Tag Archives: retirement

Participant Data And Fiduciary Liability: The Current Regulatory Environment, The Vanderbilt Lawsuit, And Best Practices For Benefit Plan Sponsors

With cybersecurity risks on the rise and increased awareness of the sophisticated ability of hackers in the modern world, many plan sponsors have expressed growing concerns that they may have fiduciary liability with respect to protection of participants’ personal information. By now, most plan sponsors have become accustomed to complying the Health Insurance Portability and Accountability Act (“HIPAA”) with respect to participant data within their employer-sponsored health plan. However, employers are not accustomed to applying such standards in the retirement plan context. Given the heightened cybersecurity risks in today’s digital society, employers serving as plan sponsors of retirement and welfare benefit plans should begin to implement policies and procedures to protect participant data and carefully monitor their service providers as they handle participant data.

In recent years, there has been a push for regulation governing protection of personally identifiable information (“PII”) in the retirement plan context. In 2011, an ERISA advisory council that serves as an advisor to the Secretary of Labor issued a report urging the Department of Labor (“DOL”) to issue guidance or regulations relating to the obligation of plan fiduciaries to protect the PII of plan participants and beneficiaries. The counsel expressed concern over insecurity of plan financial data, asking the DOL to provide guidance on whether ERISA fiduciaries must secure PII and develop educational materials for participants. Specific areas of concern included theft of PII or money from accounts, unsecured/unencrypted data, hacking into plan administration and service provider systems, outdated password protections, phishing emails, and stolen hardware. The counsel met again in 2016 and once again urged the DOL to issue guidance and hoped that the report could serve as a reference for plan sponsors to secure plan data and assets from cybersecurity risks.

To date, the DOL has issued no direct guidance on cybersecurity considerations for PII within retirement and welfare plans. However, a new argument has emerged under ERISA fiduciary standards that the “prudent man” rule, exclusive benefit rule, and the obligation to select and monitor service providers include the obligation to maintain the privacy and security of plan data and monitor service providers’ use of the data. Under ERISA, fiduciaries must act prudently, taking the course of action that a similar, prudent man would in like circumstances and with like knowledge. Furthermore, ERISA requires fiduciaries to act only for the exclusive benefit of plan participants and their beneficiaries. Finally, ERISA fiduciaries must prudently select and monitor a plan’s service providers.

Some have begun to use Interpretive Bulletin 96-1 as a reference point to establish a requirement of prudence in service provider selections, including the prudent selection of a service provider that securely maintains electronic plan data. Additionally, one of the arguments in a lawsuit against Vanderbilt University stated that the University failed to protect plan assets by allowing third parties to market services to participants, referring to participant and financial data held by the plan as “plan assets” protected by fiduciary obligations. In that case, the plaintiffs argued that the University allowed the plan’s recordkeeper to obtain access to participants’ private and sensitive information, including investment choices, account information, contact information, proximity to retirement, age, and more, in order to market and sell its own insurance products to participants outside the plan. The plaintiffs claimed that such an action violated the University’s fiduciary duty to work for the exclusive benefit of the participants. Unfortunately, the parties recently came to a settlement agreement before the courts had a chance to rule on whether ERISA protections will apply to personal plan information.

Although there is no direct guidance from the DOL on fiduciary standards as applied to the privacy and security of participant data, it is likely in the coming years the DOL will find that retirement and welfare plan fiduciaries have a responsibility to safeguard participant data in compliance with the prudence standard, given the common knowledge of cybersecurity risks in today’s society. Specifically, plan sponsors should be aware of their duty to monitor service providers and their security measures in place for protecting plan data. Going forward, plan sponsors should implement security policies and procedures relating to the protection of PII and participant data. Some companies have formed cybersecurity committees for purposes of implementing these procedures and increasing awareness internally about the seriousness of cybersecurity. Further, in choosing service providers, plan sponsors should exercise due diligence in questioning the providers’ security measures, breach reporting practices, and contract provisions relating to the protection of plan data.

