PENSION UPDATE NATIONAL PENSION STUDY GROUP SUMMER 2012

PENSION UPDATE NATIONAL PENSION STUDY GROUP SUMMER 2012

ON THE HILL

HOUSE AND SENATE CONFEREES l l JUNE 28, 2012 House and Senate conferees have agreed to changes to pension funding stabilization legislation, including most of the provisions previously passed by the Senate. If passed the segment rate for funding will be increased, lowering the 2012 MRC. May elect to use for 2012, required to be used for later years.

HOUSE : FSA USE IT OR LOSE IT l l 6/7/12: Despite a White House veto threat, the House approved legislation that would amend a 28 -year-old rule requiring flexible spending account users to forfeit their unused balances. The bill also lifts restrictions on using FSAs and health savings accounts for over-thecounter drugs.

HOUSE KILLS FSA USE IT OR LOSE IT l Under the measure, employers can allow employees to withdraw taxable money up to $500 that's sitting in unused FSA balances at the end of the plan year or at the end of a grace period. The law also overturns a health reform provision that prohibits FSA and HSA users from getting reimbursement for OTC drugs without a prescription. Distributions for drugs without a prescription face a 20 percent federal tax.

OVERHAUL OF THE TAX CODE l l House Republicans call for overhaul of tax code in 2013 As part of a year-end budget deal, House Republicans are urging adoption of “fasttrack procedures” to force lawmakers to complete a sweeping overhaul of the U. S. tax code in 2013.

OVERHAUL OF THE TAX CODE l l House Ways and Means Committee chairman Dave Camp (R-Mich. ) said Thursday that he has two goals with respect to the tax code: “One, block massive, job-killing tax increases” at the end of the year, when the George W. Bush-era tax cuts are set to expire. “And two, enact — not just pass — comprehensive tax reform. ” Per Camp: “There is strong support to use the expiration of the [Bush tax cuts] as leverage to force action in 2013 on comprehensive tax reform. ”

LETTER SENT TO CONGRESS l l The undersigned organizations, which represent thousands of pension plans providing retirement benefits to millions of workers and retirees, urge immediate Congressional action to stabilize funding interest rate rules for private-sector pension plans. Without legislation to adjust for current economic conditions, the current plan funding regime will undermine job retention and growth and limit companies' ability to invest in capital improvements needed to be competitive worldwide and to maintain the economic recovery here at home. Moreover, failure to address on-going funding issues will threaten the long -term retirement security of workers and retirees. Sent May 15, 2012 urging the provisions in the Highway Bill of pension reform be adopted.

HIGHWAY INVESTMENT, JOB CREATION AND ECONOMIC ACT INTRODUCED 2/7/12 l l In order to create revenue to pay for the Bill it changes the interest rates to determine the MRC. Under the new provision, for purposes of determining the minimum required contribution, segment rates are confined to a 15% corridor around a 10 -year average of the rates. Since this “stabilization” will not apply for purposes of 417(e)(3), we had expressed concern

HIGHWAY INVESTMENT, JOB CREATION AND ECONOMIC ACT INTRODUCED 2/7/12 l l Change would require 2012 valuations to be redone as the MRC would go down. Bill has now been stalled as the prior law, which was to expire, was extended.

SENSE OF THE CONGRESS l l In light of the Obama’s 2013 budget plan which calls for a rollback in 401(k) deferrals and DC limits. More than 100 Representatives of the House signed a letter expressing that they support the current tax incentives in 401(k) plans.

HR 4049 INTRODUCED l l Bill would require employers that do not have a QP to provide an Auto IRA plan for employees. Not a new idea.

HR 35661 INTRODUCED l l l Small Business Pension Protection Act of 2011. Introduced 12/5/2011. Later valuation date for MRD and more time to make the payment (from 70 ½ to 75). Earnings for self employed will include the IRA or QP deduction. Repeals the excess tax on over contributions to QP. Bill has not gotten much attention and will die in the Ways and Means Committee.

PRESENTS HIS BUDGET l "Under current law, there is already a $250, 000 cap on compensation that can be used to calculate contributions to 401(k) plans. The President's proposal effectively doubles down on this limit for 401(k) plans, and takes an axe to the tax incentives that encourage small business owners to offer these types of plans at work. " (ASPPA)

PRESENTS HIS BUDGET l l l Has an add on which would eliminate the possibility of spreading payments of Inherited IRA over the lifetime of the Beneficiary. Would require payment of all assets within 5 years. The additional revenue will help pay for the rest of the bills provisions.

FROM THE COURTS

DEFENSE OF MARRIAGE ACT UNCONSTITUTIONAL l On May 31, 2012, the US Court of Appeals for the First Circuit held in Massachusetts v. United States Department of Health & Human Services that the definition of marriage as being between one man and one woman in the Defense of Marriage Act (DOMA) is unconstitutional on equal protection grounds.

DEFENSE OF MARRIAGE ACT UNCONSTITUTIONAL l l l Section 3 of DOMA states in part that under federal law, "'marriage' means only a legal union between one man and one woman as husband wife. " Although DOMA does not invalidate same-sex marriages in states where same-sex marriage is legal, it does prevent same-sex married couples from receiving federal benefits that are otherwise available to heterosexual married couples, including Social Security survivor benefits and health insurance benefits for federal employees. In these consolidated cases, the plaintiffs, seven same-sex couples lawfully married in Massachusetts, sued to enjoin federal agencies and officials from enforcing DOMA to deprive them of federal benefits available to different-sex married couples in Massachusetts. The Commonwealth of Massachusetts brought a companion case, fearing the law would revoke federal funding for programs tied to DOMA's definition of marriage. The district court found Section 3 of DOMA unconstitutional under the Equal Protection Clause, and in the companion case held Section 3 violated the Spending Clause and the Tenth Amendment of the US Constitution. Although the district court enjoined federal officials and agencies from enforcing Section 3, it stayed injunctive relief pending the defendants' appeals.

