IRS Establishes Remedial Amendment Periods for Correcting 403(b) Plan Document Defects

As we have previously reported, the IRS has made significant changes in the past few years to the way retirement plan sponsors ensure their documents comply with the Code. In 2017, the IRS confirmed that it would not issue determination letters for individually designed 403(b) plans when it opened the first three year remedial amendment period (“RAP”) for 403(b) plans. Click here to review the article.

This first 403(b) RAP expires on March 31, 2020, leaving sponsors of individually designed 403(b) plans little time to adopt necessary amendments and to correct document defects, retroactive to January 1, 2010. Plan sponsors may take one of two approaches – restate the plan onto a pre-approved plan document, or restate the plan as an individually designed plan.

In anticipation of the upcoming closure of the first 403(b) RAP, the IRS has issued Revenue Procedure 2019-39, setting forth subsequent RAPs for the correction of plan document defects occurring after March 31, 2020. How this guidance will impact 403(b) plan sponsors depends on whether the 403(b) plan is maintained on a pre-approved or individually designed format.

Pre-Approved Plan Cycles

The sponsors of pre-approved 403(b) plan products will apply for IRS opinion and advisory letters, seeking approval of the form of the plan document during pre-approved plan “Cycles.” Cycle 2 for pre-approved 403(b) plans commences immediately after March 31, 2020 (the last day of Cycle 1). The IRS anticipates the submission window for Cycle 2 will begin in 2023. Future guidance will be issued concerning submission deadlines and timeframes for pre-approved plans to be adopted by employers. The IRS will also provide a cumulative list of the changes in the 403(b) plan requirements resulting from changes in statutes or regulations since the prior Cycle. Respecting the amendment process for pre-approved plans, employers will be only peripherally involved, as adopting employers.

Individually Designed Plan 403(b) RAP

An amendment to an individually designed 403(b) plan to address a form defect occurring after March 31, 2020 must be made by the end of the 403(b) RAP. With respect to individually designed plans, the 403(b) RAP varies depending on whether the plan is governmental or non-governmental, and whether the plan document changes are made to a new plan, an existing plan or due to changes regarding or integral to the legal requirements respecting 403(b) plans. Individually designed plan sponsors will be able to track changes in the 403(b) plan document requirements by reviewing the Required Amendments List to be issued annually starting in 2019.

The measurement of the 403(b) RAP for non-governmental plans

The 403(b) RAP for individually designed non-governmental plans is measured from a starting date based on the following:

• New Plan – The date the plan is put into effect.
• Amendment to Existing Plan – The earlier of the date the amendment is adopted or effective.
• Change in 403(b) Requirements – The date the change in the requirements becomes effective.

The 403(b) RAP for individually designed non-governmental plans ends for each situation as follows:

• New Plan – The last day of the second calendar year following the calendar year in which the plan is put in effect.
• Amendment to Existing Plan – The last day of the second calendar year following the calendar year in which the amendment was adopted or effective, whichever is later.
• Change in 403(b) Requirements – The last day of the second calendar year following the calendar year in which the change in the requirements first appears in the Required Amendments List.

The measurement of the 403(b) RAP for governmental plans

The 403(b) RAP for individually designed governmental plans is measured from a starting date based on the following:

• New Plan – The date the plan is put into effect.
• Amendment to Existing Plan – The earlier of the date the amendment is adopted or effective.
• Change in 403(b) Requirements – The date the change in the requirements becomes effective.

The 403(b) RAP for individually designed governmental plans ends for each situation as follows:

• New Plan – The later of:

o The last day of the second calendar year following the calendar year in which the plan is put in effect, or

o Ninety (90) days after the close of the third regular legislative session of the legislative body with authority to amend the plan that begins after the end of the plan’s initial plan year.

• Amendment to Existing Plan – The later of:

o The last day of the second calendar year following the calendar year in which the amendment is adopted or effective, whichever is later, or

o Ninety (90) days after the close of the third regular legislative session of the legislative body with authority to amend the plan that begins after the calendar year in which the amendment is adopted or effective, whichever is later.

• Change in 403(b) Requirements – The later of:

o The last day of the second calendar year following the calendar year in which the change in the requirements first appears in the Required Amendments List, or

o Ninety (90) days after the close of the third regular legislative session of the legislative body with authority to amend the plan that begins on or after the date the change in the requirements first appears in the Required Amendments List.

The amendment deadline for discretionary amendments to individually designed 403(b) plans

The deadline for discretionary amendments is as follows:

• Non-governmental 403(b) plan – The end of the plan year in which the plan amendment is put into operation (e.g., the plan is administered in accordance with the new plan provision).
• Governmental 403(b) plan – The later of:

o The end of the plan year in which the plan amendment is put into operation, or

o Ninety (90) days after the close of the second regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date the plan amendment is put into operation.

