Keys to Deliver Superior Customer Service - … · 1 Keys to Deliver Superior Customer Service Karen Gridley, KMG Enterprises, LLC Business Owner – Professional Speaker, Coach &

1

Keys to Deliver Superior Customer Service

Karen Gridley, KMG Enterprises, LLC

Business Owner – Professional Speaker, Coach & Consultant

Karen Gridley, KMG Enterprises, LLC Business Owner – Professional Speaker, Coach & Consultant

Karen Gridley specializes in helping companies and

professionals who value work-life balance, personal leadership

skills and high-performance. Utilizing her vast experience in

service-based industries; combined with her background as a

former scientist and a Recovering Excuse Maker™ herself; Karen

gives practical tools to implement immediately for diverse teams

and business professionals. Individuals and teams improve

performance, decrease stress and know what they do makes a

difference as they save time and increase the bottom line.

Clients rave about her down-to-earth, matter-of-fact and

humorous style as they gain insights and take action. She is the

owner of KMG Enterprises, LLC.

2

Objective

Improve Customer Service

What is Customer Service?

3

Keys

• EVERYONE is a customer

• To receive superior customer service,

deliver superior customer service

• To deliver superior customer service

begins with level of customer service

to oneself

EVERYONE is a Customer

Critical components

Aligned or misaligned

Interested or committed

4

To receive superior customer service,


Empower Self and Others

Reap what you Sow

To deliver superior customer service

begins with level of customer service to

Oneself

Patience

Communication

Can vs Can’t

5

What’s GRATITUDE Got to Do With It?

EXERCISE

If I were MORE _____________

I’d be more effective at delivering

Superior Customer Service

6

TAKEAWAYS

Recap

• EVERYONE is a customer

• To receive superior customer service,


• To deliver superior customer service

begins with level of customer service

to oneself

7

Contact Info

602.428.8380

[email protected]

1

Cash Balance – Interest Credits

Kevin J. Donovan, CPA, EA, MSPA, FCA

Managing Member, Pinnacle Plan Design, LLC

Kevin J. Donovan, CPA, EA, MSPA, FCA Managing Member, Pinnacle Plan Design, LLC

Kevin is a shareholder in the accounting firm BeachFleischman PC,

where he heads up the firm‟s pension subsidiary Pinnacle Plan Design,

LLC. Kevin is a CPA and an Enrolled Actuary. He is a founding

member of the ASPPA College of Pension Actuaries (ACOPA) and

recently served as ACOPA's Vice President. In addition to being a

member of NIPA, Kevin is a member of the American Society of

Pension Professionals and Actuaries (ASPPA), as well as the American

Institute of Certified Public Accountants (AICPA).

Kevin is a frequent author and lecturer on qualified retirement plans. He

has spoken at numerous conferences sponsored by ASPPA, NIPA, the

AICPA, ACOPA, the Conference of Consulting Actuaries. In 2015

Kevin was the recipient of the ASPPA Educator‟s award.

2

2

Cash Balance Plans

• What is a Cash Balance Plan?

• DB plan where benefit defined as theoretical account balance

• As opposed to periodic benefit payment

• Paper account only

• AKA, Accumulated benefit (regs), hypothetical account, etc.

• DB plan since not DC plan [IRC §414(j) v. IRC §414(i)]

• Account credited with

• Pay credits, normally % of compensation, flat dollar amount, or

combination thereof

• E.g. lesser of $$125,000 or 50% of compensation

• AKA, Principal credits (regs) Hypothetical allocations, Contribution

credits, Theoretical allocations, etc

• Interest credits (aka earnings credits) – our emphasis

3

Interest Credits - PPA

• Age Discrimination started with interest credits

• IBM District court

• Cash balance plans are age discriminatory

• Younger participants have more interest credits at retirement

• Appeals Courts & Congress: not the case

• But what if interest credits really high? (15%?)

• At some point, higher interest credits become discriminatory against older participants

4

3


5

27 Year Old 55 Year Old

Compensation $50,000 $50,000

Interest Crediting Rate 5% 5%

Pay Credit $600 $600

Value of Pay Credit at

Age 62 (5% Growth)

$3,309.61 $844.26

Annuity Conversion at

Age 62

$13 $13

Annuity at Age 62 $254.59 (3,309.61 / 13)

$64.94 (844.26 / 13)

Annuity as % of

Compensation

0.51% (254.59 / 50,000)

0.13% (64.94 / 50,000)

Congress is OK with this.


6

27 Year Old 55 Year Old

Compensation $50,000 $50,000

Interest Crediting Rate 15% 15%

Pay Credit $25 $25

Value of Pay Credit at

Age 62 (15% Growth)

$3,329.39 $66.50

Annuity Conversion at

Age 62

$13 $13

Annuity at Age 62 $256.11 (3,329.39 / 13)

$5.12 (66.50 / 13)

Annuity as % of

Compensation

0.51% (256.11 / 50,000)

0.01% (5.12 / 50,000)

Congress is not OK with this.

Result: Congress limited interest credits with PPA 2006

4


• IRC §411(b)(5)(B)(i)(I):

• An applicable defined benefit plan shall be treated as failing to

meet the requirements of paragraph (1)(H) unless the terms of

the plan provide that any interest credit … for any plan year shall

be at a rate which is not greater than a market rate of return.

• A plan shall not be treated as failing to meet the requirements of

this subclause merely because the plan provides for a

reasonable minimum guaranteed rate of return or for a rate of

return that is equal to the greater of a fixed or variable rate of

return.

• See also Reg. §1.411(b)(5)-1(d)(1)(i)

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• So: • … shall be treated as failing to meet … (1)(H)…

• A rate in excess of a market rate results in plan DQ

• shall not be treated as failing to meet …this subclause merely because the plan provides for a reasonable minimum guaranteed rate of return

• Statute provides for „reasonable‟ minimum

• Regs appear a bit more restrictive, at least if equity based

8

5

Interest Credits - Regs

• Final regulations provide exclusive list of rates

that qualify as market rates

• i.e., cannot argue something else (e.g. LIBOR

rate) is market rate

• Reg. §1.411(b)(5)-1(d)(1)(iii)

9


• Acceptable interest rates under final regs

• Fixed rate up to 6%

• Reg. §1.411(b)(5)-1(d)(4)(v)

• First, second or third segment for funding or 417(e)

• Reg. §1.411(b)(5)-1(d)(3); §1.411(b)(5)-

1(d)(4)(iv)

• Treas. rates and COLI, with margins, from Notice

96-8

• Reg. §1.411(b)(5)-1(d)(4)(ii) / (iii)

10

6


• Acceptable interest rates under final regs (cont)

• Investment return on plan assets

• If assets diversified to minimize volatility of returns

• Reg references ERISA §404(a)(1)(C):

• “by diversifying the investments of the plan so

as to minimize the risk of large losses, unless

under the circumstances it is clearly prudent

not to do so.”

• Reg. §1.411(b)(5)-1(d)(5)(ii)(A)

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• Investment return on “subset” of plan assets

• Subset diversified to minimize volatility of returns

• 10% limit in subset on employer securities / R.E.

• Market value of assets in subset must

approximate liabilities for benefits to which

subset relates

• Reg. §1.411(b)(5)-1(d)(5)(ii)(B)

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7



• Investment return on mutual funds (RICs)

• Must be the rate of return on an actual mutual fund

• As opposed to an index

• Not significantly more volatile than US markets

• No industry sector;

• No single country other than U.S.

