What to Expect in the Employee Benefits and ERISA World

President-elect Trump’s new administration will be in place in just two months.  Employers wonder about what the incoming administration will do with respect to workplace laws that impact them.  In the Employee Benefits and ERISA (Employee Retirement Income Security Act) world, what comes to mind immediately are the Affordable Care Act and the Department of Labor’s expanded definition of a “fiduciary” (which an effective date of April 10, 2017).

We do not know how quickly the new administration might dismantle or replace the ACA or fiduciary definition, but we know is that a mere two days after Election Day 2016, President-elect Trump named J. Steven Hart (an accountant, a lawyer, and a lobbyist all in one) to lead the Labor transition team.  As a lobbyist, Hart focused on benefits and tax policy.  In the government, Hart worked on the White House Office of Management and Budget on ERISA issues  and in what is now known as the Employee Benefits Security Administration at the Department of Labor.  The DOL’s EBSA is tasked with enforcing ERISA rules.    The immediate naming of someone who has had regulatory and enforcement experience on and drill-down understanding of employee benefits, retirement plan, and tax issues might signal that the undoing of both the ACA or fiduciary rules might come early in the 2017 year.

For now, we advise clients to continue to conform with the ACA and to be aware of the fiduciary rule that is slated to go into effect.  Specifically, we note that, if clients were thinking of altering their group health plans to address ACA rules (including financial incentives, flex credits inside of cafeteria plans, Tricare, Medicare, coordination with Service Contract Act/Prevailing wage issues, etc.), those plans should be suspended until we get more direction on what may or may not remain of the ACA.


For Those with an Interest in Employee Stock Ownership Plans (ESOPs)

Jackson Lewis P.C. has a deep practice niche in employee stock ownership plans. We regularly assist our clients in structuring ESOP transactions and with related compliance matters, and in helping to further the success of our clients’ businesses by evolving an “employee ownership” culture using ESOPs. We also regularly represent and assist institutional trustees of ESOPs.

If you would like to learn more about the advantages of establishing and/or selling to an ESOP, we encourage you to review the following papers:

Description and Purpose of an ESOP

An Introduction to Employee Ownership and Selling to an ESOP

Tax Incentives for Employee Stock Ownership Plans

If you have any questions about a potential ESOP transaction or an existing ESOP, please contact me.

Early Holiday Gift from the IRS – Due Date Extension for Furnishing Forms 1095 and Related Relief

In IRS Notice 2016-70, the IRS announced a 30-day automatic extension for the furnishing of 2016 IRS Forms 1095-B (Health Coverage) and 1095-C (Employer-Provided Health Insurance Offer and Coverage), from January 31, 2017 to March 2, 2017.  This extension was made in response to requests by employers, insurers, and other providers of health insurance coverage that additional time be provided to gather and analyze the information required to complete the Forms.  Notwithstanding the extension, the IRS encourages employers and other coverage providers to furnish the Forms as soon as possible.

Notice 2016-70 does not extend the due date for employers, insurers, and other providers of minimum essential coverage to file 2016 Forms 1094-B, 1095-B, 1094-C and 1095-C with the IRS.  The filing due date for these forms remains February 28, 2017 (March 31, 2017, if filing electronically), unless the due dates are extended pursuant to other available relief.

The IRS also indicates in Notice 2016-70 that, while failure to furnish and file the Forms on a timely basis may subject employers and other coverage providers to penalties, such entities should still attempt to furnish and file even after the applicable due date as the IRS will take such action into consideration when determining whether to abate penalties.

Additionally, Notice 2016-70 provides that good faith reporting standards will apply for 2016 reporting. This means that reporting entities will not be subject to reporting penalties for incorrect or incomplete information if they can show that they have made good faith efforts to comply with the 2016 Form 1094 and 1095 information-reporting requirements. This relief applies to missing and incorrect taxpayer identification numbers and dates of birth, and other required return information. However, no relief is provided where there has not been a good faith effort to comply with the reporting requirements or where there has been a failure to file an information return or furnish a statement by the applicable due date (as extended).

