Understanding Employee Benefits and key developments in the employee benefits field and items of interest to our clients. MORE

The IRS and Department of Labor issue a number of publications on different topics, including 401(k) plans. The IRS has posted on its website a couple of jointly issued publications directed at small employers who sponsor or are considering sponsoring 401(k) plans. The publications are “401(k) Plans for Small Businesses” and “Automatic Enrollment 401(k) Plans for Small Businesses.” Employers interested in the topics may wish to review these publications.

I blogged about the Quality Stores decision which at the district court and court of appeals levels held that certain severance payments were not subject to FICA (Social Security) taxes. The IRS had challenged the employer in that case and had lost in both lower courts.

At the Supreme Court level, the IRS won. The Court held that severance payments to employees laid off in connection with an employer’s bankruptcy are subject to FICA taxes. Those employers who had filed protective refund claims based on the lower court decisions will not be receiving any refunds. The Supreme Court decision even throws into question the validity of the FICA tax exemption the IRS has allowed for severance plans tied to state unemployment compensation programs (so-called “Supplemental Unemployment Benefits” or “SUB” plans). Those plans appear typically in the union context and supplement payments under state unemployment compensation programs. We shall see whether the IRS withdraws the Revenue Rulings supporting the FICA exemption for those SUB plans.

I blogged recently about a tax court decision where a tax lawyer flubbed an IRA rollover, resulting in adverse tax consequences to him and his wife. An interesting aspect of the case – but one not mentioned in the decision – is that the tax lawyer’s action were consistent with the IRA rollover rules as described in IRS Publication 590.

The tax laws allow only one rollover from an IRA during any 12 month period and that rollover must be completed within 60 days. The Publication says that a rollover is permitted annually from each separate IRA. In other words, if an individual owns two separate IRAs, the individual can take a rollover from both IRAs in the same year – but not more than one rollover from any separate IRA. The tax lawyer had rolled money from one IRA to another IRA, and had also rolled money from a second IRA the same year. The tax court said that IRAs needed to be aggregated for purposes of the “one rollover a year” rule. The IRAs could not be treated separately for those purposes.

As mentioned, the tax court’s position conflicts with the IRS publication, making practitioners uncertain as to how to advise clients planning to take rollovers from multiple IRAs in a year. In an announcement released on March 20, the IRS said that it intends to issue a regulation consistent with the tax court opinion that the IRA rollover rule will apply to IRAs on an aggregated basis. Therefore, only one rollover will be allowed in a 12 month period regardless of how many IRAs an individual holds. However, the IRS also said that this new rule will not apply before January 1, 2015. This gives taxpayers some time to complete transactions that are planned or in process and also means that taxpayers will not be penalized for following the guidance in the publication.

Of course, as I mentioned in my previous blog, the IRA rollover limits can be avoided by using direct transfers where an IRA custodian works with another custodian to move an account directly from one institution to another. IRA holders who use the direct transfer approach will not run afoul of the rollover limits.

I have blogged in the past about individuals and businesses that are not signatories to a collective bargaining agreement being found liable for withdrawal liability imposed by multiemployer pension plans (plans jointly trusteed by union and management trustees for the benefit of a number of unionized employers). Withdrawal liability is imposed when an employer exits the multiemployer plan. If the plan has unfunded vested benefits, the withdrawing employer must pay its share. In recent years, some of the withdrawal liability amounts have been significant.

As I noted in previous blogs (here, here and here), employers that are part of the same controlled group are liable for the withdrawal liability. This can include partners and shareholders who individually own the real estate on which a business operates.

In addition to withdrawal liability, employers are also liable for delinquent contributions to multiemployer plans. To collect those delinquent contributions, the multiemployer pension plans sometimes have an additional tool in their tool box: imposing fiduciary liability on the officer of a business that fails to pay its plan contributions.

Under ERISA, plan fiduciaries must use plan assets only for plan purposes. The trustees of the multiemployer plan are themselves plan fiduciaries. A number of multiemployer plans are now providing in their trust agreements that the contributions owed to the plan constitute plan assets beginning on the date that the contribution is owed. For example, if contributions are owed based upon hours worked by the union employees, then the amount of the contribution becomes a plan asset when the hours are worked. The plan then argues that those in charge of the employer are therefore fiduciaries with respect to their use of those plan assets. If the contributions are not timely paid because the business’s managers decide to use company funds to pay other obligations, those managers can be held personally liable for failure to use plan assets for the purpose intended.

