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the Iron Workers Local 17 Pension Fund which sought cuts of monthly pension benefits for some retirees of up to 50% was withdrawn with the fund submitting a revised application.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.

How Can Employees Help Victims of Louisiana’s August 2016 Storms. . .Through an Employer Leave Donation Program or Leave Sharing Program?

Leave Donation.

In mid-September, the IRS announced income tax relief for individuals who donate through their employers to aid victims of the Louisiana storms that began on August 11, 2016. See IRS Notice 2016-55 (Sept. 16, 2016). To get this special relief — similar to that provided for leave donation aid given after the September 11, 2001 terrorist attacks, Hurricane Sandy, and the Ebola outbreak in Africa — an employer must establish a leave-based donation program (a “Leave Donation Program”). Under that program, employees forego their vacation, sick, or personal leave and ask the employer instead to make a cash-equivalent donation to charitable organizations aiding those victims from the Louisiana storms.

Under normal tax concepts, if an employee can direct an employer to make a charitable contribution on the employee’s behalf, that amount is typically included in the donating employee’s income and is thus subject to tax, as the IRS views the amount donated as “constructively received.” Under the IRS Notice, however, there will be no income to the employee foregoing vacation, sick, or personal leave when the employer makes the cash-equivalent donation (prior to January 1, 2018) to qualified tax-exempt organizations (as described in Internal Revenue Code § 170(c)) that are providing relief to the victims of the Louisiana storms. Moreover, employers will not have to include such cash amounts in Box 1, 3, or 5 of the employee’s Form W-2. Under this IRS tax relief, the employee will not be viewed as in constructive receipt of income. However, the donating employee will not be allowed a charitable deduction on his or her individual income tax return (the employee already avoided receiving income; a charitable deduction of the donated cash-equivalent would be viewed as “double dipping” on the tax benefit). Employers making contributions on behalf of the employee may deduct the payments as trade or business expenses (as the vacation, sick, or personal leave would have been deductible to the employer). [Certainly, an individual can contribute (and get a deduction for contributing) to a charity that helps Louisiana storm victims, but using a Leave Donation Program such as this allows not only for the individual to avoid income tax and but also for the employer to avoid associated employment tax obligations.]

Leave Donation Program vs. Leave Sharing Program.

We notice that employers sometimes confuse Leave Donation Programs and Leave Sharing Programs. Cash that an employer contributes because an employee has foregone vacation, sick, or personal leave, as described above, is done through a “Leave Donation” Program. This program is distinguishable from a “Leave Sharing” Program, where employees share their vacation, sick, or personal leave with co-workers who are in need of additional leave to tend to those co-workers’ own personal medical needs or major disasters.
Leave Sharing.

An employee’s donation to an employer’s Leave Sharing Program is framed as an assignment of income issue (that is, the employee “assigns” income he or she expects to receive to someone else). Normally, under tax concepts, the cash-equivalent of a donor employee’s leave is income (i.e., will show on the employee’s Form W-2), subject to income, FICA, and FUTA tax. As with the Leave Donation Program described above for charity aid to victims, the IRS here allows for exceptions to income inclusion for employer Leave Sharing Programs if an employee may donate to and thus share leave with co-workers to use for the limited instances of a “medical emergency” or “major disaster.”
Generally, a “medical emergency” requires the would-be recipient employee’s prolonged absence from work be due to a major illness or medical condition (e.g., cancer, heart attack, etc.) that would result in a substantial loss of income, without the benefit of a Leave Sharing Program. See PLR 200720017 (Feb. 9, 2007) (analyzing tax relief from assignment of income when an employer has a proper Leave Sharing Program in place). A “major disaster” is one where employees need leave assistance tied to an event that the President of the United States has declared as such. See Notice 2006-59, 2006-28 I.R.B. 60.

The IRS imposes stringent requirements on employers when designing a Leave Sharing Program. Employer and employee missteps often occur from good intent. Perhaps an employee wants to specify which specific employee can use the donated sick leave. That can’t be done. Sometimes an employer believes that any employees affected by a public health crisis (such as those suffering from the Zika virus) can avail themselves of shared leave. That also can’t be done.

Recommendation: Leave Donation or Leave Sharing?

An employer wanting to provide a vehicle for employees to donate — through a charity — to victims of a certain crisis should design a Leave Donation Program. An employer wanting to provide a charitable environment (but not a charity donation) where employees can share leave with co-workers experiencing a medical emergency or President-declared major disaster should design a Leave Sharing Program. In either situation, a well-crafted program will help insulate employers and employee from easily-avoided income and employment tax consequences.

