Employee Benefits Developments - November 2016

by Hodgson Russ LLP

Hodgson Russ LLP

The Employee Benefits practice group is pleased to present the Benefits Developments Newsletter for the month of November, 2016.


ACA Information Reporting – Bad News and Good News

First, the bad news: The 2016 final forms and instructions for 1094-C and 1095-C are out.  Form 1094-C can be found here and the instructions can be found here. This release reminds us that the filing deadline is around the corner. Among other changes, new Series 1 indicator codes have been added – codes 1J and 1K – pertaining to conditional offers of spousal coverage. 

Now, the good news. The IRS has extended the due date for furnishing to individuals the Forms 1095-B and 1095-C from January 31, 2017, to March 2, 2017. IRS Notice 2016-70. The automatic and “good cause” extension provisions in the regulations that govern the reporting requirements do not apply to further extend the March 2, 2017 due date for the individual filing. The Notice does not change the IRS filing deadlines: February 28, 2017 (for paper filings) and March 31, 2017 (for electronic filings). In more welcome news, the Notice extends the interim good faith compliance relief to the 2016 filings. If the 2016 forms are filed on time and completed in good faith, the IRS will not assess a penalty for incomplete or incorrect information.


New ACA Regulations Define Short-Term, Limited Duration Insurance

The Departments of Labor, Health and Human Services, and the Treasury (collectively, “Departments”) issued final regulations, including clarification on the definition of short-term, limited duration insurance. These final regulations are substantially similar to the previously issued proposed regulations, and will become effective January 1, 2017.  Short-term, limited duration coverage is a form of health insurance designed to fill temporary gaps in coverage when a person is transitioning from one health plan to another.  Although it is not considered an excepted benefit, like an excepted benefit, short-term, limited duration coverage is not subject to many Affordable Care Act (ACA) requirements. To address the practice of short-term, limited duration insurance being sold as a type of longer term primary coverage, the Departments limited the duration of this type of coverage to less than three months. Short-term, limited duration insurance must also include a prominent notice on the contract stating that it does not qualify as minimum essential coverage.  In addition to defining short-term, limited duration insurance, the final regulations provide additional guidance on the application of ACA rules to travel insurance. For travel insurance to be considered an excepted benefit, and therefore not subject to many of the ACA rules, it must not include major medical plans that provide comprehensive medical coverage for travelers with trips lasting six months or longer. In light of these final regulations, employers should review their policies to confirm they are consistent with these requirements.


Compliance Questions to Skip on 2016 Form 5500-Series Returns

The IRS has decided that filers of Forms 5500 (including Schedules H, I and R), 5500-SF, and 5500-EZ, should not answer various compliance questions for the 2016 plan year filings:


2016 Plan Year


- Preparer Information (page 1 bottom)

Schedule H

- Lines:

  • 4o
  • 6a-d

Schedule I

- Lines:

  • 4o
  • 6a-d

Schedule R

- Lines:

  • 20a-b
  • 21a-b
  • 22a-b

Form 5500-SF

- Preparer Information (page 1 bottom)

- Lines:

  • 14a-d
  • 15a-b
  • 16a-b
  • 17a-b
  • 18
  • 19


- Preparer Information (page 2 bottom)

- Lines:

  • 4a-d
  • 13a-b
  • 14
  • 15

For those who may still be filing for 2015, the IRS has also published a list of compliance questions to skip on those 5500-series returns.


Court Dismisses “Holder” Stock Drop Case

Forte v. U.S. Pension Committee et al. S.D.N.Y.

Last month, we wrote about BP, RadioShack, IBM, and Whole Foods prevailing in stock drop cases brought against each of them.  In a recent putative class action, a plan participant brought a stock drop suit against three retirement committees for the Sanofi US Group Savings Plan (the “Plan”) and two Sanofi employees.  The complaint alleged that the defendants breached their fiduciary duties by allowing Plan participants to continue to invest in the Sanofi stock fund under the Plan when the defendants had knowledge that the stock fund was no longer a prudent investment because of an undisclosed illegal kickback scheme allegedly engaged in by Sanofi.

The named plaintiff alleged that, upon learning of the alleged kickback scheme, defendants should have taken action to remove the stock fund as an investment option under the Plan or otherwise prevent Plan participants from purchasing shares in the stock fund during the relevant time period.  In addition, the named plaintiff alleged that the employee-defendants should have alerted their co-fiduciaries and Sanofi’s board of directors about the alleged kickback scheme, which would have prompted a curative public disclosure and a correction in the stock price.

