Subscribe
Categories
  • 409A
  • COBRA
  • Commentary/Opinions/Views
  • Deferred Compensation
  • Employment Agreements
  • Equity Compensation
  • ERISA Litigation
  • Executive Compensation
  • Family and Medical Leave Act (FMLA)
  • Fiduciary Issues
  • Fringe Benefits
  • General
  • Governmental Plans
  • Health Care Reform
  • Health Plans
  • International Issues
  • International Pension and Benefits
  • Legal Updates
  • Multi-employer Plans
  • Non-qualified Retirement Plans
  • On the Lighter Side
  • Plan Administration and Compliance
  • Qualified Plans
  • Securities Law Implications
  • Severance Agreements
  • Tax-qualified Retirement Plans
  • Uncategorized
  • Welfare Plans
  • Archives
  • March 2018
  • February 2018
  • January 2018
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • BC Network
    Monday, March 26, 2018

    On August 10, 2017, in In re Mathias, the United States Court of Appeals for the Seventh Circuit held ERISA Section 502(e)(2) venue provisions do not invalidate a forum-selection clause contained in plan documents, in a 2-1 split decision.

    Case Background

    George Mathias sued his employer Caterpillar and its ERISA-governed health plan in the United States District Court for the Eastern District of Pennsylvania, where he resided. The plan documents, however, required any suit to be brought in federal court in the Central District of Illinois, so Caterpillar moved to transfer the case.  Mathias opposed the motion, arguing that ERISA’s venue provision invalidated the plan’s forum-selection clause.  His argument was rejected and Caterpillar’s motion to transfer the case was granted in a decision relying on a Sixth Circuit decision in Smith v. Aegon Cos. Pension Plan, which held that forum-selection clauses in ERISA plans are enforceable and not inconsistent with the text of ERISA’s venue provision.  When the case arrived in the Central District of Illinois, Mathias moved to transfer it back to Pennsylvania with the same argument, and his request was denied. Then, Mathias petitioned for mandamus relief in the United States Court of Appeals for the Seventh Circuit.

    Seventh Circuit Decision

    In a mandamus proceeding, the court can only reverse a transfer decision if the applicant can show that the transfer order is a “violation of a clear and indisputable legal right, or at the very least, is patently erroneous.” In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293, 1295 (7th Cir. 1995).  This high standard was not met here.

    Under ERISA’s venue provision, an action may be brought in the district court where (1) the plan is administered, (2) the breach or violation took place, or (3) a defendant resides or may be found.  ERISA § 502(e)(2) (emphasis added).  The Seventh Circuit cited the Smith decision which found the language in ERISA to be permissive and explained that the statute doesn’t limit parties from contractually narrowing the options to one of the venues listed in the statute.  769 F.3d at 931-32. The Court ultimately found that ERISA venue provisions do not invalidate forum-selection clauses in plan documents.

    Mathias filed a petition in the U.S. Supreme Court for certiorari review. The Department of Labor filed an amicus brief encouraging the Supreme Court to review the case and to invalidate the venue provision in the Caterpillar plan.  The Supreme Court declined to review the case, however.

    Effect of Decision

    For now, employers in the Sixth and Seventh Circuit (Illinois, Indiana, Kentucky, Michigan, Ohio, Tennessee, and Wisconsin) can have confidence that their plan venue selection clauses are enforceable. However, both of these decisions were split decisions.  A more participant-friendly Circuit could reach a different conclusion.

    Friday, February 9, 2018

    We turn once again to the sad and difficult task that plan administrators face when distributing the benefits of a participant who has been murdered by his or her designated beneficiary. Sad for obvious reasons.  Difficult because ERISA and state law may provide different answers.  ERISA directs a plan to honor a participant’s beneficiary designation—meaning that the murderer would receive the benefit. “Slayer statutes” prohibit the murderer from receiving a financial benefit from his or her victim, requiring the plan to disregard the beneficiary designation.

    Our prior blog post suggested three strategies that a plan administrator might employ in the face of uncertainty: interpleader, receipt and refunding agreement, and affidavit of status.  Under the interpleader approach, the plan administrator would pay the benefit into the registry of the court and join each potential claimant as a party defendant. Each claimant would then argue for receipt of the benefit, and the court would award the benefit and issue a judgment upon which the plan administrator may rely for protection against the losing claimants.  This certainty comes at the cost and effort required by litigation in federal court.

