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

The Taxpayer Relief Act of 1997 (TRA '97), which the President signed into law on August 5, 1997, reconciles the treatment of matching contributions made to IRC section 401(k) plans for self-employed individuals (sole proprietors and partners) with the treatment provided to employees under such plans. Accordingly, effective for plan years beginning after December 31, 1997, matching contributions made for self-employed individuals under a section 401(k) plan are not subject to the limit ($9,500 in 1997 and $10,000 in 1998) on elective salary deferrals.

Prior to the 1998 plan year, under Treasury regulations, if a deduction for a partnership matching contribution was allocated to the partner for whom it was made, the matching contribution was treated as an elective salary deferral contribution for the partner. Because the regulations required that a partnership allocate the deduction for all contributions to a 401(k) plan on behalf of a partner to that partner, it was, in effect, nearly impossible for a partnership to make matching contributions for its partners or for a sole proprietorship to make such a contribution for him- or herself.

Thus, effective with the first day of a 1998 plan year, partners and sole proprietors will be able to maximize their elective salary deferral contributions and be eligible for an allocation of an employer matching contribution like any employee. Now, such contributions are only limited by the nondiscrimination tests applicable to such plans. *


By David Langer, David Langer Company, Inc., Consulting Actuaries

Retroactive Allocation Formula Change Disallowed

Although many practitioners would disagree, IRS recently ruled that an amendment to a profit sharing plan that changed the formula for allocating the contribution to participants violated anticutback rules of ERISA, since it applied to a company contribution that was made after the date of the amendment, but on behalf of a plan year that ended prior to such date and was therefore retroactive. Including the contribution in the participant's protected accrued benefit before it was made does not seem to take into account the discretionary nature of the contribution or the fact that a participant's protected "accrued benefit" in a profit sharing plan is his or her account balance.

Retroactive Benefit Reductions Allowed

IRS recently approved a plan amendment that reduced accrued benefits retroactively. This is generally not permitted; reductions in the benefit formula can only be made for future service. The reduction is permitted where the employer has a "substantial business hardship," for which a waiver of required minimum contributions will not suffice. In approving the amendment, which was adopted in January 1997 and froze benefit accruals as of July 31, 1996, IRS considered the following:

1. Is the employer operating at an economic loss?

2. Is there substantial unemployment in the employer's area of business?

3. Are profits or sales depressed or declining?

4. Will the plan likely be continued only if the amendment is adopted?

While not all of the above were satisfied, IRS decided the employer had a substantial business hardship.

Recent Decisions

Breach of fiduciary promise. A U.S. Court of Appeals found that a group of retirees could sue for breach of fiduciary duty due to misleading statements by the fiduciaries. The employer had been providing free postretirement health benefits, under a plan that was later amended to require employee contributions. The retirees had taken early retirement partly based on consistent guidance from the employer that it did not intend to change the terms of the plan, when it actually did intend to do so. The court stated that a fiduciary has a duty to provide information when it knows that failure to do so might cause harm.

Disclosure of nonmandated documents not required. ERISA mandates that employees are entitled to certain documents, such as a Summary Plan Description, a statement of benefits upon request, and the right to review the plan and other formal legal documents under which the plan is operated. According to a U.S. court of appeals, a plan need not disclose actuarial valuation reports to a participant who requested them, since the valuation report is not a legal document and is part of ordinary plan administration. The plan has no obligation to disclose.

In an advisory opinion, DOL recently clarified the criteria for disclosing a plan document under ERISA. The issue was whether, the criteria "under which the plan is established or operated," required that a contract with a third party administrator had to be disclosed. The opinion said that unless the contract modifies how the plan will work, e.g., the determination of benefits, or the plan states the administrator will provide copies of all materials requested by a participant, there is no disclosure required.

The requirement to only provide materials called for by ERISA was affirmed by another court of appeals, which dismissed a suit of a former participant who protested how her benefit calculation reflected a period of maternity leave. She had requested information and documents related to benefit calculations for other women on maternity leave.

Incomplete SPD is a breach of duty. A U.S. court of appeals found a breach of fiduciary duty where a summary plan document did not clearly communicate all retirement benefit options and their consequences. The sponsor also did not provide clarification during a retirement counseling session. The death of the participant between the time of her election of a benefit option and the benefit commencement date left her estate with a smaller death benefit than if she had made some other election.

In a similar case, a U.S. district court found that in addition to the employer's fiduciary responsibility to not misinform participants, it also has a duty to inform them when it knows that to not do so can lead to a loss of benefits. In this case, an ill participant, who could have retired and collected benefits that would then have been left to a child, decided to go on long term disability instead. Upon her death, no benefits were payable from the retirement plan to her estate, which then sued the employer for not advising her that she would forfeit her benefit if she died before retiring. *


By Sheldon M. Geller, Esq. Geller & Wind, Ltd.