• OK to track indices such as S&P 500 or Russell

2000 through a mutual fund

• Reg. §1.411(b)(5)-1(d)(5)(iv)

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• “Greater of” rates

• In general a plan may not provide an interest credit

equal to greater of two otherwise compliant rates

• Reg. §1.411(b)(5)-1(d)(6)(i)

• Exceptions (discussed herein) exist for

• Certain minimum rates

• Changing from one compliant rate to another

• Post retirement increases

14

8


• Acceptable minimum rates

• 4% annual for segment rates

• Reg. §1.411(b)(5)-1(d)(6)(ii)(A)

• 5% annual for 96-8 rates

• Reg. §1.411(b)(5)-1(d)(6)(ii)(B)

• 3% cumulative (not annual) for any rates

• Reg. §1.411(b)(5)-1(d)(6)(iii)

15


• Reality

• Most new plans are using either

• Fixed rate, or

• ROR on assets, possibly with cap (and/or

floor)

• Or some combination of the two

16

9


• What is an interest credit?

• “an interest credit for purposes of this paragraph … means the … adjustments to a participant‟s accumulated benefit under a statutory hybrid benefit formula, to the extent not conditioned on current service …”

• Reg. §1.411(b)(5)-1(d)(1)(ii)

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• What is an interest credit?

• Some plans have an “interest credit rate” that is

greater for active employees

• E.g., the rate is 6% while employed but 4% after

separation from service

• Under regs piece dependent on service (i.e. the

extra 2%) not an interest credit

• And is therefore a pay credit and treated as such

18

10

Changing interest rate

• Can interest rate be changed?

• Why would you want to?

• May be having testing issues with current

(otherwise compliant) rate

• Current rate non-compliant

19


• Relief for Interest Crediting changes

• Interest crediting is a right to which participant is

entitled once the pay credit has accrued

• i.e., once pay credit for a year has been earned,

the right to interest at current rate through

distribution is guaranteed

• Cannot cut future interest credits, even before

they‟re credited

• Except in narrow relief provided in 2014 regs

• Reg. §1.411(b)(5)-1(e)(3)(i)

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11


• OK to change from one compliant rate to another

• Wear-away approach on old balance

• i.e. payout greater of • balance at date of change, plus interest at old rate, or

• such balance, plus pay credits, plus interest at new rate

• But not for those not active (or no longer benefiting) at amendment date.

• Otherwise would be receiving greater of two compliant rates

• Reg. §1.411(b)(5)-1(e)(3)(iii)

21


• Consider plan using 30-year Treasury rate

• Recall IRS requires .5% accrual to be receiving

meaningful benefit for IRC 401(a)(26)

• 30-year rate for December 2014 is 2.83%

• Consider employee age 37, NRA 62

• Compensation = $50,000; pay credit 2% of comp.

• APR 2015 applicable table = 156.595 (13.05

annual)

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12


• Pay credit = $50,000 * .02 = $1,000

• To NRA = $1,000 * (1.0283 ^ 25) = $2,009.07

• Benefit = $2,009.07 / 13.05 / 50,000 = .31%

• Not meaningful

• What if change interest crediting rate to 5% fixed?

• To NRA = $1,000 * (1.05 ^ 25) = $3,386.36

• Benefit = $3,386.36 / 13.05 / 50,000 = .51%

• Meaningful

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• Re change from 30-year rate to fixed rate • Must keep track of pre-amendment balance and

continue to credit interest at 30-year rate

• At date of distribution such balance would be compared to actual balance

• Must track through distribution date since if interest rates rise substantially the old rate could re-appear 10 years later. • Particularly for those receiving no pay credits

• Of course if 30-year rates stay where they are will be non-issue

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13


• Non-compliant rates

• General rule: correct in most straightforward way • Reg. §1.411(b)(5)-1(e)(3)(vi)

• Examples: • Fixed at 7%: reduce to 6%

• 30-year Treasury yield, with floor of 6%: reduce floor to 5%

• Special rules apply for more complicated situations

• In general switch to 3rd segment OK

• Effective January 1, 2017 • Need to amend prior to first day of first plan year beginning on

or after January 1, 2017

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Using ROR

• Why use rate of return (ROR) for interest crediting?

• Goal is to invest assets to mirror crediting rate

• And shift investment risk to employees

• Losses do not create a funding shortfall

• Goal is to simply deposit pay credits

• Especially for multi owner situations

• Ala a money purchase plan!

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14

Using ROR

• Issues with using ROR

• Potentially lower 415 Limits

• Potentially harder to pass 401(a)(4) / 401(a)(26)

• Interim interest credits

• Potential 411(a)(9) issue

27

Using ROR

• It is important to recall that a cash balance plan is a DB plan and IRC §411(a)(7) provides that the accrued benefit is a life annuity payable at NRA

• PPA added IRC §411(a)(13)(A) to allow the accrued benefit to be defined as the account balance in a CB plan, but only for purposes of

• allowing the account balance to be paid as a lump sum - i.e. ignoring §417(e), and

• age discrimination

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15

Using ROR

• To determine the accrued benefit in a cash

balance plan the account balance is projected to

NRA with interest credits and converted to an

annuity using plan factors

• AB = acct bal * (1 + int) ^ (nra – aa) / apr (NRA)

• If crediting Actual ROR, what is “int” ?

29

Using ROR

• IRS position-> project at current ROR

• “The IRS has taken the position that the hypothetical account balance must be projected to normal retirement date using the interest crediting rate in effect on the date the projection is made.”

• IRS hybrid training manual

• Consistent with recent cash balance LRMs

• And §1.401(a)(4)-3(d)(5)(iii)(H) of old 1991 regs

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16

Using ROR - 415

• CB Plan‟s early retirement reduction performed at

greater of 5% or interest credit rate

• Recall max benefit = $210,000 per year at age 62,

reduced for years of participation less than 10

• Let‟s look at a case where ROR is being used and

most recent ROR is 15%

• Partner in law firm

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Using ROR - 415

• Consider 59-year old partner in law firm

• 2 years in plan (2014 and 2015)

• Leaving and wants money (it happens)

• Annuity based on 5% / 2015 applicable table

• Pay credit $200,000

• Look at interest credits of 5% and 15%

32

17

Using ROR - 415

• Account balance at 5% and 15%

• TAB Balance 1/1/14 $ - $ -

• 2014 contribution credit 200,000 200,000

• Balance 12/31/14 (1/1/15) 200,000 200,000

• 2015 interest credit 10,000 30,000

• 2015 contribution credit 200,000 200,000

• TAB Balance 12/31/15 $410,000 $430,000

33

Using ROR - 415

• What is 415 lump sum limit?

• If interest credit rate 5%

• $210,000 / 12 * 156.5947 / 170.0164 / (1.05^3) =

$14,193.02

• Two years of part = $14,193.02 / 10 * 2 = $2,838.60

• Max LS = $2,838.60 * 158.7841 = $450,725

• Account balance $410,000 so can pay

34

18

Using ROR - 415

• What is 415 lump sum limit?

• If interest credit rate 15%

• $210,000 / 12 * 156.5947 / 170.0164 / (1.15^3) =

$10,803.12

• Two years in plan = $10,803.12 / 10 * 2 = $2,160.62

• Max LS = $2,160.62 * 158.7841 = $343,073

• Account balance $430,000

• OOPS!!

• Mitigate by capping crediting rate at 5%

35

Using ROR – 401(a)(4)

• Normal accrual rate (NAR) for testing generally = increase in accrued benefit / Comp. • Assume same factors as previous slides

• pay credit $100K; Comp. $250K

• At 5% NAR = $100K * 1.05 ^ 7 / 13.05 / 250K = 4.31%

• At 15% NAR = $100K * 1.15 ^ 7 / 13.05 / 250K = 8.15%

• Leverage obtained by testing PS at 8.5% lost!

• Again mitigated by capping crediting rate at 5%

36

19


• Recall math from earlier slide re change in crediting rate • Pay credit = $50,000 * .02 = $1,000

• To NRA = $1,000 * (1.0283 ^ 25) = $2,009.07

• Benefit = $2,009.07 / 13.05 / 50,000 = .31%

• Not meaningful

• What if interest crediting rate 5% fixed?