    A recent Seventh Circuit case involves just this approach.  In Laborers’ Pension Fund v. Miscevice, No. 17-2022, the participant was killed by his wife.  At the state criminal court proceeding, the court determined that the wife intended to kill her husband without legal justification but also that she was insane at the time and therefore not guilty of first degree murder.  The plan administrator filed an interpleader action in district court seeking an order on the disposition of the benefits. The wife argued that she was the designated beneficiary under the pension plan and that ERISA preempted the Illinois slayer statute. The estate argued that ERISA did not preempt the Illinois slayer statute, that the statute precluded distribution to the slayer-spouse and that the couple’s minor child should receive the pension benefits of the deceased participant.  The district court awarded benefits to the estate.

    The Seventh Circuit affirmed, holding that ERISA did not preempt the slayer statute. The Court reasoned that when the state statute governs an area of traditional state regulation, the party seeking preemption must overcome the starting presumption that Congress does not intend to supplant state law.  The Court characterized the slayer statute as part of family law and thus an area of law traditionally left to the states and long-predating ERISA.  The Court also noted that ERISA’s interest in uniformity was not a concern because slayer statutes were largely uniform in denying benefits to the killer.  The Seventh Circuit noted that the Supreme Court had not addressed the issue but had commented in Egelhoff v. Egelhoff, 532 U.S. 141, 152 (2001) (holding that ERISA preempted a Washington divorce law invalidating earlier beneficiary designations to a former spouse upon the dissolution of a marriage) that “because the [slayer] statutes are more or less uniform nationwide, their interference with the aims of ERISA is at least debatable.” This comment placed slayer statutes in contrast to the divorce law at issue in Egelhoff.  Having concluded that ERISA did not preempt state law, the Court analyzed the Illinois statute and concluded, as a matter of state law, that the wife’s insanity did not overcome the statute’s denial of benefits to a person who intentionally and unjustifiably caused the death because the wife intended to kill her husband due to an insane belief that he would harm her and her child.

    Laborers’ Pension Fund not only illustrates the successful use of an interpleader action to resolve the dilemma faced by a plan administrator but also adds to the growing body of federal case law holding that ERISA does not preempt state slayer statutes.  While the Supreme Court has declined to resolve this preemption issue at least twice, district court opinions appear to be converging on an answer and the Seventh Circuit adds the weight of circuit precedent to this emerging consensus.

    Wednesday, January 31, 2018

    Bryan Cave is proud to present the third version of our in-house counsel’s guide to data privacy and security. The guide provides an overview of laws relevant to a variety of data matters topics, statistics that illustrate data privacy and security issues, and a breakdown of these data-related issues. It covers a range of privacy and security issues that apply in the HR and employee benefits areas, including HIPAA compliance and enforcement.

    You may download a copy of the 2018 guide by clicking here.

    Thursday, January 18, 2018

    The Internal Revenue Service (“IRS”) has described its recent changes to its Voluntary Correction Program (“VCP”) user fees as “simplification.”  This simplification is achieved by significantly changing the way user fees are determined and by eliminating alternative and reduced fees that were previously available.   At first blush, this simplification appears to result in a general reduction in user fees, however, in certain circumstances, the changes will actually result in significantly higher fees.   If you are the person responsible for issuing or requesting checks for your plan’s VCP application(s), it is important to note the differences from the past fee structure so that you will know what your plan is in for (good or bad) the next time a VCP application is necessary.

    In case you are not familiar with the VCP, the IRS created the program under its Employee Plans Compliance Resolution System, to allow tax-favored retirement plans not currently under examination to correct certain failures that would otherwise result in the loss of tax-favored status.  If a plan sponsor elects to submit an application under the program, the fee that must be paid with each application is called a “user fee.”  This user fee has always been subject to change, but never before has the user fee structure undergone such an extreme makeover from one year to another.

