Compliance May 9, 2016

What to Anticipate from Washington for Retirement Plans

While retirement industry regulators have been busy, not much has come out of Congress affecting retirement plans, but that may soon change.
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Not much coming out of the most recent Congressional session has affected retirement plans, but that could change in upcoming sessions, according to Rich McHugh, of counsel at Porter Wright Morris & Arthur LLP and vice president of Washington Affairs at the Plan Sponsor Counsel of America (PSCA).

McHugh noted to attendees of the PSCA’s Annual Conference that the tax treatment of defined contribution (DC) plans escaped unharmed in the 2015 budget, but proposals are still being debated. President Obama’s proposed Fiscal 2017 Budget includes a cap on amounts that can be accumulated in retirement accounts. McHugh said the tax provisions in that proposed budget may be a blueprint for actions the retirement industry may see if a Democratic president is elected this year.

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There are a couple of retirement plan proposals that have the potential for enactment, “maybe even this year,” according to McHugh. He said one is an electronic distribution bill to streamline rules about electronic disclosures to plan participants, and another is an action to make multiple employer plans a possibility for unrelated employers. When the Department of Labor (DOL) proposed rules for state-run plans, one suggestion was to allow for multiple employer plans, and some in the industry felt this created an unlevel playing field between states and the private sector.

Speaking of state-run plans, McHugh pointed out that the consideration that state-run plans could create different rules for different states, some in Congress are rethinking their opposition to federally mandated automatic individual retirement accounts (IRAs).

NEXT: Regulators have been busy

McHugh noted that retirement industry regulators have had more effect on retirement plans than Congress recently. Of course, the DOL’s fiduciary rule was big news.

But, he says the Internal Revenue Service’s (IRS’) elimination of its determination letter service is a bigger deal to plan sponsors than many think. He noted that determination letters are a big part of due diligence in mergers and acquisitions, and the PSCA has provided comments to the IRS encouraging it to continue the program in some form. Guidance issued in January that said expiration dates on determination letters issued prior to January 4, 2016, are no longer operative helps now, but eventually these letters will become stale.

McHugh also mentioned the Securities and Exchange Commission (SEC) rules for money market fund reform and liquidity requirements for mutual funds may affect plan sponsors’ investment decisions.

Finally, McHugh mentioned the Pension Benefit Guaranty Corporation’s (PBGC’s) recent focus on defined benefit (DB) plan practices for locating and paying terminated vested, participants. He said the agency may suggest that missing participants’ assets be moved to the PBGC until those participants are found and can make rollover elections.

Compliance May 9, 2016

Treasury Rejects Central States’ Application for Suspension of Benefits

A letter from Special Master Kenneth R. Feinberg says the plan to suspend benefits does not meet requirements of the Multiemployer Pension Reform Act of 2014.
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In a letter to the Board of Trustees for the Central States, Southeast and Southwest Areas Pension Plan, Treasury Department-appointed Special Master Kenneth R. Feinberg says the plan’s proposed benefit suspensions are not reasonably estimated to allow the plan to avoid insolvency.

Specifically, after reviewing the application and consulting with the Pension Benefit Guaranty Corporation (PBGC) and the Department of Labor (DOL), Treasury determined that the proposal failed to satisfy three requirements set forth in the Multiemployer Pension Reform Act of 2014 (MPRA).

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  • The proposed benefit suspensions, in the aggregate, be reasonably estimated to achieve, but not materially exceed, the level that is necessary to avoid insolvency;
  • The proposed benefit suspensions be equitably distributed across the participant and beneficiary population; and
  • The notices of proposed benefit suspensions be written so as to be understood by the average plan participant.

According to the letter, Treasury found that the 7.5% annual investment return assumption used in projections in the plan’s application for suspension of benefits was too optimistic. It says the assumption is not appropriate taking into account the plan’s negative cash flows and other factors, and the assumption does not take into account appropriate investment forecast data.

Treasury further found the entry age assumption used in the projections in the application was not reasonable. The application used a single assumed entry age of 32. The letter says this does not take into account relevant historical and current demographic data of the plan.

NEXT: Suspension of benefits not equitably distributed

Treasury determined that the proposal failed to satisfy the MPRA requirement that the proposed benefit suspensions be equitably distributed across the participant and beneficiary population because of the application’s treatment of United Parcel Service (UPS) employees. The application divided UPS employees into two groups: one group that was covered in the plan when UPS withdrew from the plan, paid its withdrawal liability and entered into a make-whole agreement; and another group that was not.

The application provides for a 40% cap on benefit reductions for the group covered under the make-whole agreement, but a 50% cap on benefit reductions for the other UPS employee group. Treasury found no justification for treating the two groups differently.

Finally, the letter says the notices of proposed benefit suspensions were not written so as to be understood by the average plan participant because the notices extensively use technical language without adequate explanation; critical terms used are not defined in the notices, but only cross-referenced to other documents; and the cross-referenced definitions are not understandable to the average plan participant.

In a statement, Thomas Nyhan, executive director of the Central States Pension Fund, said, “Although the decision by our Trustees to file this application under provisions of the Multiemployer Pension Reform Act of 2014 (MPRA) was gut wrenching, we are disappointed with Treasury’s decision, as we believe the rescue plan provided the only realistic solution to avoiding insolvency. The Central States Pension Fund Trustees will carefully consider the most appropriate next steps, based on this denial and the final guidance issued by Treasury on April 26.” Nyhan said the plan is projected to run out of money in 10 years.

However, the Pension Rights Center praised the Treasury for rejecting the Central States Pension Fund’s application to cut its retirees’ pensions. “The Treasury Department decision is a victory for democracy,” said Karen Friedman, the Center’s executive vice president and policy director. “Where the legislative process failed retirees with the passage of the Multiemployer Pension Reform Act (MPRA), the regulatory process worked to protect their interests. The Treasury Department made the legally-sound and morally-right decision that the Central States Pension Fund failed to meet MPRA's conditions.”

Treasury’s decision about the Central States plan is just the first of several it will have to make. There are at least two other union plans that have applied for a suspension of benefits.

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