Share Button

Recent Modifications To Puerto Rico’s Tax Code And The Impact It May Have On Your Qualified Retirement Plan


Governor Ricardo Roselló of Puerto Rico enacted certain revisions to the Puerto Rico tax code (the “PR Code”) in February 2017. He did so with the goal of retaining and attracting workers to Puerto Rico by improving the benefits for its professional workforce. The Governor also hoped to alleviate difficulties associated with the establishment and administration of retirement plans. As a result, tax-qualified retirement plans covering Puerto Rico employees are subject to new requirements. Although the PR Code generally tracks the U.S. Internal Revenue Code, the new rules under Act No. 9-2017 (the “Act”) establish differences between the two codes. These differences affect various aspects of qualified retirement plans, including contributions, highly compensated employees, and cash or deferred arrangements. The Act took immediate effect in February, but the Puerto Rico Treasury Department (the “Hacienda”) is still in the process of addressing the application of the various changes and the implementation of the Act. Despite the lack of guidance, employers sponsoring Puerto Rico retirement plans or dual-qualified retirement plans should pay attention to these rules because the requisite amendments will most likely require new determination letters from the Hacienda.

Material Changes to the PR Code

On February 8, 2017, the Governor of Puerto Rico enacted Act. No. 9-2017 modifying retirement plan qualifications under the PR Code. The following changes were made and apply to all retirement plans (regardless of the employer), including Puerto Rico-only plans and dual qualified plans.

  1. Highly Compensated Employees (“HCEs”): USD $150,000 Threshold and No Automatic Treatment for Corporate Officers.

Prior to the Act, the U.S. and Puerto Rico used the same monetary threshold for defining HCEs. However, under the new rules, the threshold has been increased from USD $120,000 to $150,000. Unlike the U.S. tax code, which subjects its HCE threshold to cost-of-living adjustments, the Act establishes the PR Code’s HCE threshold as a fixed number. Additionally, corporate officers may no longer receive automatic treatment as HCEs under the PR Code. Rather, corporate officers will only be classified as HCEs if their salary surpasses the new USD $150,000 threshold.

  1. Annual Contribution Limits: Limited to the lesser of 25% of net income or USD $75,000.

The new annual contribution limit on per-participant contributions to defined contribution plans under the Act is the lesser of 25% of “net income” or USD $75,000. This is a departure from the previous statutory limit, the lesser of 100% of compensation or USD $54,000, which is the current rule under the U.S. tax code. The maximum contribution under the Act does not allow cost-of-living adjustments and does not apply to rollover contributions. This new limit also comes with ambiguities, including how the Hacienda will define “net income” and whether the annual, per-participant limit on compensation under a plan will apply under the Act. Currently, both the U.S. and Puerto Rico tax codes contain provisions limiting the amount of compensation that may be used to determine benefits under the qualified retirement plan. If this annual USD $270,000 compensation limit continues to apply in both countries, contributions under the new rule cannot exceed US $67,500.

  1. Increase in the Aggregate Limit on Tax-Deductible Employer Contributions.

Currently, tax deductible contributions to defined contribution plans cannot exceed 25% of the aggregate compensation of all plan participants. However, under the Act, this aggregate limit is increased to the extent that the tax-deductible contributions do not exceed the aforementioned individual annual contribution limits.


  1. Plans with a Cash or Deferred Arrangement (“CODA”) Could Qualify for Exemption From the Average Deferral Percentage Test.

For the most part, retirement plans must comply with Puerto Rico’s laws governing coverage and participation requirements, as well as non-discrimination provisions. However, the Act provides an exemption from the Average Deferral Percentage Test for certain CODA plans. The new safe harbor rule applies to: (1) plans containing a CODA that have fewer than 100 participants; (2) whose business generates less than $10 million in annual gross income, and (3) where the employer provides a benefit of no less than 3% of compensation to all eligible employees. The definition of “business” and “gross income” are not specifically defined in the Act and require further guidance by the Hacienda.

Looking Forward: Assessing the Impact on Your Plan

Differences in the Puerto Rico and U.S. tax codes can cause confusion for employers that hire Puerto Rican employees or sponsor dual-qualified retirement plans. For example, an employer with a dual qualified retirement plan will have to comply with the new PR Code definition of HCEs, which conflicts with the HCE definition in the U.S. tax code. Furthermore, there are various ambiguities within the Act which could elicit different interpretations of the new rules. Therefore, although the Act took immediate effect, it may be prudent for employers to wait for further guidance from the Hacienda on how best to implement certain new rules (such as the safe harbor provision for plans containing a CODA). The Act does not make clear when the retirement plans must be in compliance with all of the new rules, and have yet to define many key terms for purposes of implementation.

