Regulatory roundup

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

Final Rule lowering rates of penalty charged for late payment of pension premiums
The PBGC is lowering the rates of penalty charged for late payment of premiums by all pension plans, and providing a waiver of most of the penalty for plans with a demonstrated commitment to premium compliance.

The penalty for late payment of a premium is a percentage of the amount paid late multiplied by the number of full or partial months the amount is late, subject to a floor of $25 (or the amount of premium paid late, if less). There are two levels of penalty, which heretofore have been 1 percent per month (with a 50 percent cap) and 5 percent per month (capped at 100 percent). The lower rate applies to “self-correction” — that is, where the premium underpayment is corrected before PBGC gives notice that there is or may be an underpayment.

This final rule cuts the rates and caps in half (i.e., to ½ percent with a 25 percent cap and 2½ percent with a 50 percent cap, respectively) and eliminates the floor. The rulemaking also creates a new penalty waiver that applies to underpayments by plans with good compliance histories if corrected promptly after notice from PBGC. PBGC will waive 80 percent of the penalty assessed for such a plan.

For more information, click here.

Notice extends temporary nondiscrimination relief for closed defined benefit plans
The Internal Revenue Service (IRS) released Notice 2016-57, extending the temporary nondiscrimination relief for closed defined benefit plans provided in Notice 2014-5 and 2014-2, through 2017.

The temporary nondiscrimination relief for closed plans that is provided in Notice 2014-5 is hereby extended to plan years beginning before 2018 if the conditions of Notice 2014-5 are satisfied. This extension is provided in anticipation of the issuance of final amendments to the § 401(a)(4) regulations. Those regulations are expected to be effective for plan years beginning on or after January 1, 2018, and are expected to permit plan sponsors to apply the provisions of the regulations that apply specifically to closed plans for certain earlier plan years.

To read Notice 2016-57, click here.

To read and review Notice 2014-5, click here.

DoL Extends deadline for public comments on Form 5500 modernization proposal
The Department of Labor (DoL) announced a two-month extension of the comment period on the Form 5500 modernization proposals. A range of stakeholder groups asked for an extension of time to submit comments given the scope and significance of the proposed forms revisions and regulatory amendments. The DoL, IRS, and the Pension Benefit Guaranty Corporation (PBGC) decided to extend the public comment period on the proposed forms revisions and regulatory amendments from the original Oct. 4, 2016, deadline to the new Dec. 5, 2016, deadline.

For more information, click here.

Proposal to expand missing participant program
The PBGC administers a program to hold retirement benefits for missing participants and beneficiaries in terminated retirement plans and to help those participants and beneficiaries find and receive the benefits being held for them. The program is currently limited to single-employer defined benefit pension plans covered by the pension insurance system under title IV of the Employee Retirement Income Security Act of 1974 (ERISA).

The PBGC proposes to make changes to its existing program and, as authorized by the Pension Protection Act of 2006, to establish similar programs for multiemployer plans covered by title IV, certain defined benefit plans that are not covered by title IV, and most defined contribution plans. The proposed rule is needed to implement amendments to section 4050 of ERISA.

To read the proposed rule, click here.

For an overview of the proposed missing participants program for defined contribution and other terminated plans, click here.

Continue reading

Regulatory roundup

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

Actions to better address potential noncompliance for Roth individual retirement arrangement conversions
The Treasury Inspector General for Tax Administration (TIGTA) recently released “Actions can be taken to better address potential noncompliance for Roth individual retirement arrangement conversions.” The report notes that for tax year 2011, IRS records show that approximately 400,000 taxpayers converted more than $10 billion in assets from traditional to Roth Individual Retirement Arrangements (IRA). This TIGTA audit was initiated to assess whether the IRS has sufficient processes in place to address taxpayers who underreport taxes due when converting assets to Roth IRAs.

To read the entire report, click here.

DoL posts comments on agencies’ proposed rule – Form 5500
The Department of Labor (DoL) has made 23 comment letters received to date regarding the proposed rule that would amend Form 5500 and its schedules available on its website.

To access the comments, click here.

Improvements to claims process could help people make better informed decisions about retirement
The Government Accountability Office (GAO) released “Social Security – Improvements to claims process could help people make better informed decisions about retirement benefits” (GAO-16-786). Many eligible individuals claim Social Security retirement benefits at the earliest eligibility age, even though they would receive higher benefits if they waited until older ages. In order to make an informed decision about when to claim, people need to understand how various Social Security rules and other factors affect benefit amounts. GAO was asked to examine these issues.

To read the entire report, click here.

