Federal court blocks implementation of DoL’s overtime rule

A federal district court has blocked implementation of the Department of Labor’s overtime pay regulation that was set to take effect on December 1, 2016 (Nevada v. U.S. Department of Labor (U.S.D.C., E.D. Tex., No. 4:16-cv-00731, motion granted 11/22/2016)). In granting the nationwide preliminary injunction, the court agreed with the 21 states and a coalition of business groups in the consolidated suit that the DoL exceeded its authority by issuing a rule that increased the salary level for an exemption from the Fair Labor Standards Act’s overtime pay requirements for most white-collar employees. (See Client Action Bulletin 16-2 for a discussion of the DoL’s final rule and its implications for benefit programs.)

The DoL might appeal the decision, but unless the appeal to overturn the injunction is expedited and successful, the agency cannot implement the final rule starting on December 1. In addition, the new Administration and/or the 115th Congress that convenes in January will have an opportunity to modify or nullify the rule.

Employers that have not altered their overtime pay policies and considered the “job duties” test for the final rule’s overtime pay exemption need not do so before December 1, but they should monitor developments as the suit progresses through the courts. Those that have taken action, including employee benefit plan sponsors with programs that have been affected (e.g., a retirement plan that changed its definition of compensation to include overtime pay), should discuss the implications of the court’s ruling – and appropriate courses of action, including those involving communications with affected employees – with their legal counsel and other professional advisors. Employers should also discuss their decisions with their third-party payroll administrators.

For additional information about the court’s decision on the DoL’s rule, please contact your Milliman consultant.

Milliman brings sustainability to multiemployer plan

In this article, Milliman consultant Victor Harte discusses how the firm helped one multiemployer pension fund implement the Milliman Sustainable Income PlanTM (SIP) to address issues that were adversely affecting the fund’s employers and retirees.

Here is an excerpt:

After reviewing numerous alternative plan designs, including shifting to a defined contribution plan, Milliman identified a solution that satisfied the trustees. Specifically, the trustees were looking for a way to:

• Continue to provide lifetime benefits to the members
• Eliminate potential withdrawal liability concerns for new employers
• Reduce the unfunded liability related to existing employers
• Provide retirees with a measure of cost-of-living protection
• Maintain the same level of benefits for existing and future participants

Milliman was able to help the trustees meet their goals by changing the plan to a Milliman Sustainable Income PlanTM (SIP) and by modifying the withdrawal liability procedures to make use of the direct attribution method….

…The trustees implemented the required changes for future accruals. The existing benefits are protected and will increase due to future increases in pay. The benefits provided under the new SIP are equal in value to those provided under the prior formula. Additionally, the SIP benefits for future retirees are expected to increase over time and are anticipated to provide some protection against inflation.

One of the larger contributing employers was recently sold as part of a potential bankruptcy. When these types of transactions occurred in the past, the acquiring entity refused to participate in the plan due to concerns about potential withdrawal liability. However, as a result of the plan design changes and the change in the withdrawal liability procedures, the acquiring employer agreed to participate in the plan.

To learn more about the SIP, watch the following video.

Observing the 409A speed limit on payment accelerations after an NDCP termination

Pizzano-DominickThis blog is part of a 12-part series entitled “The nonqualified deferred compensation plan (NDCP) dirty dozen: An administrative guide to avoiding 12 traps.” To read the introduction to the series, click here.

Nonqualified deferred compensation plans (NDCPs) are designed to run their course at the usual payment pace with the only designated distribution pit stops made along the way being those specifically prescribed by the plan’s provisions. Internal Revenue Code Section 409A (409A) serves as an ever waving yellow caution flag warning NDCP sponsors of the consequences of accelerating distributions (see the “Timing is Everything” blog entry from this series for description). So the question arises, what is an NDCP sponsor to do when it concludes that its vehicle for high performance executives is now no longer running smoothly and/or too costly to maintain on a per participant basis?

Prior to 409A going into effect, many NDCPs contained provisions permitting the sponsor to terminate the plan at its discretion and distribute benefits as soon as possible after such termination. This unlimited distribution discretion upon termination created the potential for the following two suspect scenarios under which sponsors and participants could violate the spirit (if not technically the rules in effect at that time) of how the IRS intended NDCPs to be administered:

Pre-409A suspect scenario #1: Until distributed, NDCPs’ benefits are required to remain subject to the creditors of the sponsor in the event of the sponsor’s insolvency in which case the participants have no greater rights than such creditors. There were cases where, because the plan sponsor was on shaky financial ground with the prospect of insolvency looming, the decision was made to terminate the NDCP so that the participants could “take their money and run” before the sponsor’s insolvency became official and the fate of any NDCP assets were left to the judgment of a bankruptcy court.

Pre-409A suspect scenario #2: Even before 409A, NDCPs were governed by the general tax principle of “constructive receipt,” which generally provides that participants should be taxed on benefits if they could potentially have access to such benefits even if they did not actually access them. Consequently, NDCPs could not contain provisions that would allow participants to withdraw funds while still employed. However, prior to 409A, there were no statutory restrictions preventing sponsors from terminating plans, distributing benefits to the participants, and then immediately creating new programs to provide future benefits, thereby in effect creating a loophole around the prohibition against “no withdrawals while employed” rule.