Finally, an individual taxpayer who files his or her tax return before receiving a 2016 Form 1095-B or 1095-C, as applicable, may rely on other information received from his or her employer or coverage provider for purposes of filing his or her return. Thus, if employers take advantage of the extension in Notice 2016-70 and receive employee requests for 2016 Forms 1095-C before the extended due date, they should refer their employees to the guidance in Notice 2016-70.

Employee Benefit Issues to Keep You Awake at Night

Last week I made a presentation in the Omaha office of Jackson Lewis with the above title. I thought it might be helpful to outline the basic points of my presentation.  The following items should keep you awake at night unless you can comfortably answer them:

  • Does your employer have ERISA fiduciary insurance? If you are a fiduciary for your 401(k) plan or other employee benefit plans, you have personal liability for fiduciary breaches. Therefore, you should make sure that your employer has insurance coverage for ERISA fiduciary breaches. This coverage is not the same as directors and officers coverage. Generally, it is a rider to directors and officers coverage or a separate policy.
  • Do you know the amount of fees paid by your 401(k) plan for 2015? Do you know both the fees in an absolute dollar amount and as a percent of assets? Have you compared vendor fees in the past? Are you monitoring the vendor fees at least annually? If you cannot comfortably answer all of these questions, the plaintiff lawyers and the Department of Labor are coming after you.
  • Does your 401(k) plan have an investment policy? The Department of Labor asks for this upon audit. Does your 401(k) plan have a benefits committee charter? This is important in order to make sure that you are separating settlor and fiduciary functions. Who is your 401(k) plan administrator? Is it the employer? That is generally a bad practice.
  • What standard do you impose upon your vendors? Is the standard in your vendor contract gross negligence? A gross negligence standard by your vendor is unacceptable. A gross negligence standard is a very low standard of conduct and is very difficult to prove. Similarly, what indemnification provisions does your contract have?
  • Is your investment advisor a fiduciary? Do you know? Do you get recommendations from your fiduciary? You should make sure that even if your investment advisor is not a fiduciary, you are getting recommendations from that advisor. In addition, those recommendations should be adequately documented.
  • Do you have complete, historic retirement plan records? How far back do your records go? Do you use the statute of limitations as the standard for determining when you can dispose of records? The statute of limitations is not a good standard for many documents of your retirement plan. Many retirement plan documents should be kept forever, for example, plan documents, summary plan descriptions, plan merger documents, and payment records. We see retirees request benefit payments that were made 20 years prior to the claim. Do you have the records to prove that you actually made the payment?
  • Are your temporary/staffing workers, independent contractors, and leased employees your employees for the Affordable Care Act (ACA) purposes? If you are treating a significant number of these types of workers as not your employees, ACA creates a huge down-side risk since you can only exclude 5% of eligible employees to avoid the major ACA penalty. If these types of employees are reclassified as employees, you could end up with an ACA penalty equal to $2,000 (with COLA adjustment) multiplied by the number of full-time employees you have minus the first 30.

TCB on the BIC: DOL Issues Guidance on Application of the Fiduciary Rule’s New Best Interest Contract Prohibited Transaction Exemption

On October 27, the DOL published guidance on the new prohibited transaction exemptions (“PTEs”) issued under the DOL’s rule redefining “fiduciary” in the context of providing investment advice (See “Guidance,” here). Intended as a means to provide protections to retirement investors, the Fiduciary Rule and related PTEs require all those providing retirement investment advice to plans, plan fiduciaries, and IRAs to abide by a “fiduciary” standard that places clients’ best interests before a party’s own profits. The Guidance covers several FAQs derived from input received from the financial services industry and other groups.

