While the economy continues to enjoy steady growth, financial experts warn that an economic slowdown is likely in the not too distant future. Preemptive action may cushion an otherwise bumpy financial ride. Therefore, it’s time again to plan for an economic downturn. We have compiled several suggestions for executive compensation planning for a downturn.

  1. Align Incentive Compensation with an Economic Downturn Strategic Plan. Consider whether performance metrics should be updated to align with the company’s strategic approach to addressing a downturn. For example, companies can review their incentive compensation programs to minimize executive risk-taking, emphasize nonfinancial measures, and underscore near-term successes and sustainability.
  2. Minimize the Need for Discretion in Performance-Based Awards. When setting performance goals for incentive compensation, think about how an economic downturn will affect the company’s ability to meet the performance goals. Setting performance metrics with a view toward appropriate achievability in a variable economy may minimize the use of discretion later.
  3. Cap Payouts. Capping payouts under performance-based plans may alleviate unintended consequences, such as shareholder reaction to a payment substantially above target during a financial downturn. This can be an issue, for example, where one metric exceeds the maximum while another fails to hit the threshold.

As we look forward to 2020, we bring you a few key takeaways on the hot topics and trends that individuals operating in the employee benefits space are watching in health and welfare, plan sponsor considerations, executive compensation, fiduciary, and fringe benefits.

The Internal Revenue Service (IRS) announced today cost-of-living adjustments affecting dollar limitations for retirement plans that will take effect for 2020. (Read the IRS Notice.) Highlights from the announcement include the following:

  • The contribution limit for elective deferrals to 401(k), 403(b), and 457(b) plans increases from $19,000 to $19,500
  • The catch-up contribution limit for elective deferrals to such plans for employees age 50 and older increases from $6,000 to $6,500
  • The annual compensation limit for amounts taken into account under a tax-qualified retirement plan increases from $280,000 to $285,000
  • The overall annual limitations on benefits set forth in Section 415 of the Internal Revenue Code increases from $56,000 to $57,000 for defined contribution retirement plans and $225,000 to $230,000 for defined benefit retirement plans
  • The compensation threshold used to define highly compensated employees increases from $125,000 to $130,000 

If you have questions about this announcement, please reach out to Randy Tracht or your Morgan Lewis contact.

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

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

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

The US Department of Labor (the Department) on October 22 announced the publication of a proposed rule intended to serve as a supplement to the Department’s existing electronic disclosure regulations. The proposed rule leaves the existing electronic disclosure regulations (and options) in place but adds a new “notice and access” rule (29 CFR § 2520.104b-31) that would permit retirement plans (but not welfare plans) to satisfy certain ERISA disclosure requirements by posting those documents to a website established for that purpose and providing notice to participants that the documents are available on the website.   

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.

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

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

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.