NEW JERSEY DOES NOT HAVE TO PAY COLAs l l 5/30/2012, The decision Superior Court Judge Douglas Hurd upholds part of the state's new pension law, which denies the adjustments until the retirement systems reach targeted funding levels. NJ ED Assoc. spokesman said it's unfair to deny retirees the payments they have bargained and planned for, which is a reason why unions like his challenged the law.

NEW JERSEY DOES NOT HAVE TO PAY COLAs l A federal judge in March threw out another lawsuit brought by New Jersey teachers, police officers, firefighters and other public workers challenging a portion of the law requiring them to pay more for pensions and health benefits. U. S. District Court Judge Anne Thompson dismissed the lawsuit on jurisdictional grounds.

SUPREME COURT DECISION OF LAST YEAR CIGNA VS AMARA USED l l l Federal Appeals Court Rejects Equitable Remedies When SPD Promises More Generous Benefits Than Pension Plan Document. The Ninth Circuit held that the terms of the more generous SPD were not enforceable under any of theories advanced by the plaintiffs. Uses the Supreme court ruling of last year to make this decision.

10% TAX APPLIES TO IRA WITHDRAWAL FROM ROLLOVER l At age 56, a partner left his law firm and elected to roll his balance in the firm 401(k) over into an IRA. Subsequently, he took a pre-age 59½ distribution from the 401(k) and was assessed with the additional 10% tax. The U. S. Tax Court upheld the additional 10% tax. The U. S. Court of Appeals for the Seventh Circuit upheld the Tax Court. The court held that the taxpayer would not have been subject to the 10% tax if he had taken the distribution directly from the 401(k) plan upon termination because of the exception in section 72(t)(2)(A)(v) of the Internal Revenue Code for post-separation distributions to an employee who has attained age 55, but because he chose to roll over his balance, the exception no longer applied to a distribution from an IRA. Kim v. Comm’r of Internal Revenue, No. 113390 -10 (7 th Cir. May 9, 2012).

EXEMPT ORG. NOT LIABLE FOR EXCISE TAX l l U. S. Tax Court ruled that a 501(c)(3) ORG was not required to pay a 20% reversion tax even though it had paid a tax on unrelated business income (a position that has been taken by the IRS for many years). The Org. had filed a Form 5330 and paid the excess tax then sued to recover the reversion tax paid. However, even though there was an overpayment of an excise tax, the court lacked jurisdiction under Sec. 6512(b) to award a refund. What do we learn from this case?

NEW SUITS OVER DO-IT YOURSELF IRAs (May 2012) l l Equity Trust Co. and Entrust Group Inc. accused of touting the security and safety of self-directed IRA. Equity Trust Co. apparently sent out statements reflecting assets that have become worthless. In addition several investment advisors have been sued for misuse of investments in self-directed IRAs. Expect future legislation to strengthen the law to protect assets of Self-directed IRAs.

TUSSEY VS ABB INC. l l April 24, 2012 Missouri federal court rules that the fiduciaries were libel for 35 M in damages for failure to properly monitor the third-party administrative costs. Courts ruled the fiduciary failed to monitor recordkeeping costs, failed to negotiate rebates for the plan, selected more expensive share classes, and permitted fees in excess of market rates.

MORGAN KEEGAN PAYS MORE THAN $630, 000 l l April 2012, Morgan Keegan a full service brokerage firm agrees to pay to 10 ERISA plans. Courts ruled it violated its fiduciary duty when it recommended certain hedge funds, that then paid revenue-sharing and other fees to the broker.

Company Hit for $35 Million in 401(k) Fee Case l IN THE FIRST CLASS ACTION OVER 401(K) FEES TO BE TRIED AND DECIDED ON ITS MERITS, A MISSOURI FEDERAL DISTRICT COURT RULED ON MARCH 31 THAT MANUFACTURER ABB INC. BREACHED ITS EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA) FIDUCIARY DUTIES. THE COURT’S OPINION IS A MUST READ FOR ALL PLAN SPONSORS AND SERVICE PROVIDERS.

Company Hit for $35 Million in 401(k) Fee Case l The company must pay $35. 2 million to the plaintiff class for (1) failing to monitor the recordkeeping fees and revenue-sharing payments made to the plan’s trust company, (2) failing to negotiate rebates to offset or reduce the cost of providing administrative services to plan participants, and (3) replacing an actively balanced mutual fund with the trust company’s target date fund that generated more in revenue sharing for the trust company.

KRAFT SETTLES CLAIM l l March 2012, Kraft will pay $9. 5 M to settle claim that it mismanaged employees’ retirement plan causing accounts to lose more than $80 M. After 5 years of litigation Kraft settled rather to continue to deal with more attorney fees and litigation, while continuing to deny any wrong doing.

FROM THE IRS

ELIMINATION OF LUMP SUM OPTION l l Proposed Reg. issued 6/21/2012. Proposed regulation would provide a limited exception under Section 411(d)(6)(B) to permit a plan sponsor that is a debtor in a bankruptcy proceeding to amend its single-employer defined benefit plan to eliminate a single-sum distribution option (or other optional form of benefit providing for accelerated payments) if certain conditions are satisfied.