• To NRA = $1,000 * (1.05 ^ 25) = $3,386.36

• Benefit = $3,386.36 / 13.05 / 50,000 = .51%

• Meaningful

• Lower rate can cause a26 failure – mitigate with 5% fixed for NHCs

37

ROR – Interim Interest Credits

• 2015 Grey Book Q28

• Under the final hybrid regulations, a plan is not required to provide interest credits to participants whose benefits commence during an interest crediting period before the interest crediting date, but may provide such interest credits. Can a cash balance plan provide an interest credit for the current partial year based on a different acceptable interest credit basis than is used for the full period?

38

20

ROR – Interim Interest Credits

• 2015 Grey Book Q28 (cont.) RESPONSE

• No. Regulation §1.411(b)(5)-1(d)(1)(iv)(D) provides that “. . a plan is not treated as failing to meet the requirements of this paragraph (d) merely because the plan calculates increases or decreases to the participant's accumulated benefit by applying a rate of interest or rate of return (including a rate of increase or decrease under an index) to the participant's adjusted accumulated benefit (or portion thereof) for the period.” The reference under this regulation to “a rate of interest or rate of return” means the plan‟s rate of interest or rate of return.

• SO … When crediting annual ROR will want to NOT credit interim interest and get folks paid ASAP

39


• IRC §411(a)(9) and Reg. §1.411(a)-7(c)(1) provide

that “periodic benefit” (i.e., annuity) payable at any

point cannot be less than previously available amount

• Most cash balance plans provide for immediately

payable lump sums upon termination of employment

• Reg 1.401(a)-20 Q&A 17 provides that if a non de-

minimis (over $5K) lump sum is available at any point

(referred to as “earliest retirement age” in the reg) then

qualified annuity forms must be available at same time

40

21


• Assume acct balance $1.5 million at age 64

• Age 64 417e/2015 5% APR = 149.47;

• Life annuity = $10,035

• Loss results in age 65 balance of $1 million

• Even after preservation of capital rule, as there were

substantial previous gains

• Age 65 417e/2015 5% APR = 145.819;

• Life annuity = $6,858

• Participant has right to $10,035 life annuity at 65

• VERY EXPENSIVE

41

ROR - Sub pools of assets

• New option in 2014 regs:

• Credit return on “sub-pool” of plan assets

• Sub-pool option intended to accommodate cash

balance conversions:

• Pool 1: Assets invested to pay traditional DB

benefits

• Pool 2: Assets invested to pay interest credit =

ROR on CB accounts

42

22


• But Preamble to regs also states:

• “…a plan sponsor may wish to credit interest

based on a rate of return that differs for different

groups of participants (such as using a more

conservative, or less volatile, subset of plan

assets for long service employees)”

43


• Lead to lifestyle/target date CB plans?

• Each sub-pool is a separate investment policy

• Participants assigned to particular sub-pool

• Segment participants by age?

• Age discrimination a risk?

• See inter-sector notes on following slide

44

23


• October 15, 2014 inter-sector notes:

• “The IRS/Treasury representatives explained that

any sort of age-based criteria would take you out of

the age discrimination safe harbor for lump sum-

based plan formulas, which means that the plan

would have to satisfy the general age discrimination

requirements of IRC section 411(b)(1)(H)(i). They

commented that they were careful that the example

they provided in the preamble depended on service,

not age.”

45


• Does the ability to use sub-pools equate to

individual direction as some have implied?

• In the words of the great philosopher Eric

Theodore Cartman

• “Uh, no”

46

24

Late Retirement

• With respect to a participant with an annuity starting date after NRA, a cash balance plan must either

• provide an actuarial increase after NRA, or

• satisfy the requirements for suspension of benefits under §411(a)(3)(B).

• Accordingly, a cash balance plan that does not properly suspend benefits violates the requirements of §411(a) if the balance of the hypothetical account is not “increased sufficiently” for post NRA distributions

• Reg. §1.411(a)(13)-1(b)(2)(i)

47

Late Retirement

• Consider a plan crediting interest based on the

ROR of plan assets (or other equity based rate)

• Absent a minimum rate such a plan could violate

the rules for post NRA increases in years with

low or negative returns

• But a minimum rate would violate the market

rate requirement (absent relief)

48

25

Late Retirement

• Reg. §1.411(b)(5)-1(e)(4) provides such relief

• “A statutory hybrid plan is not treated as providing an

effective interest crediting rate that is in excess of a market

rate … merely because the plan provides that the

participant‟s benefit, as of each annuity starting date after

normal retirement age, is equal to the greater of--

• (i) The benefit based on the accumulated benefit

determined using an interest crediting rate ... not in

excess of a market rate …; and

• (ii) The benefit that satisfies the requirements of section

411(a)(2).”

49

Late Retirement

• Of course this is not an issue if significant

pay credits are still being received

• i.e. post retirement actuarial increase is only

required if adjusted NRA accrual would

result in a benefit greater than that received

under the terms of the plan including

continued accruals

50

26

Late Retirement

• Consider balance at NRA (65) of $500,000

• Interest credit based on ROR plan assets

• APRs based on 2015 417(e) table and 5% • Age 65 = 145.819

• age 66 = 142.109

• Assume „reasonable‟ rate for post retirement increase is 5% - note there is no guidance here

51

Late Retirement

• Accrued benefit at 65 = $3,428.91 • $500,000 / 145.819 = $3,428.91

• Age 66 AB would need to be $3,694.35 • $3,428.91 * 145.819 * 1.05 / 142.109 = $3,694.35

• Balance would need to be at least $525,000 • $3,694.35 * 142.109 = $525,000

• If ROR under 5% and no (or low) pay credit would need to adjust interest credit upward

52

27

Late Retirement

• Note that this is algebraically the same as

insuring interest credit is enough for

„reasonable‟ adjustment

• So what is reasonable?

• Certainly not a negative rate based on ROR or RIC

• 30-year Treasury? Currently ~ 3%

• 3-year Treasury + 50 bps? Currently ~ 1.5%

• Again, zero guidance

53

4/12/2016

1

Marketing 408(b)(2) Compliance Assessments

David J Witz, AIF, GFS, CEO/Managing Director,

FRA Plan Tools

David J Witz, AIF, GFS, CEO/Managing Director, FRA Plan Tools

David J Witz, AIF®, GFS® is the CEO/Managing Director of

FRA PlanTools a consulting and Software as a Service

technology firm that delivers risk management solutions

including performance assessments, benchmarking,

revenue sharing data base, advisor qualification

assessments, target date analytics, online document

lockbox and fiduciary governance solutions. David has over

34 years of industry experience in multiple retirement plan

disciplines and has been published or quoted by numerous

journals and magazines and is widely recruited to speak at

national conferences. David is a 1981 graduate of Penn

State with a Bachelor of Science degree in Economics,

Insurance, and Real Estate.

4/12/2016

2

3 CONFIDENTIAL – NOT FOR DISTRIBUTION

©Copyright 2015-16 FRA PlanTools – All Rights Reserved

408(b)(2) Diagnostic Training

RISK MANAGEMENT SYSTEM

The existing fee disclosure requirements under ERISA Section 408(b)(2) provide a covered service provider (“CSP”) with a unique opportunity to win new engagements by demonstrating a mastery of the compliance obligations which goes beyond the general disclosures typically provided.

During this session, a CSP will be informed as to the appropriate approach for conducting a 408(b)(2) Compliance Assessment using a Checklist process created by FRA PlanTools that will apply specifically to advisor services.

