IRS Issues Final Regulations to Clarify Tax Treatment of Payments by Retirement Plans for Accident, Health and Disability Insurance Premium

The IRS has issued final regulations that clarify the tax treatment of premium payments paid by qualified defined contribution plans for accident and health insurance where such payments are charged against participants' plan accounts.  Included within the final regulations is a new rule governing the tax treatment of premiums paid by defined contribution plans (and charged against participants' account) for disability insurance that provides replacement plan contributions when a participant becomes disabled.  The final regulations are effective for plan years beginning on or after January 1, 2015, but taxpayers may elect to apply the regulations to earlier taxable years.

Background.  Section 125 of the Code allows employees to pay accident and health insurance premiums on a pre-tax basis.  The Code also excludes from a participant's taxable income all proceeds received under accident or health insurance policies for injuries or sickness.  Additionally, Code Section 402(a) provides that distributions from qualified retirement plans are taxable to the participant in the year of distribution.  

Accident or Health Insurance Premiums.  The final regulations reiterate that, as a general rule, premium payments made from qualified defined contribution plans for accident or health insurance (including long-term care) are considered taxable distributions to the insured participant during the year in which the premium payments are made.  Certain statutory exceptions to this general rule exist, including: (i) premiums payments made on behalf of qualified public safety officers (Code Section 402(l)), and (ii) premium payments from a qualified retiree health account (Code Section 401(h)).  

Premium payments that are charged against a participant's defined contribution plan account are treated as a taxable distribution and are deemed as being made by the participant, not the employer.  In other words, the transaction is the same as if the participant purchased the coverage with after-tax dollars.  Therefore, proceeds received from an insurance policy whose premiums are paid by a qualified plan are generally excludable from the participant's gross income. 

NOTE: Where a participant took deductions for the insurance premium distribution, the insurance proceeds would be taxable.

Disability Insurance Premiums.  The final regulations provide that premium payments made by a qualified defined contribution plan for disability insurance that provides replacement plan contributions in the event of the participant becoming disabled are not treated as a taxable distribution to the participant if the following conditions are met:

• The insurance policy provides for proceeds to be paid to the plan if the employee becomes unable to continue employment because of disability;
• Proceeds from the insurance policy are credited to the participant's plan account; and
• The amount payable under the insurance policy does not exceed the reasonably expected annual contributions that the participant would have made or received during the period of disability, reduced by any other contributions made on the employee's behalf during the disability period.  (Future salary increases that the participant would otherwise have received during the period of the disability may be considered in determining the "reasonably expected" amount of the contribution that the participant would have made.)

Disability insurance policies that meet these conditions are treated as plan investments and any proceeds received are treated as a return on that investment as opposed to plan contributions.  Thus, proceeds from the disability insurance policy are not subject to Code rules that limit annual plan contributions.  In addition, insurance proceeds are not taxable to the participant at the time of payment.

The final regulations advise that the contribution disability insurance policies can replace:

• Pre-tax contributions that a participant would otherwise have made during the period of disability;
• Any related employer-paid matching contributions the employee would have received; and
• Any employer non-elective (or profit sharing) contributions.

Action Steps for Employers.  Employers that sponsor qualified defined contribution plans should carefully consider whether to provide employees with the option to purchase contribution disability insurance through the plan on a tax-favored basis.  Offering such disability insurance as a plan investment option is a fiduciary decision that will expose the employer to the risk of fiduciary liability.  Accordingly, employers that decide to offer disability insurance are advised to engage in an objective, thorough and analytical process to identify and select the right disability insurance policy. 

Before an employer decides to offer contribution disability insurance as an investment option under its qualified defined contribution plan, the underlying plan document must be reviewed to determine what amendments are needed.  Employers are advised to engage qualified employee benefits counsel to assist in the plan document review and amendment process. 

NOTE:  Marcia Wagner testified before the Internal Revenue Service regarding the appropriate treatment of disability insurance in the context of defined contribution plans and the very position that she espoused, by virtue of the regulations, is now the law of the land. 