Importantly, the amendments necessary for compliance with the new law most likely will be classified as qualification amendments, which would necessitate updated determination letters from the Hacienda. It would be wise for employers sponsoring Puerto Rico plans or dual qualified plans to begin updating their plans and policies to the extent possible under the unambiguous provisions of the Act. Furthermore, employers should continue to monitor developments regarding the new Act by looking for newly released guidance on the aforementioned, unresolved ambiguities since mid-year changes might be necessary.

Share Button

401(k) Plans: Time To Restate And Perhaps Revise


The Internal Revenue Service maintains procedures designed to assist plan sponsors in preserving the tax qualified status of their retirement plans. With respect to prototype and volume submitter plans, the IRS procedures require that such plans be restated every six years. Under the current cycle, such plans must be restated no later than April 30, 2016. As a result, the majority of plan sponsors should review their qualified plans within the upcoming months, if they have not already done so, and make decisions regarding plan provisions.

The upcoming April 30, 2016 deadline for the restatement of prototype and volume submitter documents provides not only the occasion for plan sponsors to update their plans in accordance with legal requirements, but also an opportunity to consider possible changes to their plans’ provisions. This article sets forth some considerations for plan sponsors when presented with updated prototype documents by their plan document vendors. These considerations represent common trends and best practices and are not intended to be an exhaustive list of the changes a plan sponsor might consider.

Automatic Enrollment and Escalation

Automatic enrollment is a popular development in the 401(k) industry. Through automatic enrollment, new or current participants may be treated as having enrolled at an established contribution percentage. The participant must be provided a notice describing the terms of the automatic enrollment feature and offered the option to change the automatic percentage or elect no contribution at all. If the automatic enrollment feature is designed to be an “Eligible Automatic Contribution Arrangement”, participants may be offered the option to withdraw the amounts automatically deferred from their pay within the first 90 days after the date of the first contribution. In addition, a plan may include a “Qualified Automatic Contribution Arrangement” or “QACA” and, in so doing, avoid the 401(k) nondiscrimination testing provided certain requirements are met. This form of automatic enrollment requires an initial 3% automatic deferral rate, and automatic escalation of the default rate for each of the following three years.

More recently, plans have trended toward providing automatic escalation regardless of whether the plan is intended to comply with the QACA requirements. Automatic escalation can further serve to assist participants with accumulating retirement savings by “smoothing” the increase over time to a meaningful contribution rate. Regardless of the form of automatic enrollment chosen, automatic enrollment, through the power of inertia, can significantly increase participant retirement savings.

Vesting Revisited

Over the past several years, plan sponsors have generally shortened their plans’ vesting periods. The law permits plans to either provide for a graduated vesting schedule for employer contributions of not more than six years or no vesting for three years, with all employer contributions being vested at the end of the three-year period. One reason plans have trended toward shorter vesting schedules is to offer benefits consistent with competitors and attract talented employees. Another reason is that many plans are “safe-harbor” plans. A safe-harbor plan avoids non-discrimination testing and the potential limitation of the amount that highly compensated employees and owners can contribute provided that the plan meets the safe-harbor employer contribution requirements. Safe-harbor employer contributions must be fully vested.

The trade-off for shorter vesting schedules, or no vesting schedule, is that employers lose the benefit of forfeitures. When a participant who is not fully vested terminates employment, his or her non-vested account balance is credited to a forfeiture account. Forfeiture amounts are generally allocated to the remaining active participants or used to pay plan expenses that would otherwise be paid by the employer or charged directly to participant accounts. Forfeitures are also commonly used to offset the employer’s contribution to the plan. There are limitations on the extent to which an employer can lengthen the vesting schedule with respect to current participants. However, there is no prohibition on changing the vesting schedule for new participants.

How About Safe-Harbor?

