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IRS Announces Cost of Living Adjustments for Qualified Retirement Plans

Posted in Plan Administration, Retirement Plans

Susan Jordan, my partner in Pittsburgh, propvides me with the following:

In a news release (IR-2014-99) on October 23, 2014, the IRS announced the cost-of-living adjustments to the various dollar limitations applicable to qualified retirement plans for 2015.  As had been widely predicted, most of the limitations have been increased.

1.         LIMIT ON COMPENSATION:  The maximum amount of compensation that may be counted for plan purposes for plan years beginning in 2015 is $265,000, up $5,000 from the $260,000 limitation applicable in 2014.  This limitation applies for calendar year 2015 and for limitation years beginning in 2015.

2.         LIMITS ON CONTRIBUTIONS AND BENEFITS.  The maximum limit on annual additions to a defined contribution plan is increased from $52,000 to $53,000. However, the maximum annual benefit which may be accrued under a defined benefit plan remains unchanged at $210,000.  These limitations are applicable for calendar year 2015 and for limitation years ending within 2015.

3.         401(k) and 403(b) DEFERRAL LIMIT.  For purposes of 401(k) and 403(b) plans, the maximum limitation on voluntary salary deferrals is increased for calendar year 2015 from $17,500 to $18,000, and the limit on catch-up deferrals by those age 50 or older, which had been fixed for the last six years at $5,500, is bumped up to $6,000.

4.         IDENTIFICATION OF HIGHLY COMPENSATED AND KEY EMPLOYEES.   Effective for plan years beginning in 2015, a Highly Compensated Employee is any employee who (a) was a 5% owner during the current or preceding year, or (b) who received compensation from the employer during the preceding year in excess of $120,000. This compensation threshold had been set at $115,000 since  2012.  The dollar limit used to define a key employee in a top heavy plan under IRC Section 416(i)(1)(A)(i), however, remains unchanged at $170,000.

5.         SEP THRESHOLDThe compensation minimum for which coverage is required for a simplified employee pension plan (SEP) is increased from  $550 to $600.

6.         TAXABLE WAGE BASE.  As announced by the Social Security Administration on October 22, 2014,  the Social Security taxable wage base for 2015 will be $118,500, an increase of just 1.28% from $117,000 which was the wage base for 2014.  For plan years which operate on a fiscal year basis, this wage base will be effective for plan years beginning in 2015.

*   *   *  *   *   *   *   *   *

We frequently are asked to provide the contribution formula needed to maximize contributions for an individual with compensation at or above the maximum limit.  The following have been calculated based on the new wage base and these cost-of-living adjustments:

For a calendar year profit sharing plan integrated at the Social Security wage base, the contribution formula needed to achieve the maximum permissible allocation for an individual with compensation of $265,000 or more is:

16.84886% up to $118,500, plus 22.54886% in excess of $118,500 (up to $265,000)

For a calendar year 401(k) plan integrated at the Social Security wage base and using the 3% safe harbor design, the profit sharing contribution formula which, in the aggregate (with a $18,000 deferral and $7,950 safe harbor contribution), will achieve the  maximum permissible allocation for an individual with compensation of $265,000 or more is:

7.05641% up to $118,500, plus 12.75641% in excess of $118,500 (up to $265,000)

To Have an Expert or Not: A Fiduciary’s Quandary

Posted in Plan Administration, Retirement Plans, Welfare Plans

I am working on some cases now that involve allegations of misuse of an expert by a fiduciary of a benefit plan.  Consequently, I have been reading a lot of articles and cases relating to the fiduciary duty and expert advice.  As a result, I can see where fiduciaries could have a real question about their duty to retain experts and the restrictions on relaying on expert advice.

Generally, the only real requirement for someone to act as a fiduciary of a benefit plan under ERISA is that they be a “reasonably prudent person” and that they act with diligence and due care.  That is the essence of ERISA Section 404.  However, Section 404 includes that the measurement of care is based on a reasonable person “familiar with such matters.”  Thus, the law recognizes that someone could possibly have to look outside of their own knowledge in order to be acting reasonably.  But it is not automatically required.  Again, the standard is one of reasonable prudence, so a fiduciary is not required to substitute their own knowledge for that of another if the fiduciary has a certain skill.

