Seyfarth Synopsis: In a recent Chief Counsel Memorandum (“CCM”), the IRS stated that on audit, agents should pursue plan disqualification for a failure to produce a signed plan document. The IRS was responding to a 2018 Tax Court decision that held that the failure to produce the signed plan document would not subject the plan to disqualification upon the finding of creditable evidence that the document had been signed.

A core principle, if not “the” core principle, of the Code’s tax-qualification requirements is that a retirement plan must be a “written program . . . established and maintained by an employer” to provide for the retirement of eligible employees. Heck, that’s been the rule since before ERISA was even adopted. See Treasury Reg § 1.401(a)(2), originally adopted in 1956.

So what happens when an employer cannot produce the original signed plan document, or even a copy of that signed document? The IRS will tell us that the failure to satisfy a tax-qualification requirement results in plan disqualification: the IRS’s nuclear option. Blow it up! In fact, just recently the IRS published a chief counsel memo (CCM 2019-002) in which it sought to limit the application of a 2018 Tax Court ruling which excused the requirement to produce an executed plan document under the circumstances presented, adding that IRS agents should pursue plan disqualification if a signed plan document cannot be produced on audit.

For sure, the facts presented to the Tax Court were (or at least, should be) unique: the employer’s premises were flooded destroying plan records and the plan’s accountants had its computers seized by both the IRS and Department of Labor.

So what’s the take away from the CCM? Move your operations to a flood zone or work with a crooked accountant? Or, not worry about it and assume that should the plan ever be audited, your IRS examiner either won’t notice or care that you don’t have a signed copy? Both creative approaches, but of course not.

Rather, it would be easier to just make sure your qualified retirement plan documents are all timely signed by an authorized party and safely filed away (hard and electronic files). If you cannot locate a signed copy of a plan document, consider using the IRS voluntary correction program (VCP) to remedy the failure so that this never becomes an issue for you. The VCP fees are inexpensive when compared with the trauma of a threatened plan disqualification.

That said, if you choose to move to a flood zone, have I got a realtor for you!

Seyfarth Synopsis: Recent changes to the federal rules governing confidentiality of substance use disorder (SUD) patient records may require updates to agreements between group health plans and their third-party vendors. Group health plans may be caught up in the changes if they wind up in possession of certain SUD patient records and disclose those records to their vendors for the plan’s payment and health care operations. Plans should speak with their vendors to confirm whether they receive such records and, if so, whether their contracts already include the required language or need to be updated going forward.

Patient records held by certain SUD treatment programs that receive federal financial assistance, such as from Medicare or Medicaid, are subject to confidentiality requirements under 42 C.F.R. Part 2 (“Part 2”). Part 2 generally provides more stringent federal protections for such records than other health privacy laws, including HIPAA. For example, programs subject to Part 2 may only disclose patient records pursuant to a Part 2-compliant patient consent or in accordance with one of the other, limited exceptions under the Part 2 rules. Part 2 also applies to “lawful holders” of Part 2 information. This extension to lawful holders could bring in group health plans who receive Part 2 information from a Part 2 program, such as in connection with administering benefit claims.

In 2018, the Substance Abuse and Mental Health Services Administration (“SAMHSA”), a branch of the U.S. Department of Health and Human Services, issued a final rule implementing changes to Part 2. The final rule provides that lawful holders of Part 2 information (e.g., group health plans) are permitted to further disclose that information to their third-party vendors, without an additional patient consent, as needed to carry out the plan’s payment activities or health care operations.

According to SAMHSA’s final rule, plans that intend to rely on this provision to disclose Part 2 information to vendors must have in place a written contract with the vendor which references the vendor’s obligation to comply with Part 2 upon receipt of such information. SAMHSA declined to specify the exact contract language to be used, but made clear that existing contractual language regarding general compliance with “applicable federal laws” would not be sufficient. Based on the text of the regulation, it appears that the contract should, at a minimum, require the vendor to implement appropriate safeguards to prevent unauthorized uses and disclosures and report any unauthorized uses, disclosures, or breaches of Part 2 information to the plan.

To the extent group health plan service providers are currently receiving Part 2 information for the plan’s payment or health care operations, SAMHSA’s final rule provides applicable contracts should be in compliance with Part 2 by February 2, 2020. Group health plans should speak with their service providers, such as the third-party administrators for the plan’s medical and prescription drug programs, regarding whether those vendors currently receive records subject to Part 2 on behalf of the plan and, if so, whether the Part 2 requirements are already included in the applicable service agreement. If not, plans may want to amend their HIPAA business associate agreements with covered vendors to incorporate the necessary Part 2 language. For draft language for such an agreement, or to learn more about Part 2, please feel free to contact your Seyfarth Employee Benefits attorney.

