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  • BC Network
    Friday, April 27, 2018

    On October 12, 2017, President Trump signed a “Presidential Executive Order Promoting Healthcare Choice and Competition Across the United States” (the “Executive Order”) to “facilitate the purchase of insurance across state lines and the development and operation of a healthcare system that provides high-quality care at affordable prices for the American people.” One of the stated goals in the Executive Order is to expand access to and allow more employers to form Association Health Plans (“AHPs”). In furtherance of this goal, the Executive Order directed the Department of Labor to consider proposing new rules to expand the definition of “employer” under Section 3(5) of the Employee Retirement Income Security Act of 1974 (“ERISA”). The Department of Labor issued its proposed rule on January 5, 2018.

    In Part 1 of this “Deep Dive” series, we examined the history of AHPs and the effects of the changes proposed by the Trump Administration by providing a high-level, summary overview of the three types of arrangements that fall under the umbrella of health arrangements sponsored by associations, which include Affinity Arrangements, Group Insurance Arrangements (“GIAs”), and AHPs. In Part 2 of this “Deep Dive” series, we compared plan features of the three types of arrangements under current law.  In this installment of the “Deep Dive” series, we will examine the qualification requirements for AHPs under current law.

    Current Qualification Requirements for AHPs

    ERISA provides that an employee benefit plan may be maintained by an association of employers that effectively operates like a single employer.  Guidance around this concept has been developed through 40 years of case law and Department of Labor advisory opinions and, not surprisingly, such guidance is somewhat confusing and at times inconsistent. Nonetheless, certain basic principles can be garnered from the existing guidance. To be a bona fide association of employers, the members of the association must:

    • have a commonality of interest unrelated to the provision of benefits;
    • exercise control over the benefit plan; and
    • consist of employers with at least one employee.

    In addition, the association itself must

    • be a pre-existing organization; and
    • exist for a purpose other than providing health coverage to its members.

    The commonality of interest determination is made based on the facts and circumstances of each situation and is based on whether the members of the association have a genuine organizational relationship unrelated to the provision of benefits. Examples of activities that support a genuine organizational relationship include collaboration of resources for educational opportunities, developing marketing strategies, and other shared advocacy programs related to the particular industry. The group of employers must direct the operation and activities of the plan either through the ability to nominate, elect and remove a majority of the trustees or the ability to otherwise amend or terminate the benefit plan. Sole proprietors or other self-employed individuals who are not considered to be employees are not currently eligible to participate in AHPs.

    Benefit programs maintained by employers with no common industry affiliation or effectively controlled by a self-perpetuating board with no voice provided to the participating employers are not considered to be a bona fide association of employers. Practically speaking, very few association plans are treated as a single ERISA-covered plan under the current sub-regulatory framework, but instead are treated as a collection of plans each sponsored by individual employers.

    Currently, AHPs are subject to certain nondiscrimination requirements generally applicable to health insurance plans. AHPs are not allowed to discriminate within groups of similarly situated individuals with respect to eligibility, benefits and premiums based upon health-status factors. These rules do not, however, prohibit AHPs from varying premiums on an employer-by –employer basis.

    Next “Deep Dive”: Qualification Requirements for AHPs under the Proposed Rule

    Tuesday, January 23, 2018

    On December 22, President Trump signed “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (“Bill”) into law. The Bill was previously named the much-shorter “Tax Cuts and Jobs Act,” but was changed after a senator pointed out that the name violated an obscure Senate rule.

    The new employee benefit and executive compensation provisions in the Bill affect both individuals and employers. The good news for colleges and universities is that the harshest employee benefit provisions directed at colleges and universities were not included in the final Bill. The bad news is that the executive compensation and fringe benefit changes directed at tax-exempt organizations are unfavorable to institutions of higher education.


    The House passed a version of the Bill that would have repealed the exclusion from income for qualified tuition reductions provided by educational institutions to (i) employees and their spouses or dependents and (ii) graduate teaching assistants.  The House’s version of the Bill also eliminated the exclusion for education assistance (up to $5,250 per year per employee) that was available to all employers.

    Fortunately, both of these changes were eliminated in the final Bill.


    The Bill places a 21% excise tax on the amount of annual compensation in excess of $1,000,000 paid to covered employees of most tax-exempt organizations, including tax-exempt institutions of higher education.

    Covered Employees

    A “covered employee” is any employee—including a former employee—who is either one of the five highest compensated employees of the organization for the taxable year, or an employee who was a covered employee of the organization (or any predecessor to the organization) for any preceding taxable year beginning in 2017.


    Compensation generally includes all taxable remuneration payable to a covered employee (“Compensation”).  For purposes of this rule, remuneration is considered payable in the first year that it is no longer subject to a substantial risk of forfeiture, regardless of when actually paid. A substantial risk of forfeiture exists when a person’s rights to remuneration are conditioned upon the future performance of substantial services or the occurrence of a condition related to the purpose of the remuneration. So, to determine the total Compensation of a covered employee in any year, an employer must add together current salary and other current taxable remuneration as well as any future rights to payments (but only for the first year in which such future payments are no longer subject to a substantial risk of forfeiture).

    Compensation does not include designated Roth contributions or amounts paid to licensed medical professionals for medical or veterinary services. Licensed medical professionals include doctors, nurses, and veterinarians. The Bill does not provide any guidance on what qualifies as medical or veterinary services, but the IRS may promulgate regulations to clarify the provisions of this Code section.