IRS Issues Updated Circular 230 Regulations

The IRS has issued updated final regulations on Circular 230 that significantly revise the manner in which practitioners are required to advise on federal tax matters.  Circular 230 is a portion of the federal regulations that governs the conduct of individuals who practice before the IRS.  Practitioners who violate Circular 230's rules of conduct are subject to disciplinary actions ranging from monetary sanctions to suspension and disbarment from practice before IRS. 

This article primarily focuses on the final regulations' elimination of the covered opinion rules and the new requirements for written tax advice.  Specifically, the new regulations provide practitioners with relief from Circular 230's previously onerous rules, thereby replacing them with a more workable standard of care that is based on facts and circumstances.  Because the penalties for failing to meet Circular 230's requirements can be severe, practitioners must be aware of, and comply with, the updated regulations.

Covered Opinions.  The most significant change under the updated regulations is the elimination of the distinction between a "covered opinion" and other written tax advice.  The prior regulations provided very distinct rules depending upon which of these two categories of writing the advice was classified.  In fact, the rules on covered opinions were very complex and imposed onerous due diligence requirements that might exceed a client's expectations, whereas the rules for written advice not deemed as a covered opinion were far less stringent.

Because of the stricter requirements for covered opinions, practitioners made every effort to avoid inadvertently providing covered opinions to their clients.  To avoid  penalties relative to covered opinions under Circular 230, practitioners would include a generic disclaimer (i.e., a "Circular 230 disclaimer") at the bottom of emails and other correspondence which provides that tax advice is not being offered to the reader.  These disclaimers were often provided without narrow tailoring to the particular advice provided to the client and even where the correspondence did not involve a tax matter.

Recognizing that the covered opinion rules created onerous compliance obligations for tax practitioners while providing little benefit to taxpayers, the updated regulations provide a single, uniform set of rules governing all written advice furnished on federal tax matters.          

New Rules for Written Tax Advice.  The new rules governing written tax advice strive to maintain standards that require practitioners to act ethically and competently while remaining practical and flexible in view of today's practice environment.  Under the updated regulations, practitioners must satisfy all six of the following requirements when rendering written advice on a federal tax matter:

1. Base the written advice on reasonable factual and legal assumptions;
2. Reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know;
3. Use reasonable efforts to identify and ascertain the facts relevant to the advice;
4. Not rely on the representations of others if reliance on them would be unreasonable;
5. Relate applicable law and authority to facts; and
6. Not take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.

The updated regulations explain that the determination of whether a practitioner has met these requirements will be based on all facts and circumstances attendant to the matter, including those not contemplated by the written advice. 

Exclusions from Written Advice.  The updated regulations contain exclusions from what constitutes written advice.  For example, government submissions on matters of policy (e.g., commentary submitted to the IRS in response to proposed regulations) are not considered written advice.  Continuing education presentations that are provided to an audience solely for enhancing knowledge on federal tax matters are also generally excluded, unless such presentations promote or market transactions.   

Reasonable Practitioner Standard.  IRS will apply a reasonable practitioner standard when reviewing practitioners' compliance with the updated regulations.  The updated regulations identify situations where it is unreasonable for a practitioner to rely on the representations of others (in violation of Circular 230).  Specifically, it is unreasonable for a practitioner to rely on a representation if the practitioner knows or reasonably should know that a representation or assumption on which the representation is based is incorrect, incomplete or inconsistent.  Also, reliance is unreasonable where the practitioner knows or reasonably should know that:

1. the opinion of the other person should not be relied upon,
2. the other person lacks the necessary qualifications to provide the advice, or
3. the other person has a conflict of interest in violation of Circular 230.

NOTE: Practitioners should be aware that the requirement for reasonable reliance on others may create an obligation to inquire as to the advisor's qualifications and background.

In the case of written advice that the practitioner knows or has reason to know will be used by another in promoting, marketing or making recommendations to another taxpayer, IRS will give heightened emphasis to the additional risk caused by the practitioner's lack of knowledge of the taxpayer's particular circumstances. 

  

Conclusion.  The final regulations, which became effective June 12, 2014, provide welcome relief to tax practitioners and clients alike by simplifying the rules for providing clients with written advice on federal tax matters.  However, due to the subjective nature of the new rules, tax advisors who furnish written advice must ensure that they can demonstrate that their advice is reasonable in light of the surrounding facts and circumstances. Nonetheless, tax practitioners no longer need to incorporate Circular 230 disclaimers into their written correspondence.

