The Employee Benefits practice is pleased to present the Benefits Developments Newsletter for the month of July 2018. Click through the links below for more information on each specific development or case.
IRS Permits Forfeitures to Fund Employer Contributions Used to Satisfy 401(k) Nondiscrimination Tests
Employer sponsors of 401(k) retirement plans have a new means of satisfying the nondiscrimination tests known as the Actual Deferral Percentage and Actual Contribution Percentage tests (“ADP and ACP”). Under certain circumstances, employers are permitted to make contributions to a 401(k) retirement plan to meet these nondiscrimination requirements, or to correct failed tests.
QNECs (Qualified Non-Elective Employer Contributions) or QMACs (Qualified Matching Contributions) are employer contributions that are 100% vested and may be used to satisfy such testing requirements. Rather than making new QNEC or QMAC contributions to address nondiscrimination testing issues, employer commenters on the proposed IRS regulations regarding the definitions of QNECs and QMACs indicated it would be beneficial for employers to use plan forfeiture accounts to satisfy the nondiscrimination requirements.
Prior to issuance of the proposed IRS regulations in January of 2017, forfeitures could not be used to address ADP or ACP nondiscrimination issues. This was so because of the requirement under prior IRS regulations that employer contributions – QNECs or QMACs – must be non-forfeitable at the time the contributions are contributed to the plan. By their nature, forfeitures were not permitted to be used to address nondiscrimination testing concerns because the amounts were subject to a vesting schedule and, hence, subject to forfeitability conditions when the amounts were contributed to the plan.
The IRS has now finalized regulations that permit forfeitures to be used to fund QNECs and QMACs, provided that the amounts are nonforfeitable at the time the amounts are allocated to participants accounts, rather than when such amounts are contributed to the plan. The final regulations amending the definition of QNECs and QMACs will take effect July 20, 2018, and apply to plan years beginning on or after that date. However, employers may apply the final regulations to earlier periods. Treasury Regulations §§1.401(k)-6 and 1.401(m)-5.
Fourth Circuit Agrees An Award Of Equitable Relief Is Not Warranted In Case Involving A Transfer Of 401(k) Plan Assets
In 1998, Bank of America (BOA) amended its 401(k) plan to provide eligible participants with the opportunity to transfer their account balances to BOA’s cash balance pension plan. BOA offered the transfer option because it believed it could obtain a higher return with the beneficiaries’ money than the participants were obtaining under BOA’s 401(k) plan. Many participants elected to transfer their 401(k) plan account balances to the pension plan. Nearly $2 billion of 401(k) plan assets were transferred to the pension plan.
In 2005, the IRS concluded that the transfers violated ERISA’s “anti-cutback” rules because the transfers stripped participants of the 401(k) plan’s “separate account feature” and exposed participants to the risk that BOA would invest the transferred assets poorly. The IRS imposed sanctions on BOA that included a $10 million fine, the obligation to establish a special purpose 401(k) plan to receive a transfer of assets that were initially transferred from the 401(k) plan, and making additional restorative payments to certain participants’ accounts. Participants also filed a lawsuit which included a claim premised on BOA’s violation of ERISA’s anti-cutback provision. Plaintiffs effectively sought to obtain equitable relief based on sharing in the “profits” BOA retained as a result of the transfers of participant 401(k) plan account balances to the pension plan.
In 2015, the Court of Appeals for the Fourth Circuit ruled that plaintiffs would have suffered a “legally cognizable ongoing injury” if BOA retained a profit as a result of the transfers of 401(k) plan balances to the pension plan and the pension plan’s investment of those balances. The Fourth Circuit also ruled that the plaintiffs’ claim for a share of the profit is an available form of equitable relief under ERISA, and remanded the case back to federal district court to determine whether BOA profited from the transfers. The district court conducted a four-day bench trial to determine whether, after it restored the separate account feature and paid a $10 million fine to the IRS, BOA could still be said to have profited from the 401(k) plan transfers to the pension plan. The district court, after listening to the expert testimony of both the plaintiffs and BOA, ruled in BOA’s favor and concluded that BOA did not realize a profit stemming from the transfers.
The plaintiffs appealed the district court’s ruling and the Fourth Circuit, in an unpublished opinion, affirmed the judgment of the district court that the plaintiffs were not entitled to an award of equitable relief because BOA did not retain any profit as a result of the transfers. In upholding the district court’s ruling, the Fourth Circuit reaffirmed its position that ERISA entitles plan participants to an accounting for profits attributable to an ERISA violation. ERISA does not allow a plan sponsor to wrongfully use plan participant funds for the sponsor’s benefit and, in such circumstances, the plan sponsor must disgorge the resulting benefit to plan participants.