Compliance Deadlines

The Guidance clarifies that new conditions on all pre-existing PTEs must be met by April 10, 2017. For the two new PTEs — the Best Interest Contract (“BIC”) and Principal Transactions Exemption — the DOL has provided a “transition period” for compliance. Financial institutions and advisers relying on either of these PTEs must meet partial requirements by April 10, 2017. To rely upon one of these exemptions on April 10, 2017, impartial conduct standards must be met. These standards require that advisers and financial institutions:

• Give investment advice that is in the best interest of the retirement investor. The “best interest” component has two standards: prudence and loyalty.

o      The prudence requirement sets a professional standard of care for advice given.

o      To meet the loyalty standard, advice must be founded on the interests of the retirement investor, not on the competing financial interest of the financial adviser, institution, or firm.

• Charge no more than what is considered “reasonable compensation.” For purposes of the BIC exemption, the DOL intends to incorporate the reasonable compensation standard as set out under ERISA § 408(b)(2), Code § 4975(d)(2), and regulations thereunder. The Guidance explains that in general, “firms can ensure compliance with the standard by being attentive to market prices and benchmarks for the services; providing the investor proper disclosure of relevant costs, charges, and conflicts of interest; prudently evaluating the customer’s need for the services, and avoiding fraudulent or abusive practices with respect to the service arrangement.”

• Provide no misleading statements about investment transactions, compensation, or conflicts of interest.

In addition, financial institutions must:

• Designate an individual to address any material conflicts of interest and monitor advisers’ adherence to impartial conduct standards.

• Provide a notice to retirement investors that includes an acknowledgement of fiduciary status and describes any material conflicts of interest.
Financial institutions and advisers relying upon the new exemptions have until January 1, 2018 to comply with additional contract and disclosure requirements and to implement policies and procedures protecting investors against advice that is not in the investors’ best interests.

Scope of the BIC Exemption (PTE 2016-01)

In large part, the Guidance addresses the BIC exemption allowing investment advisers and their financial institutions to continue using certain investment-related compensation arrangements that would otherwise be prohibited as potential conflicts of interest.

The Guidance states the BIC Exemption serves as the “primary exemption for investment advice transactions” involving retail investments advisers and financial institutions that provide advice on investments to retail investors such as plan participants, plan beneficiaries — including HSA owners –, and IRA owners. The Guidance further explains that the exemption is “broadly available” for recommendations to retail investors concerning “all categories of assets” on “advice to roll over plan assets,” and advice concerning recommendations on who a customer should hire as an investment adviser or manager.

Specifically, the BIC Exemption is available for:

• Investment advice to roll-over an account, even by advisers acting as discretionary fiduciaries for the plan or participant’s account, as long as there is no discretionary authority with respect to the roll-over decision.

• Investment advice to roll-over plan assets into an IRA, even by advisers acting as discretionary fiduciaries for the plan or participant’s account, as long as there is no discretionary authority with respect to the roll-over decision.

• Insurance companies and agents, providing investment advice on fixed rate, fixed indexes, and variable annuity contracts (PTE 84-24 is also available for insurance agents providing investment advice on fixed rate annuity contracts).

• “Level fee fiduciaries” receiving only a “level fee” in connection with providing investment services or advice, if the fee is disclosed in advance to the investor.

• “Robo-advice” in which the provider is a level-fee fiduciary.

Under the DOL Guidance, the BIC Exemption is not available to:

• Investment transactions in which an adviser has or exercises any discretionary authority or control.

• “Robo-advice” that is solely provide through an interactive website (unless, as stated above, the robo-advice provider is a level-fee fiduciary).

Compensation Arrangements Covered by the Exemption

The Guidance cautions against compensation structures that incentivize advisers to promote recommendations that are not in the best interest of retirement investors or that violate what are considered reasonable compensation practices, such as using escalating grids that pay commission rates based on a set percentage of commission generated for the firm or based on profitability to the firm rather than on the value to the retirement investor. If commission rates are to be used, financial institutions are encouraged to base pay upon “neutral factors” that are not founded upon the firm’s financial interests. For example, an acceptable commission structure may be based upon neutral factors such as the “time and complexity associated with recommending investments within different product categories.” Other acceptable incentives include the use of certain price discounts (must satisfy the reasonable compensation standard) and appropriate bonus arrangements (signing awards and “front-end” bonuses unrelated to the movement of firm assets or sales targets).