ERISA's 40th Anniversary

This week marks the 40th anniversary of a landmark event that, along with Social Security, has shaped the retirement landscape in the United States. President Gerald Ford's signing into law of the Employee Retirement Income Security Act (otherwise known as ERISA) on September 2, 1974 is largely responsible for the evolution of the private retirement plan system. With 401(k) plans as its mainstay, ERISA has been largely successful in delivering broad-based retirement security to employees, as well as providing for a uniform, nationwide set of fiduciary and administrative standards.

Today, this system is being questioned, if not threatened, because of the perception that its coverage is limited and does not result in retirement readiness for those it does cover. This criticism is short-sighted, since it ignores the system's positive achievements and neglects how it has adapted to meet the needs of a modern, mobile workforce. The best way to ensure the retirement security of Americans is to preserve this system and improve it with better plan design and financial products.

The event that crystalized the need for pension plan reforms was the 1963 closing of Studebaker Corporation's automobile plant which caused many long-service workers to lose both their jobs and benefits promised under the company's poorly funded defined benefit pension plan. ERISA addressed the concern that private pension plans were mismanaged by setting new standards for the vesting and funding of benefits, introducing new reporting and disclosure rules and imposing certain standards of conduct on fiduciaries who manage plans. Subsequent legislation would amend ERISA in important ways, such as reducing the maximum age that a plan may require for participation and creating spousal rights through mandatory survivor annuities and qualified domestic relations orders in the event of divorce.

These reforms established the groundwork for the explosive growth of the private plan system. According to Department of Labor records, in 1975 this system covered not quite 45 million participants; however, by 2011 it had expanded to include nearly 130 million people. Over the same period, the growth in plan assets has been even more impressive, rising from $260 billion to $6.3 trillion, a more than 24 fold increase.

ERISA's original focus was on making defined benefit plans more secure for participants. These plans promise periodic payments for life, the amount of which is determined by a formula whose key variables include a participant's compensation and length of service. Since the plan mandates a specified level of benefits, it is the employer's responsibility to make sufficient contributions to fund this lifetime commitment.

In the 1980s, the prevalence of the defined benefit model began to give way to individual account plans which, as their name implies, provide a benefit equal to an account consisting of employer and/or employee contributions and their earnings. These defined contribution plans, which include the now familiar 401(k) plan, appealed to employers, because of the relief they provided from the investment risk associated with defined benefit plans. On the heels of the 401(k) plan came the hybrid plan, also known as a cash balance plan, which allowed considerably higher contributions helping participants build their nest eggs quickly.

Since defined contribution accounts were portable, this alternative also made sense for a workforce that changed jobs with increasing frequency. Moreover, highly mobile workers were better off, because defined contribution plans tended to have shorter vesting periods than their defined benefit counterparts. By the early 1990s, defined contribution plans had overtaken defined benefit plans in terms of assets and plan participants, a trend that has continued until they now predominate.

           

Notwithstanding its popularity and the fact that approximately 74 percent of full-time workers in private industry have access to a retirement plan of some sort, the private retirement system, as presently constituted, has been criticized for a lack of access by part-time employees and those working for small employers who are reluctant to establish a plan. Other complaints center on the investment risk now being shouldered by a workforce without a high level of financial literacy. One example of this issue was the Studebaker-like scandal that occurred in 2001 when Enron plan participants were unable to diversify their excessive holdings in employer stock. Critics also say that, even if plan participants accumulate an adequate level of retirement assets, they run the risk that they will outlive them.

The beauty of the private retirement system under ERISA is its ability to adapt to meet employees' needs. Automatic enrollment and automatic escalation of employee contribution levels (with the ability to opt out) are already being used to improve the take-up rate of employees who have plan access and can be enhanced by wider use, as well as legislation that would make them more effective. For workers without plan access, legislation could authorize these same techniques to overcome employee inertia in making contributions to IRAs.