The 403(b) RAP for terminating plans

The 403(b) RAP is shortened for terminating plans. Any required amendments that apply on the date of termination must be adopted in conjunction with the plan termination, regardless of whether the requirements have been included on an issued Required Amendments List.

Limited Extension to the first 403(b) RAP for certain plan document defects

Out of concern that plan sponsors of individually designed plans be given sufficient time to correct 403(b) plan document defects occurring near the end of the first 403(b) RAP (March 31, 2020), the IRS permits a limited extension. Respecting form defects occurring on or before March 31, 2020, plan sponsors will have until the later of March 31, 2020, or the end of the subsequent 403(b) RAP to correct the plan document defect. However, a form defect related to a change in the 403(b) legal requirements that was effective before 2019 must be corrected by March 31, 2020, even though the requirement did not appear in a Required Amendments List.

In summary, plan amendment deadlines for 403(b) plans have now been formalized in a procedure that designates specific timeframes during which a 403(b) plan document can be retroactively amended so that all of its provisions satisfy the legal requirements for 403(b) plans. Failure to correct a 403(b) plan document defect before the end of the applicable 403(b) RAP will require correction under the Employee Plans Compliance Resolution System (“EPCRS”) as provided in Revenue Procedure 2019-19.

(Revenue Procedure 2019-39, 2019-42 IRB)

Actuarial Equivalence Lawsuits Update: Defendants Earn a Win as Pepsi is Granted Motion to Dismiss

PepsiCo, Inc. (Pepsi) is the sponsor of a defined benefit pension plan. Like several other prominent sponsors of defined benefit pension plans, Pepsi was named as a plaintiff in an actuarial equivalence lawsuit that alleged problems with the actuarial equivalence assumptions and factors used to calculate plan benefit payouts. In this case, a group of plan participants who elected early retirement benefits initiated the lawsuit. For early retirees who are entitled or elect to receive a benefit in a form other than a single life annuity (SLA) – for example, a joint and survivor annuity – the benefit paid by the plan must be an actuarially equivalent benefit to their accrued benefit expressed as an SLA. The plaintiffs alleged that the fixed conversion factors used by Pepsi’s plan to convert a participant’s benefit expressed as an SLA to an alternative form of benefit left the plaintiffs worse off than if the Pepsi plan had determined actuarial equivalence “using reasonable market rates and mortality tables,” thus depriving them of benefits in violation of ERISA’s anti-forfeiture provisions.

Pepsi filed a motion to dismiss the various claims contained in the plaintiffs’ complaint. While the court rejected Pepsi’s argument that the plaintiffs’ claims fail as a matter of law because they do not arise under ERISA, the court ultimately granted Pepsi’s motion.

As to the plaintiffs’ claim that the plan violated ERISA’s anti-forfeiture provision, the court sided with Pepsi because the ERISA provision cited by the plaintiffs applies only to normal retirement benefits upon the attainment of normal retirement age. Because no plaintiff is alleged to have attained normal retirement age, and because there is no allegation that defendants deprived plaintiffs of the full amount of pension payments they would achieve at normal retirement age, the court found that the plaintiffs failed to adequately plead that the anti-forfeiture provision applies. The inadequate pleadings with respect to violations of ERISA’s anti-forfeiture provision also provided the basis for the court to dismiss the plaintiffs’ claims based on a breach of fiduciary duty. Without adequate pleadings as to the forfeiture claim, the breach of fiduciary duty claim also failed as a matter of law.

Prior to the decision in the Pepsi case, plaintiffs had managed to avoid having their cases dismissed in similar lawsuits brought against U.S. Bancorp and American Airlines. Whether the outcome in the Pepsi case signals a significant momentum shift in these actuarial equivalence cases is unclear. The issues decided in the Pepsi case are somewhat narrow and may not have much application in other similar lawsuits. It is noteworthy that some of the fundamental claims that are backstopping the recent spate of actuarial equivalence lawsuits are not substantively dealt with by the court in the dismissal of the Pepsi case, including the issue of whether ERISA affirmatively requires actuarial assumptions to be reasonable. DuBuske v. PepsiCo, Inc. (SDNY 2019).

It is also worth noting that new lawsuits alleging violations of ERISA actuarial equivalence requirements continue to be filed. AT&T now joins a growing list of prominent plan sponsors who are being sued, where the fundamental claim in the new AT&T lawsuit alleges that defined benefit plan calculations related to early retirement benefits as well as joint and survivor benefits use outdated assumptions or factors that cause participants to receive benefits that are less than the actuarial equivalent of their vested accrued benefit.

