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.

What Does the Supreme Court’s Spokeo Decision Mean in the ERISA Litigation Context?

ERISA practitioners should be aware of the extent to which the United States Supreme Court’s decision in Spokeo, Inc. v. Robins may touch on ERISA claims and defenses. In Spokeo, decided 6 to 2 last month, the Supreme Court addressed the issue of constitutional standing under the Fair Credit Reporting Act (“FCRA”), and our FCRA litigation practice group has commented recently on the decision. However, the Spokeo decision likely will have a unique impact in the ERISA litigation context.

In Spokeo, the plaintiff filed suit under the FCRA when he discovered that the defendant, a “people search engine,” had disseminated inaccurate information about him. The district court dismissed the case for lack of standing because the plaintiff could not show an “injury-in-fact” where the inaccurate information was not demonstrably harmful to the plaintiff. The Ninth Circuit reversed, holding that the harm in question was sufficiently “particularized” to show injury-in-fact because the plaintiff could show his “personal” right had been violated.

In its petition for certiorari, the defendant listed ten federal statutes with private rights of action, including ERISA, and asked the Supreme Court to require plaintiffs suing under these statutes to demonstrate a “palpable injury.” In response, one amici for the plaintiff stated that the defendant’s “unworkably narrow” proposal would “eviscerate ERISA’s comprehensive and reticulated scheme.”

The Supreme Court declined to accept the defendant’s proposal to require demonstration of a “tangible” harm for standing under federal statutes. Justice Alito, writing for the majority, explained that “Congress has the power to define injuries and articulate chains of causation that will give rise to a case or controversy where none existed before.” Spokeo holds that “concrete” harm, which can arise from the violation of tangible or an “intangible” right created by Congress, along with particularization, is all that is required by the standing analysis.

However, Justice Alito also described some clear limitations on the definition of the term “concrete.” Even in the context of a statutory violation, for an injury to be concrete, a plaintiff must allege more than just a “bare procedural violation.” A concrete injury must be de facto, that is, it must be “real” and not “abstract.”

Justice Alito’s definition of the word concrete may offer some possible defenses to ERISA claims that are pled as no more than bare procedural violations or “general grievances.” For example, Spokeo’s concreteness requirement may undercut arguments in favor of associational standing, like those asserted by a healthcare provider association in the recent Second Circuit case New York State Psychiatric Ass’n, Inc. v. UnitedHealth Group. The limits on concreteness could also bolster “equitable tracing” defenses in claims brought against non-fiduciaries who have never possessed, or no longer possess, plan assets. Finally, under Spokeo, a plaintiff might lack standing to bring a claim against a plan administrator for a statutory penalty under ERISA Section 502(c) based on alleged failure to provide plan documents, or for a failure to provide notice of a significant reduction in benefits under ERISA Section 204(h). If the plaintiff suffered no harm by the failure to provide the documents or notice, then the failure might be characterized as a “bare procedural violation” insufficient to meet the concreteness requirement.

Final Rule Issued on ACA’s Non-Discrimination Provision for Federally Funded Programs

Section 1557 of the Affordable Care Act (“ACA”), in effect since 2010, prohibits discrimination in any federally funded health program on the basis of race, national origin, sex, age, or disability.  The Department of Health and Human Services (“HHS”), through the Office of Civil Rights, has been enforcing the provision since it was enacted in 2010.  HHS has now issued the Final Rule, “Nondiscrimination in Health Programs and Activities,” providing guidance to covered entities affected by the civil rights provision.  The Final Rule requires certain covered entities to include specific nondiscrimination protections in their benefit plan design by the first day of the first plan year, beginning on or after January 1, 2017.

The Final Rule applies to “every health program or activity, any part of which receives Federal financial assistance provided or made available by the Department,[1] every health program or activity administered by the Department [HHS]; and every health program or activity administered by a Title I entity.”[2]

Under the Final Rule, “Federal Financial Assistance” means any “grant, loan, credit, subsidy, contract (other than a procurement contract but including a contract of insurance),” or any other type of arrangement in which assistance is provided or made available by the federal government in the form of funds, services of federal personnel, or real or personal property (including property use or interest in property).  The definition of “Federal Financial Assistance” also means any federal financial assistance HHS provides or makes available,

[I]ncluding Federal financial assistance that the Department plays a role in providing or administering, including all tax credits under Title I of the ACA, as well as payments, subsidies, or other funds extended by the Department to any entity providing health-related insurance coverage for payment to or on behalf of any individual obtaining health-related insurance coverage from that entity or extended by the Department directly to such individual for payment to any entity providing health-related insurance coverage.[3]

Health programs or activities conducted by the Department (HHS), include programs administered by the Centers for Medicare and Medicaid Services (“CMS”), Health Resources and Services Administration (“HRSA”), Centers for Disease Control and Prevention (“CDC”), Indian Health Services (“IHS”) (including IHS tribal hospitals), and the Substance Abuse and Mental Health Services Administration (“SAMHSA”).  Entities established under Title I of the ACA are the seventeen state-based and 34 federally-facilitated health insurance marketplaces.

