Earlier this month, the Department of Labor published a proposed amendment to its February 2012 final regulations regarding the disclosures concerning services and fees that service providers must furnish to plan fiduciaries to permit the fiduciaries to determine that the contracts or arrangements with the service providers were “reasonable” as required by ERISA Section 408(b)(2). Under the amendment, service providers would be required to furnish plan fiduciaries with a “guide” to the fee disclosures required under ERISA Section 408(b)(2) in certain circumstances.
The 2012 final regulations (which generally became effective July 1, 2012) did not require service providers to provide the disclosures in any particular format. Moreover, the preamble to the regulations acknowledged that the disclosures could be made in multiple documents so long as the documents collectively disclosed all of the information required.
The proposed amendment is intended to introduce a guide to assist fiduciaries in locating the information they need to assess the reasonableness of the services provided and fees charged by the service provider. The guide is required if the disclosures are made in multiple documents or a “lengthy” document. The Department has requested comments on the page requirement that would trigger the index requirement as well as whether future guidance should include formatting standards (such font or margin requirements) to avoid manipulation of any adopted page requirement. The guide must identify the document and page or other sufficiently specific locator, such as a section, that enables the plan fiduciary to “quickly and easily” find the specified information. More guidance is welcome on what exactly is meant by “quickly and easily.”
The guide will be required to specifically identify the location of eight items of information:
- The description of the services provided;
- The services to be provided as a fiduciary and/or as a registered investment adviser;
- The description of the direct compensation paid to the service provider;
- The description of the indirect compensation paid to the service provider;
- The description of any compensation paid among related parties;
- The description of compensation paid upon termination of the arrangement;
- The description of compensation paid for recordkeeping services (as applicable); and
- The description of any compensation, annual operating expenses, and ongoing expenses (or, if applicable, total annual operating expenses) with respect to investments (as applicable).
The guide must also identify a contact person who can answer questions and provide additional information.
The proposal also notes that the guide must be provided “in a separate document;” at this point, it is unclear exactly what is required to meet that requirement.
As noted above, the Department has requested comments on the proposal, including the alternative approaches that the Department considered, such as requiring a summary of the disclosures and providing an exemption from the index or guide requirement for service providers who can demonstrate that providing the guide is either impossible or unduly burdensome. The comment period remains open until June 10, 2014.
Finally, the Department announced that while the comment period remains open, it will begin conducting eight to ten focus groups with about 70 to 100 fiduciaries of small plans (i.e., those plans with fewer than 100 participants). Among the matters that the Department intends to explore in these focus groups are the fiduciaries’ awareness and understanding of the 408(b)(2) disclosures, their experience with receiving and reviewing the disclosures received, whether the disclosures that they received affected their engagement or retention of service providers, whether they received a guide or index, and whether they think that a guide would be useful.
Since the focus group sessions may extend past the close of the comment period, the Department acknowledged that it may reopen the comment period to address items that come out of those sessions. It appears as if the fee disclosure rule project – which began in 2007 – is still a ways from completion.
You are entitled to make one tax-free rollover from one individual retirement account or individual retirement annuity (“IRA”) into another IRA in any 1-year period, not one rollover into each separate IRA you own. This is a new interpretation by the Tax Court and IRS.
Section 408(d)(3)(B) of the Internal Revenue Code limits rollovers from one IRA into another IRA to one in any 1-year period. As provided in Proposed Treasury Regulation Section 1.408-4(b)(4)(ii), the IRS interprets this statutory limitation as applying separately to each IRA. In the current version of IRS Publication 590, the IRS provides the following example:
Example. You have two traditional IRAs, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.
However, in Bobrow v. Commissioner, T.C. Memo. 2014-21, the Tax Court recently held that the limitation applies on an aggregate basis, so that only one IRA-to-IRA rollover may be made in any 1-year period with respect to all IRAs you own. In the above example, the Tax Court’s ruling means that, after the tax-free rollover from IRA-1 to IRA-3, no tax free rollover from either IRA-1, IRA-2, IRA-3 or any newly established IRA into any other IRA would be permitted within the 1-year period beginning on the date of the rollover from IRA-1 to IRA-3.
