Asset Purchasers Face Increased Exposure for the Multiemployer Pension Debts of Sellers

Both buyers and sellers in asset sale transactions should be cognizant of the ongoing erosion of the common law rule that the purchaser is not responsible for the seller’s liabilities absent a contractual assumption of such liabilities, as evidenced by a recent Ninth Circuit case finding that the theory of successor liability may be used to hold an asset purchaser liable for the predecessor’s $2.2 million withdrawal liability obligation to a multiemployer pension plan. Federal courts originally applied successor liability in the context of federal labor law where the successor employer had notice of an unfair labor practice and continued, without interruption or substantial change, the seller’s business operations. Over the years, this “successor liability” rule has been expanded to cover various other statutory liabilities under labor and employment law.

In Resilient Floor Covering Pension Tr. Fund Bd. of Trs. v. Michael’s Floor Covering, Inc., 9th Cir., No. 12-17675, 9/11/15 (“Resilient”), the Court of Appeals for the Ninth Circuit has joined the Seventh Circuit (Chicago Truck Drivers, Helpers and Warehouse Workers Union (Independent) Pension Fund v. Tasemkin, Inc. 59 F.3d 48 (7th Cir. 1995) and Tsareff v. ManWeb Services, Inc., 7th Cir., No. 14-1618, 7/27/15) to explicitly apply the successor liability rule to a seller’s withdrawal liability from a multiemployer pension plan (withdrawal liability is an employer’s share of any underfunding in the plan following its exit from the plan) so long as the successor had notice of the liability. Consistent with prior labor and employment cases involving successor liability, the Court found that the primary factor in determining if an employer is a bona fide successor is whether, under the totality of the circumstances, there is substantial continuity between the old and new employer. In turn, the Court reasoned that continuity is best judged by whether the new employer has taken over the economically critical bulk of the prior employer’s customer base. Other factors a court may consider are whether –

  1. the new employer uses the same plant,
  2. the same or substantially the same work force is employed,
  3. the same jobs exist under the same working conditions,
  4. the same supervisors are employed,
  5. the same machinery, equipment, and methods of production are used, and
  6. the same product is manufactured or the same service is offered.

The Appeals Court reversed and remanded the case to district court for further consideration, finding that the district court failed to properly identify or weigh the successorship factors.

Two troubling peculiarities in the Resilient case merit mention:

First, the Court gave no consideration to the seeming lack of an asset purchase agreement between the parties. The owner of the alleged successor was a former salesman of the predecessor entity. Once it was announced that the predecessor would be closing operations at the end of the year, the salesman decided to start his own business in the same field – he obtained a lease on the same storefront and warehouse as the predecessor, used the same phone number and similar signage as the predecessor, bought 30% of the predecessor’s tools, equipment and inventory at a public auction, and hired many of the same employees. The predecessor did not sell, give, or otherwise assign its customer lists or any portion of its customer information to the “successor.” However, the Court notes that the “successor” did retain many customers, in large part through his prior personal and business relationships developed while employed as a salesman by the predecessor.

Second, the predecessor probably never would have been assessed any withdrawal liability but for the alleged successor’s actions to start his own company. Under a special rule covering the building and construction industry, the predecessor could have avoided withdrawal liability if he did not return to doing the same type of work covered by the collective bargaining agreement on a non-contributory basis for at least five years. The pension fund took the position that the “building and construction” exception did not apply because the “successor” essentially continued the predecessor’s work without making contributions to the fund. As a result, Resilient represents a disturbing expansion of the successor liability doctrine to both create withdrawal liability (by imputing the purchaser’s actions to the asset seller) and also to hold the purchaser liable for the withdrawal liability created as a successor.

Given the expansion of the successor liability doctrine in cases such as Resilient and the large amounts of withdrawal liability that can potentially be assessed (such amounts can and often do exceed twenty years of annual contributions), those contemplating purchasing assets (or asset sellers who are indemnifying their purchaser) or otherwise continuing the operations of a business that historically has contributed to a multiemployer pension plan should engage legal counsel with specialized knowledge of withdrawal liability to review potential liability and explore possible alternatives for structuring the transaction to minimize or eliminate such liability.

The Very Hard Facts: 2015 Reporting Requirements Under the Affordable Care Act (“ACA”)

Internal Revenue Code section 6056 requires applicable large employers (“ALEs”) to report certain details about the group health plan coverage they offer to full-time employees annually in a similar manner as wages are reported on Forms W-2. Very recently, the IRS issued the final versions of Forms 1094-C (the ALE’s summary report of health plan coverage to the IRS) and 1095-C (the ALE’s reports to full-time employees and persons enrolled in health plan coverage), along with instructions to these Forms. The IRS also published final Form 1094-B and 1095-B, the Forms for reporting by health insurance carriers and self-funded plans required under Code section 6055. The forms and instructions contain several requirements that ALEs and certain other employers will find surprising and often difficult to administer.