Under the Final Rule, a “covered entity” means:

  • An entity operating a health program or activity that receives Federal financial assistance for any part of the health program or activity;
  • An entity established under Title I of the ACA that is administering a health program or activity; or
  • The Department [HHS].[4]

Section 92.208 of the Final Rule, “Employer liability for discrimination in employee health benefit programs,” provides that a covered entity providing an employee health benefit program to employees will be liable under § 1557 only when:

  • The entity is principally engaged in providing or administering health services, health insurance coverage, or other health coverage;
  • The entity receives Federal financial assistance a primary objective of which is to fund the entity’s employee health benefit program; or,
  • The entity is not principally engaged in providing or administering health services, health insurance coverage, or other health coverage, but operates a health program or activity, which is not an employee health benefit program, that receives Federal financial assistance; except that the entity is liable under this part with regard to the provision or administration of employee health benefits only with respect to the employees in that health program or activity.

Application to State Agencies Receiving Federal Funds

As noted in the Summary to the Final Rule,[5] the limitations of § 92.208 were not restricted or revised in any manner from the original version of the section as set forth in the proposed rule, which provided that “unless the primary purpose of the Federal financial assistance is to fund employee health benefits, we propose to not apply Section 1557 to an employer’s provision of employee health benefits where the provision of those benefits is the only health program or activity operated by the employer.”  As explained further in the preamble, if an organization “uses grant funds to support personnel costs, including employee health benefits, Section 1557 would not apply to the organization’ s provision of employee health benefits.”[6]

Based on the definitions and summary explanations provided in the Final Rule, a state agency receiving non-HHS grant funds that may be applied in part for supporting personnel costs that would include employee health benefits would not be subject to liability under § 1557 of the ACA.  Under the Final Rule, § 1557 liability will not attach to such an agency unless the agency is either 1) principally engaged in providing or administering health services or coverage or operating a health program or activity; or, 2) receives federal financial assistance for which a primary objective is to fund the agency’s employee health benefit program.

[1] “Department” means the “U.S. Department of Health and Human Services.”  Final Rule, p. 334.

[2] Final Rule, § 92.2 Application, p. 330-31.

[3] Id., § 92.4 Definitions, p. 334-35.

[4] Final Rule, § 92.4 Definitions, p. 333.

[5] Id., p. 226.

[6] 80 Fed. Reg. 173, at 54191, Preamble to the proposed rule.

Healthcare Subsidies for Grad Students: An ACA Conundrum

Colleges and universities historically have provided graduate student employees (e.g., teaching assistants) with a stipend or reimbursement to help defray (or even fully cover) the cost of their medical coverage under the student health plan. Competing guidance under the Affordable Care Act (“ACA”) from the Departments of Health and Human Services (“HHS”), Labor (“DOL”), and the Treasury (collectively, the “Departments”) will soon make such arrangements quite problematic.

Four years ago, HHS released regulations clarifying that student health insurance is a form of individual market coverage (rather than a group health plan). This was meant in part to ensure that students enrolled in these plans benefit from consumer protections applicable to individual market coverage under the ACA. About a year later, the Departments issued guidance that effectively prohibits employers from using a health reimbursement arrangement (an “HRA”) to reimburse employees for individual market coverage. The goal there was to prevent employers from incentivizing employees to opt for public exchange coverage over an employer group health plan. The result? Any school that provides a stipend to student employees enrolled in a student plan is considered to be using an HRA to reimburse individual market coverage, and could be subject to penalties.

Such penalties are severe. This type of HRA would be considered its own group health plan, and thus would be subject to the ACA’s market reforms, which include, among other things, prohibitions on annual and lifetime limits and on cost-sharing for preventive services (each of which this type of HRA would inherently fail to satisfy). Such a failure can result in a penalty of up to $100 per day per employee under Internal Revenue Code §4980D.