In an advance copy of Announcement 2014-15, the IRS indicates that it intends to follow the Bobrow decision and withdraw the proposed regulation, but will not apply the aggregate one IRA-to-IRA rollover rule to rollovers which occur prior to January 1, 2015. As the IRS points out in the Announcement, a direct trustee to trustee transfer is not a rollover, so this new interpretation does not prohibit IRA consolidation that does not involve a rollover.
There may be some interesting lessons to learn from this about-face. First of all, appreciate that the same Treasury Department that proposed the regulation described above and developed the example described above from Publication 590 (its own publication provided to assist taxpayers with compliance) is the one that challenged the position taken by Mr. Bobrow in reliance on these items before the Tax Court. So much for reliance on a position of Treasury and/or the IRS as articulated in one of its own compliance publications.
Second, the change in position is likely to catch some people by surprise, especially seniors trying to do proper planning and who do not read all of the Tax Court cases and IRS Announcements. These are not the folks who are “gaming the system” by taking out distributions as short-term loans and paying them back within the 60-day rollover period. Instead, these taxpayers innocently take distributions and roll them over within the 60-day period usually because the financial institution holding the IRA assets makes a direct transfer difficult (if not impossible). And, of course, many of them don’t even appreciate the difference between a rollover and a direct transfer. They are simply trying to consolidate their accounts.
If you intend to do any tax planning or financial organization that involves IRA rollovers, now’s the time.
The proposed rules for implementation of the Employer Mandate (aka “Shared Responsibility for Employers Regarding Health Coverage” or “Play or Pay“) provided an optional Look-Back Method for identifying which employees are full-time and must be offered health care coverage to avoid excise taxes under Code Section 4980H, but they didn’t identify any alternatives to the Look-Back Method. The final regulations provide the Monthly Measurement Method as an alternative to the Look-Back Method. If you choose not to use the Look-Back Method, you by default have selected the Monthly Measurement Method.
The Monthly Measurement Method is aptly named: an employer identifies full-time employees based on the hours of service for each calendar month. There is no use of stability periods as with the Look-Back Method – generally, for any given month, an employee is or is not full-time and entitled to an offer of coverage.
There are some nuances, however. An employer will not be subject to excise taxes with respect to an employee because the employer does not offer him coverage until the first day of the fourth calendar month after he otherwise becomes eligible. This is helpful if you have a part-time employee who starts to pick up additional hours and becomes full-time – it is essentially a “first three months free” rule. (Keep in mind, the employer must still comply with the separate 90-day maximum waiting period rule, which could require coverage to be effective sooner.)
The rules are clear that this relief can only be used once per period of employment of an employee. As a result, to the extent an employee moves between full- and part-time, the employer could be exposed to penalties. Take the following example: Acme Corp. uses the Monthly Measurement Method. Employee Beth is a full-time employees covered under Acme’s group health plan. When she first started, she became covered under the Acme plan on the first day of the fourth month after she started. On June 1, Beth requests fewer hours and Acme schedules her for 25 hours per week beginning July 1. Acme feels certain that Beth will not have more than 130 hours of service in July, so it terminates her coverage effective July 1. Beth has 115 hours of service in July, 110 in August, and 120 in September. In October, Beth obtains health coverage on the government exchange (aka the Marketplace) and obtains a cost-sharing subsidy. She also works 130 hours in October. Acme offers her coverage effective November 1 in recognition of her full-time status in October. However, Acme’s failure to offer Beth coverage for the month of October can subject Acme to the excise taxes for that month.