As an initial matter, it is extremely important that ALEs both recognize the circumstances under which they are required to comply with the ACA’s reporting requirements and put into place the operational measures to assure their Forms 1094-C and 1095-C are filled out correctly and completely. It is the ALE who is responsible for the Form 1094-C and 1095-C reports, not the health insurance carrier or plan administrator. It is the ALE who will be liable for tax penalties if the Forms are either not submitted to the IRS and employees or are erroneous.


All employers who have 50 or more full-time plus full-time equivalent employees must report on Forms 1094-C and 1095-C for 2015, whether or not they have below 100 employees and are entitled to the transition relief that renders them ineligible for ACA penalties until 2016. The information an ALE must put together in order to complete the required forms includes the identities of employees who were offered coverage; the identities of individuals covered by the ALE’s health plan by month; the type of coverage chosen; the price of coverage; and the affordability safe harbor relied upon by the ALE. ALEs who wait until the end of the year to commence gathering and organizing the data needed for reporting will find themselves scrambling to get Forms out to full-time employees and plan participants by the February 1, 2016 deadline.


Penalties for failing to submit correct reports to the IRS and to covered individuals are $250 per report, per year, up to a $3 million cap. If the IRS determines an ALE intentionally disregarded ACA reporting requirements, the penalty is $500 per report, per year, with no monetary cap. This means, for example, that an ALE with 200 full-time employees who mistakenly fails to report, or submits erroneous reports, may be penalized $50,000 in 2016. The same ALE who intentionally disregards the reporting requirements will be penalized $100,000. These penalties are in addition to the assessable penalties under Code section 4980H that an ALE may incur if it fails to offer full-time employees minimum essential coverage that is affordable and has minimum value.


An ALE may be granted relief from the reporting penalties if it can demonstrate it attempted in good faith to comply with the reporting requirements. There is no “good faith” defense available to an ALE who is found to have acted with intentional disregard of Code section 6056’s reporting obligations.


One “surprise” contained in the 2015 ACA reporting instructions impacts non-ALE employers: Non-ALEs must submit Form 1094-B to the IRS and Form 1095-B to covered individuals if they sponsor a group health plan that is self-funded. Essentially, the IRS requires these employers to comply with the same reporting requirements as group health insurance carriers.


Another potential 2015 ACA reporting “surprise” concerns supplemental health plans. In mid-September, the IRS published Notice 2015-68, stating that a forthcoming Proposed Regulation will provide that reporting will not be required for minimum essential coverage that supplements and provides benefits to participants with other minimum essential coverage, so long as the primary and supplemental coverage have the same plan sponsor or the coverage supplements government-sponsored coverage, like Medicare. Following the guidance proposed by Notice 2015-68, the final Instructions to Form 1094-B and 1095-B provide the following rules with regard to supplemental minimum essential coverage:


  • A health plan provider is only required to report one type of minimum essential coverage with respect to an individual who is covered by more than one type of minimum essential coverage.


  • If an individual is covered by two group health plans sponsored by the same employer, a provider of minimum essential coverage will not need to report such coverage with regard to that individual; so long as a report is required to be filed with respect to the individual’s other minimum essential coverage plan.


Thus, an ALE who sponsors both a self-funded major medical health plan and an HRA that covers an employee will be required to report on Form 1095-C for the employee on either the major medical plan or the HRA, but not both.


Good news may be found, consistent with the draft IRS Instructions: the final Instructions for Forms 1094-C and 1095-C allow ALEs who make payments to a union for minimum essential coverage for full-time employees are, this year, permitted to indicate on Form 2019-C (via a Code series 2 indicator on line 16) that they make such payments and, thereby, avoid providing the more detailed coverage information required by the Form. This likely provides some solace to those ALEs who voiced concerns that they may not possess the information necessary to complete the Forms.


Employers who are members of an Aggregated ALE Group (i.e., a controlled or affiliated service group under Code § 414) must each report and file with the IRS one “Authoritative Transmittal” Form 1094-C. On this Form, the employer member will not only report the Forms 1095-C that it has distributed to full-time employees and covered persons, but will also identify the other ALEs that are part of the Aggregated ALE Group.