    Compensation of a covered employee by an applicable tax-exempt organization includes amounts paid by all related tax-exempt organizations and governmental entities. So, if two related organizations each pay a covered employee $900,000, even though neither organization pays the covered employee more than $1,000,000 individually, both will be liable for a 21% tax on a portion of the amount over $1,000,000 that the covered employee receives (here, $800,000). Each related organization is liable for the amount of taxes proportional to Compensation it pays the covered employee during the year. In the example above, each organization would be liable for half of the taxes assessed because each organization paid the covered employee an equal amount. However, if one organization paid $450,000, and the other paid $1,350,000, the first organization would owe one-quarter of the total tax assessed and the other organization would owe three-quarters of the total tax assessed.


    The Bill also places a 21% excise tax on the amount of “excess parachute payments” paid to covered employees of most tax-exempt organizations, including tax-exempt institutions of higher education.

    Parachute payments are taxable payments available to a covered employee contingent on the employee’s termination of employment (“Parachute Payments”). An excess parachute payment is any such taxable payment in excess of three times the base amount allocated to such payment. The base amount is the annualized includable Compensation of the covered employee for the five taxable years ending before the date of the employee’s separation from employment. So, if an employee’s annualized Compensation (including amounts not subject to a substantial risk of forfeiture) is $200,000, any amount over $600,000 paid to the employee contingent upon his separation from service would be taxed at a rate of 21%.

    Many of the concepts described in the preceding section apply in the Parachute Payment context.  The definitions of “covered employee” and “Compensation” are the same, and Parachute Payments do not include amounts paid to licensed medical professionals for medical or veterinary services.  In addition, amounts payable to non-highly compensated employees and distributions from qualified plans, 403(b) plans, and 457(b) plans do not count as Parachute Payments.

    One element of uncertainty associated with the Parachute Payment excise tax relates to amounts which become fully vested upon an involuntary termination of employment under a Section 457(f) plan.  Assume, for example, that a covered employee would be entitled to a $300,000 payment under a Section 457(f) plan on the earlier of an involuntary separation from service without cause or March 1, 2025.  Assume further that the covered employee is involuntarily terminated without cause on January 1, 2025 and receives a lump sum payment of $300,000.  By analogy to the golden parachute payment regulations issued under Internal Revenue Code Section 280G, the value of such payment for purposes of the 21% excise tax should equal at most the value of the two-month vesting acceleration rather than the full $300,000, but this is not clear pending further guidance from the Internal Revenue Service.

    If an amount is subject to the Parachute Payment excise tax, it will not also be subject to the Excess Compensation excise tax described in the preceding section.


    The first step for employers potentially affected by either of these excise taxes will be to identify their covered employees and the covered employees’ annual Compensation and potential Parachute Payments due upon severance from employment. After identifying the Compensation and potential Parachute Payments associated with each covered employee, employers may want to restructure certain covered employees’ compensation. Affected employers will need to weigh competing interests: (i) the need to retain skilled executives and other key employees against (ii) the added tax costs and the perception of donors and the public in the event either excise tax might apply to payments to a covered employee.


    The Bill also increases the amount of unrelated business taxable income of a tax-exempt organization by any amount that is paid or incurred by the organization (i) as a qualified transportation fringe, (ii) made to a parking facility used in connection with qualified parking, or (iii) towards any on-premises athletic facility. For example, if an organization pays $100 a month for an on-premises gym on behalf of an employee, $1,200 ($100/month x 12 months) will be added to that organization’s unrelated business taxable income.

    When considering this new provision, employers will want to weigh their own financial interests with the interests of their employees. While no longer providing the fringe benefits discussed above may save unrelated business income taxes, doing so would undoubtedly be viewed unfavorably by employees.

    Wednesday, November 9, 2016

    Now that the historic election between the two most unpopular candidates in recent memory has been called for Donald Trump, the questions (of which there are many) now facing the President-Elect and the rest of us are how a President Trump will govern.  One of his campaign promises (and a favorite Republican talking point) was the repeal of the Affordable Care Act and replacing it with something else.  (Its recent premium hikes were even cited by his campaign manager as a reason voters would choose him.)  So is that going to happen?

    At this point, we cannot know for sure (and given the beating that prognosticators took this election cycle, we’re not sure we want to guess).  However, we can identify a few hurdles that might make it harder.

    Republicans Need a Plan First.  One of the major hurdles is Republicans themselves have yet to completely agree on a coherent alternative.  Speaker Ryan released a thumbnail sketch of a proposal in June which looked more like “pick and choose” than “repeal and replace.”  However, it is often said the devil is in the details and that will certainly prove true here.

    And Then They Have to Agree On It. The other challenge is getting enough Republican votes to get the plan through (and maybe some Democratic ones as well).  As of now, the GOP is still projected to retain majorities in both the House and Senate.  However, some races are still too close to call and, at least at the moment, it looks like their majorities will be smaller than they were coming out of the 2014 mid-term elections.  Particularly in the House, this means the Freedom Caucus could have a stronger voice and prevent consensus on a Republican plan.  And then there’s the question of whether Congress and the President can agree on any plan as well.

    The Democrats Could Also Filibuster. Given that Democrats have been resistant to sweeping ACA changes proposed by Republicans, they could filibuster any legislation that makes its way to the Senate.  The Republicans, as of now, are projected only to have a simple majority in the Senate, and well less than the 60 votes needed to shut down a filibuster (which will be true even if the remaining races are all called their way).

    There are other hurdles, but these are the obvious political ones that stand in the way of an ACA repeal and replace strategy.

    That’s not to say, however, that Trump can do nothing.  He will appoint the heads of Treasury, Labor, and Health and Human Services and will likely get his appointees confirmed with relative ease, given Republican control of the Senate.  Those appointees will have the authority to write any remaining rules and a chance to rewrite existing rules.  That said, regulatory changes will be somewhat constrained by the existing statutory framework and concerns about insurance market disruption.  However, because Congress has largely given over the authority to interpret the laws to the Executive Branch, President Trump’s appointees may be able to take wider latitude than you would think to rewrite existing rules.

