In a rather quick turnaround, the Department of Labor has withdrawn a final regulation previously published on Inauguration Day concerning who may provide investment advice to qualified retirement plan participants.  Previously, the new Administration had twice pushed back the effective date of those final regs until November 18, 2009 and then May 17, 2010  in order to receive more public comment on them.

The Pension Protection Act of 2006 (PPA) had developed a somewhat broad set of conditions under which individuals and entities could provide specific investment advice (as opposed to general investment education) to plan participants.  The PPA then authorized the DOL to issue regulations with greater levels of detail on what was permissible.

In the last days of the Bush Administration, the DOL issued those rules, which some in Congress took to be overly lenient.  One House Committee Chairman, George Miller (D-CA) passed a bill through his Committee that would have severely restricted those final regulations and required (among other things) increased independence of any financial adviser offering investment advice to participants.  The DOL postponed the effective date of the final regulations in order to receive additional public comment and to work with Congress on what was intended by the PPA.

On November 17, 2009, the DOL announced that it was withdrawing the final regulation altogether.  We now expect that it will begin its rulemaking process anew with the data collected from the previous public comments.

Plan sponsors will now need to review the DOL’s withdrawal of the final regulations and wait to see what the new requirements will be before safely assuming who may provide such investment advice to participants.

In May, 2007, the IRS informed all employers that any qualified retirement plans that had a normal retirement age (NRA) earlier than age 55 (with the exception of public safety officers, where an age of 50 was permitted) were automatically deemed as not meeting the requirements in the Tax Code.  If a plan had an NRA between 55 and 62 it had to prove that such an age met an “industry standard,” a very high burden of proof in most industries and even in the public sector.

This created two problems for many governmental employers.  First, many had normal retirement age provisions less than age 62.  Second, many such employers also often had a years-of-service provision that enabled participants to retire long prior to age 62.  For example, you could often find a 25-and-out provision with full benefits in many governmental (and private sector) plans.

Later in 2007, nongovernmental employers were told in IRS Notice 2007-69 that they had to have updated NRA provisions in their plan for any plan year beginning on or after July 1, 2008.  For most plans, that meant for plan years beginning on January 1, 2009 (calendar year plans).  Governmental employers were given an additional two years to comply (plan years beginning January 1, 2011).

However, with yesterday’s new IRS Notice, governmental employers now have another additional two years until January 1, 2013 to fix both of these problems.

If only nongovernmental employers had the same relaxed provisions…

Starting with the 2009 IRS Form 5500, sponsors of 403(b) plans are required to begin filing on their plans.  One of the main concerns of 403(b) plan sponsors was that under the now-obsolete IRS Notice 90-24, plan participants could individually invest their 403(b) funds in custodial or annuity contracts.  The 5500 form requires a plan sponsor to collect all financial information on plan assets, and employers were concerned that they would be unable to collect and report this information from a large number of unrelated financial and insurance institutions holding individual 403(b) accounts on the requisite Schedule H or I of the 5500.

Now however, under IRS Field Assistance Bulletin (FAB) 2009-2, a plan sponsor of a 403(b) plan gets some relief from the financial reporting requirement if a number of conditions are met relating to these individual contracts:

1) the contract or account was issued to a current or former employee before January 1, 2009;

2) the employer ceased to have any obligation to make contributions (including employee salary reduction contributions), and in fact ceased making contributions to the contract or account before January 1, 2009;

3) all of the rights and benefits under the contract or account are legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer; and

4) the individual owner of the contract is fully vested in the contract or account.

As long as all four conditions are met, the 403(b) plan sponsor is not required to include these individual accounts on the 5500 report.  This is indeed good news.