EFAST2…Faster Than I Thought!

For the last year or so I have been dreading the arrival of EFAST2. However, my first experience with the Department of Labor’s online filing system for Form 5500 was more pleasant than expected.

Background

EFAST stands for ERISA Filing Acceptance System, a collaboration of three governmental agencies – Department of Labor (DOL), Internal Revenue Service (IRS), and the Pension Benefit Guarantee Corporation (PBGC) – designed to expedite the processing of Form 5500 filings for pension and welfare benefit plans.

The first version of this system, introduced in 1999, allowed plan sponsors to submit Form 5500 to the DOL via both “machine-print” paper forms and electronic media. The new “machine-print” forms included barcodes to allow faster processing. Prior to the introduction of EFAST, Form 5500s were filed with the IRS without barcodes.

The original electronic filing process was not exactly a big hit. A Government Accountability Office report indicates that 98% of Form 5500 filings were still being submitted via paper forms as of 2005.

The DOL claimed that uptake was slow because the system was voluntary, a true but incomplete statement. The original system was cumbersome. It required sponsors to submit a paper form in order to receive electronic filing credentials. Service providers had to purchase potentially expensive software to accommodate the electronic filing. And attaching actuarial certifications or accountants opinions further complicated matters.

The only way to achieve wide usage of such a system would be through government mandate. This mandate came in 2006 when the Pension Protection Act required that all Form 5500s be submitted to the DOL via a 100% electronic filing system. The original mandate was for the 2007 plan year filings. However, after two postponements electronic filing officially became mandatory on January 1, 2010 for the 2009 plan year filings.

Industry Frets

Needless to say many of us in the industry worried whether this new system would prove too complicated for plan sponsors and providers to navigate. We also worried whether it could handle such a high volume of electronic filers.

The information that came out of the DOL was not comforting either. As we approached the deadline the DOL issued numerous FAQs (up to 46 and counting). The detailed explanations made the system sound very complicated. I still don’t understand the difference between the statuses “Unprocessable Submission” and “Filing Unprocessable.”

Systems Works – At Least For Now!

However, last week I tried the IFILE system for the first time. (IFILE is the DOL developed web-based filing system.) I was surprised at how easy it was.

I registered for the website and filled out the Form 5500 online in about 20 minutes. I had already completed the Form 5500 plus attachments in our desktop software, so I was only copying entries onto the website form. Nonetheless it was easy.

Once I completed the Form and Schedules, I contacted the plan sponsor. He was able to obtain signer credentials and electronically sign the Form 5500 by following the online DOL instructions in about 10 minutes. (If he had run into problems the DOL prepared this tutorial to guide him through the process.)

Then with a click of a button I filed the 5500 with the DOL. The whole process took less than half and hour and I didn’t run into any bugs or problems.

There are a few drawbacks I see to the IFILE system:

• The User ID and PIN required to electronically sign the documents will be easy to forget, especially for people only using them once a year.
• There are limited tools for preparers to manage larger numbers of filings
• Additional tools to facilitate collaboration with accountants and actuaries would be nice
• Integration with existing recordkeeping and administration software would also be helpful

Most of these issues are being solved by third-party software vendors licensed by the DOL to provide more robust tools to facilitate electronic filing.

Sleeping Better at Night

Of course, a single experience is not enough to substantiate a final judgment. But, I am much less worried about filing Form 5500 than I was a few months ago.

Update from the "Other" Washington: Washington D.C.

There’s a lot going on in Washington D.C. related to employee benefits so we thought a quick update was in order:

1) The senate passed a bill that would allow participants to do a Roth conversion within their 401(k) and 403(b) plans.

• However, in order to be eligible for the conversion participants must have incurred a “distributable event.”
• Our sources in Washington indicate the House is expected to approve the Senate Bill in the coming weeks.

2) This same bill also include pension funding relief.

• Allowing employers that sponsor defined benefit plans to amortize investment losses over a greater number of years.

3) We expect the House Ways and Means committee to mark up it’s version of a 401(k) Fee Disclosure bill today Wednesday, March 17.

• This bill has support of key members of the house, so it has a good shot of getting passed.
• It includes service provider and participant fee disclosures.
• See our webinar from this past fall for background on 401(k) plan fees.

4) The DOL has proposed new regulations on the provision of investment advice to participants in 401(k) plans and IRAs.

• The new regs touch on the active v. passive debate with respect to computer model generated advice.

5) The DOL and SEC recently held a rare joint hearing examining Target Date funds.

• Both agencies are looking for enhanced disclosure.
• Consumer “perceptions” and provider “reality” for 2010 Target Retirement Date Funds were “night and day.”
• The DOL's concerns stem from the fact that the default investment rules allow Target Date Funds to be a Qualified Default Investment Alternative (QDIA) within a 401(k) Plan.

6) We also hear that the DOL wants to rethink and refresh ERISA’s fiduciary standards and definitions, “revolutionizing” them for today's marketplace.

• In particular they are rethinking how to influence participant behavior when it comes to retirement distributions (i.e. lump sum v. annuities).
• See their recent request for information on this topic.