    On the surface, the biggest change to the VCP user fee structure is that for applications submitted prior to January 2, 2018, the user fee was based on the number of plan participants, and for applications submitted on and after January 2, 2018, the user fee is based on the plan’s assets.  The current user fee structure is as follows:

    Plan AssetsUser Fee
    $0-$500,000$1,500
    $501,000 - $10,000,000$3,000
    $10,000,001 or more$3,500

    Previously, the applicable user fee ranged from a low of $500 for plans with 20 or fewer participants to a high of $15,000 for plans with more than 10,000 participants.  As a result, capping user fees at $3,500 under the new fee structure results in a huge break for the largest plans since the prior applicable user fee was $15,000.  However, a plan with 51 participants and $10,000,001 in assets would have previously paid a $1,500 user fee and now it will be required to pay a $3,500 user fee.  In this example, “simple” is not good.

    In addition, the IRS eliminated special reduced user fees for certain common errors such as failures related to minimum distribution requirements or plan loans.  Again, this “simplification” is not good for plans that would previously have benefitted from the reduced user fees.  For example, where a plan would have previously paid a $300 user fee for its VCP application related to a plan loan failure which affected 13 or fewer participants, the applicable user fee is now $3,500 if the plan has $10,000,001 or more in assets.  Orphan plans and group submissions are still eligible for alternative VCP user fees, but gone are the failure-based exceptions to the standard VCP user fees.

    Take heed, and check your plans regularly for compliance, so that your plan isn’t another example of how “simple isn’t always good” with the new VCP application user fees!

    Tuesday, October 31, 2017

    New rules issued by the Trump administration, including both interim final and temporary regulations effective October 6, 2017, significantly expand “who” may object to the Patient Protection and Affordable Coverage Act’s (PPACA) contraceptive coverage mandate and why those entities or individuals may object.

    Background:

    Under the PPACA, the Health Resources and Services Administration (HRSA), a division of the United States Department of Health and Human Services (HHS), has the authority to require that certain preventive care and screenings for women be covered by specific group health plans and health insurance issuers.  HRSA has used that discretion to require, among other things, contraceptive coverage.  HHS, the Department of Labor, and the Department of the Treasury, the agencies tasked with enforcing that requirement, have permitted certain health insurance issuers and group health plans with religious objections, such as non-profit organization and church plans, to receive an exemption or accommodation from this requirement.  As a result of the Hobby Lobby litigation, closely held for-profit organizations with religious objections to contraceptive coverage were added to the list of entities which could request an accommodation; however, accommodations are intended to shift the cost of providing these services and supplies to third-party administrators and health insurance issuers rather than permitting a group health plan to truly not offer the services or supplies.

    The new world order:

    The first interim final rule and associated temporary regulations provide that all non-governmental plan sponsors and health insurance issuers that object to contraceptive coverage based on sincerely held religious beliefs, including student health plans of institutions of higher education, may qualify for an exemption.  Those same entities may request an accommodation rather than exemption if they prefer.  Individual employees, even those employed by governmental entities, are also permitted to object to contraceptive coverage’s inclusion in their health plan based on their sincerely held religious beliefs.

    The second interim final rule provides that the entities and individuals who may request an exemption may also request an exemption because of their sincerely held moral convictions, not just their religious beliefs.

    Conclusion:

    If you, or the group health plan you sponsor, object to contraceptive coverage based on a sincerely held religious belief or moral conviction, it is more likely than not that this expansion now permits you to exclude all or a portion of contraceptive coverage from your plan.

    Thursday, October 19, 2017

    The Internal Revenue Service today released the 2018 dollar limits for retirement plans, as adjusted under Code Section 415(d). We have summarized the new limits (along with the limits from the last few years) in the chart below.

