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: https://www.irs.gov/newsroom/patient-centered-outcomes-research-institute-fee

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.

By Richard G. Schwartz and Nicholas J. Waddles

Seyfarth Synopsis: The SECURE Act—just signed into law late last week—includes probably the most comprehensive revisions to the law governing employer-sponsored retirement plans since the Pension Protection Act of 2006. Many of the provisions will not be effective until after 2020, but some provisions go into effect immediately. For the most part, the SECURE Act provides additional flexibility for both employers and employees; however, as with all tax acts, it’s not all good news.

Several of the SECURE Act provisions will require employers to closely consider the new rules and determine whether—and how—to incorporate them into their existing retirement plans. Here’s a highlight of the more significant new rules, based on the date the provisions go live:

Effective January 1, 2020

  • Employers may now adopt a tax-qualified retirement plan retroactive to the beginning of a plan year as late as the employer’s tax return deadline for that prior year
  • Establishment of a fiduciary safe-harbor for plan sponsors that adopt a “life-time income investment” (i.e., annuity) distribution option under a defined contribution plan
  • Penalty-free in-service withdrawals of up to $5,000 for adoption or childbirth-related expenses
  • Increase in the required minimum distribution age from 70 1/2 to 72
  • Increase in the cap on defined contribution plan auto-escalation provisions from 10% to 15%
  • Elimination of the advance notice requirement for a non-elective contribution safe harbor plan, as well as the ability to adopt such a safe-harbor plan design at any time before the end of the plan year
  • Non-discrimination testing relief for defined benefit plans frozen to new participants (referred to as a “soft freeze”)
  • Clarification of the rules relating to the termination and distribution of 403(b) custodial accounts

Effective After 2020

  • Establishment of “pooled employer plans”, that allow unrelated employers to participate in a “single” retirement plan
  • Establishment of a “life-time income” (i.e., annuity) annual disclosure requirement for defined contribution plans
  • Non-discrimination testing relief for 401(k) plans that allow “long-term” part-time employees (those who work at least 500 hours each year for three consecutive years) to make employee contributions

This is just a snapshot of the SECURE Act provisions that affect employers that sponsor retirement plans. Be on the lookout for additional Beneficially Yours blog posts and a Seyfarth Legal Update that will take a deeper dive into the plan sponsor and plan participant provisions of the SECURE Act . . . coming to your inbox soon‼

Seyfarth Synopsis: Although it is not law yet, according to the must-pass spending legislation passed by both the House and Senate, it looks like the infamous Cadillac Tax and the Annual Fee on Health Insurance Providers (HIP Fee) will both be repealed for good. Absent any unforeseen circumstances, the President is expected to sign it into law before the December 20th deadline in order to prevent another government shutdown.

The Trump administration has been busy chipping away at the Affordable Care Act (ACA), and it looks like they show no signs of slowing down. Congress has already repealed the individual mandate – a tax on those who don’t have health insurance. Now a permanent repeal of the Cadillac Tax and HIP Fee is materializing as well.

Cadillac Tax

The so-called “Cadillac Tax,” a 40% excise tax on high-cost employer-sponsored health plans, will be repealed once and for all. The burden of the tax was to fall on employers as a way to get them to reduce excess health care spending. The tax was not very popular from the start. Thus, although the Cadillac Tax was originally scheduled to be effective for taxable years beginning after 2017, it never took effect; the effective date was continually pushed back due to all of the opposition it received from unions, employers, insurers and others.

Annual Fee on Health Insurance Providers

The ACA imposed an annual fee on health insurance providers that was ultimately passed through to consumers. Originally effective for 2014, there was a moratorium on the HIP Fee for 2017 and 2019, but it applied for 2018 and will apply again for 2020. According to the House and Senate bills, the annual HIP Fee will be permanently repealed effective 2021. The HIP Fee will not be repealed for 2020 as lawmakers feel that most plans have already gone through the process of factoring in that cost for the next year, and repealing the fee would create compliance costs and issues.

Although the legislation is not yet law, we’ll know very shortly whether or not these taxes will be repealed. So stay tuned….

By Sarah Touzalin and Mark Casciari

Seyfarth Synopsis:  Administrators of ERISA plans frequently receive requests from participants, beneficiaries, and their representatives for plan-related documents. A recent decision from the Court of Appeals for the Fifth Circuit supports providing only those documents that fall under a narrow reading of ERISA Section 104(b)(4). Over-production could serve to facilitate litigation.

Section 104(b)(4) of ERISA requires that plan administrators provide certain plan documents to a participant or beneficiary (or their authorized personal representative) upon written request, including copies of the summary plan description, plan document, annual report, trust agreement, contract and bargaining agreement, as well as documents that fall within a catch-all of “other instruments under which the plan is established or operated.” When document requests are received, it’s not at all uncommon for the request to include a long list of documents, often times repetitive, leaving the plan administrator to weed through the request and identify the documents that must be provided under ERISA.

In Theriot v. Building Trades United Pension Trust Fund, et al. (E.D. La. Nov. 4, 2019), plaintiff alleged that the defendants, a multi-employer pension fund and its trustees, failed to timely produce plan documents in violation of Section 104(b)(4), entitling the plaintiff to statutory penalties of up to $110 per day.

In 2017, the plaintiff requested “a complete copy of the plan agreement, including [her deceased mother’s] application and all other correspondence from her to the Fund.” The defendants provided a copy of the plan document, current through 2017. The plaintiff alleged that the defendants should have known that she was also requesting other plan documents, including an outdated version of the plan document and summary plan description, even though she did not specifically request them.

In 2018, the plaintiff made a second request, also including a long list of additional plan documents. The defendants provided only copies of the 2017 plan document, trust agreement and summary plan description in effect as of the dates specifically requested, as well as copies of Forms 5500 and attachments. Plaintiff, however, alleged that the defendants failed to produce any of the other documents from the 2018 request. The court determined that certain of the document requests were not sufficiently clear, some of the requested documents did not exist and some were not relevant to the plaintiff understanding her rights under the plan. The court also determined that a reasonable plan administrator would not have known that the plaintiff was requesting other documents beyond the 2017 plan document. And notably, the court agreed with the majority of other circuits that Section 104(b)(4) did not encompass the fidelity bonding policy, any errors and omissions insurance policy or any fiduciary insurance policy.

Takeaway: The Theriot case shows that narrowly construing Section 104(b)(4) can be defensible. It also can be advisable. Any lawsuit challenging fiduciary conduct must allege plausible facts to survive a motion to dismiss and enter into expensive discovery. There is no sound reason to make the plaintiff’s task in this regard easier by over-producing documents under Section 104(b)(4).