3

AGENDA





1. 1974 - ERISA

2. 1990? - Advent of Revenue Sharing

3. 1998 - DOL Study on 401(k) Fees

4. 2003 - DOL publishes Fee Disclosure Form

5. 2006 - Wall Street Darlings Sued for Excess Fees

6. 2009 - Schedule C Revisions

7. 2012 - 408(b)(2) Increased disclosure obligations

8. 2015 - Fee Policy Statement: Is it time to document process and procedures?

4

FEES – An Historical Timeline

4/12/2016

3





5

What Does 408(b)(2) Require?

Rules Old Rule New Rule

The Document must permit fees to be paid from plan assets Yes Applies

Services must be necessary for plan establishment or operation Yes Applies

Fees must be paid for services rendered, not promised Yes Applies

Contract must be terminable on short notice without penalty Yes Applies

Fees must be determined to be reasonable Yes Applies

Covered Service Provider must meet new disclosure rules Yes

Disclosures must be delivered timely Yes

Disclosures must be complete Yes

A fiduciary must determine disclosures are complete Yes





1. DOL has not defined “reasonable”

2. Office of the Chief Accountant has not defined “reasonable”

3. The Courts have not defined “reasonable”

4. There are no auditing standards that define “reasonable”

NOTE: Reasonableness is determined on the basis of the facts and circumstances

supported by the documentation that reflects a procedurally prudent process.

So how do you determine if fees are reasonable?

6

Subjective Nature of “REASONABLE”

4/12/2016

4





7

If Reasonable is AVERAGE You are Racing to the BOTTOM

$10 $50 PRESSURE POINT $90

$10 $30 $50





8

The Race to the Bottom – NO IMPACT on Legal Fees

$250 $550 $460 $640 $975 $740

Where is the PRESSURE POINT?

4/12/2016

5





9

408(b)(2) Requires a Comparative Assessment

According to the 408(b)(2) Preamble,

“The Department does not believe that responsible plan fiduciaries should be entitled to relief provided by the class exemption absent a reasonable belief that disclosures required to be provided to the covered plan are complete. To this end, responsible plan fiduciaries should appropriately review the disclosures made by covered service providers. Fiduciaries should be able to, at a minimum, compare the disclosures they receive from a covered service provider to the requirements of the regulation and form a reasonable belief that the required disclosures have been made.” [77 FR 5647-48 (2-3-12)]

No Relief Absent a Reasonable Belief Disclosures are Complete

A Reasonable Belief is Dependent on a Comparative Assessment

See Fall 2014 – Silver Lining in ERISA 408(b)(2)





10

Tussey v ABB, Inc. (W.D. Mo. Mar. 31, 2012)

The court found that the plan fiduciaries failed to monitor the reasonableness of expenses… According to the court, ERISA…required that the fiduciaries engage in a “deliberative” process…plan fiduciaries are expected to know the exact amount of revenue sharing expenses and whether the amount is competitive... Recent ERISA Fee Litigation: Key Lessons For Plan Fiduciaries, Orrick Law Firm Client Alert, 4-26-12

“Further, the Court noted that the fiduciaries…did not investigate the market price for comparable fees…Comparing the ABB plan to other plans, the Court found that ABB overpaid... While ABB noted that it did monitor the reasonableness of the overall expense ratio, the Court concluded that this was not enough. This was insufficient because it does not show how much revenue is flowing, does not show the competitive market for comparable funds, and fails to take into account the size of the plan…*T+he Court explained, if a fiduciary opts for revenue sharing, “it also must have gone through a deliberative process for determining why such a choice is in the Plan’s and participants’ best interest.” Dorsey & Whitney LLP, April 2012.

4/12/2016

6





11

the court found that the fiduciaries could not…engage in a deliberative process to justify that the fee arrangement…it is not clear whether participants may initiate lawsuits with a basis on the newly disclosed information and claim first-time knowledge of alleged fiduciary breaches similar to those found in Tussey.” Littler Mendelson, P.C, April 2012 The fiduciaries did not obtain a benchmark cost of Fidelity’s services prior to choosing revenue sharing...” Haynes and Boone April 2012 Also, ABB did not get a benchmark of costs for Fidelity’s services before choosing the revenue sharing arrangement…The Court also rejected ABB’s argument that its monitoring of the overall expense ratio of the funds was sufficient because this monitoring did not show how much revenue Fidelity Trust was receiving or provide a basis for ABB to compare its revenue sharing arrangement to the market…the Court emphasized that "if a plan sponsor opts for revenue sharing as its method for paying…it must have gone through a deliberative process for determining why such choice is in the Plan’s and participants’ best interest" Trucker Huss, April 2012 (Emphasis added)

Tussey v ABB, Inc. (W.D. Mo. Mar. 31, 2012)





12

Why Offer 408(b)(2) Compliance Engagements

1. It is a requirement

2. It is a value-add service

3. There is little competition

4. It demonstrates your knowledge and understanding

5. It is a way to collect data on your competition

6. It is a way to get paid for prospecting

4/12/2016

7





13

ERISA § 408(b)(2) Compliance Checklist

5 Step Process to evaluate an Advisor’s Compliance with 408(b)(2)





By Process and Opinion

1. Procedural prudence dictates a documented comparative process such as:

a. Benchmarking,

b. Informal Request for Information (RFI) and/or

c. Formal Request for Proposal (RFP)

2. Comparative assessment should be engaged periodically

a. Historically, every 3-5 years unless material changes occur,

b. Kraft Foods – Judge suggests every 3 years, or

c. Best practices – material changes or changes you know would impact fees

3. Give thoughtful consideration to quantity and quality of services

4. Consider complexity of plan design and operational issues (i.e. multiple payrolls, directed brokerage, abnormal number of investment options).

5. Leverage the RPF’s trump card – their “SUBJECTIVE” opinion

6. Focus on a general rule of thumb for your clients…25th and 75th percentile

14

How do You Define REASONABLE?

4/12/2016

8





15

Benchmarking Category Example





16

Benchmarking Service Lines

4/12/2016

9





1. What are the Statutory Standards?

2. What are the Regulatory Standards?

3. What are the Judicial Standards?

4. Are the Standards SUBJECTIVE or OBJECTIVE?

17

Determining VALUE?





18

11 Steps to Determine Value

Assessing Value Condition Meet

1. Does the Document permit fees to be paid from plan assets? Yes

2. Are the services necessary for plan establishment or operation? Yes

3. Are fees paid from plan assets for services rendered, not promised? Yes

4. Can I terminate the contract on short notice without penalty? Yes

5. Have I determined & documented fee reasonableness procedurally? Yes

6. Have my Covered Service Providers meet the disclosure rules? Yes

7. Have the disclosures been delivered timely? Yes

8. Are the disclosures complete? Yes

9. Have services been delivered timely? Yes

10. Have services been delivered with accuracy? Yes

11. Are the Responsible Plan Fiduciaries satisfied? Yes

4/12/2016

10





Questions?

19

1

Changes in Plan Years (Short Plan Years)

Robert M. Kaplan, APA, CFP, CPC, QPA

Robert M. Kaplan, APA, CFP, CPC, QPA

Bob Kaplan is the VP, National Training Consultant for Voya. His responsibilities

include web cast and live training for members of the TPA and Financial

Services community as well as Voya personnel.

He is currently a Co-Chair of the American Society of Pension Professionals

and Actuaries (ASPPA’s) Government Affairs Committee. Bob is a member of

ASPPA’s Leadership Counsel. He previously served as a member of the Board

of Managers of the American Institute of Retirement Education (AIRE) as well

as the Board of Directors of the National Institute of Pension Administrators

(NIPA). In 2009, Bob was presented with NIPA’s Lifetime Achievement Award

for his contributions to the retirement plan industry. Bob is a frequent speaker at

industry events. He has provided testimony before the Treasury department on

401(k) issues and other retirement plan issues. Bob has over 35 years of

experience in retirement plan services, including plan design, administration,

sales and consulting. Bob is also a former high school basketball coach. He is a

graduate of the State University at Albany, NY and has a graduate degree from

William Paterson University in New Jersey.

