Compliance April 11, 2008

DoL Sues Investment Advisory Firm on Behalf of MI Union Plans

The U.S. Department of Labor (DoL) has filed a lawsuit in federal district court in Chicago against Chicago-based AA Capital Partners Inc. and its executives.
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A DoL announcement said the investment firm is accused of improperly causing more than $25 million in losses for five Michigan union pension funds by misusing plan assets to benefit themselves and by charging the plans excessive investment management fees.

The suit alleges that AA Capital Partners, its co-owner and president John Orecchio, chief financial officer Mary Elizabeth Stevens, and affiliate AA Capital Liquidity Management LLC violated the Employee Retirement Income Security Act (ERISA) by imprudently misusing plan assets and charging the plans excessive fees on investments.

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According to the DoL, at various times from 2002 to 2006, the defendants are alleged to have improperly used $25.9 million of the plans’ assets to pay for, among other things, the operating expenses of the firm, renovations to a horse farm and a strip club managed by Orecchio. In addition, the DoL alleges the defendants caused the plans to pay unauthorized fees to AA Capital Partners.

The suit seeks a court order to require that the defendants restore to the plans all losses, return illegal profits, and correct transactions prohibited by law, and also asks that the defendants be permanently barred from serving in the future as fiduciaries to any plan governed by ERISA.

The pension plans cover more than 60,000 participants of the Carpenters Pension Trust Fund of Detroit and Vicinity, Operating Engineers Local Number 324 Pension Fund, Michigan Regional Council of Carpenters Annuity Fund, Millwrights’ Local Number 1102 Supplemental Pension Fund, and Michigan Teamsters Joint Council #43 Pension Fund.

“This case involves gross abuse of the trust that workers and their families placed in the management of these pension funds,” said Secretary of Labor Elaine L. Chao, in the statement.

Compliance April 11, 2008

IRS Continues Fleshing Out PPA DB Funding Mandates

As part of regulators’ continuing efforts to flesh out the Pension Protection Act’s (PPA) mandates, the Internal Revenue Service (IRS) on Friday issued proposed regulations on single-employer defined benefit plan funding requirements.
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A news release said REG 108508-08, tied to Section 430, along with three earlier sets of regulations should help plan sponsors figure out the PPA’s required DB plan contribution, including the application of the quarterly contribution requirements.

According to the new document, under section 430(j)(3)(A), quarterly contributions must be made during a plan year if the plan had a funding shortfall for the preceding plan year. Each quarterly installment is 25% of the required annual payment while the required annual payment is equal to the lesser of 90% of the minimum required contribution under section 430 for the plan year or 100% of the minimum required contribution under section 430 (determined without regard to any waiver under section 412) for the preceding plan year.

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The determination of the amount of the minimum required contribution for a plan year depends on whether the value of plan assets, as reduced to reflect certain funding balances pursuant to section 430(f)(4)(B) (but not below zero), equals or exceeds the plan’s funding target for the plan year, the IRS said in the new guidance. If this value of plan assets is less than the funding target for the plan year, the minimum required contribution for that plan year is equal to the sum of the plan’s target normal cost for the plan year plus any applicable shortfall amortization installments and waiver amortization installments.

If this value of plan assets equals or exceeds the funding target for the plan year, the minimum required contribution for that plan year is equal to the target normal cost of the plan for the plan year reduced (but not below zero) by any such excess.

IRS officials said although the new funding rules are generally effective for plan years beginning on or after January 1, 2008, the regulations are proposed to be effective for plan years beginning on or after January 1, 2009. Plan sponsors can rely on the proposed regulations to satisfy the minimum funding requirements for plan years beginning in 2008.

The funding regulations will be amended to reflect any changes from the PPA technical corrections bill moving through Congress.

Public comments on the funding regulations should be sent to: CC:PA:LPD:PR (REG-108508-08), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-108508-08), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC, or sent electronically via the Federal eRulemaking Portal at www.regulations.gov (IRS-REG- 108508-08).

The latest proposed funding regulations are available here.

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