Compliance October 19, 2006

Court Approves $11M Settlement in Co. Stock Suit

The US District Court for the Southern District of Ohio has approved an $11 million settlement for a class of former employees of Broadwing Inc., which sued the company for fiduciary breaches under the Employee Retirement Income Security Act (ERISA) relating to offering company stock as a retirement plan investment.

Reported by

Rebecca Moore

In approving the settlement, the court pointed out it was unlikely the class would win a trial on the merits of the case. “Several district court decisions favor the possibility of establishing liability in cases alleging fiduciary breaches concerning holdings of risky company stock in individual retirement accounts, however, few of these cases reached the stage of a decision based on the merits,” the opinion said.

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In addition, the court said the settlement was favorable since the $11 million plus interest would provide valuable relief to all class members. The court also pointed out that the case is likely complex and a trial would take long and be expensive to litigate. The opinion said it would be more beneficial for the class members to take the settlement now, since a delayed award minus expenses could result in less relief for each class member.

According to the opinion, the plaintiffs alleged that Broadwing, its board of directors, its employee benefits committee, and the plans’ trustees breached their fiduciary duties by failing to follow the provisions of the plans, failing to ensure that Broadwing stock was a prudent investment, failing to monitor the plans’ fiduciaries, and failing to disclose material information regarding the value of Broadwing stock to the plans’ participants.

The class included more than 5,000 participants in the plans, which the court noted was almost all of current Cincinnati Bell employees who worked for Broadwing from November 9, 1999 to February 28, 2003. The court awarded the class the $11 million plus interest, less attorneys’ fees and reimbursements.

The case is In re Broadwing Inc. ERISA Litigation, S.D. Ohio, No. 1:02-cv-00857, 10/5/06.

Compliance October 19, 2006

Making Amends: Problems and Solutions for Participant Loan Missteps

According to the IRS, one of the common retirement plan administration mistakes relates to plan loan failures and deemed distributions. Advisers can assist their clients in implementing administrative measures to ensure that participant loans from the plan are compliant with the plan document and any separate written loan policy adopted by the plan, which will can also help in monitoring loan payments to be sure they are made in a timely fashion.

Reported by

Alison Cooke

Loan failures are most commonly caused by three issues, the IRS reports:

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• loans that exceed the maximum dollar amount,
• loans with payment schedules that don’t meet the time or payment limits, and
• defaulted loans due to failure to make required payments.

Each of these issues will cause the loan, or a portion of the loan, to become a “deemed’ distribution for tax purposes, which means that the participant is taxed as if the distribution were received. However, that does not excuse the participant from the obligation to repay the loan (frequently the reason cited for the loan would be insufficient to justify a distribution from a 401(k) plan). If the participant fails to repay the loan, he can suffer further tax consequences, including having the loan considered a prohibited transaction. Additionally, when a loan goes into default, whether from participant or administrator error, this results in a deemed distribution of the entire unpaid loan balance plus accrued interest.

Disqualification Issues

A loan failure can also cause a plan to become disqualified, resulting in adverse tax consequences to the employer and employees under the plan but, the Department of Labor’s Voluntary Correction Program (VCP), part of the Employee Plans Compliance Resolution System (EPCRS),can be used to correct these mistakes. In fact, the recent Revenue Procedure 2006-27 adds three new corrections for plan loan failures which, when made through VCP, remove the deemed distribution tax reporting requirements. It is important to note, however, that these corrections are only allowed if the normal maximum period for repayment of the loan has not expired.

Where a plan loan has exceeded the dollar limit ($50,000 or 50% of the participant’s vested account balance, whichever is less), correction will be permitted if there is a payment to the plan based on the excess loan amount. If loan repayments were made before correction, the prior repayments may be applied in three ways, either:

• to interest on the excess so the participant only repays the excess loan amount,
• only to the amount of the loan not exceeding the dollar limit so that the participant repays the excess loan amount (plus interest), or
• pro rata against the loan excess and the maximum loan amount, so that the corrective repayment would equal the outstanding balance remaining on the original loan excess on the date that corrective repayment is made.

Where a plan loan has a payment schedule that is greater than allowable by law, the loan can be reamortized over the remaining period of the proper maximum payment period measured from the original date of the loan.

For loans that are deemed in default, correction can be made in a lump sum payment equal to what should have been made to the plan, plus interest or reamortization of the outstanding balance of the loan over the remaining payment schedule of the original term of the loan; defaults can also be corrected by a combination of either of the aforementioned methods.

Additionally, the IRS says, certain situations could require the employer to pay some of the repayment needed to fix a defaulted loan, such as when an employer did not start payroll withholding for repayment of the loan.