ELIMINATION OF LUMP SUM OPTION l l Condition: the court overseeing the bankruptcy case has issued an order, after notice to each affected party (within the meaning of section 4001(a)(21) of ERISA) and a hearing, finding that the adoption of the amendment eliminating that optional form of benefit is necessary to avoid a distress termination of the plan pursuant to section 4041(c) of ERISA or an involuntary termination of the plan pursuant to section 4042 of ERISA before the plan sponsor emerges from bankruptcy (or before the bankruptcy case is otherwise completed). PBGC has issued a determination that the adoption of the amendment eliminating that optional form of benefit is necessary to avoid a distress or involuntary termination of the plan before the plan sponsor emerges from bankruptcy (or before the bankruptcy case is otherwise completed) and that the plan is not sufficient for guaranteed benefits within the meaning of section 4041(d)(2) of ERISA.

NRA GOVERNMENT PLANS l Notice 2012 -29 [issued April 18, 2012], the IRS and Treasury have signaled their agreement with many in the governmental plans community that the requirements of the 2007 Final Normal Retirement Age Regulations should not be imposed on governmental retirement plans that do not provide for in-service distributions. . [A] governmental plan that does not 'provide' for in-service distributions before a participant's attainment of age 62 does not need to contain a definition of normal retirement age; alternatively, a governmental plan that does not make inservice distributions may contain a definition of normal retirement age that does not conform to the requirement of the 2007 Final Normal Retirement Age Regulations that normal retirement age not be attainable until the participant has reached a specified chronological age. "

NEW FORM SS-4 ISSUED l Effective 5/22/2012 they will issue only one EIN per day to each "responsible party", whether online or by phone, fax or mail. This is to ensure "fair and equitable treatment for all taxpayers".

FORM 5558 INSTRUCTIONS l l l May 3, 2012 IRS advises that a separate 5558 must be filed for each request for an extension. A list of plans may not be attached. The form has room for three such requests. Any form submitted with a list, will not be returned but will simply be ignored by the IRS.

FORM 5558 INSTRUCTIONS l l Many users submit the forms in a single mailing with a cover sheet listing all the forms enclosed. The Service stated that the cover sheet will not serve as part of the request for an extension. When submitted this way, at times, only the top form gets processed, or one or more of the attached forms get lost. Signatures are still required for extension to file 5530 or 8955 SSA. Only enrolled people are allowed to sign the form. See ASPPA for common mistakes when filing the form.

FORM 5558 AND FORM 8955 -SSA l l Although there is no requirement to have Form 5558 signed to request an extension to file Form 5500, no such exception exists if requesting an extension to file Form 8955 -SSA. Many applications to extend the deadline for the 8955 -SSA have been returned. ASSPA in November 2011 requested that Treas. Reg. 1. 6081111 be expanded to include the 8955 -SSA. 6/20/2012: Proposed guidance to eliminated the signature requirement on Form 5558, when requesting an extension of Form 8955 -SSA, (still required to file extension of Form 5330).

FORM 5558 AND FORM 8955 -SSA l l l Per a member of the IRS, they intend to issue a proposed Reg. that would eliminate the signature requirement for the 5558 when requesting an extension to Form 8955 -SSA. See ASAP 12 -10. On June 11, 2012, several members of GAC met with individuals from the Treasury Department and the IRS. At the meeting, ASPPA was notified that regulations will be issued that will allow the Form 5558 to be filed to extend the due date for filing Form 8955‐SSA without a signature. ASPPA was also informed that regulations are expected to be issued before the end of July 2012.

MISSED THE DEADLINE OF 4/30 TO RESTATE YOUR DB PLAN l Service on May 5, issues a “kit” that can be used under the VCP to submit late adopters. l This kit is designed for plan sponsors who failed to restate their pre-approved defined benefit retirement plan documents for EGTRRA by the April 30, 2012, deadline. Defined benefit plan sponsors who use pre-approved plan documents (i. e. , documents that are reviewed by the IRS and sold to plan sponsors through law firms, banks, brokers, other financial institutions, or plan administrative firms) were generally required to sign new plan documents, amended to reflect the Economic Growth and Tax Relief Reconciliation Act of 2001 (commonly referred to as “EGTRRA”), by April 30, 2012.

MISSED THE DEADLINE OF 4/30 TO RESTATE YOUR DB PLAN l l l l l Fee Schedule: Number of Participants Fee if submitted on or before April 30, 2013, and you have no other qualification failures other than your failure to timely restate your plan for EGTRRA by the April 30, 2012 deadline Fee if submitted after April 30, 2013, or if you are reporting additional failures 20 or fewer $375 $750 21 to 50 $500 $1, 000 51 to 100 $1, 250 $2, 500 101 to 500 $2, 500 $5, 000 501 to 1, 000 $4, 000 $8, 000 1001 to 5, 000 $7, 500 $15, 000 5, 001 to 10, 000 $20, 000 Over 10, 000 $12, 500 $25, 000

IRS's surprising position on 415 limits could mean lower pension benefits l A new IRS interpretation of Section 415 limits could sharply reduce pension benefits for some defined benefit plan participants whose distributions begin before normal retirement age or are paid as a qualified joint and survivor annuity. So far, agency officials have expressed only informal, individual views, but authoritative guidance confirming the new interpretation may be published soon. If so, the guidance would mark a fundamental break with the long-standing, widely held understanding of how Section 415 limits work.

IRS's surprising position on 415 limits could mean lower pension benefits l l This is a large plan issue, and most small plans limit the NRB to the 415 limit then actuarially reduce that benefit for early commencement. Rather than reduce the benefit first then limit it to the 415 Max. benefit. Apparently a common practice for large plans. IN MY OPINION THE Service is correct

NEW POA FORM l l l March 2012, IRS issues yet another new POA form. A separate form must now be completer for each taxpayer/plan of the Er. Will need a separate form for the Er. and one for the Plan and perhaps even one for the Trust.

