On December 20, 2006, the Department of Labor’s Employee Benefits Security Administration gave plan administrators a present in the form of Field Assistance Bulletin (FAB) 2006-03. This FAB provides general guidance regarding new participant notice requirements in the Pension Protection Act of 2006. These changes are effective for plan years beginning after December 31, 2006.

PPA § 508(a) made a number of significant changes to ERISA’s participant notice requirements. The most important change is an affirmative obligation to automatically furnish benefits statements. Plans with individual accounts that allow participant direction of investments must provide a benefit statement at least once per quarter. Other individual account plans must provide a benefit statement at least once a year. Defined benefit plans must provide a statement at least once every three years. Plans are also required to increase the information contained in benefit statements. In addition, the PPA requires DOL to provide model benefit statements by August 18, 2007.

According to the FAB, these requirements have generated considerable concern among plan administrators, service providers, and others. In response, the FAB states that the DOL will treat a plan administrator as satisfying the section 105 notice requirements “. . . if the plan administrator has acted in good faith with a reasonable interpretation of those requirements.” The FAB then addresses several questions regarding those requirements.

First, the FAB states that pending DOL guidance, good faith compliance “does not preclude the use of multiple documents or sources for benefit statement information.” The FAB adds an important provision: recipients must be given an explanation of how and when the required information will be furnished. This explanation must be written in a manner that the average participant can understand and provided before the date the plan must provide its first enhanced benefit statement.

Second, the new statute permits the use of electronic or other means to provide the required information, and the DOL has a “safe harbor” regulation regarding electronic communications. The FAB notes that the Treasury and the IRS recently issued their own safe harbor regulation regarding use of electronic media. Pending its review of this regulation, the DOL will consider benefit statements issued in accordance with the Treasury regulation as good faith compliance with the new notice requirements.

Third, the FAB addresses the timing of the benefit statements. For plans with participant-directed investments, a calendar year plan would have to provide a statement for the quarter ending March 31, 2007. If the plan does not have participant direction, the first statement for a calendar year plan would cover the 2007 plan year. A statement furnished within 45 days of the end of either the calendar quarter or plan year, as applicable, will “constitute good faith compliance.” For defined benefit plans, the first required statement would cover the 2009 plan year.

Fourth, the FAB states that a participant loan provision does not mean that participants have the right to direct investments of their accounts.

Fifth, for now, benefit statements must describe limitations on participant investment direction imposed by the plan, but not limitations imposed by “investment funds, other investment vehicles, or by state or federal securities laws.”

Sixth, the FAB includes model language regarding the importance of a well-balanced diversified portfolio.

Seventh, the FAB discusses good faith compliance with the PPA provision requiring a plan to diversify investments in employer securities.

Finally, the FAB includes a Web site address how to comply with a new PPA requirement. Unfortunately, an early version of the FAB appeared to include a flawed address. The correct address is included in the version of the FAB on the EBSA Web site and is:
http://www.dol.gov/ebsa/investing.html.

Buried in Notice 2007-03 (discussed on page 10), are statements on guidance that the IRS expects to issue soon regarding changes in the Pension Protection Act of 2006. The following chart provides the key information regarding these provisions. The first three are of particular interest of 401(k) sponsors—hard- ship distributions to beneficiaries, the ability of non-spouse beneficiaries to roll over death benefit provisions, and faster vesting of employer nonelective contributions. According to the Notice, the last two items will be included in the final regulations pertaining to IRC § 415, which are also expected “soon.”

Relatively small mistakes by participants during the completion of a beneficiary designation can pose big problems for 401(k) administration, plan administrators and those charged with managing benefits. These errors can easily result in large expenditures when it comes time to pay a beneficiary. If plan administrators do not provide clear and concise instructions on completing the form, they can find themselves in the middle of family feuds and possibly defending a civil suit. Beneficiary designations may seem straightforward, but with a move to electronic administration, the possibility for miscues and misunderstandings can be greater.