    2018 Qualified Plan Limits

    Type of Limitation20182017201620152014
    Elective Deferrals (401(k), 403(b), 457(b)(2) and 457(c)(1))$18,500$18,000$18,000$18,000$17,500
    Section 414(v) Catch-Up Deferrals to 401(k), 403(b), 457(b), or SARSEP Plans (457(b)(3) and 402(g) provide separate catch-up rules to be considered as appropriate)$6,000$6,000$6,000$6,000$5,500
    SIMPLE 401(k) or regular SIMPLE plans, Catch-Up Deferrals$3,000$3,000$3,000$3,000$2,500
    415 limit for Defined Benefit Plans$220,000$215,000$210,000$210,000$210,000
    415 limit for Defined Contribution Plans$55,000$54,000$53,000$53,000$52,000
    Annual Compensation Limit$275,000$270,000$265,000$265,000$260,000
    Annual Compensation Limit for Grandfathered Participants in Governmental Plans Which Followed 401(a)(17) Limits (With Indexing) on July 1, 1993$405,000$400,000$395,000$395,000$385,000
    Highly Compensated Employee 414(q)(1)(B)$120,000$120,000$120,000$120,000$115,000
    Key employee in top heavy plan (officer)$175,000$175,000$170,000$170,000$170,000
    SIMPLE Salary Deferral$12,500$12,500$12,500$12,500$12,000
    Tax Credit ESOP Maximum balance$1,105,000$1,080,000$1,070,000$1,070,000$1,050,000
    Amount for Lengthening of 5-Year ESOP Period$220,000$215,000$210,000$210,000$210,000
    Taxable Wage Base$128,700$127,200$118,500$118,500$117,000
    IRAs for individuals 49 and below$5,500$5,500$5,500$5,500$5,500
    IRAs for individuals 50 and above$6,500$6,500$6,500$6,500$6,500
    FICA Tax for employees and employers7.65%7.65%7.65%7.65%7.65%
    Social Security Tax for employees and employers6.2%6.2%6.2%6.2%6.2%
    Medicare Tax for employers and employees1.45%1.45%1.45%1.45%1.45%
    Additional Medicare Tax*.9% of comp
    >$200,000
    .9% of comp
    >$200,000
    .9% of comp
    >$200,000
    .9% of comp
    >$200,000
    .9% of comp
    >$200,000

    *For taxable years beginning after 12/31/12, an employer must withhold Additional Medicare Tax on wages or compensation paid to an employee in excess of $200,000 in a calendar year for single/head of household filing status ($250,000 for married filing jointly).

    Tuesday, August 8, 2017

    According to one recent survey, telemedicine services (i.e., remote delivery of healthcare services using telecommunications technology) among large employers (500 or more employees) grew from 18% in 2014 to 59% in 2016.  Common selling points touted by telemedicine vendors include reduced health care costs and employee convenience.  However, state licensure laws imposing restrictions on telemedicine practitioners can often limit the value (or even availability) of telemedicine services to employees.

    But that seems to be changing.

    Texas Law Change

    This summer Texas passed legislation (SB 1107) prohibiting regulatory agencies with authority over a health professional from adopting rules pertaining to telemedicine that would impose a higher standard of care than the in-person standard of care.  With the enactment of SB1107, the Texas Medical Board must revise portions of its existing telemedicine regulations, which had largely been viewed as some of the most restrictive in the country.  Key revisions proposed by the Board at its July meeting included the elimination of the following requirements:

    • Patient must be physically in the presence of an agent of the treating telemedicine practitioner
    • Physical examination of the patient by the telemedicine practitioner in a traditional office setting within the past twelve months
    • Interaction between the patient and telemedicine practitioner must be via live video feed

    However, it appears that the Board will continue its prohibition against the use of telemedicine for prescribing controlled substances for the treatment of chronic pain.

    Prescribing Controlled Substances

    Meanwhile other states have relaxed their rules relating to telemedicine practitioners seeking to prescribe controlled substances.  For example, the Florida Board of Medicine replaced its ban on any prescription of controlled substances using telemedicine with a new rule that allows telemedicine practitioners to issue prescriptions except in the case of controlled substances for the treatment of psychiatric disorders.  Delaware, Indiana, Michigan, Ohio and West Virginia have also expanded the circumstances under which telemedicine practitioners can prescribe controlled substances.

    For more information on the Texas legislation, read this overview from Bryan Cave’s healthcare attorneys.