For employees who work for more than one member of an Aggregated ALE Group there are two different reporting requirements for the two types of arrangements that may exist. For full-time employees who work for more than one member of the Aggregated ALE group each month, each employer member must issue a Form 1095-C for the employee for each month of coverage. For full-time employees who work for one employer member for some months of the year and another employer member for the remainder of the year, the employer member need report only for those months the employee work for that member.


Finally, perhaps in an effort to simplify reporting (whether or not it accomplishes that goal) the IRS has permitted certain eligible ALEs to rely upon a “Qualifying Offer Method” of ACA-required reporting. This method relieves the ALE from having to complete Part II, line 15 of Form 1095-C for each month for which the employee received a “Qualifying Offer.”


To be eligible to use the “Qualifying Offer Method,” the ALE must certify that it made a “Qualifying Offer” to one or more of its full-time employees for each month of the year in which the employee was “full-time” and thus may expose the ALE to a Code section 4980H penalty. A “Qualifying Offer” is defined in the instructions as “an offer of MEC [minimum essential coverage] providing minimum value made to one or more full-time employees for all calendar months during the year in which the employee was a full-time employee for whom a section 4980H assessable payment could apply, at an employee cost for employee-only coverage for each month not exceeding 9.5% of the mainland single federal poverty line, divided by 12, provided that the offer includes an offer of MEC to the employee’s spouse and dependents.” Various additional requirements may also apply under this method, depending upon whether the ALE is relying upon transition relief for 2015.


ALEs should make arrangements for completing and submitting their Forms 1094-C and 1095-Cs now, as the deadlines for February 1, 2016 for delivery of the Forms 1095-C to employees and March 31, 2016 for electronic submission of the Form 1094-C and attachments to the IRS. Hopefully, the Form 1095-Bs that employees receive from the insurance carriers will conform to the information provided by their ALEs on the Form 1095-Cs. The IRS has issued no guidance concerning correction if an employee receives conflicting Forms, or which of the Forms it will rely upon (i.e., the Form 1095-B from the carrier, or the employer’s Form 1095-C) in the event of any inconsistency.   We (meaning employee benefit professionals and ALEs) all look forward to an interesting first quarter 2016.

ACA Cadillac Tax: Cruising Toward Proposed Regulations


Effective 2018, Section 4980I of the IRC — the so-called “Cadillac Tax,” which was added to the IRC by the ACA — will impose a 40% nondeductible excise tax on the aggregate cost of applicable employer-sponsored health coverage that exceeds an annually-adjusted statutory dollar limit. For 2018, the dollar limits are $10,200 for self-only coverage and $27,500 for other than self-only coverage, subject to any potential upward adjustment based on age and gender characteristics of an employee population or other applicable adjustment factors. The cost of coverage that exceeds the dollar limit is referred to as the “excess benefit.”

Notice 2015-52

On July 31, 2015, IRS and Treasury issued Notice 2015-52, describing, and inviting comment concerning, potential approaches to Section 4980I issues for anticipated incorporation into proposed regulations. Notice 2015-52 supplements Notice 2015-16, which was issued earlier in 2015 and which described potential implementation approaches to other and related Cadillac Tax issues.

Public comments concerning Notice 2015-52 must be submitted to the IRS by October 1, 2015.

Notice 2015-52 highlights include:

Who pays the tax?

The coverage provider is liable for the tax. Who is the coverage provider? That depends on the type of plan at issue: with an insured plan, it’s the insurer; with an HSA or Archer MSA, it’s the employer; and for all other applicable coverage, it’s “the person who administers the plan benefits” — a term that is not defined in the ACA or elsewhere. IRS and Treasury are considering defining “the person who administers the plan benefits” as the person responsible for the day-to-day administration of the plan (processing claims, etc.) — generally, the third party administrator of a self-insured plan — or, in the alternative, as the person that has ultimate authority or responsibility for administration of plan benefits (eligibility determinations, etc.) — which is determined based on the terms of the plan document and is typically the employer.

At the end of each calendar year, the employer will calculate the tax that applies for each employee. Then, the employer will notify each coverage provider and the IRS concerning the amount of excise tax the coverage provider owes on its share of the excess benefit. Each coverage provider will then pay its portion of the excise tax.

IRS and Treasury are considering the designation of a particular quarter of the calendar year as the time for payment of the excise tax.

Who’s the employer? 

Related employers will be aggregated and treated as a single employer, consistent with IRC Section 414 provisions. This creates special issues regarding how to identifying: the applicable coverage; the employees to be taken into account for age, gender and high-risk profession adjustments to the applicable dollar limits; the employer responsible for calculating and reporting the excess benefit; and the employer liable for any penalty for improper calculation of the tax.

