Morgan Lewis has been named the 2016 “Law Firm of the Year” for Employee Benefits (ERISA) Law by U.S. News and World Report – Best Lawyers. According to the publication, the “Law Firm of the Year” practice designation is given to the one law firm in each practice area with “an impressive overall performance” in the given specialization.
In IRS Revenue Procedure 2015-36 (Revenue Procedure), the IRS announced that it will allow prototype and volume submitter employee stock ownership plan (ESOP) documents. The IRS hopes that this will not only reduce its own costs in reviewing plan documents, but also reduce the costs to companies that are considering ESOPs by allowing them to avoid custom-created plan documents.
The Revenue Procedure provides that a preapproved ESOP cannot be a standardized plan and cannot have a money purchase plan feature. However, it can have a 401(k) feature (i.e., it can be a KSOP). Further, the IRS will not issue approval letters under this new program for ESOPs that hold preferred stock.
The Revenue Procedure states that a preapproved ESOP must meet all of the requirements of the Internal Revenue Code (IRC) Section 401(a), the requirements set forth in the Defined Contribution Plan Listing of Required Modifications, the requirements set forth in the Employee Stock Ownership Plan Listing of Required Modifications and Information Package (ESOP LRM), the requirements in the Revenue Procedure, and the requirements in the 2014 Cumulative List of Changes in Plan Qualification Requirements (IRS Notice 2014-77, as updated). The ESOP LRM contains samples of plan provisions that satisfy certain requirements of the IRC applicable to ESOPs, and the IRS encourages plan sponsors to use such language as applicable. The IRS will not consider preapproved ESOP applications until the next defined contribution application period, which begins on February 1, 2017.
Today, the Internal Revenue Service (IRS) announced the 2016 dollar limitations for retirement plan contributions and other retirement-related items based on its annual cost-of-living adjustments.
Many limitations will remain unchanged because, as the IRS explained, “the increase in the cost-of-living index did not meet the statutory thresholds that trigger their adjustment.” Accordingly, the elective deferral (contribution) limit for 401(k), 403(b), most 457 plans, and the government’s Thrift Saving Plan remains at $18,000. Likewise, the catch-up contribution limit for employees ages 50 and older who participate in these plans remains at $6,000. The limit on annual contributions to an Individual Retirement Arrangement (IRA) also remains unchanged at $5,500, with the catch-up contribution limit remaining at $1,000.
Some limitations will change based on the increase in the cost-of-living index. Those include increases to the adjusted gross income (AGI) phase-out range for taxpayers who make contributions to a Roth IRA and the AGI limit for a saver’s credit (otherwise known as the retirement savings contribution credit) for low- and moderate-income workers.
As the calendar year rapidly wanes, 401(k) plan required notices for calendar-year plans will soon be due. Three of the most common year-end notices are Section 401(k) plan safe harbor notices, Qualified Default Investment Alternative (QDIA) notices, and automatic contribution notices. These notices must be provided no more than 90 days (and not less than 30 days) prior to the new plan year. Accordingly, for calendar year plans, December 1, 2015 is the notice distribution deadline.
Safe Harbor Notices
- Standard Safe Harbor. Section 401(k)(12) of the Internal Revenue Code provides that a cash or deferred arrangement is deemed to meet the nondiscrimination requirements of Section 401(k)(3)(A)(ii) if the arrangement provides at least one of two types of safe harbor employer contributions and if a safe harbor notice is provided to each employee eligible to participate in the arrangement. The notice must be provided at least 30 days (but no more than 90 days) before the beginning of each plan year and must be sufficiently comprehensive to inform employees of their rights and obligations under the plan. It must include (among other things) a description of the safe harbor employer contribution, other contributions made under the plan and the conditions under which they are made, and compensation on which deferrals are based. The safe harbor notice must include any scheduled changes to the plan that will apply in the new plan year.
- QACA Safe Harbor. Section 401(k)(13) sets forth a slightly different nondiscrimination safe harbor that relates to a qualified automatic contribution arrangement (QACA)—that is, an arrangement under which, in the absence of an election to defer, an employee eligible to participate in a plan is treated as having elected to defer a certain percentage of compensation. The annual timing requirement of the notice for this QACA safe harbor is the same as under the standard safe harbor. The content requirement is also the same, with the exception that a QACA safe harbor notice must describe the automatic contributions that will be made on the employee’s behalf, the employee’s right to elect not to have elective contributions made (or to elect to have them made at a different percentage), and how contributions made under the QACA will be invested in the absence of any investment election by the employee.
Like all things involving governmental health plans, trying to apply an administrative structure designed for traditional employers creates a special set of challenges for the governmental employers sponsoring those plans.
Take, for example, the Affordable Care Act’s (ACA’s) reporting requirements. They seem straightforward enough; IRC Section 6055 requires the sponsor of a self-insured health plan to annually report certain health coverage information to the IRS as well as to those who are covered by the plan. The plan sponsor reports with regard to all individuals covered under the plan, including employees, non-employees (including COBRA participants and retirees), and their dependents (including spouses and dependent children). This report typically is made via the Form 1094-B and 1095-B (the “B” forms).
“Applicable Large Employers” (ALEs) (generally defined as employers that have 50 or more employees) must report annually to the IRS and their full-time employees whether they offer full-time employees (and the employees’ dependent children up to age 26) the opportunity to enroll in the ALE’s health plan, as well as other information about the employees’ access to health coverage. This report typically is made via Form 1094-C and 1095-C (the “C” forms).
ALEs that are also plan sponsors of self-insured plans may meet their reporting obligations under both Sections 6055 and 6056 by filing just the “C” forms.