7) Finally, news was made this week when Senator Dodd unveiled the “new and improved” Financial Services Reform Bill.

• The current version gives the new Consumer Financial Protection Agency (CFPA) jurisdiction over plan investment service providers.
• It also recommends a single set of Fiduciary standards for brokers (FINRA) and advisors (SEC).
• Unfortunately a last minute change gave the CFPA jurisdiction over Pension Consultants and Recordkeepers (like Spectrum).
• This is all we need, another regulator to compete with the DOL, Treasury, and PBGC!

March 2010 has proven to be very pivotal, and thus we are entering extremely interesting times. Stay Tuned!

BORSAs and ERSOPs and ROBS…Oh My!

Are these scary names for 3 new genetically engineered carnivores replacing the traditional "lions and tigers and bears?"

No...These three acronyms all refer to an arrangement under which a prospective small business owner uses his rollover account to finance a start-up business.

BORSA = Business Owner’s Retirement Savings Account
ERSOP = Entrepreneur Rollover Stock Ownership Plan
ROBS = Rollover Business Start-ups

The first two acronyms were coined by private vendors who provide assistance to business owners with this type of transaction. The IRS came up with “ROBS” and it is indicative of their perception of these types of arrangements.

So how do they work? Usually something like this:

An individual with a substantial retirement account wants to start a business and needs financing. Cash distributions from her retirement account would be subject to income tax and potentially an early withdrawal penalty. So, instead of a direct distribution, she establishes a “C-corporation” and creates, but does not issue, any number of corporate shares. This corporation then establishes a qualified profit sharing plan, and the “owner-employee” rolls over her retirement account into the qualified plan. Then the plan exchanges the cash from the rollover with the newly issued company stock and…Viola! The entrepreneur now has cash to finance her business without incurring a taxable event.

Like many things in life these arrangements look good in theory, but in practice have lots of problems. In October 2008 the IRS issued a memorandum, Guidelines regarding rollovers as business start-ups, in which it states: “Although we do not believe that the form of all of these transactions may be challenged as non-compliant per se, issues such as those described within this memorandum should be developed on a case-by-case basis.”

The IRS memo discusses 7 potential issues for these arrangements:

• Benefit Rights and Features Discrimination: Stock investment is not “effectively available” to all participants
• Prohibited Transactions – Stock Valuations: Initial valuation cannot be substantiated based on fair market value of start-up business
• Prohibited Transactions – Promoter Fees: If promoter is a fiduciary the “diversion” of plan assets to pay promoter fees may be a prohibited transaction. (Promoter may be giving investment advice by recommending investment in company stock. Because they are getting paid this makes them a fiduciary and potentially leads to a claim of self-dealing.)
• Permanency: If the plan doesn’t have substantial and recurring contributions then the IRS can challenge whether it was ever intended to be a qualified plan.
• Exclusive benefit: In some cases the proceeds from the ROBS transaction are used for personal non-business items (e.g. recreational vehicles). This would violate the exclusive benefit rule (i.e. that assets must be used exclusively to pay retirement benefits to participants).
• Plan not communicated to employees: May violate requirement that plan be definite written program communicated to employees.
• Inactivity of 401(k) arrangement: Plan may include a 401(k) provision, but participants have not been allowed to make a deferral.

Interestingly, this memo may have consequences not intended by the IRS. Instead of acting as a deterrent, the memo is being used as “a road map of the late-stage procedural issues brokers need to monitor closely in order to keep ROBS compliant” (at least according to sources referenced in this Forbes.com article: The IRA Job Machine).

Despite these potential issues, the recent credit crunch and increase in unemployment makes dipping into retirement savings look pretty appealing to many would be entrepreneurs.

We are definitely not in Kansas anymore.

Household Income in America and Retirement Savings

Household income in America typically refers to all income of residents in every household over the age of 18. Income is usually made up of:

• Wages and Salaries
• Unemployment Insurance
• Disability Payments
• Child Support Payments
• Regular Rental Receipts
• Personal Business, Investment, or other Income received routinely

In 2007, the Median Annual Household Income rose 1.3% to $50,233 according to the Census Bureau, with approximately $7.896 Trillion in total income.

Median Annual Household Income for the state of Washington ranked #10 in 2008 at $58,078.

If every American Household deferred 10% of Household Income into tax-deferred retirement savings vehicles such as 401(k)s or IRAs, based on 2007 Census Bureau numbers, approximately $790 Billion would be tax deferred. Unfortunately, the Average American defers significantly less (closer to 5%).

Interestingly enough, the U.S. Department of Commerce, Bureau of Economic Analysis shows the following earnings changes from 2001-2009 in this Interactive Chart:

• $4,183B ('01) to $5,148B ('09) in Private Sector
• $804B ('01) to $1,184B ('09) in Government

All Private Sector earning Americans had an earnings increase of 23%, and All Government earning Americans as a whole had an earnings increase of 47%.

The same source reports Personal Savings Rate, as a percent of Disposable Personal Income in Flow of Funds Accounts (FFAs) was:

2006: (0.2)%
2007: 4.8%
2008: 8.7%
2009: ?