The Wagner Law Group | Est. 1996

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On Behalf of | Nov 14, 2013 |

It gives me great pleasure to acknowledge and congratulate our 2013 New England Super Lawyers in Employee Benefits/ERISA: John Keegan, Russ Gaudreau and Marcia Wagner. I would also like to congratulate our 2013 Super Lawyer in Employment and Labor, David Gabor!

The U.S. Supreme Court’s ruling has upheld a lower court decision declaring Section 3 of the federal Defense of Marriage Act (“DOMA”) unconstitutional. Read the article below to learn how the IRS guidance resolves the debate over the territorial scope of the Windsor decision by adopting a general rule respecting a marriage of same-sex individuals for federal tax purposes.

Looking for ways to stabilize returns and manage downside risk -you are not the only one. The interest in Tactical Asset Allocation (TAA) strategies has increased. To learn more about how this trend could impact the rosy projections for target-date funds and the market share held by the dominant providers, please read the article below or refer to the white paper.

And finally, take a look at the new DOL guidance on plan asset rules.

2013 2014
Maximum annual payout from a defined benefit plan at or after age 62 (plan year ending in stated calendar year) $205,000* $210,000*
Maximum annual contribution to an individual’s defined contribution account (plan year ending in stated calendar year) $51,000** $52,000**
Maximum Section 401(k), 403(b) and 457(b) elective deferrals (under Code Section 402(g)) $17,500*** $17,500***
Section 414(v)(2)(B)(i) catch-up limit for individuals aged 50 and older $5,500*** $5,500***
Maximum amount of annual compensation that can be taken into account for determining benefits or contributions under a qualified plan (plan year beginning in stated calendar year) $255,000 $260,000
Test to identify highly compensated employees, based on compensation in preceding year (plan year beginning in stated year determines “highly compensated” status for next plan year) $115,000 $115,000
Wage Base For Social Security Tax $113,700 $117,000
Wage Base For Medicare No Limit No Limit
Amount of compensation to be a “key” employee $165,000 $170,000

* There are late-retirement adjustments for benefits starting after age 65.
** Plus “catch-up” contributions.
*** These are calendar year limitations.

IRS Releases Guidance Concerning Same-Sex Marriages

Supreme Court Ruling

In United States v. Windsor (June 2013), the U.S. Supreme Court upheld a lower court decision declaring Section 3 of the federal Defense of Marriage Act (“DOMA”) unconstitutional. Section 3’s definition of “marriage” as “a legal union between one man and one woman as husband and wife” was determined to violate constitutionally required due process and equal protection principles. With this decision, same-sex couples in states that recognize marriages between persons of the same sex clearly obtained marriage-based federal rights and benefits under the tax laws, including rights relating to 401(k) plans governed by the Internal Revenue Code.

The Windsor decision did not address the validity of Section 2 of DOMA, which gives individual states the right to recognize, or not recognize, same-sex marriages of other states. The effect of the decision on same-sex spouses who reside in states that do not recognize same-sex marriage was not clear, and awaited regulatory guidance. On August 29, the IRS issued the first installment of such guidance in the form of Revenue Ruling 2013-17 and two sets of frequently asked questions and answers.

IRS Ruling

The IRS guidance resolves the debate over the territorial scope of the Windsor decision by adopting a general rule respecting a marriage of same-sex individuals for federal tax purposes. This rule holds that if such a marriage was validly entered into in a state whose laws authorize same-sex marriages, it will be recognized under the tax laws even if the married couple resides in a state that does not recognize the validity of same-sex marriages. The IRS cited historical precedent as well as practical considerations for this decision. With regard to employee benefit plans, it noted the need for nationwide uniformity and pointed to the difficulty that employers would have in applying rules, such as spousal elections, consent and notices, if the rules changed every time a same-sex couple moved to a state with different marriage recognition rules. The IRS ruling eliminates the need for plans to continually track the state of domicile of same-sex couples.

While the uniformity rule may make sense for many, it may lead to legal challenges under Section 2 of DOMA. It should also be noted that the uniformity rule applies to same-sex marriages contracted outside the United States in foreign jurisdictions having the legal authority to sanction marriages. Since Revenue Ruling 2013-17 does not purport to address the treatment of same-sex couples in domestic partnerships or civil unions, the uniformity rule has no application to these relationships.