A recent federal district court decision upheld such an argument. The court concluded that the founders and sole officers of a cleaning company violated their fiduciary duties under ERISA by failing to remit contributions to a multiemployer plan. The plan’s collection policy specifically provided that “all money owed to the trust, which money (whether paid, unpaid, segregated or otherwise traceable, or not) becomes a trust asset on the due date.” Because of that statement, the court determined that the contributions became trust assets from the date they were owed and that the officers of the company who chose to pay other company obligations were personally liable for the delinquent contributions. That liability attached even though the business was operated in corporate form.

Now that the IRS has issued final regulations under Section 4980H, the so-called “pay or play” provision of the Affordable Care Act, employers are deciding how to determine whether employees are full-time (30 hours or more a week on average), whether the coverage the employer offers is affordable (generally no more than 9½% of the participant’s income for single coverage) and whether it provides minimum essential coverage (based upon actuarial formulas or calculations). One requirement for adequate coverage is that the offer must include coverage for both the employee and the employee’s dependents. The employer is not required to offer coverage to the employee’s spouse.

The final regulations state that “dependents” include biological children and adopted children. Step-children and foster children do not need to be covered. Coverage must be provided through the end of the month in which a child attains age 26. Generally speaking, if an employer subject to these rules fails to offer coverage to a full-time employee for any day of the calendar month, the employer is treated as not having been offered coverage during that entire month and could be subject to a penalty for that month.

Under these rules, a cautious employer must now embrace plan designs that continue coverage to dependent children until the last day of the month in which they attain age 26. If they do not, the failure to cover the dependent during the entire birthday month would result in a failure to provide dependent coverage at least for that dependent and at least for that month. There is a risk, however, that the IRS could consider the offer insufficient on its face for all employees because the coverage was not offered for all dependents through age 26. Although the IRS has not formally issued guidance on this point, I have heard at least one IRS official suggest in informal comments that the failure to provide coverage to the end of the month would be viewed as an inadequate offer of coverage.

If an employer does not offer at least some coverage to at least 95% of its full-time employees (70% for 2015), the employer is subject to a penalty equal to $2,000 multiplied by the number of full-time employees, less the first 30 employees, if any employee receives subsidized coverage on the exchange. If the failure to offer coverage to dependents through the end of the month in which the dependent attains age 26 is considered an inadequate offer of coverage, the employer could be subject to this large penalty even though it was offering coverage to many of its employees.

Minnesota law requires that coverage in place at the beginning of a month continue through the end of the month in which an event occurs that would result in loss of coverage. Therefore, any employer with a Minnesota insured policy will meet the requirement to continue coverage for a dependent through the end of the birthday month. Employers in other states and employers with self-funded plans may wish to rethink their plan design if at present they terminate coverage on a dependent’s 26th birthday.

For 2015, there are a number of transition rules for the pay or play regulation, some of which are discussed in my partner Jewelie Grape’s blog. Among those rules is one that allows employers who are taking steps in 2015 to add dependent coverage to avoid penalties if such coverage is not in place until 2016. Possibly this plan design glitch will be permitted in 2015 under the transition rule.

Employers whose coverage for dependents ends on the dependent’s birthday may wish to consider changing that design at least by the beginning of the 2016 plan year.

