The Employee Benefits
Practice is pleased to present the Employee Benefits Developments Newsletter
for the month of May 2019.
IRS Published Updated Self-Correction Program with Welcomed Improvements
The Internal Revenue Service (IRS) periodically updates and republishes guidance describing the terms and conditions of the Employee Plans Compliance Resolution System (EPCRS) under which sponsors of qualified retirement plans, including 403(b) plans, may self-correct certain plan document and operational failures. The latest update to EPCRS, in the form of Revenue Procedure 2019-19, was published in April, and became generally effective as of April 19, 2019.
Revenue Procedure 2019-19 reflects significant expansions to the Self-Correction Program (SCP) feature of EPCRS, which the IRS believes will make it easier to fix certain plan document and operational failures, including plan loan issues, without having to file a submission to the IRS under the Voluntary Correction Program (VCP) feature of EPCRS. There are three significant areas in which SCP has been expanded:
Plan Loan Self-Correction. Under the new EPCRS guidance, a plan sponsor may –
- Report a deemed distribution resulting from a defective or defaulted plan loan in the year of correction rather than in the year of the failure.
- Adopt a retroactive plan amendment conforming the written plan document to the plan’s operation when the number of plan loans made to a participant exceeds the number of loans permitted by written plan terms.
- Correct the failure to obtain spousal consent for a plan loan as required by plan terms.
- Correct defaulted loans by having the participant make a single sum repayment or by reamortizing the loan balance or some combination of those two methods, as long as the maximum period for repayment of the loan pursuant has not expired.
Self-Correction of Certain Plan Document Failures. Under the new EPCRS guidance, the plan sponsor may self-correct certain Code Section 401(a) (including 401(k) and 403(b)) retirement plan document failures, but only if –
- The plan document has a favorable determination or opinion letter.
- The correction is made within the prescribed two-year correction period (i.e., no later than the close of the second plan year following the plan year in which the amendment should have been adopted).
- The failure does not involve a failure to timely adopt an initial Code Section 401(a) plan document, or a failure to adopt an initial written Code Section 403(b) plan document.
- The failure does not involve a failure to timely adopt corrective amendments to resolve demographic failures.
Additional Opportunities for Correcting Certain Operational Failures by Retroactive Plan Amendment. Under the new EPCRS guidance, the plan sponsor may self-correct certain operational failure by retroactive plan amendment if –
- The corrective amendment results in an increase of a participant’s benefit, right or feature.
- The increase in benefit, right or feature is provided to all employees eligible to participate in the plan.
- The correction otherwise satisfies certain general correction principles of EPCRS.
Expanded opportunities to self-correct plan document and operational failures without incurring the expense and delay associated with a VCP application are a welcomed development that is expected to encourage greater numbers of plan sponsors to take self-corrective action consistent with EPCRS correction principles.
IRS Changes its Mind (Again) on Retiree Lump-Sum Buy-Out Offers
In Notice 2015-49, the Internal Revenue Service expressed its intent to prohibit qualified defined benefit plans from offering in-pay retirees an opportunity to convert their annuity into a lump-sum payment because it would violate the rules on required minimum distributions. That Notice was contrary to certain private letter rulings the IRS previously issued that indicated that those offers would not violate the required minimum distribution regulations. By issuing that Notice, the IRS effectively prohibited defined benefit plans from offering a lump-sum buy-out offer to in-pay retirees. The IRS has now issued Notice 2019-18, which reverses the IRS’s position by retracting Notice 2015-49. The IRS indicated they will not assert that a plan amendment providing for such an offer violates required minimum distribution rules of Code Section 401(a)(9). The IRS indicated that it will continue to evaluate whether such an amendment would satisfy other Internal Revenue Code provisions dealing with non-discrimination requirements, non-forfeiture requirements, benefit limitations, spousal protections, and compliance with certain funding based plan restrictions. Plan sponsors who have considered lump-sum buy-out options as a means of de-risking a plan or a method to reduce PBGC premiums may wish to consider whether a lump-sum buy-out offer to in-pay retirees may be suitable. To view IRS Notice 2015-49, click here.
DOL Issues Guidance for Association Health Plans Affected by the Federal District Court Decision Striking Down Association Health Plan Regulations
On March 28, 2019, a District of Columbia federal district court struck down significant portions of the U.S. Department of Labor final regulations allowing unrelated small employers and working owners to band together to form association health plans (“AHPs”). See our April 2019 newsletter article. In response, the DOL has issued a statement and two FAQs explaining the impact of the decision on existing AHP coverage and declaring a non-enforcement policy.
