NEW DISCLOSURE REQUIREMENT
FOR UNDERFUNDED DEFINED
BENEFIT PLANS

By Steven H. Ellner, ASA, EA, Geller & Wind, Ltd.

The Retirement Protection Act of 1994 (RPA '94) adds a new annual notice requirement to participants of underfunded defined benefit plans, disclosing the extent of the plan's underfunding and the limits on benefits guaranteed by the Pension Benefit Guaranty Corporation (PBGC) if the plan terminates while underfunded (PBGC Reg. Sec. 2627, issued June 30, 1995).

The notice contains specific language and must be distributed to all participants of underfunded defined benefit (DB) plans that are subject to the PBGC variable rate premium. The notice must be distributed within two months after the due date of Form 5500 for the previous plan year (including extension).

The notice requirement is first effective for plan years beginning in 1995. Plans with fewer than 100 participants, however, are first subject to this notice requirement for the plan years beginning in 1996. Therefore, it is likely that many plans will be required to distribute this notice for the first time in 1996. (For example, an underfunded plan with less than 100 participants must first distribute this notice by September 30, 1996, if the 1995 Form 5500 is filed on July 31, 1996.)

The notice must also disclose any missed quarterly contributions (if paid more than 60 days late). The notice must inform participants whether the missed quarterly payment has been made, and if it has, the date of late payment.

Failure to issue timely notices may bring penalties of up to $1,000 per day assessed by the PBGC. *

EMPLOYER LIABILITY UNDER
401(K) PLANS

By J. Michael Bermensolo, Esq., Geller & Wind, Ltd.

Since 1994, it has been generally accepted that employer sponsors of Sec. 401(k) plans have broad protection from lawsuits brought by employee participants in such plans under the Employee Retirement Income Security Act of 1974 (ERISA). It has been understood that employee participants would be unsuccessful in lawsuits brought against employer sponsors due to investment losses suffered by the participants in investment options selected by the employers if the participants a) were offered at least four investment options with a wide range of investment goals, and b) had the opportunity to change their investment selections at least four times per plan year.

It appears, however, that such a broad interpretation of the protection afforded to employers under ERISA is now unfounded. Based on a recent court case, employers can be required to pay money damages when participants lose money in their Sec. 401(k) plans. In the case of Meinhardt vs. Unisys Corp. (Unisys), the Third Circuit Court of Appeals (court) held that the employer could be potentially liable for such losses where the employer does not provide Sec. 401(k) plan participants with enough information about the investment options for them to make informed decisions concerning the risks inherent in investing in certain investment contracts and where the employer does not exercise prudence in selecting investment options. Such contracts were guaranteed investment contracts (GICs) issued by Executive Life Insurance Company (Executive). When Executive became insolvent, the GICs were frozen so that the participants could not withdraw their funds. The court held that Unisys could not invoke ERISA Sec. 404 as an automatic and absolute defense in a situation where the employer may have provided insufficient information to participants concerning the exercise of control of the investment of their
plan assets.

Accordingly, employers should demonstrate that the decision to offer an investment option was prudent and also provide the participants with sufficient information about the investment risks regarding the investment option. Unfortunately, as of this date, a standard for "sufficient information" was not determined by the court. Thus, employers should work closely with their registered investment advisors, registered representatives, and consultants to ensure that the proper information is provided to these participants before they make their investment decisions. *

TIME REDUCED FOR EMPLOYERS TO DEPOSIT 401(K) CONTRIBUTIONS

By J. Michael Bermensolo, Esq., Geller & Wind, Ltd.

The Department of Labor (DOL) has issued proposed regulations that would reduce the maximum amount of time an employer will have to transmit employee salary reduction contribution amounts to a Sec. 401(k) plan.

Current Rule

Under the existing Employee Retirement Income Security Act of 1974 (ERISA) regulations, employee salary reduction contributions are deemed to be plan assets on the earliest date on which the employee salary reduction contribution amounts can be reasonably segregated from the general assets of the employer, but in all cases no later than 90 days from the date of withholding by the employer.

Proposed Rule

The proposed regulation will continue to require that employee salary reduction contribution amounts be transmitted to a Sec. 401(k) plan as soon as they can be reasonably segregated from the employer's general assets. The proposed regulation, however, also will provide that the maximum amount of time employers will have to transmit employee salary reduction contribution amounts would be no later than the maximum amount of time employers now have under the Employment Tax Deposit rules for the transmission of Social Security tax and Federal income tax withholdings to the IRS.

The amount of time that an employer has to deposit employment tax amounts is determined by the amount of employment taxes paid by the employer during a 12-month look-back period. In general, the new rule would require all but the smallest of employers sponsoring Sec. 401(k) plans to make deposits of employee salary reduction contribution amounts within a few days of withholding such amounts from their respective employees' wages, while smaller employers may make these deposits on a monthly basis.

In particular, employers who have more than $50,000 in Social Security tax and Federal income tax withholdings annually must deposit the employee salary reduction contribution amounts which were withheld within a few days of such withholding.

If an employer has withholdings of Social Security tax and Federal income tax amounts of $50,000 or less annually, the employer must make deposits of employee salary reduction contribution amounts to the Section 401(k) plan on or before the 15th day of the month following the month in which the employer withheld the employee salary reduction contribution amounts from the wages of such employees.

This new regulation was effective on or about March 15, 1996. *

Editors:

Sheldon M. Geller, Esq.

Geller & Wind, Ltd.

Avery E. Neumark, CPA

Rosen Shapss Martin & Company

Contributing Editor:

Steven Pennacchio, CPA

KPMG Peat Marwick LLP