    For now, plan sponsors should continue with compliance as they always have.  Nothing of significance is likely to change between now and President Trump’s inauguration in January.  Even after that, it will take some time (and some political maneuvering) for any huge changes to get implemented.

    Update 11/10/16: Some readers have asked whether the Republicans could use the reconciliation process in the Senate (which bypasses the filibuster and only requires a simple majority of 51 Senators) to achieve their goals.  The good lawyerly answer is “yes and no.”  Reconciliation actions have to have a budgetary impact, so a full repeal and replacement is not really possible using that process.  However, Republicans could strip out several aspects of the act (like the play or pay employer mandate or the premium tax credits for individual insurance) through that process, effectively making the law unworkable.  It wouldn’t be a full repeal and replacement, but it might do enough damage to the law bring the possibility of a repeal and replacement to the table.

    Wednesday, October 26, 2016

    confusionYou might recall that the Department of Labor (DOL) took the position earlier this year that it had to protect individual retirement accounts and annuities as well as IRA owners by extending certain ERISA protections to them. In its promulgation of the amended investment advice regulation (otherwise known as the fiduciary rule) and the related prohibited transaction exemptions, it extended its reach deep into parts of the individual retirement plan structure where it had not ventured before.  (Its authority to do so is presently the subject of numerous lawsuits.)   It did so contending that public policy requires it to protect the IRAs and IRA owners from its perceived conflicts of interest emanating from the investment advisory and sales arms of financial services organizations.

    Now, the DOL has done an about face, seemingly in furtherance of a different public policy goal. The policy this time is to enhance savings opportunities for American workers who do not have access to ERISA-protected employer-sponsored qualified retirement plans.  By creating a “safe harbor” that allows states to mandate payroll deduction IRAs for these workers, the DOL fails to provide the protections afforded by ERISA to participants in these State-sponsored IRA plans (other than, presumably, the investment advice rule).  The irony (and intellectual inconsistency) is patent:  IRAs are important enough to be caught within the ambit of ERISA’s fiduciary rule, but large state plans using IRAs can otherwise avoid the myriad of other ERISA protections.

    The safe harbor addresses a state law creating an automatic enrollment IRA program with these requirements:

    1. The program is established and maintained pursuant to state law.
    2. The program requires employer participation in the automatic enrollment arrangement.
    3. The program is implemented and administered by the State.
    4. The State is responsible for investing the employee savings and it is the State that selects the investment options for participant direction. (Unlike its ERISA control, the DOL apparently recognizes that it cannot control what the States do to implement, control, and monitor this requirement.)
    5. The State is responsible for securing payroll deductions and savings (although the State need not be a guarantor of them).
    6. The State adopts processes to ensure that employees receive notice of their rights under the program.
    7. The State must create a mechanism to enforce the rights of employees.
    8. Employees may opt out at any time.
    9. All employee rights are enforceable the employee, a beneficiary or the State.
    10. The employer’s involvement is limited to ministerial acts: (i) collecting contributions through payroll deduction, (ii) providing notices and maintaining records regarding collections and remittances, (iii) providing information to the State as needed to assist operation of the program, and (iv) distributing program information to the employees.
    11. The employer cannot contribute or provide savings incentives.
    12. The employer has no discretion, authority or control.
    13. The employer is only paid its approximate reasonable costs.

    In “stretching” the definition of fiduciary under ERISA to cover IRAs, the DOL took the position that times have changed and that the marketplace for retirement savings (particularly IRA savings) and investment is very different today than it was when the original regulation (29 CFR § 2510.3-21(c)) was adopted in 1975. However, in creating a safe harbor for State-sponsored IRAs, the DOL relies on another 1975 regulation (29 CFR § 2510.3-2(d)) that apparently is not affected by any change in the retirement marketplace and does not need modification to cause certain IRA structures to gain other ERISA protections.

    State-sponsored IRAs are arguably not established or maintained by an employer. But the safe harbor does mandate employer participation, and employers are in a position to control employee deferrals.  Were the plan an ERISA plan, employee deferrals used for prohibited purposes would invoke the prohibited transaction protections of ERISA that the DOL relies on so heavily in imposing the investment advice regulation.  Recognizing that this mandate might be interpreted to cause an employer either to establish or maintain the State’s auto-IRA arrangement and therefore making it subject to ERISA , the safe harbor tries to avoid this by applying the four non-ERISA plan requirements under the 1975 regulation: (i) no employer contributions, (ii) voluntary employee participation, (iii) without endorsement, collect payroll deduction contributions and remit them, and (iv) the employer receives no compensation other than the reasonable cost for servicing the arrangement.

    After the 1975 regulation exempting the type of IRA described above, the courts weighed in. One might contend that the DOL has seen fit to bring a traditional IRA into the ERISA arena under the investment advice regulation even though it is not established or maintained by an employer while exempting a new form of IRA structure from ERISA (except for the investment advice regulation, of course) that may violate well-settled case law.