What this means is that the process of selecting and relying on an expert requires a fiduciary to go deeper than simply selecting someone who claims to know more than the fiduciary.  Assuming the fiduciary determines that a reasonably prudent person would seek outside advice, the fiduciary then has to determine from whom the advice should be sought.  The due diligence of investigating and selecting someone who does in fact have an expertise defines whether a fiduciary can rely on the advice.  Simply put, you can’t rely on an expert if you have not first determined them to be an expert and that is only done through investigating their qualifications.

Assuming a fiduciary has diligently selected an expert, the next question is whether the fiduciary can rely on the advice given.  In order to do that, the trustee has to reasonably understand the advice given.  In other words, the fiduciary has to demonstrate that they understood what the expert has opined and why.  How and why are the important questions…why did you reach this conclusion and how did you get there?  Fiduciaries have to show the understood the rationale, not just the recommended action.

This last part creates the quandary because sometimes it can be reasonable to reject expert advice.  A fiduciary is not always required to replace their own knowledge and skill with that of an “expert.”  A fiduciary should recognize that they have the duty to act and they will be judged on those actions, not the expert.  So a fiduciary who does not agree with the rationale provided by the outside expert should not blindly agree to an action simply because the advice came from an expert.  This is not to suggest that expert advice should be easily rejected or ignored.  But expert advice does not replace the knowledge and skill of the reasonable fiduciary.

Having experts is not a bad thing.  And relying on experts is generally good when it is a topic about which a fiduciary has no knowledge.  But don’t assume that using an expert will be an insulator from any claim for breach of duty.  It only helps if it is truly an area where an expert is needed, they were properly selected and you understand their advice.

It’s Not Easy Having Plans: Revising Benefits Can Give Rise to Other Claims

Posted in Plan Administration, Retirement Plans, Welfare Plans

As employers continue preparing for health plan changes that take place in 2015 under the ACA, I have been following a number of developments that remind me of the importance of thinking globally with respect to revisions to benefits.  What I mean by that is just because you can do something does not necessarily mean you should do something because of the breadth of other laws that impact employers beyond ERISA and the ACA.

Earlier this week, a number of news outlets reported how some companies were adding “egg freezing” benefits to their health plan fertility coverage.  The health plans cover the cost of female employees who want to cryogenically preserve eggs to be used to have children.  In one quote I read, it suggested that this would allow women more opportunity to wait to have children until after their career has matured.  But a concern with this type of benefit is that the company is sending a message that if you have children when you are younger, the company sees you as being not career oriented.  Women who chose not to take advantage of the benefit might feel discriminated against if they are not promoted as quickly.  So the risk for these companies is that women who decide to have children can make claims for discrimination.

Wellness plans have to be carefully considered as well.  Recently, the EEOC announced that it had filed two suits against employers under the ADA by requiring employees to submit to medical examinations and inquiries that “were neither job-related nor consistent with business necessity.”  The EEOC contended that these programs were not voluntary and thus violated the ADA.  Since the EEOC has not yet issued guidance on how employers may structure their wellness programs to avoid violations of the ADA, this leaves employers up in the air over whether their “voluntary” wellness programs, while permissible under the ACA, will run afoul of the EEOC.

Finally, I saw a notice at AT&T is terminating its retiree medical and replacing it with an HRA.  AT&T anticipates this will help them control costs associated with their medical plan.  As someone who has defended employers in class action litigation brought by retirees for terminating medical coverage, I can say for certain that while it may be permissible to make that change, the process for doing it properly requires much more than just announcing change and implementing the new plan.  Careful consideration has to be given to each phase of the process.  I am not suggesting AT&T has not followed the appropriate procedure, but merely suggesting that making a change like this is a much longer and more involved process than a new notice might reveal.

The point being that while employers are diligently seeking ways to manage ACA compliance and health benefits costs, they should not lose sight of the adage that just because you can do something does not mean you should do it.  Any change to a benefit plan comes with some risk and it has to be fully evaluated before the change is made.  The more an employer considers potential risks, the less likely there are to get bad press.