Seyfarth Synopsis: In two months (on March 31, 2020), the window closes for 403(b) plan sponsors to take advantage of the unique opportunity to retroactively amend their 403(b) retirement plans to correct document errors retroactively all the way back to January 1, 2010.  After March 31, 2020, 403(b) plans likely will be subject to amendment deadlines that mirror 401(k) plans unless otherwise announced by the IRS.

Many may remember that as part of Treasury’s final 403(b) regulations that became effective in 2009, tax-exempt employers maintaining a 403(b) vehicle were required to adopt a written 403(b) plan document by January 1, 2010.  Further, certain changes in laws or regulations may result in a requirement that a retirement plan (including a 403(b) plan) be amended. When that happens, the sponsor has a period of time (referred to as a “remedial amendment period”) in which to adopt the amendment necessary to reflect the legislative or regulatory change.

While a 403(b) plan document had to be in place by January 1, 2010 (or the plan’s effective date, if later), more recently the IRS announced the last day of the remedial amendment period for 403(b) plans to reflect current statutory and regulatory requirements would be March 31, 2020.  Of particular interest, this remedial amendment period permits a 403(b) plan to be amended (or restated) to correct any form defect (i.e., a provision that does not comply with the tax code or regulatory guidance) retroactive all the way back to that initial date of January 1, 2010. This gives plan sponsors a chance to make any edits necessary to properly reflect the terms of the 403(b) plan, that may have been missed or drafted in error in the rush to get a written document in place.

A couple of noteworthy points:

  • If the employer desires to adopt an amendment and restatement back to January 1, 2010, the restatement will need to incorporate all plan provisions that applied at any time since January 1, 2010 (or effective date, if later) to the amendment/restatement date.
  • The remedial amendment relief applies only to form (i.e., document) failures – for example, absence of a required provision or misstatement of an optional or required provision.

Notably, operational or administrative failures (e.g., the plan was not administered in accordance with its terms) may not be fixed using this remedial amendment period. Rather, such failures will need to be handled separately through an IRS voluntary correction program, to the extent applicable.

As such, the remedial amendment period provides a unique opportunity to address any form defects in your 403(b) plan document, so long as the correction is adopted no later than March 31, 2020.

If you need assistance reviewing a plan document for compliance with 403(b) and related provisions, please contact your Seyfarth attorney.

Seyfarth synopsis: The Supreme Court has just granted certiorari in a case regarding the question of whether ERISA preempts state efforts to regulate Pharmacy Benefit Managers (PBMs). The decision will have important implications as the broad ERISA preemption doctrine will become further defined.

The Supreme Court just granted certiorari in Rutledge v. Pharmaceutical Care Management Association, No. 18-540. A full description of the case is available here, but in summary, Arkansas enacted a law purporting to regulate PBMs, governing the conduct of third party administrators and claims processors for both ERISA and non-ERISA pharmaceutical plans. The law created an appeals process by which pharmacies could challenge reimbursement rates offered by PBMs, with the stated goal of protecting pharmacies against below-cost reimbursement.

The Court of Appeals for the Eighth Circuit found that ERISA preempts the law. Arkansas had tried to argue that merely because ERISA-governed plans are included, preemption should not be automatic, as the law targets third party administrators. The Eighth Circuit rejected this contention, finding that the law “relate[d] to and has a connection with employee benefit plans,” and was therefore preempted.`

In granting certiorari, the Supreme Court is poised to resolve a conflict over PBM regulation. The D.C. and Eighth Circuits hold that all PBM regulation is preempted, while the First Circuit holds that none is preempted.

Thus, the legality of PMB regulation by the states is likely to be resolved.

The decision in Rutledge also, hopefully, will clarify the scope of ERISA preemption by adding to over fifteen Supreme Court decisions on what it means for a state law to “relate to” an ERISA plan. The meaning of “relate to” is important because, in our era of political gridlock in Congress, some states would like to legislate expansively in the employee benefits space.

Seyfarth will pay close attention to the decision in Rutledge. Stay tuned.

Seyfarth Synopsis: The Puerto Rico Department of the Treasury (“PR Treasury”) recently announced the limits that apply to Puerto Rico qualified retirement plans in 2020. These limits may look familiar because the PR Code incorporates many of the applicable limits under the U.S. Code by reference. Employers maintaining Puerto Rico-only plans and dual-qualified plans (i.e., a plan that qualifies under both the PR Code and the US Code) will need to make the necessary adjustments to the plans’ administrative/operational procedures and notices with respect to Puerto Rico participants.