The Department of Labor has commenced an overall examination of 401(k) plan fees. The department is concerned that high returns in recent years as a result of the robust economy and booming stock market may be obscuring the fees paid for plan asset investment. Moreover, there may be confusion about investment choices. Even when employees choose their plan investments, the employers retain responsibility for selecting and monitoring the investment options from which the employees choose. Employees need to understand there is a cost associated with the services they select. It is more expensive to administer a plan with a wide range of investment options and trading compared to one that permits only quarterly investment options and limited trading. Both employees and employers should note that there may be trade-offs between services and fees.

The Pension and Welfare Benefits Administration (PWBA) will be reviewing a broad range of issues, including (i) whether a plan sponsor and participants understand the fees and expenses they are paying, (ii) what information is disclosed about fees and whether there is a need for more disclosure of fee information, and (iii) what practices plan sponsors are following to ensure that plan participants are not paying excessive fees for their investments.

The PWBA wishes to determine what, if any, additional actions are needed to ensure that employees receive value on their retirement investments. The PWBA's initiative on 401(k) fees also includes determining whether plan sponsors are meeting their fiduciary responsibility and developing a consumer publication to help employers and employees understand the costs associated with plan investments.

Bundled Services. Bundles of services typically include various administrative services (i.e., participant recordkeeping and investment education) along with the investment packages offered by a financial institution. The fees from the investment of the plan's assets are used to offset charges for the administrative services. The Department of Labor has recently been reviewing such relationships and commenting on the impact these fees have on a fiduciary's duty to prudently invest the plan's assets and to place the participant's interests first.

So long as an investment professional or a fiduciary does not exercise any authority or control to "cause" a plan to invest in a mutual fund, the fiduciary will not violate the anti-kickback prohibition under ERISA by receiving fees directly from mutual funds in connection with plan asset investments.

Disclosure Requirements. Plan administrators are only required to furnish statements of assets and liabilities and of income and expense and accompanying notes when requested to do so by a participant or beneficiary. These documents must be supplied free of charge and the summary annual report must contain a notice advising recipients of that fact. ERISA requires that plan participants and beneficiaries receiving benefits under a qualified plan, including a 401(k) plan, be furnished annually with a document that fairly summarizes the latest actuary report. This document known as a summary annual report contains the principal information set forth in the financial statements of the annual report.

The summary annual report also contains a notice advising participants and beneficiaries that, on request, they may obtain a copy of the full annual report. The full annual report sets forth, among other things, administrative expenses (i.e., salaries, fees, commissions, and insurance premiums) as well as other expenses associated with the maintenance of the plan. The annual report further describes administrative expenses as accounting fees, actuarial fees, administrator fees, investment advisory and management fees, legal fees, and trustee fees payable by the plan with plan assets. The summary annual report sets forth plan expenses in the aggregate and the amount of these expenses that are attributable to administrative expenses and the benefits paid to participants and beneficiaries.

Nevertheless, the summary annual report and the annual report are prepared at the plan level, and do not provide in detail the expenses born by each plan participant.

Participant Value and Benefits. Plans generally have a relationship with investment professionals' who, for the payment of investment fees, respond to all participant questions regarding investment of their account balances. Further, these investment professionals provide rollover and retirement kits, investment profiles on the funds offered under the plan, and provide annual prospectuses on all funds.

Further, these investment professionals conduct enrollment meetings and re-enrollment meetings, and provide retirement plan, asset allocation, and distribution planning services to plan participants. The investment professional should provide participants with quarterly newsletters and performance updates for the funds.

Further, an investment professional would normally conduct an annual fiduciary review of the investment of plan assets including a review of the investment policy statement, with the risk-and-reward profiles of the mutual funds as well as the qualitative aspects of the funds to determine whether and to what extent the funds should continue to be offered under the plan.

Plan Sponsor Responsibility. Plan sponsors, as fiduciaries, are required to administer plan assets in accordance with an investment policy statement and the fiduciary responsibility provisions of the Employee Retirement Income Security Act. More particularly, the plan sponsor must discharge his duties with respect to the plan solely in the interest of participants and beneficiaries. These duties must be discharged for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan.

Employers are advised as fiduciaries to look closely at the fees associated with their retirement plans. Employers may face increased liability if they do not avoid high fees, or otherwise receive investment related services commensurate with their fee arrangement. *

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

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

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