Additional Information

The Guidance also provides clarity on the BIC Exemption contract and disclosure requirements as well as application of the new Principal Transactions Exemption (PTE 2016-02) for advisers and financial institutions selling or purchasing certain recommended debt securities and other investments from their own inventories either to or from plans and IRAs. The DOL notes that the Guidance is the “first of several” FAQs to be published in the coming months. (See Borzi, DOL Blog post). Consequently, plan sponsors, retirement investment advisers, and plan service providers will want to consult this and any future FAQs issued by the DOL for further guidance on application of the Fiduciary Rule and related exemptions.

Pension Plan Suffers Cybersecurity Attack, ERISA Advisory Council Offers Cybersecurity Recommendations to DOL

Image resultIt has been reported that infamous bank robber, Slick Willie Sutton, once said, “I rob banks because that’s where the money is.” Data thieves, understandably, have a similar strategy – go where the data is. The retail industry knows this as it has been a popular target for payment card data. The healthcare and certain other industries do as well considering ransomware attacks have increased four-fold since 2015. But the retirement plan industry must also see that it too is a significant target – that’s where a lot of data is!

PR Newswire reported yesterday that the UFCW Local 655 Food Employers Joint Pension Plan is notifying participants that it suffered a ransomware attack. In general, a “ransomware” attack occurs when a hacker takes control of the victim’s information systems and encrypts its data, preventing the owner from accessing it unless the victim pays a sum of money, usually in the form of bitcoins. The data at risk in the UFCW Local 655 case included individuals’ names, dates of birth, Social Security numbers, and bank account information. Every retirement plan, including pension and 401(k) plans, maintains this and other data about current and former participating employees, and their surviving spouses and designated beneficiaries, as applicable.

The question is whether plan sponsors and third party service providers are doing enough to safeguard the treasure troves of data they maintain.

On November 10, the ERISA Advisory Council, a 15-member body appointed by the Secretary of Labor to provide guidance on employee benefit plans, shared with the federal Department of Labor some considerations concerning cybersecurity. The Council noted that it is not seeking to be prescriptive, nor is it providing an opinion on fiduciary duties concerning protection of data. However, it is hoping its considerations will be publicized and “provide information to the employee benefit plan community to educate them on cybersecurity risks and potential approaches for managing those risks.”

According to the Council, there are four major areas for effective practices and policies:

  • Data management.
  • Technology management.
  • Service provider management.
  • People issues.

This is a good list to work from. Consider, for example, the wide range of service providers that perform various services to retirement plans – record keepers, auditors, law firms, accountants, actuaries, investment managers, brokers, etc. These organizations access, use, maintain, and disclose vast amounts of personal information in the course of servicing their retirement plan customers. Do these organizations have sufficient safeguards in place? Do you know if they do? What does the services agreement say?

Obviously, services providers are not the only source of risk to retirement plan data. As the Council points out, there are other considerations for plans concerning cybersecurity, such as:

  • Know your data and assess your risk (how it is accessed, shared, stored, controlled, transmitted, secured and maintained).
  • Think of how you could and should protect it (e.g., applicable federal and state laws, NIST, HITRUST, SAFETY Act, and industry-based initiatives).
  • Protect it with appropriate policies and procedures and an overall strategy taking into account available resources, cost, size, complexity, risk tolerance, insurance, etc.

In most discussions about data security and employee benefit plans, HIPAA tends to loom large. While important, with respect to employee benefit plans, the HIPAA privacy and security regulations only reach health plans, not retirement plans. But, as noted above, data thieves want to go where the data is, and that includes retirement plans.

2017 Cost of Living Adjustments for Retirement Plans

The Internal Revenue Service recently announced its cost-of-living adjustments applicable to dollar limitations for retirement plans and Social Security generally effective for Tax Year 2017 (see IR-2016-141). Most notably, the limitation on annual salary deferrals into a 401(k) plan (along with many other retirement plan limitations) remains unchanged. The dollar limits are as follows:

LIMIT 2016 2017
401(k)/403(b) Elective Deferral Limit (IRC § 402(g))

The annual limit on an employee’s elective deferrals to a 401(k) or 403(b) plan made through salary reduction.

