There are four conditions which need to be satisfied in order for a line of business to be treated separately for purposes of applying the minimum coverage and nondiscrimination requirements.

A Separate Organizational Unit. The line of business must be organized as a separate unit within the employer and must be set up as a separate corporation, partnership, division, or other organizational unit on each day of the year.

Separate Profit Center. The line of business must be a separate profit center within the employer, and the employer must maintain records that separately account for the revenue and expenses of that line of business.

Separate Workforce. The line of business must have its own separate employee workforce, requiring that 90% of all employees who perform services for a particular line of business must spend at least 75% of their time working for that line of business.

Separate Management. The line of business must have separate management. An employer must identify the top 10% of highly compensated employees (HCE) who perform at least 25% of their service for that line of business and, of those employees, at least 80% must provide at least 75% of their services to that line of business. Employers that maintain centralized support services may not be able to satisfy the separate line of business requirements if the support staff performed more than 25% but less than 75% of their services for the separate line of business.

Furthermore, on each day of the year there must be at least 50 employees who provide services exclusively for the separate line of business. The employer must notify the IRS that it is treating itself as operating a separate line of business for purposes of applying the minimum coverage and non-discrimination tests.

Payment of Plan Expenses

with Plan Assets

Employers are increasingly interested in reducing the cost of maintaining their benefit programs and, therefore, desire to use plan assets for the payment of expenses related to plan operation. More specifically, sponsors of over-funded defined benefit pans desire to use excess assets of the plan without effecting a termination. In addition, as part of a program to shift costs to the employee, an employer may have a plan (or the subaccounts under a Sec. 401(k) plan) directly pay for certain administrative services or otherwise receive reimbursement from the plan for the employer's costs. The Department of Labor (DOL) has increased its enforcement program involving payments received by plan sponsors from their employee benefit plans. Generally, the employer may be reimbursed for expenses incurred in maintaining a plan if 1) reimbursement is permitted by the plan, 2) the conditions of the statutory exemption under ERISA are met, and 3) the employer receives reimbursement only of its direct expenses. ERISA requires that plan assets be used for no other purposes than to provide benefits to participants and beneficiaries, and to pay "reasonable expenses of administering the plan."

Employers that sponsor benefit plans have interests which may conflict with the interests of plan participants and beneficiaries. The DOL has taken the position that certain decisions affecting a plan are not fiduciary decisions but, rather, are "settlor functions," which are generally discretionary decisions by the employer. For example, an amendment to a plan to reduce future accruals is a settlor function, whereas an amendment to comply with legislative changes is not. Payment of expenses associated with settlor functions generally should not be paid by the plan, including plan establishment and plan termination costs.

The expenses of investment management, plan administration, and recordkeeping services would be properly payable by the plan. Employers who wish to implement a cost-shifting program should make certain that the payment of plan expenses with plan assets is consistent with ERISA's guidelines to avoid potential fiduciary liability under ERISA.

Non-Deductible Contributions

Not Returnable to Employer

The IRS has ruled that contributions made to a retirement plan that exceed the year's maximum deductible contribution were not made due to a mistake of fact and, therefore, were not returnable to the employer. In certain limited circumstances, employer contributions may be returned to the employer based upon a mistake of fact, provided which the amount is returned within one year of its deposit. The IRS noted which generally a mistake of fact means a misplaced decimal point, an incorrectly written check, or an error in determining the contribution calculation. However, an employer who assumes there will be a contribution requirement and contributes an amount exceeding the deductible limit, will not be able to receive the employer contributions from the plan. This ruling demonstrates the need to obtain actuarial valuations for defined benefit plans as well as contribution calculations for defined contribution plans (including matching contribution calculations for Sec. 401(k) plans) before making contributions.