GASB 74/75: Impact on small government employers

The Alternative Measurement Method (AMM) allows small government employers to use a modified approach to calculate their postemployment benefits other than pensions liabilities. In this article, Milliman consultant Joanne Fontana reviews the AMM, which is used by small government employers in lieu of an actuarial valuation. It also discusses the important changes relevant to small government employers as GASB 74/75 takes effect.

It’s Your Move: The dash(board) to retirement

O'Brien-ShaneDonald Rumsfield, the former U.S. Secretary of Defense, once discussed “known unknowns,” referring to things that we are aware we don’t know. The idea can be applied to retirement plan participants as well. It is evident year after year that plan participants still lack a fundamental understanding of certain aspects of retirement planning, such as how to invest, how much to invest, and how to create a plan for retirement. These aspects remain widely misunderstood.

Enter the It’s Your Move dashboard on Milliman’s newly reimagined website. This dashboard aims to make participants aware of the tools at their disposal that can help them plan for retirement. The dashboard falls in line with other initiatives in the industry, all aimed toward improving employees’ preparations for retirement. I’ve previously discussed how the working population in the United States is massively unprepared for retirement and suggested that “gamification” was a possible solution. The SaveUp app was cited as an example of the effectiveness that gamification can have on retirement planning.

Now there is another newsmaker with a similar name—the Secure, Accessible, Valuable, Efficient Universal Pension Accounts (SAVE UPs) Act—grabbing a few headlines. SAVE UPs is a new piece of legislation that was introduced by Representative Joe Crowley (D-New York). The main objective is to provide all American workers with the opportunity to generate tax-advantaged assets. The legislation intends to help smaller employers subsidize the cost of contributing to IRAs in the form of a tax credit for the value of the contributions to 10 employee accounts. This bill, if enacted, could be following down a very controversial path similar to that of, I shudder to say, Since the full name of this new legislation threatens to exceed the character limit of any tweet commenting on it, I figured it would be easier to discuss on this platform since the overall objective appears to be to help provide opportunities for more people to prepare for retirement. The new Milliman Benefits dashboard was created with the same goals in mind and has a significantly lower chance of becoming part of the script for the next season of House of Cards.

The new It’s Your Move dashboard was designed to make participants aware of the various successful behaviors that will optimize their experience. With tools that help participants maximize company matches, diversify their investments, and utilize automatic increase and rebalance features, it could help to set new standards for best practices and increase participation rate in the plans that we manage.

PlanAhead - It's Your Move 2

Participant feedback has shown that a knowledge gap still exists in regards to retirement planning and investment decisions. A survey in March showed that 71% of participants were very likely or somewhat likely to seek advice from their plan providers and 69% were likely to seek advice from an independent advisor or financial services company. The advice they were seeking is on how to invest their money, what to do with their savings when they leave their employers, and what to do with the money when they retire. This shows that a majority of participants would like assistance in their retirement planning. The It’s Your Move dashboard helps to do just that. This readily accessible checklist of retirement behaviors is making participants aware of the tools available to them in an effort to improve their retirement outcomes. It can help employees feel more confident about retirement and offer some encouragement and useful information along the way.

Regulatory roundup

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

Study reveals accumulation potential of 401(K) by looking at consistent participants’ balances
The average 401(k) plan account balance of workers who participated consistently in one 401(k) plan increased significantly over the four-year period ending at year-end 2014, according to new data published today by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI).

The study, “What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Account Balances, 2010–2014,” examines the accounts of about 8.8 million “consistent participants” – those who remained active in the same 401(k) plan for the four-year period covering year-end 2010 through year-end 2014. It finds that average account balances increased during this period for consistent participants in all age cohorts.

To read the entire study, click here.

Modifications to minimum present value requirements for partial annuity distribution options
The IRS issued a final rule providing guidance relating to the minimum present value requirements applicable to certain defined benefit pension plans. The rule change the regulations regarding the minimum present value requirements for defined benefit plan distributions to permit plans to simplify the treatment of certain optional forms of benefit that are paid partly in the form of an annuity and partly in a single sum or other more accelerated form.

To read the entire final rule, click here.

GAO report explores 401(k) lifetime income options
The Government Accountability Office (GAO) released a report entitled “401(k) plans: DOL could improve use of lifetime income options” (GAO-16-433), presenting the results of a questionnaire the GAO sent to 401(k) plan record keepers. Among other issues, this report examines things, what is known about the adoption of lifetime income options in 401(k) plans, barriers that deter plan sponsors from offering such options, and the defaults that exist for participants who do not choose a lifetime income option.

GAO made seven recommendations to the Department of Labor (DoL), including that it clarify the criteria to be used by plan sponsors to select an annuity provider, consider providing limited liability relief for offering an appropriate mix of lifetime income options, issue guidance to encourage plan sponsors to select a record keeper that offers annuities from other providers, and consider providing RMD-based default lifetime income to retirees. DOL has described actions it would take to address the intent of the recommendations.