2

Short Plan Year – when do they arise

• First plan year

• Less than 12 months – usually to align with tax year or

calendar year

• Must amend plan

• Most of ours do not have to file Form 5308 with IRS – but some

subject to §412 minimum funding – check instructions

• Final or termination year

• Note: Check Plan document as many contain provisions

that identify Short PY counting and methodologies

First Plan Year

• May be a short year – but why would one do this?

• Make effective date retroactive so 12 months

• Check document language to ensure this is

accomplished

• Adoption cannot be after last day of first plan year

• Example – cannot adopt now for 2015

• Remember 401(k) deferrals cannot occur until that

provision is adopted

• Addition of deferral feature to an existing PS plan does not create

Short PY

3

HCE Determination

• 5% owner in current or preceding year, or

• Compensation above is the defined amount in preceding

year

• Current Year for 5% test can be the Short PY

• In both cases – the preceding year is a full 12 month

period

• Example – Short PY – 7/1/15 – 12/31/15

• Ownership for current year is the Short PY

• Both compensation test and ownership test must look back to

period 7/1/14 – 6/30/15

• Then for 2016 year look back to 12 months in 2015

Key Employee

• 5% owner

• 1% owner who made more than $150,000

• Officers making more than defined compensation

(currently $170,000)

• No mention in regulations of how to handle short PYs

• Annualize compensation, or

• Pro-rate $ limit

4

Top Heavy Short PYs

• Look-back for distributions – count short year as a whole

year

• 3% contribution in short PY is based on short plan year

compensation

• Termination year – calculate 3% on compensation until

termination date (even if all assets are not paid out)

Eligibility

• The first eligibility computation period is measurement of

12 months from date of hire

• Subsequent periods may retain DOH period (anniversary) or

switch to PY

• Eligibility periods may not be less than 12 months…but

• Hours may be pro-rated in a short plan year BUT ONLY if there is

a provision to credit a year if 1,000 hours is worked within 12

months

• 7/1/15 – 12/31/15 – can use a prorated approach

• But if participant works less than 500 hours in Short PY must also

measure if over 1000 in 7/1/15 – 6/30/16

5

Coverage Testing

• No special rules

• Annual testing method – based on workforce in short plan year

• Quarterly testing method – not clear from regulations but seems

like you would divide short PY into quarters

Deferrals and Catch Ups

• Based on participant’s tax year so Short PY does not

impact

• Usually a calendar year

• Example

• PY – 7/1/14 – 6/30/15

• Short PY – 7/1/15 – 12/31/15

• PY – 1/1/16 – 12/31/16

• 2014 §402(g) = $17,500 + $5,500

• 2015 §402(g) = $18,000 + $6,000

• 2016 §402(g) = $18,000 + $6,000

6

Benefits

• 1,000 hour (other equivalency) for benefits – regulations

do not address. This would be addressed by the

amendment that creates the Short PY.

• Usually pro-rated but make sure the amendment states

Vesting

• Elapsed time method – count actual elapsed time without

regard to PY so Short Plan Year issues do not arise

• Hours Method – Based on 12 consecutive months

• Overlap of time periods may occur

• Example:

• Plan changes from 6/30 PYE to 12/31 for 2015

• 7/1/14 – 6/30/15 = 1 year

• 7/1/15 – 6/30/16 = 1 year (must be 12 months vesting computation)

• 1/1/16 – 12/31/16 = 1 year

• Double count 1/1/16 – 6/30/16 hours

7

Vesting – A Twist

• Hours may be prorated in short plan year BUT ONLY if

work more than 1,000 hours in 12 month period – gets

credit

• Short PY – 7/1/15 – 12/31/15 – prorate to 500 hours

• If work 450 hours in that period – no credit

• If work 1,000 hours in 7/1/15 – 6/30/16 – then credit

Vesting – Another Twist

• First Plan Year

• Some plans credit prior service

• If so, then use 12 month periods that are the same as the first

plan year

• Example

• First plan year is 7/1/16 – 12/31/16

• Count 1/1/16 – 12/31/16

• Prior years (if counted) would be 1/1 – 12/31

8

Compensation – §401(a)(17)

• Pro-rated by months in the short plan year

• Remember in initial plan year may include compensation

before the plan is effective so pro-ration may not need to

occur

• Note: If compensation definition is based on 12 months

that end on last day…….then no proration is required in

short PY

Annual Additions – §415 Limit

• Check Limitation Year in plan document

• If Plan Year (and not Calendar Year) pro-rate by months

in Short Plan Year

9

Permitted Disparity

• Taxable Wage Base at beginning of Short Plan Year is

pro-rated

401(k) Testing

• Short PY counts as a “year” for testing

• Current year testing – short plan year for both HCEs and NHCEs

• Example 7/1/15 – 12/31/15 is Short PY

• 7/1/15 – 12/31/15 date for both HCEs and NHCEs

• Counting 5 years of current before being allowed to switch to

prior – short PY counts as a “year”

10

401(k) Testing

• Short PY counts as a “year” for testing

• Prior year testing – use data in Short Year

• Example 7/1/15 – 12/31/15 is Short PY

• 12/31/15 testing

• 7/1/15 – 12/31/15 for HCEs

• 7/1/14 – 6/30/15 for NHCEs

• 12/31/16 testing

• 1/1/16 – 12/31/16 for HCEs

• 7/1/15 – 12/31/15 for NHCEs

401(k) Safe Harbor

• New Safe Harbor Plan– must be at least 3 months

• This includes both brand new plans and conversions from an

existing Profit Sharing Plan

• Converting an existing 401(k) plan must be 12 months

• Note: If the plan is part of a newly established business the 3

month rule does not apply

11

401(k) Safe Harbor

• For an existing SH plan you may amend to a short Plan

Year IF the years both before and after are full 12 month

Safe Harbor Plans

• Example:

• 7/1/14 – 6/30/15

• 7/1/15 – 12/31/15

• 1/1/16 – 12/31/16

401(k) Safe Harbor

• In the year the SH provision terminates:

• ADP/ACP testing on full year

• Current year testing

• Lose TH exemption

• Owe SH through date of termination of the provision

• If termination is due to business hardship or

merger/acquisition then none of the above apply

12

Tax Deductions

• Tax deduction is based on employer’s tax year and not

plan year

• Plan’s or company’s CPA needs to know which tax year

each contribution relates to

• If there is a short tax year; deduction limit (25% for DC

plan) is based on compensation in that short tax year

5500 Filing

• Due for short year (same timing – 7 months plus

extension)

• After termination – must file until all assets are distributed

• Do not show assets as “zero” due to a “payable”

• Accountant’s Audit

• If short year is 7 months or less you can defer (not forget) filing

• Filing based on # of participants on first day of plan year

(including short year)

13

Final Plan Year

• For 5500 purposes plan is still a short year only in year

all assets paid out

• But final contribution will be based on selected

termination date (even if assets not paid out)

• Plan that terminates 9/30/16 – will use compensation from 1/1/16

– 9/30/16

• Annual additions limit would be pro-rated by months in

short PY

• Example – 1/1/16 – 6/30/16 = $53,000/2 = $26,500

Questions

• Thank you for attending

1

Human Resource Management for TPAs HR 101

Monday, May 2, 2016, 11:25 AM – 12:15 PM

Charan Singh, Vice President – Operations

United Retirement Plan Consultants

Charan Singh, Vice President – Operations United Retirement Plan Consultants

Charan Singh, APA is VP, National DB Operations Manager at

United Retirement Plan Consultants in Los Angeles. A veteran of

over 15 years in the pension industry, prior to United Retirement,

Charan was Vice President and Operations Manager at Union

Bank (TruSource), Pension Consultant at Kravitz, and Chief

Operations Officer at Cache Pension Services where he lead a

total overhaul of operations over 15 months that resulted in a

successful sale of the company. At United Retirement, Charan

successfully led a multi-year, intra-company effort to reorganize

operations along functional lines that led to improved productivity,

boosted morale, and improved client retention. Charan

specializes in building customer-centric operations processes,

and training customer friendly pension administrators with top-

notch consulting skills.

