ERISA Articles

Looming Threat in 401(k) Loans ?

The ability to borrow from your 401(k) plan is thought to be one of its biggest selling points.

And yet, this loan program holds a lot of pitfalls for participants, employer/sponsors, and trustee/fiduciaries.

For a participant, a defaulted loan brings with it an income tax on the loan balance, a 10% early distribution penalty, a depletion of his retirement savings, and a compounding loss of future earnings on the depleted savings. And for a participant whose loan is paid back by payroll withholding, these blows frequently come via job loss or layoff, when the participant can least afford the added tax burden.

For the employer/sponsor, the loan program brings added administrative costs for advising participants, issuing loans, scheduling payroll withholding repayments, and tracking and reporting defaults. Audit fees related to the plan's Form 5500 are likely to be higher to reflect added testing for loan program issues.

For employers whose plans experience higher default rates, especially plans in high-turnover industries, I've been warning for years that plans with high default rates could face qualification issues and challenges as disguised in-service distribution programs.

Now, Bruce Ashton, with Drinker Biddle & Reath, predicts a looming threat to fiduciaries. "Do plan sponsors have fiduciary risk when a participant defaults on his or her loan from the company’s retirement plan?" he asks. In his article in PlanSponsor, Participant Loans: A Fiduciary Storm Brewing? , he concludes "the short answer is likely yes."

SCOTUS Saves ERISA Exemption for Church Affiliates

The last three years we have seen a slew of cases in which courts ruled that church-affiliated plans were not exempt from ERISA because they were not established by a church. (See my prior article on lower court findings here.)

Well, now the Supreme Court has weighed in on the issue, and ruled in favor of the church-affiliates .

In deciding Advocate Health Care Network v Stapleton (6/5/17) the Supreme Court extended the "established by a church" criteria to include plans established by "principle-purpose organizations". This ruling is a blessing for religious hospitals, which would have faced funding shortfalls of up to $4 billion if they were subject to ERISA.

But is the issue really resolved? I don't see how a church-affiliated hospital qualified as a "primary-purpose organization" under the language of the statute. Maybe the pension committee of that hospital is the primary-purpose organization?

ESOP Valuations - It's About the Process

ESOPs are unique among employee benefit plans subject to ERISA in that, by design, they are intended to invest primarily in the sponsor’s stock, and may borrow money to purchase that stock from a party in interest. That borrowing, buying, and holding would be a prohibited transaction for any non-ESOP plan, but ESOPs enjoy statutory and regulatory exemptions for these otherwise prohibited transactions. But, as is often the case, PT exemptions come with conditions, and you have to meet the conditions in order to enjoy the exemption.

Overview: ESOP Audits

ESOP: Financial Statement Audits

An Employee Stock Ownership Plan, by definition, is a qualified retirement plan consisting of either a stock bonus or a stock bonus/money purchase combination plan, which is designed to invest primarily in qualifying employer securities. It is a defined contribution plan which maintains individual accounts for each participant, and each participant’s eventual benefit is determined by the amount of allocations to his account, the investment performance of the account, and allocation of forfeitures, and administrative expenses incurred.

The AICPA Audit Guide, “Audits of Employee Benefit Plans”, devotes only about a dozen pages to ESOP plans, on the theory that ESOP plan audits should follow the general guidance applicable to all defined contribution plans. Where ESOPs are different, the Audit Guide provides a brief discussion of those differences:

Form 5500-EZ Non-Filing Relief

Small Businesses Can Get IRS Penalty Relief for Unfiled Retirement Plan Returns

Small businesses that fail to file required annual retirement plan returns, usually Form 5500-EZ, can face stiff penalties — up to $15,000 per return

However, under an IRS relief program, eligible small businesses that did not file certain retirement plan returns can 'fess-up and pay a much reduced amount, enabling them to come back into compliance.

Withdrawal Liability Can Be Imposed on Successor Business.

Ninth Circuit Expands Liability Exposure to "Successor"

gavel If an employer withdraws from participation in an underfunded multiemployer pension plan, the employer can be assessed withdrawal liability based on its allocated share of the plan's unfunded vested benefits.

Of course, there are exceptions.

Overview- Withdrawal Liability

An employer that withdraws from participation in a multiemployer plan may do so either in a:

complete withdrawal, or
partial withdrawal.

If the plan has unfunded vested benefits allocable to the employer, the plan will assess withdrawal liability. The plan determines the amount of liability, notifies the employer of the amount, and collects it from the employer.

Health Plans: Plug Those Leaks

Eligibility Audits Can Pay Big Dividends

If you have ever catered a big event, you know the feeling that you might be paying for people who were not "officially" invited.

You should get the same feeling if you are managing a medical benefit plan. As plans grow bigger, they eventually pay for coverage for people who are not eligible to participate.

The reasons might be innocent. Life keeps changing. A spouse becomes an ex-spouse, a child gets married, your son, who is never moving out of the basement, actually gets a job with coverage, and in the process a covered dependent becomes ineligible. And, for various reasons, no one notifies the plan.