During the relevant time period, the named plaintiff did not direct the Plan’s administrator to purchase or sell any Sanofi stock allocated to his account under the Plan’s stock fund; however, the named plaintiff alleged that the failure to disclose the alleged kickback scheme caused him to forego alternative investments that were available to him under the Plan. 

The court dismissed the complaint, holding that the named plaintiff lacked standing to bring suit.  In particular, because the named plaintiff had neither purchased stock at an inflated price nor sold stock for a loss, he had not suffered a sufficient injury to possess standing.  As a result of its holding, the court did not decide whether the complaint satisfied Dudenhoeffer’s pleading standard for public company stock drop cases. (Forte v. U.S. Pension Committee et al. (S.D.N.Y.)


ESOP Termination Gone Wrong – Plan Fiduciaries Held Personally Liable

Perez v. California Pacific Bank (N.D. Cal. 2016)

California Pacific Bank (the “Bank”) is a privately-held bank that extends credit to small, minority-owned businesses. The Bank sponsored an employee stock ownership plan (ESOP), and certain officers and directors of the Bank were trustees of the ESOP. At the end of 2010, the Bank terminated the ESOP. 

Under the terms of the ESOP, when the ESOP is terminated, payment to each affected participant was supposed to be made in cash as soon as practicable after liquidation of the trust assets, but not later than one year following the December 31, 2010 termination date. Instead of plan mandated cash distributions on termination, the ESOP distributed Bank stock held by the ESOP to the individual retirement accounts of the Plan participants. At some later point, some (but not all) participants were paid cash by the Bank’s senior credit officer for the Bank shares they received in connection with the ESOP termination – some (but not all) of those payments included a small amount of interest. Some of the participants who exchanged their Bank shares for cash received cash based on the appraised value of the Bank stock at the time of termination ($12.75 per share), while others received less than $12.75 per share.

In light of the Bank’s mishandling of the ESOP termination, the U.S. Department of Labor (DOL) brought an ERISA enforcement action against the ESOP and four ESOP trustees. The DOL’s claims for relief included a claim that the ESOP failed to liquidate and distribute the Bank shares as cash upon termination of the ESOP. Based on the evidence and arguments presented at trial, the court held that the defendants violated ERISA and were therefore jointly and severally liable to pay principal and interest to the ESOP participants in an amount exceeding $700,000 as damages for their failure to liquidate and distribute bank shares held by the ESOP as cash in accordance with the terms of the ESOP. In support of that holding, the court ruled that the losses suffered by the individual ESOP participants should be deemed “losses to the Plan,” and that the facts clearly provided a basis “to impose joint and several liability on all four individual fiduciary defendants.” The defendants, in response to the DOL assertions, argued, in part, that certain participants had been “happy” to sell their Bank shares for less than the appraised value of $12.75 per share. The court specifically rejected that argument by stating that “[h]appiness is not a recognized exception to the plain terms of an ERISA plan, and defendants failed to provide any basis in the case law or statute that would excuse compliance on that ground.”  The court also determined that the defendants also were jointly and severally liable to pay to the ESOP an additional amount approaching $160,000 for amounts that were improperly transferred from the ESOP to the Bank.

While the problems with the management of this ESOP termination may seem relatively obvious to many familiar with the operation of qualified retirement plans, this case serves as a good reminder that basic steps like understanding and following the terms of a plan document, and seeking the advice of knowledgeable advisors, can be important to avoiding missteps in the operation or termination of a plan.  Perez v. California Pacific Bank (N.D. Cal. 2016)


IRS Updates the Employee Plans Compliance Resolution System (EPCRS)

The IRS recently updated the Employee Plans Compliance Resolution System (“EPCRS”), which sets out guidance for plan sponsors of certain retirement plans, such as 401(k) and 403(b) plans, to correct errors that could otherwise result in loss of tax-favored status.  The EPCRS consists of three programs: (1) the Self-Correction Program (“SCP”), which allows plan sponsors to correct certain failures without contacting the IRS or paying a fee; (2) the Voluntary Compliance Program (“VCP”), which allows plan sponsors to receive IRS approval for a proposed correction of a plan failure with payment of a fee; and (3) the Audit Closing Agreement Program (“Audit Cap”), which allows plans under audit to be corrected with payment of a sanction. 