The Internal Revenue Service Issues Final Rules Defining Marriage

The Internal Revenue Service (“IRS”) has recognized that marriages of couples of the same sex should be treated the same as marriages of couples of the opposite sex for federal tax purposes. On September 2, 2016, the IRS issued final regulations — in furtherance of the Supreme Court’s decisions in Obergefell v. Hodges and Windsor v. United States, as well as Revenue Ruling 2013-17 — defining marriage for federal tax purposes. The IRS’s final regulations generally adopt the rules proposed by the IRS in October 2015 and amend the Income Tax Regulations, Estate Tax Regulations, Gift Tax Regulations, Generation-Skipping Transfer Tax Regulations, Employment Tax and Collection of Income Tax at Source Regulations and the Regulations on Procedure and Administration.

Under the final rule, the terms “spouse,” “husband” and “wife” apply to same-sex marriages for federal tax purposes, if the marriage is recognized in the state where the couple was married, regardless of where they live. However, the term “marriage” does not include registered domestic partnerships, civil unions, or other similar relationships recognized under state law that are not denominated as a marriage under that state’s law, and the terms “spouse,” “husband and wife,” “husband,” and “wife” do not include individuals who have entered into such a relationship.

Employers should be aware of these new rules and should also be aware that their employees who are married to same sex spouses may be amending their tax returns for open years to reflect the change of status for federal tax purposes.

The Final Regulations can be found at 81 FR 60609 [TD 9785].

IRS Publishes Guidance Allowing Taxpayers to Self-Certify An Excuse from the 60-day Rollover Rule in Specified Hardship Scenarios

If you ask, plan administrators will tell you that for every deadline or specified time limit that is imposed by law upon plan participants for taking action with respect to an employee benefit plan, there are always a significant number of participants who come forward with one or more “excuses” why they could not meet the deadline. Often these “excuses” are legitimate. However, only occasionally is there a legally authorized protocol provided to plan administrators and participants which can remedy the circumstance of the missed deadline. Such an occasion occurred on August 24, 2016.

In Rev. Proc. 2016-47, the IRS published guidance to assist participants who, because of certain circumstances of hardship, miss the 60-day deadline for rolling over qualified retirement plan or IRA assets and, without a legally authorized excuse, would otherwise be required to pay additional taxes due on early distributions. Even better, the IRS set forth a protocol for participant “self-help,” which permits plan administrators to accept transfers of plan assets after the 60-day deadline has passed.

The reasons the IRS deems to provide legitimate excuse for missing the 60-day deadline are, in summary:

a) An error by the financial institution in receiving a contribution or distributing assets relating to a contribution;
b) The distribution made by check was lost and not cashed;
c) The distribution was inadvertently deposited to, and left in an account the participant believed was, an eligible retirement plan, but was not;
d) The participant’s residence suffered severe damage;
e) There was a death in the participant’s family, or a serious illness;
f) The participant was incarcerated;
g) A foreign country imposed a restriction which delayed deposit of the participant’s plan assets;
h) There was a delay caused by the postal service;
i) The plan assets intended to be distributed were levied by the IRS, and the IRS later returned the plan assets to the participant; or
j) The distribution of plan assets and the rollover were delayed due to the failure of the distributing party to provide the information needed by the recipient plan or IRA, despite the participant’s “reasonable efforts” to obtain the information.

See Rev. Proc. 2016-47.

A plan participant who has received a prior IRS determination that it will not waive the 60-day time limit as to a particular distribution event is not eligible for the “self-help” offered by Rev. Proc. 2016-47. Otherwise, however, the participant may write a “certification” to a plan administrator or IRA trustee that the participant’s excuse for missing the 60-day deadline for depositing distributed plan assets into another tax-qualified retirement plan or IRA fits within the conditions that permit such delay to be excused as set forth in Section 3.02 of Rev. Proc. 2016-47. The plan administrator or IRA trustee may rely upon such certification, unless the plan administrator or trustee possesses knowledge that the facts recounted in the certification are not accurate or are untrue.

The plan participant may also rely upon the certification in taking a tax position on the participant’s individual tax return. On examination, however, the IRS has authority to challenge the position taken by the participant based upon the written certification. The IRS also has the ability to determine other statutory or regulatory grounds exist that support a waiver of the 60-day rollover time limit.