2

Human Resource Management HRM

What is HRM?

Policies

Practices

Systems

Influencing

Behavior

Attitudes

Performance

Conclusion and Summary

3

Strategic HRM Scope of HR Management 101

Selection Recruiting HR

Planning

Analysis and

Design of Work

Strategic HRM Scope of Advanced Topics (Afternoon Session)

Employee Relations

Performance Management

Compensation Training &

Development

4

HR Basics Trends in HR Management

• Changing Workforce

• Aging

• Diversity

• Skill Deficiencies

• Knowledge Workers

• Teamwork

• Employee Empowerment

Traditional Psychological “Contract”

Employers Provide:

Compensation, Job Security, Opportunities

Employees Provide: Time, Effort, Skills, Abilities, and

Loyalty

5

New Psychological “Contract”

Employer Employee

“Take Responsibility”

Work Longer Hours

Lack of Job Security

Financial Incentives

“Employability”

Comfortable Work Environment

Job Experiences

Flexibility

Equal Employment Opportunity-Federal Laws

ACT REQUIREMENTS COVERS ENFORCED BY

Thirteenth

Amendment

Abolished slavery All individuals Court system

Civil Rights Acts

of 1866 and 1871

as amended

Grants all citizens

the right to enter

into contractual

relationships

All individuals Court system

Equal Pay Act of

1963

Men and women

performing equal

jobs receive equal

pay

Employers

engaged in

interstate

commerce

EEOC

Title VII of CRA Forbids

discrimination

based on race,

color, religion,

sex, or national

origin

Employers with 15

or more

employees

EEOC

6

Equal Employment Opportunity Federal Laws


Age

Discrimination in

Employment Act

of 1967

Prohibits

discrimination

against individuals

40 years and older

Employers with 15

or more

employees

EEOC

Pregnancy

Discrimination Act

of 1978

Treats

discrimination

based on

pregnancy related

conditions as

illegal sex

discrimination

All employees

covered by Title

VII

EEOC

Americans with

Disabilities Act of

1990

Prohibits

discrimination

against individuals

with disabilities

Employers with

more than 15

employees

EEOC

Equal Employment Opportunity – Recent Changes


USERRA 1994 Requires rehiring

and

accommodation of

returning vets

Veterans and

members of

reserves

Veterans

Employment and

Training Service

Genetic

Information

Nondiscrimination

Act of 2008

Prohibits

discrimination

based on genetic

information

Employers with 15

or more

employees

EEOC

7

Concepts in Avoiding Discrimination

• Disparate Treatment

• Differing treatment of covered individuals

• Disparate Impact

• “Four-fifths” Rule

• Hiring rate of minority group is less than 80% of hiring rate of

majority group

• Use of BFOQ

• Bona fide Occupational Qualification

• Example:

• Requirement of having a male worker handing out towels in a men’s

locker room

Changing Workforce – BLS Projections 2014-2024

Group Percent Change

2014-2024

Age, years:

16 to 24 -13.1%

25 to 54 3.9%

55 and older 19.8%

Gender

Men 4.4%

Women 5.8%

Race

White 2.3%

Black 10.1%

Asian 23.2%

Ethnicity

Hispanic Origin 28%

White non-Hispanic -3.0%

8

Analyzing Work & Designing Jobs

Output

Client Reports, Government Filings

Activity

Trust Accounting, Compliance Testing, Contribution Calculations, Form 5500s

Human Resources

Knowledge, Skills, Abilities

Equipment

ASC, Relius, Datair, etc.

Raw Input

Census, Trust Info

Job Analysis

• Job Descriptions (“TDRs”)

• Tasks

• Duties

• Responsibilities

(Observable Actions)

• Job Specifications (“KSAOs”)

• Knowledge – factual or procedural information

• Skills – level of proficiency at a given tasks

• Abilities – general enduring capability

• Other Characteristics – persistence, motivation, etc.

• For complex tasks: Position Analysis Questionnaire and

Fleischman Job Analysis System

9

Job Design

• Design for Efficiency

• Repeatable, quick tasks performed over and over

• Design for Mental Capacity

• Filtering information

• Clear displays and instructions

• Memory aids

• Design for Motivation

• Skill variety

• Task identity and significance

• Autonomy

• Feedback

• Design for Safety and Health

• Ergonomics

Characteristics of a Motivating Job

10

HR Planning

Recruitment Influences

11

Personnel Policies

• Internal vs. External Recruiting

• Promote from within, opportunities for advancement

• Lead-the-market Pay Strategy

• Pay more than current market rate for the job

• Employment-at-will Policy

• State law plays a role

• Image Advertising

• Advantage in highly competitive labor markets

Recruitment Sources

• Internal Sources

• Job Posting

• External Sources

• Direct Applicants

• Referrals

• Electronic Recruiting/LinkedIn

• Advertising/Craigslist?

• Colleges and Universities

12

Recruiter Behavior

• Recruiter can have an impact on the outcome

• Too positive – leads to unmet expectations

• Too negative or passive – turn off

• Recruiting Teams

• Job Expert as a Recruiter

• Use your senior administrators

Selection Process

13

Interview Questions – Do’s and Don’ts

Permissible Questions Impermissible Questions

What is your full name? What was your maiden name?

Have you ever worked under a

different name?

What’s the nationality of your name?

If you are hired, can you show proof of

age (to meet a legal requirement)?

How old are you? How would you feel

about working for someone younger

than you?

Will you need any reasonable

accommodation for this hiring

process?

Are you able to perform this job with or

without reasonable accommodation?

What is your height and weight?

Do you have any disabilities?

Have you been seriously ill?

Please provide a photograph of

yourself.

What languages do you speak?

(Statement that employment is subject

to verification of applicant’s identity

and employment eligibility under

immigration laws.)

What is your ancestry? Are you a

citizen of the United States? Where

were you born? How did you learn to

speak that language?

Interview Questions

Permissible Questions Impermissible Questions

What schools have you attended?

What degrees have you earned? What

was your major?

Is that school affiliated with [religious

group]? When did you attend high

school? [to learn applicant’s age.]

Can you meet the requirements of the

work schedule? [ask all candidates]

What is your religion? What religious

holidays do you observe?

Please provide any names of relatives

currently employed by this employer.

What is your marital status? Would you

like to be addressed as Mrs., Ms., or

Miss? Do you have any children?

Have you ever been convicted of a

crime?

Have you ever been arrested?

What organizations or groups do you

belong to that you consider relevant to

being able to perform this job?

What organizations or groups do you

belong to?

14

Employment Tests

• Aptitude tests

• Job performance tests

• Personality tests

Personality

Dimensions

Descriptive words

Extroversion Sociable, gregarious, assertive, talkative,

expressive

Adjustment Emotionally stable, non-depressed, secure, content

Agreeableness Courteous, trusting, good-natured, tolerant,

cooperative, forgiving

Conscientiousness Dependable, organized, persevering, through,

achievement-oriented

Inquisitiveness Curious, imaginative, artistically sensitive, broad-

minded, playful.

Interviewing Techniques - Nondirective

• Nondirective Interview

• Great discretion in choosing questions

• Reply to one or more questions leads to other questions to ask

• More of a conversation

• Open ended questions about strengths, weaknesses, career

goals, and work experience

• Reliability is not great

• Questions are not necessarily valid and some might even be

illegal.