Effective Date

The uniformity holding of Revenue Ruling 2013-17 is to be applied prospectively as of September 16, 2013. For example, in the case of a defined contribution plan providing for default distributions to a participant’s spouse upon the participant’s death, the plan must presumably pay the death benefit to a same-sex surviving spouse if the participant’s death occurs on or after the effective date. However, the ruling does not provide guidance with regard to the Windsor decision’s application to employee benefit plans with respect to periods before September 16, 2013, although the IRS promises to do so in a manner that considers the potential consequences to all involved, including the plan sponsor, the plan, and affected employees and beneficiaries. But even if the IRS is true to its word, any rule it promulgates will not have the power to prevent certain parties, such as the surviving same-sex spouse of a deceased participant, from pursuing claims against a benefit plan or its sponsor.

Specific 401(k) Issues

Most plans subject to ERISA and tax-qualified retirement plans, other than government plans and non-electing church plans, must contain a number of provisions that hinge upon the marital status of the plan participant. With respect to 401(k) plans, these provisions may raise the following issues:

Spousal Death Benefit

A retirement plan may not pay a death benefit to a beneficiary other than the participant’s surviving spouse unless the spouse consents to the designation of a non-spouse beneficiary, and the participant’s spouse is generally the default beneficiary if there is no beneficiary designation. A plan provision that automatically designates a surviving spouse as the plan beneficiary enables a 401(k) plan not only to avoid the need to pay benefits in the form of an annuity, as described below, but also eliminates the requirement to obtain spousal consent as a condition of granting a plan loan. As noted above, the Windsor decision and Revenue Ruling 2013-17 require a participant who has designated a beneficiary other than his or her same-sex spouse, or wishes to designate such an individual as his or her beneficiary to obtain the consent of the same-sex spouse to the designation.

Spousal Annuity

For those plans subject to the joint and survivor annuity rules, lifetime benefits in a qualifying joint annuity form will need to be offered to participants with same-sex spouses, and same-sex spousal consent will now be required for non-annuity benefit payments or annuity payments that do not provide for a survivor annuity to the spouse.

Plan Loans

Many tax-qualified retirement plans that permit participant loans require spousal consent to any such loan. A same-sex spouse’s consent will now be required unless the plan provides that the spouse is the participant’s designated beneficiary

Qualified Domestic Relations Order

Domestic relations orders requiring the payment of a participant’s benefit to his or her same-sex spouse or their children will now be enforceable against the plan.

Hardship Distributions

Under the hardship distribution rules applicable to 401(k) plans, the rules allowing such distributions for certain medical, tuition or funeral expenses of spouses will now apply to same-sex spouses.

Required Minimum Distributions

Under the minimum distribution requirements applicable to tax-qualified retirement plans, including 401(k) plans, spouses of deceased plan participants may delay the commencement of benefits for a longer period after the participant’s death than non-spouse beneficiaries. Same-sex spouses will now be able to take advantage of this opportunity to defer payment of death benefits.


A same-sex spouse entitled to receive a death benefit distribution from a tax-qualified retirement plan will now be able to roll over the distribution to an employer plan, as well as to certain other retirement vehicles, and will no longer be limited to making a rollover to an inherited IRA.


Many uncertainties remain as to the impact of the Supreme Court’s decision, even after the IRS’s recent guidance. Additional guidance addressing open questions has been promised but may face resistance and/or challenge from employers, same-sex spouses or relatives of the parties to a same-sex marriage based on Section 2 of DOMA or how the IRS resolves the issue of retroactivity. While this guidance is being developed, 401(k) sponsors and their advisers should now be considering the following actions:

  • Communicating the Supreme Court’s decision to employees;
  • Identifying all past and present employees who are in a same-sex marriage;
  • Identifying those plan provisions that may be affected by a changed definition of the terms “spouse”, “marriage” and “husband and wife”; and
  • Preparing plan amendments removing any requirement that the forgoing relationships be limited to members of the opposite sex.

