DOL Recommends Reopening Retirees’ Lawsuit Against IBM

The Department of Labor has backed an appeal by IBM retirees to reopen a lawsuit alleging the company used outdated mortality tables to determine the value of pension benefits.

The Department of Labor is urging the U.S. 2nd Circuit Court of Appeals to reopen a lawsuit filed against IBM Corp. and its plan administrator committee in June 2022.

The technology company was accused by three long-time IBM employees of using outdated mortality tables and inflated interest rate assumptions to determine the value of annuity benefits to be paid out by the pension plan.

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The three employees—Joshua Knight, Michael Campbell and Ernest Fabrizio—joined the firm’s Personal Pension Plan prior to 1999 and selected various forms of joint and survivor annuities upon retirement. The original complaint, Joshua Knight et al. v. International Business Machines Corp. et al., was filed in the U.S. District Court for the Southern District of New York.

The employees alleged that IBM and IBM’s plan administrator committee violated the Employee Retirement Income Security Act’s actuarial equivalence and non-forfeitability rules by calculating employee benefits using an outdated mortality table, arguing that that it was “more than 40 years out of date, despite dramatic increases in longevity of the American public.”

The plaintiffs argued that if IBM had used more current actuarial assumptions—such as those referenced in regulations promoted by the Department of the Treasury—the plaintiffs’ benefit payments would have been larger.

IBM moved to dismiss the case, and the district court approved the dismissal on April 4. The plaintiffs filed a motion to appeal the dismissal on May 3.

IBM claimed in its motion to dismiss that the plaintiffs’ fiduciary breach claim was “untimely” under ERISA’s statute of limitations for such claims because the employees had “actual knowledge” of the alleged fiduciary breach—their pension protection statements disclosed the UP-1984 mortality table—more than three years before filing the initial complaint.

However, the DOL argued in an amicus brief filed in support of the plaintiffs on Tuesday that the district court did not make any factual findings as to whether the IBM employees were aware of the company’s use of the 1984 mortality table when they received their statements.

ERISA requires that plaintiffs filing a lawsuit for fiduciary violations do so within three years of obtaining “actual knowledge of the breach or violation.”

The district court held that the IBM employees had actual knowledge of the company’s breach upon receiving their pension projection statements, but the U.S. Supreme Court has stated that “disclosure alone” does not suffice for obtaining “actual knowledge” of the breach. As a result, the DOL argued in its brief, the court should reverse its decision.

“It is the height of speculation that any plaintiff, after receiving their statement, continued reading past the key information to find the technical notes, and understood their practical implications by referencing an earlier definition,” the brief stated.

The DOL also clarified that the projection statements are “merely pre-retirement estimates” of what the employees’ pensions were likely to be, not statements of how IBM determined the workers’ actual benefits.

“Because this case was dismissed on the pleadings, there is certainly no deposition testimony from any of the plaintiffs attesting that they even received their pension projection statements, let alone read them,” the DOL stated.

At minimum, the DOL argued, to determine if the complaint was filed before the statute of limitations expired, limited discovery regarding the employees’ knowledge of the mortality table is necessary to determine the point at which each employee had actual knowledge of the alleged fiduciary breach.

The DOL brief was submitted by Seema Nanda, solicitor of labor, Wayne Berry, associate solicitor of plan benefits security, and Jeffrey Hahn, counsel for appellate and special litigation. Sarah Holz is the trial attorney representing the DOL.

SPARK Meeting Addresses Roth Catch-Up Preparedness

Committee lays out recordkeeper and payroll provider workflow for the pending SECURE 2.0 Roth catch-up mandates.

A retirement industry workshop on SECURE Act 2.0 of 2022 implementation held by the SPARK Institute sought to bring clarity and coordination for retirement recordkeepers and payroll providers as they prepare for new Roth catch-up provisions and so-called “super-catch-up” contributions.

In the July 16 meeting, SPARK, the Society of Professional Asset Managers and Recordkeepers, brought providers to Vanguard’s offices in Valley Forge, Pennsylvania, in person and virtually. About 150 recordkeepers, payroll providers and Employee Retirement Income Security Act experts attended, with most of the focus on the catch-up provision for higher-earning participants, while the super-catch-up for people aged 60 through 63 was discussed more briefly, according to Tim Rouse, the executive director of the SPARK Institute.

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“We had great participation from recordkeepers and payroll providers,” Rouse says. “Now we can reassure plan sponsors that both industries have worked together, and we believe we’ve got it worked out for them.”