NEW POA FORM l Special language now required if the authorization is to be able sign a form: This power of attorney is being filed pursuant to Treasury regulation section 16012 -1(a)(5). Which requires a power of attorney to be attached to a return if the return is signed by an agent by reason of {enter the specific reason listed under (a), (b), or (c) under Authority to sign your return, earlier}. No other acts on behalf of the taxpayer are authorized.

LAW SUIT AGAINST THE IRS l l l Filed 3/12/2012 Challenges federal licensing of Tax Preparers. Suit claims the law is unwarned and designed to benefit big tax preparers.

IRS CAUTIONS AGAINST “SHAM” RETIREMENTS l In PLR 201147038 the Service, once again, expresses its opinion that retirement may not be before age 62. In Service distributions prior to age 62 may be consider as a inappropriate retirement age and the plan disqualified.

GUIDANCE ON LIFETIME INCOME OPTIONS l l l 2/2/2012 Four different sets of regulatory guidance issued. 1)Proposed guidance: RIN 1545 -BJ 55 would substantially decrease the complexity of having a partial lump sum and annuity with the rest of the benefit (bifurcated benefit) by amending the final regulations under 417(e). Would remove the requirement that 416 also apply to the benefit as well as the lump sum.

GUIDANCE ON LIFETIME INCOME OPTIONS l 2)Proposed guidance would provide that any investment in a QP or IRA that is a longevity annuity (an annuity which provides for the commencement of benefit at a later age i. e. 80 or 85), would not be considered when determining the MRD.

GUIDANCE ON LIFETIME INCOME OPTIONS l l 3) RR 2012 -3: clarifies that when a participants invests in a deferred annuity contract under a DC plan, the participant’s account is not subject to the QPSA requirements before the participant affirmatively elects to commence annuity distributions. See ASAP 12 -04.

GUIDANCE ON LIFETIME INCOME OPTIONS l l RR 2012 -4: Rollovers from DC plans to DB plans. Participants may roll their DC money to the DB plan and receive a actuarially equivalent annuity from the DB plan.

403(b) FEE DISCLOSURE l l The new participant fee disclosure rules do not apply to 403(b) plans. ASPPA announces, 2/7/2012, that it has, along with several other entities, produced a fee disclosure form for 403(b) plans.

BIG CHANGES TO THE DL PROGRAM l l IRS ANNOUNCEMENT 2011 -82. See ASAP #12 -09, also see Revenue Procedure 2012 -6. Can no longer ask for a determination regarding testing, or coverage testing under 401 a 4. Demos 5& 6 of Sch Q have been eliminated). You are on you own and only upon audit will you find out for sure if the IRS agrees with the way you passed any discrimination test.

BIG CHANGES TO THE DL PROGRAM l l l Prototype plans may no longer be submitted for approval. The employer must rely on the letter provided by the Prototype Sponsor. Form 5307 now limited to VS plans that modify a Pre-approved plan. And only when the modifications are not so extensive as to cause the plan to be treated as an Individual Designed Plan.

FROM THE DOL

DOL ISSUES AN ADVISORY OPINION ON OPEN MP QP l l Advisory Opinion 2012 -04 A, Issued, 5/25/21012 to Law office of Robert Toth, Jr. , regarding a MP plan set up by 401(K) Advantage and TAG Resources a registered investment advisor. “It has been the Departments’ consistent view that several unrelated employers merely execute identically worded trust agreement or similar document as a means to fund or provide benefits, in the absence of any genuine organizational relationship between the Employers, no employer group or association exists for the purpose of ERISA section 3(5).

DOL ISSUES AN ADVISORY OPINION ON OPEN MP QP l The fact that the participation agreements were in the form of a MEP does not change the conclusion. Instead of having a single ERISA plan, it is “an arrangement under which each participating employer establishes and maintains a separate employee benefit plan for the benefit of its own employees. ” The DOL specifically rejected every argument generally advanced in support of the arrangement being treated as a single plan.

DOL ISSUES AN ADVISORY OPINION ON OPEN MP QP l l “Rather than acting in the best interest of any employer with respect to the plan, Advantage and TAG appear to be acting more as a service provider to the plan, much like a third party administrator or investment advisor. As a result, in the Departments view, neither Advantage nor TAG would constitute an employer for purpose of section 3(5) of ERISA that is capable of sponsoring the plan as a single “multiple employer” plan. ” See ASPPA 12 -12

DOL ISSUES AN ADVISORY OPINION ON OPEN MP QP l "The most immediate implication of this ruling is that arguably open MEPs must file separate Forms 5500 (or 5500 -SF or -EZ) for each adopting employer. If an employer has more than 100 participants, there would need to be a separate audit. This takes away two of the benefits open MEP promoters have long claimed for their arrangement. However, other benefits remain. " (Sun. Gard Relius)

DOL ISSUES AN ADVISORY OPINION ON OPEN MP QP l l Next day response from TAG Resources "TAG Resources has provided plan management services to 401(k) plan sponsors since 2004, and will continue to do so in accordance with the guidance issued to us by the United States Department of Labor. . TAG Resources welcomes this guidance and the certainty it brings to the marketplace. With just a few adjustments which our model was designed to accommodate, this opinion enables us to continue to provide the professional plan management services to a broader spectrum of the market which had heretofore been uncomfortable with the lack of clarity under MEP arrangements. "

403(b) SAFE HARBOR EXCLUSION FROM ERISA COVERAGE l l l Advisory Opinion 2012 -02 A A 403(b) plan does not fail to comply with [this] 'safe harbor' merely because the employer maintains a separate plan qualified under Code section 401(a). Nor does compliance with the safe harbor preclude an employer from taking employee participation in the 403(b) plan (including salary reduction contributions) into account in ensuring that employer contributions to the other plan meet tax qualification requirements in the Code. It is the view of the Department, however, that conditioning employer contributions to the separate pension plan on the employee making salary reduction contributions to the 403(b) plan would be inconsistent with the limited employer involvement permitted by section 2510. 3 -2(f)(3) of the safe harbor, and would also conflict with the requirement in section 2510. 3 -2(f)(1) that employee participation in the 403(b) plan be 'completely voluntary. See ASAP 12 -13

