Compliance August 20, 2018

IRS Approves Plan Sponsor’s Student Loan Repayment Benefit in 401(k) Plan

Because participants receiving a student loan repayment non-elective contribution can still make deferrals to the 401(k) plan and receipt of the contribution is not dependent on whether the employee makes deferrals to the plan, the IRS ruled the benefit will not violate the “contingent benefit” prohibition of the Income Tax Regulations.

Reported by

A 401(k) plan sponsor requested and Internal Revenue Service (IRS) ruling that its proposal to amend the plan to provide student loan repayment (SLR) non-elective contributions under the program will not violate the “contingent benefit” prohibition of section 401(k)(4)(A) and section 1.401(k)-1(e)(6) of the Income Tax Regulations.

In a Private Letter Ruling, the IRS explains that under the 401(k) plan, if an eligible employee makes an elective contribution during a payroll period equal to at least 2% of his or her eligible compensation during the pay period, the plan sponsor makes a matching contribution on behalf of the employee equal to 5% of the employee’s eligible compensation during the pay period.  The regular matching contributions are made each payroll period.

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The plan sponsor proposes to amend the plan to offer a student loan benefit program, under which it would make an employer non-elective contribution on behalf of an employee conditioned on that employee making student loan repayments (SLR non-elective contribution). The program is voluntary—an employee must elect to enroll, and once enrolled, may opt out of enrollment on a prospective basis. If an employee participates in the program, the employee would still be eligible to make elective contributions to the plan but would not be eligible to receive regular matching contributions with respect to those elective contributions.

Such an employee would be eligible to receive SLR non-elective contributions and true-up matching contributions, as appropriate. All employees eligible to participate in the plan will be eligible to participate in the student loan repayment program. If an employee initially enrolls in the program but later opts out of enrollment, then the employee will resume eligibility for regular matching contributions.

Under the program, if an employee makes a student loan repayment during a pay period equal to at least 2% of the employee’s eligible compensation for the pay period, then the plan sponsor will make an SLR non-elective contribution as soon as practicable after the end of the year equal to 5% of the employee’s eligible compensation for that pay period. The SLR non-elective contribution is made without regard to whether the employee makes any elective contribution throughout the year. If the employee does not make a student loan repayment for a pay period equal to at least 2% of the employee’s eligible compensation, but does make an elective contribution during that pay period equal to at least 2% of the employee’s eligible compensation for that pay period, then the plan sponsor will make a matching contribution as soon as practicable after the end of the plan year equal to 5% of the employee’s eligible compensation for that pay period (true-up matching contribution). 

In order to receive either the SLR non-elective contribution or the true-up matching contribution, the employee would need to be employed with the plan sponsor on the last day of the plan year (except in the case of termination of employment due to death or disability). 

Both SLR non-elective contributions and true-up matching contributions will be subject to the same vesting schedule as regular matching contributions. The SLR non-elective contribution will be subject to all applicable plan qualification requirements, including, but not limited to, eligibility, vesting, and distribution rules, contribution limits, and coverage and nondiscrimination testing. The SLR non-elective contribution will not be treated as a matching contribution for purposes of any testing under or requirement of section 401(m). The true-up matching contribution will be included as a matching contribution for purposes of any testing under or requirement of section 401(m).

The plan sponsor said it has not extended and has no intention to extend any students loans to employees that will be eligible for the program.

What the IRS says

In this case, the IRS notes that SLR non-elective contributions under the program are conditioned on whether an employee makes a student loan repayment during a pay period and are not conditioned (directly or indirectly) on the employee making elective contributions under a cash or deferred arrangement.

In addition, because an employee who makes student loan repayments and thereby receives SLR non-elective contributions is still permitted to make elective contributions, the SLR non-elective contribution is not conditioned (directly or indirectly) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash. Therefore, the IRS concludes that the proposal to amend the plan to provide SLR non-elective contributions under the program will not violate the “contingent benefit” prohibition of section 401(k)(4)(A) and section 1.401(k)-1(e)(6).

The agency says its ruling is based on the assumption that the plan sponsor will not extend any student loans to employees that will be eligible for the program. 

IRS Private Letter Rulings are directed only to the taxpayer requesting it. However, they can give plan sponsors an idea of what the IRS thinks about plan sponsor decisions or programs.

Compliance August 20, 2018

Analysis of Settlement Terms in Deutsche Bank ERISA Litigation

The bank has agreed to pay $21.9 million to settle charges it benefited from including proprietary funds in its 401(k) plan.

Reported by

Terms of the settlement agreement reached between Deutsche Bank and participants in the firm’s own retirement plan have been filed with the U.S. District Court for the Southern District of New York.

