2012 Legal Update On Issues Affecting Retirement Plans

1. Church Benefits Association Annual MeetingIndianapolis, IndianaNovember 28, 2012 2012 Legal Update On Issues Affecting Retirement Plans Danny Miller Conner & Winters, LLP 1627 I Street NW, Suite 900 Washington, D.C. 20006

2. Legislative Activity

3. Church Plan Clarification Act (H.R. 4050/S. 3532) Correction of problem relating to application of controlled group rules to non-QCCOs. Provision to allow transfers between 403(b)(9) and 401(a) plans. Provision to preempt state wage withholding laws, permitting auto-enrollment for church pension plans. Remedy for 415 limit problem that applies to 403(b) defined benefit plans. Provision to clarify the ability of 403(b)(9) plans to invest in 81-100 trusts. Church Alliance Legislation

4. Stable Value Fund Legislation (H.R. 33) In 2004, the securities laws were amended to permit church plans to invest in collective trusts. In 2009, counsel for several investment firms raised a concern about whether the 2004 legislative language works for church 403(b) plans or for church retirement plans with participants who are self-employed ministers. Legislation was passed by Congress and signed into law by President in July. A new issue has emerged . . . Securities Law Amendments

5. Regulatory Activity

6. Upcoming Guidance • When will revenue procedure updating Employee Plans Compliance Resolution System (“EPCRS”) on 403(b) plan corrections be issued? • When will revenue procedure on 403(b) prototype be issued? • Note: These revenue procedures have been “in clearance” at IRS and Treasury for more than a year.

7. Plan with Puerto Rican participants must qualify under Puerto Rican tax laws. Solutions: Dual qualified plan. Transfer assets to Puerto Rican plan. Transfer creates taxable event for participants. But Notice 2012-6 provides transition relief through 2012 for transfers from 401(a) qualified plan to Puerto Rican plan. No transition relief for transfers from 403(b) plans to Puerto Rican plan. Possible additional solution: 403(b)(9) plan qualified in Puerto Rico. Puerto Rican Plan Assets

8. Announcement 2012-44 – IRS relief to plan participants who have been adversely affected by Hurricane Sandy: Streamlined loan procedures and liberalized hardship distribution rules Available to participants who live or work in designated disaster areas; person who lives outside the disaster area can take loan or hardship distribution and use it to assist dependent who lived or worked in the disaster area. Loan or hardship distribution must be made no later than 2/1/2013. Relief available to 403(b) and 401(a) plans. Hurricane Sandy

9. Two sets of regulations: Disclosures from service providers to plan (regulations effective July 2012). Disclosures from plan administrators to participants (regulations effective August 2012). Regulations apply to ERISA-covered plans only. Query: Should church plans obtain service provider disclosures and provide fee disclosures to participants? Fee Disclosure Regulations

10. Final investment advice regulations became effective December 27, 2011. Two types of exemptions available under regulations: Fee leveling. Computer model. Conditions applicable to both exemptions include: Advice program must be authorized by fiduciary unrelated to advisor. Program must take into account fees and expenses. Annual independent audit required. Written disclosure to plan participants required. Investment Advice Regulations

11. Investment advice regulations apply to ERISA-covered plans only But what is liability/risk to church plans that offer investment advice? Church plans not subject to ERISA. Church plans not subject to securities laws. Potential fiduciary liability under state law. Investment Advice Regulations

12. Housing Allowance

13. Freedom From Religion Foundation v. Geithner First Amendment challenge to the income tax exclusion for minister’s housing allowance. United States filed a motion to dismiss for lack of standing. On August 29, 2012, the District Court denied the United States’ motion to dismiss, allowing the case to move forward. Housing Allowance Litigation

14. Driscoll v. Commissioner (Tax Court January 2011) Minister is entitled to claim housing allowance for both his primary residence and vacation home. Decision was appealed to U.S. Court of Appeals for the 11th Circuit, which reversed lower court decision. Housing Allowance Litigation

15. Unclaimed Property Laws

16. Pension plans with missing participants and beneficiaries who have not filed claims or for whom there is no available current address – do state unclaimed property laws apply? Unclaimed property laws require plans to turn over property to the state for safekeeping until a claimant appears. Some states have adopted versions of the Uniform Unclaimed Property Acts while others have not; laws are constantly changing. Unclaimed Property Laws

