith was necessary to invalidate a plan amendment adopted in disregard of plan procedures.

The D.C. Circuit stated that the union gave it “no reason why we should treat the written procedures of the plan so lightly, nor can we think of any. An amendment procedure is there to be followed.”