Health & Welfare Plans

Health Care Reform: IRS Transitional Relief Delays Pay or Play Reporting and Penalties
As we reported in an alert on July 3, the IRS has provided transitional relief to employers that delays pay or play reporting and penalties until 2015.  Pay or play reporting obligations (and for many employers, at least some penalties) were set to take effect in 2014 pursuant to the Affordable Care Act.  Many employers have struggled with administrative details, recordkeeping, and other tasks necessary to comply with the pay or play rules, and the IRS’s transitional relief is intended to allow the IRS to have time to simplify informational reporting requirements.  The delay is also intended to provide employers additional time to adapt their health coverage to comply with the law.  The IRS provided additional detail on the delay in Notice 2013-45.  The IRS indicated that pay or play will be “fully effective for 2015.”  Further, the IRS stated that individual shared responsibility rules and premium tax credits (for taxpayers) will still be effective in 2014.

Even though reporting and penalties will not be effective in 2014, the IRS indicated that employers should still engage in real-world testing of reporting systems and plan designs to ensure a smoother transition to full implementation in 2015.  This advice is sound, as the tasks of tracking hours and eligibility, determining potential penalties, and potentially restructuring plan designs and employee contributions to avoid penalties require careful attention and perhaps some trial and error.  At least in 2014, errors will be penalty free.

Retirement Plans

DOL Issues Guidance on Revenue-Sharing Arrangements
In Advisory Opinion 2013-03A, the DOL determined that revenue-sharing payments received by a plan recordkeeper did not constitute plan assets.  More importantly, the opinion provided additional guidance on the subject of revenue-sharing arrangements in general and fiduciary standards applicable to such arrangements. Principal Life Insurance Co., which requested the opinion from the DOL, provides recordkeeping and other administrative services to a number of defined contribution plans, and makes investment options available for these plans.  Principal receives and retains revenue-sharing payments from these investments (though Principal may agree with a client to maintain a record of such payments and apply them to pay plan administrative expenses, or apply them directly into a plan account). Principal asked the DOL for an opinion on whether these payments constituted “plan assets” of their clients’ plans.

The DOL applied “ordinary notions of property rights” to determine whether the payments were plan assets.  The DOL ultimately concluded that while revenue sharing amounts would be plan assets in some circumstances, in this particular case nothing in the facts led to the conclusion that the payments were assets of the client’s plan “before the plan actually receives them.”  However, the client plan’s “contractual right to receive the amounts” or to have them applied to plan expenses would be an asset of the plan. The DOL also cautioned that plan fiduciaries must act prudently and in the best interests of plan participants in the negotiation of the specific formula and methodology under which revenue sharing will be credited to the plan.  While the DOL’s opinion does not answer all questions concerning revenue sharing arrangements, it provides some guidance that may help plan fiduciaries determine prudent strategies in this area.

DOL Field Assistance Bulletin Permits One-Time “Reset” in Timing of Participant Disclosures
In 2010, the DOL published its final regulation on disclosure requirements for participant-directed individual account plans (such as 401(k) plans).  A “comparative chart” is required to be furnished to participants, showing the plan’s designated investment alternatives and fees. The regulation requires plan administrators to disclose this information at least once in any 12-month period.  The first disclosure was required by August 30, 2012 for calendar year plans.  The requirement to provide this disclosure at least once in any 12-month period led to concern among plan administrators and service providers that the disclosure had no correlation to other annual participant disclosures.  Pursuant to Field Assistance Bulletin 2013-02, the DOL will permit a one-time reset of the timing of 2013 disclosure to be made no later than 18 months after the 2012 disclosure.  Plan administrators who have already furnished the 2013 comparative chart received the same relief with respect to furnishing their 2014 disclosure.  This one-time relief is intended to allow plan administrators and service providers to align these disclosures with other annual participant notices and disclosures, so they can be distributed in a single mailing.  

Public Plans

Teachers’ Retirement System Early Retirement Option Extended
On June 28, the Governor signed Senate Bill 1366 (now Public Act 98-042) into law, extending the TRS early retirement option (“ERO”) for public school teachers and school administrators for another three years.  Public Act 98-042 also significantly increased the required employee and employer contributions necessary for ERO to be available. For employees participating in the “new” ERO, the employer’s contribution will be 29.3% of the employee’s highest annual salary rate for each year the employee is under age 60.  Further, employees will be required to contribute 14.4% of their highest annual salary rate for each year that they are under age 60 or have less than 35 years of service (whichever is less).  These amounts are increased from the previous amounts of 23.5% and 11.5%, respectively.  In addition, PA 98-042 now only permits ERO to be elected by an employee if the employee’s last employer before retirement grants the employee’s application.  Nothing in the law requires employers to grant the employee’s application, though employers who elect to do so must adopt criteria with the “mutual consent” of the teachers’ union for the school district.

Illinois Conference Committee on Pensions Continues to Explore Pension Reform
Illinois lawmakers missed a July 9 deadline set by Governor Pat Quinn to provide a comprehensive bill on state pension reform.  Quinn criticized the 10-member committee, while the committee indicated that significant actuarial due diligence was still needed to ensure that any pension reform bill actually addressed the problem.  The committee continues to meet and hear testimony from various parties, though it is unclear what the ultimate product of the committee’s deliberations will be or when it will occur. 

City of Detroit Declares Bankruptcy, Eyes Public Pension Obligations
Detroit filed for bankruptcy protection under Chapter 9 of the U.S. Bankruptcy Code, becoming the largest city to ever file for bankruptcy.  Detroit’s public pension shortfall accounts for about $3.5 billion of its $18 billion in debt, and the city is exploring how to spread the effects of bankruptcy among pension payments to retirees and other creditors.  Meanwhile, unions and pension beneficiaries field suit in Michigan state court, arguing that the Michigan Constitution prohibits interference with public pensions.  While the state court ordered a withdrawal of the bankruptcy petition, the impact of the order is much in doubt due to a subsequent appeal of that order, as well as the potentially overriding effect of the federal bankruptcy petition itself.