Plan sponsors may begin to use the updated EPCRS guidance on January 1, 2017.  The guidance, published in Revenue Procedure 2016-51, modifies and replaces the guidance contained in Revenue Procedures 2013-12, 2015-27, and 2015-28.  While the new revenue procedure incorporates many provisions from the prior revenue procedures, it also makes several changes.  Some of the significant changes include:

  • Determination letters:
    • Plan sponsors may no longer submit determination letter applications as part of the VCP or SCP process. 
    • An individually-designed plan that has a favorable determination letter no longer needs to have a “current” Favorable Letter when using SCP to correct significant Operational Failures.  
  • VCP fees:  Fees for VCP submissions will now be user fees that will be published in the IRS’ annual Employee Plans user fees revenue procedure (Note: for 2016 fees, consult Rev. Proc. 2016-8 and 2013-12).
  • Clarification regarding compliance statements:  The new guidance clarifies that a compliance statement issued by the IRS in response to a VCP submission involving correction of a Plan Document Failure or Operational Failure with a plan amendment, relates only to the correction, and is not a determination that the plan or amendment meet qualification requirements in form.
  • Fee refunds for Anonymous Submissions:   If the IRS and a VCP applicant making an Anonymous Submission cannot reach an agreement regarding a correction, the IRS will no longer refund any portion of the user fee.  The previous guidance to be replaced provides that the IRS would refund 50% of the user fee in such cases.
  • Timing of correction for Interim Amendment and Nonamender Failures:  The guidance clarifies that corrections of Interim Amendment and Nonamender Failure must be made before making a VCP submission.  All other corrective plan amendments necessitated by a VCP submission must be adopted no later than 150 days after the compliance statement date.
  • Audit CAP sanctions:  Sanctions for failures found on examination will now be based on a review of the facts and circumstances, but will generally not be less than what a VCP fee would be.  The previous guidance that will be replaced provides that the sanction would be a negotiated percentage of the Maximum Payment Amount.


PBGC Premium Rate Increases for 2017-2019

As a result of the Bipartisan Budget Act of 2015 and indexing, private-employer defined benefit plans will be subject to the following premium rates beginning with the 2017 plan year:


Single-Employer Plans

Multi-Employer Plans

Plan Year

Flat-Rate Premium:

Per Participant

Variable-Rate Premium:

Per $1,000 in unfunded vested-benefits   (“UVBs”)

Variable-Rate Premium:

Per participant Cap

Per Participant Flat-Rate
















The rates for 2018 and 2019 with an asterisk may ultimately be higher than the amount listed due to indexing.  Absent further legislation, all rates will be subject to indexing for plan years after 2019.


SEC Issues Some Guidance on Pay Ratio Disclosure

Provisions of the Dodd Frank Act require most public companies to disclose the amount of and the ratio between the annual total compensation of the chief executive officer and the medium compensation of all employees other than the chief executive officer.  The disclosure is required for the first fiscal year beginning on or after January 1, 2017.  Companies with a calendar fiscal year will need to provide the pay ratio with the 2018 proxy statement based on 2017 compensation information.  The disclosure requirement does not apply to emerging growth companies, smaller reporting companies, foreign private issuers, and registered investment companies. 

As companies have begun to prepare for this disclosure, there have been some recurring issues that arise under several areas of the regulations.  The Securities and Exchange Commission has issued guidance which provide guidance to some common questions.

A common question addressed by the guidance is whether a worker who is an independent contractor or leased employee must be included in determining the median compensation of all employees.  The guidance states that in determining whether a worker is an employee for this purpose does not depend on tax or employment law purposes but is based on the company’s overall employment and compensation practices.  If the company determines the compensation of that worker, the worker should be treated as an employee.  A company will not be determining the compensation if it only determines the minimum compensation level for the worker hired through a third party or as an independent contractor.  While this guidance is helpful, it does not provide a decisive answer in many situations. 

The pay ratio regulation also provides that a company may use compensation measures that consistently and reasonably reflect the annual compensation of employees.  The guidance indicates that this is a facts and circumstances determination.  The guidance provides some examples where a compensation measure does not reasonably reflect the annual compensation of an employee.   Under the pay ratio regulations a company may determine the annual compensation of the median employee by selecting a date within the last three months of the company’s last completed fiscal year.  The guidance provides further guidance in determining annual compensation if the determination date is other than the last day of the fiscal year.

Companies subject to this new pay ratio reporting requirement should have already begun the process of collecting data and setting up systems for making the determination.  These companies should review this new guidance and determine whether changes to the systems need to be made or if the process may be simplified.  (SEC Compliance & Disclosure Interpretations of Regulation S-K, Section 128C - Item 402(u) Pay Ratio Disclosure)



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.

© Hodgson Russ LLP | Attorney Advertising

Written by:

Hodgson Russ LLP

Hodgson Russ LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.