Interest in Tactical Asset Allocation Grows Among ERISA Plans According to CFDD White Paper

Looking for ways to stabilize returns and manage downside risk, the interest in Tactical Asset Allocation (TAA) strategies has increased. This was initially driven by the 2008 financial crisis, where diversification of asset classes did not provide participants with downside protection. Fueled by concerns over a transitioning monetary policy and asset class repricing, today’s equity market valuations, changing interest rate environment and a better understanding of participant risk tolerance has further increased interest in TAA. This trend could impact the rosy projections for target-date funds and the market share held by the dominant providers.

Given today’s investment dynamics – heightened risk for equities as well as bonds – astute investment advisors are increasingly questioning the prudence of modern portfolio theory. The DOL’s recent Tips for ERISA Plan Fiduciaries may also have sparked the desire for more oversight through custom solutions.

While somewhat limited in application, many proprietary target date fund managers already use a tactical overlay. Until now, there was very little guidance for plan fiduciaries to help them understand the different types of core TAA strategies, let alone evaluate the suitability of a particular strategy for their individual plans.

Separating analytically disciplined TAA strategies from high risk “market timing” type strategies, the CFDD’s exclusive white paper on Tactical Asset Allocation & ERISA Plans will become an invaluable resource for plan sponsors, investment advisors and product manufacturers considering TAA strategies. It will also spearhead the need for tactical transparency and accountability.

TAA contemplates dynamic changes based on current conditions. In addition to requiring special skills and being more complex than traditional approaches, TAA managers may have different goals and trigger methodology. Offered in conjunction with the Wagner Law Group – one of the nation’s most prestigious ERISA law firms – the white paper provides a conceptual overview of legal standards, core fiduciary principles and QDIA applications that will benefit both the experienced and those considering tactical strategies for the first time.

In addition to providing the analytic framework for evaluation, the white paper includes a checklist of best practices and key considerations for plan fiduciaries considering TAA strategies. Moving beyond the marketing hype, the white paper empowers plan fiduciaries with the knowledge to understand/evaluate TAA strategies and ask the right questions. It also paints a realistic picture of the rewards, risks and limitations of these wide ranging strategies.

View the White Paper. Read an article about the white paper and the 12 TAA Best Practices to Keep In Mind.

ERISA Accounts Meet Plan Asset Rules in New DOL Guidance

Duty to Review Plan Expenses. Revenue sharing payments, such as 12b-1 and sub-transfer agency fees, are paid by mutual funds to 401(k) plan service providers to compensate them for services undertaken on behalf of plans. For example, a plan recordkeeper may receive sub-transfer agency fees to track participant-level ownership of shares. The DOL has recognized that such payments can improve efficiency and reduce the cost of administrative services. At the same time, the complexity of revenue sharing practices contributes to the need for the plan-level fee information required by recently effective regulations. Among other things, these regulations are intended to give plan sponsors the tools to oversee revenue sharing and ensure that plans do not pay excessive amounts for services as a result of such indirect payments.

Levelizing Provider Compensation through ERISA Accounts. One of the strategies developed by recordkeepers to assist plan sponsors in this regard is the so-called ERISA account (sometimes referred to as an ERISA budget or an ERISA expense account). Where such an account is used, some or all of the revenue sharing allocated to a plan may be used to compensate a plan service provider, such as the recordkeeper itself or the provider of accounting, advisory or third party administrator services. From a recordkeeper’s perspective, this approach ensures that the recordkeeper’s compensation will not exceed the fee stated in its plan contract. Because the recordkeeper does not retain revenue sharing payments for its own benefit, its compensation remains level which eliminates its incentive to steer plan clients to investment options with high revenue sharing.

In one version of this technique, revenue sharing dollars are paid to a plan account and are part of plan assets. If the account is not zeroed out at the end of the year by payments to service providers, the plan allocates the remainder to participants in order to comply with the IRS requirement that all plan assets be fully allocated to participant accounts.

An alternative version of the ERISA account (sometimes referred to as a pension expense reimbursement account or PERA), requires revenue sharing to be credited to a hypothetical bookkeeping account maintained by the recordkeeper. Under this arrangement, the actual dollars remain with the recordkeeper as part of its general assets and do not belong to the plan. The plan may, however, direct the recordkeeper to use the assets (up to the credited amount) in a number of ways, as specified by its agreement with the recordkeeper, including the compensation of plan providers. This type of account carries over from year to year; however, if the plan discontinues the services of the recordkeeper, the account may be forfeited in which case the recordkeeper retains the remaining revenue sharing payments that generated the account.