To read the entire report, click here.


August resembles July as record-low interest rates continue to drive the pension funding deficit

Wadia_ZorastMilliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In August, these pension plans experienced a $4 billion decrease in funded status due an increase in pension liabilities and flat asset returns. The funded status for these pensions inched downward from 75.8% to 75.7%.


Not much movement in pension funding last month. Assets didn’t budge in August, and the discount rate reached yet another record low with a modest step down. For the last three months, the funded ratio has barely moved in spite of continued funding by plan sponsors.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.52% by the end of 2016 and 4.12% by the end of 2017) and asset gains (11.2% annual returns), the funded ratio would climb to 79% by the end of 2016 and 91% by the end of 2017. Under a pessimistic forecast (3.12% discount rate at the end of 2016 and 2.52% by the end of 2017 and 3.2% annual returns), the funded ratio would decline to 73% by the end of 2016 and 67% by the end of 2017.

The NDCP dirty dozen: Timing is everything

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.

While most nonqualified deferred compensation plan (NDCP) sponsors will be hard-pressed to find humor in 409A compliance, they may be willing to acknowledge that proper administration of NDCP distributions shares at least one common attribute with a winning comic performance: for the NDCP to successfully stand up in front of the most demanding critic—i.e., the Internal Revenue Service (IRS)—without facing any heckling, the plan must practice precision timing with its distributions to participants. Just as a comedian must work not to deliver a punch line too early or too late, an NDCP needs to avoid improper accelerations or delays of participant payments. A failure to do so can elicit a most unpleasant response in the form of a cacophony of catcalls and boos from participants, or an IRS audit discovery of 409A noncompliance, thereby triggering the resultant penalties.

This blog entry examines some of the toughest timing tests for the satisfactory operation and administration of NDCPs under section 409A of the tax code.

Activating the trigger
Section 409A severely restricts employer and/or executive discretion on the timing of distributions. It identifies six permissible NDCP distribution triggers, which generally must be established within 30 days of the date the executive first becomes eligible to participate in the plan:

1. A specified payment date (i.e., a future distribution date is designated either by the employer and/or executive upon the participant’s initial eligibility)
2. Separation from service
3. Disability
4. Death
5. Change in ownership or control of a corporation
6. Unforeseeable emergency

Except for death, each trigger has its own special 409A definition, along with complicated rules regarding how it may be applied. There is also a separate rule that permits the attachment of a “window” period to the applicable trigger. Under this rule, the participant may not designate the taxable year of payment; and such period must either both begin and end within one taxable year or must not be more than 90 days.

Recent IRS guidance expanded the permissible early payout alternatives to an NDCP participant’s beneficiaries in cases of death, disability, or unforeseeable emergencies. The guidance also clarifies that the NDCP may provide that the occurrence of death, disability, or an unforeseeable emergency may accelerate a schedule of payments that has already commenced prior to a participant’s or beneficiary’s death.

One of the most complex triggers happens to be one of the most commonly used: the “separation from service” distribution trigger. This trigger will not pose problems when the separation is clear-cut and final, such as a full retirement, resignation, or termination of employment. However, employment separations are often not so simple, such as where an executive’s duties are scaled back from his or her previous role (e.g., under a “phased retirement” scenario) or where a key employee “retires” but is then retained to consult as an independent contractor. Depending on the extent of the cutback and the terms of the NDCP, the plan may risk either prematurely commencing payment or impermissibly delaying a distribution that should commence. This may occur if the employer and/or the executive’s idea of what constitutes a separation does not align with the guidance under 409A. Although it basically is a facts-and-circumstances test, 409A considers a termination to have occurred if the employer and employee reasonably anticipate that either of these two conditions applies:

1. No future services will be performed after a certain date.
2. The rate of bona fide services to be performed after such date will not exceed 20% of the average rate of services performed over the preceding 36-month period (or the full period, if less than 36 months). (If the new rate of services is over 20% but less than 50%, such reduction may be treated as a separation from service under 409A, provided special rules are met.)

Continue reading

Regulatory roundup

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

DOL files final rule on savings arrangements established by states for nongovernmental employees
The U.S. Department of Labor (DoL) filed at the Federal Register a final rule entitled “Savings Arrangements Established by States for Non-Governmental Employees.” The final rule describes circumstances in which state payroll deduction savings programs with automatic enrollment would not give rise to the establishment of employee pension benefit plans under ERISA.

The final rule provides guidance for states in designing such programs so as to reduce the risk of ERISA preemption of the relevant state laws. The final rule also provides guidance to private-sector employers that may be covered by such state laws. This rule affects individuals and employers subject to such state laws.