Immediately after the district court ruling, the DOL issued a brief set of FAQs to assure participants receiving coverage through AHPs that valid health claims would continue to be paid in accordance with the policies.
On April 29, 2019, the DOL issued a statement assuring businesses and employees that coverage obtained through an AHP can continue without disruption through the end of the plan year, or if later, the contract term. In addition, the Department of Health and Human Services confirmed that the guaranteed-renewability rules give members of an AHP an independent right to maintain existing AHP coverage. After the current plan year or contract term ends, however, small employers must comply with applicable requirements for group health plans based on the employer’s size, including the obligation to provide essential health benefits and comply with community rating rules. Meanwhile, both the DOL and HHS have issued non-enforcement policies for employers who continue coverage through AHPs in good faith reliance upon the vacated final regulations.
On May 13, 2019, the DOL issued a second set of FAQs explaining the impact of the district court decision by distinguishing between AHPs formed under pre-rule guidance (“Pathway 1 AHPs”), and AHPs formed pursuant to the now-vacated final regulations (“Pathway 2 AHPs”). Pathway 1 AHPs are unaffected by the district court decision and may continue to be maintained under previous sub-regulatory guidance. Such guidance prohibited participation in Pathway 1 AHPs by owners without employees, required AHP members to have close economic or representational ties, and did not allow AHPs to extend coverage to members based on geography. The DOL clarified that Pathway 2 AHPs may not be marketed to or enroll new members, but may offer coverage to new employees of existing members based upon the occurrence of special enrollment events, such as marriage, birth, adoption, or loss of eligibility for other coverage. AHPs intended to satisfy the Pathway 1 standards and seeking to verify their status are encouraged to review available DOL online guidance and/or have informal discussions with the DOL before commencing the time consuming process of obtaining an advisory opinion.
On April 26, 2019, the DOL filed an appeal of the ruling in the D.C. Circuit Court of Appeals. The government has not yet obtained a stay of the district court order, and therefore, no new AHPs may be established under the vacated final regulations. We will continue to monitor this issue for future guidance. Department of Labor Statement Relating to the U.S. District Court Ruling in State of New York v. United States Department of Labor (April 29, 2019); Federal District Court Ruling in State of New York v. United States Department of Labor Concerning Department of Labor’s Final Rule on Association Health Plan, Questions and Answers; and Federal District Court Ruling in State of New York v. United States Department of Labor Concerning Department of Labor’s Final Rule on Association Health Plan, Questions and Answers- Part Two (May 13, 2019).
IRS Reopens Determination Letter Program for Certain Plans
Previously, the Internal Revenue Service decided that sponsors of individually designed qualified plans could apply for a determination letter only for initial plan qualification or upon plan termination. In a recent Revenue Procedure, the IRS expanded the availability of the determination letter program to two ways. First, individually designed plans that are merged in connection with a business transaction may file for a determination letter on an on-going basis. The date of plan merger must occur no later than the first day of the first plan year beginning after the plan year that includes the date of a corporate merger, acquisition, or similar business transaction between unrelated parties. The resulting merged plan must be submitted within the period beginning on the date of plan merger and ending on the last day of the first plan year that begins after the date of the plan merger. Second, statutory hybrid plans (typically, cash balance plans) will have a 12-month period beginning September 1, 2019 and ending on August 31, 2020 to apply for a determination letter. Plan sponsors of merged plans and statutory hybrid plans should consider applying for determination letters on these plans as permitted by the new IRS guidance. To view Rev. Proc. 2019-20, click here.