Since the last prototype restatement cycle, there have been several significant trends with respect to plan contributions. One major trend is the continued proliferation of safe-harbor 401(k) plans. Safe-harbor 401(k) plans offer employers a free pass on the non-discrimination requirements. In translation, this simply means that business owners and highly-compensated employees can contribute up to the maximum contribution dollar limit ($18,000 for 2015 and $24,000 for participants age 50 or older under a plan’s “catch-up” provision) without the threat of having the amount of contribution limited to a lesser amount or returned to them. The trade-off is that eligible non-highly compensated employees must receive either a fully vested employer contribution of three percent of their compensation or a fully vested matching contribution not less than 100% of the first three percent they contribute plus 50% of the next two percent they contribute. Safe-harbor plans are very popular and any employer that has problems with the non-discrimination tests should very seriously consider a safe-harbor 401(k) design.

Roth Continues to Expand

Roth contributions can be very appealing due to the fact that although employee contributions are made on an after-tax basis, such amounts and the earnings attributable to Roth contributions are not taxed upon distribution. In order for a distribution to be a “qualified Roth distribution,” certain requirements must be met including the requirement that the participant maintain a Roth account for a minimum of five years.

Employers may also include an in-plan Roth rollover or conversion provision. Under such a provision, a participant may elect to convert pre-tax accounts, whether or not currently distributable, to Roth accounts. Of course, the participant is required to recognize income on the converted amount. However, future earnings on the converted amount will be distributed tax-free provided the Roth requirements are met. Through IRS guidance, the conversion rules were expanded to allow the conversion of amounts attributable to pretax contributions to be converted to Roth amounts regardless of whether the participant is eligible to receive a distribution of such amounts.

Plan Governance and Fiduciary Practices

The restatement process is also a good time to review your plan’s governance and fiduciary practices. The Department of Labor (the “DOL”) has significantly increased its plan audit activity in recent years. As part of its review process, the DOL is examining fiduciary committees and asking for copies of committee bylaws and/or charters, meeting minutes, information relating to monitoring plan vendors and evidence of fiduciary training to name a few. The DOL will examine whether plan fiduciaries understand and have reviewed the fees paid by the plan. It is highly recommended that plans of all sizes have a committee in place that meets regularly and conducts itself in a manner that satisfies the high expectations of the DOL.

Reconsider and Confirm or Revise

Plan sponsors have grown accustomed to periodic plan updates and restatement cycles. But too often the restatement process is a rubber-stamp ceremony, with little discussion surrounding the existing plan provisions. During this restatement cycle, plan sponsors should take the time and give thought to their plan’s terms and provisions and discuss optional provisions with their advisors. This is also a good time to review your plan’s governance and fiduciary practices. The restatement process can serve as an opportunity for plan sponsors to reconsider existing plan provisions and operation and implement new features that align with their goals and needs and the goals and needs of their employees.

Share Button

When Bad Things Happen To Good Plans: IRS Enhances Plan Correction Methods

Corrective Action

The Employee Plans Compliance Resolution System (“EPCRS”) is a program offered by the IRS that allows plan sponsors to correct retirement plan compliance violations on a voluntary basis. Plan sponsors whose plans experience operational errors or mistakes can avail themselves of EPCRS and pay a penalty that is a fraction of the penalty that would otherwise be assessed if the defect is discovered under an IRS audit. In some cases, if the defect qualifies for self-correction without IRS approval, the sanction or penalty can be entirely avoided.

EPCRS continues to improve as a very beneficial tool for plan sponsors who desire to maintain legal compliance in a complex regulatory environment. Most recently, the IRS published two new Revenue Procedures, which serve to further entice plan sponsors to utilize EPCRS by expanding the program and lowering the cost of certain corrections. The opportunity to correct certain defects in accordance with the Revenue Procedures is available immediately. This article provides a brief summary of the more pertinent enhancements to EPCRS offered by the Revenue Procedures.

Employee Elective Deferral (401(k)) Contributions

A common plan error is the failure on the part of the plan sponsor to accurately honor the salary deferral election of eligible employees in a 401(k) plan. Before the issuance of the Revenue Procedures, the permitted corrective measure under EPCRS was for the plan sponsor to contribute 50% of the amount that should have been contributed and the full matching contribution that would have been contributed if the participant’s election had been followed. These corrective contributions were adjusted for earnings.