A plan participant who desires to take advantage of the “self-help” procedure contained in Rev. Proc. 2016-47 can find the IRS’s preferred form for certification, the “Certification for Late Rollover Contribution,” attached as an appendix to the Rev. Proc. Participants who desire to rely upon the certification are advised to deposit their distributed plan assets into an eligible retirement plan or IRA “as soon as practicable” after the event which caused the deposit delay has resolved. As an express “safe harbor,” the participant who makes the deposit within thirty (30) days of resolution of the event that caused the delay described in the certification will be deemed to have made such deposit “as soon as practicable” within the meaning of Rev. Proc. 2016-47.

Are You Down With O.O.P.s?: Opt-Out Payments Under the Affordable Care Act

In Notice 2015-87, the IRS addressed the impact of employer opt-out payments — payments made to employees who decline enrollment in an employer’s group health plan — on affordability for ACA purposes. Employers who do not offer group health coverage that is affordable as defined under the ACA risk significant penalties.  For 2016, group health coverage is considered affordable if the employee’s cost for the least expensive self-only coverage under the plan does not exceed 9.66% of the employee’s annual household income.  For 2017, the percentage increases to 9.69%.

The Notice discussed two types of opt-out payments: unconditional opt-out payments — pursuant to which an employee does not have to provide any substantiation of other coverage (or anything else) in order to receive the payment — and conditional opt-out payments — pursuant to which the employee is required to provide substantiation of other coverage (such as a spouse’s group health coverage, but not individual market coverage) in order to receive the payment.  The Notice explained that, generally, unconditional opt-out payments are the equivalent of a salary reduction contribution that increases the employee’s cost of coverage (subject to relief for unconditional opt-out arrangements adopted before December 16, 2015).   Few specifics, however, were provided concerning conditional opt-out payments for purposes of the ACA employer mandate and informational reporting.

Recently issued proposed regulations reaffirm and clarify the approach described in Notice 2015-87: unconditional opt-out payments increase the employee’s cost of coverage (and, accordingly, impact whether the coverage is affordable under the ACA), conditional opt-out payments made pursuant to an “eligible opt-out arrangement” do not.

So, what is a conditional payment under an eligible opt-out arrangement? It has two requirements:  (a) the employee must decline enrollment in employer-sponsored coverage and (b) at least annually, the employee must provide reasonable substantiation that he/she and his/her “tax dependents” — i.e., family members including spouses and children for whom the employee expects to claim a personal exemption — have minimal essential coverage from a source other than the individual market place.

The proposed regulations generally apply beginning January 1, 2017, but may be relied on by employers immediately. Employers who offer, or are considering offering, opt-out payments should review their arrangements in light of the proposed regulations.

“Hire Me” Exception Offers Little Real World Protection

Financial Advisers and retail financial services firms face a number of challenges in dealing with the new fiduciary rule the Department of Labor announced this spring. But little did they know that they may confront the issues from their first contact with a potential client. That’s right—even before selling their advisory services, these new fiduciary issues pop up.

The final regulations made clear that merely recommending yourself to perform as an investment adviser is not in and of itself investment advice (often called the “hire me” exception). It is only when this solicitation is combined with an investment suggestion that the exception couldn’t be relied on.

However, the typical adviser is only offering their services to individuals who rollover their accounts to a new IRA on the adviser’s platform (or at least to an IRA compatible with it). And the final form of the regulation spells out that rollover recommendations are investment advice covered by the regulation. So, while “Hire Me” appears to offer some protection, this exception offers little real world solace to these advisers.

Instead, this exception appears to be an additional attempt by the Department of Labor to steer these advisers to the Best Interest Contract (or “BIC”) exemptions—of which there are several varieties. The good news is that the final BIC exemptions are far less onerous than had been previously proposed.  But with deadlines quickly approaching for applicability of the terms of the regulations (April 10, 2017) and implementation of BIC policies (January 1, 2018), the race is on to put the right practices in place.

Affordable Care Act Mid-Year Checkup: Count Your Contingent Workers

The ACA requires “applicable large employers” (those with 50 or more employees) to offer health coverage meeting affordability and other standards to their full-time employees. Failing to offer minimum essential coverage to at least 95% of full-time employees, or offering coverage that is not “affordable,” may result in significant penalties if a full-time employee receives a federal premium tax credit to purchase coverage through an ACA exchange. A full-time employee is one who works on average 30 or more hours per week or 130 or more hours per month. The hours of part-time employees are converted to full-time equivalents to determine whether a business is an applicable large employer, but only full-time employees must receive offers of complying coverage.