The example illustrates the underlying issue with the Monthly Measurement Method. Excise taxes may be assessed for any calendar month during which a full-time employee was not eligible to receive affordable, minimum value coverage for each day of that calendar month. However, an employer may not know whether the employee is full-time until the end of that same calendar month.
Employers can use both the Monthly Measurement Method and the Look-Back Method, but only with respect to certain categories of employees. The regulations do not permit an employer to adopt the Look-Back Method for variable hour and seasonal employees while using the Monthly Measurement Method for employees with more predictable hours of service. However, the different methods can be used for hourly vs. salaried employees, collectively bargained vs. non-collectively bargained employees, and employees who work in different States, and a different method can be applied to each group of collectively bargained employees. There are specific, detailed rules about how to handle an employee’s transition from a position for which the Monthly Measurement Method is used to a position for which the Look-Back Method is used, and vice versa.
At least for an employer with a workforce whose hours tend to fluctuate, use of the Monthly Measurement Method would seem to be impractical to administer, and an employer that chooses to insure its health plan might encounter resistance from its insurance issuer to adding and removing existing employees to and from coverage throughout the year. The employer would also be in the position of sending a lot of COBRA election notices. What do you see as a utility for the Monthly Measurement Method? Leave your ideas in the comments section below.
In the latest step of a rulemaking process begun in 2013, on March 11 the Pension Benefit Guaranty Corporation published a final rule which provides that both flat rate and variable rate premiums for small defined benefit plans will be due 9½ months after the beginning of the plan year for which they are payable. This change, which eliminates the system under which premium due dates varied based on the type of premium and the size of the plan, will accelerate the premium due date for small plans, which has been four months after the end of the premium payment year, by 6½ months. While the final rule is applicable for 2014 and later plan years, a transition rule provides a four month delay in the new due date for small plans for the first plan year beginning after 2013 in order to ease potential cash flow problems raised by commentators.
Example, a small calendar year plan pays its 2013 premiums on April 30, 2014. The plan’s 2014 premiums are due on October 15, 2014; however, the plan will have until February 15, 2015 to pay those premiums under this transition rule.
PBGC estimates indicate that the accelerated due date will shift earnings on premium payments from small plans to the PBGC, but that on average small plans will gain due to reduced administrative expenses.
Since small plans may have a valuation date that is as late as the last day of the plan year, the final rule also changes the procedure for calculating small plans’ variable rate premiums in order to avoid a timing issue where premiums might otherwise be due before or shortly after the valuation date for the premium payment year. Under a look-back rule, the unfunded vested benefits for the plan year preceding the premium payment year will generally be used to calculate variable rate premiums for small plans. However, small plans may elect to opt out of the look-back rule in accordance with procedures that will be included in future PBGC premium instructions. In addition, new and newly covered small plans, other than plans resulting from a non-de minimis consolidation or spinoff, will be exempt from variable rate premiums for their first year. The final rule also more closely aligns the category of small plans subject to the look-back rule with those eligible to designate a valuation date other than the first day of the plan year under the funding rules by defining a small plan as one with 100 or fewer participants on the last day of the plan year preceding the premium payment year. Prior to the final rule, small plan status was based on paying flat rate premiums for fewer than 100 participants for the plan year preceding the premium payment year.
As previously announced by the PBGC, the final rule also includes provisions relating to:
- Coordination of the Due Date for Terminating Plans with the Termination Process. In order to promote the routine payment of final year premiums by plans terminated in a standard termination, the due date will be the earlier of (1) the normal due date, and (2) the date the post-distribution certification is filed. In addition, those plans which terminate and make a final distribution within the same plan year will be exempt from the variable rate premium for that year. In the case of distress or involuntary terminations, the liability for premiums will rest solely with the contributing sponsor and its controlled group after the termination process begins.
- Clarification of the Variable Rate Premium Rules. The phase in of at-risk funding targets applies in determining unfunded vested benefits, but the MAP-21 segment rate stabilization corridor does not apply in determining the alternative premium funding target that a plan may elect to use for that purpose.