17. Uniform Unclaimed Property Act: Covers all “holders” – i.e., institutions that are “obligated to hold for the account of or deliver or pay to the owner property subject to the [Act].” Covered property includes: Fixed and certain interest in intangible property. Amounts due and payable under the terms of an annuity or insurance policy. Amounts distributable from a trust or custodial fund established under a plan to provide pension or retirement benefits. Property that is “abandoned” or “presumed abandoned.” Unclaimed Property Laws

18. Uniform Unclaimed Property Act Property in pension plan is “presumed abandoned” 3 years after the earliest of the date of distribution or attempted distribution, or the date of the required distribution as stated in the plan or as may be required by law. Unclaimed Property Laws

19. Compliance issues: Most states require annual report identifying all abandoned property. Most states require holder of unclaimed property to turn that property over to the state. Penalties and/or interest can be imposed if the required report is not filed or the unclaimed property is not turned over to the state. More states are using “inactivity” as a trigger for reporting requirement. Unclaimed Property Laws

20. DC Plan Lifetime Income Options

21. Fiduciary Liability: Fiduciary liability issues may arise in selecting providers. ERISA plans may rely on DOL safe harbor guidance regarding selection of annuity providers. Vendor Selection: Sponsors must review information and compare expenses and rate annuity providers. Sponsors must continue to monitor selections. Demand & Utilization: Unclear how many participants will elect annuities; recent indications are that demand is there. Additional education and communication will be necessary. Design Options: Sponsors should consider whether annuities offered within or outside of a plan. Plan Sponsor Considerations

22. Three basic ways to provide annuity option to participants: Option 1: Retirement board purchases annuity and is owner of annuity contract; annuity payments either come from retirement board or insurance company. Option 2: Retirement board purchases annuity contract and distributes to participant. Option 3: Plan distributes participant’s account balance in form of lump sum and participant rolls amount over to an individual retirement annuity (IRA). Methods for Providing Annuity Options

23. Fiduciary obligations will apply with respect to selecting and monitoring products offered under the Plan under both Options 1 and 2. Query: What about release and waiver? Annuity pricing raises practical problems for Plan Sponsors because it may be difficult to obtain and interpret information about annuity returns and costs. Annuity Options Inside Plan

24. In-plan annuities are subject to “unisex” pricing (this provides favorable result for women with longer life expectancy and a disadvantage for men). Contract limits may apply. For example, annuity provider may have minimum account balance requirements. If option is not available to all participants, this may create a problem if a plan is subject to nondiscrimination rules. Annuity Options Inside Plan

25. Sponsor does not endorse or contract with annuity provider, but provides basic communications to permit participant to select an annuity option. Sponsor may interview and provide information regarding limited number of providers. Only way to completely avoid fiduciary responsibility in selection of annuity provider is to make lump sum distribution that the participant could roll over directly to IRA (Option 3). Annuity Options Outside Plan

26. Tax implications if retirement board purchases annuity contract and distributes directly to participant: 401(a) Plans: Regulations specifically permit qualified plans to purchase annuity contract and distribute it to participant without the participant being subject to taxation at time of purchase. 403(b) Plans: No similar authorization for purchase of annuities by 403(b) plan; but 403(b) regulations relating to purchase of annuities in the context of plan termination suggest that an annuity purchase and distribution is treated in manner similar to 401(a) qualified plan. NQDC Plans: Entire value of the annuity contract is taxable to the participant at the time of distribution. Tax Implications

27. Note: There is no guidance on whether housing allowance designation can be made in the context of annuity purchase. Under Option 1, because annuity contract is still part of plan, and distributions will be made from the plan, denominational board should be able to continue to make annual housing allowance designations. Housing Allowance Considerations

28. Under Option 2, it may be possible for retirement board to make housing allowance designation at the time it purchases the annuity contract and have that designation apply over the entire period of distribution. Under Option 3, it is not clear whether it is possible to make housing allowance designation with respect to distributions from IRA where participant has rolled over lump sum distribution from plan. Note: Under either Option 2 or 3, 1099-R form issued by annuity provider will in all likelihood not reflect non-taxable housing allowance. Housing Allowance Considerations