The ACA regulations define the term “employee” with reference to the common-law standard and assume that most workers are employees. Generally, an employer has the right to control and direct the individual who performs the services, not only as to what work is to be done, but how, where and when it is to be accomplished.

As budgeting and workforce planning for 2017 is underway, now is a good time to catalogue and assess your existing and planned staffing arrangements to determine who are and who may be deemed to be your employees by looking closely at the following:

1. Independent contractors performing work that is long term or fundamental to your business could be deemed your employees. Consider them carefully, especially if you are near the 50-employee threshold or if their addition to your workforce could cause you to fail to offer coverage to at least 95% of your full-time employees. Review your accounts payable records, and scrutinize carefully any payments made to someone who uses a Social Security number as their Taxpayer ID number.

2. Examine your employee census for “temporary employees,” and review your medical plans to determine whether they are or should be covered. If full-time, they are considered in determining whether you offer coverage to 95% of your full-time workforce, and, whether full or part-time, they are included in calculating full-time equivalents to determine whether you are an applicable large employer.

3. If you utilize a Professional Employment Organization (PEO) — an organization that hires your employees and provides payroll, benefits and other HR support — then you should review your contract to insure that the PEO offers minimum affordable coverage to each full-time member of your staff and that you are charged an appropriate, additional fee for each employee who elects coverage. The ACA regulations offer this way for the employer to provide required coverage, but the arrangement has other serious benefits implications and should be analyzed closely and in consultation with legal counsel.

4. Payrolling — where the client recruits and refers workers to a staffing company that acts as their employer — is a gray area between a PEO and a traditional staffing agency model that may receive heightened IRS scrutiny. Examine payrolling arrangements carefully and weigh their risks and advantages compared to true PEOs and traditional staffing companies.

5. The IRS generally takes the view that employees of temporary staffing agencies are employed by the agency and not the client company. If you use a staffing company for temporary labor, review your contracts and practices to reinforce that the arrangement is not a PEO.

Key takeaway: Companies that classify all of their workers properly are best positioned to be found in compliance with ACA requirements. For questions about ACA’s employer mandate or assistance in analyzing your workforce composition, please contact Jackson Lewis.

Proposed Changes to Section 409A are Welcome (for the Most Part)

The Internal Revenue Service recently issued proposed regulations under Section 409A of the Internal Revenue Code (“Section 409A”) in an effort to clarify and modify parts of the current final regulations (issued in 2007) and proposed income inclusion regulations. For the most part, the proposed regulations are consistent with how most practitioners have been interpreting and applying the final regulations. The proposed regulations do provide some helpful new guidance as well. However, the revisions to the proposed income inclusion regulations limit the ability to make changes to unvested amounts without incurring Section 409A penalties.

Some of the proposed changes include:

  1. Modification of the short-term deferral exception to permit a delay in payments to avoid violating federal securities laws or other applicable law. This change will make it much easier for plan sponsors to address the inherent conflicts between avoiding the imposition of excise taxes under Section 409A and the violation of federal securities laws.
  2. Clarification of issues related to stock rights. The proposed regulations clarify that a stock right (e.g., an option) structured to be exempt from Section 409A (e.g., it has an exercise price per share equal to the fair market value of a share on the date of grant, no deferral feature) will not be treated as being subject to Section 409A solely because the amount payable under the stock right upon an involuntary termination for cause, or the occurrence of a condition within the employee’s control, is based on a measure that is less than fair market value.
  3. Revision of the rules to allow pre-employment equity grants to be exempt from Section 409A. The proposed regulations modify the definition of “eligible issuer of service recipient stock” to include a corporation (or other entity) for which a person is reasonably expected to begin, and actually begins, providing services within 12 months after the grant date of a stock right. Accordingly, options and stock appreciation rights granted to employees prior to employment commencement can still qualify for an exemption under Section 409A.
  4. Clarification of Involuntary Separation Pay Exception. The proposed regulations provide that separation pay plans intended to be exempt from Section 409A under the involuntary separation pay exception can still meet this exception even where an employee had no compensation from the employer during the year preceding the year of termination (generally, to utilize this exception, an employer must be able to calculate the employee’s prior year compensation). The proposed regulations clarify that where an employee has no compensation for the prior year, for purposes of this exception, the employee’s annualized compensation for the year of termination may be used.
  5. Modification of the rules regarding recurring part-year compensation. In response to complaints by educational institutions that the guidance in IRS Notice 2008-62 did not sufficiently address issues related to part-year compensation for some teachers, including college and university faculty, the proposed regulations provide that an arrangement under which an employee receives recurring part-year compensation that is earned over a period of service is not subject to Section 409A if the arrangement does not defer payment of any of the recurring part-year compensation to a date beyond the last day of the 13th month following the first day of the service period for which the recurring part-year compensation is paid, and the amount of the employee’s recurring part-year compensation (not merely the amount deferred) does not exceed the annual compensation limit under Section 401(a)(17) ($265,000 for 2016) for the calendar year in which the service period commences. This is a significant liberalization of the guidance in Notice 2008-62 which applies only if the arrangement does not defer from one year to the next year the payment of more than the applicable dollar amount under Section 402(g)(1)(B) ($18,000 for 2016).
  6. Addition of a rule regarding when payment has been made. The proposed regulations add a generally applicable rule to determine when a payment has been made for all provisions of the regulations under Section 409A. Under the guidance, a payment is made, or the payment of an amount occurs, when any taxable benefit is actually or constructively received. In addition, the proposed regulations provide that the inclusion of an amount in income under Section 457(f)(1)(A) of the Internal Revenue Code (governing the taxation of nonqualified deferred compensation of tax exempt entities) is treated a payment for all purposes under Section 409A. The proposed regulations also clarify that a transfer of property that is substantially non-vested to satisfy an obligation under a nonqualified deferred compensation plan is not a payment for purposes of Section 409A unless the recipient makes an election under Section 83(b) to include in income the fair market value of the property (less any amount paid for the property).
  7. Clarification and modification of the rules applicable to amounts payable following death. The proposed regulations clarify that the rules applicable to amounts payable upon the death of an employee also apply to amounts payable upon the death of a beneficiary. In addition, as the time periods for the payment of amounts following death in the final regulations often are not long enough to resolve certain issues related to the death (for example, confirming the death and completing probate), the proposed regulations provide that an amount payable following the death of an employee, or following the death of a beneficiary who has become entitled to payment due to the employee’s death, will be considered timely paid if it is paid at any time during the period beginning on the date of death and ending on December 31 of the first calendar year following the calendar year during which the death occurs.
  8. Clarification of certain rules permitting payments in connection with the termination and liquidation of a plan not made in connection with a change in control. The proposed regulations clarify that the acceleration of a payment pursuant to this special acceleration rule is permitted only if the employer terminates and liquidates all plans of the same category that the employer sponsors, and not merely all plans of the same category in which a particular employee actually participates. The proposed regulations also clarify that under this rule, for a period of three years following the termination and liquidation of a plan, the employer cannot adopt a new plan of the same category as the terminated and liquidated plan, regardless of which employees participate in the plan.
  9. Limitation on ability to make corrections of unvested amounts under the proposed income inclusion regulations. Proposed Treasury Regulation Section 1.409A-4(a)(1)(ii)(B) includes provisions which allow employers to make changes to nonqualified deferred compensation plans before amounts under the plans are vested without causing penalties to be incurred under Section 409A. However, due to perceived abuses, the revised proposed regulations curb the ability to make corrections. These revised proposed regulations may not be used to make changes to plan provisions that are already compliant with Section 409A. In addition, any corrections made under these revised proposed regulations must be made in accordance with existing guidance regarding corrections (e.g., IRS Notice 2010-6) to the extent possible. Thus, employers who have corrected Section 409A failures using the proposed income regulations in the past, should review these new proposed regulations before making similar changes/corrections going forward.

Effective Dates

The proposed regulations amending the final regulations are proposed to be applicable on or after the date on which they are published as final regulations, but taxpayers may rely on these proposed regulations immediately. However, certain clarifications made in the proposed amendments are not intended as substantive changes to the current requirements under Section 409A.  In connection with these clarifications (set forth in the preamble to the proposed regulations), taxpayers are now precluded from taking certain positions under the final regulations.

Until the Treasury Department and the IRS issue further guidance, taxpayers may rely on the proposed income inclusion regulations, as modified by these new proposed regulations, for purposes of calculating Section 409A penalties.

Employers Wonder How to Respond to Marketplace Notices

Many employers have begun receiving Health Insurance Marketplace notices – letters stating that a particular employee reported that he or she wasn’t offered affordable minimum value coverage for one or more months during 2016.  The letter states that the employee has been determined to be eligible for subsidized Marketplace coverage.  This means, if the employer is an “applicable large employer” for purposes of the Affordable Care Act’s employer shared responsibility penalties, the employer may be subject to penalties with respect to that employee.

