Employee Benefits Developments - January 2018

Hodgson Russ LLP

The Employee Benefits practice group is pleased to present the Benefits Developments Newsletter for the month of January 2018. Click through the links below for more information on each specific development or case.

IRS Presents Required Amendments List For Individually Designed Plans

As we reported in our August, 2017 newsletter, the IRS has eliminated the determination letter program for individually designed plans, except when such plans are established or terminated. Concurrently, the IRS substantially restructured the opinion letter process for pre-approved plans (i.e. prototype plan documents, volume submitter plan documents, etc.) to encourage the conversion of individually designed plans to pre-approved formats.

For plan sponsors continuing to maintain individually designed plan documents, the IRS provides an annual “Required Amendments List” to track a qualified retirement plan’s conformity to changes in the law. On December 5, 2017, the IRS issued the 2017 Required Amendments List for Qualified Retirement Plans (Notice 2017-72) with the following changes affecting cash balance plans, and eligible cooperative or charity plans:

  • Cash balance/hybrid plans must be amended to comply with the final regulations regarding market rate of return and other requirements made applicable in 2017; and
  • Certain cooperative or charity plans must be amended to incorporate the benefit restrictions of Code Section 436.

In addition, some defined benefit pension plans that permit benefits to be paid partially in the form of an annuity and partially as a lump sum must be amended to the extent necessary to comply with the Code Section 417(e) regulations regarding the minimum present value of partial distributions.

Plan sponsors of individually designed plans should work with their legal advisors to ensure their plans are amended in conformity with the 2017 Required Amendments List.


Final Disability Claims Procedures Become Effective On April 1, 2018

The federal Department of Labor issued final regulations on December 16, 2016 strengthening protections for disability claimants. The new disability claims rules apply to any type of plan, including retirement and severance plans, where benefits or rights are conditioned upon a finding of disability. The disability claims procedures, however, are not applicable to accidental death and dismemberment benefit programs. The disability claims procedures only apply to disability determinations made by a plan, not determinations made independently by another party, such as the Social Security Administration, or another plan of the employer.

With respect to disability claims filed on and after April 1, 2018, the following procedures will apply in addition to the current timeframes and other requirements under Section 503 of the Employee Retirement Income Security Act of 1974 (ERISA):

  • Claims and appeals must be adjudicated in a manner designed to ensure independence and impartiality of the persons involved in making the benefit determination, such as claims adjudicators, or medical or vocational experts.
  • Benefit denial notices must contain a complete discussion of why the plan denied the claim and the standards applied in reaching the decision, including the basis, if any, for disagreeing with the views of health care professionals, vocational professionals, or with disability benefit determinations by the Social Security Administration.
  • Initial benefit denial notices must include a statement that the claimant is entitled to receive, upon request, the entire claim file and other relevant documents.
  • Initial benefit denial notices must include any internal rules, guidelines, protocols, standards or other similar criteria of the plan that were used in denying a claim, or contain a statement that none were used.
  • Claimants must be given notice and a fair opportunity to respond before a denial at the appeals stage that is based on new or additional evidence or rationales.
  • The plan must not prohibit a claimant from seeking court review of a claim denial based on a failure to exhaust administrative remedies if the plan failed to comply with significant claims procedure requirements (“deemed exhaustion”).
  • Rescissions of coverage, except for rescissions for non-payment of premiums, must be treated as adverse benefit determinations triggering the plan's appeals procedures.
  • Appeal determinations must include a description of any applicable contractual limitations period and its expiration date.
  • Required notices and disclosures issued under the claims procedure must be written in a culturally and linguistically appropriate manner.

Plan sponsors should evaluate their welfare and retirement plans to determine whether compliance with the disability regulations is required. Plan sponsors should then work with their legal advisors to ensure their plans and forms are amended in conformity with the new regulations for any disability claims filed on or after April 1, 2018.


PBGC Expands Missing Participants Program to Include Terminating Defined Contribution Plans

The Pension Benefit Guaranty Corporation (PBGC) has expanded its missing participants program to cover terminating defined contribution plans (including 401(k) plans). The expanded program is voluntary and will be available for plans that terminate on or after January 1, 2018. Before the expansion, the missing participants program was open only to terminated PBGC-insured single-employer defined benefit plans.

