IRS Announces Cost of Living Adjustments for 2012 Plan Limits

The IRS has announced COLA adjustments for employee benefit plan limits for 2012. This is the first time since 2009 that the COLA process has resulted in increased limits over the previous year. Among the new limits are:

  • The elective deferral limit is raised from $16,500 to $17,000.
  • The 401(a)(17) compensation limit is raised from $245,000 to $250,000.
  • The limit on aggregate contributions to defined contribution plans is raised from $49,000 to $50,000.
  • The limit on amounts payable from defined benefit plans is raised from $195,000 to $200,000.
  • The social security taxable wage base is raised from $106,800 to $110,000.

The IRS website includes a table that traces all of the limits since 1989. www.irs.gov/pub/irs-tege/cola_table.pdf

401(k) Investment Menu Held Prudent

Most 401(k) plans permit a participant to direct the investment of his or her interest among available plan investment options. Typically, either the plan sponsor or an appointed committee has the authority under the plan to select the investment options. In the recent case of Renfro v. Unisys Corporation, (3d Cir. 2011), two participants in a Unisys 401(k) plan sought to hold Unisys and the plan's trustee, Fidelity Management Trust Co., liable for a breach of fiduciary duty arising out of the alleged inadequate selection of the mix and range of investment options. Renfro generated significant interest in the 401(k) industry because the case could have had far-reaching implications on the selection of investment options and the merits of a defense afforded to plan fiduciaries in the Third Circuit under ERISA Section 404(c).

The plaintiffs alleged that the selection of retail mutual funds (67 at the time of the filing of the plaintiffs' complaint were available options) by Unisys and Fidelity breached their duty of loyalty and prudence under ERISA because the administrative fees under the Fidelity trust agreement and the fees associated with the funds were excessive in light of the services rendered as compared to other, less expensive investment options not included in the plan. In brief, the plaintiffs claimed that Unisys could have selected investments, such as collective trusts or separately managed accounts, with lower fees or used its bargaining power to demand lower fees.

The Third Circuit held in favor of Unisys and Fidelity. With regard to the claims against Unisys, the Third Circuit looked first to the characteristics of the mix and range of options and then evaluated the plausibility of claims challenging fund selection against the backdrop of the reasonableness of the mix and range options. Because the plan offered 67 mutual funds with a variety of risk and fee profiles, four commingled funds, a stable value fund, and a Unisys stock fund, the Third Circuit found that it could not infer that the selection process was flawed and therefore, upheld the motion to dismiss.

Comments: Although it discusses the duties imposed on a fiduciary under ERISA, including the prudent man standard, and cites the ERISA regulation which provides that "an ERISA fiduciary acts prudently when it gives appropriate consideration to those facts and circumstances that, given the scope of such fiduciary's investment duties, the fiduciary knows or should know are relevant to the investment course of action involved," the Third Circuit appears to have reached the conclusion that an in-depth review of the process was not needed because offering enough choices with a range of characteristics necessarily meant that Unisys had met its fiduciary obligations under ERISA on the face of that offering.

Under the facts of Renfro, it was not a great leap to conclude that a participant had enough choices to meaningfully impact his rate of return despite the retail nature of the mutual funds. Consequently, Renfro may not provide meaningful guidance to a plan sponsor that may not desire to offer 67 mutual funds. In this latter case, the fiduciary charged with the selection and maintenance of investment options should be prepared to demonstrate that it engaged in a prudent process in arriving at the investment menu.

Eighth Circuit Decides that Severance Benefits provided under an Employment Agreement do not constitute an ERISA Plan

In the recent case of Dakota, Minnesota & Eastern Railroad Corp. v. Schieffer, (8th Cir. 2011), the Eighth Circuit Court of Appeals, addressed whether a one-person contract may be a plan that is subject to the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). Relying on the language of ERISA's definition of "employee welfare benefit plan" and the broader context of ERISA preemption, the federal district court held that an individual contract providing severance benefits to a single executive employee is not an ERISA employee welfare benefit plan.

Dakota involved an executive who entered into an employment agreement with his employer. The agreement provided benefits in the event of his termination without cause or resignation for good reason. The employer terminated the executive without cause, triggering the severance provisions of the agreement. Disputes arose. The executive filed a demand for arbitration under the agreement. The employer commenced an action in federal district court to enjoin the arbitration, contending that ERISA preempts the arbitration. Relying on prior Eighth Circuit precedent, the district court concluded that the severance benefit was not covered by ERISA because it did not require an ongoing administrative scheme. The Eighth Circuit affirmed, but instead, used the broader holding described above.

To conclude that benefits are payable under an ERISA plan, courts have held that the benefits must require an ongoing administrative program to meet the employer's obligation. For example, a one-time, lump-sum payment triggered by a single event has generally been viewed as not requiring an ongoing administrative scheme. The relevant considerations have included whether the payments are one-time lump sum payments or continuous payments, whether the employer undertook any long term obligation with respect to the payments, whether the severance payments come due upon the occurrence of a single unique event or any time that the employer terminates employees and whether the severance arrangement under review requires the employer to engage in a case-by-case review of employees.

The Eighth Circuit stated that the ongoing administrative analysis was not necessary because as defined in ERISA, the term "employee welfare benefit plan" implies that an employer provides benefits to a class of employees, and more significantly, its use of the phrase "providing for its participants or their beneficiaries" reflects the Congressional intent that a covered plan is one that provides welfare benefits to more than one person. It further found that the conclusion that ERISA does not preempt a one person plan is consistent with the broader view that Congress did not intend to regulate individual employment contracts.

Comment: ERISA provides employers with substantial advantages with respect to severance plan administration. If ERISA applies, state laws allowing punitive damages, bad faith claims and jury trials are all avoided. The argument for ERISA coverage is strengthened if the employer adopts a plan document that reflects an ongoing administrative scheme, complies with the SPD rules and files a Form 5500 for the plan. The argument may have been strengthened in the Dakota case if the employer had taken these actions and if the the employment agreement had specifically referred to the plan.

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