    Expanded State Licensing of Practitioners

    State licensing laws generally preclude or restrict a provider licensed in one state from delivering medical services to individuals in another state.  Consequently, an out-of-state physician (absent certain exceptions) must obtain a full and unrestricted license to practice medicine on patients in a particular state.  In an effort to facilitate license portability and the practice of interstate telemedicine, the Federation of State Medical Boards developed an Interstate Medical Licensure Compact.  So far, 25 states participate in the Compact or have taken action to become Compact states.  Under the Compact, licensed physicians can qualify to practice medicine across state lines within the Compact if they meet the agreed upon eligibility requirements.

    Employer Compliance Considerations

    These and other actions by states to facilitate the growth of telemedicine may encourage more employers to jump on the telemedicine bandwagon.  However, employers should be aware that as with any group health plan, the provision of a telemedicine program to employees can raise a number of compliance issues under the Affordable Care Act (ACA), Health Insurance Portability and Accountability Act (HIPAA), Employee Retirement Income Security Act (ERISA) and the Consolidated Omnibus Budget Reconciliation Act (COBRA) as well as disqualify individuals participating in a high deductible health from making or receiving contributions to their health savings account.

    Wednesday, July 19, 2017

    Update: On November 24, 2017, the Department of Labor filed a final rule to delay the applicability date of new disability claims procedures regulation by 90 days, through April 1, 2018.

    Plan sponsors are typically forced to wait for last minute guidance to satisfy year-end compliance obligations. As a result, those of us who work with these plans spend the last days of the year frantically ensuring plans are in compliance mode while friends and family ring in the new year with frivolity and festivities. While we can’t guarantee that won’t happen again this year, if it happens to you because you are evaluating the impact of the new disability claim procedures on plans, then shame on you. As discussed below, the information necessary to comply with the new rules is already available. So address these obligations now – then dig out your little-black-dress or tux, and join the year-end frivolity!

    The final rule modifying the disability claims procedures, issued late last year, became effective January 18, 2017, and applies to claims for disability benefits which are filed on or after January 1, 2018.  Plan sponsors should identify their claims procedures, plan documents and SPDs that may need to be updated to reflect the new rule. To assist in that endeavor, the key changes implemented by the new rule are summarized below.

    1. New Independence and Impartiality Provisions. These new provisions are intended to reduce the possibility of unfair claims review. The change requires that “decisions regarding hiring, compensation, termination, promotion, or other similar matters…must not be based upon the likelihood that the individual will support the denial of benefits.” That being said, the regulation does not represent a significant change from prior law as both industry practice and case law have generally protected procedural independence.
    2. New Disclosure Requirements. The new disclosure requirements mandate three new disclosures upon an adverse benefit determination. First, the plan must provide a “discussion of the decision” explaining the basis for disagreeing with views presented by certain professionals. The regulation requires the discussion when the plan administrator disagrees with the (1) “views presented by the claimant to the plan of health care professionals treating the claimant and vocational professionals who evaluated the claimant,” (2) “views of medical or vocational experts whose advice was obtained on behalf of the plan…regard[less of] whether the advice was relied upon in making the benefit determination,” and (3) “disability determination[s] regarding the claimant presented by the claimant to the plan made by the Social Security Administration.” Second, the plan must disclose the specific internal rules, guidelines, protocols, standards and other similar criteria which were relied upon in making the adverse determination. If such guidelines, protocols, etc. do not exist, the plan must make a statement saying so. Third, the plan must make a statement that the claimant is entitled to receive upon request and free of charge all the documents, records, and other information relevant to the claimant’s claim for benefits.
    3. Enhanced Review Rights. The final rule also requires affords enhanced rights to review and respond to new information before the final decision. The plan must promptly disclose (1) “new or additional evidence considered, relied upon, or generated by the plan, insurer, or other person making the benefit determination…in connection with the claim;” and (2) new or additional rationales forming the basis of the plan’s determination. The disclosures must be made free of charge and “as soon as possible and sufficiently in advance of the date on which the notice of [an] adverse benefit determination on review is required.”
    4. New Deemed Exhausted Provisions. The new deemed exhausted provision allows claimant to immediately pursue civil enforcement if the plan fails to strictly adhere to all the requirements of the ERISA claims procedures in connection with the claim.
    5. Expanded Definition of Adverse Benefit Determination. The new regulation adds that in the case of a plan providing disability benefits, the term ‘adverse benefit determination’ includes any cancellation or discontinuance of disability coverage that, except to the extent it is attributable to a failure to timely pay required premiums or contributions, has a retroactive effect with respect to a participant or beneficiary.
    6. New Culturally and Linguistically Standards. New standards apply when the claimant’s address is in a county in which ten percent or more of the population is literate only in the same non-English language (e.g. ten percent of the county is literate in Spanish but not English). In those circumstances, a notice will not be culturally and linguistically appropriate unless the plan meets the following requirements: (1) “[t]he plan provide[s] oral language…that include answering questions in any applicable non-English language and providing assistance with filing claims and appeals,” (2) “[t]he plan must provide, upon request, a notice in any applicable non-English language,” and (3) “[t]he plan must include in the English version of all notices, a statement prominently displayed in any applicable non–English language clearly indicating how to access the language services provided by the plan.”
    7. New Disclosure Requirements. The new regulation provides additional requirements to the process of notifying the claimant of the plan’s benefit determination following review. While the prior regulation required a statement of the claimant’s right to bring an action under § 502(a), the new regulation also requires the plan to describe any applicable contractual limitations periods applying to the claimant’s right to bring the action as well as the calendar date upon which the claimant’s rights expire.

