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  • BC Network
    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.

    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, January 16, 2018

    Did you read our post “Work Now, Party Later,” advising you to do just that in response to the new Department of Labor rule governing disability claims procedures? If so—party on! If not, we hope you enjoyed your holiday celebrations, because it is now time to work.

    On January 5, the Department of Labor announced its decision that the new disability claims procedure rules will take effect on April 1 of this year. Here is our suggested plan of attack for employers:

    Step 1: Review our previous blog post to familiarize yourself with the new rules.

    Step 2: Identify which of your plans offer disability benefits.

    Remember to check both your ERISA qualified and nonqualified plans.

    Step 3. Determine whether you need to amend your plan and/or SPD.

    Under the new rules, participants who file a disability claim must receive an expanded explanation of their adverse benefit determination and a notice of their rights. The explanation will need to include the following:

    • A discussion of the claimants’ description to their own doctors regarding their disability,
    • the views of the health care and vocational professionals hired by the plan,
    • any disability determinations made by the Social Security Administration and presented by the claimants, and
    • any specific rules, guidelines, protocols, or standards used by the plan in making its determination.

    Claimants must also be notified that they are entitled to receive upon request, and free of charge, all documents relevant to their claim, and a statement of their right to bring an action under Section 502(a).

    Step 4.  Update your plans, SPDs and internal policies.

    If you determine that your plan and/or summary plan description needs an update, or you are not sure whether an update is appropriate, contact your attorney. Even if your plan does not require amendment, you should closely review your disability denial policy and modify any form letters, internal manuals, or similar documents governing disability claims procedures so that they comply with these new procedures.

    Finally, remember that the new rules expand the definition of “adverse benefit determination”.  This definition now includes any cancellation or discontinuance of disability coverage that, except to the extent attributable to a failure to timely pay required premiums or contributions, has a retroactive effect with respect to a participant or beneficiary.

    So for all of you who failed to heed our earlier advice, your final deadline for complying with the new disability claims procedures is April Fool’s Day.  Draw your own conclusions.

    Thursday, November 9, 2017

    Last week the House unveiled its tax overhaul plan, the Tax Cuts and Jobs Act (“Act”).  The Act’s proposals related to employee benefits and compensation are as follows:

    Nonqualified Deferred Compensation

    Perhaps one of the most talked about aspects of the Act (at least among benefits practitioners) is the demise of Code section 409A and the creation of its replacement, Code section 409B.

    Under the proposed Code section 409B regime, nonqualified deferred compensation would be defined broadly to include any compensation that could be paid later than the March 15 following the taxable year in which the compensation is no longer subject to a substantial risk of forfeiture, but with specific carve-outs for qualified retirement plans and bona fide vacation, leave, disability, or death benefit plans.  Stock options, stock appreciation rights, restricted stock units, and other phantom equity are included expressly in the definition of nonqualified deferred compensation.

    All nonqualified deferred compensation earned for services performed after 2017 would become taxable once the substantial risk of forfeiture no longer exists, even if payment of the compensation occurs in a later tax year.  As a result:

    • Stock options and stock appreciation rights would become includible in income in the year in which the award vests, without regard to whether they have been exercised.
    • An employee’s deferral of any salary under a nonqualified deferred compensation arrangement until separation from service or otherwise would result in the inclusion of such amount in the employee’s income in the year earned.
    • All salary continuation payments under a severance arrangement would be taxable in the year in which the termination of employment occurs.

    Further, a substantial risk of forfeiture exists only so long as the compensation remains subject to the service provider’s continued substantial future services.  The satisfaction of performance conditions would no longer qualify as a substantial risk of forfeiture.

    All nonqualified deferred compensation earned for services performed before 2018, to the extent not previously includible in income, will be included in income in the last tax year beginning before 2026 or, if later, the date the substantial risk of forfeiture with respect to such compensation no longer exists.  A limited period of time would be provided during which such nonqualified deferred compensation may be amended to conform the date of distribution to the date such amount would be required to be included in the participant’s income without violating Code section 409A.

    Performance-Based Compensation

    The Act also would eliminate the exception to the Code section 162(m) limit on deductible compensation for performance-based compensation, effective January 1, 2018.  The definition of a “covered employee” for purposes of application of Code section 162(m) would change to include an employee who is the principal executive officer or principal financial officer at any time during the taxable year or one of the top three highest-paid employees (or who has ever been a covered employee after 2016).

    Since satisfaction of the specified performance targets would no longer constitute a substantial risk of forfeiture, an employee who participates in a long-term incentive plan that does not require continued employment through the end of the performance period as a condition to receiving the bonus (or the Company subsequently waives such requirement) would be required to include the bonus amount in income in the year in which no additional services are required (even if the final performance results are unknown).