29. Recent trend towards offering annuities or annuity-like investment options in defined contribution plans. Many providers such as Vanguard, Prudential, Great-West, Financial Engines and others are offering products. Data suggests that even younger workers taking advantage of annuities when offered. Lifetime Income Options

30. Two Private Letter Rulings Address DC Annuities: PLR 200951039- Addresses certain technical issues related to required minimum distribution requirements and qualified joint and survivor annuity rules in context of both group and individual variable annuity contracts in a defined contribution plan. PLR 201048044- Addresses guaranteed withdrawals under a life annuity for purposes of the qualified joint and survivor rules under 401(a)(11) and 417 of the Code. The annuity option involved a target date fund which would automatically be directed to variable deferred annuity contracts. IRS Guidance

31. Guidance package issued February 2012 – includes 2 revenue rulings and set of proposed regulations. Guidance is intended to promote increased savings and retirement income and provide incentives for participant to take annuity form of distribution. Revenue Ruling 2012-4 addresses technical issues relating to a rollover from a DC plan to a DB plan. Revenue Ruling 2012-3 provides guidance on the application of the spousal consent rules if a DC plan offers an annuity form of benefit. IRS Guidance

32. IRS Guidance • Proposed regulations provide guidance on “qualified longevity annuity contracts” (“QLACs”). • Requirements for QLAC: • Premiums cannot exceed lesser of 25% of account balance or $100,000. • QLAC can provide for distributions in future (but no later than age 85). • Must provide certain death benefit protections for surviving spouses and nonspousal beneficiaries. • Contract must specifically say it is a QLAC. • Insurers would have to provide notices explaining amount, timing and other features. • If QLAC meets requirements, it is excluded from determination of RMD.

33. Fiduciary Duties

34. Potential Liability and Exposure Fiduciary liability falls into two categories: Liability associated with plan investments; and Liability associated with discretionary decisions regarding plan distributions. Plan investment liability exposure is by far the most significant area of risk in terms of dollar exposure. Liability and Exposure

35. Fiduciary liability and exposure with respect to plan investment decisions falls into certain discrete areas: Decisions regarding the plan’s investment fund “line-up” or “menu”; Choice of the plan’s default investment option; Issues related to participant investment election, including the decision to offer participant investment election; and Issues related to fees and expenses payable in connection with plan investments and plan administration. Liability and Exposure

36. Fiduciary liability associated with plan distribution decisions principally arises in connection with decision to deny a participant or beneficiary’s claim to receive all or a portion of his/her benefit. Liability and Exposure

37. Church plans are not subject to ERISA. Church plans are subject to state fiduciary laws and the “common law of trusts.” Based on “choice of law” rules, the trustee or trustees of a trust associated with a church plan are generally subject to the state laws applicable to trustees chosen in the trust document. Fiduciary Duties – General Rules

38. The Uniform Prudent Investor Act (“UPIA”) Common law of trusts (i.e., fiduciary case law) Uniform Management of Institutional Funds Act Exclusive benefit rule State non-profit corporation law Sources of Fiduciary Duties

39. Although ERISA fiduciary rules do not apply to church plans, they (or a modified version of them) are often applied by church plans as “best practices.” But remember . . . If you put a particular rule in your plan, you have imposed a contractual obligation on plan fiduciaries in favor of plan participants. If the plan provision is not followed, or the standard imposed is not met, a plan participant has a contractual claim he/she can make against the plan. Retirement Plan Fiduciaries

40. Ways to protect against fiduciary liability: Fiduciary liability and E&O insurance policies (check to see who is covered and to make sure limits are adequate and coverage is sufficiently broad – e.g., not limited to just ERISA fiduciary claims). Indemnification provisions in corporate bylaws. Use of experts to assist with investment fund selection and fulfillment of plan administration compliance requirements. Amend trust agreement to relieve plan fiduciaries from specific fiduciary liabilities. Reducing or Eliminating Exposure

41. Ways to protect against fiduciary liability (cont’d): Use of an “acknowledgement/release” form to be signed by participant with regard to vendor or investment selection by participant (or inclusion of similar language in participant investment election forms). Consider making a church plan subject to ERISA. Reducing or Eliminating Exposure