    In Donovan v. Dillingham, 688 F. 2d 1367 (2nd Cir. 1982), the court identified the four factors that give rise to an ERISA plan: “a plan, fund or program [established or maintained by an employer] under ERISA implies the existence of intended benefits, intended beneficiaries, a source of financing, and a procedure to apply for and collect benefits.”  Five years later, in Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987), the Supreme Court added a fifth factor:  “ongoing plan administration” such as determining eligibility for benefits, calculating benefit amounts and monitoring plan funding. A State –sponsored IRA program as described in the safe harbor meets the four Dillingham requirements and in many cases will meet the fifth Fort Halifax requirement.  However, isn’t a State-sponsored arrangement a plan, fund or program established or maintained by an employer where that employer is mandatorily obligated to participate in the program?  Regardless, that begs the question:  shouldn’t the IRA accounts in State-sponsored auto-enrollment IRAs get ERISA protections if IRAs generally (including, presumably, those that are part of the State-sponsored programs) are important enough to be subject to the investment advice regulation? Is it good policy to eschew ERISA to enhance employee savings opportunities?

    It would appear that the DOL is conflicted by its policy considerations: Protect traditional IRAs and IRA owners by imposing ERISA investment advice rules on them while at the same time enhancing employee retirement savings without the other protections.

    Friday, September 23, 2016

    griefWhen the IRS announced that it would virtually eliminate the determination letter program for individually designed retirement plans, many practitioners moved through the classic Kübler-Ross five stages of grief (see the picture at the right).  Some have yet to finish.  In Announcement 2016-32, the IRS requested comments on how these plans can maintain compliance going forward since determination letters are no longer available.

    As a general rule, the IRS used to deny plans the ability to incorporate tax code provisions by reference (rather than reciting them wholesale in the plan), except for a very short list available here.  The IRS is asking if there are additional provisions that would also be appropriate to incorporate by reference.  This would avoid the need to reproduce these provisions wholesale and run the risk of a minor foot fault if the language did not line up.  It would also help avoid the need to update plans for law changes, in some cases.

    Additionally, much to the anger of many practitioners, the IRS has historically sometimes required a plan to include provisions that were not applicable to the plan.  For example, there are special diversification requirements for plans that hold publicly-traded employer stock, yet the IRS has required them even for private companies.  One wonders if the IRS actually observed numerous situations where privately held corporations became public companies and then failed to amend those of their plans that held employer stock.  What a scourge on the individually designed plan world this must have been!  The IRS would like to know if there are other provisions that could possibly be avoided and the likelihood that the plan sponsor will actually amend the plan when the provision becomes applicable.  While there may be a few of these provisions out there, there likely aren’t enough to make a significant difference in the length of individual designed plans or to stem the tide of faulty individually designed plans.

    For those employers who still want the comfort of an IRS letter of some kind, they could bargain with a company that offers a pre-approved plan.  However, there are challenges to switching to a pre-approved prototype or volume submitter plan, and the IRS wants to know about them.  For example, employers with unique plan designs or multiple different benefit formulas may not be able to fit under a particular pre-approved form.  Under the rules applicable to those plans, too much variation from the pre-approved form destroys the ability to rely on the letter and turns the plan into an individually designed plan (which can’t then get a determination letter).

    What might depress practitioners most is that the above areas are the only ones the IRS came up with as possibilities.  For example, it would make sense to let plans apply for a determination letter when there is a plan merger.  The IRS has historically requested the documents of plans that were merged into a plan under determination letter review.  Without allowing this, the IRS will end up not reviewing a plan until it is terminated.  At that time, the Service may be asking for plans that were merged from 20 or more years ago.  That level of recordkeeping would be prohibitive for some plan sponsors.  Additionally, if the IRS found an error at that time, it could be extremely difficult to fix.  Therefore, allowing a complete review of the plan when it is a party to a plan merger would be highly valuable. Additionally, since plans will be permitted to obtain a determination letter on initial adoption, a limited determination approval process might be available to review amendments to the already approved plan rather than the entire plan again.

    The Service will accept comments in writing on or before December 15.  Service employees responsible to draft the rules may also read this post, so feel free to leave your comments below.

    Thursday, July 7, 2016

    Good NewsOn the TV show Futurama, the aged proprietor of the delivery company Planet Express, Professor Hubert J. Farnsworth, had a habit of entering a room where the other characters were gathered and sharing his trademark line, “Good news, everyone!”  Of course, his news was rarely good.  More often, it was the beginning of some misadventure through which the other characters would inevitably suffer, often to great comedic effect.  So we can forgive you for thinking that we may be standing in his shoes when we tell you that new 409A regulations are good news, but really, hear us (read us?) out.

    The IRS released proposed changes to both the existing final regulations and the proposed income inclusion regulations.  And the news is mostly good.

    The changes are legion, so we are breaking up our coverage into a series of blog posts. This first post is all about the changes related to the end of the service relationship.  Check back for future posts discussing other aspects of these proposed regulations.

    Severance Safe Harbor Available for Bad Hires. Severance is, surprisingly to some, generally considered deferred compensation subject to 409A.  However, severance can be exempt from 409A if the severance is due to a truly involuntary separation under 409A and does not exceed two times the lesser of (1) the employee’s prior annual compensation or (2) the limit on compensation for qualified plans under Code Section 401(a)(17) (currently $265,000, for a limit of $530,000).  To qualify for the exemption, the severance must also be paid by the end of the second tax year following the year of separation.  This is sometimes referred to as the “two years, two times” rule.

    But what if you make a bad hire or otherwise decide you want to fire someone in the same year you hired them? Is the severance safe harbor still available?  Treasury confirmed that, indeed, it is.  In that case, the limit is two times the lesser of (1) the employee’s annualized compensation for the year of termination or (2) the 401(a)(17) limit.

    Reimbursement of Legal Fees for Bona Fide Employment Claims is Exempt. Trial lawyers (or more likely their clients), rejoice!  Some employment agreements contain provisions where the employee can be reimbursed for legal fees if they succeed in a claim they bring against the company following termination.  These legal fee reimbursement provisions always had an uncertain status under 409A, until now.  The IRS has said that if they are a result of a bona fide dispute, they are exempt from 409A.