How is the Cost of Applicable Coverage Determined?

The cost of applicable coverage is determined using rules similar to those that apply in calculating COBRA premiums. Many plans, however, may face timing issues when calculating the cost of applicable coverage: self-insured plans may need to wait for the expiration of a run-out period before the actual cost of coverage can be determined and experience-rated insured plans may need to reflect subsequent period premium discounts back to the original coverage period. With regard to account-based plans with employee contributions that can fluctuate from month to month — such as HSAs, MSAs and FSAs — a safe harbor is being considered under which total annual employee contributions would be allocated on a pro-rata basis over the plan year, without regard to when the contributions are actually made. Safe harbor treatment is also being considered for FSAs with carry-forward salary features: employee annual salary reductions would be included in the cost of applicable coverage only in the year the salary reductions occur, without regard to any carry-forward that happens.

To the extent a coverage provider — other than an employer — incurs liability for the excise tax and passes through some or all of that liability to the employer, the reimbursement from the employer is taxable income to the coverage provider. It is anticipated that any reimbursement of the excise tax — and reimbursement of any associated income tax — could be excluded from the cost of applicable coverage only if separately billed.

Employer takeaways: The Cadillac Tax is highly complex and employers will play a key role in compliance. Although repeal is always possible, employers should start preliminary planning for their role in administering the tax.

Is Your Health Plan Affordable? If You Offer an Opt-Out Payment, You Better Check Again

An “applicable large employer” is subject to a penalty if either (1) the employer fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan and any full-time employee obtains a subsidy for health coverage on a government exchange (Section 4980H(a) liability) or (2) the employer offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan, but one or more full-time employees obtains a subsidy on an exchange because the employer’s coverage was not affordable or does not provide minimum value (Section 4980H(b) liability).

What does “affordable” mean for this purpose? Affordable means that an employee’s required contribution for individual coverage under his employer’ plan may not exceed 9.5 percent (indexed) of the employee’s household income. As employers do not generally have the household income information of their employees, the regulations under Internal Revenue Code Section 4980H provide three separate safe harbors under which an employer may determine affordability based on information that is readily available to the employer – (1) the Form W-2 wages safe harbor, (2) the rate of pay safe harbor, and (3) the federal poverty line safe harbor.

  • For example, if an employer uses the Form W-2 safe harbor, health coverage will be deemed to be affordable for Section 4980H(b) liability purposes if an employee’s required contribution is no more than $190 per month and his Form W-2 compensation is $2,000 per month ($190 is 9.5% of $2,000).

However, if the employer also offers employees an “opt-out” payment for those who decline coverage, then this opt-out amount must be counted as part of the employee contribution, according to informal discussions with Internal Revenue Service representatives (speaking in their individual rather than official capacities).

  • Therefore, using the previous example, if the employer offers employees a $100 per month opt-out payment, the employee contribution amount would be deemed to be $290 per month, rendering the insurance unaffordable under the Form W-2 safe harbor ($290 is 15.5% of $2,000).

While this impact of cash opt-out payments on affordability is not clearly articulated in the Section 4980H regulations, the Internal Revenue Service’s informal position described above is consistent with the final regulations relating to the requirement to maintain minimum essential coverage and makes sense from an economic standpoint. We note that the Internal Revenue Service also stated informally that it may treat similar cash payments to Service Contract Act and Davis-Bacon Act employees differently.

Employer takeaway: If you have analyzed affordability without taking into account any opt-out payments you offer, you should take another look at whether your plan is affordable.


Are Employee Life Insurance Benefit Plans Worth the Risk of Litigation After CIGNA Corp. v. Amara?

Five years ago, Chief Justice Roberts observed: “People make mistakes. Even administrators of ERISA plans.” Conkright v. Frommert, 559 U.S. 506, 509 (2010). Four years ago, searching for a mechanism to provide monetary relief for such mistakes under ERISA, the Supreme Court reached into the desiccated maw of early 19th century trust law and pulled out the make-whole remedy of surcharge. CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011). While the contours of the surcharge remedy are still being worked out in the lower courts, it currently appears to have only two elements – (1) a breach of fiduciary duty (2) that results in actual harm.

Since this important change in ERISA jurisprudence, we have noticed a significant increase in ERISA breach of fiduciary duty claims against employers alleging errors in the administration of life insurance plans in particular. Many such cases seem to involve conversion, porting, and/or continuation of coverage provisions. (Hereafter, “conversion” provisions.) Plaintiffs are blaming denied life claims on their employers – for instance, in failing to provide accurate or timely information about conversion issues that allegedly caused the rejection of an application for conversion. As even the Chief Justice recognizes, plan administration mistakes – sooner or later – are inevitable. Given this inevitability, employers – especially small to medium-sized employers – may have cause to reconsider whether the liability risks outweigh the value of providing life insurance benefit plans to their employees.

