Cycle D 2008 Cumulative List of Changes for ERISA Qualified Plans Available

December 9th, 2008

The Internal Revenue Service (IRS) released Notice 2008-108, which contains the 2008 Cumulative List of Changes in Plan Qualification Requirements.  According to the IRS, this list is principally to be used by plan sponsors of individually designed plans which are considered Cycle D plans.  Generally, a plan is considered a Cycle D plan if the plan sponsor’s EIN ends in either 4 or 9, or if it is a multiemployer plan under §414(f).

According to the Notice, the IRS will begin accepting determination letter applications for Cycle D plans on February 1, 2009.  The submission period for Cycle D plans will end on January 31, 2010.

Notice 2008-108 contains information for plan sponsors about specifically identified plan issues that should be reviewed in determining whether a plan has been properly updated for recent law changes.  Information on legal updates contained in the 2008 Cumulative list includes the:

  • Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
  • Pension Funding Equity Act of 2004 (PFEA)
  • American Jobs Creation Act of 2004 (AJCA)
  • Katrina Emergency Tax Relief Act of 2005 (KETRA)
  • Gulf Opportunity Zone Act of 2005 (GOZA)
  • Pension Protection Act of 2006 (PPA)
  • U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007

According to the IRS, the 2008 Cumulative List does not include any guidance issued after October 1, 2008; any statutes enacted after October 1, 2008; any qualification requirements first effective in 2010 or later; or any statutory provisions that are first effective in 2009 for which there is no guidance identified in the Notice.  If a Cycle D plan submission for determination includes updates based on these excluded items, the IRS will not consider those updates in its determination letter review.  However, in order to be considered qualified by the IRS, a plan must comply with all relevant requirements, whether or not they are reflected in the 2008 Cumulative List.

The Notice also provides special rules for the PPA and the Heroes Earnings Assistance and Relief Act of 2008 (HEART).  Cycle D plans must be amended to include applicable PPA provisions.  However, Cycle D plans, whose first plan year beginning after January 1, 2009 ends on or after February 1, 2010, may defer submission of its plan until Cycle E, provided the Cycle E application is filed timely.  The plan will then be treated as a Cycle E plan only for the initial cycle and all subsequent filings would be made in Cycle D.

Cycle D plans may include HEART Act provisions but the IRS will not consider these updates in issuing determination letters for Cycle D plans.  However, since §107(a) of the HEART Act extends the applicability of qualified reservist distributions to participants ordered or called to duty after December 31, 2007, the IRS will treat an amendment for this HEART provision as if it were included in §1107 of the PPA.

Cycle D plan sponsors should have benefits counsel carefully review their qualified plans to determine what legal changes are required for their plans and which discretionary changes are desired.  For additional information or assistance, contact our office.

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Mergers and Acquisitions – Don’t Ignore ERISA Employee Benefit Plans

November 18th, 2008

Generally, there are two different ways that companies can grow their existing businesses – 1) obtaining new customers (organic growth) or 2) merging with or acquiring another company.  Many companies attempt to grow through mergers and acquisitions (“M&A”) as it can allow for the rapid growth of a company’s client base and/or business capabilities.  However, M&As can pose numerous legal challenges to businesses.  One of the most often overlooked area in any M&A deal is employee benefits plans.

During a M&A deal, companies generally perform due diligence across all areas of the target company to identify issues that need to be addressed during the negotiation phase of the deal.  If employee benefits plans are not included in this due diligence, an acquiring company can discover that it has inadvertently become the owner of significant employee benefits plan problems.  While problems that arise in the area of employee benefits plans do not generally become “deal breakers”, ensuring that any and all benefits issues are identified and addressed before the final agreement is signed can avoid major headaches in the future.

Benefit plan issues can vary depending on the type of deal that is being contemplated – either an asset purchase or a stock purchase.  In an asset purchase, the due diligence required for employee benefits plans could be reduced if the agreement does not include the buyer assuming liability for employee benefit plans.  However, even in that situation, due diligence on the benefit plans should still be conducted to ensure that the buyer has a complete picture of the seller’s business.

In a stock purchase deal, or in an asset purchase deal where the buyer is assuming liability for benefit plans, the buyer needs to ensure that significant due diligence is conducted on the existing benefit plans.  Generally, this due diligence should include:

  • Identifying all employee benefit plans, programs and practices currently in existence – both formal written plans and informal, unwritten plans.
  • Obtaining all pertinent documents for each plan identified (e.g., plan documents, summary plan descriptions, Form 5500s, annual nondiscrimination testing and audits, determination letters, third party administrator contracts).
  • Reviewing all documentation to ensure the plans are currently compliant with applicable laws and looking for potential problem areas (e.g., accelerated vesting on change of control, unfunded liabilities, funding arrangements for nonqualified deferred compensation plans).
  • Requesting disclosure on currently pending or threatened claims based on benefit plans and on whether any governmental audits have been commenced or are pending.
  • Identifying potential problems to be addressed during negotiation of the deal.