IRS Denies IRA

Rollover Treatment

The IRS has ruled that it lacked authority to waive or otherwise extend the 60-day statutory period within which a qualified retirement plan distribution may be rolled over to an IRA. A surviving spouse of a plan participant received a distribution from the deceased spouse's retirement plan, and a check representing the entire balance of the distribution was turned over to a financial planner for deposit into an IRA. The financial planner failed to timely deposit the distribution into an IRA, the check was returned to the surviving spouse, and the surviving spouse deposited the funds in an IRA after the 60-day rollover period had expired. The ruling suggests that taxpayers must be very careful to avoid adverse tax consequences following a failure to observe the 60-day rule.

Bankruptcy

A bill has been proposed which will exclude pension plan assets from bankruptcy proceedings. The bill would amend ERISA to clarify that the Federal Bankruptcy Code has no application to assets held in or benefits provided under a qualified pension plan, confirming that assets set aside in a qualified plan were intended to be excluded from bankruptcy proceedings. Both ERISA and the IRC require that plans contain a provision restricting the assignment or alienation of plan interests. If the plan administrator turns over an employee's interest in plan assets because of a bankruptcy order, the plan may lose its qualified status under current law.

On a different front, the Supreme Court has agreed to resolve the frequently litigated question of whether an interest in a retirement plan subject to ERISA is excludable from a debtor's bankruptcy estate. The dispute has generated an even split among the eight Circuit Courts of Appeal to have considered the issue.

Summary Plan Governs

Employee Claim

An Erisa-governed group accidental death insurance policy beneficiary is entitled to benefits according to the terms of a summary plan description, even though the plan summary conflicts with the policy terms. According to the Appeals Court, the summary plan description is binding, and if a conflict between the summary plan and the terms of the plan exists, the summary plan must govern. The court further stated that any other rule would be unfair to employees and would undermine ERISA's requirement of an accurate and comprehensive summary. Accordingly, summary plan descriptions for welfare benefit plans as well as qualified retirement plans need to be carefully drafted and consistent with the plan document and intent of the sponsoring employer.

IRS Enforcement Program

The IRS has implemented an enforcement program designed to offer employee benefit plans an alternative to plan disqualification. Plans that have been audited and found to have violated qualification requirements would be able to avoid the harsh penalty of plan disqualification under a closing agreement program initiated by the IRS.

The enforcement program is designed to apply to certain form and operational defects, including those plans failing to make plan amendments according to TEFRA, DEFRA, and REA, applying the improper application of an integration formula, making partial terminations, and committing operational top-heavy violations. The program provides plan sponsors with the opportunity to clean up their plans and to get on with day-to-day plan operation without incurring a plan disqualification determination or having plan participants taxed on their vested interests in the plan.

Life Insurance Contracts

Subject to State Supervision

Qualified plan distributions that do not include the portion of the account invested in life insurance contracts issued by a company with assets under state court supervision would be allowed tax-favored treatment under a recently issued IRS letter and revenue procedure. The distribution from a plan would be treated as the "balance to the credit" of the employee's account even though the distribution did not include an employee's contingent interest in court-impounded funds of the plan. A distribution of the "balance to the credit" of the employee needs to be effected to be eligible for rollover or taxation under special rules available for lump sum distributions. The "balance to the credit" of the participant generally includes all amounts credited to that employee's account that are payable because of the occurrence of certain triggering events, such as separation from service, death, attainment of age 59, or disability.

Audits of Terminated Plans

Obtaining a determination letter from the IRS upon a termination of a qualified plan is not required, and many plans, especially defined contribution plans, do not seek a determination because of the delay and cost involved in obtaining an IRS determination. We understand the IRS has targeted for audit plans terminated without seeking determination letters. The IRS is apparently reviewing IRS Forms 5500 filed in respect of a final plan year indicating that the plan has been terminated, but that a determination letter had not been requested by the employer sponsoring the terminated plan. The IRS apparently intends to select plans to establish a profile of plans that have filed a final IRS Form 5500 without seeking a determination to avoid potential problems that may be associated with a plan's termination. Accordingly, plan sponsors may want to consider seeking a determination, where they may not have otherwise been inclined to, since there may be an IRS presumption of potential problems with the terminated plan.