The law in and around the claims made in the actuarial equivalence lawsuits is still far from settled and future court decisions bear careful monitoring. In the meantime, we expect that the list of plan sponsors who could face actuarial equivalence lawsuits will continue to expand.

Once Accelerated, ERISA Withdrawal Liability May Not Be Decelerated

Revcon Technology Group, Inc. and S&P Electric, Inc. were under common control and were participating employers in a multiemployer pension fund. Revcon withdrew from the Fund in 2003 and S&P withdrew in 2004. In 2006, the Fund notified the companies that they owed approximately $400,000 in withdrawal liability and demanded 80 quarterly payments starting in October 2006. In 2006, after missing several payments, the Fund informed Revcon and S&P of their default and demanded immediate payment. Revcon failed to pay and, pursuant to ERISA, the Trustees of the Fund accelerated the outstanding withdrawal liability and filed suit for the entire amount plus interest.

Before appearing in the case Revcon offered to cure the default and resume making quarterly payments in exchange for the dismissal of the lawsuit. Revcon made up its missed payments, made three more quarterly payments, and again defaulted in 2009. The Trustees of the Fund again sued seeking the defaulted payments and the entire accelerated withdrawal liability amount.

Revcon again promised to cure its default and to resume making payments. The Trustees again voluntarily dismissed the suit. This process of default, lawsuit and promise to cure occurred three more times in 2011, 2013 and 2015.

In 2018, after another default, the Trustees filed a lawsuit in which it claimed the delinquent payments rather than just the total outstanding withdrawal liability. Revcon moved to dismiss the case, arguing that because the Trustees tried to collect the entire accelerated debt in 2008, the six-year statute of limitations expired in 2014. The district court agreed with Revcon that the case was untimely and noted that the Trustees’ lawsuits in 2009, 2011, 2013 and 2015 all stated the withdrawal liability was accelerated in 2008.

On appeal to the Seventh Circuit Court of Appeals, the position of Revcon was affirmed. The Seventh Circuit found that there was no provision in ERISA to allow for deceleration of a withdrawal liability claim that had been previously accelerated. The Seventh Circuit also refused to create federal common law under ERISA to allow for this deceleration. In dismissing the case, the Seventh Circuit noted that the Trustees of the Fund may have a state law claim under the agreements with Revcon even though the claim under ERISA is now time barred.

For both multiemployer funds and withdrawn employers who have become delinquent in payments, the ability to enter into agreements to reform delinquent contributions may become more difficult and legally complicated to accomplish. Bauwens v. Revcon Tech. Grp., Inc. (7th Cir. 2019).

Court Reverses Award of COBRA Penalties

The Sixth Circuit Court of Appeals reversed a district court’s decision to award statutory penalties resulting from a late Consolidated Omnibus Budget Reconciliation Act (“COBRA”) election notice. In this case, the plaintiff/employee had coverage under her employer’s group health plan when she went on a Family Medical Leave of Absence (“FMLA”). Under the terms of the plan, she would remain eligible for coverage when she was on leave. However, the plan required all participants (including those on leave) to timely pay their portion of the premium in order to remain covered under the plan. While on leave, the plaintiff/employee began receiving workers’ compensation payments and her employer deducted her portion of the group health plan premiums from her workers’ compensation checks. When the workers’ compensation payments ended, the employer notified the plaintiff/employee that she needed to pay an additional amount to continue her coverage. When no additional payments were made, her employer terminated her coverage.

The plaintiff/employee sued, claiming in part that her employer failed to timely provide her with a COBRA election notice. The district court agreed, awarding her incurred claims and a statutory penalty. On appeal, the Circuit Court reversed the district court’s decision. The Circuit Court held that the loss of coverage resulted from the plaintiff/employee’s failure to pay premiums, not the FMLA leave or accompanying change in payment method. Under COBRA, a qualified beneficiary must be sent a COBRA election notice, if she has a qualifying event that causes a loss of coverage. Here the Circuit Court held that, although there was a qualifying event (i.e., a reduction of hours when the employee went on leave), it did not cause the loss of coverage. Rather, the non-payment of premiums caused the loss of coverage. The Circuit Court further clarified that the change in the contribution method was not a “loss of coverage” because it did not constitute a change in the “terms” or “conditions” of coverage. As such, the employer was not required to offer COBRA coverage to the employee.

Employers often overlook how an employee’s eligibility for (and payment of) benefits is affected by a leave of absence. As this is an area of significant potential liability, we recommend employers review their leaves of absence policies and coordinate those policies with the eligibility and contribution provisions in their plan documents. Morehouse v. Steak N Shake, Inc. (6th Cir. 2019).