- Relief from Late Payment Penalties. The penalty cap for late payments that are self-corrected is reduced from 100% of the unpaid premium to 50%, a pre-existing PBGC policy to waive penalties on premium payments that are no more than seven days late is codified and, in conjunction with acceleration of the premium due date for small plans, the penalty waiver applicable where estimated variable rate premiums are paid on the due date and trued-up within six months is extended to small plans.
While commonly confused as the same thing, a fidelity bond is separate and distinct from fiduciary liability insurance. A fidelity bond is specifically required by ERISA § 412(a) for any “plan official” For this purpose, a “plan official” is a fiduciary of an employee benefit plan and/or a person who handles funds or other property of such a plan. Each plan official must be bonded for at least 10% of the maximum plan assets that he or she handles. Unlike a fidelity bond, fiduciary liability insurance is not mandated by ERISA.
A fidelity bond is fixed at the beginning of each year for each plan official covered by the bond, and guards the applicable plan against losses due to fraud or dishonesty – for example, theft – by any covered plan official. Fiduciary insurance, on the other hand, is designed to insure the plan against losses caused by breaches of fiduciary responsibilities and, simultaneously, protect the covered fiduciary or fiduciaries from any personal liability resulting from such breaches. The cost of the fidelity bond generally can be paid from plan assets. The same is true of fiduciary liability insurance only if the insurance permits recourse by the insurer against the fiduciary in the case of a breach of a fiduciary obligation by the fiduciary.
In addition to ensuring that the fidelity bond meets certain criteria under ERISA, the fidelity bond carrier must also report the fact that it has coverage and the amount of such coverage annually on the applicable plan’s IRS Form 5500. Thus, before you file your next Form 5500, it might be a good time to make sure your plan is maintaining an appropriate fidelity bond covering all the appropriate individuals in the mandated amounts.
A special thanks to our spring extern, Ann Lut, for her valuable assistance in drafting this blog entry.
As we have noted previously, March 15 is tax “Code Section 409A Day.” For employers with calendar fiscal years, that is generally the last day an amount can be paid and still qualify as a short-term deferral that is exempt from 409A’s stringent timing and form of payment requirements. But what does one do when March 15 falls on a weekend, as it does this year? You likely aren’t cutting payroll checks on a Saturday. Can you wait until Monday to pay?
The answer is no. The rules are clear that the payment generally has to be made by the 15th day of the 3rd month (hence, March 15) of the year following the year in which either the right to the compensation arises or the compensation is no longer subject to a substantial risk of forfeiture (and note that for this purpose, the 409A definition is different than the Section 83 definition). (The deadline can be different if an employer has a non-calendar year fiscal year, but the concept is essentially the same.)
There are a few exceptions. First, if making the payment by the deadline is administratively impracticable and such impracticability was not reasonably foreseeable when the right to the compensation arose, then payment can be made after the deadline, as long as payment is made as soon as practicable. Of course, for 2014 it is difficult to argue that the impracticability wasn’t foreseeable simply because you didn’t happen to look into next March in your Outlook, iCal, or Gmail calendar.
A company can also pay late if the payment would jeopardize the company as a going concern and the payment is made as soon as practicable after the payment would no longer jeopardize the company. As you can probably tell, that is a pretty high standard.
Finally, if you’re dealing with a public company, and the payment would not be deductible under 162(m), then the public company can pay as soon as the payment would be deductible. Here, however, you have to establish that a reasonable person would not have anticipated the application of 162(m) to the payment to be able to take advantage of the delay.
Regrettably, there is no exception permitting a delay in payment merely because the 15th of the month happens to fall on a Saturday, Sunday, or holiday.
So the bottom line is that you should make sure that any payments you want to qualify as short-term deferrals get paid by Friday the 14th. Unless you qualify for one of the exceptions, waiting until Monday is not an option.
