We have just completed an update of our guide on Roth 401(k)s. Contact our office for a copy of the 20-page booklet that was written to address the administrative issues relating to operating a 401(k) with a Roth contribution. Contact Janet Panebianco or your contact at Matthews Benefit Group, Inc.

With the deadline for providing the second quarterly participant statements rapidly approaching for many 401(k) plans, none of the DOL guidance released to date fully answers critical questions on how to comply with this new law. There are still many questions that are unanswered. The new participant statement requirement first applied to defined contribution plans allowing participants to direct the investment of their account balances in 2007. Other defined contribution plans with trustee directed investments will not be subject to the DOL guidance until the end of the first plan year beginning in 2008. Thus, the first required statement for calendar year 401(k) plans with participant direction was due for the quarter ending March 31, 2007; the same requirements apply for reports due on the quarter ending June 30.

Quarterly and annual benefit statements generally must include: (i) the value of the participant's total account balance, (ii) the extent to which the participant is vested in this amount (or the date the participant will become vested), (iii) if applicable, an explanation of how the plan incorporates Social Security or a floor-offset into how benefits are determined, and (iv) the value of each of the investments allocated to the participant's account.

Statements for defined contribution plans that allow participants to direct the investment of their accounts must also include: (i) an explanation of the plan's limitations or restrictions on the right to direct investments, (ii) an explanation of the importance of a diversified and well-balanced investment portfolio, and (iii) a notice directing participants to the DOL's website for information on individual investing and diversification. The DOL has provided safe harbor wording for meeting the second item listed above.

A plan that does not otherwise provide participant direction, but allocates the interest paid on a participant’s loan to the participant’s account, does not cause a plan to be treated as participant directed. However, if a plan with participant direction permits participants to direct the investment of their accounts, then that plan must treat the right to make a participant loan as a participant directed investment. Then the quarterly statement must provide information on any restrictions applicable to obtaining a plan loan. And finally, the statements need not describe limitations or restrictions on investment direction imposed by law or by an investment fund under the plan, just the restrictions imposed by the plan or plan administrator.

The Pension Protection Act requires the DOL to provide model benefit statements by August 18, 2007, some three months after the date when the first quarterly statement is due. Until that guidance is issued, the DOL has indicated that a plan sponsor will be treated as satisfying the new benefit statement legislation if the plan sponsor follows the guidance in Field Assistance Bulletin 2006-03. Here are some of the more critical points discussed in that guidance.

Form of Statement:The required form of the statement need not be contained in a single document. Thus, a plan sponsor could meet the requirement with two or more separate documents. If separate documents are used, then participants must be given advance notice explaining how and when the required information will be furnished or made available.

Distribution of the Statements:Participant statements may be distributed in written, electronic, or other forms, provided that the form is reasonably accessible to participants and beneficiaries. The guidance states that giving the participant continuous access to account information through one or more secure websites is one way to satisfy the good faith standard for compliance as long as participants are given an explanation of the availability of the account information and if desired, how to obtain it in a written form.

The DOL Website:The DOL website that you will include in benefits statements for defined contribution plans with participant direction is www.dol.gov/ebsa/investing.html.

Date for distribution:The DOL guidance allows 45 days after the quarterly or annual reporting date to distribute the information. For a calendar year 401(k) plan with participant direction, that is May 15, 2007 (45 days after March 31, 2007). For other calendar year defined contribution plans the due date is February 15, 2008. That will help keep you occupied while you are waiting for information on your ADP and ACP testing.

You might be wondering what will actually be distributed by these early due dates, and legislation guidance gives plan sponsors some latitude. They can distribute the most recent account information “even if a year old,” but you still need to provide the information on diversification, social security integration or a floor offset if applicable, and direction to the DOL’s web site. Of course, all this could change with future guidance or legislation driven by sponsors frustrated with delay with the new requirements.

We’ll bet that lots of participants will get outdated and otherwise useless information.

On the heels of his Oscar winning climate-change documentary, An Inconvenient Truth, former Vice President Al Gore recently spoke with the attendees of the National Association of Pension Funds conference in Edinburgh, Scotland. In his keynote address, Gore urged that trustees consider sustainability factors when trustees elect funds with which to invest plan dollars stating, “If you do truly invest on a long-term basis, then it’s easy and more profitable to fully integrate sustainable factors into your analysis.”

While the accuracy of Gore’s financial analysis warrants debate, it would certainly be prudent to remind American trustees of the requirements of ERISA §404(a) for choosing funds in which to invest ERISA plan money. For any privately run retirement system to work effectively, to achieve the ultimate goal of ensuring a comfortable retirement, it requires those who would make decisions on behalf of the plan to act in a way that solely benefits the plan, even though it may damage the individual representative personally. Section 404(a) of ERISA provides that plan fiduciaries discharge their duties for the sole purpose of providing benefits to participants with the care and skill that a prudent man familiar with such matters would act.