    Beginning in 2018, tax-exempt organizations would become subject to a 20% excise tax on all compensation (cash and the cash value of all remuneration, including benefits paid in a medium other than cash, except for payments to a qualified retirement plan and amounts that are excludable from the employee’s gross income) in excess of $1 million paid to the five highest-paid employees.

    Retirement Plans

    Many of the proposed changes for qualified plans would be favorable for participants.

    Hardship distributions would no longer require participants to cease making contributions during the six-month period after the distribution.  In addition, a defined contribution plan could permit participants to receive a distribution from qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), profit sharing contributions and earnings on any such contributions.  In addition, participants would no longer be required to seek any available plan loan first to alleviate their financial need.

    The minimum age at which a defined benefit pension plan could permit commencement of in-service benefits or a state and local government defined contribution plan could permit an in-service distribution is reduced from age 62 to age 59 ½.

    A participant would have until the due date for filing his or her tax return to roll over a loan balance from a qualified plan to an individual retirement account (IRA), instead of the current 60 day period, before such amount is treated as a distribution.

    Miscellaneous and Fringe Benefits

    Effective January 1, 2018, the following benefits would become taxable to the employee:

    • Reimbursed dependent care expenses under a dependent care assistance program (DCAP) and employer-provided onsite daycare
    • Qualified tuition reimbursement plan benefits
    • Adoption assistance plan benefits
    • Qualified moving-expense reimbursements
    • Employee achievement awards given in recognition of length of service or safety achievement
    • Employer contributions to an Archer Medical Savings Account (accounts could not be established after 2005). Such contributions also would be non-deductible by the employer.

    Transportation fringe benefits would continue to be excludible from employees’ income, but an employer would no longer be entitled to a deduction.

    As expected, the House is engaged in intense negotiations on various parts of the Act so the extent to which any of these provisions will remain in their current iteration in the final version is yet to been determined.

    For more information on the Act’s proposals related to estate transfer taxes, read the Trust Bryan Cave blog’s summary of the Act.

    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).

    Thursday, September 14, 2017

    Employers seeking ways to help employees and their family members affected by Hurricanes Harvey, Irma, or Maria should consider the various relief made available by the Internal Revenue Service under Announcements 2017-11 and 2017-13 and Notice 2017-48.

    Under Notice 2017-48, employers who maintain a leave-based donation program (there is still time to adopt one) can afford employees the opportunity to forgo their vacation, sick or personal leave in exchange for cash contributions made by the employer, before Jan. 1, 2019, to charitable organizations assisting those impacted by Hurricane Harvey.  The donated leave will be excluded from the donor employees’ income and wages and the employer will be able to deduct such contributions to a qualifying charitable organization as a business expense.  As always, the Notice includes specific guidelines that must be followed in order for employers and employees to take advantage of this relief.  Note that currently this relief is approved only for Hurricane Harvey assistance.

    Announcements 2017-11 and 2017-13 permit employers who sponsor a “qualified employer plan” to offer hardship distributions and/or plan loans to participants for reasons (including to obtain food and shelter) relating to Hurricanes Harvey and Irma even if the plan doesn’t currently permit hardship distributions or loans.  For purposes of this relief, participants may obtain a hardship distribution and/or plan loan not just for their own needs but also to help certain affected family members.  In addition, certain other restrictions (e.g., automatic six-month suspension of elective deferrals following a hardship distribution) that generally apply are suspended.

    Your qualified employer plan does not need to be formally amended before the hardship withdrawal and plan loan relief is offered; however, the plan must be amended no later than the end of the first plan year beginning after December 31, 2017, and the relief can only be offered to the extent provided and within the time period authorized by Announcements.

    The IRS is also offering other forms of relief to affected taxpayers (employers and individuals), including penalty relief for certain late tax filings, extended deadlines for certain tax filings and payments. A special IRS website contains links to all of its Hurricane Harvey relief and other helpful information about reconstructing records, checking the tax-exempt status of charitable organizations and more.  Similar information is provided on a separate webpage for those affected by Hurricanes Irma and Maria.

    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.

    Wednesday, May 10, 2017

    Originally posted on BankBryanCave.com.

    Employee Stock Ownership Plans offer an opportunity for banks to offer an attractive employee benefit plan, but can also do so much more.  On the latest episode of The Bank Account, Jonathan and I are joined by Bryan Cave Partner, Steve Schaffer, to discuss the advantages to banks considering implementing an ESOP.

    To hear the Bank Account Podcast, please visit here.

    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.