In Circular Letter No. 19-17 (“Circular Letter”), the PR Treasury announced the applicable limits for Puerto Rico qualified retirement plans in 2020. Pursuant to the Circular Letter, if you participate in a dual-qualified plan, you may contribute up to $19,500 in 2020, an increase of $500 over the 2019 limit. However, if you participate in a Puerto Rico-only plan that is only qualified under the PR Code, the limit remains unchanged for 2020 at $15,000. If you are or will be age 50 by the end of 2020, you also may be eligible to contribute up to an additional $1,500 as a “catch-up” contribution (this limit did not change, and is much lower than the catch-up contribution limit under the U.S. Code). If you participate in a Puerto Rico retirement plan sponsored by the federal government, special limits may apply to you.

The limit on voluntary after-tax contributions did not change, and remains at 10% of a participant’s aggregate compensation for all years of participation in the plan.

Other annual limits that changed include:

  • the maximum that may be contributed to a defined contribution plan in 2020, inclusive of both employee and employer contributions, has increased $1,000 to $57,000;
  • the maximum annual compensation that may be taken into account has increased from $280,000 to $285,000; and
    • the “highly compensated employee” income threshold will increase from $125,000 to $130,000 (in the case of calendar year plans, the Puerto Rico Treasury clarified that the 2019 dollar limit of $125,000 must be used when determining whether someone is a highly compensated employee for 2020 testing purposes).
    • Individuals should check their plan contribution elections and consult with their personal tax advisor to make sure that they take full advantage of the contribution limits in 2020. Employers who sponsor a Puerto Rico-qualified retirement plan should make the necessary adjustments to plan administrative procedures and participant notices to ensure proper administration of the plan in 2020 with respect to Puerto Rico participants.
    • Employers who sponsor Puerto Rico qualified defined benefit pension plans also should be sure to review the new limits in the Circular Letter and make any necessary adjustments to plan administrative/operational procedures.

By: Jim Goodfellow and Kathleen Cahill Slaught

In Retirement Plans Committee of IBM v. Jander, the Supreme Court, in a unanimous opinion, clarified the its opinion in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014), which set forth the duties that administrators of Employee Stock Ownership Plans (“ESOP”) owe to participants, and when they are required to act on inside information.

In this case, plaintiffs alleged that the IBM’s ESOP fiduciaries violated their duty of prudence under ERISA by continuing to invest the plan’s funds in IBM’s stock even though they knew the stock’s market price was artificially inflated. Under Dudenhoffer, a plaintiff bringing such a claim must allege that a fiduciary in the same position could not have concluded that taking a different action “would do more harm than good to the fund.” The question presented to the Court in Jander was whether the plaintiffs’ complaint can survive a motion to dismiss when they make only general allegations that the costs of undisclosed fraud grow over time.

Though the Court agreed to take the case, it ultimately declined to opine on the issue presented. Rather, it remanded the matter to the Second Circuit for further consideration of the SEC’s position on whether an ERISA based duty to disclose inside information, that is not otherwise required to be disclosed by the securities laws, would otherwise conflict with the objectives of the insider trading and corporate disclosure requirements contained in the securities laws. IBM argued that ERISA imposed no duty to act on inside information.

Thus, the Supreme Court left unresolved the question presented regarding the pleading standard. It did, however, provide some helpful guidance to fiduciaries of ESOP plans in that it emphasized that ERISA’s duty of prudence does not require a fiduciary to break the law. Thus, if taking an action on inside information would violate the securities law, there is no violation of ERISA for not taking that action. But we will also wait to see how the SEC views ERISA’s duty of prudence in this context.

Seyfarth Synopsis: Many employers maintain a tax-preferred transportation fringe benefit plan to provide tax-free transit benefits to employees. Under such plans, the benefit is often distributed in the form of an electronic voucher or payment card. However, if the electronic payment card malfunctions after it is received, cash reimbursements for transit expenses will be taxable.

The Office of Chief Counsel of the IRS has released a memorandum addressing the taxation of cash reimbursements for employee transportation benefits when an employer-provided transit card malfunctions. In general, transit passes provided by an employer to employees are qualified transportation fringe benefits excludable from gross income (up to $270 per month for 2020). A “transit pass” is any pass, token, farecard, voucher, or similar item (such as a smartcard or terminal restricted debit card) that entitles a person to transportation on mass transit facilities.

Cash reimbursements by an employer for a transit pass are nontaxable only if a voucher (or similar item that may be exchanged for a transit pass) is not “readily available” for distribution in-kind to the employee. When available, employers must distribute vouchers or electronic payment cards that qualify as vouchers instead. The IRS has recognized certain nonfinancial restrictions that effectively prevent the employer from obtaining vouchers or electronic payment cards (e.g., advance purchase requirements, purchase quantity requirements, and limits on denominations of available vouchers) as restrictions that prevent vouchers or the cards from being readily available. Under that guidance, if an employer distributes a transit card that is not functioning, the employer would reasonably assume that such malfunction would be considered a nonfinancial restriction that prevents the card from being readily available and provide nontaxable cash reimbursements to the employee for payment of eligible expenses.