The justification by the IRS for requiring the 50% contribution in lieu of the elective deferral is that even though the participant received the cash amount that should have been deferred, the participant was deprived of the tax deferred savings opportunity. Recognizing that the 50% could be considered a “wind-fall” for the participant, the Revenue Procedures provide that if the correct deferral amount begins not later than the first payroll after a three month period after the failure first occurred, only the corrective matching contribution is required. If the correction is made after three months, the corrective percentage for missed deferrals is 25% rather than 50%. In order to be eligible for the lower 25% correction percentage, the following conditions apply:

  • The participant election must be followed not later than the first payroll after the second year following the year the failure occurred or, if the plan sponsor is notified by the employee, the first payroll made after the month of the notification;
  • The corrective contribution must be made before the last day of the second plan year after the year of the failure and, in no case, after the plan or plan sponsor is under examination by the IRS; and
  • Corrective contributions for missed matching contributions are made in accordance with existing EPCRS rules and all corrective contributions are adjusted for earnings.

Regardless of whether the correction is made within the first 3 months or the second year following the initial failure, notice of the failure must be provided to the employee no later than 45 days after the date the correct deferrals begin.

Automatic Enrollment/Contributions

Recognizing that automatic enrollment errors are common, the Revenue Procedures provide significant relief with respect to the available correction method for failure by a plan sponsor to implement a plan’s automatic contribution feature. The Revenue Procedures provide that where the failure to implement a plan’s automatic contribution feature does not extend beyond 9½ months after the end of the plan year during which the failure occurs, no corrective contribution is required to be made by the plan sponsor if:

  • The correct deferrals begin no later than the end of the 9½ month period after the end of the plan year in which the failure first occurred or the first payroll date after the end of the month the plan sponsor is notified of the failure by the affected employee;
  • Notice of the failure is provided to the affected employee no later than 45 days after the date the correct deferral amount begins; and
  • Corrective contributions for missed matching contributions are made in accordance with the existing EPCRS rules and all corrective contributions are adjusted for earnings.

Other Revisions

The Revenue Procedures include several other revisions to the correction methods including an extended period to correct excess annual additions, reduced sanctions for required minimum distribution and participant loan violations under certain conditions, clarification regarding the plan sponsor’s duty to collect excess distributions, a new permitted method for calculating lost earnings in some situations and a variety of procedural changes.


The revisions to EPCRS by the recently released Revenue Procedures provide an impetus to plan sponsors to utilize the IRS voluntary correction program and to make the corrections sooner rather than later. By catching errors within the stated timeframes, plan sponsors can significantly reduce the cost of correction. The regulatory environment surrounding retirement plans is vast and complex; however, when errors occur, prompt correction can serve to significantly reduce and eliminate further costs and financial exposure. If you have questions regarding the IRS plan correction program, please feel free to contact one of our employee benefits lawyers or your McGrath North attorney.

Share Button

New IRS Plan Limits Announced for 2015

2015IRSlimitsOn October 23, 2014, the IRS released the new plan limits for 2015.  The following is a brief summary of the changes in retirement plan limits:

  1. Salary deferral contributions have been increased from $17,500 to $18,000.  This salary deferral limit applies to 401(k), 403(b), and eligible 457(b) plans.
  2. Catch-up contribution limits for those age 50 and over has been increased from $5,500 to $6,000.  This limit also applies to 401(k), 403(b), and eligible 457(b) plans.
  3. The total contribution limit for defined contribution plans in 2015 has been increased from $52,000 to $53,000.  Note, the limit on contributions is the lesser of 100% of compensation or $53,000 for a defined contribution plan in 2015.
  4. The annual compensation limit has been increased from $260,000 to $265,000.  Note, this means that any compensation paid over and above $265,000 may not be taken into account in calculating contributions to a defined contribution plan.
  5. The dollar limit for the definition of key employee in a top-heavy plan is unchanged at $170,000.
  6. The definition of HCE (highly compensated employee) has been increased from $115,000 to $120,000.
  7. The limit on the annual benefit under a defined benefit pension plan remains unchanged at $210,000 for 2015.
  8. The annual limit on contributions to an IRA remains unchanged at $5,500 and the catch-up contribution for those 50 and over stays at $1,000.
  9. The taxable wage base is increasing from $117,000 to $118,500 by the Social Security Administration for 2015.

These are just a few of the changes in plan limits (or lack of changes) for 2015.  If you have any questions or need any additional information on other adjustments for 2015, please do not hesitate to give us a call.

Share Button