Pension plans that are not fully funded for PBGC purposes have two parts to their PBGC premium. One part is a flat rate premium of $83 per participant in 2020 ($80 for 2019). The other is a variable rate premium that looks to the value of the plan’s “unfunded vested benefits,” which is the excess, if any, of the plan’s Premium Funding Target over the fair market value of plan assets. The Premium Funding Target is generally determined the same way as the plan’s funding target for ERISA Section 303 minimum funding requirements, with one important exception. The interest rate used to measure the Premium Funding Target is a “spot” rate, rather than an interest rate averaged over 24 months. In lieu of using the special premium discount rates, a plan sponsor may make an election (irrevocable for five years) to use smoothed discount rates, similar to, and in some cases identical to, the rates used to determine the minimum required contribution (the Alternative Premium Funding Target). The PBGC variable rate premium for 2020 is 4.5% of the plan’s unfunded vested benefits, subject to a headcount cap of $561 per participant.

With the recent decline in interest rates (and the possibility of further decline before yearend), plans may face an unexpected increase in their variable rate PBGC premium for 2020 because the value of the “unfunded vested benefits” may be quite a bit higher in 2020 compared to 2019. In this regard, each of the spot segment rates in December 2018, used for determining variable rate premiums for 2019 for calendar year plans, is at least 100 basis points higher than the comparable spot segment rates in October 2019. The spot segment rates in December 2019 will be used to determine variable rate premiums in 2020 for calendar year plans unless the Alternative Premium Funding Target has been elected. We recommend that plan sponsors check with their actuaries to determine estimated total PBGC premiums for 2020, and to evaluate whether it is advisable to undertake action to reduce the estimated premiums (e.g., by making additional contributions to the plan or electing the Alternative Premium Funding Target).

While the Setting Every Community Up for Retirement Enhancement Act (the SECURE Act) and its promise of truly open multiple employer plans (MEPs) sat with the Senate this summer, the US Department of Labor (DOL) and Internal Revenue Service (IRS) both issued guidance addressing MEPs.

DOL Final Regulations – MEPs Open Up for Bona Fide Groups or Associations

Under ERISA, only an “employer” may sponsor a pension plan. ERISA defines the term “employer” to include certain groups or associations of employers. The DOL has interpreted this to mean that only a bona fide group or association of employers may sponsor an MEP, thereby limiting the ability of employers to group together to achieve economies of scale aimed at reducing the administrative costs of establishing and maintaining a retirement plan.

On July 31, 2019, the DOL published final regulations addressing the definition of “employer” under ERISA for purposes of its rules on who may sponsor MEPs. These final regulations supersede proposed regulations issued on October 23, 2018, and prior subregulatory guidance.

The final regulations provide a safe harbor definition of “bona fide group or association of employers.” If a group of employers satisfies this definition, the DOL will deem the group an “employer” for purposes of being able to sponsor an ERISA pension plan. This safe harbor definition requires the group to satisfy a seven-factor test.

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Join Morgan Lewis this month for these programs on employee benefits and executive compensation:

• Hot Topics in Employee Benefits: What We’re Seeing | October 3 | Webinar presented by Sage Fattahian, Michelle McCarthy, Anna Pomykala, Elizabeth Goldberg, and Mark Simons
• Executive Compensation Challenges | October 8 | Philadelphia | Seminar sponsored by NASPP and presented by Morgan Lewis and Korn Ferry | Morgan Lewis panelists are Mims Maynard Zabriskie and Erin Randolph-Williams
• 65th Annual Employee Benefits Conference | October 21–23 | San Diego | Conference sponsored by the International Foundation of Employee Benefits Plans | Live panels at several sessions featuring Morgan Lewis lawyers Craig Bitman, Daniel Salemi, Sage Fattahian, and Lindsay Goodman

We’d also encourage you to attend the firm’s Global Public Company Academy series.

• 2019 Annual Meeting Hot Topics and What They Mean for 2020 | October 16 | Webinar presented by Patrick Rehfield

Visit the Morgan Lewis events page for more of our latest programs.

The Internal Revenue Service on September 23 finalized proposed regulations relating to hardship distributions under an IRC 401(k) plan. The final regulations differ little from the proposed regulations published on November 14, 2018, and, like the proposed regulations, reflect changes made under the Bipartisan Budget Act of 2018 (BBA 2018), and provide updates reflecting changes (already in practice) made under the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act) and the Pension Protection Act of 2006 (PAP 2006). They also modify the existing “non-safe harbor” determination of whether a distribution is necessary to satisfy an immediate and heavy financial need. To learn about these changes, please read our LawFlash.