COMBINATION OF TERMINATED OR ABANDONED PLANS l l Advisory Opinion 2012 -03 A, NRP a Minnesota Corp. established to take over terminated or abandoned plans, then merge the plans into the NRP plan to administer. DOL rules: There is no employment-based common nexus that is unrelated to the provision of benefits between the NRP Plan and the employers of employees that benefit from the abandoned plans or among the different groups of employees that participate in these plans. Rather than acting i n the interest of an employer with respect to the plan, NRP appears to be acting more as a service provider to the plan, much like a third party administrator or investment advisor. . [Therefore] it is the view of the Department that the NRP Plan does not constitute a single employee benefit plan for purposes of Title I of ERISA. Rather, the Department would view the NRP Plan as a collection of separate, albeit apparently abandoned, employee benefit plans.

DOL TAKES A STAND ON OPEN MEPs l l May 17, 2012 case deals with a welfare plan, but the DOL, as it has so often in its advisory opinions, views the ERISA definition of employer as being the same between retirement and welfare plans (as indeed it is). The DOL states the arrangement was not a single "multiple employer plan" pursuant to ERISA. This is because there was no commonality of employmentbased interest among the participating employer sponsors of the plans apart from the provision of retirement benefits, and there was no control of the program by the participating employers such that it qualified as a "group" or "association" of employers as required to be a single plan covering multiple employers for purposes of ERISA section 3(5). Thus, it failed to qualify as a single "pension plan" for purposes of ERISA section 3(2), since it was not established or maintained by an "employer" for purposes of that section. Instead, each of the employers that signed up with the arrangement individually established a separate plan subject to Title I of ERISA for the purpose of providing pension benefits to its own employees.

DOL TAKES A STAND ON OPEN MEPs l l The DOL's litigation position in a single case is not the same as an opinion letter, but it certainly gives an indication of where the DOL is going, and it is not going well for open MEPs. This could also be seen from the testimony of Phyllis Borzi (Assistant Secretary of Labor) to a Senate committee on March 7, when she said: While it is clear from my testimony that the Department supports efforts to expand small business coverage, it is just as important that ERISA's protections for workers' pensions be maintained. In that regard, the Department has more recently become aware of promoters marketing multiple employer plans, or "MEPs, " that do not involve collective bargaining with an employee representative. These arrangements, often called "open MEPs, " purport to allow totally unrelated businesses to join together to offer a collective pension plan. Promoters claim that these arrangements relieve businesses of their ERISA reporting and fiduciary obligations in connection with administering the plan or monitoring the plan investments and service providers. Proponents say such arrangements can provide the participating employers with a way to pool resources and reduce administrative costs. There are several bills pending in Congress which call for the Department, in coordination with the Treasury Department, to provide fiduciary relief and simplified administrative, reporting and disclosure obligations for multiple employer plans. We are currently analyzing these

RULING OF STATE RUN PLAN FOR PRIVATE EMPLOYERS l l 4/27/2012 THE DOL issues an advisory opinion (2012 -01 A) stating that participation of a private non profit employers in Connecticut's’ state health plan would adversely affect its status as a governmental plan under ERISA. State then does not pass legislation to implement such a program including a state run pension plan for private Employers.

FEE DISCLOSURE Q&A l l On May 7, 2012, the U. S. Department of Labor issued Field Assistance Bulletin 2012 -02, which includes Questions and Answers on the participant-level fee disclosure regulation under ERISA § 404(a)(5) and the fiduciary-level fee disclosure regulation under ERISA § 408(b)(2). The Field Assistance Bulletin covers topics that include disclosures related to administrative expenses, brokerage windows, benchmarks, comparative formats, and model portfolios. A DOL press release on this guidance is available at http: //www. dol. gov/ebsa/newsroom/2012/EBSA 050712. html and the Field Assistance Bulletin itself is available at http: //www. dol. gov/ebsa/regs/fab 2012 -2. html.

FEE DISCLOSURE Q&A l l l What is a designated investment alternative (DIA)? A DIA is any investment alternative designated by the plan into which participants may direct the investment of assets. This includes : brokerage windows, self-directed brokerage accounts. See ASAP 12 -14

2010 -02 Q&A 30 CREATES PROBLEMS l l l 6/24/2012 Phyllis C. Borzi Assistant Sec. States that Q&A 30 is nothing new and Fiduciaries have always been responsible for monitoring and evaluate Non. Designated Investment Alternatives (brokerage account or window). Ms. Borzi said her agency addressed brokerage windows in plans after finding "a disturbing trend" among plan sponsors seeking to avoid ERISA responsibility by 'just giving choices. '" 6/24/2012 ASPPA along with many other organizations sent letter to Borzi:

LETTER TO BORZI OF 6/25/12 l l Questions the DOL statement that “the failure to designate a manageable number of investment alternatives raises questions as to whether the plan fiduciary has satisfied its obligation under ERISA”. Questions the failure of the DOL to provide guidance as to when or how any fiduciary would comply with this newly created fiduciary principle.