    Party on!

    The author thanks St. Louis summer associate Ben Ford for his assistance in researching and preparing this blog post.

    Thursday, April 13, 2017

    Challenges AheadRetirement plans are complicated creatures to administer so it perhaps is not surprising that the process of determining the beneficiary of a deceased participant can present its own set of challenges and, if things go awry, expose a plan to paying twice for the same benefit.

    These risks were recently highlighted in an 11th Circuit Court of Appeals decision decided in the aftermath of the Supreme Court case of Kennedy v. Plan Administrator for DuPont Savings and Investment Plan.  In that 2009 decision, the Supreme Court ruled that a beneficiary designation naming a spouse had to be given effect even though the spouse had subsequently waived her interest in any of her husband’s retirement benefits in a divorce agreement.

    In the 11th Circuit case, Ruiz v. Publix Super Markets, the question was whether a deceased participant’s prior designation of her niece and nephew as beneficiaries would trump the participant’s considerable efforts to change that designation shortly before her death.  In deciding the case upon Publix’s motion for summary judgment, the Court assumed as true statements from the deposition of Arlene Ruiz, the partner of the deceased participant, who was asserting a right to the benefits as the newly intended beneficiary of Ms. Ruiz.  According to the deposition, Ms. Ruiz spoke with a Publix representative who advised her that the beneficiary designation could be changed if the participant wrote a letter and delivered it to Publix indicating the new person she wanted to be her beneficiary and that person’s Social Security number.  She was advised that such a letter had to be signed and dated.

    The instructions provided by the Publix representative were contrary to a card system maintained by Publix especially designed for changes in beneficiary designations.  Ms. Ruiz alleged that the Publix representative advised her that including a beneficiary designation change card with her correspondence was not necessary.  Following the instructions of the Publix representative, Ms. Ruiz signed a letter following the instructions provided to her and included one of the Publix beneficiary designation change cards that contained the same pertinent information as the letter with the exception that the participant, Ms. Rizo, did not sign the card.  Instead, on that card, she simply referenced her accompanying correspondence.

    Faced with these facts, the Court concluded that it was clear that Ms. Rizo intended to change her beneficiary but that she did not strictly comply with the directions contained in the plan’s summary plan description for how to change a beneficiary designation.  The issue for decision, according to the Court, was whether the equitable doctrine of substantial compliance required a ruling in favor of Ms. Ruiz.  The doctrine of substantial compliance would give effect to a beneficiary designation where a participant evidenced his or her intent to make a change and made discernible attempts to effectuate the change.  The Court concluded that the doctrine of substantial compliance did not survive the Supreme Court decision in Kennedy given the Supreme Court’s emphasis on the duty of a plan administrator to act in accordance with the plan documents.

    The 11th Circuit decision should be helpful to plan administrators, although it highlights (i) the necessity of having a clearly stated process for changing beneficiary designations, (ii) for requiring that participants follow those procedures, and (iii) for being consistent in the administration of those procedures.