Locating Missing Particiants, Or at Least Trying To

Posted in Plan Administration, Retirement Plans, Welfare Plans

One of the most frustrating things about benefit plans is that they have participants, participants are people and people sometimes disappear.  It is unfortunately a fact of plan administration and it can be a problem.  Plan sponsors, and administrators sometimes need to locate missing participants or beneficiaries for things like notice, distributions or even corrective actions being taken by the plan.

Consider Section 6.02(5)(d) of Revenue Procedure 2013-12:

“(d) Locating lost participants. (i) Reasonable actions must be taken to find all current and former participants and beneficiaries to whom additional benefits are due, but who have not been located after a mailing to the last known address. In general, such actions include, but are not limited to, a mailing to the individual’s last known address using certified mail, and, if that is unsuccessful, an additional search method, such as the use of the Social Security letter forwarding program, a commercial locator service, a credit reporting agency, or Internet search tools. Depending on the facts and circumstances, the use of more than one of these additional search methods may be appropriate. A plan will not be considered to have failed to correct a failure due to the inability to locate an individual if reasonable actions to locate the individual have been undertaken in accordance with this paragraph; provided that, if the individual is later located, the additional benefits are provided to the individual at that time.”

It used to be that the IRS would help, but it eliminated its letter-forwarding services to help locate missing plan participants. See Revenue Procedure 2012-35.  Instead, the IRS suggests using commercial locator services, credit reporting agencies or internet search tools.  In Field Assistance Bulletin No. 2014-01, the DOL lists the following search methods as the minimum steps the fiduciary of a terminated defined contribution plan must take to locate a participant:

  • Send a notice using certified mail
  • Check the records of the employer or any related plans of the employer
  • Send an inquiry to the designated beneficiary of the missing participant
  • Use free electronic search tools

DOL Field Assistance Bulletin 2004-02 provides guidance on locating missing participants in defined contribution plans.  It gives search methods and default treatment of account balances for participants you can’t find, but the options look a lot like with the IRS already suggests.  In any event, there will have to be a showing of the good faith efforts used to locate a missing participant, so keep a record of what effeorts were made.

It might be worthwhile for a plan to consider adopting certain administrative guidelines for dealing with participants that cannot be located.  For example, if participant consent is required to change administrators (such as in an employee stock plan or some other retirement plan), consider inserting a provision in the plan that provides that if consent is not denied within 30 days from the notice date, it will be deemed accepted.  Or perhaps inserting specific language that obligates the participant to provide the plan with current contact information with the understanding that the plan will rely on that information as current unless told otherwise.

But unfortunately there is no easy answer except to try and find them using suggested resources.  The good news is that if you show that you use them, you will have a stronger defense to a charge that you failed to find interested people.

Who’s in Control? Determining Control Group Status is Important

Posted in Plan Administration, Retirement Plans, Welfare Plans, Withdrawal Liability

The existence of a “control group” is important in a variety of benefit concerns.  From retirement plans to welfare plan, and particularly in withdrawal liability matters, establishing whether companies are under common control is very important.  Under the ACA, it matters for determining whether you are an applicable large employer so as we get closer to that January 1, 2015, deadline, lets revisit control group rules.

Basically there are two types of control groups.  The first is a parent-subsidiary control group.  In this relationship, 80 percent of the stock of each corporation, (except the common parent) is owned by one or more corporations in the group; and the parent corporation must own 80 percent of at least one other corporation.  The second type is a brother-sister control group.  It is a little more complex.  A brother-sister controlled group is a group of two or more corporations in which five or fewer common owners own directly or indirectly a controlling interest of each group and have “effective control”.  The first part, the controlling interest, means that the group holds 80 percent or more of the stock of each corporation (but only if such common owner own stock in each corporation).  Effective control means more than 50 percent of the stock of each corporation, but only to the extent such stock ownership is identical with respect to such corporation.

Confused yet?  Well you also have to consider the definition of person that includes, amongst other things, estates and beneficiaries of trusts.  You also have to consider the attribution rues in Section 1563 of the Code because ownership between spouses, children and even adult children can be attributed to other owners depending on the circumstances.  So it is not just a function of who owns what, but also how the owners are related to each other.

All of this is relevant because in many instances, the IRS and DOL measure compliance by control group, not simply by individual employer.  Moreover, there are many situations in the benefits arena where liability for wrongdoing flows to the entire control group, not just one member.  Commonality of ownership can cause common responsibility.