The case of Robinson v. MeadWestvaco Corp. provides a cautionary tale of unclear beneficiary designation instructions involving a former spouse and children. In Robinson, the deceased employee-participant designated in writing his sister as the sole beneficiary of his 401(k) plan account. Eventually, MeadWestvaco amended the plan to accept solely the electronic submission of changes in beneficiary designations. The children of the participant asserted that at one point during his life, the participant logged onto the appropriate website and was confronted with the following text:

“Note: Beneficiary elections previously made on paper will no longer be valid. The elections made on this site, or through the Benefits Resource Center will take precedence over all other previous beneficiary elections.”

A linked page of the website entitled “Naming a Beneficiary” stated:

“If you haven’t named a beneficiary, and you’re not married, your account is paid in this order when you die: (1) your children, in equal shares (2) your parents, in equal shares; (3) your siblings, in equal shares, and (4) your estate.”

Upon the participant’s death, the children of the participant sued the plan arguing that the participant viewed the website and believed his initial beneficiary designation was invalid and that his beneficiary designation defaulted to his children.

After much legal maneuvering, the court determined that the original beneficiary designation was the correct one, and thus the children were not entitled to any of the proceeds from the retirement plan. While many may believe the correct outcome was eventually reached, the case shows exactly why the exact provisions of the plan need to be set out in clear and concise language with as little chance for creating participant ambiguity as possible.

To prevent any participant uncertainties regarding beneficiary designations, plan administrators should encourage plan participants to periodically review their beneficiary designation.

Beginning in the first plan year after December 31, 2006, the PPA requires that plans apply a shortened statutory vesting schedule for both employer and 401k matching contributions. Previously a plan could apply a 5-year cliff vesting, or 3- to 7-year graded vesting to non-matching contributions. These vesting options are now replaced with a 3-year cliff, or 2- to 6-year schedule (e.g., the top heavy vesting schedule). Thus, matching and non-matching contributions will be subject to the same requirements, with an exception.

The new vesting schedule for non-matching contributions may be applied on a bifurcated basis. That is, contributions made for plan years prior to the 2007 plan year can be subject to the old vesting schedule with contributions made after 2006 under the shorter schedule. A plan amendment made to satisfy the new vesting rules could, of course, be written to apply the shortened schedule to all non-matching contributions. That probably makes sense for most plans. If a plan does adopt the bifurcated vesting, the Notice provides that a contribution is a pre-2007 contribution (i.e., not subject to the new PPA vesting rules), for the plan year for which those contributions are allocated.

Employers will need to apply the statutory notices to participants where the new vesting schedule is less favorable than an existing schedule. This will generally not occur. An employer may also elect to limit the new vesting provisions to only individuals who are credited with one year of service after the start of the 2007 plan year.

North Carolina is not necessarily known as trendsetter, but it may be on the leading edge of a troubling new trend. Last May, Philip Morris reported that it had fired 14 employees working at a North Carolina plant for taking out hardship withdrawals for homes that were not listed on their hardship applications or for using the distributed funds for purposes other than buying the home they said they intended to purchase. Additional inquiry revealed that the company dismissed more than 70 employees at this plant because of falsification of applications for hardship distributions. Philip Morris employees in Richmond, Virginia were reportedly also dismissed for similar reasons.

Now come media reports that 15 employees of the Department of Transportation for Charlotte, North Carolina, were suspended without pay due to improper hardship withdrawals from their 401(k) plan. Apparently, another co-worker provided advice on the preparation of the hardship applications. That worker was also suspended. The city’s human resources director told the press that some or all of these workers may be fired. The city learned of potential problems with the distributions from the plan’s investment provider. Some of the suspended employees may have had legitimate reasons to receive a hardship distribution but failed to follow proper procedures.

Meanwhile, an arbitrator has been conducting hearings regarding whether the disciplined Philip Morris workers should return to work. According to media reports, a Philip Morris representative said that the company considers that any falsification, misstatement, or omission of information related to plan transactions may be cause for dismissal. Former workers have said that they were assured that they would not lose their jobs for using the money in a different way from what they had stated on their hardship applications.