    On the other hand, consistently applied administrative procedures will not necessarily solve all of a plan administrator’s issues with beneficiary designations.  Apart from failed or incomplete efforts to change designations, we have encountered a number of thorny situations raising the question of who is the rightful beneficiary, including divorces, simultaneous deaths, multiple spouses, and beneficiaries as murderers of their benefactors.  With these situations in mind, plan sponsors may wish to consider some of the following practices and additions to plan language in anticipation of these situations:

    • Giving frequent written reminders to participants about their beneficiary designations
    • Resoliciting updated beneficiary designations from participants on a periodic basis
    • Adopting a rule providing for the revocation of spousal designations upon divorce
    • Adopting a rule specifying a presumption of survival in the event of the simultaneous death of a participant and beneficiary
    • Adopting a rule that voids a beneficiary designation naming a person who is convicted of the murder of the participant

    While state law may address some of these situations, ERISA preemption muddies those waters and adopting a plan rule should avoid any debate over the applicability of a state law.  Another helpful procedural provision to consider is a freeze on the distribution of a participant’s account where there is a dispute over the rightful beneficiary.

    Where a dispute among beneficiary claimants appears insoluble, filing an interpleader action in federal court may be the only definitive way to resolve the dispute without exposing the plan to the possibility of having to pay twice for the same benefit.

    Wednesday, March 15, 2017

    DesolationIn today’s virtual world, we suspect most plan sponsors rely upon the self-certification process to document and process 401(k) distributions made on account of financial hardship. The IRS has recently issued examination guidelines for its field agents for their use in determining whether a self-certification process has an adequate documentation procedure.  While these examination guidelines do not establish a rule that plan sponsors must follow, we believe most plan sponsors will want to ensure that their self-certification processes are consistent with these guidelines to minimize the potential for any dispute over the acceptability of its practices in the event of an IRS audit.

    The examination guidelines describe three required components for the self-certification process:

    (1)        the plan sponsor or TPA must provide a notice to participants containing certain required information;

    (2)        the participant must provide a certification statement containing certain general information and more specific information tailored to the nature of the particular financial hardship; and

    (3)        the TPA must provide the plan sponsor with a summary report or other access to data regarding all hardship distributions made during each plan year.

    The notice provided to participants by the plan sponsor or TPA must include the following:

    (i)         a warning that the hardship distribution is taxable and additional taxes could apply;

    (ii)        a statement that the amount of the distribution cannot exceed the immediate and heavy financial need;

    (iii)       a statement that the hardship distributions cannot be made from earnings; and

    (iv)       an acknowledgement by the participant that he or she will preserve source documents and make them available upon request to the plan sponsor or plan administrator at any time.

    The participant certification statement for financial hardship distributions must contain the following information:

    (i)         the participant’s name;

    (ii)        the total cost of the hardship event;

    (iii)       the amount of the distribution requested;

    (iv)       a certification provided by the participant that the information provided is true and accurate; and

    (v)        more specific information with regard to the applicable category of financial hardship, as outlined in the examination guidelines that can be found at the following website link:  https://www.irs.gov/pub/foia/ig/spder/tege-04-0217-0008.pdf.

    In cases where any participant has received more than two financial hardship distributions in a single plan year, the guidelines advise agents to request source documents supporting those distributions if a credible explanation for the multiple distributions cannot be provided. Given the instructions being given to agents in this regard, plan sponsors may wish to consider limitations on the number of financial hardship distributions that a participant may take or to apply a more stringent process for approving requests for financial hardship distributions where more than two requests are made in any plan year.

    Plan sponsors should be aware that this IRS memorandum only addresses substantiation of “safe-harbor” distributions and that if a plan permits hardship distributions for reasons other than the “safe-harbor” reasons listed in the regulations, the IRS may take the position that self-certification regarding the nature of those hardships is not sufficient.

    The good news with these guidelines is that if a self-certification process with respect to “safe-harbor” hardship distributions adheres to these guidelines, plan sponsors should have less concern over using the self-certification process and there should be fewer, if any, disputes with IRS field agents over the need for plan sponsors to maintain or provide access to source documents.