The Employee Benefits
Practice is pleased to present the Employee Benefits Developments Newsletter for the month of August 2019. Click through the links below for more information on each specific development or case.
New Developments Involving Multiple Employer Plans (MEPs)
In July, there were three significant developments affecting MEPs. A MEP, generally speaking, is a plan under which the employees of multiple unrelated employers may be covered. Participation in a MEP might be attractive to an employer, particularly a small employer, that cannot easily absorb the administrative time and expense needed to properly operate a qualified retirement plan.
Final DOL Regulations. The Department of Labor (DOL) published final regulations on MEPs (84 FR 37508). One category of MEPs covered by the regulations sometimes may be referred to as “association retirement plans” or “ARPs.” The regulations prescribe the rules under which it will be easier for a bona fide group or association of employers (e.g., trade associations) with a “commonality of interest” to jointly sponsor an ARP. The “commonality of interest” needed to establish an ARP is satisfied if the employer members of the group or association either (1) are in the same trade, industry, line of business or profession, or (2) have a principal place of business in the same region that does not exceed the boundaries of a single state or a metropolitan area (even if the metropolitan area includes more than one state).
The primary purpose of the group/association may be to offer and provide MEP coverage, but the group/association also must have at least one other substantial business purpose. The group/association, among other things, must have a formal organizational structure, the group/association must have its functions and activities controlled by the employer members, and plan participation may not be made available to employees of non-members. The final regulations prescribe rules under which a working owner (e.g., sole proprietors) may qualify as both an employer and as an employee of a trade or business for purposes of participating in an ARP.
The final DOL regulations also prescribe rules under which a MEP may be sponsored by a bona fide professional employer organization (PEO). To be a bona fide PEO, the PEO, among other things, must –
- Perform “substantial employment functions” on behalf of the client employers that adopt the MEP;
- Have substantial control over the functions and activities of the MEP, as the plan sponsor, as plan administrator and as a named fiduciary;
- Ensure that each adopting client employer acts directly as an employer of at least one employee who is a participant covered by the MEP; and
- Ensure that MEP participation is restricted to current and former employees (and their beneficiaries) of the PEO and client employers.
The regulations state that whether a PEO performs “substantial employment functions” may be determined on a facts and circumstances basis, but the regulations also offer safe harbor standards under which a PEO will be considered to perform “substantial employment functions.”
Request for Information. While the final DOL regulations published in July address MEPs that are in the nature of ARPs where there is some “commonality of interest,” those regulations do not yet prescribe a clear path forward for the establishment of so called “open” MEPs (i.e., MEPs for which there would not necessarily be any “commonality of interest”). Currently, the DOL would not treat open MEPs as a single plan for ERISA purposes. The DOL, however, believes open MEPs deserve further consideration. To generate further commentary on open MEPs, the DOL published a request for information (84 FR 37545) pursuant to which the DOL is soliciting comments on a broad range of issues relating to open MEPs. Comments must be submitted to the DOL on or before October 29, 2019.
IRS Regulations. In early July, the Internal Revenue Service (IRS) published a proposed regulation (84 FR 3177) that would provide relief to MEPs from the so-called “one bad apple” rule – the IRS calls it the “unified plan rule.” Under the “one bad apple” rule, a qualification failure by one of the participating employers in a MEP could potentially disqualify the entire plan, which some believed might make employers reluctant to join a MEP.
The impetus for the proposed regulation is a 2018 Executive Order intended to expand access to workplace retirement plans. The Executive Order included a directive to the Secretary of the Treasury to consider the issuance of proposed regulations that would expand access to MEPs. Accordingly, the Treasury Department proposed new regulations that would provide an exception to the “one bad apple” rule for certain defined contribution MEPs. A defined contribution MEP would be eligible for the exception to the “one bad apple” rule on account of certain qualification failures due to actions or inaction by a participating employer, if certain conditions are satisfied. To avoid full plan disqualification, the regulations, among other things, would allow, in the case of certain types of failures, for a spinoff of the assets and account balances attributable to participants to a separate plan and a termination of that plan where the participants are employed by a participating employer that is unable or unwilling to correct a qualification failure. Termination distributions from the spinoff plan generally would not lose favorable tax treatment normally available to qualified plan retirement plan distributions, including the availability of tax-deferred rollover treatment.
IRS Issues Guidance on Preventive Care Services for HSA Participants
The Internal Revenue Service (IRS) issued Notice 2019-45, expanding the list of preventive care benefits that may be provided by a high deductible health plan (HDHP). To qualify as a HDHP, the plan generally may not provide benefits for any year until the deductible is satisfied. However, the deductible does not need to be satisfied for the coverage of preventive care services. Also, individuals covered by a HDHP may contribute (or receive employer contributions) to a health savings account, as long as they do not have any other disqualifying coverage. In prior guidance, the IRS had stated that preventive care generally does not include any service or benefit intended to treat an existing illness, injury or condition.