LETTER TO BORZI OF 6/25/12 l l Questioned the DOL authority to issue new regulations without first proposing them or asking for public comment but simply stating them in a form a Q&A, (Such an approach was struck down by the Supreme Court in a similar case). Q&A-30 suggestion that plan sponsors may need to look through brokerage windows to determine whether any particular investment is popular enough with plan participants to be considered a “designated investment alternative” is surprising and even more concerning is the statement in Q&A 30 which states

LETTER TO BORZI OF 6/25/12 l l “If, through a brokerage window or similar arrangement, non-designated investment alternatives under a plan are selected by a significant number of participants and beneficiaries, an affirmative obligation arises on the part of the plan fiduciary to examine these alternatives and determine whether one or more such alternatives should be treated as designated for purposes of this section. Full text of letter can be found at ASPPA website.

DOL QUESTIONS 5500 FILINGS l l March 2012, the DOL sent over 600 large plan filers (over 100 participants) a letter questioning the lack of information provided on Sch. C. See ASAP 12 -7

DOL Files Lawsuit Against Plan Sponsor Over Investment in Ponzi Scheme l On Feb. 9, 2012, the DOL filed a lawsuit against John J. Barrett III, the owner of Dynasty Construction Inc. , and Dynasty Construction Inc. for breach of fiduciary duty. The DOL seeks to recover more than $775, 000 which the company’s 401(k) invested in Transcontinental Airlines Employee Investment Savings Account, an alleged Ponzi scheme, in 2006. Dynasty Construction Inc. ceased operations in 2007.

DOL files Suite l The DOL’s lawsuit alleges that “the defendants failed to adequately or prudently research the credentials of the financial representative they retained, and failed to adequately or prudently research or analyze the investment of plan assets in the Transcontinental Airlines Employee Investment Savings Account”.

FINAL 408(B)(2)- FEE DISCLOSURE l l ISSUED 2/4/2012; EFFECTIVE 7/1/2012; 109 PAGES. Also has the effect of delaying initial employee level disclosure for CY plans to 8/30/2012. “Addresses disclosure that must be furnished before plan fiduciaries enter into, extend or renew contracts or arrangements for service to certain pension plans. ” “The Department believes that plan fiduciaries need this information, when selecting and monitoring service providers, to satisfy their fiduciary obligations. ”

FINAL 408(B)(2)- FEE DISCLOSURE l l The furnishing of goods, services, between a plan and a party in interest is a PT under 406(a)(1)(C) of ERISA unless except under 408(b)(2) provides that contract for services must be reasonable, the services be necessary and no more that reasonable compensation be paid.

FINAL 408(B)(2)- FEE DISCLOSURE l l l In July 2010 the DOL added that in order to be reasonable certain information must be disclosed to the fiduciary. These final regulations describe the information that must be disclosed. Interim final regulations were published in July 2010.

FINAL 408(B)(2)- FEE DISCLOSURE l l l Covers arrangements between a “Covered Plan” and a “Covered Service Provider” Covered Plan: excludes SEP; SRA, IRA. Covered Service Provider: a service provider that enters into a contract or arrangement that is expected to receive 1, 000 or more in direct or indirect compensation. Three different categories of Service Providers are described.

FINAL 408(B)(2)- FEE DISCLOSURE l l l If several providers under one contract, only one required to disclose all fees. The discloser must be clear and understandable; indicated were the compensation will come from. At the current time no requirement that the discloser be in a certain format. But the DOL intends to do so at a later date.

FINAL 408(B)(2)- FEE DISCLOSURE l l l Sample guide to discloser provided in appendix. Can be delivered electronically. Discloser must be delivered “reasonably in advance” of the date the contract or arrangement is entered into, or July 1, 2012 if later. There is a 60 day standard to advise as to any changes in the discloser. Regulations require that the DOL be notified of any Service provider that fails to meet the disclosure requirements.

FINAL 408(B)(2)- FEE DISCLOSURE l Failure to comply: will result in the plan being subject to a PT and the service provider being consider a disqualified person and subject to an 15% excise tax for participating in a PT (see IRC 4975).

FROM THE PBGC

PASSWORD CHANGES REQUIRED l Federal information security regulations require the PBGC to strengthen the password requirements for My PAA (My Plan Administration Account), which is used by practitioners to electronically file premiums to the PBGC. Active account holders will receive an email about the change; and you do not need to rush to change your password. You may continue to access My PAA according to your normal schedule; and My PAA will prompt you to change your password at the appropriate time.

ROBS l No matter how many times the IRS raises a red flag about [Rollovers as Business Start-ups ('ROBS')] arrangements, they keep popping up in the popular press. . Earlier this year, the IRS. . . said that while some of the ROBS were successful, many of the companies studied by the IRS had gone out of business within the first 3 years of operation, with the owners experiencing significant monetary loss, bankruptcy, personal and business liens, or had their corporate status dissolved by the Secretary of State, either voluntarily or involuntarily. "

FOREIGN PARENT LIABLE l l l Asahi Tec Corp. a Japanese company, was assisted controlled group liability over a underfunded terminated plan of a YS subsidiary. Asahi filed a motion to dismiss. U. S. Court for the District of Columbia ruled that Asahi was liable and the PBGC had grounds for the claim.

AMERICAN AIRLINES l l 2/6/2012 announces that as part of its reorganization it plans to terminate all its DB plans. Which would require PBGC to take over the $10 B unfunded liabilities. PBGC requires AA to justify the plan termination. Which to date they have failed to do. If it does happen there will be cutback in benefits, due to PBGC maximums of over $1 B. Congress gave American Airlines an estimated $2. 1 billion in pension funding relief over the past six years, nearly double an earlier estimate, the PBGC announced on 2/6/2012.

