Compliance September 23, 2008

IRS Explains Government Money-Market Fund Insurance Program

More details emerged Monday about the federal government’s plan to shore up U.S. money market funds so they can maintain their traditional $1 per share net asset value.
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In Notice 2008-81, the Internal Revenue Service (IRS) explained that the voluntary temporary program will be limited to assets in money market funds as of the close of business on September 19 and to investors of record as of that date. New money flowing into these funds after close of business on that date is not covered by the program.

Funds electing to take part in the Treasury Department/IRS program are required to pay premiums that will be tied to the per share net asset value of the money market fund.

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“This Notice provides administrative relief in furtherance of public policy to promote stability in the market for money market funds,” the IRS wrote. “Except with respect to the administrative relief expressly provided in this Notice, no inference should be drawn from this Notice regarding any other federal tax issues affecting tax-exempt bonds, money market funds, or any other security.”

According to a notice distributed Monday by Brian H. Graff, executive director/chief executive officer of the American Society of Pension Professionals and Actuaries (ASPPA), most, if not all, investment companies with money market funds are planning to participate.

Graff said the amount insured will not be capped like FDIC insurance and that once a participating fund board determines the fund has “broken a buck” and decides to liquidate, any shortfall would be covered by Treasury. The Securities and Exchange Commission (SEC) has been given the responsibility of developing this program.

Impact on Tax-Exempt Bonds

According to the IRS notice, government officials said they will not assert that the program violates the restrictions against federal guarantees of tax-exempt bonds with respect to any tax-exempt bond assets held by tax-exempt money market funds participating in the program. The program will not impair the ability of a money market fund to designate exempt interest dividends or of the shareholders of such a fund to claim the benefits of tax exemption with respect to such exempt interest dividends.

Graff said the SEC told the American Society of Pension Professionals and Actuaries (ASPPA) that covered fund values include the effect of buy and sell instructions made by plan participants and beneficiaries before the trading close on September 19 but processed after hours. “We are still waiting on clarification as to whether interest accruals not yet posted for the month of September as of the 19th will need to be taken into account,” Graff wrote in the ASPPA member alert.

Graff also said the $1 per share net asset value guarantee will apply to the account value as of close of business on September 19, 2008, even if there was a subsequent exchange and repurchase prior to fund liquidation.

The IRS notice is available here.

Compliance September 22, 2008

9th Circuit Stands with Other Courts on Ex-Participant Lawsuit Ruling

Another court ruled that participants who have cashed our of their defined contribution plan can still pursue fiduciary breach lawsuits.
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The 9th U.S. Circuit Court of Appeals became the seventh appellate panel to rule that way. The court overturned a lower court ruling by holding that allowing former participants to pursue fiduciary claims under the Employee Retirement Income Security Act (ERISA) to recover their losses fit with the true meaning of the federal benefits rights law.

Circuit Judge Betty B. Fletcher, in writing for the court, said the decision in a case involving Bay Environmental Management Inc. was the way to allow participants to “prevent the misuse and mismanagement of plan assets by fiduciaries.” The 9th Circuit’s decision joins similar holdings from the 1st, 3rd, 4th, 6th, 7th, and 11th appellate circuits.

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According to the opinion, plaintiffs Jerry Vaughn and Theresa Travers worked for Bay Environmental and participated in either a pension plan funded by contributions by Bay Environmental, or a retirement plan consisting of a profit-sharing component and a 401(k) component.

Plan Terminations

In April 2001, Bay Environmental notified its employees that it was going to terminate its retirement plans. According to the court, the plan’s investments were liquidated into cash in August 2001 and the participants received lump-sum distributions of their individual accounts.

After receiving his distribution, Vaughn filed a lawsuit in the U.S. District Court for the Northern District of California alleging that Bay Environmental and the plan’s fiduciaries breached their ERISA fiduciary duties by:

  • failing to adjust the plans’ investments to reflect the likelihood that the plans would terminate early
  • delaying the transfer of the plan’s non participant-directed assets to appropriate investments once the defendants knew or should have known that the plans would terminate
  • imprudently investing the plans’ assets.

The district court ruled that Vaughn lacked standing to sue Bay Environmental for fiduciary breaches because he had received the lump-sum distribution of his accounts and therefore was not entitled to additional benefits.

For his part, Vaughn alleged he did not receive all of the benefits due to him under the plan because the accounts contained less than they would have if the fiduciaries had not breached their duty to invest prudently, the court said.

The case is Vaughn v. Bay Environmental Management Inc., 9th Cir., No. 05-17100, 9/19/08.

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