But wait, not so fast. The IRS memorandum clarifies that once an employer has distributed a functioning transit pass or card to employees, the benefit is considered provided, meaning it is no longer possible to treat the benefit as not readily available for distribution to employees. If a card later malfunctions, even if the malfunction is not caused by the employer or employee (e.g., the card’s chip stops working or the system reading the card malfunctions), the card is still treated as readily available to employees. “Since the employee has a valid card, it would be the transportation system’s responsibility to honor the card and address possible technical malfunctions.” As a result, any cash reimbursement issued by the employer as a result of such malfunction is a taxable benefit.

The takeaway from this guidance appears to be that employers should be careful not to act too quickly, and that cash issued to an employee as a result of the malfunction of a transit voucher, pass or card after being issued to the employee, will be a taxable benefit. So, as the saying goes, “no good deed goes unpunished.” Or untaxed!

Seyfarth Synopsis: We previously blogged that the so-called Cadillac tax was movin’ out. Well, the Patient-Centered Outcomes Research Institute (“PCORI”) fee is moving back in. On December 20th, the President signed the “Further Consolidated Appropriations Act, 2020” (the “Act”), which repealed the Cadillac tax as well as the annual fee on health insurance providers. The Act, however, reinstates the PCORI fee paid by health plans for an additional 10 years.

The Affordable Care Act established the Patient Centered-Outcomes Research Institute to support research on clinical effectiveness. The Institute has been funded in part by fees paid by certain health insurers and sponsors of self-insured health plans. The PCORI fee is determined by multiplying the average number of covered lives for the plan year times the applicable dollar amount, and is paid annually to the IRS using Form 720. The applicable dollar amount as set by the IRS for 2018 was $2.45 per covered life.

Under the ACA, the PCORI fees were scheduled to apply to plan years ending before October 1, 2019. This meant that the final 2018 PCORI payment for calendar year plans was due July 31, 2019. Under the Act, however, the PCORI fee is now extended to plan years ending on or before September 30, 2029, and the last payment for calendar year plans will be July 31, 2029.

For more information on paying the PCORI fee, see the IRS website at:

Seyfarth Synopsis: The recently enacted SECURE Act defers the latest commencement of payment of our retirement benefits from age 70½ to age 72. Why now, why was it ever set to a half-birthday convention, and which half of the population benefits more from this change? Oh, and how is the required minimum distribution (“RMD”) rule tied to the Cuban Missile Crisis? Yes, the Cuban Missile Crisis!!

To answer these questions, we need to look back a little bit into history – all the way back to 1962. It seems that the requirement to commence distribution of our retirement benefits tied to the attainment of age 70½ found its way into law as part of the Self-Employed Individuals Tax Retirement Act of 1962, adopted by Congress in October 1962 and signed by President Kennedy shortly thereafter. For historical context, President Kennedy also was dealing with the Cuban Missile Crisis and the possibility of thermonuclear war at the very same time he was reading and deciding whether or not to sign this new Act. Talk about being able to multi-task!

For those of us wondering why Congress selected our “half-birthday” (age 70½) and not our full birthday (age 70) to determine our RMD, the answer lies in the legislative history of the 1962 Act, which indicates that the half-year convention was adopted “to accord with usual insurance practice which treats the maturity date of an annuity, endowment or life insurance contract as falling on the anniversary date of the policy nearest to the insured’s birthday.” (Remember, back in 1962 pensions providing lifetime income were the predominant form of retirement benefit.)

And for those of us born in the first half of the year, because of the half-year convention of the 70½ RMD, this change to age 72 actually gives us a little extra boost – a 2-year deferral of our RMD date! I’m sorry to tell you that the RMD date for those of you born in the second half of the year is only pushed back one year.

So why change it now? A few reasons seem apparent. Life expectancy has increased over the past 57 years, making it important to be able to stretch our retirement benefits over a longer period of time. Further, back in 1962, the predominant form of retirement benefit was a pension that provided a monthly payment for life. Today the predominant form of retirement benefit is a defined contribution or individual account-type plan, including IRAs. These forms of retirement benefit typically provide for lump sum or partial lump sum distribution options, including scheduled installments, but don’t typically provide for lifetime annuity payment options. As a result, Congress has become increasingly concerned about the ability of workers today to fund a sufficient retirement for themselves. The SECURE Act includes several provisions that reflect this concern, the deferral of the RMD date being just one such provision.

We will be discussing other SECURE Act provisions in later issues.