By expanding the program, terminating defined contribution plans will have the option of transferring missing participants’ benefits to the PBGC instead of establishing an IRA at a financial institution. Before turning to the PBGC, the plan administrator must make a diligent effort, including the use of a locator service, to locate a missing participant. Participant benefits that are ultimately transferred to and held by the PBGC will not be diminished by the maintenance fees or distribution charges typically imposed by an IRA. The PBGC will pay out defined contribution plan benefits with interest (at the Federal mid-term rate) when a participants is found. The PBGC generally will charge a one-time administrative fee of $35 with respect to each missing distributee for whom the plan transfers a payment obligation of more than $250 to the PBGC.

The expanded program is intended to make it easier for people to locate their retirement benefits after a plan terminates. Note that the missing participant program also offers terminating defined contribution plans the option of simply notifying the PBGC of the disposition of one or more missing distributees’ benefits, without necessarily transferring the actual benefit. The PBGC will share the information regarding the benefit information with the participant once found. A notifying plan is not subject to any administrative fee.

The expanded program also covers small (25 or fewer participants) professional service defined benefit plans, and PBGC-insured multiemployer pension plans that terminate and pay out all remaining benefits. The relevant rules were published in the Federal Register on December 22, 2017 at 82 FR 60800. Information on the expanded missing participant program also can be found at https://www.pbgc.gov/prac/missing-participants-program.


Wellness Program Uncertainty Continues

The US District Court for the District of Columbia recently ruled to vacate the Equal Employment Opportunity Commission (EEOC) wellness program regulations effective January 1, 2019. In August 2017, the same court ruled that EEOC had not provided a reasoned explanation for its decision to create regulations under the Americans with Disabilities Act (ADA) and Genetic Information Nondiscrimination Act (GINA) that set particular incentive levels for wellness programs. The regulations allowed employer-sponsored wellness plans to offer employees discounts of up to 30% of the cost of self-only health coverage for providing certain medical information, or to impose penalties of up to 30% for not doing so. The court found that EEOC “failed to adequately explain its decision to construe the term ‘voluntary’ in the ADA and GINA to permit the 30% incentive level adopted in both the ADA rule and the GINA rule.” However, to avoid disruption that would occur if the rules were vacated immediately, the court decided to remand without vacating the regulations “for the present.” In its most recent ruling on the matter, the court rejected the EEOC’s proposed 2021 timeline for implementing new regulations. Instead the court ruled that the effective date for vacating the current EEOC regulations will be January 1, 2019. Employers who sponsor wellness programs should continue to monitor developments in this area and conduct a review their wellness programs to determine if they implicate the current EEOC regulations. AARP v. U.S. Equal Emp’t Opportunity Comm’n (D.D.C 2017).

Court Answers More Questions on Church Plan Exemp


As we reported last year, the Supreme Court, in a unanimous decision, ruled that an employee benefit program for employees of a church-affiliated organization can qualify as a “church” plan, if (a) the plan is maintained by an entity (e.g., a retirement benefits committee or pension board) the principal purpose of which is the administration or funding of an employee benefit plan (i.e., a principal purpose organization”); and (b) the “principal purpose organization” is controlled by or associated with a church. A recent decision by the Court of Appeals for the Tenth Circuit addresses issues not clearly decided by the Supreme Court when it held that a retirement plan sponsored by Catholic Health Initiatives (“CHI”), a church-affiliated healthcare organization, is a “church plan” under ERISA.

The first question decided by the Court: is the entity that offered the plan a tax-exempt organization that is associated with a church? The Tenth Circuit held that CHI is associated with a church because of CHI’s relationship with Catholic Health Care Federation (which was created by, and accountable to, the Vatican), because of CHI’s Articles of Incorporation (which provide that CHI was organized exclusively to carry out religious purposes), and because CHI is listed in the Official Catholic Directory.

The second issue decided by the Court: is the entity’s retirement plan maintained by an organization whose principal purpose is administering or funding a retirement plan for entity employees? The Court found that CHI’s committee which administered the CHI plan, is the “principal purpose organization” that “maintained” the plan for purposes of the exemption.

The third issue: is principal-purpose organization itself associated with a church? The Court concluded that was the case because the committee is associated with CHI (which was associated with a church), and because the CHI plan document states that the committee shares “common religious bonds and convictions” with the Catholic Church.

Finally, the Court rejected the claim that the church plan exemption violates the Establishment Clause. Medina v. Catholic Health Initiatives (10th Cir. 2017).