    Employees Becoming Contractors Can Have a Separation from Service. An employee who transitions to an independent contractor status can have a separation from service as an employee in connection with that transition if his/her level of services as an independent contractor are low enough to constitute a separation. Usually, this means that the former employee could provide no more than 20% of the level of services s/he was providing as an employee over the prior 36-months.  We always believed this was the rule, but there was some language in the regulations that caused others to question it. The IRS has clarified the rule, stating that such a reduction in services rendered constitutes a separation from service.

    Monday, June 6, 2016

    Gavel and ScalesIt was bound to happen. For several years, the plaintiffs’ bar has sued fiduciaries of large 401(k) plans asserting breach of their duties under ERISA by failing to exercise requisite prudence in permitting excessive administrative and investment fees.  It may be that the plaintiffs’ bar has come close to exhausting the low-hanging lineup of potential large plan defendants, and, if a recent case is any indication, the small and medium-sized plan fiduciaries are the next target.  See, Damberg v. LaMettry’s Collision Inc., et al. The allegations in this class action case parallel those that have been successful in the large plan fee dispute cases. Now that the lid is off, small and medium sized plan fiduciaries should be forewarned of the need to employ solid plan governance to avoid, or at least well defend, a suit aimed at them.

    Exceptional plan governance means that, at a minimum, plan sponsors (and designated fiduciaries) should consider the following items to help demonstrate that they are primarily operating their plans to the benefit of participants and their beneficiaries and then to reduce liability exposure for themselves:

    • Understand and exercise procedural prudence – process, process, process
    • Identify plan fiduciaries and know their roles and duties
    • Seek and obtain fiduciary training for all plan fiduciaries
    • Adopt a proper plan committee charter or similar document
    • Appoint fiduciaries and retain service providers prudently and monitor them
      • Know the difference between a 3(16), 3(21) and a 3(38) fiduciary and make prudent decisions with respect to retaining them
      • Utilize a qualified administrative committee of no fewer than three members that meets regularly and memorializes its decisions properly
    • Utilize a corporate trustee/custodian
    • If you adopt an investment policy statement (as you probably should), follow it
    • Understand and properly evaluate plan fees and 408(b)(2) disclosures and services and service contracts
    • Monitor plan administration
    • Memorialize actions taken and the reasons for doing so
    • Retain a qualified independent investment advisor (although it may not make financial sense for small plan sponsors to pay for this service)
      • Engage in periodic comparisons of fees and services being charged for similar plans (RFPs, RFIs, benchmarking)
      • Address participant concerns promptly and, if necessary, seek advice of counsel in responding to participant complaints
    • Understand and evaluate a proper operational structure for your plan
      • Know the difference between a bundled structure and an unbundled one – with a really good record keeper
      • Appreciate the nature of services to be provided
      • Evaluate cost to participants and reasonable of fees for needed services
      • Determine cost that the plan sponsor is willing to share
      • Identify parties that will be making statements regarding the plan and its operation (like the plan’s TPA) and how there is control to avoid misstatements
      • Determine responsibility for keeping plan documents current and confirm that it is ongoing
      • Determine responsibility for claims processing and confirm that it is ongoing
    • Verify that a proper ERISA bond is in place
    • Procure fiduciary insurance
    • Seek assistance of counsel as needed
    • Evaluate the investment platform regularly, and, if a brokerage window is made available, be certain to understand it, how it works, and what its limitations might be
    • Assure 404(c) compliance, if applicable
    • Understand target date funds and how they work in your plan
    • Establish solid internal controls
      • Review current systems to confirm segregated responsibilities and that the IT systems being used for the plan (particularly payroll) are effective
      • Confirm that those maintaining plan records are knowledgeable
      • Confirm “good transfers” regularly
      • Make certain that the proper definition of compensations is being used for example, by reviewing payroll coding against the plan document
      • Be certain someone is responsible to verify data, particularly for nondiscrimination testing

    While this list does not address every possible governance practice, following the applicable items appropriately should result in good plan governance. It will also be of value to your participants by demonstrating that you have their best interests at the forefront of plan operation. Additionally, the result should be better liability protection for you and the other plan fiduciaries. While the list may seem daunting, once you understand each of the steps and implement them, it will become easier and, with regularity, can become second nature.

    Thursday, April 21, 2016

    Changes AheadEarlier this month, the Department of Labor finally released the long-awaited “Definition of Fiduciary; Conflict of Interest Rule.”

    This blog post is intended to do two things:

    1. Provide a brief history of the proposal, and
    2. Provide an overview of the key points of the final rule and how it differs from the 2015 proposal.

    For additional materials and information on the Final Rule, visit the DOL webpage. In addition, you can access all 200 plus pages of the final rule here.

    I.  The “Conflict of Interest” Rule’s History

    Since the adoption of ERISA, the governing regulations have mandated use of a five-part test that dictates whether an individual will be considered an investment advice fiduciary. In order to rise to the level of an investment advice fiduciary, the five-part test required that a person give investment advice: (1) about the value or advisability of investing in securities or other property; (2) on a regular basis; (3) pursuant to an agreement with the plan; (4) individualized to the specific plan; and (5) with the mutual understanding that such advice will serve as a primary basis for investment decisions.