As stated earlier, issues identified during the due diligence process for employee benefits plans are generally not severe enough to stop a deal from closing.  However, if properly addressed during the negotiation phase, they can be factored in with all the other components in the decision making process.  Where these issues are not properly addressed, they can become a significant concern for the buyer after the deal has completed. 

Benefits counsel can assist in completing comprehensive due diligence of a target company’s benefit plans to ensure that the acquiring company does not get blind-sided by benefit issues in the future.  Please contact our office for additional information or to talk to an attorney about your particular situation.

The ERISA and Non-ERISA Employee Benefit Implications of the Emergency Economic Stabilization Act of 2008

October 27th, 2008

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (EESA).  While most people are familiar with the “bailout” provisions applicable to the financial industry that are contained in the statute, many are not aware that it also contained numerous other provisions unrelated to the economic bailout.  Several of those other provisions are applicable to various employee benefit plans.

One of the most significant benefit provisions contained in the EESA is the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008.  Effective January 1, 2009, this act makes permanent the 1996 mental health parity provisions.  Additionally, it also makes certain enhancements to existing mental health parity provisions, including:

  • Requiring plans that provide mental health benefits to extend those benefits to substance abuse-related problems.
  • Mandating that the cost-sharing requirements for mental health and substance abuse benefits (such as deductibles, co-insurance, and out-of-pocket costs) may not be more restrictive than the cost-sharing requirements applicable to medical and surgical benefits.
  • Mandating that the benefits limitations requirements for mental health and substance abuse benefits (such as number of visits and maximum days covered) may not be more restrictive than the cost-sharing requirements applicable to medical and surgical benefits and there may not be separate limits for treatment applicable only to mental health and substance abuse benefits.
  • Mandating that participants can receive benefits for mental health and substance abuse treatments received out-of-network if out-of-network treatment is allowed for medical and surgical benefits under the plan.
  • Requiring Plan’s to furnish participants with the criteria used to determine medical necessity and the reason for denial of benefits for mental health and substance abuse claims.

The enhancements are generally effective for plan years beginning one year after October 3, 2009.  However, small employers (less than 50 employees) are excluded from the enhanced provisions.

Other provisions contained in the EESA that can impact employee benefit plans are detailed below:

  • The statute requires that any financial institution that directly sells troubled assets under the EESA, the financial institution must meet certain standards for executive compensation and corporate governance, including limits on compensation, recovery of bonus or incentive compensation, and prohibitions on certain “golden parachute” payments.
  • The statute details for applicable employers that participate in the Troubled Assets Relief Program (TARP), an amendment of the Internal Revenue Code (IRC) §162(m) and a denial of a tax deduction for the payment of compensation or other benefits in excess of $500,000 to executives or other highly compensated employees. The EESA also amends IRC §280G to apply the tax penalties for excess parachute payments to certain employers and their executives who participate in TARP.
  • The statute updates IRC §132(f) to allow employees to exclude employer reimbursements for bicycle commuting expenses from gross income.
  • The statute requires that “nonqualified entities” include in gross income for income tax purposes the employee compensation deferred under a nonqualified deferred compensation plan when there is no substantial risk of forfeiture of the rights to such compensation. A “nonqualified entity” is defined as any foreign corporation unless substantially all of its income is: (1) effectively connected with a trade or business in the U.S.; or (2) subject to a comprehensive foreign income tax.

Employers should consult with benefits counsel to decide whether any of the benefit-related provisions contained in EESA are applicable to their benefits programs.  Please contact our office for more information on the EESA and its benefit plan implications.

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Discrimination Claims Under ERISA

October 13th, 2008

Most employers are aware of the common “discrimination” claims brought by employees or former employees like gender, race, disability, and age.  However, there is another not so well-known anti-discrimination/retaliation claim under the Employee Retirement Income Security Act (ERISA) that is becoming more and more prevalent.

ERISA §510 states that “It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan . . . or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan”.  This provision provides protection to employees from adverse action by an employer in order to interfere with the attainment of rights under ERISA or in order to stop a participant from availing himself/herself of rights under ERISA.

Historically, ERISA §510 claims have been most often asserted in relation to retirement/pension plans.  However, recent cases have been brought under ERISA §510 in relation to health and welfare plans.  Claims for ERISA §510 violations occur most often when an employer has terminated an employee, and the employee claims that the termination was in anticipation of the employee making a claim under a benefit plan or becoming eligible for benefits under a benefits plan.