Further, small employers could be encouraged to establish retirement plans for their employees by means of tax incentives, authorizing simpler plan designs that eliminate burdensome nondiscrimination testing of the relative amounts deferred by high and low wage earners and deeming certain of an employer's fiduciary duties satisfied in certain circumstances.

The issue of investment risk is being addressed by the further development and wider use of investment products that automatically diversify and rebalance plan accounts, a concept already legislatively approved and in use in the form of qualified default investment alternatives.

To promote lifetime income options, proposed regulations would require disclosure to participants of the level of periodic income that could be supported by their plan accounts, and work is underway to remove regulatory barriers to offering annuity options in 401(k) plans. In addition, longevity annuities with a lifetime income stream beginning as late as age 85 are now permitted, so that participants can manage a portion of their retirement assets until an advanced age and still have assurance that their retirement assets will not run out. To address participant resistance to committing assets to an annuity, consideration is being given to developing a 401(k) plan default investment in the form of a trial annuity with an opt-out clause.

ERISA critics would supplement the private retirement plan system with an expansion of Social Security or various government-controlled retirement programs that would diminish support for employer-provided plans and could eventually crowd them out. But these alternatives are flawed and do not offer the advantages of the current system. For example, Social Security is already under financial strain, and even if this were not the case, its expansion would reduce the low national savings rate, given that Social Security revenues are immediately spent by the government and the program's putative pre-funding is a special government bond on which a future generation will have to make good.

Other proposals currently in vogue aim to provide universal pension coverage for privately employed workers under programs run by the federal or state governments. These programs would provide for contributions at an annual rate that is only half the average rate currently enjoyed by participants under the current system, effectively downsizing retirement benefits when we should be thinking of increasing them. The proposals for government controlled systems also entail such unappealing features as taxpayer-subsidized investment returns and carry the potential for misallocating assets due to political pressure. Moreover, each program would require special dispensations from ERISA's fiduciary requirements, fracturing the nationwide scope of their application.

The private retirement plan system has been successful in providing and safeguarding retirement benefits for millions of Americans. It has demonstrated the capacity for growth and change that bodes well for meeting the needs of the future. As we celebrate ERISA's achievements, we should realize that the system it was designed to foster is the appropriate vehicle for ensuring that all Americans are retirement ready.

IRS Issues Guidance Providing Penalty Relief for Late Filing of Forms 5500

The Internal Revenue Service ("IRS") has issued two pieces of guidance that provide relief to retirement plan sponsors and administrators from the penalties that may be assessed under the Internal Revenue Code (the "Code") for delinquent Forms 5500 filings.  Plans that fail to timely file Form 5500 series annual reports can be subject to penalties under both Title I of the Employee Retirement Income Security Act ("ERISA") and the Code.  IRS penalties for delinquent Forms 5500 filings can reach $15,000 for each late return, plus interest.

The first piece of guidance, Revenue Procedure 2014-32 ("Rev. Proc. 2014-32"), sets forth a temporary pilot program that provides relief from Form 5500 late filing penalties for retirement plans that are ineligible to participate in the DOL's Delinquent Filer Voluntary Compliance Program (the "DFVC Program").  The second piece of guidance, Notice 2014-35, modifies the requirements for retirement plans to qualify for IRS late filing penalty relief by requiring ERISA-covered retirement plans to file Forms 8955-SSA with the IRS in addition to satisfying the requirements of the DFVC Program.      

Rev. Proc. 2014-32.  Rev. Proc. 2014-32 establishes a temporary one-year pilot program providing relief from Form 5500 late filing penalties to plan administrators and sponsors of retirement plans that are subject to the filing requirements of the Code but not subject to Title I of ERISA.  These plans include:

• small business plans that provide benefits only for the owner and the owner's spouse, and plans of business partnerships that cover only partners and their spouses (collectively, "one-participant plans"); and 

• certain foreign plans.

NOTE: Relief is not available where the IRS has already issued a CP-283 Notice (Penalty Charge on Your Form 5500 Return) to a plan sponsor or administrator in relation to the delinquent Form 5500. 