While there are fiduciary liability risks associated with the administration of any kind of plan, surcharge claims under life insurance plans seem to provide a particularly tempting variety of low-hanging fruit for the ERISA plaintiffs’ bar. First, there is often a substantial – and relatively undisputed – amount of money at issue. Benefits under such plans commonly reach six figures. Claims of a quarter to a half million dollars are not at all uncommon. Second, life insurance policies are often complex documents, particularly when it comes to conversion provisions. Far too often, small to medium-size employers simply are not attuned to the specialized language of insurance. Indeed, in our experience, such employers are often surprised to learn that the full weight of fiduciary responsibility may rest upon their shoulders – and not upon the insurance companies – to ensure employees are properly informed about when and how to exercise conversion rights. See Brenner v. Metropolitan Life Ins. Co., 2015 U.S. Dist. LEXIS 36044 at * 21 (D. Mass. Mar. 3, 2015) (insurer, “in general … would not be considered liable for failing to send an individual notice of conversion or to otherwise advise the [insureds] of their rights”). We suspect the combination of high damages and fertile ground for mistakes creates a tempting target for the ERISA plaintiffs’ bar.

In recent months, more than one client – after facing expensive litigation over alleged conversion administration issues – has expressed to us a concern that group life insurance plans may no longer be worth the risk of litigation. In our view, it is a legitimate question. Sooner or later, mistakes will be made. If any mistake, in the eyes of ancient trust law, is a breach of fiduciary duty (see, e.g., Stiso v. Int’l Steel Grp., 604 Fed. Appx. 494 (6th Cir. 2015) (misleading statements were a breach of fiduciary duty, whether “made intentionally or negligently”)), it seems to follow that a large court award – if not inevitable – is at least a highly probable risk. Perhaps judge-made exceptions will ameliorate the risk over the years to come. But that possibility will be of little comfort to employers watching their litigation budgets in the meantime.

Almost twenty years ago, the Supreme Court noted the “competing congressional purposes” of ERISA, “such as Congress’ desire to offer employees enhanced protection for their benefits, on the one hand, and, on the other, its desire not to create a system that is so complex that administrative costs, or litigation expenses, unduly discourage employers from offering welfare benefit plans in the first place.” Varity Corp. v. Howe, 516 U.S. 489, 497 (1996) (emphasis added). One wonders, will the newly minted ERISA surcharge remedy – while providing significant monetary relief for a few plaintiffs – ultimately result in the complete loss of some kinds of benefit plans – such as life insurance plans – for employees generally? Your comments are welcomed.


IRS Prohibits Future Annuity-to-Lump Sum Conversions for Defined Benefit Plan Retirees Currently Receiving Benefits

On July 9, 2015, the IRS released Notice 2015-49 (the “Notice”) informing taxpayers that the Service and the Treasury intend to amend the required minimum distribution regulations to eliminate the recent defined benefit (“DB”) plan risk management strategy of offering lump sum payments to replace annuity payments to retirees currently receiving joint and survivor, single life, or other life annuity benefit payments. The regulations will provide that DB plans generally will not be permitted to offer retirees an option to replace any annuity currently being paid with a lump sum payment or other accelerated form of distribution. According to the Notice, the amendments to the regulations will be effective as of July 9, 2015, with limited exceptions aimed solely to protect those employers who have already taken sufficient action to announce or establish a limited lump sum payment conversion program for existing in-pay status retirees. The proposed amendments were motivated by growing concerns over the prevalence of these lump sum conversion programs that transfer the investment and life longevity risk from the plan to retirees and whether participants were adequately advised and understood the financial tradeoffs when electing to forego the lifetime annuity for the lump-sum payment.


Over the last few years, since the modest rebound in market conditions and limited increase in interest rates, DB plan sponsors have been exploring affordable options to reduce or transfer risk out of their DB pension plans. One risk management strategy has been to amend their pension plans to offer a limited period (“window”) during which retirees who are currently receiving annuity payments from those plans may elect to convert the annuity into an immediately payable lump sum. This particular, so-called “de-risking” strategy emerged only within the last few years, after the IRS had sanctioned the practice in a couple high-profile private letter rulings (PLRs) that generated significant media attention in light of the notable plan sponsors involved, the number of plan participants affected, and the value of the benefits transferred off the balance sheet. Before these PLRs, the practice of offering retirees an option to convert in-pay status annuities to lump sums was almost nonexistent because of uncertainty over whether these conversion offers to retirees would violate required minimum distribution (RMD) rules under Code Section 401(a)(9). The PLRs eliminated much of the uncertainty by approving these retiree lump-sum conversion offers as falling within a broad RMD regulation exception for post-retirement “increases in benefits.”

