[co-author: Cheryl VanDenHandel - Senior Paralegal]
The Employee Benefits practice group is pleased to present the Benefits Developments Newsletter for the month of November 2017. Click through the links below for more information on each specific development or case.
Minimum Required Distributions – IRS Guidance for Handling Missing Participants
Missing participants and beneficiaries, as well as issued but uncashed distribution checks, present administrative challenges that add to the time and expense of administering qualified retirement plans. The inability to timely satisfy the required minimum distribution (RMD) rules (i.e., the rule that generally require the commencement of benefit payments by April 1 of the calendar year following the later of the year in which the participant attains age 70½ or the year in which the participant retires from employment) is just one of the problems plan administrators confront when participants cannot be located. The fact that plan examinations by both the Internal Revenue Service (IRS) and the Department of Labor (DOL) include a focus on whether retirement plans are following proper distribution procedures and are making RMDs compounds the pressure felt by plan sponsors to have adequate missing participant procedures in place. However, the lack of coordinated and comprehensive DOL and IRS guidance on the handling of missing participants and uncashed distribution checks, despite industry urgings, has left plan administrators uncertain as to exactly what those procedures should be.
The good news for plan administrators is that the IRS has recently provided some helpful guidance in the form of a memorandum to its plan examiners instructing the examiners not challenge a qualified plan for violation of the RMD standards where there is a failure to commence or make a distribution to a missing participant or beneficiary to whom a payment is due, as long as the plan administrator has taken the following steps:
Searched plan and related plan, sponsor, and publicly-available records or directories for alternative contact information;
Used any of the following search methods:
A commercial locator service;
A credit reporting agency; or
A proprietary internet search tool for locating individuals; and
Attempted contact via United States Postal Service (USPS) certified mail to the last known mailing address and through appropriate means for any address or contact information (including email addresses and telephone numbers).
This guidance obviously helps plan administrators to understand what they need to do to avoid an RMD compliance problem, and plan administrators will want to be certain their missing participant procedures fall into line with this new guidance. However, this is not the comprehensive missing participant guidance many were hoping for, and this guidance does not represent a statement as to what missing participant procedures the DOL will find acceptable.
The IRS memorandum referenced in this article can be found at https://www.irs.gov/pub/foia/ig/spder/tege-04-1017-0033.pdf).
IRS Updates Guidance Regarding ACA Enforcement
The IRS recently provided new guidance concerning its process for notifying and assessing penalties under the Employer Shared Responsibility provisions of the Affordable Care Act. The IRS’s website (accessible here: https://www.irs.gov/affordable-care-act/employers/questions-and-answers-on-employer-shared-responsibility-provisions-under-the-affordable-care-act#Making ) describes the timing and form of the anticipated enforcement effort.
Background. Under the Employer Shared Responsibility provisions of the Affordable Care Act employers with at least 50 full-time employees could face a penalty if they do not offer affordable coverage to their full-time employees.
Timing. The IRS guidance states that the IRS plans to issue letters to applicable large employers concerning their potential liability relating to the 2015 calendar year “in late 2017.”
Form. The IRS plans to issue a letter (Letter 226J https://www.irs.gov/pub/notices/ltr226j.pdf) to employers, if the IRS determines that, for at least one month in the year, one or more of the employer’s full-time employees was not offered affordable coverage under the employer’s plan and, instead, the employee received a premium tax credit for coverage through a Healthcare exchange. Employers will generally need to respond within 30 days from the date on the letter.
If an employer receives one of these letters, the employer will be given an opportunity to respond before a penalty is assessed. Because the response period is short (and the end of the year is busy), we recommend some advance preparation, such as gathering the necessary information and identifying the person (or people) who will be responsible for preparing the response.
IRS Adopts New Mortality Tables for Defined Benefit Plans
As required by the Pension Protection Act of 2006, the Internal Revenue Service (IRS) has finalized Regulations providing for new mortality tables which reflect that that people are living longer. While the issuance of new tables was expected, it was unclear whether the new effective date would be in 2018 or 2019. Under the final Regulations, the new morality tables generally become effective in 2018.