Rouse says the institute called the meeting to focus on the SECURE 2.0 Roth provisions due to plan sponsors “raising concerns” about the coordination required between recordkeepers and payroll providers to implement them.

The higher-contributor catch-up provisions got early attention from the industry as a potentially tricky area to implement. Under Section 603(c) of the SECURE 2.0 Act of 2022, plan catch-ups from participants in 401(k), 403(b) and 457(b) plans earning at least $145,000 in the prior year are required to be made on a Roth, after-tax basis. However, widespread industry response that this would not be possible to implement quickly prompted the IRS to push that timing out to 2026.

The super-catch-up provisions, meanwhile, kicking off in 2025, offer higher catch-up capabilities for workers aged 60 through 63, up to either $10,000 or 150% of the regular catch-up amount per year, depending on which is greater.

Some specifics that emerged from the workshop, according to SPARK, included the workflow between payroll providers and recordkeepers. The group that attended the meeting also sought to address a concern about tax filing corrections. Rouse explains that a person’s income level for a given year can and “often does change,” meaning an individual who was thought not to be part of the Roth catch-up population may ultimately be in it.

“It could be weeks or months until the recordkeeper finds out that the taxpayer’s previous year income was over the $145,000 amount,” Rouse notes. “In our view, the easiest way to fix the problem is to back out the withdrawal from the incorrect catch-up contributions, with earnings, and to issue the taxpayer a 1099-R for the next year.”

To that end, SPARK filed a letter to the IRS and the Department of the Treasury on August 27 making that recommendation.

Other details of the discussions included:

For the Roth catch-up (Section 603 of SECURE 2.0):

  • Participant Identification and Reporting: Payroll providers will report the Roth catch-up population to plan sponsors, who will then inform recordkeepers; the group emphasized flexibility in reporting arrangements and timely data;
  • Threshold Calculations: Payroll providers will enforce the new Roth catch-up rules, ensuring contributions do not exceed IRS limits, with recordkeepers providing secondary validation;
  • Reconciliation of Contributions: Misapplied pre-tax contributions will be corrected via 1099-R, pending a final decision by the IRS on how such corrections should be addressed;
  • Automatic Conversion to Roth: Shifting contributions from pre-tax to Roth will be carefully managed to avoid an inconsistent participant experience; and
  • Control Groups: Plan sponsors will need to identify cases when employee movement changes their eligibility for the catch-ups, alleviating concerns for payroll providers and recordkeepers.

Super-Catch-Up (Section 109 of SECURE 2.0):

  • Adoption Strategy: A unified approach for implementing super-catch-ups (with most recordkeepers choosing to implement automatically) and providing an “opt-out” strategy for plan sponsors; and
  • Threshold Calculations: Payroll providers will enforce super catch-up calculations, with recordkeepers providing secondary validation to ensure compliance.

SPARK has another SECURE 2.0-focused meeting coming up next month. On September 20, the group will host a meeting of industry players in Chicago at Alight’s offices and virtually. That meeting will focus on the Saver’s Match federal benefit and the DOL’s lost-and-found program.

Rouse notes that the Saver’s Match has the potential to bolster retirement savings for millions of lower-income participants. But if the setup is not simple enough, it may not get off the ground.

“Our industry very much wants this to be successful, but it’s a plan feature, and the plan sponsors will have to adopt it as a plan feature for plan sponsors that is easy to implement,” he says. “If recordkeepers turn up their nose at it, then plan sponsors will not put it in their plan.”

IRS SECURE 2.0 Reminders

In other SECURE 2.0 news, the IRS on Thursday issued a reminder to businesses about filing W-2 forms for the 2023 tax year and beyond.

In a fact sheet, the IRS points to three areas in which SECURE 2.0 makes available certain provisions for employer-sponsored plans that should be accounted for in employee W-2s.

One relates to “de minimis” (small) financial incentives (Section 113 of the SECURE 2.0 Act), which employers may offer to employees for choosing to participate in a plan: Those incentives are considered part of income.

The second concerns Roth SIMPLE and Roth SEP individual retirement accounts (Section 601 of the SECURE 2.0 Act). These provisions allow plans to provide plan participants the option to designate a Roth IRA as the IRA for contributions and an employer match. Salary reductions for participants to these Roth options are subject to federal income and other taxes; employer matching and nonelective contributions to them are not subject to withholding for federal income and other taxes.

Finally, the IRS addressed the optional treatment of employer nonelective matching contributions as Roth contributions (Section 604 of the SECURE 2.0 Act). These contributions are not subject to withholding for federal income tax and generally are not subject to withholding for Social Security or Medicare tax.

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