Misc TOPICS

NEW ACCOUNTING FOR PUBLIC PLANS l l 6/25/2012: The Governmental Accounting Standards Board (GASB) today voted to approve two new standards that will substantially improve the accounting and financial reporting of public employee pensions by state and local governments. Statement 68 ["Accounting and Financial Reporting for Pensions"] replaces the requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers and Statement No. 50, Pension Disclosures, as they relate to governments that provide pensions through pension plans administered as trusts or similar arrangements that meet certain criteria. Statement 68 requires governments providing defined benefit pensions to recognize their long-term obligation for pension benefits as a liability for the first time, and to more comprehensively and comparably measure the annual costs of pension benefits. The Statement also enhances accountability and transparency through revised and new note disclosures and required supplementary information (RSI).

NEW ACCOUNTING FOR PUBLIC PLANS l The Statement calls for immediate recognition of more pension expense than is currently required. This includes immediate recognition of annual service cost and interest on the pension liability and immediate recognition of the effect on the net pension liability of changes in benefit terms. Other components of pension expense will be recognized over a closed period that is determined by the average remaining service period of the plan members (both current and former employees, including retirees). These other components include the effects on the net pension liability of (a) changes in economic and demographic assumptions used to project benefits and (b) differences between those assumptions and actual experience. Lastly, the effects on the net pension liability of differences between expected and actual investment returns will be recognized in pension expense over a closed five- year period.

NEW ACCOUNTING FOR PUBLIC PLANS l The provisions in Statement 67 are effective for financial statements for periods beginning after June 15, 2013. The provisions in Statement 68 are effective for fiscal years beginning after June 15, 2014. Earlier application is encouraged for both Statements 67 and 68 will be available for download at no cost from the GASB website in early August.

GM MOVES $26 B OF LIABILITIES INTO A PRUDENTIAL ANNUITY CONTRACT l l l 110% of the pension liability will be turned over to Prudential who will then pay the benefits. It will cover 118, 000 retirees, with about 42, 000 also given the option to take a lump sum. Largest transaction ever of this type.

STATE AND LOCAL PLANS IN THE NEWS l l l New accounting procedures directed at liabilities. Most states and local governments starting to realize that there must be changes, their agreed upon plans have or will place a un- payable debt on the tax system. What about the federal plans?

CAMPAIGN TO LAUNCH NEW DB PLAN l l A campaign to launch a series of hybrid cash balance-defined benefit (CBDB) pension plans across all 50 states is taking shape, in an effort that would target small employers with a new option for delivering employee retirement benefits. The new initiative from the National Conference on Public Employee Retirement Systems would introduce the same type of CBDB pension plans that several states have added or are considering. Based on the national trade association’s plan, the system could bring new mandates and opportunities to asset managers and institutional consultants. The association’s Secure Choice Plan aims to provide small business owners and employees with the same type of retirement security traditionally reserved for large corporations and public entities.

CAMPAIGN TO LAUNCH NEW DB PLAN l l l l The basic structure entails pooling the retirement assets of private employees from multiple businesses into a centrally managed defined benefit plan, but doing so through a cash balance vehicle that allows portability of accounts for individual retirees. It would do so through the build-out of new trusts established at the state or regional level that would give small businesses and their employees the option to contribute to the plan, whose assets are then pooled and invested in a group fashion. Cash balance generally plans are similar to traditional defined balance plans in that funds are typically managed as pooled assets, but differ in the distribution of liabilities. Such a system is being proposed for the Kansas Public Employees Retirement System, as reported. While the model requires some state interaction – namely, each fund would be established by the legislature and ideally overseen by boards of trustees composed of state, business and employee representatives – the funds would operate separately from existing public pensions. “The thought is, particularly at inception… that it could partner with the state employee public system and then be able to coinvest with that plan, ” Kim explains. As such funds would mature, their assets would be managed alongside – but not comingled with – those of existing state public employee retirement systems. “That way, the Secure Choice Plans could get price breaks and economies of scale that the larger public plan has because of its size, ” Kim adds. For private sector employers, it could offer a simple, affordable, sustainable, portable and flexible retirement option for their staffers. Small businesses traditionally have struggled to offer this type of retirement benefit, Kim says. NCPERS says it sees support for the Secure Choice Plan model. In a recent survey of 500 California-based small business owners – classified as having fewer than 50 employees – the organization found that 82% support the idea of a retirement plan that “would offer employees a guaranteed monthly pension payment for life after they stop working. ” Further, about 69% of those respondents indicated they would adopt that type of plan. “One of the things that we found out from our polling is that small business owners, unlike Wall Street banks, really do care about their employees, ” Kim says. “Intuitively, that makes sense. Small business owners know their employees by sight; they might even know their families. And what they feel is they have a moral obligation to provide a retirement for their employees, but under their structure, they really don’t have the ability. ”

CAMPAIGN TO LAUNCH NEW DB PLAN l l l l The concept goes against the grain of what’s been a lasting trend among larger or longer-established private sector pensions, which have generally looked to close out or freeze defined benefit plans and offer new employees defined contribution and options, such as 401(k) plans, as an alternative. “The biggest reason for a corporation to do so is primarily financial statement risk, ” says John Meier, managing director at San Francisco-based investment consultant Strategic Investment Solutions. “There’s some significant risk to their balance sheet or their income statement [in an area] that’s not their core competency. It can be a major driver, and what they are trying to do is take that risk off their shoulders and put that risk on the shoulders of their employees through a DC plan. ” As with Kansas’ proposed CBDB plan, the Secure Choice Plan could change the way liabilities are distributed, and employees would be able to take accrued savings with them if they were to leave the small business where they are employed, Kim says. For the system to take off, Kim says, it would first have to clear several hurdles, notably state legislature signoff and potentially changes to the existing federal tax code, along with some amendments to the Employee Retirement Income Security Act, or ERISA, under which the Secure Choice model falls. “What we know we need is support from small businesses, ” Kim says. “And we think we have that. We know that we need enabling legislation at the state level. ” California is among the first states considering the Secure Choice Plan, Kim says, with the model clearing three significant legislative hurdles in the past six weeks or so. He was anticipating a Senate vote this week, which if successful, would move a California Secure Choice Plan bill to the California State Assembly for approval. “We have been having conversations with a number of other states, ” Kim says. “New York is one, and a handful of others are having conversations about the feasibility. I think at the state level what you’re really seeing is this percolation of activity because they recognize the crisis that is out there. And they are not really waiting for the federal government to act. ”