While none of the above-described guidance was likely intended to keep schools from being able to offer these healthcare stipends to their graduate student employees (a point which an IRS representative informally confirmed to Jackson Lewis shortly after this clash in the guidance came to the attention of practitioners), the Departments appear to have doubled down on their position with the release of Notice 2016-17 and corresponding guidance from the DOL and HHS. This most recent guidance states that schools must re-structure their graduate student benefits and provides a period of transition relief by indicating that no penalties will apply for plan years beginning prior to January 1, 2017.

On whether there has been any talk of extending or making permanent the transition relief, given the unintended consequences of the prior guidance to graduate student subsidies, an IRS representative indicated to Jackson Lewis that the IRS was not aware of any such talks, but pointed out that the problem is a “three agency question” and that another Department could propose a permanent fix.

In the meantime, schools continue wrestle with the issue. Solutions under consideration include allowing graduate student employees to participate in the school’s employee group health plan (under the ACA, an employer may provide a stipend/reimbursement through an HRA that is integrated with the employee group health plan) or offering a cash bonus that, at the student’s discretion, can be put toward the cost of healthcare.

“Off the Rails:” A Plan Administrator’s Burden

When an ERISA plan provides the plan administrator with discretion to interpret the terms of the plan, the administrator’s claims and appeals decisions are generally reviewed by courts under a lenient standard of review such as “abuse of discretion.” In such cases, courts generally will not upset the plan administrator’s decision absent a clear error.

Recently, the United States Court of Appeals for the Ninth Circuit decided the case of Estate of Barton v. ADT Security Services Pension Plan, No. 13-56379 (April 21, 2016), that threatens to through a wrench in the standard of review analysis. Barton presented what appears to be a factually difficult situation. The plaintiff had not worked for the company in decades. The plan administrator had no record of the plaintiff being entitled to pension benefits, but the plaintiff presented records that showed prior employment with company-related entities. According to the plan administrator, however, the plaintiff’s records failed to establish that those entities participated in the pension plan, or that he had earned enough years of continuous service to be entitled to a benefit. Consequently, the plan administrator denied his claim. The district court applied an abuse of discretion standard and found in favor of the plan.

The 9th Circuit reversed and remanded. The majority opinion held that “where a claimant has made a prima facie case that he is entitled to a pension benefit but lacks access to the key information about corporate structure or hours worked needed to substantiate his claim and the defendant controls such information, the burden shifts to the defendant to produce this information.” The majority noted that its decision would “not require defendants to produce records listing entities not covered by their pension plan,” but rather only information about which companies did participate. The majority expressed its concern that holding otherwise would create a “Kafkaesque regime where corporate restructuring can license a plan administrator to throw up his hands and say ‘not my problem.’”

The dissent, however, argued that the majority’s decision went “off the rails” and created a “one-off burden-shifting rule” that contravened existing Supreme Court precedent holding that courts should not make “ad-hoc exceptions” to the abuse of discretion standard. According to the dissent, the administrative record showed that the plan administrator’s decision was not clearly erroneous.

It is unclear at this point how Barton will affect other cases in the 9th Circuit. It is possible that courts will read the majority’s holding narrowly, and only apply the new burden-shifting rule in circumstances very similar to the facts in Barton. It is also possible, however, that Barton may be used as a tool to get around the abuse of discretion standard in many cases where there is a lack of clear historical information and the facts appear unfair to the plaintiff. Plan administrators in the 9th Circuit should keep a close eye on how this progresses.

Arbitrator Slashes Annual Withdrawal Liability Payments in Underfunded Multiemployer Pension Plan Dispute

Employers who cease contributing to an ERISA multiemployer pension plan are liable for their allocable share of any underfunding, or “withdrawal liability.”

For a variety of reasons, withdrawal liability has become both prevalent and significant. Indeed, the Pension Benefit Guaranty Corporation (the federal agency tasked with the enforcement and regulation of the withdrawal liability rules) has estimated that approximately 10 percent of the 1,400 multiemployer pension plans face insolvency in the next 10 years to 15 years. Legislation to address this looming multiemployer pension plan crisis includes the Pension Protection Act of 2006 (“PPA”).  To read my full article, click here.