Under Rev. Proc. 2014-32, the IRS will not impose any penalty for delinquent Forms 5500/5500-EZ filings if the applicant submits a complete Form 5500 series return, including all required schedules and attachments, for each plan year for which the applicant seeks relief.  All returns submitted must be sent to the IRS in paper format and cannot be submitted electronically via the DOL's EFAST2 filing system.

Delinquent returns submitted under the pilot program must be marked, in red letters at the top margin of the first page, "Delinquent return submitted under Rev. Proc. 2014-32, Eligible for Penalty Relief."  In addition, a completed paper copy of the Transmittal Schedule provided in the Appendix of Rev. Proc. 2014-32 must be attached to the front of each delinquent return.

No penalty or payment is required under the temporary pilot program.  However, IRS has indicated that if the temporary program is replaced with a permanent program, a fee or other payment will be required.  Delinquent filers can submit an application for penalty relief under the temporary pilot program from June 2, 2014 until June 2, 2015.        

Notice 2014-35.  Since 2002, IRS has not imposed penalties relating to delinquent Forms 5500 filings where a plan administrator or sponsor has satisfied the requirements of the DOL's DFVC Program.  The DOL's DFVC program allows plans that fail to timely file their Forms 5500 to submit the late reports and pay a reduced civil penalty.  Retirement plans participate in the DFVC Program by filing an application and submitting the late Forms 5500. 

Notice 2014-35 updates the terms for retirement plans covered by Title I of ERISA to obtain relief from IRS penalties for failure to timely comply with the Code's Form 5500 filing requirements.  To obtain relief, the delinquent Form 5500/5500-SF must be filed electronically via EFAST2 in accordance with the requirements of the DOL's DFVC Program, and the delinquent Form 8955-SSA must be filed in paper format with the IRS.  If these requirements are met, IRS will not impose penalties for untimely filed Forms 5500/5500-SF and 8955-SSA.

NOTE: If a Form 8955-SSA is filed pursuant to Notice 2014-35, the filer must check the box on Line C, Part I (Special extension) on Form 8955-SSA, and enter "DFVC" in the space provided on Line C.

Delinquent Forms 8955-SSA must be filed with the IRS no later than 30 days after completing the DFVC filing for the late Form 5500/5500-SF, or December 1, 2014, whichever is later.  This requirement applies to all DFVC filings submitted via EFAST2 (i.e., all DFVC filings after December 31, 2009), regardless of whether the filing was submitted before the release of Notice 2014-35.   

NOTE: Form 8955-SSA must be used for years prior to 2009 even though Schedule SSA would have been filed for those years if the filing had been timely submitted to DOL.

For example, if a DFVC filing for a delinquent 2008 Form 5500 was submitted in 2012 and Schedule SSA was never filed for the 2008 plan year, a paper Form 8955-SSA must be filed with IRS for the 2008 plan year no later than December 1, 2014.     

Action Steps for Plan Sponsors and Administrators. Plan sponsors and administrators for one-participant plans and foreign plans are advised to confirm that all required Form 5500 filings have been completed.  Any outstanding filings discovered should be corrected while the opportunity to do so at no cost exists via the temporary pilot program created by Rev. Proc. 2014-32.  Plan sponsors and administrators should also monitor the development of the temporary program to see if it becomes permanent.  

Notice 2014-35 makes clear what retirement plan sponsors and administrators must now do to bring retirement plan Form 5500 and 8955-SSA filing obligations into compliance with IRS requirements. Retirement plan sponsors and administrators are advised to confirm that all required filings have been completed, and any outstanding Forms that are discovered should be corrected before IRS assesses a penalty in relation to the delinquency. 

Form 8822-B: What is it and Who Needs to File it?