The approved table is RP2014 applying a projection scale MP2016 to project mortality improvement. These tables apply for purposes of plan funding requirements (including minimum required contributions and determining the maximum deductible contribution), lump sum payments subject to Internal Revenue Code Section 417(e), calculation of PBGC variable rate premium, and the Internal Revenue Code Section 415 maximum annual limit on defined benefit payments. The Regulations indicate that a plan with sufficient experience can apply for use of a substitute morality table that reflects the plan’s actual experience. An application to use a substitute mortality table for the 2018 plan year must be filed by February 28, 2018.
The IRS guidance provides for an exception to the effective date of 2018. For purposes of minimum funding requirements and PBGC variable rate premium calculations, the implementation of the morality table can be postponed to 2019 if either the change will be administratively impracticable or create a greater than de minimis adverse business impact. Informal statements from the IRS have indicated that an adverse business impact would be very generously interpreted. Therefore, many plan sponsors may be able to postpone the implementation for an additional year for minimum funding requirements and for PBGC premium calculations. The election of much of the delayed implementation date does not require a formal application but, rather notification of the plan actuary that the delay should be implemented. Note, there is no delay permitted for use of the new mortality tables for lump sum payments.
Mortality Tables for Determining Present Value Under Defined Benefit Pension Plans, https://www.gpo.gov/fdsys/pkg/FR-2017-10-05/pdf/2017-21485.pdf; Updated Static Mortality Tables for Defined Benefit Pension Plans for 2018, Notice 2017-60, https://www.irs.gov/pub/irs-drop/n-17-60.pdf; Revenue Procedure 2017-5, https://www.irs.gov/pub/irs-drop/rp-17-55.pdf.
Law Firm Commits Malpractice By Failing to Advise Clients of Controlled Group Status, Resulting in Withdrawal Liability Assessment
Businessmen Neal Cohen and Darren Chaffee contacted the Michigan law firm of Jaffe Raitt Heuer & Weiss (“Jaffee”) for advice regarding liabilities associated with the potential purchase of LSI Corporation (“LSI”). In particular, Cohen and Chaffee had learned that LSI’s union employees participated in an underfunded multiemployer pension plan and wanted to “be sure that we aren’t personally liable or put our other assets/companies at risk” regarding estimated pension withdrawal liability of $3.9 million.
Weiss, the partner who managed the relationship with Cohen and Chaffee, explained that withdrawal liability would only be of concern if the two had “common ownership” interests that constituted a controlled group. Chaffee and Cohen stated that they did not have common ownership of any entities, and Weiss assured them that they could not be held liable for the pension withdrawal liability. Chaffee and Cohen purchased LSI and after three years of financial struggles to sustain the company, LSI terminated its entire union workforce and was assessed withdrawal liability of $3.3 million.
Cohen and Chaffee filed a malpractice suit against Jaffee. The key legal issue was whether Jaffee breached the standard of care by failing to properly advise its clients about the controlled group rules.
Determining whether businesses are in a controlled group or under common control requires the proper application of a complicated set of rules, and a thorough understanding of the relationships among the businesses and their owners. Whether businesses are under common control depends upon whether they have a parent-subsidiary or brother-sister relationship.
Parent-subsidiary control exists if one entity possesses at least 80% of the capital or profit interests of the other entity. Two businesses are members of a brother-sister common control group if the same 5 or fewer individuals have a controlling interest and effective control. A controlling interest means the same 5 or fewer individuals together own at least 80% of each business. Effective control means the same 5 or fewer individuals have identical ownership across both businesses in excess of 50%, taking into consideration each owner’s interest where it is the smallest.
In addition to conducting a complex ownership analysis, controlled groups may be found to exist through “attribution” of ownership. “Attribution” means an ownership interest is deemed to exist by virtue of an indirect relationship. Here, Cohen and Chaffee each owned separate companies and those companies owned another business, SSL Assets. Under the attribution rules, an ownership interest in a company that is held by a partnership or corporation is deemed to be proportionally owned by the partners or owners who hold at least a 5% interest. While Cohen and Chaffee did not have direct ownership of SSL Assets, their separate companies’ ownership interest in SSL Assets was deemed to be held by Cohen and Chaffee through “attribution.”