On March 19, 2014, a three judge panel of the United States Court of Appeals for the Eighth Circuit issued its decision in Tussey v. ABB, Inc., No. 12-2056 (8th Cir. Mar. 19, 2014).  The case came to the Eighth Circuit on an appeal of a decision by the United States District Court for the Western District of Missouri awarding participants in ABB, Inc.’s 401(k) Plan (the “Plan”) $13.4 million in damages related to the Plan’s fiduciaries’ failure to control the cost of recordkeeping services provided to the Plan and $21.8 million in damages for losses participants suffered as a result of a change in investments options offered under the Plan.  In addition, the District Court found the Plan’s recordkeeper (Fidelity) liable to Plan participants for $1.7 million  of lost float income, and ordered Fidelity and the fiduciaries of the Plan to pay more than $13.4 million in attorney fees and costs.  Despite the fact the Eighth Circuit upheld the $13.4 million judgment against the Plan fiduciaries for failure to control recordkeeping costs, many aspects of the Circuit Court’s ruling are favorable for plan sponsors – the appellate court recognized that the determinations of plan administrators are owed deference by courts, the $21.8 million judgment against the Plan fiduciaries was vacated, and the judgment against the Plan fiduciaries which was undisturbed was based on facts specific to the case.

First, the Eighth Circuit held when plans grant plan administrators discretion to interpret and construe the terms of the plan, courts must defer to the plan administrator’s interpretation or construction of the plan so long as it is reasonable.  Thus, the District Court in this case erred when it failed to grant any deference to the ABB Plan’s determinations regarding the Plan.  In reaching this conclusion, the Eighth Circuit rejected the claim of the Plan participants that courts only owe such deference to benefit claim determinations, and that courts should review other determinations de novo.  Instead, the Eighth Circuit joined the Ninth, Seventh, Sixth, Third, and Second Circuits, in holding deference to the determinations of plan administrators is not limited to benefit claims.  Having an additional circuit recognize that deference is owed to plan administrators for non-benefit claims should give plan administrators  more confidence the judicial system will respect their interpretations of their own plans.

Second, the Eighth Circuit vacated the District Court judgment and $21.8 million award against the Plan fiduciaries stemming from their decision to change the investment options offered under the Plan.  In 2000, the fiduciaries of the Plan decided to remove the Vanguard Wellington Fund as an investment option and replace it with Fidelity Freedom Funds.  The Plan fiduciaries accommodated those Plan participants with money in the Wellington Fund who had not specified an alternate investment for their balances by mapping funds held in the Wellington Fund to the age appropriate Freedom Funds.  Because the District Court opinion cited the fact that “between 2000 and 2008 the Wellington Fund outperformed the Freedom Funds,” when finding mapping of the funds breached a duty to the participants, the Plan fiduciaries argued the court’s analysis reflected “an improper hindsight bias” and an erroneous substitution of the court’s “own de novo . . . view of the ideal Plan investments. . . .”

The Court of Appeals concluded the Plan fiduciaries’ “points are well taken” and ruled that the reasonableness of the Plan’s investment choices must be determined based on analysis of what the Plan fiduciaries knew at the time the investment options were selected, and not the options’ subsequent performance.  Furthermore, the District Court failed to afford the Plan administrator’s interpretation of the Plan document in regards to investment options the appropriate amount of deference.  Because the Eighth Circuit could not determine if the District Court would have decided the Plan fiduciaries breached their duty if it applied the appropriate standard of review, it vacated the judgment on this claim and remanded the claim for further consideration.  A reminder to district courts that the prudence of investment decisions made by plan sponsors must be judged based only on the information available at the time of the decision, and not the subsequent performance of the investment, may help reduce the tendency of participants to litigate when investment returns fail to meet expectations.

Third, where the Eighth Circuit allowed the judgment against the Plan fiduciaries to stand, it did so because of the specific facts of the case.  The District Court found the Plan fiduciaries violated their duties “when they agreed to pay Fidelity an amount that exceeded market costs for Plan [recordkeeping] services in order to subsidize the [other] corporate services provided to ABB by Fidelity, such as ABB’s payroll and recordkeeping for ABB’s health and welfare plan and its defined benefit plan” and awarded Plan participants $13.4 million in damages based on this breach.  On appeal, the Plan fiduciaries argued the District Court finding on this point was in error because the District Court “‘implied that certain business arrangements, such as bundling of investment management and recordkeeping services through a single provider,’ were automatically improper.”  The Eighth Circuit rejected this interpretation of the District Court’s decision and instead concluded that the District Court’s determination that the Plan fiduciaries breached their duties to the Plan in regards to the recordkeeping fees Fidelity charged was amply supported by the record given that the Plan fiduciaries failed to take any action or make any investigation of the recordkeeping fees after Fidelity informed the Plan fiduciaries it provided other services to ABB for free or at below market cost and an outside consulting firm informed the Plan fiduciaries ABB was overpaying for recordkeeping services performed by Fidelity.  The existence of these facts explain the Eighth Circuit’s refusal to set aside the judgment against the Plan fiduciaries on this claim, and should also limit the precedential value of this case in situations where plan fiduciaries can show that they have adequately evaluated the recordkeeping fees the plan pays  and are not using amounts paid under a plan to subsidize other corporate expenses.