However, recognizing that certain chronic conditions are made worse without care, the IRS expanded the list of preventive care services to include the treatment of certain chronic conditions listed on an Appendix to the IRS Notice. The guidance emphasized that the Notice does not expand the list of preventive care services beyond the specific services and items listed on the Appendix. This expansion is a welcomed development for many HDHP participants with chronic conditions because they may now receive care for those conditions without having to first satisfy their deductibles. The guidance includes a statement that the list will be reviewed and amended periodically. IRS Notice 2019-45 may be viewed here.
Internal Revenue Service Issues Revenue Ruling Addressing Tax and Reporting Consequences of Uncashed Distribution Checks from Qualified Retirement Plans
A retirement plan participant’s failure to cash a distribution check is commonplace and gives rise to certain responsibilities on the part of the plan administrator. In Revenue Ruling 2019-19, the Internal Revenue Service analyses the taxation, withholding and reporting obligations associated with uncashed distribution checks from tax qualified retirement plans.
The Revenue Ruling discusses a fact pattern where a distribution of $900 is required to be made from a tax qualified retirement to a plan participant in 2019. The plan administrator withholds required tax from the distribution and mails a check for the remainder to the participant. The participant receives, but does not cash the check and makes no rollover contribution of any portion of the distribution.
The IRS states that the amount distributed is includable in the participant’s gross income in the year the distribution is made, pursuant to Code Section 72. The individual cannot exclude the amount from gross income under Section 402(a) merely by failing to cash the check received in 2019. The reason for the participant’s failure to cash the check (e.g., lost, destroyed, returned) is immaterial to the IRS’ conclusion.
Next, the IRS confirms that the participant’s failure to cash the distribution check does not alter the plan administrator’s obligation to withhold tax from the distribution under Code Section 3405. Finally, the IRS states that the participant’s failure to cash the distribution check does not alter or defer the plan administrator’s obligation to report the distribution amount and tax withheld on Form 1099-R for the tax year in which the distribution was made.
While this guidance is welcome, the IRS’s position is not unexpected given the well-established doctrine of constructive receipt. The Revenue Ruling notes that the IRS continues to analyze issues related to uncashed checks, including situations involving missing participants. This may foreshadow that the IRS will issue future guidance concerning a retirement plan administrator’s obligation to locate and make distributions to missing participants.
No Withdrawal Liability But An Exit Fee Owing?
Four-C-Aire, Inc. was a contributing employer to the Sheet Metal Workers National Pension Fund, a multiemployer pension plan. In 2016, Four-C-Aire ceased to have an obligation to contribute to the Fund as the terms of the Collective Bargaining Agreement expired and Four-C-Aire had not entered into a new agreement requiring it to contribute to the Fund. Following that, the Fund notified Four-C-Aire that Four-CAire had withdrawn under Title IV of ERISA because it had not entered into a new agreement requiring contributions to the Fund but continued to perform work in the jurisdiction covered by the Fund. Thus, Four-C-Aire would not have qualified to avoid withdrawal pursuant to the construction industry exception.
The Fund demanded that Four-C-Aire pay an amount to the Fund which did not represent withdrawal liability. The actual withdrawal liability owed by Four-C-Aire was eliminated because of the Fund’s de-minimus rule eliminating liability as the amount was less than $150,000. Instead, the Fund requested the payment of approximately $97,000 as an “exit fee” based on an amendment made to the Fund’s governing plan document.
The Fund sued Four-C-Aire to collect the exit fee. The district court granted Four-C-Aire’s motion to dismiss holding the exit fee could not be imposed on Four-C-Aire under the terms of the collective bargaining agreement.
The Fund appealed to the Fourth Circuit Court of Appeals. The Fourth Circuit found that it was improper to dismiss the action against Four-C-Aire. The circuit court found that the Collective Bargaining Agreement contained a provision whereby Four-C-Aire agreed to be bound by the terms of the Plan Documents, including any amendments made by the Fund. Thus, the Fourth Circuit held that the amendment to the Fund documents to impose an exit fee was agreed to by Four-C-Aire and the action should not have been dismissed. The Fourth Circuit remanded the case back to the district court where one of the issues may be whether the Fund properly adopted the amendment.
Recently, multiemployer pension funds have been extremely aggressive in trying to impose withdrawal liabilities and, as shown in this case, using other means to collect funds from an employer. Employers who participate in multiemployer funds should carefully review any participation agreements they have with the Fund and obtain current plan documents and fund rules to see whether the fund may impose liabilities of which the employer may not otherwise be aware. There is no indication in this case that the employer was aware of the amendment made by the Sheet Metals Fund that would impose an exit fee where the employer owed no withdrawal liability. Bd. of Trs. of Sheet Metal Workers’ Nat’l Pension Fund v. Four- C- Aire, Inc. (4th Cir. 2019).