Planning for Retirement Needs
The Retirement Field
Chapter 2
Chapter 2: Overview
• Getting a feeling for the pension business
-Laws
-Regulators
-Professionals and organizations
-Sources of information
ERISA
Title I - Amends the labor law to ensure the employee’s
right to collect promised benefits, reporting and
disclosure requirements
Title II - Amends the Internal Revenue Code to condition tax
benefits on meeting minimum standards (funding,
vesting eligibility)
Title III - Creates a regulatory framework for ongoing
implementation, dividing responsibilities between the
DOL and the IRS
Title IV - Establishes the Pension Benefit Guarantee
Corporation to insure benefit payments
from defined-benefit pension plans
Post ERISA Legislative Trends
• Eliminate special tax treatment
– Special averaging treatment
– Estate tax exemptions
• IRAs
– No clear trend over the years
– Recently many improvements
• Maximum deductible contributions
– Reduction in limits in 1980’s
– Increase in limits recently to encourage new plans
Post ERISA Legislative Trends
• Limiting tax deferral
– Required minimum distributions 401(a)(9)
• Parity
– Eliminate differences between Keogh (selfemployed and corporate plans)
• Small businesses
– Concern for abuses (1980’s) top-heavy
requirements
– Recently creating incentives to adopt plans
Post ERISA Legislative Trends
• Affiliation requirements—concern that coverage
rules were being avoided
• Funding—require more accelerated funding of
DB plans to limit PBGC exposure
• ESOPs—eliminate some (but not all) tax
incentives for ESOPs
• Simplification—encourage small businesses to
establish plans
– SIMPLE
– Simplified 401(k) requirements
IRS
• Initial qualification (voluntary)
• Auditing (Form 5500)
• Interpretation
– Regulations
– Revenue Rulings
– Private Letter Rulings
DOL
• Enforces reporting and disclosure rules (distribution of
SPD and SAR)
• Polices investments
– avoid prohibited transactions
– prudent
– exclusive benefit rule
• Polices fiduciaries
• Also interprets legislation
PBGC
• Insures defined-benefit plans
– excludes professional services organizations
with fewer than 25 employees
• Oversees fund solvency
– voluntary termination
– involuntary termination
• Legal interpretation
Additional Comments
• Market of private employers includes
– corporations
– sole proprietors (Keogh plans)
– partnerships
– nonprofit organizations
• Master and prototype plan documents
• Note marketing lists in the text
• Skim resources materials
Vocabulary
• Employee Retirement
Income Security Act
(ERISA)
• final regulations
• proposed regulations
• temporary regulations
• revenue rulings
• private letter rulings
• fiduciary
• Pension Benefit
Guaranty
Corporation (PBGC)
• third-party
administrators
(TPAs)
• master and prototype
plans
• primary sources
• blue book
True/False Questions
1. Title I of ERISA protects participants by allowing them to sue
fiduciaries in order to collect promised benefits.
2. Disqualifying a qualified plan can have negative tax implications for
the employer but not for the participants.
3. ERISA established the top-heavy requirements.
4. Many of the special rules concerning income tax and estate tax
treatment have been repealed since ERISA.
5. The Pension Protection Act of 2006 made significant changes to the
funding rules that apply to defined-benefit plans.
6. An individual or corporation that has discretionary authority or
responsibility over the administration of the plan is a fiduciary.
7. The PBGC issues advance determination letters regarding the
qualified status of plans.
True/False Questions
8. All defined-benefit pension plans are covered under the insurance
program of the Pension Benefit Guaranty Corporation (PBGC).
9. The Internal Revenue Service polices the investment of plan
assets.
10. The Internal Revenue Service is responsible for enforcing the
fiduciary rules that apply to those who manage plan assets.
11. Many plan sponsors farm out the administrative process to thirdparty administrators.
12. The Pension Answer Book is an example of a primary reference
source.
13. Unfortunately, the IRS and Department of Labor publications are
arcane and difficult to read, and are of little use to the financial
services practitioner.
Chapter 2 Review
• 4 Titles of ERISA
–
–
–
–
Labor
Tax rules
Divide regulation
PBGC
• Role of IRS
• Role of DOL
• Role of PBGC
• Post ERISA changes
– Simplification
– Remove some tax
advantages
– Pension limits
– Top heavy
– Controlled group
– Funding standards