IRS Announces Intent To Revise RMD Regulations

Now, with Notice 2015-49, the IRS has announced a change in policy marked by an intent to amend the RMD regulations retroactive to July 9, 2015 that will significantly narrow the RMD regulations to foreclose future use of these retiree lump-sum conversion programs. Accordingly, the Notice explains that the proposed amendments will provide that the types of permitted post-retirement benefit increases described in the RMD regulations will include only those that increase ongoing annuity payments, and do not include those that accelerate annuity payments, as is the case with the conversion of annuity payments to lump sum payments to retirees who are currently receiving benefits.

 Announcement Has No Impact On Other Lump Sum De-Risking Programs

It is important to note that Notice 2015-49 has no impact on the ability to offer DB plan lump sum de-risking programs to either terminated vested (non-retired) participants, or to actively employed participants upon plan termination. The Notice indicates only that the IRS will amend the minimum required distribution regulations so as to prohibit a defined benefit plan from offering immediate lump sum payment conversions (or similarly-styled accelerated payments) to defined benefit plan retirees currently in pay status receiving a form of life contingent annuity.


There are a wide range of corporate financial and plan funding reasons for choosing and designing a lump sum distribution window program. Those factors remain relevant for employers seeking to “de-risk” their pension liabilities by removing liability through payment of lump sums at any time for terminated vested participants, and for active participants only at plan termination. The IRS Notice’s reach is limited; it only forecloses future use of these pension de-risking programs to allow for consensual lump sum cash out of in-pay status retirees.

Reducing Employee Hours to Avoid ACA Obligations to Offer Coverage Violates ERISA § 510, Class Action Suit Alleges

One strategy for minimizing exposure to the employer shared responsibility penalties under the Affordable Care Act (ACA) is to minimize the number of “full-time employees” – that is, the number of employers working 30 or more hours per week on average. Employers can accomplish this through reducing the number of hours certain current and future employees work so that they will not be considered to be “full time” as defined by the ACA, requiring coverage to be offered to a smaller group or none at all. One company’s alleged attempt to do just that is the central claim in a class action lawsuit by an employee alleging the company has interfered with her rights to benefits under ERISA. (Marin v. Dave & Buster’s, Inc., S.D.N.Y., No. 1:15-cv-03608)

The claims are based on Section 510 of ERISA. The relevant section of that law provides:

It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan, this title, section 3001 [29 USC §1201], or the Welfare and Pension Plans Disclosure Act, or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan, this title, or the Welfare and Pension Plans Disclosure Act.

Put simply, the law makes it unlawful for any person to discriminate against a participant or beneficiary for exercising a right granted (or interfering with the attainment of a right) under ERISA or an ERISA employee benefit plan. In this case, the plaintiff is claiming that the employer reduced her hours of work to below that which the ACA would cause her to be a “full-time employee.” In doing so, the defendant avoided the requirement under the ACA to offer her coverage, as well as any the corresponding penalty under Internal Revenue Code Section 4980H if she were a full-time employee. In other words, the essence of the plaintiff’s claim is that by reducing her hours of employment, the employer interfered with her attainment of a right under the plan to be eligible to be offered coverage under the medical plan.

So, plan documents say that if you work 30 or more hours per week on average you will be offered coverage, and that by lowering your hours per week, triggering a loss of eligibility for coverage, the employer has impermissibly interfered with your right to eligibility for benefits. Could this be right? Employers have historically modified their workforces in this manner – trimming work hours and consequently eligibility for welfare benefits – as business needs dictated. COBRA, for example, recognizes this ebb and flow of the workplace providing protection for workers who experience a “qualifying event” when they have a reduction in their hours of employment that leads to a loss of coverage under a group health plan. If successful, one effect of plaintiff’s argument may be that once an employer hires an employee in an eligible classification under an ERISA plan, that employee has a right under ERISA and the plan to be eligible, and any change by the employer in that classification, or what causes the employee to be in that classification, is an impermissible interference with that right.