An employer may appeal the decision that the employee is eligible for subsidized Marketplace coverage if the employee was offered affordable minimum value coverage or is enrolled in group health coverage. The employer has only 90 days from the date of the notice to appeal the Marketplace notice and may do so by using the appeal form available from the website (which may be mailed or faxed to the Marketplace appeals unit) or by sending a letter with the information specified in the notice.  Faxing the appeal (to the fax number provided in the letter) may result in a faster response regarding the employer’s appeal according to an appeals unit representative.

If the employer’s appeal is decided in the employer’s favor, this could eliminate reports to the Internal Revenue Service (“IRS”) that the employee received subsidized Marketplace coverage (thus, potentially avoiding receipt by the employer of an IRS penalty notice with respect to that employee).  However, the Marketplace notices issued so far only relate to the first part of 2016.  An employer’s successful appeal of a determination made about an employee’s eligibility for subsidized Marketplace coverage during the first part of the year would not insulate the employer from penalty vulnerability for the whole year.

Employers deciding to appeal the Marketplace determinations should bear in mind that an employee’s status as part-time or the fact that an employee is in a measurement period (or any other fact besides being covered or offered affordable minimum value coverage) is irrelevant to the Marketplace’s determination. Therefore, such facts are not the basis for appealing a Marketplace determination.  Instead, those facts would be the basis for appealing an IRS determination that an applicable large employer owes shared responsibility penalties and such employers are well-advised to make sure they have the documentation necessary to provide evidence of those facts regardless of whether they decide to appeal.

Employers also are reminded that discriminating against an employee because he or she received subsidized Marketplace coverage is prohibited. To help avoid and defend against potential claims of such discrimination, employers should take appropriate steps to ensure that individuals making employment decisions are not made aware of Marketplace determinations about employees (see our prior blog post regarding related considerations).

We also caution employers who decide to appeal Marketplace determinations to be circumspect in their responses and avoid disclosing more than the information minimally necessary to make a proper appeal.

For additional information or advice regarding Marketplace notices and appeals, contact qualified legal counsel.


Last year’s announcement by the Internal Revenue Service (IRS) of the elimination of the current five-year remedial amendment cycle system for determination letter approval of restated individually-designed qualified plan documents provoked bitter criticism and calls to reverse course. The Service cited budget constraints allowing a median time of only three hours of agent review per plan for the necessity of severely restricting the issuance of letters.

Even if it was partly a cry for help, they weren’t bluffing. Revenue Procedure 2016-37, issued June 29, 2016, confirms that, generally effective January 1, 2017, a individually-designed plan sponsor can get a determination letter only (1) upon initial plan qualification, (2) at plan termination and (3) in other circumstances including, e.g., “significant law changes, new approaches to plan design and the inability of certain types of plans to convert to pre-approved plan documents.” The existing “interim amendments” requirements are going away.  Ongoing Cycle A submissions will be the last under existing procedures.

An annually published “Required Amendments List (RAL)” will contain descriptions of required amendments that must generally be made by the end of the second calendar year following the year in which the RAL is issued. The IRS assures that a document qualification change will not normally appear in the RAL until guidance with respect to the change, including any model amendments the Service decides to produce, have been promulgated.  The first RAL will mainly apply to document qualification changes first effective during the 2016 calendar year.

A favorable IRS determination letter is a kind of document “qualification insurance” for an employer-sponsor. Curtailing the availability of such letters will significantly complicate plan administration, the making of both required and discretionary plan amendments, due diligence in merger and acquisition transactions and, in general, the tax and ERISA exposure in the maintenance of qualified plans.

The advice and opinions of benefit counsel and other plan advisors will likely become more important than it is already. Historically, benefits attorneys have not, as a rule, issued opinions on the qualified status of plan documents because of the availability of periodically updated favorable determination letters, together with liberal remedial amendment periods for required changes. Under the new regime we can expect that tax and legal issues over proposed plan language will loom larger than before, including cases where model plan amendment language must be adapted to certain plans. Discretionary amendments that do not fit into any model language will give rise to even greater uncertainties.

Of course, beyond budget constraints, the IRS would like to move even more plan sponsors toward the adoption of pre-approved prototype and volume submitter plans. And the new revenue procedure continues those programs with certain modifications.  The benefits industry should adapt to the new restricted determination letter world by providing ever more flexible pre-approved documents.