The settlement agreement follows a previously issued partial decision for summary judgement, reached after the district court first ruled the lawsuit claims, filed in December 2015, should not be time-barred by ERISA’s various statutes of limitation. Subsequent to that decision, the court approved class action status for the complaint in September 2017.

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The case history of the litigation offers a prime example of the incredible complexity of Employee Retirement Income Security Act (ERISA) challenges. In the run-up to the settlement agreement, while plaintiffs’ motion for class certification was still pending, the plaintiffs filed a third amended complaint, adding additional allegations regarding defendants’ alleged failure to adhere to plan documents as required by ERISA and the U.S. Code.

In sum, the underlying allegations were that Deutsche Bank and other defendants violated their fiduciary duties by offering in the company’s own 401(k) plan proprietary, high-cost investments that profited the bank. According to the plaintiffs’ amended complaints, the Deutsche Bank Matched Savings Plan, as of 2009, had roughly $1.9 billion in assets and offered participants 22 “designated investment alternatives,” 10 of which were “proprietary Deutsche Bank mutual funds.” The core of the complaints’ allegations concerned the inclusion of Deutsche Bank proprietary mutual funds among the plan’s offerings. According to the complaints, “Deutsche Bank earned millions of dollars in investment management fees by retaining [these proprietary mutual funds] in the plan.”

Important to note, the Deutsche Bank defendants still deny all liability to the class representatives; deny all of the claims made in the action; deny all allegations of wrongdoing made in any of the complaints in this action; and deny that the class representatives, the plan, or any of the plan’s current or former participants suffered any losses. Defendants further maintain that they acted prudently and loyally at all times when acting in any fiduciary capacity with respect to the plan.

Details from the settlement

As stipulated by the settlement agreement, within 20 business days after the date the court’s preliminary approval order is entered, Deutsche Bank or its insurers shall deposit 33% of the gross settlement amount ($7,300,000) into the qualified settlement fund. Subsequently, within 20 business days after the settlement effective date, Deutsche Bank or its insurers shall deposit the remainder of the gross settlement amount ($14,600,000) into the qualified settlement fund.

Then, within 120 calendar days after the settlement effective date, the gross settlement amount will be distributed from the qualified settlement fund as follows: “(a) first, all attorneys’ fees and costs approved by the court shall be paid to class counsel within five business days after the settlement effective date; (b) second, any class representatives’ compensation approved by the Court shall be paid within five business days after the settlement effective date; (c) third, all administrative expenses approved by the court shall be paid within five (5) business days after the settlement effective date; (d) fourth, a contingency reserve not to exceed an amount to be mutually agreed upon by the settling parties and approved by the court shall be set aside by the settlement administrator for: (1) administrative expenses incurred before the settlement effective date but not yet paid, and (2) administrative expenses estimated to be incurred after the settlement effective date but before the end of the settlement period; and (e) fifth, the net settlement amount will be distributed pursuant to the plan of allocation.”

After this process, no later than February 15 of the year following the calendar year in which Deutsche Bank makes a transfer to the qualified settlement fund pursuant to the terms of the settlement agreement, the firm “must timely furnish a statement to the escrow agent, or the settlement administrator on its behalf, that complies with Treasury Regulation 1.468B-3(e)(2), which may be a combined statement under Treasury Regulation 1.468B3(e)(2)(ii), and shall attach a copy of the statement to their federal income tax returns filed for the taxable year in which Deutsche Bank, its insurers, or agents make a transfer to the qualified settlement fund.” After setting out this groundwork, the settlement agreement presents a 10-page “plan of allocations,” describing in detail how class members will be compensated in due course.

Prospective relief also included

Beyond the monetary settlement terms already outlined, the settlement agreement includes substantial description of prospective relief to be provided by Deutsche Bank.

“All decisions regarding the selection, retention, removal, or evaluation of any Deutsche fund in the plan shall be delegated to an independent fiduciary appointed pursuant to ERISA,” the agreement states. “Deutsche Bank shall retain the independent fiduciary to provide a written opinion, within six months of the settlement effective date, regarding whether any of the existing Deutsche funds or non-Deutsche funds in the plan should be replaced with alternative investment vehicles (e.g., separate accounts or collective trusts).”

Also notable is this description of the establishment of a “settlement website” to help distribute relevant information to stakeholders: “On or before the date that the settlement notices are mailed, the settlement administrator will establish a settlement website on which it will post the following documents or links to the following documents: the third amended complaint, settlement agreement and exhibits thereto, settlement notices, former participants claim form, preliminary approval order and any other court orders related to the settlement, and any other documents or information mutually agreed upon by the settling parties in writing. When filed, the settlement administrator will also post or include links to the motion for attorneys’ fees and costs, administrative expenses, and class representatives’ compensation (and any documents submitted in support). … The settlement administrator will take down the settlement website at the conclusion of the settlement period.”

The full text of the decision is available here. 

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