Fiduciary Regulation May be Substantially on Hold, But Other Regulators are On the Move
Once upon a time, our retirement plan worries were primarily generated by the U.S. Department of Labor (“DoL”) or the Internal Revenue Service and their regulatory and enforcement efforts. In more recent times we have seen agencies asking questions about retirement plans that were historically and statutorily within the jurisdiction of other agencies. With the long term delay of the full implementation of the DoL’s fiduciary regulation and related prohibited transaction exemptions, we are seeing at least one other federal agency as well as some state regulators stepping up to attempt to fill the void. Retirement plan fiduciaries, investment committees and administrators should be aware of these developments and understand the implications for their roles with respect to the retirement plans.
The SEC settled its charges against Ameriprise for overcharging retirement account customers for mutual fund shares by recommending and selling higher–fee mutual fund shares to retail retirement account customers and for failing to provide sales charge waivers. They recommended and sold higher-fee share classes when lower-fee share classes were available and did not tell their customers of the availability of lower-fee share classes or the possibility of a fee waiver. Ameriprise settled the administrative and cease and desist proceedings without admitting or denying the findings and consented to a cease and desist order, a censure and payment of a $230,000 penalty. According to the consent order, the customers impacted “may include” 401(k) plans, 403(b) pans, profit-sharing plans, defined benefit plans and certain IRA plans. In this litigious era, plan fiduciaries should be careful to review the advice received and document such review and analysis related to the investments offered, the class of shares available and direct and indirect compensation related to the investments.
Massachusetts has filed an administrative complaint against Scottrade, Inc. regarding its sale contests involving retirement accounts violating its internal policies to comply with the DoL’s fiduciary rule. Several states have proposed or passed legislation to mirror some of such rule’s requirements, so while the DoL’s fiduciary rule is for the most part suspended, it has begun to be reincarnated in other forms and enforcement efforts and cannot be ignored. While ERISA preemption may protect some plans from state regulation, that will depend on what each state’s legislation is targeting in its regulation and it will not impact civil enforcement.
Since there are a number of parties involved in these enforcement efforts, it is best to prepare a defense before one is faced with a challenge to his or her acts in a fiduciary capacity. While the fiduciary regulatory package may be on hold for the most part, plan fiduciaries should remain vigilant in monitoring their fiduciary duties and documenting their procedural prudence.
Tax Reform’s Impact on Schedule C Reporting for Expenses in 2018
The Tax Cut and Jobs Act (P.L. 115-97) (the “Tax Act”) enacted late last year has repercussions for reporting of indirect compensation related to meals provided by plan service providers in 2018. Meals provided by service providers were previously excluded from Form 5500 Schedule C reporting as “Excludable Non-Monetary Compensation” (72 Fed. Reg. 64731,64825 (Nov. 16, 2007)); however, the meals that were excludable are only those of insubstantial value that were tax deductible for federal income tax purposes by the person providing the meal or give so that they were not taxable income to the recipient. Section 13304 of the Tax Act eliminated the deduction for meal expenses for entertainment. So, unless there is new guidance on the Schedule C reporting requirements, service providers to plans should be tracking and reporting meals provided to plan sponsor personnel as entertainment on and after January 1, 2018. Plan sponsors may want to inquire about their vendor’s compliance with tracking this so that their Form 5500’s schedules are correct and complete when filed.
DOJ Memo to U.S. Attorneys Regarding Guidance Policy in Litigation has Implications for Health and Retirement Plans
Late in January, the Associate Attorney General issued a memorandum to the Department of Justice (“DOJ”) heads of civil litigation in the U.S. Attorneys indicating that the DOJ should not be enforcing in litigation positions taken only in guidance that has not been through the full regulatory notice and comment procedure. Plan sponsors and practitioners recognize that much guidance in recent years has come from processes other than the full regulatory review process, but that does not mean that we can disregard all of that guidance because if the sub regulatory is merely interpreting the statute or a lawful regulation it is not impacted. The new policy is that the sub regulatory guidance does not create binding requirements that do not already exist in a statute or regulation and that the DOJ litigators may not use noncompliance with the guidance documents as a basis for providing violations of applicable law in the cases they are litigating. Note this memo is only going to come into play once an attorney from the DOJ U.S. Attorneys Civil Enforcement group is pursuing enforcement and it does not alter enforcement by the subject matter regulating agencies which for a plan sponsor can involve significant expense.
This memo also does not alter whether a plan sponsor might be at risk for class actions or private actions alleging noncompliance based on sub regulatory guidance as what is interpreting and construing a statute can always be debated. While we have seen an abundance of sub regulatory guidance in the health plan area (FAQs), we have also seen such guidance in the retirement plan areas. For instance, the DoL’s Field Assistance Bulletin on a plan sponsor’s obligation with respect to finding missing participants so this position should be kept in mind when dealing with enforcement initiatives in all types of employee benefit plans.