Recognizing there may still be legitimate reasons for an NDCP sponsor to want or need to terminate its plan(s) and distribute benefits, 409A does allow for an exception to its general prohibition against accelerations of payments. However, in an effort to prevent future occurrences of the past abuses described in scenarios #1 and #2, the 409A rules mandate that such payments will only be permissible upon certain specified circumstances. The remainder of this blog entry will review those cases where 409A raises the green flag for such early payments upon a plan’s termination.

Continue reading

Public pension plans’ funded status improves in Q3

Sielman-BeckyMilliman today released the third quarter results of its Public Pension Funding Index, which consists of the nation’s 100 largest public defined benefit pension plans. As of September 30th, the funded ratio of these plans rose to 71.0%, up from 69.8% at the end of June. The funded status improved by $48 billion, the result of an estimated $86 billion increase in plan assets thanks to relatively healthy investment returns of 3.5% for the quarter.

While investment returns were healthier than expected, our Milliman 100 plans experienced a wide range of returns, from an estimated low of 1.33% to a high of 4.37%. Bond funds and commodities generally fared poorly, after having done well in the second quarter. It’s yet to be seen whether they will rebound as we close out the year.

The Milliman 100 PPFI total pension liability (TPL) increased from $4.583 trillion at the end of Q2 to an estimated $4.620 trillion at the end of Q3. The TPL is expected to grow modestly over time as interest on the TPL and the accrual of new benefits outpaces the benefits paid to retirees.

To view the Milliman 100 Public Pension Funding Index, click here. To receive regular updates of Milliman’s pension funding analysis, email us.

Final fiduciary rules: Frustrations and the unknown

Tedesco-KaraOn June 8, 2016, the U.S. Department of Labor (DOL) final fiduciary rules became effective, but these new rules are not actually applicable until April 10, 2017. The final rules outline what advisers, financial institutions, and employers need to do to adhere to them. Daunting? Yes. Impossible? Maybe, but some believe the fiduciary rules have been a long time coming. The new rules require advisers and financial institutions to comply with and uphold the fiduciary standards surrounding ERISA when advising clients for a fee. This is significant, as it has the potential to impact how some advisers help their clients with retirement planning. Some advisers may decide to stop helping.

As participants become more and more responsible for their own retirement savings, employers are finding they need to turn to their retirement plan experts for help. A plan adviser who gives fiduciary advice receives compensation for the recommendation he or she makes, and usually the recommendation is based on the specific needs of the participant. The advice is given so that an action will be taken. The final rules clearly state this expert is a fiduciary and the recommendation made has to be in the best interest of the participant and not the pocketbook of the employer and or adviser.

Why is this so important? Because millions of participant dollars have been rolled into IRAs that have high fees and expenses associated with them. Participants don’t understand the fees, they don’t understand their investments, and often they lack the proper tools to help them make educated decisions. It bears asking the question, should an adviser make a recommendation to roll or transfer account balances to another plan or IRA, when a participant might be better off staying put? The answer could be yes, and employers may find that terminated employees are staying with them because it is a better financial decision.

How do advisers and employers feel about this? Many advisers are frustrated they will have to comply with the best interest contract exemption. It has several requirements, but it means advisers may need to modify or fine tune their current practices to satisfy the rules. Plan sponsors will have to take another look at their advisers and service providers and understand their fiduciary responsibilities. It’s important they confirm that any rollover assistance is administrative in nature and cannot be perceived as advice from non-fiduciary human resources (HR) staff or service providers. However, plan sponsors can now feel good knowing that the general education they offer to participants about plans and investments is acceptable; it does not mean they are providing investment advice or taking on additional fiduciary responsibility.

With all of this said, could the election results change, delay, or repeal the final fiduciary rules? There is speculation this could happen, which makes the financial services industry happy, but for those pushing for reform, very unhappy.

Regulatory roundup

More retirement-related regulatory news for plan sponsors, including links to detailed information.

IRS issues new process for information document requests regarding retirement plan audits
The Commissioner for the IRS’ Tax Exempt and Government Entities (TE/GE) issued a memorandum containing new procedures for all TE/GE examiners on Information Document Requests (IDR). The IRS in the past had been flexible with the extension of response deadlines for document requests as long as the examiner views the sponsor as acting in good faith, especially once a professional becomes involved in the process.

This new memorandum takes flexibility out of the manner in which the IRS collects plan and employer information to conduct an audit. These new rules center on the timing of the IDRs, which are central to an audit.

To learn more, click here.

GAO publishes survey on 401(k) plans
The Government Accountability Office (GAO) issued “401(K) plans – effects of eligibility and vesting policies on workers’ retirement savings” (GAO-17-69). The publication is a non-generalizable survey of 80 401(k) plans ranging in size from fewer than 100 participants to more than 5,000. The GAO found that many plans have policies that affect workers’ ability to (1) save in plans (eligibility policies), (2) receive employer contributions, and (3) keep those employer contributions if they leave their job (vesting policies).

To download a copy of the entire publication, click here.

Proposed rule issued regarding minimum present value requirements for DB plan distributions
The Internal Revenue Service (IRS) filed a proposed rule providing guidance on changes made by the Pension Protection Act of 2006 (PPA) relating to the minimum present value requirements applicable to certain defined benefit (DB) pension plans. These proposed regulations would amend the current final regulations under section 417(e) regarding the minimum present value requirements of section 417(e)(3) in several areas. Specifically, the proposed regulations would update the regulations for changes made by PPA and eliminate certain obsolete provisions. The proposed regulations also contain a few other clarifying changes.

To read the entire proposed rule, click here.