A recent case, Rodrigues v. The Scotts Co., LLC., involved an employer who had a company policy that prohibited its employees from smoking at any time.  One employee was terminated shortly after being hired after he tested positive for nicotine.  The employee brought several causes of action against the employer, one of which was a claim of an ERISA §510 violation.  The employer moved to dismiss the claim, but the district court denied the motion and allowed the case to proceed, stating that the key inquiry is whether the employment action was taken with the specific intent of interference with the right to a benefit.

In order for an employee to prevail under a claim of an ERISA §510 violation, he/she must prove that the employer’s adverse employment action was taken with the specific intent to interfere with the employee’s rights or benefits under an ERISA plan.  This means that the loss of benefits was the motivating factor behind the adverse employment action, not merely a consequence of the action.  As with other employment discrimination causes of action, if the employee can make an initial showing of a prima facie case for intentional interference, then the employer must prove that there was a legitimate, non-discriminatory basis for their action.  If the employer succeeds, then the employee is then required to offer proof that the employer’s legitimate, non-discriminatory reason is a mere pretext.  Because the requirements to maintain an ERISA §510 action mirror many other employment discrimination causes of action, they are often brought in conjunction with other causes of action.

As companies continue to explore ways to decrease their operational expenses, benefit costs may seem to be an easy area in which to realize cost savings.  However, employers need to be cautious in the criteria used for making benefit reduction decisions.  ERISA § 510 claims seem to go hand-in-hand with employment discrimination claims such as age discrimination.  Before making any decisions about reducing benefits costs, employer should consult with benefits counsel to ensure that any actions taken aren’t in violation of ERISA.

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Correcting ERISA 401(k) Plan Failures When Employee Contributions Are Not Remitted in a Timely Manner

September 22nd, 2008

Both the Internal Revenue Service (IRS) and Department of Labor (DOL) require that employee contributions are remitted in a timely manner.  Current IRS regulations mandate that employee 401(k) contributions must be remitted to the employer sponsored plan as soon as they can be reasonably segregated from the plan sponsor assets.  The regulations specify that they must be made no later than 15th business day of the month following the month in which the amounts are withheld from wages or received by the employer.  Additionally, the IRS has proposed a safe harbor for small plans – those with less than 100 participants – that these plans can comply with currently.

While some may interpret the regulation as a safe harbor limit, in practice, the key words in the regulation are that the monies must be remitted “as soon as they can reasonably be segregated”.  This means that if the funds can be segregated within a shorter period than the outside limit – for example, within a few days of the date of payroll – the funds must be remitted by this shorter time.

If contributions are not remitted in a timely manner, the failure could be held to be a prohibited transaction, a fiduciary breach or both.  There are significant penalties for both of these violations and, if there is a breach of fiduciary duty, then the plan’s fiduciary could be held personally liable.  Prohibited transactions, which can include a delay in the deposit of employee deferrals, continue until corrected by the plan sponsor.

Both the IRS and DOL have self-correction programs which can be followed to correct many qualification and fiduciary violations, including violations associated with the late remittance of retirement contributions.  In order to correct an issue with timely remittance of employee contributions, the voluntary compliance programs generally require that the plan sponsor make the participant whole by depositing the outstanding contributions as well as any lost earnings/interest or restoration of profit applicable during the time the employer held the participants’ funds.

The DOL has an online calculator that can be used to assist with this process.  An employer enters the required information into the calculator, which then performs the interest calculations and provides the plan sponsor with the amount of interest and/or lost profit due based on the greater of the two options. The online calculator uses the Internal Revenue Code (IRC) 6621(a)(2) underpayment rate for calculating interest owed and the IRC 6621(c)(1) underpayment rate for calculating restoration of profits.  The IRC underpayment rate is the sum of the federal short-term rate plus 3 percentage points.  The federal short-term rate changes quarterly, so the interest percentage used under this method will probably change every quarter contributions are delayed.

The IRS has recently indicated that, although full restoration is generally required, reasonable estimates of restoration amounts may be used when it is not feasible to obtain actual investment results.  If it is either (1) possible to precisely calculate the actual investment results but the difference between the estimate and the actual is insignificant and the administrative cost to determine the actual investment results would significant exceed the probable difference; or (2) it is not possible to determine actual investment results, then the DOL’s online calculator rates will be accepted by the IRS as a reasonable interest estimate.

Timely remittance of employee 401(k) funds is a process of which every fiduciary should be aware.  Additionally, fiduciaries and employers who use the 15th business day of the month following pay dates as a safe harbor need to take a close look at how payroll deductions are transmitted to determine reasonable segregation dates for their particular circumstances and take action to deposit the deferrals into plans on a more timely basis.

Where there have been violations, employers should consult with benefits counsel to understand the steps that will need to be taken to analyze which self-correction program is right for their individual situation and to ensure that all necessary steps of the program are taken.  Please contact our office for more information.

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