    The DOL initially proposed rulemaking to change the definition of an investment advice fiduciary back in October of 2010. The 2010 proposal generally did the following:

    • suggested eliminating the five-part test and, more specifically, the requirement that investment advice be provided on a regular basis;
    • indicated that a paid advisor would have been treated as a fiduciary if the advisor provided one of the three types of advice defined in the proposal and either: (1) represented that s/he was an ERISA fiduciary; (2) was already an ERISA fiduciary to the plan by virtue of having control over plan assets or discretionary authority over plan administration; (3) was already an investment advisor under the Investment Advisers Act of 1940; or (4) provided advice pursuant to an agreement, arrangement or understanding that the advice may be considered in connection with plan investment or asset management decisions and would be individualized.

    This 2010 proposal was withdrawn, and the Employee Benefits Security Administration (EBSA) announced in September 2011 that it would repropose the rule.

    It wasn’t until spring of 2015 that the DOL released for public comments its revised proposal, which incorporated various comments received on the original 2010 proposal. These resulting changes included a “Best Interest Contract Exemption,” “Principal Transactions Exemption,” a carve-out for investment education provided to IRA owners as well as plan sponsors and plan participants, and a change to focus on the advice rendered when determining who constitutes a fiduciary rather than on title/designation. Despite the many differences from the 2010 proposal, the revised proposal still eliminated the five part test and eliminated the requirement that the advice must be provided “on a regular basis.” Instead, a single act of advising could render an individual an investment advice fiduciary.

    As discussed in our two prior posts, the 2015 proposal would include in the definition of fiduciary anyone who (1) receives compensation, directly or indirectly, for the requisite type of advice (e.g., advice, appraisals, or fairness opinions about the value of any investment; recommendations to purchase, hold, or sell any investment; or recommendations as to the management of any investment) and (2) meets one of the following conditions:  (i) is or represents his or herself to be an ERISA fiduciary, or (ii) provides the advice pursuant to an agreement or understanding that the advice may be considered in connection with investment or management decisions with respect to plan assets and will be individualized to the needs of the plan. Accordingly, much if not all of the full-service and discount brokerage services that broker-dealers offer to plan sponsors and plan participants would be subject to a fiduciary duty under the proposed rule.

    Like the 2010 proposal before it, the 2015 revised proposal received many comments and concerns. Unlike the 2010 proposal, the 2015 revised proposal was not withdrawn. Instead, a final rule was published in the Federal Register on April 8, 2016.

    II. Third Time’s the Charm? The Final Rule

    Below we describe some of the key provisions and significant ways in which the Final Rule differs from the 2015 revised proposal.

    A.  Applicability Date

    Unlike the 2015 proposal which stated that the rules should be applicable eight months following publication, the Final Rule adopts a phased implementation approach. First, the revised definition of fiduciary investment advice as well as the new and amended exemptions become applicable on April 10, 2017. This means that the current five-part test remains in effect for roughly the next year. The Best Interest Contract Exemption and the exemption for the Principal Transactions become fully applicable later as a transition period under which more limited conditions will apply until January 1, 2018.

    B.  Fiduciary Investment Advice

    1.  Investment Advice Definition

    The Final Rule adheres to the general structure of the 2015 revised proposal. It states that individuals provide investment advice if they provide, for a fee or other compensation, certain specified types of information, including:

    • A recommendation as to the advisability of acquiring, holding, disposing of, exchanging, rolling over, transferring, or distributing securities or other investment property of the plan or IRA; or
    • A recommendation as to the management of securities or other investment property including investment, portfolio composition, or recommendations with respects to rollovers, transfers, or distribution from a plan or IRA.

    In addition to providing a perquisite type of information, the individual must also (i) represent or acknowledge that they are acting as a fiduciary within the meaning of ERISA or the Internal Revenue Code; (ii) provide advice rendered pursuant to a written or verbal agreement, arrangement, or understanding that the advice is based on the particular investment needs of the recipient; or (iii) provide recommendations directed to a specific advice recipient or recipients regarding the advisability of a particular investment or management decision. Again, the “on a regular basis” requirement is not included in the Final Rule.

    A notable difference between the Final Rule and the 2015 revised proposal is that the Final Rule does not consider appraisals, fairness opinions, or similar statements concerning the value of securities or other property to constitute investment advice. All appraisals and valuations, not just those for ESOPs, are excluded from the rule. The DOL has also made it clear that advice regarding “investment property” does not include health, disability, and term life insurance policies and other assets to the extent they do not contain an investment component.

    2.  What Constitutes a Recommendation?

    The Final Rule makes clear that whether a communication constitutes a “recommendation” depends on its content, context, and presentation. If the content, context, and presentation would reasonably be viewed as a suggestion that the recipient of such advice engage or refrain from taking a particular course of action, then the communication is likely a recommendation. In addition, the more individually tailored the communication, the more likely that it will constitute a recommendation.

    The Final Rule also provides a non-exhaustive list of what does not constitute a recommendation. Examples on the list include:

    • marketing or making available to a plan fiduciary a platform of investments;
    • providing selection and monitoring assistance such as identifying investment alternatives (provided that the person identifying the investment alternatives discloses in writing whether the person has a financial interest in any of the identified investment alternatives and the precise nature of such interest) or providing objective financial data and comparisons with independent benchmarks;
    • furnishing or making available general communications to a plan, plan fiduciary, plan participant, beneficiary, IRA, or IRA owner; and
    • furnishing or making available investment education to a plan, plan fiduciary, plan participant, beneficiary, IRA, or IRA owner.

    3.  What Constitutes Investment Education?

    The Final Rule still recognizes the same general four categories of investment education (plan information, general financial/investment information, asset allocation models, and interactive investment materials).