In addition to the statutory requirements concerning investment choices, the DOL issued an Advisory Opinion on May 28, 1998, concerning investing in “socially-responsible” funds and the potential impacts such investments may have on a trustee’s fiduciary duty.

“Socially-responsible” funds are funds that are registered with the Securities and Exchange Commission under the Investment Company Act of 1940. These funds are generally designed to achieve an investment goal as well as making a significant contribution to society through the products the companies that comprise the fund make as well as “bettering” the world through the business practices of these companies. Social criteria can vary from fund to fund and be as diverse as “environmentally friendly” or eschewing the use of third-world sweatshop labor factories.

In the ordinary course of plan decision making, the fiduciary must consider only factors that will enhance the plan participant’s account upon retirement, taking into account such factors as liquidity, diversification, and fund risk. In the DOL Advisory Opinion, the Department states that the fiduciary standards required by ERISA do not preclude the consideration of collateral benefits entwined in “socially-responsible” funds. However, these collateral benefits can only be decisive in the decision to invest if the investments are expected to provide a return akin to traditional investments with similar profiles as those that would be considered under the traditional method of picking plan investments.

Thus, those fiduciaries who are considering the lessons preached by former Vice President Al Gore should remember that a personal belief in being “socially-responsible” cannot trump their fiduciary duties to provide solely for their participants’ retirements.

As a general rule, ERISA qualified plans cannot require that employees be older than 21 or complete more than one year of service to become an eligible participant under the retirement plan. However, an ERISA plan may be written to exclude a class of employees meeting the age and service requirement as long as the group satisfies certain minimum coverage requirements under IRC §410(b). To meet this requirement the excluded group must constitute a “reasonable classification” found not to be discriminatory in favor of highly compensated employees.

While some exclusions may constitute, on their face, reasonable classifications, certain plan restrictions are treated as imposing an impermissible age or service requirement that exceeds age 21 or 1 year of service. For example, an exclusion that requires that a person have their driver’s license for 15 years before they can become a plan participant will be treated as an age requirement in excess of the allowed maximums. Additionally, a plan that has a 1000 hour requirement for participation but excludes "part-time" employees will not meet ERISA qualification as there may be instances where part-time employees will otherwise meet the 1000 hour requirement.

Even if the exclusion does not result in the actual exclusion of any employees who have met the base service and age requirements, Treasury Regulation 1.410(a)-3(e) states that a plan that includes any age or service requirements that COULD result in an impermissible age or service requirement should be considered as containing an improper exclusion. An IRS Quality Assurance Bulletin, FY-2006 No. 3, has asked plan specialists to closely scrutinize plans that have exclusions labeled “part-time,” “seasonal,” “temporary” or any other reference that may be an impermissible exclusion. Specialists are now encouraged to require that any plan with a suspect classification that may impose an impermissible age or service requirement more clearly define their classification.

In addition to openly questioning age and service requirements that contain suspect classifications, IRS Publication 794 states that any determination letters that have been issued cannot be relied upon in reference to exclusions imposing impermissible age or service requirements. By openly stating that plans may not rely on determination letters if the classification is an indirect age or service requirement, both in-patient and outpatient medical facilities will find themselves potentially straddling the line of what the IRS may find an acceptable exclusion and disqualifying exclusion.

Many medical facilities have staffs that necessarily only work part-time hours. Some staff may only work weekends and others may only work part of the night shift. If the facility excludes these employees fully believing that it is a reasonable business classification, it is not beyond imagination that upon audit the IRS would find itself questioning that exclusion. If the medical facility happens to exclude all employees who are "part-time" through these classifications, the IRS may have a stronger argument for disqualification of the plan than it would if the plan did not exclude some groups of part-time employees.

This provides for a definite problem with the IRS’s new position. Many times these exclusions are completely reasonable business classifications. The very low standard of disqualifying a plan merely if a plan could violate the minimum age and service requirements means that the IRS may be punishing plans that had no malicious intent in the designation of its exclusions.

If there is some question as to whether the IRS would take issue with a plan’s exclusions, the plan can define these groups as it normally would, but caveat their exclusion by allowing those in these questionable exclusions who reach 1000 hours to participate. This would prevent the IRS from disqualifying a plan because its exclusions could pose an impermissible age or service requirement, as those in these questionable groups would, by definition of the exclusion, not be in the excluded group.

While it is always appropriate to review your plan for potentially disqualifying issues, employers that have a great number of employees who are excluded by their job classification may want to review the wording of their exclusions to ensure the IRS cannot take any disqualifying action in case of a plan audit.