ERPA RENEWAL l If you are an ERPA whose Social Security number ends in 7, 8 or 9 your application renewal period ends on June 30, 2012. You will not receive a letter from the IRS prompting you to renew so please remember to renew by the deadline. Until further notice from the IRS, please make a note of when you need to renew. To renew, you must file Form 8554 EP, Application for Renewal of Enrollment to Practice before the Internal Revenue Service as an Enrolled Retirement Plan Agent (ERPA) (revised March 2011), either electronically or by paper by June 30.

THE HOT PENSION ARRANGEMENT l l l The floor offset cash balance plan, or the CB plan that provides a benefit for the HCE and a benefit for the NHCE of the PS account. The later does not work for lots of reasons and most of the floor offset arrangements will not work either. However, there seems to be a major sales advantage to tell the owner he is “the only one getting a benefit from the CB plan”. In the long run, even if done correctly, it will probably cost the client more money.

OHIO PUBLIC RETIREMENT SYSTEM NEEDS OVERHAULED l l $72 billion. That's the collective unfunded liabilities of Ohio's five defined-benefit publicpension plans. That's more than Ohio's biennial budget. Under current law, three out of the five plans never will be able to pay off those liabilities. It’s not just Ohio, most states are in the same boat and now realizing what something must be done.

A NEW WAY TO REDUCE PENSION RISK? ? l l Ford announced on April 27 that it will offer A lump sum option to about 90, 000 eligible U. S. salaried retirees and salaried former employees. If someone chooses to receive the lump-sum payment they will lose their COLA’s. For plan sponsors, the ability to provide retirees a lump-sum offer provides greater flexibility in managing their retirement plans, including the ability to better manage the size of the plan relative to ongoing operations, as well as the ability to more efficiently administer the plan ongoing basis

A NEW WAY TO REDUCE PENSION RISK? ? l l Bob Shanks, Ford's executive vice president and chief financial officer, said in the statement that the move is part of the company's long-term strategy to "de-risk" its global funded pension plans. Driving the decision is Ford's strategy to continue improving the underlying strength of its balance sheet, he added. Jon Waite, an expert on the management of corporate pension plans and chief actuary at SEI, a provider of outsourced fiduciary management investment services in Oaks, Pa. , says it's not certain that Ford's strategy is the start of a larger trend. But from an HR perspective, it provides an option and strategy alternative to the inactive population.

401 K PARTICIPANTS SHOW HIGH AVERSION TO RISK l Schwab's survey found that 35 percent of Americans consider protecting retirement assets more important than growing those assets, while only eight percent consider growing retirement assets more important than protecting them. . The 2008 downturn may have had a particular impact on younger Americans [because the] survey found 29 percent of those age 18 -34 plan to pull money out of the market, with only 11 percent of older Americans indicating they would take this action. " (Charles Schwab)

GOV. RUN PENSION FILES BANKRUPTCY l l l May 2012; Northern Mariana Islands, a US Commonwealth, has its public pension fund declare bankruptcy. (located about 5, 000 miles off the cost of Ca. ) This is the first time such a plan has declared bankruptcy, and could set a precedent for more plans to do the same. Several plan participants sue saying that Chapter 11 does not cover governmental units. Case currently being heard in the federal court of the Northern Mariana.

GOV. RUN PENSION FILES BANKRUPTCY l l June 2012 "The [Commonwealth of the Northern Mariana Islands, a U. S. Territory, ] may be small, but this case has ramifications for much larger pension funds all across the U. S. that are facing shortfalls. . The judge wrote that the Northern Mariana Islands Retirement Fund is 'a 'governmental unit' and therefore 'not eligible for relief under Chapter 11 of the Bankruptcy Code. '" (National Public Radio)

NEW IDEA ON PENSIONS l l l Use the States Pension system to provide retirement benefits to Employees of Employers in the Private sector. News article 3/28/2012 in New York Times. Massachusetts legislature passes bill to establish a State run 401(k) plan for small non profits. ASPPA tells the Governor to veto or at lease limit the use. State of CA. once again proposes a state run Cash Balance plan for the Private Sector.

New Fee Disclosure For 403(b) l l 2/1/2012: New Fee Disclosure Solution Released by NEA, NTSAA & ASPPA Joint 403(b) Taskforce. With the new 403(b) Model Disclosure form, teachers and other school district staff will for the first time, have a simple uniform tool to make apples-to-apples comparisons among their 403(b) retirement plan investment options. The form is designed to offer public school employees simple and clear information about the services and fees associated with their retirement savings choices, so they can make the best decisions about their 403(b) retirement savings.

ON THE LIGHTER SIDE l l State of Kentucky Senate votes to retire the Confederate pension fund. There will no longer be a $50 per month pension provided to Civil War veterans and the $100 death benefit will be eliminated.

ON THE LIGHTER SIDE l l l CB plan intended to be an on cycle submission (2/1/2011 to 1/31/2012 cycle), is submitted 1/27/2011. Letter confirming receipt received 2/17/2011. Letter from IRS dated 2/12/2012 received. It returned the submission saying it was submitted off cycle (received prior to 2/1/2011, and it should be submitted during the correct cycle.