The final rule is effective 60 days after publication in the Federal Register. It is scheduled for publication on August 30, 2016.

To read the entire final rule, click here.

Proposed rule on savings arrangements established by states for nongovernmental employees
The DoL filed a proposed rule entitled “Savings Arrangements Established by State Political Subdivisions for Non-Governmental Employees.” The proposed rule would amend a regulation that describes how states may design and operate payroll deduction savings programs, using automatic enrollment, for private-sector employees without causing the states or private-sector employers to establish employee pension benefit plans under ERISA. The proposed amendments would expand the current regulation beyond states to cover programs of qualified state political subdivisions that otherwise comply with the current regulation. This rule would affect individuals and employers subject to such programs.

Written comments should be received on or before 30 days after the date of publication in the Federal Register. Publication is scheduled for August 30, 2016.

To read the entire proposed rule, click here.

New procedure to help people making IRA and retirement plan rollovers
The Internal Revenue Service (IRS) provided a self-certification procedure designed to help recipients of retirement plan distributions who inadvertently miss the 60-day time limit for properly rolling these amounts into another retirement plan or IRA.

IRS Revenue Procedure 2016-47 explains how eligible taxpayers, encountering a variety of mitigating circumstances, can qualify for a waiver of the 60-day time limit and avoid possible early distribution taxes. In addition, the revenue procedure includes a sample self-certification letter that a taxpayer can use to notify the administrator or trustee of the retirement plan or IRA receiving the rollover that they qualify for the waiver.

To read the entire revenue procedure, click here.
For more information on rollovers and transfers, click here and here.

Guidance for one-participant plan sponsors
One of the most common reasons why a retirement plan becomes an orphan plan is because the plan sponsor no longer exists. The IRS has published some information offering sponsors guidance on how to prevent orphan plans.

For more information, click here.

SEC adopts rules to enhance information reported by investment advisers
The Securities and Exchange Commission (SEC) adopted amendments to several Investment Advisers Act rules and the investment adviser registration and reporting form to enhance the reporting and disclosure of information by investment advisers. The amendments will improve the quality of information that investment advisers provide to investors and the SEC.

For more information, click here.

Not-for-profit reduces payroll using voluntary early retirement program

In his article “Reducing payroll without involuntary terminations,” pension actuary Zorast Wadia discusses how Milliman helped a not-for-profit client reduce its payroll through a voluntary early retirement program (VERP).

Here is an excerpt:

The client considered a VERP that offered numerous types of incentives, including:

• Additional years of service and/or age credits
• Cash payment(s)—for example, one or two weeks of pay for each year of service
• Additional benefits, such as an extension of health coverage
• “Bridge” payments, where employees are paid an annuity from their termination date to a fixed date (such as age 62 or 65). …

…The window was offered to participants who were age 57 or older with early retirement benefits being calculated as if retiring participants were two years older with an additional two years of service. The additional years of service reward participants retiring early with higher benefits while the additional age criteria results in a lower reduction in benefit for most of the participants in the window group who would be retiring early. The client decided against offering an extension of health coverage because this option was deemed too costly.

The client also decided to amend the early retirement provisions in the retirement plan for future retirees. The early retirement eligibility was lowered from age 60 with 20 years of service to age 58 with 10 years of service going forward. The client felt that these changes would allow for a more orderly retirement of the work force and help facilitate work force transitions better in the future. Thus, not only was the client able to continue rewarding its employees with a strong retirement program, it was also able to redesign the retirement program to accomplish its human resource objectives.

Approach 401(k) eligibility provisions strategically

Employers who take a strategic approach to defining eligibility provisions in a 401(k) plan can contain benefit costs, recruit and retain talent, simplify administration, and comply with regulations. In his article “Making participants out of employees via eligibility,” Milliman’s Noah Buck answers six strategic questions that plan sponsors should take into consideration. The excerpt below highlights two of the questions.

To what degree is the plan used to attract and retain talent?
A law firm does not want highly sought-after recruits joining a competing law firm down the road because they can enter the competing firm’s retirement plan sooner. Employers relying partially on their 401(k) plans for recruitment should consider that quicker and easier access to the plan will be more attractive to those in their prospective talent pools.

Are eligibility and entry date provisions cost-efficient with respect to turnover and vesting?
An organization’s turnover rate and average employee tenure are important to consider. A restaurant chain employing high-turnover wait staff will save cost and administrative energy by requiring employees to work six months before entering the plan instead of requiring one month.

It’s also important to consider the plan’s vesting provisions. If the plan has immediate vesting, the employer matching contributions — meant to supplement long-term retirement savings — could be going right out the door to short-term employees who are allowed to enter the plan too quickly. Employers should consider structuring eligibility and plan entry provisions so employer contributions are more likely to stay in-house with longer-term employees.