Third Circuit Upholds Penalty Imposed on Plan Administrator for Failure to Provide Documents

A plan administrator is required by the Employee Retirement Income Security Act of 1974 (ERISA) to disclose certain governing documents and records within 30 days of receiving a written request. When a plan administrator fails to provide documents on a timely basis, the plan administrator can be held personally liable for penalties of up to $110 a day from the date of the failure. The Court of Appeals for the Third Circuit recently ruled that a federal district court in Pennsylvania did not abuse its discretion by imposing a penalty of nearly $16,000 on a plan administrator for failing to timely produce copies of certain validly requested plan documentation. Aside from the plan administrator’s attempt to charge $1,800 for the cost of furnishing the documents (which far exceeded the 25 cents per page maximum allowable by Department of Labor regulations) and the length of the delay in furnishing documents (which ranged from 300 days to 959 days), the circumstances surrounding the document requests and the plan administrator’s delay in furnishing the documents are not particularly remarkable. It is notable, however, that the penalty amount imposed by the district court judge and affirmed by the Third Circuit was well below the maximum penalty allowable under ERISA – the lesser penalty was in part due to a breakdown in communications between counsel for the parties, and the absence of bad faith with respect to furnishing a custodial account agreement. Nonetheless, the case serves as a reminder that plan administrators who do not address document requests on a timely basis risk being subject to substantial monetary penalties. Askew v. R.L. Reppert, Inc. (3rd Cir. 2017).

Court Rejects Short-Swing Profits Claim Relating to Share Withholding to Satisfy Taxes

On January 26, 2018, the United States District Court for the Northern District of Oklahoma granted summary judgment to WPX Energy, Inc. (the “Company”) and its CEO and general counsel in relation to a plaintiff’s claim that the Company’s satisfaction of its tax withholding obligations by withholding shares having a fair market value equal to the withholding obligation violated Section 16(b) of the Securities Exchange Act of 1934. As discussed in our June 2017 newsletter, the Southern District of Texas reached a similar conclusion in Jordan v. Flexton. See http://www.hodgsonruss.com/newsroom-publications-9795.html. However, the opinion from the Northern District of Oklahoma provides a much more comprehensive analysis than the Jordan opinion.

Section 16(b) requires that officers, directors, and beneficial owners of more than 10% of any class of an issuer’s equity securities disgorge any profits realized from any purchase and sale (or sale and purchase) of the issuer’s equity securities made within a six-month period. Section 16(b) authorizes the SEC to issue exemptions from Section 16(b)’s rules. In furtherance of this statutory authorization, the SEC issued Rule 16b-3, which exempts certain transactions from the “short-swing profit” rules under Section 16(b). Importantly in the WPX case, Rule 16b-3(e) generally exempts certain transactions involving the disposition of issuer equity securities to the issuer, if the terms of the disposition are approved in advance by a committee of the board of directors that is composed solely of two or more non-employee directors (i.e., the Compensation Committee of the Board). The SEC provided this exemption because, in an exempt transaction under Rule 16b-3(e), both the issuer and the insider have access to the same information, and there is no informational imbalance between the parties.

WPX had established an equity incentive plan in 2013. The plan provided that the plan was to be administered by the Board, except that an independent committee would administer the plan with respect to any awards made to executive officers. The independent committee was expressly created for the purpose of complying with Rule 16b-3 (along with Section 162(m) of the Internal Revenue Code). In regard to the satisfaction of any tax withholding obligations, the plan provided that an award recipient is required to “remit an amount in cash, or in the Company’s discretion, in Shares, valued at their Fair Market Value on the date the withholding obligation arises, sufficient to satisfy the employer’s federal, state, and local tax withholding requirements related thereto.”

The Company’s CEO and general counsel were each awarded restricted stock units (“RSUs”) under the Company’s equity incentive plan. The RSU award agreements mandated that a number of Company shares having a fair market value equal to the Company’s withholding obligation be withheld at the time the RSU was settled through the issuance of Company shares to the CEO and general counsel. When the RSUs vested and were settled, the Company withheld shares in satisfaction of the tax withholding obligation. The plaintiff alleged that this disposition by the CEO and general counsel occurred within six months of the date each executive made purchases of the Company’s stock and, therefore, violated Section 16(b).

In dismissing the plaintiff’s claim, the district court pointed to the second sentence in Note 3 to Rule 16b-3, which provides that “where the terms of a subsequent transaction (such as the exercise price of an option, or the provision of an exercise or tax withholding right) are provided for in a transaction as initially approved pursuant to [Rule 16b-3(e)], such subsequent transaction shall not require further specific approval.” In this regard, since the RSU award agreement that was approved by the independent committee expressly mandated that share withholding occur to satisfy any tax withholding obligation, the court found no further approval was required by the committee and the disposition squarely came within the exemption to Section 16(b) provided by Rule 16b-3(e). Olagues v. Muncrief (N.D. Okla. 2017).


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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