The Plan Asset Question. In Advisory Opinion 2013-03A, the DOL recently issued guidance to Principal Life Insurance Company clarifying the application of plan asset rules to a PERA-type arrangement. The issue is important, because if revenue sharing payments held by a recordkeeper are treated as plan assets before being applied for the benefit of the plan or its participants, there would be a violation of ERISA’s requirement that all plan assets be segregated and held in a plan’s trust. Moreover, possession of plan assets would confer fiduciary status on the recordkeeper holding them and, as a result, the recordkeeper would engage in a fiduciary breach as well as violate the prohibited transaction rules by commingling the revenue sharing moneys with its own assets.

The new advisory opinion’s analysis of what constitutes plan assets begins with the observation that “the assets of an employee benefit plan generally are to be identified on the basis of ordinary notions of property rights.” This breaks no new ground, since numerous DOL advisory opinions have previously made this point. The new opinion goes on to note that plan assets generally include any property in which a plan has a beneficial ownership interest and that to determine whether such an interest exists requires consideration of any contracts or legal instruments involving the plan, as well as the actions and representations of the parties involved with the ERISA account.

Thus, according to the opinion, the requisite beneficial interest generally arises if particular assets are held in trust on behalf of the plan, or in a separate account in the plan’s name with a third party, such as a bank. In addition, the plan would have a beneficial interest in an ERISA account maintained by a recordkeeper if a document or legal instrument indicates that the funds in that account belong to the plan. The new opinion also indicates that a plan could have a beneficial interest in an ERISA account if an intent has been expressed (presumably by the recordkeeper or other party holding revenue sharing funds, although the opinion does not say) to grant such an interest to the plan. Moreover, a representation (again, presumably by the recordkeeper or other service provider) sufficient to lead plan participants and beneficiaries reasonably to believe that revenue sharing funds separately secure promised benefits would create the beneficial interest that turns those funds into plan assets.

On the other hand, the opinion notes that the mere segregation of a service provider’s funds to facilitate the administration of its service contract with a plan would not in itself create a beneficial interest in the segregated assets on behalf of the plan. Thus, merely crediting revenue sharing payments to an ERISA account maintained by a recordkeeper, without more, should not create a beneficial interest in the plan.

In the case of Principal Life, to which Advisory Opinion 2013-03A was addressed, the DOL noted that Principal’s arrangements and communications with each plan from whose investments Principal received revenue sharing could potentially lead to the conclusion that such amounts are plan assets. Advisory opinions do not attempt to resolve such factual questions, so that Principal could not have expected to receive an ironclad guaranty that the revenue sharing amounts in its possession are not plan assets. It did, however, receive assurance that the DOL saw nothing in the typical PERA arrangement presented by Principal which would lead it “to conclude that amounts recorded in the bookkeeping account as representing revenue sharing payments are assets of a client plan before the plan actually receives them.” Thus, the new guidance does not seem to require changes to the standard PERA arrangement.

Caveats. Advisory Opinion 2013-03A makes several observations as to the obligations of plan fiduciaries with respect to an ERISA expense account. First, the client plan’s contractual right to receive payments (or have such payments applied to plan expenses) under the arrangement would be a plan asset. If a recordkeeper or other service provider fails to make a required payment under the arrangement, the plan would have a claim against the service provider that would itself be a plan asset.

Since the contractual arrangement that underlies an ERISA account is a plan asset, plan fiduciaries must act prudently in negotiating the specific formula and methodology under which revenue sharing will be credited to the plan and paid back to the plan or to its service providers. The new opinion indicates that the plan fiduciary must understand the formula, methodology and assumptions to be used by the service provider in implementing the ERISA account. The plan fiduciary should also be capable of monitoring the service provider’s performance under the ERISA account arrangement to ensure that amounts payable to the plan are correctly calculated and applied for the plan’s benefit. The implication appears to be that if the plan fiduciaries do not have the capability to oversee the service provider’s implementation of the ERISA account, the plan should not enter such an arrangement.