Closed defined benefit plans—i.e., defined benefit plans that are frozen to new participants but that allow existing “grandfathered” participants to continue to accrue benefits—are nearly certain to face challenges in passing nondiscrimination testing. This is because, over time, the grandfathered group that continues to accrue benefits is likely to become disproportionately highly compensated as a result of their longer service and the absence of shorter-service employees participating when they are first hired.

Congratulations to employee benefits partner Daniel Salemi, who was recently named to the 2019 40 Under Forty List in the Chicago Daily Law Bulletin. The Chicago Daily Law Bulletin and Chicago Lawyer selection committee chooses the honorees from a pool of recommendations submitted by peers to recognize those attorneys who have demonstrated intelligence, passion, success in the office, and a desire to help the community through civic or pro bono efforts. Honorees were recognized at a September 19 ceremony celebrating the 20th anniversary of the 40 Under Forty list in Chicago.

In final regulations set to take effect for 2020 Forms W-2, the IRS gives employers the option of using truncated Social Security numbers (SSNs) on employee Forms W-2 issued after December 31, 2020. The new rules are an attempt to assist employer efforts to protect confidential employee identification information from identity theft.

Recent decisions by the US Court of Appeals for the Ninth Circuit have reinvigorated the debate over whether mandatory individual arbitration provisions are enforceable with respect to ERISA claims and, if so, whether these provisions are worth including in your ERISA plan document. In Dorman v. Charles Schwab Corp., the Ninth Circuit affirmed that provisions in plan documents requiring individual arbitration of ERISA claims could be arbitrable, a contrast to the Munro v. University of Southern California decision in July 2018. To learn about these changes, please read our LawFlash.

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.

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 (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.

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).