SCOTUS Again Considers Claim of Lifetime Retiree Medical Benefits
The U.S. Supreme Court again admonished that retiree medical benefit provisions in collective bargaining agreements are to be interpreted “according to ordinary principles of contract law” just as it had stated in its decision in M&G Polymers USA, LLC v. Tackett in 2015. SCOTUS reversed the Sixth Circuit’s decision in CNH Industrial N.V. v. Reese and remanded the case for further proceedings consistent with its interpretation stating, “thus, the only reasonable interpretation of the 1998 agreement is that the health care benefits expired with the collective-bargaining agreement expired in May 2004.” SCOTUS again made it clear that the presumptions used in the Sixth Circuit under its Yard-Man decision to find inferences to presume lifetime vesting of benefits were not able to be used to generate an ambiguity in the contract to then allow in other extrinsic evidence. Lesson learned: consultation with a good labor lawyer on the collective bargaining agreement is important.
Short Term Limited Duration Insurance Proposal
The DoL proposed regulations on Association Health Plans earlier this year and next a proposal to permit the short term limited duration health insurance policies to be offered for up to 12 months instead of 3 months as provided under the Affordable Care Act (“ACA”). First, these are both just in the form of proposed regulations and they are not full regulations and thus they are not in effect, nor do they bind anyone. Employers will want to watch what happens in this area as the availability of these may impact the pressures on the employer sponsored health plans and in the insurance is available on the insurance marketplaces created under the ACA. Both the Association Health Plans and the short term limited duration health insurance will not be required to provide the full benefits under an ACA compliant health insurance policy and thus should be less costly. If these are less costly than the ACA compliant health insurance policies, the healthier individuals are more likely to elect these lower cost alternatives pushing the less healthy to the ACA compliant policies offering more complete coverage and toward employer sponsored health plans. If the less healthy move toward the marketplace and employer sponsored health plans, this is likely to increase pressure on employer sponsored health plans both in terms of costs and in requests to enroll.
Vasectomy or Male Contraception Benefit Disqualifies from HDHP Status
While some state insurance laws have recently included coverage for vasectomy and male contraception as part of the state law health insurance coverage mandates, the Internal Revenue Service (“Service”) clarified that such coverage is not preventive coverage under the guidance regarding what constitutes a High Deductible Health Plan for purposes of being eligible to make a Health Savings Account deductible contribution, nor is it required coverage under the ACA. Thus, having such coverage makes the individual not eligible to make and take a federal income tax deduction for contributions to a health savings account. However, because certain states have mandated such coverage be provided without a deductible applicable to such services or supplies and because some of those states will not be able to immediately alter the state law requirements, the Service has provided transition relief for individuals in states where state laws mandate coverage of male contraceptive services for periods before 2020 if their policy provides such coverage before the individual satisfies the minimum deductible for the policy to be a high deductible health plan.
If an individual is covered by a health policy in a state where state law mandates coverage of a vasectomy or for male contraception before the individual satisfies the federal law minimum deductible for a high deductible health plan, for any period before 2020, this will not disqualify such individual from being treated as eligible for a deduction for making a contribution to a health savings account, provided the individual does not have other health coverage that makes him ineligible to contribute to a health savings account (e.g., if the other coverage was a general purpose health savings account.)
HSA Contribution Limit Dropped for 2018
Yesterday the Service released a notice that adjusted limits as the result of indexing changes in the Tax Cuts and Jobs Act enacted late in 2017. This notice reduced the family limit on Health Savings Account Contributions from $6900 to $6850. This is a limit which if exceeded results in the individual incurring an excise tax. The good news is that employees can still adjust the amount that they contribute to their HSA during 2018 to avoid exceeding this limit.
Employers offering High Deductible Health Plans with Health Savings Accounts should consider notifying their employees of this reduced limit on the total contributions to the Health Savings Account for those with family coverage in 2018 so the employees can reduce their contributions. While an employer could reduce any seed money it has not already funded as an alternative, a payment of the $50 reduction to employees with family coverage to make up the difference may raise issues under the Fair Labor Standards Act for employees who are not exempt from the FLSA’s mandated overtime calculation, and also under various state law minimum wage and overtime calculation statutes. Employers should also consider whether a payment only made to employees with family coverage might not be perceived as fair by all members of the workforce.
The other limits for high deductible health plans with respect to minimum deductibles and out of pocket maximum limits were not altered, only the contribution limit for the family coverage based health savings account.