$18,000 $18,000
Government/Tax Exempt Deferral Limit (IRC § 457(e)(15))

The annual limit on an employee’s elective deferrals concerning Section 457 deferred compensation plans of state and local governments and tax-exempt organizations.

$18,000 $18,000
401(k)/403(b)/457 Catch-up Limit (IRC § 414(v)(2)(B)(i))

In addition to the regular limit on elective deferrals described above, employees over the age of 50 generally can make an additional “catch-up” contribution not to exceed this limit.

$6,000 $6,000
Defined Contribution Plan Limit (IRC § 415(c))

The limitation for annual contributions to a defined contribution plan (such as a 401(k) plan or profit sharing plan).

$53,000 $54,000
Defined Benefit Plan Limit (IRC § 415(b))

The limitation on the annual benefits from a defined benefit plan.

$210,000 $215,000
Annual Compensation Limit (IRC § 401(a)(17))

The maximum amount of compensation that may be taken into account for benefit calculations and nondiscrimination testing.


($395,000 for certain gov’t plans)


($400,000 for certain gov’t plans)

Highly Compensated Employee Threshold (IRC § 414(q))

The definition of an HCE includes a compensation threshold for the prior year. A retirement plan’s discrimination testing is based on coverage and benefits for HCEs.


(for 2016 HCE determination)


(for 2017 HCE determination)

Key Employee Compensation Threshold (IRC § 416)

The definition of a key employee includes a compensation threshold. Key employees must be determined for purposes of applying the top-heavy rules. Generally, a plan is top-heavy if the plan benefits of key employees exceed 60% of the aggregate plan benefits of all employees.

$170,000 $175,000
SEP Minimum Compensation Limit (IRC § 408(k)(2)(C))

The mandatory participation requirements for a simplified employee pension (SEP) includes this minimum compensation threshold.

$600 $600
SIMPLE Employee Contribution (IRC § 408(p)(2)(E))

The limitation on deferrals to a SIMPLE retirement account.

$12,500 $12,500
SIMPLE Catch-up Limit (IRC § 414(v)(2)(B)(ii)))

The maximum amount of catch-up contributions that individuals age 50 or over may make to a SIMPLE retirement account or SIMPLE 401(k) plan.

$3,000 $3,000
Social Security Taxable Wage Base $118,500 $127,20

Healthcare Subsidies for Grad Students: Problem Solved?

This summer we wrote about an impending issue under the Affordable Care Act (“ACA”) for colleges and universities wishing to provide graduate student employees with a stipend or reimbursement to defray the cost of medical coverage under a student health plan. Though a common arrangement, guidance issued in connection with the implementation of the ACA meant that schools could be subject to severe penalties for, in effect, using a “health reimbursement arrangement” to reimburse the cost of individual (rather than group) healthcare coverage.

Earlier this year, Notice 2016-17 provided temporary relief by indicating that schools would not be penalized for any such arrangements with a plan year beginning prior to January 1, 2017. Last week, the agencies responsible for issuing ACA guidance released further FAQs indicating that this temporary relief will be extended indefinitely (pending further guidance).

This is good news for the many schools that have been unhappy about the options for restructuring their benefit plans in order to avoid penalties. Although the latest guidance does not guarantee a permanent fix, the reasoning contained therein suggests that the agencies are aware that a special rule should apply in the college and university setting. We will continue to monitor and keep you apprised of any further guidance issued in connection with the ACA and its effect on healthcare subsidies in the graduate student employee context.

January 1st is Quickly Approaching – Have you Reviewed your Health Plan for Section 1557 Compliance?

Earlier this year the U.S. Department of Health and Human Services (“HHS”) finalized regulations that implement Section 1557 of the Affordable Care Act (“Section 1557”). You can read our prior discussions of these regulations in our blog post and newsletter article.  As the new year approaches, we wanted to take a moment to remind you that you still have time to amend your employee health plans to comply with the new regulations.  The deadline to make any necessary changes is the first day of the first plan year beginning on or after January 1, 2017.