15

Interviewing Techniques – Directive/Structured

• Structured Interview

• Questions are tightly organized around job requirements – based

on the posted Job Description

• Tasks, Duties and Responsibilities (TDRs)

• Knowledge, Skills, Responsibilities and Other Characteristics

(KSAOs)

• Interviewers likely to object to being restricted

• More valid and reliable than nondirective in general

• Especially when interviewing a large number of candidates

Interviewing Techniques

• Situational Interview

• Special form of a Structured Interview

• Describe a set of situations that arise on the job, and elicit

reactions

• High validity in predicting job performance

• Behavioral Interview

• Type of Situational Interview

• Ask candidates about how he or she handled a type of situation

in the past

• Questions about candidates actual experiences appear to have

the highest validity

16

Interviewing Best Practices

• Plan your questions for each type of interview

• Job application – get the “Permissible Questions” out of the way

• Phone Interview – specific set of basic questions

• No/little diversion from this list

• Directive/Structured Interview – TDRs and KSAOs

• Situational Interview

• Behavioral Interview

• Nondirective Interview – look for “personality dimensions”

• Keep a “scoring sheet” of candidates across multiple

interviewers

• So you can compare and contrast candidates and fine tune your

selection process

Making the Selection

• Who do you “Like” vs. “Best Fit” for the position

• Best combination of Ability and Motivation

• Use the “Multiple-Hurdle” model

• Remove candidates from the running based on performance in

each stage

• Who communicates the decision?

• Negotiate any pay, benefits, and work arrangements for higher

level (managerial or professional) positions

• Offer letter – get very specific

• Job responsibilities

• Work schedule, rate of pay, starting date

• Require acceptance by a specific date to avoid open ended

situations

17

Strategic HRM - Scope of Advanced Topics (Afternoon Session - Reminder)

Employee Relations

Performance Management

Compensation Training &

Development

References

• Employment Projections 2014-2024, Bureau of Labor

Statistics Retrieved from:

http://www.bls.gov/news.release/pdf/ecopro.pdf

• Noe, Hollenbeck, et al., Fundamentals of Human

Resource Management, McGraw Hill 2015




18

Contact for Further Questions

Charan Singh, APA

Vice President, Operations

United Retirement Plan Consultants

[email protected]

[email protected]

Office Phone: 310-862-8457

Cell Phone: 949-307-3397

mailto:[email protected]

mailto:[email protected]

1

LCN-1423841-021816 LCN-1423841-021816

The Complex World of Church Plans

Speaker: Wayne McClain III, AVP and Senior Counsel

Lincoln Financial Group

LCN-1423841-021816

Wayne McClain III, AVP and Senior Counsel Lincoln Financial Group

Wayne McClain is Senior Counsel / AVP for Lincoln Financial Group

focusing his practice on retirement benefit plans. He has a 20-year

background in tax, ERISA and compliance aspects of qualified and non-

qualified retirement plans with special emphasis on retirement plans for

tax-exempt and governmental entities.

He has extensive experience in both the national law firm and national

insurance company settings, including as Senior Counsel for several

American International Group (AIG) companies, including The Variable

Annuity Life Insurance Company (VALIC) and SunAmerica Financial

Group.

2

2

LCN-1423841-021816

Wayne McClain III, AVP and Senior Counsel Lincoln Financial Group

In addition to his experience as an employee benefits attorney, Mr.

McClain has significant experience managing the administration and

compliance of multi-billion dollar benefit plans in higher education. Mr.

McClain was the Director of Benefits Plan Administration and

Compliance for the University of Illinois and the University Director of

Retirement Program Services for Indiana University. His experience in

managing benefit plans for major state universities has given him a

unique insight into the distinct needs of and challenges faced by tax-

exempt and governmental plan sponsors in benefit plan administration

and compliance.

Mr. McClain is a graduate of Indiana University, The Philadelphia

Institute, and the Indiana University - Robert H. McKinney School of

Law. Mr. McClain is currently pursuing an LL.M. in employee benefits

from the John Marshall Law School in Chicago, Illinois.

2

LCN-1423841-021816

What is a “Church” Plan?

A church plan is a plan that is established and

maintained by either

a) church or

b) church-related organization

2

3

LCN-1423841-021816

“Church”

Generally, a place of worship

• not defined in Internal Revenue Code

Includes:

• temples, mosques, synagogues, etc.

• conventions and associations of churches

• integrated auxiliaries of a church

3

LCN-1423841-021816

14 Criteria for a Church

A distinct legal existence Ordained ministers selected after

completing prescribed studies

A recognized creed and form of

worship

A literature of its own

A definite and distinct ecclesiastical

government

Established places of worship

A formal code of doctrine and

discipline

Regular congregations

A distinct religious history Regular religious services

A membership not associated with

any other church or denomination

Sunday schools for religious

instruction of the young

Ordained ministers ministering to its

congregations

Schools for the preparation of its

ministers

4

4

LCN-1423841-021816

What is a Qualified Church-Controlled Organization?

The term qualified church-controlled organization generally refers to a

church-controlled 501(c)(3) tax-exempt organization that:

1) Does not generally offer goods, services, or facilities for sale to the

general public; or

2) Receives less than 25 percent of its financial support from government

grants or receipts from goods and services in related activities or

business.

Example of QCCOs are church seminaries.

5

LCN-1423841-021816

What is a Non-Qualified Church-Controlled Organization?

The term non-qualified church-controlled organization or ―religious

organization‖ generally refers to any church-controlled tax-exempt

organization described in Code section 501(c)(3) that:

1) Offers goods, services, or facilities for sale, other than on an incidental

basis, to the general public, other than goods, services, or facilities that

are sold at a nominal charge that is substantially less than the cost of

providing such goods, services, or facilities; or

2) Normally receives more than 25 percent of its support from either

a) governmental sources or

b) receipts from admissions, sales of merchandise, performance of services, or

furnishing of facilities, in activities which a e not unrelated trades or businesses,

or both.

6

5

LCN-1423841-021816

Religious Organizations

Include:

• nondenominational ministries

• interdenominational and ecumenical organizations

• entities whose principal purpose is the study or advancement of religion

• church operated hospitals

• church operated colleges and universities

• church operated nursing homes

7

LCN-1423841-021816

Tax-Exempt Status

Exempt under 501(c)(3) if:

• organized and operated

• no ―inurement‖ of benefits

• no substantial lobbying

• no political activity

• must be legal

No IRS registration (but many do)

Group rulings

8

6

LCN-1423841-021816

Tax-Exempt Status

Automatic Exemption for Churches

Churches that meet the requirement of IRC Section 501(c)(3) are

automatically considered tax exempt and are not required to apply for

and obtain recognition of tax-exempt status from the IRS.

Although there is no requirement to do so, many churches seek

recognition of tax-exempt status from the IRS because this recognition

assures church leaders, members and contributors that the church is

recognized as exempt and qualifies for related tax benefits. For

example, contributors to a church that has been recognized as tax

exempt would know that their contributions generally are tax-deductible.

9

LCN-1423841-021816

Tax-Exempt Status


Unlike churches, religious organizations that wish to be tax exempt

generally must apply to the IRS for tax-exempt status unless their gross

receipts do not normally exceed $5,000 annually.

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Special Rules Limiting IRS Authority to Audit a Church

Tax Inquiries and Examinations of Churches

Congress has imposed special limitations, found in IRC Section 7611,

on how and when the IRS may conduct civil tax inquiries and

examinations of churches. The IRS may only initiate a church tax inquiry

if an appropriate high-level Treasury Department official reasonably

believes, based on a written statement of the facts and circumstances,

that the organization:

a) may not qualify for the exemption or

b) may not be paying tax on an unrelated business or other taxable activity.