Supreme Court Decides Not to Decide on Latest Challenge to ACA Contraceptive Coverage

The Supreme Court in a unanimous opinion remanded Zubik v. Burwell — and the six cases consolidated with Zubik — back to the Courts of Appeals to rule on the contraceptive opt-out notice provisions.  The Court directed the lower courts to consider the new information presented in the parties’ post-oral argument briefs ordered by the Court on March 29.  The petitioners in each of these cases are religiously-affiliated nonprofit organizations which are challenging the requirement that notice be given to the government of religious objections to providing no-cost contraceptive coverage under employee health insurance plans, as required by the Affordable Care Act (“ACA”) and its regulations.

In the ruling, the Court stated that the parties had agreed in their briefs to a regulatory compromise solution originally suggested by the Court in its March 29 order. The high court’s workaround would permit an objecting religious nonprofit employer to contract with their insurance provider for a health insurance plan that excludes contraceptives.  The insurer, in turn, would provide the contraceptive coverage directly to the nonprofit organization’s employees, with no further action or notice required from the organization.

The Court further provided that until the lower courts rule on the cases, the government could consider the petitioners as having provided adequate notice of their religious objection, and could proceed to provide contraceptive coverage at no cost to the nonprofit’s employees through their insurance provider in accordance with the ACA and its regulations. The Court’s ruling also stayed the imposition of any fines the petitioners might face for failing to comply with the notice requirements.

Additionally, pending the lower court rulings, the government can continue to act on notices of religious objection provided by other religious nonprofits, by providing no-cost contraceptive coverage through the nonprofits’ insurance providers in accordance with the ACA regulations.

For religious nonprofits who object to providing contraceptive coverage to their employees, but who are not among the petitioners or among the petitioners in 13 similar cases that the high court has not yet agreed to hear, the likely best approach at this point would be to provide appropriate notice of religious objection to the government in accordance with current ACA regulations. The risk, however, of incurring penalties as a result of noncompliance may not be great, given that the high court appears to be championing a compromise solution.

Did Your Company Fail to Adopt a New Preapproved Defined Contribution Plan by the April 30th Deadline? The IRS Has a Solution for You


Sponsors of preapproved defined contribution retirement plans were generally required to sign new plan documents on or before April 30, 2016 that incorporated changes required by the Pension Protection Act of 2006 (PPA). Defined contribution plans include profit sharing plans, 401(k) plans, and money purchase pension plans.  Preapproved plans are plan documents that have been approved by the Internal Revenue Service (IRS) and are sold to plan sponsors through law firms, banks, brokers and other financial institutions. 

A prototype plan is a type of preapproved plan.  It consists of two parts: an adoption agreement and a basic plan document.  The basic plan document contains the non-elective provisions applicable to all adopting employers.  The adoption agreement contains all of the options that can be selected by an adopting employer in a “check the box” format.  A volume submitter plan is another type of document that has been preapproved by the IRS.  Volume submitter documents sometimes consist of an adoption agreement and basic plan document, although many take the form of a self-contained single document that only reflect the provisions that an adopting employer has selected.

Effect of Failure to Timely Adopt New Plan

If you are a plan sponsor of a defined contribution retirement plan that is on a preapproved document, and you did not sign a restated plan document as required on or before the April 30, 2016 deadline, your retirement plan is technically no longer entitled to tax-favored treatment.  Losing tax-favored treatment of your plan could reduce your deduction for contributions paid to the plan, and your employees could be prevented from accumulating retirement savings.  In addition, while not required by the IRS or the Internal Revenue Code, the financial institution holding the plan assets could refuse to make distributions. If they have already made distributions, the distributions could potentially be taxable and not eligible for tax-free rollover.

What Can You Do?

You will have to go to the IRS in order to correct this.  The correction can be done by filing a submission for a Voluntary Correction Program (VCP) compliance statement with the IRS as provided under the IRS Employee Plans Compliance Resolution System (EPCRS).  There is a user fee associated with VCP submissions.  Typically, the applicable user fee is determined using the number of participants in a plan.  The user fee ranges from $500 to $15,000 depending on how many participants are in the plan.  A recently released VCP submission kit indicates that if a plan sponsor sends the VCP submission to the IRS by April 29, 2017, the general user fee is reduced by 50% (so long as the failure to adopt the PPA restated document is the only failure of the submission.  This VCP submission kit is designed to help plan sponsors who missed the April 30th deadline.  The new VCP submission kit can be found at

If your submission is approved, the tax-favored status of your plan will be restored.  Your Employee Benefits counsel can advise as to the program, and assist with preparation of the required IRS forms.  You should reach out to your Benefits Counsel as soon as possible to discuss this process.