Earlier this year, the US Equal Employment Opportunity Commission (EEOC) published a Notice of Proposed Rulemaking (NPRM) that addresses how Title I of the Americans with Disabilities Act (ADA) applies to employer wellness programs that are integrated with a group health plan. Although the EEOC has previously initiated litigation associated with wellness programs, it has never released any related regulations and has come under significant pressure from employers and Congress to address when wellness programs are “voluntary” under the ADA.
Earlier this year, the IRS issued proposed regulations under section 83(b) of the Internal Revenue Code that would eliminate the current requirement that a copy of a section 83(b) election be attached to the federal income tax return for the taxable year of the relevant transaction. The proposal (which, if finalized, would be in effect as early as the 2015 tax year) is intended to simplify tax reporting, especially for taxpayers who file tax returns electronically.
A bit of background on section 83 is in order. The general rule under section 83(a) governs compensatory transfers of property (e.g., employer stock) to a service provider (an employee or consultant). The rule generally requires that the service provider recognize ordinary income in the year in which the transferred property is no longer subject to a substantial risk of forfeiture (SRF) (or is transferable free of an SRF) equal to the difference between (a) the property’s fair market value on the date it became free of any SRF and (b) the purchase price, if any, for the property. This approach recognizes that taxpayers do not have full ownership of property subject to an SRF (e.g., a vesting schedule) until the forfeiture conditions no longer apply, and defers taxation until that point. The employer’s tax deduction for the ordinary income amount included by the service provider is similarly deferred.
As an alternative to the general rule set forth in section 83(a), section 83(b) permits a service provider who receives property subject to an SRF (and thus subject to the general rule) to make an election to be taxed as of the time of transfer as if the property were not subject to an SRF, in which case the service provider would recognize ordinary income equal to the difference between (a) the property’s current fair market value (disregarding any SRF) and (b) the purchase price, if any, paid for the property. The service recipient’s deduction is similarly determined. This election must be made no later than 30 days following the transfer of the property in question and cannot readily be reversed by revocation or rescission. In general terms, the reason a service provider might decide to make a section 83(b) election is because while the transferred property may not have a great deal of value at the outset, it is expected to increase significantly in value over the vesting period (e.g., stock of a successful start up). That said, an 83(b) election is not without risk—if the stock depreciates in value or the property is forfeited under the SRF, the electing service recipient can be a significant loser.
On September 11, 2015, the Pension Benefit Guarantee Corporation (PBGC) issued final reportable events regulations that are intended to reduce the burden of reporting for plan sponsors that present the least risk of not being able to fund their plans in the future. The PBGC estimates that the new rules will exempt approximately 94% of plans and plan sponsors from many reporting requirements.
By way of background, under the Employee Retirement Income Security Act of 1974, as amended (ERISA), sponsors of defined benefit pension plans are required to notify the PBGC of certain so-called “reportable events” that may signal financial issues with the plan or a contributing employer that could potentially put the pension plan at risk of a need for PBGC intervention. These “reportable events” include plan sponsor events such as bankruptcy, corporate transactions, extraordinary dividends, and loan defaults, as well as plan events such as missed contributions, insufficient funds, and large pay-outs.
Earlier this year, the Internal Revenue Service proposed regulations that address when an allocation of income by a partnership to a partner in exchange for services is really a disguised fee that should be taxable to the service provider, not as a partnership allocation, but as ordinary compensatory income. While directed primarily at the practice of “fee waivers” by investment advisers who provide asset management services to private equity and hedge funds, the proposed regulations may also cast doubt on the use of certain special income allocations to other sorts of service providers to a partnership.
Section 707(a)(2)(A) of the Internal Revenue Code distinguishes between allocations and distributions from a partnership to a partner that are received in a partner capacity, and are therefore taxed as a distributive share of partnership income and may involve a pass-through of capital gains, and allocations and distributions received in a non-partner capacity, such as payments for services that are taxable to the service provider at ordinary income rates. The proposed regulations under the statute explain that an arrangement will be treated as a disguised payment for services if a person provides services to the partnership and is allocated partnership income in return, but the transaction is really one between the partnership and the service provider acting in a non-partner capacity.
The proposed regulations then provide a non-exclusive list of factors that may indicate that the services are provided in a non-partner capacity. The most important of these factors is whether the arrangement lacks “significant entrepreneurial risk” to the service provider. The presence of any of the factors listed in the regulations (below) will create a presumption that there is no significant entrepreneurial risk.
Earlier this month, in Resilient Floor Covering Pension Tr. Fund Bd. of Trs. v. Michael's Floor Covering, Inc. (9/11/15), the US Court of Appeals for the Ninth Circuit, for the first time, found successor liability as a means to hold companies responsible for multiemployer pension plan withdrawal liability. Although the Ninth Circuit has previously applied successor liability in other labor and employment contexts, including in situations where multiemployer plans seek delinquent multiemployer pension plan contributions from companies under a successor liability theory, this is the first time the appeals court has explicitly applied successor liability in the context of multiemployer pension plan withdrawal liability.
In Michael’s Floor Covering, the court found that, in general, a successor employer may be subject to multiemployer pension plan withdrawal liability and, in particular, a construction industry successor employer can be subject to such liability, “so long as the successor took over the business with notice of the liability.” For purposes of imposing such withdrawal liability, the court held that “the most important factor in assessing whether an employer is a successor  is whether there is substantial continuity in the business operations between the predecessor and the successor, as determined in large part by whether the new employer has taken over the economically critical bulk of the prior employer’s customer base.” The court's ruling also sets out the list of factors courts should consider when deciding whether a company is a successor that can be held liable for multiemployer withdrawal liability.