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Special Rules Limiting IRS Authority to Audit a Church

No Restrictions on Church Inquiries and Examinations for


Restrictions on church inquiries and examinations apply only to

churches (including organizations claiming to be churches if such status

has not been recognized by the IRS) and conventions or associations of

churches. They don’t apply to related persons or organizations. Thus,

for example, the rules don’t apply to schools that, although operated by

a church, are organized as separate legal entities. Similarly, the rules

don’t apply to integrated auxiliaries of a church.

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Internal Revenue Code Section 410(d)

(d) Election by church to have participation, vesting,

funding, etc., provisions apply

1) In general. If the church or convention or association of churches which

maintains any church plan makes an election under this subsection (in

such form and manner as the Secretary may by regulations prescribe),

then the provisions of this title relating to participation, vesting, funding,

etc. (as in effect from time to time) shall apply to such church plan as if

such provisions did not contain an exclusion for church plans.

2) Election irrevocable. An election under this subsection with respect to

any church plan shall be binding with respect to such plan, and, once

made, shall be irrevocable.

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Is this plan subject to ERISA?

• Churches, QCCOs and religious organizations are generally

exempt from ERISA

• The church, QCCO or religious organization can elect to be

covered under Title I of ERISA

• To elect to be covered by ERISA, the plan administrator would

attach a statement to the Form 5500 for the first plan year that the

election applies as described in IRC 410(d)

• If an election to be covered by ERISA is made, the election is

irrevocable.

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ERISA Section 3(33) – Church Plan

A. The term ―church plan‖ means a plan established and maintained

(to the extent required in clause (ii) of subparagraph (B)) for its

employees (or their beneficiaries) by a church or by a convention or

association of churches which is exempt from tax under section 501

of title 26.

B. The term ―church plan‖ does not include a plan which is established

and maintained primarily for the benefit of employees (or their

beneficiaries) of such church or convention or association of

churches who are employed in connection with one or more

unrelated trades or businesses (within the meaning of section 513

of title 26), or if less than substantially all of the individuals included

in the plan are individuals described in subparagraph (A) or in

clause (ii) of subparagraph (C) (or their beneficiaries).

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ERISA Section 3(33) – Church Plan cont’d

C. For purposes of this paragraph—

i. A plan established and maintained for its employees (or their beneficiaries) by a church or by a

convention or association of churches includes a plan maintained by an organization, whether a civil

law corporation or otherwise, the principal purpose or function of which is the administration or

funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for

the employees of a church or a convention or association of churches, if such organization is

controlled by or associated with a church or a convention or association of churches.

ii. The term employee of a church or a convention or association of churches includes (1) a duly

ordained, commissioned, or licensed minister of a church in the exercise of his ministry, regardless of

the source of his compensation; (2) an employee of an organization, whether a civil law corporation

or otherwise, which is exempt from tax under section 501 of title 26 and which is controlled by or

associated with a church or a convention or association of churches; and (3) . . .

iii. A church or a convention or association of churches which is exempt from tax under section 501 of

title 26 shall be deemed the employer of any individual included as an employee under clause (ii).

iv. An organization, whether a civil law corporation or otherwise, is associated with a church or a

convention or association of churches if it shares common religious bonds and convictions

with that church or convention or association of churches.

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https://www.law.cornell.edu/uscode/text/26/501

https://www.law.cornell.edu/uscode/text/26/501

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Qualification Requirements that Apply to Non-Electing Church Plans

401(a)(1) – Employee Requirement

401(a)(2) – Exclusive Benefit Rule

401(a)(4) – General Nondiscrimination Testing

401(a)(9) – Required Minimum Distributions

401(a)(10) – Top Heavy Rules

401(a)(16) – Annual Additions Limit (415)

401(a)(17) – Compensation Dollar Limit

401(a)(30 – Elective Deferral Limit (402(g))

401(a)(31) – Direct Rollover Distributions

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Qualification Requirements that Do Not Apply to Non-Electing Church Plans

401(a)(3) – Minimum Age and Service

401(a)(3) – Minimum Coverage

401(a)(7) – Minimum Vesting

401(a)(11) – QJSA

401(a)(12) – Merger and Protection of Benefits

401(a)(13) – Anti Assignment Rule

401(a)(14) – Commence of Benefits Rule

403(b)(12) – Nondiscrimination Testing for 403(b) plans

412 – Minimum Funding

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Unique Church Plan Rules – Commingling of Plan Assets and Church Assets

Treas. Reg. Section 1.403(b)-9(a)(6) –

(6) Combining retirement income account assets with other assets. For purposes of

§ 1.403(b)-8(f) relating to combining assets, retirement income account assets held

in trust (including a custodial account that is treated as a trust under section 401(f))

are subject to the same rules regarding combining of assets as custodial account

assets. In addition, retirement income account assets are permitted to be

commingled in a common fund with amounts devoted exclusively to church

purposes (such as a fund from which unfunded pension payments are made to

former employees of the church). However, unless otherwise permitted by the

Commissioner, no assets of the plan sponsor, other than retirement income account

assets, may be combined with custodial account assets or any other assets

permitted to be combined under § 1.403(b)-8(f). This paragraph (a)(6) is subject to

any additional rules issued by the Commissioner in revenue rulings, notices, or other

guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of

this chapter).

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Unique Church Plan Rules – Minister Home Allowances

Internal Revenue Code Section 107 -

―In the case of a minister of the gospel, gross income does not include —(1) the

rental value of a home furnished to him as part of his compensation; or (2) the

rental allowance paid to him as a part of his compensation, to the extent used

by him to rent or provide a home and to the extent such allowance does not

exceed the fair rental value of the home, including furnishings and

appurtenances such as a garage, plus the cost of utilities.‖

Treasury Regulations limit the housing allowance exclusion to the amounts paid

for the home provided ―as remuneration for services which are ordinarily the

duties of a minister of the gospel.‖

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Unique Church Plan Rules – Housing Allowance and Retirement Plan Distributions

IRS Publication 517 –

―If you are a retired minister, you can exclude from your gross income the rental

value of a home (plus utilities) furnished to you by your church as a part of your

pay for past services, or the part of your pension that was designated as a

rental allowance.‖

If the church does designate some or all of the plan distribution as a housing

allowance payment, some service provides are willing to code the Form 1099-R

as ―taxable amount not determined‖ because it is the minister’s responsibility to

determine the amount qualifying as an exclusion from taxes. Other service

providers may indicate a taxable amount on the Form 1099-R and leave it to the

minister to substantiate what they include in income on their Form 1040.

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The Church Plan Clarification Act of 2015

Automatic Enrollment by Church Plans

The Act allows church plans to have automatic contribution

arrangements and supersedes any law of a State that relates to wage,

salary, payroll payment, collection, deduction, garnishment, assignment,

or withholding which would directly or indirectly prohibit or restrict the

inclusion in any church plan of an automatic contribution arrangement.

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The Church Plan Clarification Act of 2015

Plan-to-Plan Transfers and Mergers between Church 403(b)

and Church 401(a) Plans

Internal Revenue Code Section 414(z) has been added to the Code by the Act to permit –

• Transfer of all or a portion of the accrued benefit of a participant or beneficiary, whether or

not vested, from a church 401(a) plan to a church 403(b) plan, if such plan and annuity

contract are both maintained by the same church or convention or association of churches,

• Transfer of all or a portion of the accrued benefit of a participant or beneficiary, whether or

not vested, from a church 403(b) plan to a church 401(a) plan,, if such plan and annuity

contract are both maintained by the same church or convention or association of churches

• Merger of a church 401(a) plan with a 403(b) plan, if such plan and annuity contract are

both maintained by the same church or convention or association of churches

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Thank you

Thank you for your time and participation today.

St. Bartholomew Church and School (formerly All Saints) Columbus, Indiana

Class of 1987

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Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates.

Affiliates are separately responsible for their own financial and contractual obligations.

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