Compliance January 26, 2015

Post-Termination Plan Amendment Impermissibly Reduced Payments

A federal appellate court has agreed with the PBGC that a retirement plan amendment adopted after the plan’s termination impermissibly reduced its benefit obligations to participants.
Reported by

The 6th U.S. Circuit Court of Appeals agreed with a lower court that the Pension Benefit Guaranty Corporation (PBGC) did not err when it found that Kentucky Bancshares failed to pay all benefits due to employees under its pension plan when the plan was terminated.

In 2008, as it was preparing to terminate its pension plan, Kentucky Bancshares also began implementing changes to meet the requirements of the Pension Protection Act of 2006 (PPA). The company incorporated new interest-rate and mortality assumptions for computing the minimum lump-sum benefits payable to participants under the plan, which generally lowered the lump-sum benefits for participants. The court found that nothing in the PPA or the Internal Revenue Code made it necessary for Kentucky Bancshares to amend the plan in a way that caused a decrease in the value of benefits.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

In addition, even though it began implementing the changes in 2008, Kentucky Bancshares did not adopt an amendment to the terms of the plan until February 2009—two months after the plan was terminated on December 31, 2008. Kentucky Bancshares noted that the PBGC acknowledged that the plan amendment resulting in decreased benefits would have been permissible if only it had been adopted two months earlier. The company argued that the PBGC’s finding of a deficiency is based on a technical timing violation that results in an unwarranted windfall to plan participants.

While the appellate court agreed the argument had appeal, it pointed out that it is not free to simply substitute its judgment for that of the agency. The court noted that PBGC’s enforcement of its own regulation that “plan benefits are determined under the plan’s provisions in effect on the plan’s termination date” and “post-termination decreases are permissible if necessary to meet qualification requirements” cannot be deemed arbitrary or capricious, an abuse of discretion, or not in accordance with law.

The court added that PBGC’s rationale for its decision that benefit payments made upon plan termination were deficient explains the importance of the statutory requirements that benefit plans be established and maintained pursuant to a written instrument and that the plan specify the basis on which payments are made, so that every employee may, on examining the plan document, determine exactly what his rights and obligations are under the plan.

The 6th Circuit’s decision in PBGC v. Kentucky Bancshares is here.

Compliance January 26, 2015

President Obama Proposes Retirement Tax Reform

President Obama's retirement tax reform plan would give 30 million additional workers the opportunity to save for retirement through their employers, but would put a limit on lifetime savings.
Reported by

The White House has released a statement outlining the president’s tax proposals. In his State of the Union address, President Obama explained that the savings in his proposal will pay for additional reforms that will help working families cover costs, including a secure retirement.

The president addressed what he calls unfairness in the tax system, stating most middle-class retirees spend down their assets during retirement, which means they owe income taxes on whatever capital gains they have accrued. The proposal contends that the wealthy can often afford to hold onto assets until death, allowing them to use a loophole to avoid ever having to pay tax on capital gains. The president’s proposal would treat bequests and gifts (other than to charitable organizations) as realization events, like other cases where assets change hands. Additionally, it would increase the total top capital gains and dividend rate to 28%, the same rate as under President Reagan.

Get more!  Sign up for PLANSPONSOR newsletters.

To make retirement tax benefits work for middle-class families, President Obama has advised reforming retirement tax incentives and expanding savings opportunities. The president acknowledged that Americans face an array of retirement savings choices, ranging from auto-enrollment to doing everything on their own, including opening an account, managing contributions, and researching and selecting investments.

The president outlined four key aspects of the retirement tax reform plan:

  • Auto-enrollment for Americans without access to a workplace retirement plan in an individual retirement account (IRA) – Employers that do not currently offer a retirement plan and have more than 10 employees would be required to automatically enroll their workers into an IRA. Workers could opt out of saving if they choose.
  • Tax cuts for auto-IRA adoption, as well as businesses that offer employer plans or switch to auto-enrollment – The proposal would provide a $3,000 tax credit to employers with 100 or fewer employees that offer an auto-IRA, minimizing the burden on small businesses. Additionally, the proposal includes tripling the existing “start up” credit in order to provide a $4,500 tax credit to small employers that begin offering a retirement plan, offsetting the administrative expenses. The tax cuts would also include a $1,500 tax credit for small employers already offering a plan that add auto-enrollment.
  • Ensuring long-term, part-time workers can contribute to their employer’s retirement plan – The president proposes that employers who offer plans be required to allow employees who have worked for the employer for at least 500 hours per year for three years or more to make voluntary contributions to the plan. This plan aims to combat the fact that only 37% of part-time workers have access to a workplace retirement plan, the proposal said, partly because employers offering plans are currently allowed to exclude employees who work less than 1,000 hours per year, no matter how long they’ve worked for the employer.
  • Imposing a maximum on retirement account savings – President Obama advises prohibiting contributions and accruals of additional benefits in tax-preferred retirement plans and IRAs once balances are about $3.4 million, which the proposal said is enough to provide an annual income of $210,000 in retirement.

The proposal compliments other actions taken by the president, including the creating of the “myRA” starter savings vehicle.

A fact sheet outlining the president’s tax proposals is here.

«