    Unlike the 2015 revised proposal, the Final Rule still allows asset allocation models and interactive investment materials to identify specific designated investment alternatives available under the plan without being considered fiduciary investment advice. However, doing so comes with additional requirements. Specific alternatives may be identified if: (1) the alternative is a designated investment alternative under an employee benefit plan; (2) the alternative is subject to fiduciary oversight by a plan fiduciary who is independent of the person developing/marketing the investment alternative; (3) the asset allocation models and interactive investment materials identify all the other designated investment alternatives available under the plan with similar risk and return characteristics; and (4) the asset allocation models and interactive investment materials are accompanied by a statement that identifies where information on the alternatives included may be obtained.

    Since the Final Rule requires that an independent fiduciary have oversight of the specific designated investment alternatives, this exception does not apply to any presentations of asset allocation models or interactive investment materials to IRA owners. Presentations to IRA owners may not include specific alternatives without being considered investment advice.

    4.  Carve-Outs

    The Final Rule includes a list of additional activities that will not be considered investment advice, even if the activities otherwise meet the recommendation and investment advice criteria. These carve-outs include: transactions with independent fiduciaries with financial expertise, swap and security-based swap transactions, and advice provided by an employee to a plan fiduciary, other employee, or an independent contractor if the advice is provided in connection with the individual’s role as an employee.

    C.  The Best Interest Contract Exemption

    1.  Who Requires a Contract, and When Must it be Executed?

    The Best Interest Contract Exemption requires a financial institution to acknowledge it and its advisors’ fiduciary status in writing in order to receive compensation that would otherwise be prohibited. The contract requirement for ERISA plans has been dropped, but the Final Rule requires an enforceable contract in writing for IRAs and other non-ERISA plans. In addition, the contract also no longer requires a contract signed the customer, financial institution and adviser. Instead, only the financial institution and the customer need to sign the contract.

    The Final Rule also allows the contract to be incorporated into other account opening documents. The contract no longer needs to be entered into prior to the time that any advice is provided. Instead, the contract may be entered into before or at the same time the recommended transaction is executed.

    2.  Covered Assets

    The Final Rule eliminated the list of covered assets included in the 2015 revised proposal. This means that the Best Interest Contract Exemption may be available for any asset type so long as the advisor meets the impartial conduct standards (advice in client’s best interest, avoid misleading statements, receive no more than reasonable compensation) and other conditions of the exemption.

    3.  Level Fee Fiduciaries

    The Final Rule added a special exemption for level fee fiduciaries. This special exemption covers a recommendation to roll over assets from a plan into a fee-based account, or transfer assets from a commission-based account to an account that charges a fixed percentage of assets under management, if the financial institution and adviser are “level fee fiduciaries” and other conditions are satisfied.

    D.  The Principal Transaction Exemption

    The Final Rule does not require that the pricing of the principal transaction be at least as favorable as the price offered by two unaffiliated counterparties. Instead, advisers and financial institutions must seek to obtain the best execution reasonably available under the circumstances

    The Final Rule also includes a broadened list of the types of assets that may be traded on a principal basis under this exemption. These assets include:

    • purchases by a plan of Certificates of Deposit (CDs), interests in Unit Investment Trusts (UITs), and “debt securities,” and
    • sales by a plan of “securities or other property,” which the DOL indicates corresponds to “the broad range of assets that can be recommended” by fiduciary advisers.

    Though the DOL expanded the Principal Transaction Exemption to cover more types of assets, it did not expand the exemption to cover purchases of other types of investments, including municipal securities, currency, asset-backed securities, equities, derivatives, and bank note offerings.

    Wednesday, March 16, 2016

    Piggy Bank in CrosshairsOne might be led to believe that the current administration is in favor of expanding retirement savings opportunities. After all, the DOL has somewhat apologetically subverted ERISA to allow the States to sponsor employer-based savings plans.  And the President’s recently proposed budget endeavors to provide a national retirement savings program. (See page 135 of the General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals) So why then would the IRS reverse two decades of regulation that favors cross-tested plans in small businesses, an action that might cause many small employers to terminate their qualified plans or amend them to reduce the employer contribution to employee’s accounts?

    Some background may be in order. Cross-tested defined contribution plans are allowed to test equivalent benefit accrual rate (EBAR) groups separately using the ratio percentage test or the average benefits test. Unlike testing for coverage, application of the average benefits test here does not include testing for a reasonable business classification. This has permitted cross-tested plans to create small rate groups each of which meets the modified average benefits test and permits greater relative nonelective contribution (NEC) amounts for HCEs. Typically, the average benefits test for cross-testing finds that the EBARs for HCEs are the same or less than the EBARs for NHCEs. Notwithstanding this EBAR comparison, this allows for a sizeable difference in nonelective contribution allocation rates that benefit the HCEs who are often older and certainly more highly compensated. To take advantage of this otherwise seeming-to-discriminate structure, the plan must provide a gateway NEC of at least 5% of compensation for all eligible NHCEs, a rather generous employer minimum contribution. This trade-off was seen as a fair differentiation that would allow small business owners the opportunity to “skew” contribution allocation rates in their favor while at the same time providing their employees with a meaningful account addition. This has led to adoption of thousands of cross-tested plans benefitting many NHCEs around the country.

    The proposed rule upends the trade-off. By adding the reasonable business classification requirement to the average benefits test for cross-testing purposes (and, of course, leaving the gateway contribution in place), the IRS, in proposed regulation §1.401(a)(4)-13, will force many cross-tested plans to use the ratio percentage test at a far greater cost since the small rate group approach will be eliminated. That will require an increase in the EBARs for the NHCEs in order for a larger rate group to pass the ratio percentage test if the EBAR for the specified HCE is static. That will require a greater NEC for NHCEs, an increased cost that many small businesses simply cannot afford or will not want to contribute for other business reasons (like the high cost of health insurance). And the average benefits test will not be palatable since small rate groups that often include only one NHCE will not be based on a reasonable business classification. A reasonable business classification is based on “all the facts and circumstances . . ., is reasonable and is established under objective business criteria that identify the category of employees who benefit under the plan. Reasonable classifications generally include specified job categories, nature of compensation (i.e., salaried or hourly), geographic location, and similar bona fide business criteria. An enumeration of employees by name or other specific criteria having substantially the same effect as enumeration by name is not considered a reasonable classification.” Treas. Reg. §1.410(b)-4(b). Of course, a “facts and circumstances” test often presents an unknown, one that small businesses are not likely to embrace.