Court Rules Benefit Claim Time Barred
The U.S. Court of Appeals for the Second Circuit upheld a district court’s determination that a plaintiff’s action was time barred under a benefit plan’s applicable statute of limitations. In this case, a plan participant suffering from chronic motions sickness had been receiving long term disability benefits under a group long term disability plan. Although the participant initially received benefits, the plan subsequently determined that she was no longer eligible for continuing benefits. The plaintiff appealed the benefit denial. However, the district court determined that the action was time barred because it was filed after the limitation period set forth in the plan document. The Second Circuit upheld the district’s court’s determination, holding that the plan’s statute of limitation provision applied to both the initial claim and subsequent claim for benefits. Although ERISA’s benefit claim provision does not specify a statute of limitations, the Supreme Court has held that such actions are time barred if they are filed after the statute of limitations in a plan document, so long as the plan’s required time period is reasonable. This case highlights the importance of including a reasonable statute of limitations provision in benefit plan documents. Arkun v. Unum Grp. (2nd Cir. 2019)
Tenth Circuit Rules Stable-Value Fund Manager Not a Functional Fiduciary Under ERISA
A large class action lawsuit, involving 270,000 plan participants and 13,000 plans, was filed against Great-West Life Annuity and Insurance Company (“Great-West”), which managed an investment fund that invested participant monies and guaranteed capital preservation. The fund employed a “conservative investment strategy,” and was invested in fixed-income instruments such as treasury bonds, corporate bonds, and mortgage-backed securities. Plan participant monies invested in the fund earned interest at a Credited Interest Rate set by Great-West on a quarterly basis.
Plaintiffs in the case alleged, among other things, that Great-West breached an ERISA fiduciary duty to participants invested in the fund because Great-West set the Credited Interest Rate for its own benefit. Under the terms of the fund, Great-West retained as revenue the difference between the total yield on the fund’s monetary instruments and the Credited Interest Rate. Plaintiffs alleged that Great-West set the Credited Interest Rate artificially low and profited by retaining the difference. On the issue of the fiduciary breach claim, a federal district court granted summary judgment for Great-West because its ability to set the Credited Interest Rate did not render it a fiduciary under ERISA – participants could effectively “veto” the chosen rate by withdrawing their money from the fund. Because the court found that Great-West was not a fiduciary, the district court rejected all of the plaintiffs’ claims, including the fiduciary breach claim stemming from Great-West’s ability to set the Credited Interest Rate.
The case was appealed to the Court of Appeals for the Tenth Circuit. In hearing the appeal, Great-West’s status as a functional fiduciary was the focus of the Tenth Circuit’s review of plaintiff’s fiduciary duty claims. Plaintiffs argued Great-West is a functional fiduciary because it exercised “authority or control” over plans and their assets by changing the Credited Interest Rate without plan or participant approval. Plaintiffs also contend Great-West had sufficient control over its own compensation to render it an ERISA fiduciary. The Tenth Circuit ruled that plaintiffs did not make an adequate showing in response to Great-West’s summary judgment motion to support these points. In particular, the plaintiffs needed to show that Great-West “(1) did not merely follow a specific contractual term set in an arm’s-length negotiation; and (2) took a unilateral action respecting plan management or assets without the plan or its participants having an opportunity to reject its decision.” Ultimately, because the Tenth Circuit found that the plaintiffs had not provided sufficient evidence to create an issue of material fact as to whether plans or participants were contractually constrained from rejecting a change in the Credited Interest Rate, the court could not conclude that Great-West acted as a fiduciary in setting the quarterly Credited Interest Rate. The court found that Great-West also lacked sufficient authority or control over its compensation.
This case provides some valuable insights as to the level of control over plan assets that may be needed to make a service provider into a functional fiduciary. Money managers no doubt see this as a favorable outcome for investment products such as stable-value funds. But the Tenth Circuit’s decision in this case likely is not the last we’ll hear of the functional fiduciary issue - other federal circuit courts may have the opportunity to consider similar issues and could reach a different conclusion. Teets v. Great-West Life & Annuity Insurance Company (10th Cir. 2019)
IRS Allows Flexibility in Paying Exercise Price for Option Under Employee Stock Purchase Plans
A recent IRS private letter ruling addresses whether an employee stock purchase plan (“ESPP”) may permit participants to pay the exercise price of an option issued under the plan through salary reductions or through a loan unless the loan would not be permitted under the Sarbanes-Oxley Act of 2002 (“SOX”). In particular, the employer was concerned that only allowing certain participants to pay the exercise price through a loan would violate the ESPP requirement that all participants granted options must have the same rights and privileges. In this regard, if the ESPP did not meet the same-rights-and-privileges requirement for any single option, then no options awarded under the ESPP would qualify for the favorable tax treatment afforded ESPP options. With very little explanation or analysis, the IRS concluded that a participant’s inability to pay the exercise price through a loan due to the application of SOX would not cause the ESPP to violate the requirement that all participants must have the same rights and privileges under the ESPP. Although only the party receiving a private letter ruling may rely on the ruling, this ruling nonetheless suggests that the IRS would not have objections to an ESPP containing a similar provision. [PLR 201911002]