The US Department of Labor has been extremely active in recent years as the federal agency investigating compliance with and enforcing the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). These investigations have frequently resulted in findings of fiduciary breach and monetary recoveries for ERISA retirement plans. Please see our recent LawFlash on this topic, and reach out to the LawFlash authors or your Morgan Lewis contacts if you have additional questions.
The Employee Benefits Security Administration (EBSA) at the US Department of Labor (DOL) compiles statistics every year to measure its activities as the agency responsible for investigating and enforcing the fiduciary duties under ERISA. Statistics for the agency’s 2018 fiscal year enforcement activities affirm that EBSA’s enforcement program remains extremely active, with a particular focus on terminated vested participant investigations.
It is apparent from the extensive investigation of defined benefit plans on the part of the US Department of Labor (DOL) that the DOL is quite focused on timely payment of plan benefits to participants. The DOL is interested not only in when benefits begin, but in how a participant is made whole when benefits begin after normal retirement age. A defined benefit plan must generally increase a normal retirement benefit actuarially where payment begins after a participant’s normal retirement age. The Internal Revenue Code (Code) and underlying regulations, however, allow a plan to pay instead the normal retirement benefit amount plus make-up payments in some instances. In light of the DOL’s scrutiny in this area, it may be wise for plan sponsors to review pertinent plan provisions and operation to make sure they comply with applicable rules.
On March 6, the Internal Revenue Service (IRS) issued Notice 2019-18, which would allow sponsors of defined benefit pension plans to offer retirees in pay status the opportunity to elect a lump sum payment in lieu of continued annuity payments. This development represents an about-face for the IRS, which abruptly shut down retiree lump sum windows in 2015—seemingly forever—when it indicated its intention to propose regulations under the required minimum distribution (RMD) rules of Internal Revenue Code Section 401(a)(9) that would specifically prohibit retiree lump sums.
A recent case provides a reminder for plan administrators of the importance of complying with Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) notice obligations and a good excuse to review health plan COBRA procedures.
In Morehouse v. Steak N Shake, Inc., a former employee brought a suit against her former employer after a workplace injury ultimately led to her losing her employer group health plan coverage. Before her injury, the plaintiff paid for her plan coverage by biweekly payroll deductions. Once injured, the plaintiff went on Family and Medical Leave Act (FMLA) leave and started workers’ compensation benefits. She was not provided a COBRA notice when she began leave. Instead, she continued to be covered under the plan and premiums were deducted from her workers’ compensation benefits. Once her workers’ compensation benefits ended, she was unable to pay her premiums and her plan health coverage was cancelled. She was then terminated from employment following the expiration of the FMLA period. After her plan coverage ended, she purchased health insurance to help pay for surgery to address her injury, but still had more than $30,000 in out-of-pocket costs.
Longtime observers of the twists and turns of the Affordable Care Act (ACA) have seen this before—namely, yet another dramatic chapter in the almost 10-year journey of the ACA.
The latest chapter began last week when a Texas district court determined that the ACA is unconstitutional because the individual mandate—starting January 1, 2019—no longer triggers a tax for a violation of the mandate.
The IRS on December 4 released Notice 2018-95, which provides transition relief to tax-exempt 403(b) plan sponsors that may not have complied with the “universal availability” rule for part-time employees.
Background on Universal Availability Rule. Code Section 403(b) contains a “universal availability” eligibility rule, which generally provides that all of a tax-exempt employer’s employees must be eligible to make elective deferrals to the employer’s 403(b) plan. This rule only applies to employee elective deferrals and does not require that a tax-exempt employer make employer non-elective or matching contributions available to all employees. There are limited exceptions to the universal availability rule such that an employer can still exclude certain groups of employees from the opportunity to make elective deferrals – including non-resident aliens, students, and employees who normally work fewer than 20 hours per week. However, the exclusions must be applied consistently and to all similarly situated employees. So, for example, if one or more part-time employees who work fewer than 20 hours per week are permitted to make employee elective deferrals, then all similarly situated part-time employees must be given the same opportunity.
Now that two weeks have passed since the Internal Revenue Service released its proposed hardship regulations, most defined contribution plan sponsors have determined which changes to their plan's hardship programs (if any) will be effective beginning January 1, 2019 (for calendar year plans), and which changes will be postponed. One of the changes that we see being almost universally adopted as early as possible is the elimination of the six-month suspension of contributions following a hardship withdrawal. However, there are two consequences of this removal of the suspension requirement that are sometimes overlooked:
- Communication with Participants. Plans have different procedures to end hardship suspensions—some automatically reinstate contribution elections and others require participants to make new elections following the suspension. In either case, a plan administrator removing the suspension before the six months would otherwise elapse (e.g., January 1, 2019) should consider letting participants know about the change before the end of this year so that the participants do not miss out on making a new deferral election (or are not surprised when a deferral election is automatically reinstated). But even in cases where no change is being made to existing hardships, if the plan is eliminating the suspension for new hardships taken in 2019, the plan administrator should consider notifying participants who apply for hardship withdrawals during these final weeks of 2018 of the imminent change in the plan’s hardship withdrawal rules. In addition, as many plans have outsourced management of the hardship withdrawal program to a recordkeeper or other manager, plan administrators are encouraged to discuss a communication strategy with their recordkeepers or other managers (e.g., affirmatively reaching out to participants, including a description of the change with hardship request forms).
- Nonqualified Plans. Often overlooked in discussions on eliminating the suspension requirement following hardship withdrawals is the impact this change has on nonqualified deferred compensation plans. By way of background, the suspension requirements in the current hardship regulations (before modification by the proposed regulations) require that participants be suspended from making contributions into all plans sponsored by the plan sponsor, which includes nonqualified plans. In order to accommodate this requirement, the applicable Treasury Regulations governing nonqualified deferred compensation plans subject to Internal Revenue Code Section 409A expressly allow a plan to provide for the cancellation of an otherwise irrevocable nonqualified plan deferral election following a hardship withdrawal. Some nonqualified deferred compensation plans are drafted to provide for the cancellation of a deferral election only if such cancellation is required under the rules governing the defined contribution plan. Other nonqualified deferred compensation plans mandate the cancellation of a deferral election following any hardship withdrawal, regardless of the circumstances. The proposed hardship regulations were silent as to whether a nonqualified deferred compensation plan can continue to cancel deferral elections following a hardship withdrawal. Considering that effective January 1, 2019, suspensions following hardship withdrawals will no longer be required, plan sponsors with nonqualified plans may wish to review the suspension language in their nonqualified deferred compensation plans to determine whether any changes need to be made in light of the proposed regulations.
If you have any questions about these changes or what they mean to your plans, please feel free to reach out the authors or your Morgan Lewis contact.
With 2018 coming to a close, retirement plan sponsors should make sure they have addressed any required year-end plan amendments, are preparing any required year-end participant notices, and are looking ahead to any changes in 2019 that may impact their plans. This post focuses on the 2019 changes, while Part 1: Closing Out 2018 concentrated on 2018 year-end obligations.
As 2018 comes to a close, it’s time for retirement plan sponsors to make sure they have addressed any required year-end plan amendments, are preparing any required year-end participant notices, and are looking ahead to any changes in 2019 that may impact their plans. This Part 1 focuses on the 2018 year-end obligations, while the forthcoming Part 2: Getting Ready for 2019 will concentrate on changes for next year.