Remember that being part of a control group is not in and of itself a bad thing.  But make sure you know whether or not your company is part of one.  It can have a substantial impact on benefit related decisions, so make sure to figure out who is in control.  For assistance in determining whether you are part of a control group, you can always seek assistance from your attorneys at Fox Rothschild.

The Latest on Cafeteria Plan Elections: Changes that Allow Changes

Posted in Plan Administration, Welfare Plans

What happens if an employee wants to drop out of the company plan and get into the exchange?  Seems like an option except the cafeteria plan rules prevent someone from making a mid-year change in their cafeteria plan election.  Along comes the IRS with Notice 2014-55.  This notice addresses situations in which individuals can change their health coverage elections under a Section 125 cafeteria plan and expands the options available.  This is a step toward final rules that should be consistent with this notice, but this guidance provides for immediate remedies.

Generally, a cafeteria plan participant can’t change elections mid-year, with certain specific exceptions that the plan can permit.  These exceptions did not include any reference to exchanges until now.  Now a plan can provide for revocations in two situations directly related to participation in the exchanges.  Specifically, an employee may revoke a cafeteria plan election if:

  • The employee has a reduction of hours that will drop them below 30 hours per week average but they still remain eligible for company coverage; or
  • The employee wants to drop employer coverage and purchase coverage through the exchange without having a period of either duplicate coverage or no coverage.

This is now permissible so long as:

  • The cafeteria plan is not a health FSA; and
  • It provides minimum essential coverage.

Note that the revocation cannot be retroactive.

What this means is that if an employee has a change in employment during a stability period that results in a reduction in hours but does not eliminate eligibility for coverage, that employee may elect to revoke the cafeteria plan election and go into the exchange.  Also, a cafeteria plan may allow an employee to revoke an election of coverage under a group health if the employee is eligible for special enrollment in an exchange plan OR the he intends to enroll in the exchange during an open enrollment period AND the revocation of the election of coverage under the group health plan corresponds to the intended enrollment of the employee in the exchange.

But it is not automatic.  The plan has to be amended to permit these election changes.  So if you want to provide the option to revoke participation in the cafeteria plan to allow employees to opt out and get into the exchange, review this notice with your benefit professionals and take appropriate action.

Is it Time for Checkup for Your 401(k) Plan?

Posted in Plan Administration, Retirement Plans

As we approach the end of the plan year for most plans, now is a good time for plan administrators and plan sponsors to give their 401(k) plans a quick once over to see if everything is properly in place.  The IRS even provides a 401(k) plan checklist with some suggested corrective mechanisms that can be taken to bring plans into compliance.

A good starting place for a compliance tune up is to see if you can answer some basic questions about your plan:

  1.         Who are the trustees?
  2.         Who is the plan administrator?
  3.         Who are the outside service providers and how often are they contacted?
  4.         What are the plan’s eligibility rules and who is responsible for verifying them?
  5.         How are participants notified of eligibility?
  6.         How is plan documentation distributed?
  7.         Where are the plan records kept?
  8.         Who is responsible for preparing and filing the form 5500?

After you get past these, some basic questions about plan administration come into play:

  1.            Who keeps track of contributions and limits?
  2.            How does the plan define “Compensation”?
  3.            What is the vesting schedule?
  4.            Are there required contributions from the employer?
  5.            Who is responsible for the discrimination testing?
  6.            Does the plan permit loans and how are they tracked?
  7.            Who is responsible for reporting to participants?
  8.            How are distributions made and who is the contact person?

The reason I bring this topic up is that I was recently working with a client who had one person who was solely responsible for benefit administration.  Unfortunately that person passed away suddenly and no other person in the organization could answer any questions about the 401(k) plan.  Although it seems like the above information is simple to collect, the company still spent hours and hours recreating the plan history because they neglected to keep a record of how the answers to these questions had changed over the years.

Think of your 401(k) plan as a well maintained car.  It needs a check up on a regular basis to keep running smoothly.  You have to keep records of what was done and you have to know where the important information is if you need it.  Just like your car, you hope your 401(k) plan never breaks down.  But in anticipation of a future problem, it is worthwhile to stop and make a record of the responsibility for plan administration and the current status of the plan.  That way it will be easier to make repairs if they ever become needed.