Thus, while the Eighth Circuit did ultimately uphold a $13.4 million judgment against the Plan fiduciaries, several elements of the opinion augur well for plan sponsors and employers.  Increasing judicial recognition of the respect that courts should pay a plan administrator’s reasonable interpretation of plan provisions and of the proper factors to consider when judging the prudence of investment selection may reduce the number of good faith decisions made by plan fiduciaries which become the subject of participant litigation.  In addition, the Tussey case should remind plan sponsors that simply hiring a market leader, such as Fidelity, is not sufficient in itself to discharge fiduciary duties.  Fiduciaries must scrutinize the actions of even reputable service providers and investigate information tending to show the plan is being overcharged.

Back in 2013 I blogged about an employer who was ordered to pay a COBRA penalty of $1,852,500 to a class of employees to whom timely COBRA notices had not been sent. That amount was equal to $2,500 per affected participant. I mentioned that the class would also be entitled to attorneys’ fees yet to be awarded. The court has now awarded those attorneys’ fees. The case had continued for nine years and the court approved rates ranging from $325 per hour for the lead counsel through $125 an hour for paralegals. Class counsel requested payment for more than 1,300 hours in total. Although some hours were disallowed, in all the court approved $302,780 in attorneys’ fees and $11,444.97 in costs. Thus, the employer’s failure to maintain good COBRA procedures and records cost in excess of $2,000,000. As I mentioned before, failing to maintain proper COBRA procedures can be expensive.

On February 12, 2014, the Treasury Department issued final regulations for the employer shared responsibility (“pay or play”) requirement under the Affordable Care Act (proposed regulations were issued in December of 2012). The regulations provide a large number of clarifications and transition relief – this article highlights several important transition relief provisions that employers should be aware of.

“Smaller” applicable large employers get an extra year before the employer mandate penalties apply. The pay or play regulations define “applicable large employer” as an employer who employed an average of at least 50 full-time equivalent employees on business days during the preceding calendar year. The final regulations delay the employer responsibility provisions for employers with 50-99 full-time equivalent employees until January 1, 2016. Employers with 100 or more full-time equivalent employees must comply with the employer responsibility provisions or pay a penalty starting on January 1, 2015. When determining if they have 100+ full-time equivalent employees for 2015, employers can use a shorter measurement period of at least six consecutive months in 2014 (instead of a year).

For “larger” applicable large employers, 70 is the new 95 until 2016. The proposed regulations required applicable large employers to offer coverage to “substantially all” (at least 95%) of their full-time employees and dependents, but in the final regulations this threshold is reduced for 2015. To avoid a penalty for failing to offer health coverage in 2015, such employers must offer coverage to at least 70% of their full-time employees and dependents. 95% of full-time employees and dependents must be offered coverage in 2016 and beyond. Please note that the part (b) penalty – the penalty for offering group health coverage that does not meet the affordability or minimum value requirements – still applies to employers with 100+ full-time equivalent employees in 2015, regardless of whether or not 70% of full-time employees have been offered group health coverage.

And 80 is the new 30 in 2015. Under the proposed regulations, the penalty for applicable large employers offering no group health coverage (as long as at least one full-time employee purchases coverage on an exchange and receives a subsidy) was $2,000 x the number of full-time employees, less the first 30. For 2015 only, the final rules provide that the penalty for employers offering no group health coverage to full-time employees will be $2,000 x the number of full-time employees, less the first 80.