To maintain correct ownership details, curb abusive tax schemes, and ensure that the correct individual is contacted regarding tax matters, the IRS has mandated new requirements to report a change in the identity of a "responsible party" for entities that have an employer identification number ("EIN").  Effective as of January 1, 2014, an entity (e.g.,a plan sponsor, plan administrator or plan trust) must report a change in its "responsible party" by completing and filing IRS Form 8822-B with the IRS within 60 days of the change.  Background.  As a general rule, every entity must obtain an EIN for tax filing and reporting purposes. To obtain an EIN, the IRS requires an entity to complete Form SS-4, "Application for Employer Identification Number." Before January 2010, the name and identifying number (i.e., social security number) of the principal officer, general partner, grantor, owner or settlor was reported on Form SS-4.  Effective January 2010, the IRS revised Form SS-4 to instead report the name and social security number of the entity's "responsible party."  IRS, however, believed that, in many circumstances, the individual originally reported on Form SS-4 was either acting on behalf of the entity or no longer in that position.    Who is a "Responsible Party"?  Form 8822-B instructions define "responsible party" as the "person who has a level of control over, or entitlement to, the funds or assets in the entity that as a practical matter, enables the individual, directly or indirectly, to control, manage or direct the entity and the disposition of its funds and assets."    In the context of retirement plans, the IRS has published guidance as to whom is a "responsible party."  (See Issue 2013-8 of Employee Plans News.)  According to the IRS, a responsible party for retirement plans "is the person who has a level of control, directly or indirectly, over the funds or assets in the retirement plan."  For benefit plans where the entity that serves as the plan administrator is not the plan sponsor, such entity will have its own EIN.  Consequently, in cases where the plan administrator's "responsible party" has changed, a separate Form 8822-B must be filed.               Penalty for Failing to File Form 8822-B.  Currently, there is no penalty for failing to file a Form 8822-B.  However, entities that fail to provide the IRS with a current mailing address or the identity of its responsible party run the risk of not receiving a notice of deficiency or a notice of demand for tax, meaning that penalties and interest will continue to accrue on any tax deficiency.    Action Steps.  Going forward, plan sponsors and plan administrators are advised to report changes in their "responsible party" by filing Form 8822-B with the IRS within 60 of such change.  Currently, Form 8822-B cannot be e-filed.

Society of Actuaries Releases New Mortality Tables

Defined benefit pension plan sponsors use mortality tables for a variety of purposes, including calculating lump sum distributions and minimum contribution requirements.  The IRS mandates the mortality tables that plan sponsors must use when calculating lump sum distributions and minimum contributions obligations. 

Currently, plan sponsors must use the RP-2000 mortality table to determine present value lump sum conversions and minimum contributions.  The Society of Actuaries (the "SOA") published RP-2000, and it is based on data from over 20 years ago.  Given that the RP-2000 data is stale and that the Pension Protection Act of 2006 mandated a review of IRS-required mortality tables every ten years, the SOA, in 2009, began a study to update underlying mortality assumptions.

In February 2014, the SOA released "exposure drafts" of a new mortality table, RP-2014, and a new mortality improvement scale.  RP-2014 contained a new table for disabled life mortality, and separate tables for white collar and blue collar participants.  As expected, RP-2014 reflects longer life expectancies.  The SOA has asked the actuarial community to submit comments on RP-2014 on or before May 31, 2014.  After reviewing these comments, the SOA will issue a final report containing the RP-2014 and the new mortality improvement scale.  

IRS Notice 2013-49 contains the mortality tables that plan sponsors must use for the 2014 and 2015 valuation years.  These tables are predicated on RP-2000.  IRS is expected to require plan sponsors to begin using RP-2014 for the 2016 valuation year.  For accounting purposes, however, plan sponsors may elect to adopt RP-2014 earlier to determine pension liabilities.

While the final content of RP-2014 is unknown,the following is certain: in application, RP-2014, which reflects longer life expectancies, will produce larger pension liabilities and increase the cost of lump sum distributions and plan contribution obligations.  RP-2014 will also affect defined contribution plans, as annuities purchased with account balances will cost more and provide lower monthly benefits. 

In view of the imminent release of RP-2014, plan sponsors are advised to consult with their ERISA counsel and actuaries to formulate strategies to manage the increased pension plan liabilities and contribution obligations that will result.

Compliance Refresher: Fee Disclosure Deadlines

Effective as of July 2012, retirement plan service providers must provide plan sponsors with a disclosure regarding the compensation they receive for the services provided (i.e., the ERISA 408(b)(2) disclosure).  In addition, effective as of August 2012, employers that sponsor retirement plans with participant-directed accounts must disclose detailed investment-related information to participants using a comparative chart format (i.e., the ERISA 404(a)(5) disclosure).