In this specific case, however, the Fourth Circuit ruled that the district court was not required to follow plaintiffs’ proposed “proportionate-share-of-the whole” approach to assessing whether BOA profited from unlawfully transferred funds, although it was within its discretion to do so. The Fourth Circuit further ruled that the district court did not clearly err by concluding that the application of the proportionate-share-of-the-whole methodology was inappropriate in this particular case, or by relying on BOA’s “attribution” approach in determining BOA did not profit from the plan asset transfers. The Fourth Circuit concluded that there was adequate factual basis to deviate from the “proportionate-share-of-the-whole” methodology, which other courts have used to assess whether profits are realized from unlawfully commingled funds. It is worth noting that the Fourth Circuit was not unanimous in this ruling. The dissenting judge offered a strongly worded opinion that BOA profited “lavishly” from its unlawful use of the transferred assets for its own purpose, and that the district court “plainly abused its discretion” in the case. Pender v. Bank of America (4th Cir.).
Pension Funds’ Attempts to Pursue Successor Liability Extinguished
Central Grocers, Inc. and its affiliates filed for Chapter 11 bankruptcy. As part of the bankruptcy proceeding, the debtors sought to sell substantially all of their assets as part of a competitive bidding process free and clear of all claims, including any successor liability. Among certain of the debtors’ creditors were multiemployer pension funds that held unsecured claims for withdrawal liability. Supervalu Holdings, Inc. successfully bid on one of the debtor’s distribution centers where the debtor had employees on whose behalf it had made contributions to the multiemployer pension fund. The bankruptcy court approved the sale free and clear of all claims.
The multiemployer funds subsequently appealed, asking that the portion of the sale approval preventing them from pursuing Supervalu for the unsatisfied withdrawal liability under a successor liability theory be set aside. However, the district court held that, since the funds had not obtained a stay of the sale pending appeal as required by Section 363(m) of the Bankruptcy Code, there were no grounds to set aside the bankruptcy court’s approval. Accordingly, the funds’ appeal was dismissed. The Chicago Area I.B. of T. Pension Fund v. Central Grocers, Inc. (N.D. Ill.)
Court Rules Against Retiree Lifetime Health Benefits
The US Court of Appeals for the Sixth Circuit reversed a district court’s decision to continue a group of retirees’ lifetime health benefits. Generally, employers may reserve the right to prospectively amend or terminate welfare benefits, such as medical benefits. However, medical benefits may vest if a company contractually agrees to provide them for some future period. In this case, the plaintiffs were two groups of retirees, each covered under a separate collective bargaining agreement (CBA) with the defendant company. After the CBAs expired, the company sought to terminate the retirees’ medical coverage. The retirees’ sued, claiming that they were entitled to lifetime medical coverage pursuant to the terms of their CBAs. In ruling in the company’s favor, the Circuit Court noted that neither CBA contained a promise to provide benefits for the lifetime of the retiree and no indication that the provisions relating to retiree health care were exempt from the general durational clause governing the agreement. Furthermore, the court noted that there were no ambiguities in the CBAs that would require the court to look at any extrinsic evidence to determine the intent of the parties. This case is a reminder of the importance for parties to collective bargaining agreements (or other agreements such as employment agreements) to clearly draft their intentions regarding the duration of welfare benefits in those agreements. Fletcher, et al. v. Honeywell Int'l, Inc., (6th Cir. 2018).
Constructive Notice Sufficient for Imposition of Withdrawal Liability on Successor Employer in Purchase of Assets
In several earlier cases, courts have held that withdrawal liability may be imposed on a purchaser of assets when the purchaser is treated as a successor employer and had notice of a withdrawal liability. For example, in an asset purchase transaction if, as part of the due diligence process, the purchaser of the assets became aware of the withdrawal liability and if the purchaser is treated as a successor, the purchaser would be liable for the withdrawal liability if it is not paid by the selling entity. The purchaser would be treated as a successor if there was sufficient continuity in operations without interruption or substantial change.
In a recent case, the court held that actual notice of the potential withdrawal liability was not required. In this case, a private equity firm bought a hotel in Hawaii where the seller of the assets was party to a collective bargaining agreement that provided for participation in a multiemployer pension fund. Just before the transaction was completed, the seller stopped contributing to the plan and seller withdrew from the plan on the date of sale. The plan sent a notice of withdraw liability to the purchaser. The purchaser contested liability in this situation claiming that it lacked a formal notice of the withdrawal liability. The Ninth Circuit Court of Appeals held that constructive notice was sufficient to impose liability because the purchasers were deemed to have notice of the facts that “when using reasonable care or diligence should have” been discovered. The Court held that this would not impose strict liability on the purchasers of assets; liability would be imposed only if if the buyer, using reasonable care in the diligence process, should have discovered the withdrawal liability and if it was “fair” to impose the liability. As this case demonstrates, multiemployer plans continue to be aggressive in pursuing withdrawal liability against parties who did not directly contribute to plan and the courts have been willing to impose liability. Heavenly Hana LLC v. Hotel Union & Hotel Industry of Hawaii Pension Plan, 9th Cir., 2018.