Regulators Release Informational Copies of 2016 Form 5500
The U.S. Department of Labor (DOL) Employee Benefits Security Administration (EBSA), the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) released advance informational copies of the 2016 Form 5500 annual return/report and its related instructions. This year’s “Changes to Note” section highlights important modifications to Forms 5500 and 5500-SF, as well as their schedules and instructions. The documents are for information only and may not be used to file a 2016 Form 5500 annual return/report. Copies of the forms, schedules and instructions are available at www.dol.gov/ebsa/5500main.html. IRS Clarifies Interest Crediting Rules for Pension Equity Plans
The Internal Revenue Service (IRS) has issued Notice 2016-67, describing the applicability of the market rate of return (ROR) limitation rules to defined benefit (DB) plans known as PEPs—or pension equity plans. These plans express a participant’s accumulated benefit as the current value of a percentage of his final average compensation, highest average compensation, or highest average compensation during a limited period of years. In particular, the notice clarifies that the ROR limitation rules do not pertain to “implicit interest PEPs,” which apply a deferred annuity factor to the participant’s accumulated benefit to determine his deferred benefits. The IRS is considering a reversal of that rule, however, the notice says. As the change would require amending the regulations, the IRS is requesting comments about adopting any such amendments. Court Imposes Hefty Penalty for Failure To Provide Documents
After deciding, in February, that R.L. Reppert Inc. had violated the Employee Retirement Income Security Act (ERISA) by failing to provide certain documents to a participant in its 401(k) plan who had requested them, U.S. District Judge James Knoll Gardner of the U.S. District Court for the Eastern District of Pennsylvania, in September, ordered the plan to pay a total of $15,959 in restitution.
The court also found that the R.L. Reppert 401(k) plan neglected to file required financial audits with its Form 5500, from plan years 2008 through 2011, and that the plan’s recordkeeper was not liable for the lapse. Granting judgment in favor of the plaintiff, Gardner found that the plan was not exempt from audit those years—that it had no longer qualified to file a simplified annual Form 5500 report because it had more than 100 participants at the start of those plan years. Also it had failed to qualify for the “80- through 120-participant rule,” which permits a 401(k) plan starting a plan year with between 80 and 120 participants to file a simplified annual report if it had done so the previous year; the trial found that the plan covered more than 120 participants at the start of 2008.
The defendants alleged that the plan’s recordkeeper, California Pension Administrators and Consultants Inc. (CalPac), had breached its contract to provide Reppert with plan administration and recordkeeping services by incorrectly determining the number of participants in the plan at the start of 2008 and incorrectly recommending that the company not conduct a plan audit. Gardner found that the defendants’ breach of contract claim failed; he stated it was unclear that CalPac, as opposed to R.L. Reppert, was responsible for any error. Bill Would Fix Closed DB Plan Nondiscrimination Issues
U.S. Senators Ben Cardin, D-Maryland, and Rob Portman, R-Ohio, both members of the Senate Finance Committee, and U.S. Representatives Pat Tiberi, R-Ohio, and Richard Neal, D-Massachusetts, both members of the House Ways and Means Committee, introduced the Retirement Security Preservation Act of 2016 (RSPA), which amends the nondiscrimination rules that apply to qualified retirement plans. The act would protect older, longer-service participants whose defined benefit (DB) plans have been closed or frozen. The legislators explain that, over time, the grandfathered group in closed plans generally becomes more highly compensated—almost always inadvertently violating the Internal Revenue Service (IRS) nondiscrimination testing rules. The bill also contains anti-abuse rules related to closed and frozen plans. The Treasury Department has proposed regulations that partially address these issues, but only for a certain subset of affected plans. RSPA incorporates elements of those regulations and provides targeted relief to plans unqualified to take advantage of them. FASB Proposes New Reporting Standards for Pensions
The Financial Accounting Standards Board (FASB) has issued an exposure draft on “Compensation—Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The amendments in the proposed update to FASB accounting standards would require a defined benefit (DB) plan sponsor to report the service cost component of pension expenses in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period.
The other components of net benefit cost would be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item, or items, are used to present the other components, that, or those, items must be appropriately described. According to the FASB, many stakeholders have observed that the presentation of defined benefit cost on a net basis combines elements distinctly different in their predictive value. Therefore, these stakeholders have stated that the current presentation requirement has less value and requires users to incur greater costs in analyzing financial statements, and that the reduced transparency in the presentation of net benefit cost also reduces the usefulness of financial information. PBGC Multiemployer Program Deficit
The Pension Benefit Guaranty Corporation (PBGC) released its Fiscal Year 2016 Annual Report, showing that the deficit in its multiemployer insurance program rose to $58.8 billion. The increase was driven by additional multiemployer plans that are expected to run out of money within the next 10 years, and by decreases in interest factors used to value the PBGC’s liabilities. The agency’s single-employer insurance program showed improvement; its deficit narrowed from $24.1 billion at the end of fiscal year (FY) 2015 to $20.6 billion at the end of FY 2016. This was primarily due to investment and premium income and a low level of plan terminations during the year. The PBGC multiemployer program’s income is small relative to its deficit and to the increase in its liabilities during FY 2016. Income for the program totaled $425 million, combining $282 million in premium revenue and $143 million in investment income. In contrast, liabilities increased by $6.8 billion. This was primarily due to a drop in interest factors used to measure the value of the agency’s future financial assistance payments, and the identification of 11 additional multiemployer plans that terminated or are projected to run out of money within the next 10 years. In its most recent Projections Report, the PBGC estimated that its multiemployer program will likely be insolvent by the end of 2025 and could run dry before then. If the multiemployer insurance program becomes insolvent, the agency will be able to provide only enough financial assistance to pay a small fraction of guaranteed benefits in insolvent plans. IRS Offers Educational Materials For Plan Sponsors
The Internal Revenue Service (IRS) has announced the availability of three new Issue Snapshots this fall and updated two fix-it guides. The agency’s Tax Exempt and Government Entities (TE/GE) Knowledge Management team periodically issues the snapshots—research summaries on tax-related subjects for retirement plan practitioners. The latest topics of interest to plan sponsors include: change in plan vesting schedules, hardship distributions from 401(k) plans, and consequences to a participant who makes excess deferrals to a 401(k) plan. In addition, the IRS has updated its SIMPLE IRA [Savings Incentive Match PLan for Employees Individual Retirement Account] Plan Fix-It Guide as well as its 403(b) Plan Fix-It Guide.