ERISA 510 claims, however, are not simple to establish and win. For example, a plaintiff generally must show that the employer acted with a specific intent to violate ERISA §510 in order to interfere with the plaintiff’s attaining a right under the plan. This intent can be difficult to prove and, absent direct evidence to the contrary, the defendant may be able to show that its motivation for reducing hours of certain employees was not to interfere with any rights the employees may have had under the medical plan, but was for legitimate, non-discriminatory reasons. In addition, plaintiffs have generally had a difficult time succeeding under ERISA § 510 in regard to welfare benefit plans because of the broad power employers have to amend or terminate benefits under those plans, which typically do not vest like benefits do under retirement plans.

We believe this is the first case in which a court will address this issue and an important case for employers to watch, especially those employers that have taken or are thinking about taking similar steps to address their employer shared responsibility obligations under the ACA.

IRS Makes it Riskier to Maintain Individually-Designed Retirement Plans

The Internal Revenue Service just made it riskier to maintain a tax-qualified individually-designed retirement plan by eliminating the five-year determination letter remedial amendment cycle for these plans, effective January 1, 2017.

Although determination letters are not required for retirement plans to maintain tax-qualified status under the Internal Revenue Code, virtually all employers sponsoring individually-designed retirement plans have long relied on the Internal Revenue Service’s favorable determinations that their plans meet the Code’s and the IRS’ vexingly complex – and ever-changing – technical document requirements. A plan risks losing tax-qualified status (and all the favorable tax treatment that goes along with that status) if the plan document is not timely amended to reflect frequent, sometimes obscure, Code and regulatory changes. In light of that, the IRS has long offered a program for reviewing and approving those plan documents – often conditioning its favorable determination letter on the employer’s adoption of one or more corrective technical amendments. The current program, established in 2005, has provided for a five-year remedial amendment cycle which effectively extended the period of time during which a plan could be amended under certain circumstances to retroactively comply with the ever-changing qualification requirements. Under this determination letter program, employers have filed for determination letters for their individually-designed plans every five years and had an opportunity to fix plan document issues raised by the IRS on review.

The IRS announced elimination of the five-year determination letter remedial amendment cycle in Announcement 2015-19 and said that determination letters for individually-designed plans will be limited to new plans and terminating plans. A transition rule applies for certain plans currently in the five-year cycle (i.e., employers with “Cycle E” or “Cycle A” plans may still file for determination letters) but, effective July 21, 2015, the IRS will not accept off-cycle applications except for new plans and terminating plans.

The IRS said that plan sponsors will be permitted to submit determination letter applications “in certain other limited circumstances that will be determined by Treasury and the IRS” but did not give a hint as to what those circumstances might be. The IRS intends to periodically request comments from the public on what those circumstances ought to be and to then identify those circumstances in future guidance.

In addition, the IRS said that it is “considering ways to make it easier for plan sponsors to comply with the qualified plan document requirements” which might include providing model amendments, not requiring amendments for irrelevant technical changes, or permitting more liberal incorporation by reference.

Comments on the issues raised in the Announcement – e.g., what changes should be made to the standard remedial amendment period rule, what considerations ought to be taken into account regarding interim amendments, and what assistance should be given to plan sponsors wishing to convert to pre-approved plans – may be submitted to the IRS until October 1, 2015. We anticipate submitting comments on behalf of clients who want to continue to sponsor individually-designed plans rather than resigning themselves to the limitations of pre-approved plans.


Frequently a plan sponsor’s operational failure to follow the terms of its 401(k) or other qualified plan can be corrected under the IRS’s Employee Plans Compliance Resolution System (“EPCRS”) (described at with a retroactive amendment instead of a sometimes expensive financial correction. This possibility should not be surprising, given that the maintenance of qualified plans depends heavily on IRS rules and procedures that permit plan sponsors to keep plan documents in compliance with all legally required written provisions by retroactively adopting required restatements and amendments. Apart from what the plan document states, however, the IRS also considers any uncorrected failure to follow the terms of the plan to constitute a qualification defect that threatens the current income exemption and other tax benefits of the plan.

Under EPCRS, a few operational failures, such as making hardship distributions or plan loans from a plan that has no plan terms allowing such distributions or loans, may be self-corrected by the plan sponsor with a retroactive amendment. In general, however, a retroactive amendment fix will require the employer or other sponsor to submit an application to the IRS under the Voluntary Correction Program (“VCP”) to get IRS approval.

As a threshold requirement, the way the plan was actually operated must have been permissible under the law and regulations in order to obtain approval for a retroactive amendment conforming the plan terms to that operation. For example, a retroactive amendment can be considered if a 401(k) plan actually allowed deferrals on bonuses even though the plan’s definition of compensation did not include bonuses, because the plan could have so provided under the law. If the plan was a prototype or volume submitter, then the amendment must also be permitted under the vendor’s pre-approved document.