Retirement plan sponsors and service providers are advised to review the timing requirements for these mandatory disclosures and determine whether any information requirements have changed since the original disclosures.  This article will review the distribution deadlines for each disclosure and if applicable, any transitional relief provided by the Department of Labor ("DOL").

408(b)(2) Disclosures.  The service provider fee disclosure mandate under the DOL's 408(b)(2) regulations became effective on July 1, 2012.  Accordingly, covered service providers must have provided such fee disclosures to all existing plan sponsor clients by July 1, 2012.  Service providers must provide updated fee disclosures to plan sponsors following a change in fee information as soon as practicable, but in no event later than 60 days after the change.  

Barring a change in fee information, service providers need only furnish updated fee disclosures to plan sponsors when the underlying service agreement is extended or renewed.  Where a service provider enters into a new service arrangement with a plan sponsor, it must provide the mandatory fee disclosure "reasonably in advance" of the commencement of services. 

It should be noted that recordkeepers are subject to additional 408(b)(2) disclosure rules.  In addition to providing a 408(b)(2) fee disclosure reasonably in advance of being hired, recordkeepers must also provide fee and expense information concerning the plan's investment options.  Instead of the 60-day deadline for providing updated disclosures after a change in fee information occurs, however, recordkeepers need only provide updated disclosures on an annual basis. 

404(a)(5) Disclosures.  The DOL's 404(a)(5) regulations require plan sponsors to distribute, on an annual basis, a comparative chart to participants that summarizes the plan's investment options as well as provide, on a quarterly basis, certain fee disclosures to participants. Plan sponsors must furnish the comparative charts on an annual basis, meaning at least once in any 12-month period.  

Plan sponsors of calendar year plans were required to furnish the first comparative chart by August 30, 2012, and the first quarterly fee disclosure by November 14, 2012.  Thus, if the 2012 Comparative Chart was provided to participants in August 2012, the next comparative chart (the "2013 Comparative Chart") need not have been provided until August 2013. 

DOL recently issued regulatory relief that affects the timing of plan sponsors' 404(a)(5) disclosures.  In Field Assistance Bulletin 2013-02 ("FAB 2013-12"), DOL provided plan sponsors with an additional six-month period for furnishing the 2013 Comparative Chart.  Accordingly, a plan sponsor that provided the 2012 Comparative Chart in August 2012 had until February 2014 to provide the 2013 Comparative Chart.  Many plan sponsors used this regulatory relief to "reset" the annual timing for the Comparative Chart so as to align its distribution with other participant disclosures and to also allow the 2013 Comparative Chart to reflect performance data for the full 2013 calendar year. 

Plan sponsors that, prior to the issuance of FAB 2013-02, had already taken steps or incurred administrative costs to furnish the 2013 Comparative Chart by the original deadline (i.e.,August 2013) were provided a similar six-month grace period for furnishing the next comparative chart (the "2014 Comparative Chart").  While plan sponsors must furnish comparative charts to participants on at least an annual basis, there is no restriction against plan sponsors distributing comparative charts on a more frequent basis.

Re-Cap of Fee Disclosure Deadlines.  The 408(b)(2) regulations require covered service providers to furnish disclosures to plan sponsors in the following four instances:  

1.  when the service provider is first hired,

2.  when a service provider has changes or corrections to its previous disclosures,

3.  when a service provider's contract or arrangement is extended or renewed, and

4. when the plan's record keeper has updated fee and expense information for the plan's investment options (but only on an annual basis).

With respect to the ERISA 404(a)(5) disclosures, the DOL (pursuant to FAB 2013-02) provided plan sponsors with a one-time additional six-month grace period for furnishing the annual comparative charts so that  distribution efforts could be coordinated with other participant disclosures.  Indeed, many plans have already availed themselves of this six-month grace period when distributing the 2013 Comparative Chart.  Plan sponsors that were in the process of furnishing the 2013 Comparative Chart when FAB 2013-12 was released have the opportunity delay furnishing the 2014 Comparative Chart until as late as February 2015.