Application of the brother-sister and attribution rules resulted a determination that SSL Assets was in a controlled group with financially troubled LSI.
Evidence introduced at trial showed that Weiss failed to gather any information on the ownership structure of the entities in which Cohen or Chaffee had an interest. Moreover, Weiss stated that he did not have a “legally accurate” understanding of the controlled group rules, nor did he understand the specifics of the brother-sister control test or attribution rules.
The jury concluded that Jaffee breached its duty of care in providing legal advice, which caused damages of more than $6 million to Cohen and Chaffee. However, the jury determined that Cohen and Chaffee could have mitigated their losses, presumably by not investing additional funds in attempting to save LSI. Thus, the jury reduced its award to $1.7 million for Cohen and Coffee, but awarded damages of $3.3 million to SSL Assets, the amount of the withdrawal liability.
Cohen v. Jaffe Raitt Heuer & Weiss, P.C., (E.D. Mich., 2017).
ESOP Settlements Shed Light on DOL’s Expectations for ESOP Fiduciaries
The Department of Labor (“DOL”) recently settled three lawsuits against First Bankers Trust Services (“FBTS”) alleging that FBTS, as trustee for three Employee Stock Ownership Plans (“ESOP”), breached its fiduciary obligations under the Employee Retirement Income Security Act of 1974 (“ERISA”) in connection with FBTS’ approval of stock purchases by the plans. In total, the settlements require FBTS to restore $15.75 million to the plans. Most notably, FBTS also agreed to an extensive set of procedures it will follow when handling any future ESOP transactions. In addition to the settlement with FBTS, DOL recently reached a proposed settlement agreement with James F. Joyner III, a special trustee for an ESOP. The proposed settlement in that case outlines similar (but not identical) procedural requirements for the special trustee to follow in the future.
The settlements provide detailed procedures for the ESOP trustees to follow on each of the following topics:
The settlement agreements make clear that the procedures outlined are not intended to specify all of, or in any way supersede, the ESOP trustee’s fiduciary obligations under ERISA. While the settlement agreements are non-binding on third parties, they provide important insight on DOL’s due diligence expectations for ESOP fiduciaries.
Acosta v. First Bankers Trust Services, Inc., (S.D.N.Y., 2017); Acosta v. First Bankers Trust Services, Inc. (S.D.N.Y., 2017); Acosta v. First Bankers Trust Services, Inc., (S.D.N.Y., 2017); Acosta v. BAT Masonry Co., Inc., (W.D. Va., 2017) (proposed settlement with J. Joyner III).
Employer May Not Challenge Amendment to Multiemployer Plan Rehabilitation Plan That Affects Withdrawal Liability
If a multiemployer pension plan’s funding status is less than 65%, the plan must adopt a rehabilitation plan that is intended to enable the plan to improve its funding status or forestall possible insolvency. In a recent case, a multiemployer plan had amended its rehabilitation plan in 2013 to provide that, if an employer withdraws from the plan when the plan has an accumulated funding deficiency under Section 304 of ERISA, then the withdrawing employer will be liable for its pro rata share of that accumulated funding deficiency in addition to any withdrawal liability determined to be owed by the employer. When a participating employer withdrew from the plan in 2016, the plan demanded payment from the employer for its pro rata share of the accumulated funding deficiency. The employer filed an action for declaratory relief in Federal district court seeking an order that the amendment to the rehabilitation plan permitting the plan to assess the pro rata share of the accumulated funding deficiency violated ERISA.
The court held that, while an employer has standing under Section 502(a)(10) of ERISA to file a civil action to require a multiemployer plan to adopt, update, or comply with a rehabilitation plan in accordance with Section 305 of ERISA, an employer does not have standing under ERISA to challenge a plan’s amendment to its rehabilitation plan or the plan’s compliance with its rehabilitation plan. Keyes Fibre Corp. v. Pace Industry Union-Management Pension Fund, M.D. Tn. 2017).