IRS standards for approving a retroactive amendment fix are not formally set out anywhere. In practice, however, the IRS normally needs to see some convincing documentary evidence indicating that the way the plan was actually operated was the way the sponsor, participants and any relevant TPAs or vendors assumed the plan was written. A summary plan description (“SPD”) that provides for the particular event or practice that occurred is usually considered the best evidence. However, other good evidence might be emails, internal memoranda or correspondence that reflect the way some or all parties thought the plan actually read.

A retroactive amendment is often appropriate to correct a failure to follow plan terms that occurs after a sponsor restates its plan on the pre-approved form of a new vendor as part of a change in plan investments and/or administrative services. In such cases, even though it is clear from the record that no plan design change was intended in conjunction with the vendor change, the plan is sometimes incorrectly mapped over to the new document. The IRS frequently approves a retroactive amendment in such cases as long as the amendment is permissible under the vendor’s document.

New Regulatory Guidance Issued on Plan Benefit Suspensions and Plan Partitions for Multiemployer Pension Plans at Risk of Insolvency

As part of on-going efforts to prevent the collapse of financially troubled multiemployer pension plans, the Pension Benefit Guaranty Corporation (“PBGC”) and Internal Revenue Service (“IRS”) have issued regulatory guidance under the Multiemployer Pension Reform Act of 2014 (“MPRA”). Together, the Treasury Proposed and Temporary Regulations, a new Revenue Ruling, and PBGC interim rule prescribe how multiemployer pension plans in critical and declining status can apply for plan partitions and plan benefit suspensions.

Plan Partitions

A partition order provides for the transfer of an original multiemployer pension plan’s liabilities to a successor plan backed by the PBGC. The amount transferred from the original plan is the minimum amount necessary to keep the original plan solvent. Prior to the MPRA, partitions were not available to multiemployer plans unless a participating employer member was involved in bankruptcy. The PBGC’s authority to partition plans has been expanded under the MPRA and implemented under the interim final rule, which sets forth partition application and notice requirements under ERISA § 4233 (29 USC § 1413).   Partitions may now be sought by “eligible multiemployer pension plans.” Under ERISA, a plan is an “eligible multiemployer plan” if:

  • The plan is in critical and declining status (as defined under ERISA, The plan sponsor has demonstrated all reasonable measures have been taken to avoid insolvency (including “maximum benefit suspensions”);
  • The PBGC has determined a partition is necessary for the plan to remain solvent and will reduce the PBGC’s expected long-term loss with regards to the plan;
  • The PBGC can meet its existing financial obligations to assisting other plans (as certified to Congress); and,
  • Costs for partition are paid entirely from PBGC’s fund for basic benefits guaranteed for multiemployer plans.

The PBGC will not recognize an application as complete until all required information is provided, which includes plan information, partition information, financial and actuarial information about the plan (including its most recent actuarial report and certification of critical and declining status), plan participant census data used for actuarial and financial projections, and any additional information related to the plan’s request for PBGC assistance. Once an application is deemed complete, the PBGC provides notice to the plan sponsor and has 270 days to review. The plan sponsor must provide notice to interested parties within 30 days of receiving notice that a complete partition application has been accepted.

Since a partition applicant must show it has taken “all reasonable measures”—including benefit suspensions—to avoid insolvency, the PBGC expects that plans seeking partitions will also apply for proposed suspension of benefits. Therefore, the PBGC strongly recommends that plan sponsors file concurrent applications for partition and suspension of benefits. If a plan seeks both a suspension of benefits and a plan partition, the partition must occur first.

Suspension of Benefits

Multiemployer pension plans in “critical and declining status” may seek approval for proposed benefit suspensions in certain situations under the Treasury’s Temporary Regulations, Proposed Regulations, and the new Revenue Procedure 2015-24. Plan proposals for suspension of benefits must satisfy certain statutory requirements (i.e., actuarial certification and plan-sponsor determinations). Additionally, certain limitations and exemptions apply; for example, benefits may not be suspended for certain categories of individuals based upon age or for benefits based upon disability. Applications for benefit suspensions must be certified by an authorized trustee on behalf of the board of trustees, and each application with supporting material is to be published for public disclosure on the Treasure Department website.

Public Comment

Partition application requirements issued by the PBGC apply to applications received as of June 19, 2015. The PBGC is seeking comments on its interim final rule. Comments may be submitted on or before August 18, 2015. Although the IRS has begun accepting applications for proposals of suspension of benefits, the Treasury will not approve proposal applications until regulations are finalized. Public comment on the Treasury’s proposed regulations is set for September 10, 2015.