    So, why, after all these years, would the IRS change the rule to make it more expensive to sponsor a cross-tested plan, possibly causing many small employers to amend their plans to eliminate NECs or even terminate their plans? The answer may lie in looking at who most adopts these plans. Although there are no available statistics, it is commonly understood that many, possibly the majority of, cross-tested plans have been adopted by professional practices including those dastardly doctors and lawyers, seemingly high earners that the IRS may believe want nothing more than to take advantage of their employees. If the rule is finalized, the affect will likely be a reduction in the size of employer contributions to the accounts of those NHCEs fortunate enough to be participants in cross-tested plans. The impact of the new rule would seem to be contrary to the policy goal of expanding coverage for NHCEs. When looking at annual contribution limits under current law and the President’s goal of limiting the size of a tax-favored account (see the Proposal beginning on page 167 of the General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals) that would prevent the doctors and lawyers from getting a perceived too large a share of the tax advantage, it doesn’t seem to make policy sense to disrupt a plan structure that provides the gateway contribution for NHCEs.

    Update: If you want to contact Treasury or your Congressional representative to tell them what you think of this change, you can go to

    Wednesday, March 2, 2016

    ThinkstockPhotos-122516159A few weeks ago, the President released his proposed budget for the fiscal year 2017. As usual, it is dense. However, the President has suggested some changes to employee benefits that are worth noting. While they are unlikely to get too much traction in an election year, it is useful to keep them in mind as various bills wind their way through Congress to see what the President might support.

    • Auto-IRAs. Stop us if you’ve heard this one before. The proposal would require every employer with more than 10 employees that does not offer a retirement plan to automatically enroll workers in an IRA. No employer contribution would be required and, of course, individuals could choose not to contribute. (In case you’ve forgotten, we’ve seen this before.)
    • Tax Credits for Retirement Plans. Employers with 100 or fewer employees who “offer” an auto-IRA (note the euphemistic phrasing in light of the first proposal) would be eligible for a tax credit up to $4,500. The existing startup credit for new retirement plans would also be tripled. Small employers who have a plan, but add automatic enrollment would also be eligible for a $1,500 tax credit.
    • Change in Eligibility for Part-Timers. The budget would require part-time workers who work 500 hours per year for three consecutive years to be made eligible for a retirement plan.
    • Spending Money to Help Save Money. The President proposes to set aside $6.5 million to encourage State-based retirement plans for private sector workers.
    • Opening Up MEPs. To help level the playing field with the State-run plans, the budget proposes to remove the requirement that employers have a common bond to participate in a multiple employer plan (MEP). This is a proposal that has already been floated by Sen. Orrin Hatch, so there’s some possibility that, even in an election year, this might get passed (probably, if not mostly, because it would be hard for anyone to have a vote for open MEPs used against them on the campaign trail given that so few outside the retirement space even know what they are).
    • More Leakage For Long-Term Unemployed. The budget also proposes to allow long-term unemployed individuals to withdraw up to $50,000 per year for two years from tax-favored accounts. This proposal, if implemented, would be interesting to study empirically. Obviously, it would lead to more leakage from retirement plans, but would people be more apt to contribute knowing that they could withdraw if they really needed to do so?
    • Double-tax of Retirement Benefits? In what appears to be a repeat of a prior proposal, page 50 of the budget summary states that the value of “Other Tax Preferences” (not specified) would be limited to 28 percent. This would seem to describe the President’s proposal from prior years that to the tax benefit of retirement plan contributions (among other items). However, such a proposal is, in our view, counter-intuitive given the other proposals to expand retirement access.
    • Cadillac Tax Would Get a Tune-Up. The ACA tax on high-cost coverage would change the thresholds that determine when the tax applies. Currently, there is one threshold for self-only coverage and another for coverage other than self-only coverage. The budget would propose to change the thresholds to the higher of those amounts or the average premium for a gold plan in the ACA Marketplace in each state. This is designed to help address geographic variations in the cost of coverage. There is also a mention in the summary of making it easier for employers with flexible spending arrangements to calculate the tax, but it is not clear what form that would take.
    • Miscellaneous. In the budget tables, there are also a few benefits items, such as:
      • Expanding and simplifying the small employer tax credit for employer contributions to health insurance (page 148).
      • Simplifying the required minimum distribution rules (page 152).
      • Taxing carried interests / profits interests as ordinary income (page 153).
      • Requiring non-spousal beneficiaries of deceased IRA owners and retirement plan participants to take inherited distributions over no more than five years (page 153).
      • Capping the total accrual of tax-favored retirement benefits (which seems like another repeat of prior proposals – page 153).
      • Limiting Roth conversions to pre-tax dollars (page 153).
      • Eliminating the deduction for dividends on stock in ESOPs of publicly-traded companies (page 153).
      • Repealing the exclusion of net unrealized appreciation for certain distributions of employer securities from qualified retirement plans (page 153).

    A summary of these changes from the Administration is available here (along with a few other items).  More on the overall budget is available here. Do you have additional details, other information, or a point of view on these proposals? Post it in the comments!