When an employee’s request for a medical leave may qualify for both unpaid leave under the Family and Medical Leave Act (“FMLA”) and compensation under an employer’s Short Term Disability (“STD”) plan or policy, it can be tempting to allow the STD process to drive the administration of the leave. After all, a reduction in paperwork is always welcome, and the employer is permitted to rely on information received through the STD process when determining whether the employee is entitled to FMLA leave.
However, there are a number of FMLA notice requirements and other considerations that should be keep in mind when processing a claim for medical leave:
- FMLA eligibility should be determined before moving on to the FMLA and/or STD entitlement determination. Within five business days of receiving notice that an employee’s leave may be for an FMLA-qualifying reason, the employer must provide the employee with notice of the employee’s eligibility to take FMLA leave. Thus, it is important to ensure that the eligibility analysis for FMLA purposes is conducted, and the employee is informed of his/her eligibility status, prior to moving into the determination of whether the employee’s health condition entitles the employee to leave (under the FMLA and/or STD policy).
- FMLA eligibility can be attained during an STD leave. Depending on the circumstances, an employee who is not eligible for FMLA leave when an STD or other medical leave begins may become eligible for the FMLA’s protections during the leave (such as when an employee who began STD leave after 11 months of employment hits the all-important 12 months of employment mark during that leave, assuming the employee also meets the other tests for FMLA eligibility). Thus, the employer must remain alert concerning the employee’s eligibility status so that, if and when an employee becomes FMLA-eligible during the middle of a non-FMLA leave, the employee is given the appropriate FMLA notices and protections. Importantly, only that portion of the leave that occurs after the employee becomes FMLA-eligible can be deemed FMLA leave.
- Giving notice only of the employee’s STD obligations is not sufficient. Even if the employee will be required to provide medical substantiation exclusively be completion of STD paperwork (and not through a separate FMLA certification), it is still necessary to provide an FMLA-eligible employee with notice of the employee’s rights and responsibilities under the FMLA. Although the DOL’s suggested notice (Form WH-381) does not have to be used, all of the information reflected in that form notice should be included in whatever written communication is provided to the employee.
- It may be beneficial to obtain an FMLA certification in addition to the required STD documentation. Even though employers are permitted to rely on information received through the STD process in order to determine an employee’s entitlement to FMLA leave, the information required by the STD process is not always the same as the information that can be required for FMLA purposes (e.g., the standards for leave entitlement may be different; the STD paperwork may not discuss a need for intermittent leave). Accordingly, consider requiring employees to submit an FMLA certification (Form WH-380-E) so as to assist in managing the FMLA aspects of the leave.
- An FMLA designation notice may be required even before an STD determination is made. The STD can, unfortunately, be protracted; sometimes, additional medical information is needed, or an STD claim is denied and goes through an extended appeal process. Yet under the FMLA, as soon as the employer has enough information to know whether the leave is being taken for an FMLA-qualifying reason, the employer has only five business days to provide notice to the employee as to whether the leave will be designated and counted as FMLA leave. Note also that, if more detailed medical information is needed for purposes of an STD determination than is necessary (or permitted) for purposes of an FMLA determination, then the employee should be notified that the additional information is required only for purposes of STD.
- Notice of FMLA exhaustion must be given, even if the employee remains on STD (or LTD) leave beyond the FMLA entitlement. When an employee exhausts his/her 12-week FMLA entitlement during the applicable 12-month period, the employer must provide written notice to the employee concerning such exhaustion within five business days of being placed on notice that the employee will need to remain on leave after such exhaustion. Accordingly, even if an employee is permitted to remain on leave (such as through an extended STD or LTD leave, or other non-FMLA leave), this FMLA notice is required.
Overlooking the foregoing FMLA requirements can be costly, including the potential for expensive and time-consuming litigation based on claims of FMLA interference and/or retaliation. Accordingly, it is imperative to carefully coordinate the administration of FMLA and STD leave.