Coverage for dependents – you get an extra year if you can show you are trying. The employer mandate requires applicable large employers to offer group health coverage to substantially all full-time employees and their dependents, or face a penalty. The requirement to offer coverage to dependents will not apply in 2015 if the employer can show it is taking steps to offer dependent coverage in 2016. The final rules also clarified that dependents do not include foster children and step children, and that dependent coverage must continue through the last day of the month that contains the dependent’s 26th birthday.

On February 26, 2014, the Internal Revenue Service published a final regulation clarifying the meaning of “substantial risk of forfeiture” under section 83 of the Internal Revenue Code.  The new guidance will help taxpayers who receive property, other than money, in exchange for services determine when they must recognize the difference between the fair market value of the property and the price, if any, they pay for the property as income for tax purposes.

Generally, section 83 is intended to allow service providers who have received an uncertain and unalienable property interest in exchange for services to delay recognition of the value of the property (in excess of what the service provider paid for the property) until it is clear the service provider will, in fact, receive some benefit from owning the property.  Thus, under section 83, the difference between the fair market value of the property and what the service provider paid for it is not includable in the service provider’s income until the property is either no longer subject to a substantial risk of forfeiture or not subject to transfer restriction (i.e. is freely alienable).[i]  In the new regulation, the IRS elaborates on when property is subject to a substantial risk of forfeiture.

First, the Service explains, except in limited circumstances, property is only subject to a substantial risk of forfeiture when the transfer of property is subject to a service condition, meaning the service provider’s right to the property only vests upon the performance (or restraint from performance) of services in the future, or the property interest is subject to a condition related to the purpose of the transfer; for example, the recipient of the service maintains a certain level of revenue in the future.  Not only must the service provider’s property interest be subject to a service condition or condition related to the purpose of the transfer for the property interest to be subject to a substantial risk of forfeiture, but the facts and circumstances at the time of the property transfer must establish the likelihood that the condition leading to forfeiture will occur, and that the service recipient is likely to enforce the forfeiture.

Second, the new guidance states that restrictions on the transfer of property alone cannot make that property subject to a substantial risk of forfeiture.  Thus, service providers who receive property subject to onerous transfer restrictions cannot defer recognition of taxable income from receipt of the property unless the property is also subject to a service condition or a condition related to the purpose of the transfer.  This is the case even if violating the transfer restriction results in the service provider losing the property.  The new regulation does, however, grant two exceptions to this rule by providing that if sale of the property at a profit would open the service provider to a suit under section 16(b) of the Securities Exchange Act of 1934, the property is treated as if it is subject to a substantial risk of forfeiture for the period such a sale could result in a section 16(b) suit; and that property subject to a restriction on transfer to comply with the “Pooling-of-Interests Accounting” rules (the so-called “lock-up” period after certain acquisitions or an IPO) is also considered subject to a substantial risk of forfeiture.

The new regulation applies to any property transferred after January 1, 2013.

[i] A service provider may, however, elect to include the difference between the price it paid for the property and its fair market value in its income when it receives the property, in accordance with section 83(b).

The Department of Labor recently issued the Form M-1, an annual report that must be filed by Multiple Employer Welfare Arrangements (MEWAs). In general, a MEWA is an arrangement that offers health or other welfare benefits to employees of more than one employer. Employers that are part of a controlled group of businesses are treated as a single employer for these purposes.

MEWAs must file both the Form M-1 and a Form 5500. The due date for the M-1 is March 1 following the calendar year for which the filing is required. Because March 1, 2014 is a Saturday, the due date for 2014 is March 3, 2014. Extensions of time may be available.

Most of the employers that we represent do not participate in MEWAs and are not required to file the Form M-1. However, the form contains a good self compliance tool on certain provisions of ERISA, including

• HIPAA portability compliance

• pre-existing conditions limitations

• certificates of creditable coverage

• special enrollment rights

• nondiscrimination based on health status

• the Mental Health Parity Act

• the Newborns and Mothers Act

• the Women’s Health and Cancer Rights Act

• the Genetic Information Nondiscrimination Act (GINA)

• Michelle’s Law

• various Affordable Care Act (health care reform) requirements

Although single employer plans do not need to file the M-1, they do need to comply with these laws. The self-compliance tool can be a helpful check to make sure that employer plans meet required standards.