The Case of the Accidental Fiduciary: When a Signature is More Than Just a Name

Posted in Court Cases, Plan Administration

The issue of fiduciary status is often cumbersome because while a fiduciary can be directly named by a plan, someone can also be deemed to be a fiduciary by virtue of having discretionary authority, or even by exercising some discretionary authority through plan administration.  Consider the case of Perez v. Geopharma, a case from the Middle District of Florida brought by the US Department of Labor.

Before reading further, consider that this decision is only on a motion to dismiss; this is hardly a definitive decision relating to what it takes to become a fiduciary.  However, the ruling from the Court does seem to suggest that at least some argument can be made that company officers could be liable for fiduciary breaches unless they can demonstrate that they did not control plan assets.  Therefore, it might be worthwhile for employers as plan sponsors to actually formally separating plan assets limit the signatory authority on those accounts to people actually intended to be plan fiduciaries.  Here is why:

In bringing the case, the DOL is looking to hold the company and three corporate officers, including the CEO jointly and severally liable for alleged breaches of fiduciary duty.  The nature of the breaches is not as important as the fact that the DOL is arguing that the officers of the company are co-fiduciaries and thus liable for each other’s actions under 29 U.S.C. § 1105.  The CEO brought a motion to dismiss the Complaint arguing that he was not named as a plan fiduciary and that his general signature authority over the company’s bank accounts was not enough to trigger ERISA’s fiduciary responsibilities because he did not really exercise discretionary authority. The DOL countered that because the officers were signatory to the company’s bank accounts, they had a fiduciary duty to monitor the plan’s other fiduciaries, as well as the company’s management and administration of the plan.  Since there was not a bank account segregated for plan assets, signing authority on the company account was enough.

The Court denied the motion to dismiss, finding that signature authority made him a plan fiduciary because ERISA provides, in part, that someone can become a fiduciary by exercising ANY authority or control over the management or disposition of plan assets, even without having “discretion.”  At this stage (the Motion to Dismiss), the Court declined to consider whether discretion was an ERISA fiduciary requirement at this stage, but suggest that at least one other court (the 11th Circuit) for the proposition that actual discretionary authority was required to obtain fiduciary status.  So for now, check signing authority was enough to state a claim.

Since this decision is only a motion to dismiss, this is hardly a definitive decision relating to what it takes to become a fiduciary.  However, it does suggest that at least some argument can be made that company officers could be liable for fiduciary breaches unless they can demonstrate that they did not control plan assets.  Therefore, it might be worthwhile for employers as plan sponsors to actually formally separating plan assets limit the signatory authority on those accounts to people actually intended to be plan fiduciaries.

So are separate accounts and separate signing authority required?  Maybe and maybe not.  But if the DOL used the single signatory theory as a basis to bring the case, companies that sponsor plans should consider the possibility that separate accounts might be worthwhile for litigation avoidance.

Draft Instructions for PPACA Reporting Requirements: Get Ready for 2015

Posted in Plan Administration, Welfare Plans

They promised they would be coming and now they have.  On August 28, 2014, the IRS issued draft instructions for Forms 1094-C and 1095-C and Forms 1094-B and 1095-B, which I provided in my July 31, 2014 entry.  These forms were provided in draft format and they are used to satisfy PPACA’s “information reporting requirements.” We also got draft instructions for Form 1095-A that relates to the statement about the Health Insurance Exchange Marketplace.  The IRS has indicated that it will finalize the forms and instructions in 2014.  On top of that, they issued some FAQs that address the reporting requirements.

NOTE: Reporting for the 2015 year is due in 2016, so the instructions and guidance should help employers and plan sponsors put together a framework to following in 2015 so that they can properly report.

As a starting point, the FAQs provide that some short-term penalty relief will be available for incomplete or incorrect information returns that are filed (or employee statements provided to employees) in 2016 for coverage offered, or not offered, in 2015. Under this relief, the IRS will not impose penalties on employers that can demonstrate that they made good faith efforts to comply with the information reporting requirements. This relief applies to returns and statements filed and furnished in 2016 to report offers of coverage in 2015 for incorrect or incomplete information reported on the return or statement, but the relief is not available if you fail to file. You have to show a good faith effort to comply so you cannot simply not file anything an expect relief.

