On behalf of the ESOPs & Employee Benefits team, we hope you’re enjoying the first days of Spring, when the longer days allow more time to ponder the ever-changing landscape of employee benefits compliance. Please find below a few of our thoughts on both emerging benefits issues as well as longstanding rules that employers should keep in mind.
 
New Form 5500 Compliance Questions for Retirement Plans
 
Retirement plan sponsors will see a new series of IRS compliance questions as they start to file their 2023 Form 5500s. Added to the end of the Form 5500-SF (for smaller plans) or to Schedule R of the Form 5500 (for larger plans), plan sponsors will now need to respond to the following inquiries:

• Whether the plan is aggregated with any other plans for purposes of minimum coverage testing and certain nondiscrimination testing. This question will elicit whether the plan sponsor maintains other plans that it combines for certain types of compliance testing. This could cover one employer with multiple plans (or multiple types of plans) or several different employers in a controlled group that sponsor separate plans but, either voluntarily or out of necessity, combine those plans for compliance testing purposes.
• How a 401(k) plan passes employee deferral and employer matching nondiscrimination testing. This can include either a “safe harbor” 401(k) plan that provides employer contributions in exchange for being exempt from certain compliance tests, or a 401(k) plan that performs annual ADP and ACP testing. 
• For employers that use a pre-approved plan document, the date and serial number of the IRS opinion letter that corresponds to the plan document. The response here will indicate whether the plan has been restated (a mandatory process once every six years) on a currently approved plan document.

While it’s too early to tell exactly what the IRS or DOL may do with the responses, the questions could indicate upcoming audit, investigation, or compliance check topics. In any event, employers should use the opportunity to ensure they can confidently answer those questions and, if they can’t, work with their advisors to make sure their plans are compliant.
 
Corporate Transparency Act Compliance for ESOP-Owned Companies
 
While the newly effective Corporate Transparency Act will have a broad impact on many types of new corporate entities, ESOP-owned companies should be aware of the unique ways they could be impacted. Depending on their revenue, employee headcount, and other factors, ESOP-owned companies may or may not be exempt from the beneficial ownership filing requirements. Even larger ESOP-owned companies—especially those using holding companies—may need to closely review their corporate structure to ensure they either meet the exemption requirements or file as appropriate. If ESOP-owned companies are required to file, their trust ownership structure will result in filings that may differ from other corporate entities.
 
We have detailed the CTA filing requirements, relevant exemptions, and potential pitfalls for ESOP-owned companies here.
 
Keeping Tabs on Affiliated Employers
 
Although by no means a new issue, employers failing to recognize or properly handle affiliated entities remains a major compliance concern both for retirement plans and welfare plans.
 
At the risk of oversimplification, different entities can be “affiliated” with one another in two ways—by ownership or by providing services. By way of ownership, entities can be in a “parent-subsidiary” relationship where one entity owns at least 80% of another, or a “brother-sister” relationship where five or fewer people own at least 80% of two different entities. Alternatively, where certain service organizations are involved (like doctors, hospitals, lawyers, accountants, etc.), if two entities have less overlapping ownership but one provides services to or coordinates services with the other, they can be affiliated. Making these determinations particularly difficult, the tax code also has a complicated set of rules for deemed ownership among family members, trusts, upstream entities, and other structures that would allow evasion of the underlying rules. Determining affiliation among different entities can be an enormous undertaking depending on the complexity of the organizational chart and relationships.
 
While the analysis itself can be complicated, the consequences are clear: Affiliated entities are treated for most benefits purposes as one single employer.
 
For example, if two entities each sponsor their own separate 401(k) plan covering only their employees, but the two entities are affiliated, each employer would need to perform 401(k) compliance testing taking into account its own employees as well as the employees of the other employer, much like if the combined employees were all employed by one employer. Unless planned for, this can wreak havoc on compliance testing.
 
Relatedly, employees of all affiliated employers are counted when determining whether a particular individual employer has at least 50 full-time employees and is therefore subject to ACA coverage. Take two entities in a “brother-sister” group, where each entity has only 40 full-time employees. Separately, they would both be exempt from most ACA requirements. But, when combined, they are each considered to have 80 full-time employees, making them both large employers subject to the ACA. The consequences can be extraordinary here as well.
 
There are risks in the other direction too. If one assumes two entities are related closely enough but they are not—for example, a 75%-owned subsidiary—different problems arise. If both entities are covered by the same retirement plan, they will need to be considered separately for most compliance testing. On the welfare side, if both participate in the same group health plan, they may have created a “multiple-employer welfare arrangement,” which in Virginia either requires a separate and complicated registration with the State Corporation Commission (for fully insured health plans) or is illegal without becoming licensed as a health insurance carrier (for self-insured plans).
 
In short, lack of awareness or assumptions in either direction can be dangerous. Employers who believe they may have affiliated entities—or who may assume they do but actually might not—should make sure they have a clear understanding of their status and its consequences.
 
Recent Lawsuits Hint at Broadening Scope of ERISA Class Actions Topics
 
If the last few months are any indication, the accelerating trend of ERISA class action lawsuits will continue to pick up steam. What started about fifteen years ago as a string of 401(k) fee-related lawsuits, and then morphed into a broadside on 403(b) plans, church plans, COBRA notices, and other types of benefit plans, is expanding further afield. While many of the suits are filed against very large employers where a class action can provide a meaningful aggregate recovery, the lawsuits can inform employers of all sizes.
 
Recently filed claims have challenged, among other things, 401(k) plans’ use of forfeitures to offset employer expenses and contributions; pension plans’ decisions to “de-risk” by buying annuities from private equity-owned insurance companies (as opposed to insurers owned in more traditional forms); re-leveraging transactions in which ESOPs purchase additional shares from the plan sponsor (a topic to be covered in more depth soon); and, most recently, a large self-insured employer’s alleged fiduciary failures regarding its prescription drug pricing.
 
It’s impossible to forecast the outcome of these and similar cases, but their pace and scope make it clear that fiduciary decisions that previously hadn’t received significant attention can, in fact, be fraught with risk. Employers should continue to monitor these types of cases with their advisors to learn from the missteps of companies sued and adopt best practices that come out of their resolution.