Section 1557 prohibits discrimination in certain health plan and programs on the basis sex, age, race, color, national origin, and disability. The HHS regulations implement the statute by codifying rules that apply to entities that operate health plans and programs that receive funding from or through HHS.  Included in the regulations are specific requirements relating to health insurance, including provisions related to coverage for transgender individuals.

As we previously noted, the regulations may not directly apply to many employee health plans because neither the sponsoring employer nor the plan receives HHS funding. However, HHS has noted that it may refer discriminatory plans and employers to other government agencies (such as the EEOC), so it is a good idea for all plan sponsors to review their plans to see if any discriminatory provisions need to be amended or removed.

Here are some issues you may wish to consider:

  • Many plans deny coverage for any services related to gender transition. HHS has determined that such a categorical exclusion is discriminatory (although HHS declined to provide a list of services that must be covered).
  • Plans cannot contain exclusions or limitations for sex-specific services that discriminate against transgender individuals. Such discriminatory provisions may impermissibly discriminate on the basis of sex.
    • For example, if a transgender woman needs a prostate exam, a plan could not deny that service based on the individual identifying as a woman.

You still have time to amend your plan to make it compliant with Section 1557, but the deadline under the new regulations is rapidly approaching. Every plan is unique, and the changes that may be required will vary depending on the plan.

Jackson Lewis attorneys are available to assist you with your review.

The MPRA: One Size Fits No One

This is another in our series addressing the continuing deterioration of multi-employer defined benefit pension plans.

Regardless of the identity of the next tenant of the White House, a major item on the new administration’s domestic agenda must be curbing the continuing deterioration of multi-employer defined benefit pension plans. Hopefully any new legislation will approach the problems differently than did the Kline-Miller Multiemployer Pension Reform Act of 2014 (the “MPRA”).

In the waning moments of the 2014 lame duck Congress, an Omnibus Bill was passed containing the MPRA. This legislation was intended to provide a “quick fix” to the problems confronting multi-employer pension plans by permitting them, for the first time since the passage of ERISA, to reduce core benefits.  Those funds were obligated to file applications to the Department of the Treasury seeking the relief sought and providing reasons.

In the two years since the passage of the MPRA, nothing has happened except expenditures of a great deal of money by multi-employer funds to obtain the relief from the Treasury and a hue and cry from Senator who now regret having voted in favor of legislation that has caused such human suffering. They then penned a common letter to the Treasury Department demanding that the lengthy and costly application by the Central States and Southeast Pension Fund be denied.  Central States’ application was subsequently denied.

Although other pension funds have also attempted to obtain the relief permitted under the MPRA, none of those applications have been granted. The application filed by the Iron Workers Local 17 Pension Fund which sought cuts of monthly pension benefits for some retirees of up to 50% was withdrawn with the fund submitting a revised application.  Applications were recently filed by the New York State Teamsters Conference Pension and Retirement Fund and the Bricklayers and Allied Craftworkers Local 5 New York Retirement Fund.

Based upon the finding by the Treasury Department that the assumptions used by Central States in the actuarial projections contained a bias because the projected 7.5% annual investment rate of return was “significantly optimistic,” it is unclear how these new applications will be addressed by the Treasury Department.

Concurrently, Congress has come up with a new iteration to bail out the multi-employer funds in the form of a “composite plan.” The composite plan has been described as being a newly created defined contribution plan which Congress envisions as being the successor to existing multi-employer plans.  Perhaps in an effort to eliminate opposition by the PBGC, these composite plans would not participate in the PBGC’s defined benefit plan insurance.

A positive note is that at least one member of Congress is sounding the alarm about a stealth passage of a pension revamp. Congressman Joseph Courtney of Connecticut has warned about passage of some pension “reform” in the post-election lame duck session and has specifically referred to the manner in the MPRA was passed in 2014 as part of an omnibus bill.

We continue to monitor the situation.