With respect to the instructions themselves, to say that they are lengthy is an understatement.  Employers should read them in detail to understand their obligations.  However, some key provisions that help in compliance include:

  • Clarification that employers must file Forms 1095-C and 1094-C with the IRS, and provide a copy of Form 1095-C to employees.
  • A statement that, as noted above, forms 1095-C and 1094-C information returns are not required for 2014. Actual filings are not required until 2016 for the 2015 calendar year but employers may voluntarily file these forms in 2015 for 2014.  If by chance an employer does choose to voluntarily files in 2015 for the 2014 year, penalties for the employer mandate payments will not be assessed for 2014.
  • Establishment of specific dues dates for Forms 1095-C and 1094-C information returns.  They must be filed by February 28 (for paper filings), or March 31 (for electronic filings) of the year following the calendar year to which the return relates.
  • Clarification that a Form 1094-C must be attached to any Forms 1095-C filed by an employer. Each employer must file one 1094-C that reports aggregate employer-level data for all the employer’s full-time employees, which is referred to as the “authoritative transmittal” (and denoted accordingly on Line 19 of the Form 1094-C). Only one authoritative transmittal may be filed for each employer.
  • Employers also must provide a Form 1095-C to each full-time employee by January 31 of the year after the year to which the form relates (so that would be January 31, 2016 for the 2015 reporting year).  Incidentally, employee statements must be furnished to individuals in paper format by mail, unless the individual affirmatively consents to receiving the statement electronically

As with the forms, the instructions are in draft format and subject to change and finalization.  However, between the draft forms and the draft instructions, employers should now be able to ascertain generally what is required of them in reporting.  Even though the mandatory reporting requirement does not completely kick in until after 2015, employers should spend some time reviewing these requirements with their plan professionals, preferably sooner rather than later, to get a sense of what data they will have to collect and how who has responsibility for making sure the information is accurate.

Withdrawn Employers Don’t Have Standing: Why Employers Can’t Sue Trustees

Posted in Court Cases, Retirement Plans, Withdrawal Liability

For employers who cease to contribute to a multiemployer defined benefit pension plan, withdrawal liability is becoming more and more common.  When a pension fund is underfunded, the cessation of the contribution obligation can trigger the obligation to pay off the allocated portion of that unfunded liability which can be substantial.  When I am working with employers who are addressing withdrawal liability, I am frequently asked whether the employer can sue the fund or the trustee for causing the unfunded liability.  The short answer is no, but a recent case lays out very clearly why that answer is no.

In DiGeronimo Aggregates, LLC v. Zelma, the Sixth Circuit Court of Appeals recently considered a case where a withdrawing employer filed a complaint against the trustees of the multiemployer pension fund for negligent management of the plan that caused the underfunding.  The District Court dismissed the complaint and the Sixth Circuit affirmed.  The employer sued using ERISA Section 4301, which provides that persons, including employers, can bring a cause of action for appropriate legal or equitable relief.  However, the Sixth circuit found that this section confers no actual substantive rights.  It only provides who may potentially enforce the sections of ERISA.

The Court went on to determine that causes of action for “negligent management” of plan assets already have a specified remedy in ERISA.  When it comes to bringing claims of this nature, ERISA specifies that claims can be brought by participants and beneficiaries, but makes no mention of employers.  The Court reasoned that had Congress intended to give employers this right, they could have easily included them as parties capable of bringing an action.  Since they are not included, they must be assumed to be specifically excluded.  Since Congress did not include them, contributing employers must not have standing to bring a claim for mismanagement of plan assets.

This decision is not new or novel.  It merely reaffirms a long-held rationale that contributing employers lack standing to argue out of withdrawal liability claims by suing plan trustees.  A more effective way of dealing with withdrawal liability is to plan for it before it occurs.  If an employer is considering any transaction, be it a sale, merger, decertification or closing of a facility that will potentially halt contributions to a multiemployer pension fund, withdrawal liability must be a priority concern.  Dealing with withdrawal liability BEFORE a withdrawal is much easier than defending withdrawal liability claims after a withdrawal occurs.  Make sure to ask your professionals about withdrawal liability in advance and avoid the surprise.