Please join Morgan Lewis in San Diego next month for these featured sessions at the 65th Annual Employee Benefits Conference:

Managing Risks | Dan Salemi, panelist
Monday, October 21 | 9:15–10:30 am
Tuesday, October 22 |  7:30–8:45 am

Legal and Legislative Updates for Health Plans | Sage Fattahian and Lindsay Goodman, panelists
Monday, October 21 | 1:15–2:30 pm
Tuesday, October 22 | 9:15–10:30 am

Environmental, Social, and Governance (ESG) Investment Initiatives | Craig Bitman, panelist
Monday, October 21 | 10:45–12:00 pm
Tuesday, October 22 | 10:45–12:00 pm

See our events page for more information on this can’t-miss “event of the year” for the employee benefits sector.

Morgan Lewis partner Mims Maynard Zabriskie has been recognized in the Philadelphia Business Journal’s third annual Best of the Bar awards.

The awards identify Philadelphia’s top lawyers—those who have distinguished themselves in their practice specialties—across eight categories. Mims was chosen for this year’s class because of her significant, impactful work in the tax and employee benefits arena in the last year.

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In a case of first impression, the Delaware Court of Chancery has held that the entire fairness standard of review applies to compensation decisions made with respect to controlled companies, absent implementation of specified protections.

On September 20, 2019, Vice Chancellor Joseph Slights of the Delaware Court of Chancery denied a motion by Tesla, Inc. (Tesla) to dismiss a shareholder lawsuit (Tornetta v. Musk et al., case number 2018-0408) challenging the approval of a 10-year incentive-based compensation plan for Tesla’s Chief Executive Officer Elon Musk (the Award). The Award, which was approved by an independent compensation committee of Tesla’s Board of Directors and thereafter ratified by a majority of the minority of Tesla’s stockholders, provides Musk with the opportunity to earn performance-based stock options that, if fully realized, would be valued at approximately $55 billion.[1] A minority stockholder filed both direct and derivative claims against Musk and the Tesla board, alleging that the Award is excessive and is the product of breaches of fiduciary duty. In response to the derivative suit, Tesla filed a motion to dismiss, which required Vice Chancellor Slights to address the “gating question that frequently dictates…a breach of duty claim: under which standard of review will the court adjudicate the claim?” Determining that the “entire fairness” standard—rather than the business judgment rule—should be applied absent implementation of the “dual protections” of Kahn v. M & F Worldwide Corp., 88 A.3d 635, 642 (Del. 2014) (M&FW), the court refused to dismiss the complaint, in a ruling that marks a major shift in Delaware case law.

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Enacted in 1974, ERISA celebrates its 45th birthday this year. A lot has changed in those 45 years. While ERISA has kept up with the changes at time, one area where ERISA has not stayed current is Section 404(b). Here we discuss this section in brief and offer a word of caution to ERISA fiduciaries pursuing global investment strategies.

ERISA Section 404(b) is a sneaky section, stuck between two arguably more prominent sections: Section 404(a), which sets forth the fiduciary duties, and Section 404(c), which helps fiduciaries protect themselves against claims of breach of those duties. But there between them—clocking in at a slim 44 words—is Section 404(b):

Indicia of Ownership of Assets Outside the Jurisdiction of District Courts.—Except as authorized by the Secretary by regulation, no fiduciary may maintain the indicia of ownership of any assets of a plan outside the jurisdiction of the district courts of the United States.

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Join Morgan Lewis this month for these programs related to employee benefits and executive compensation:

• SEC Standards of Conduct: Navigating New Requirements for Retail Advice Disclosures | September 10 | Webinar presented by Lindsay B. Jackson, Jennifer L. Klass, Daniel R. Kleinman, Christine M. Lombardo, Monica L. Parry, Brian J. Baltz, Natalie R. Wengroff, and Kyle D. Whitehead

We’d also encourage you to attend the firm’s Global Public Company Academy series.

• SEC Enforcement Development and Hot Topics | September 11 | Webinar presented by Peter Chan and Amy Greer
• US Disclosure and Reporting Updates | September 18 | Webinar presented by Joanne Soslow, Laurie Cerveny, and Bryan Keighery

Visit the Morgan Lewis events page for more of our latest programs.

After more than two years without one, three ERISA cases will come before the US Supreme Court in 2019–2020. Exciting times for ERISA attorneys, to be sure, but each case also presents issues of practical consequence for plan sponsors, fiduciaries, and participants in ERISA plans across the country.

Intel Corp. Investment Policy Committee v. Sulyma, No. 18-1116

In a case that may end up being the most impactful, the Court will address how to apply ERISA’s three-year “actual knowledge” statute of limitations. ERISA Section 413 requires that a plaintiff file suit in the six years following an alleged breach or violation. But if a plaintiff has “actual knowledge” of a breach or violation, that period shrinks to three years. In this case, Intel argued that the plaintiff’s claims were time barred because plan disclosures gave the plaintiff “actual knowledge” of all information necessary to challenge the Intel plans’ investments and fees—even though the plaintiff claimed not to have read them or remember whether he had read them. The US Court of Appeals for the Ninth Circuit held that this was enough to create a factual dispute, preventing summary judgment and requiring a trial.

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