Illinois Secure Choice Savings Program – A Mandatory Retirement Plan 

Employers in Illinois with at least 25 employees must comply with the Illinois Secure Choice Savings Program Act (Secure Choice) or offer employees an employer-sponsored retirement plan. Secure Choice is set to roll out in November 2018.

Secure Choice applies to Illinois employers that do not sponsor a qualified retirement plan. The program, adopted in 2015, requires employers to automatically withhold five percent of an employee’s compensation (up to the annual maximum allowed for IRA contributions each year as provided by the IRS), unless the employee elects a different amount or opts out of the program entirely, and remit those contributions to the Secure Choice program.

Employers who do not comply with the Illinois Secure Choice Savings Program Act may face a penalty of $250 per employee for the first year and $500 per employee for each subsequent year.

For more information, see our legal update here.

Segal Blend Litigation, Part Two: New Jersey District Court Holds That Use of Segal Blend Did Not Violate MPPAA

As our earlier article reported, Judge Robert W. Sweet of the U.S. District Court for the Southern District of New York had recently held that a multiemployer pension fund’s use of the “Segal Blend” to calculate a withdrawn employer’s withdrawal liability violated the provisions of the Employee Retirement Income Security Act (“ERISA”), as amended by the Multiemployer Pension Plan Amendments Act (“MPPAA.”)  The “Segal Blend” is a proprietary method of valuing a plan’s unfunded vested benefits to calculate withdrawal liability that was developed by The Segal Company, one of the preeminent actuarial firms servicing multiemployer pension plans.  By blending the plan’s investment-return interest rate assumption with the lower risk-free rates published by the Pension Benefit Guaranty Corporation (called “PBGC Rates”), the Segal Blend generally results in greater withdrawal liability assessments against withdrawn employers.  Judge Sweet’s decision (The New York Times Co. v. Newspapers & Mail Deliverers’-Publishers’ Pension Fund, No. 1:17-cv-06178-RWS (S.D.N.Y. Mar. 26, 2018)) has been appealed to the United States Circuit Court of Appeals for the Second Circuit.

On July 3, however, Judge Kevin McNulty of the United States District Court for New Jersey held that using the Segal Blend by the UAW Local 259 Pension Fund did not violate MPPAA.  The decision (Manhattan Ford Lincoln, Inc. v. UAW Local 259 Pension Fund, No. 2:17-cv-05076-KM-MAH (DNJ July 3, 2018)) creates a split within the two district courts to have considered the issue, and opens the door to a possible Circuit Court split (pending the resolution of the New York Times appeal by the Second Circuit and the potential appeal of the Manhattan Ford decision to the Third Circuit.)  A Supreme Court decision on this issue would then become a real possibility.

Both Judge Sweet and Judge McNulty looked at the same two potential bases for disallowing the use of the Segal Blend.  Both judges initially looked at whether using different interest rates for different purposes (namely funding and withdrawal liability) is always impermissible under Concrete Pipe & Prods. of Cal., Inc. v. Constr. Laborers Pension Tr. for S. Cal., 508 US 602 (1993), in which the Supreme Court discussed (albeit in dicta) “the necessity” of a Fund actuary to apply “the same assumptions and methods in more than one context” while highlighting the critical interest rate assumption.

The significance of this issue is readily demonstrated by the fact that in both cases, using the 7.5% funding interest rate assumption would have generated zero withdrawal liability for each employer.  Using the Segal Blend, however, generated withdrawal liability amounts of approximately $25 million (in The New York Times) and $2.5 million (in Manhattan Ford.)

Similar to Judge Sweet, Judge McNulty held that “Concrete Pipe does not impose a statutory bar” on the use of a different interest rate assumption for withdrawal liability than that used for funding purposes, concluding that Concrete Pipe “leaves open the possibility of separate actuarial assumptions being permissibly applied to funding and withdrawal liability.”

Where Judge Sweet and Judge McNulty diverged, however, was in determining whether using the Segal Blend for withdrawal liability purposes represented the actuary’s “best estimate of estimated experience under the plan” (as required by Section 4213(a)(1) of ERISA.)  Judge Sweet found compelling the plan actuary’s testimony that a 7.5% interest assumption (the rate used for funding) was her “best estimate of how the Pension Fund’s assets…will on average perform over the long term.”  Judge Sweet concluded that if 7.5% represents the actuary’s “best estimate,” it “strains reason to see how the Segal Blend” (which blends that 7.5% rate with lower, no-risk PBGC Rates) “can be accepted as the anticipated plan experience.”  Judge Sweet therefore ordered the plan to recalculate the employer’s withdrawal liability using the 7.5% “best estimate” rate.  (As noted above, this resulted in zero withdrawal liability.)

Judge McNulty disagreed.  Unlike Judge Sweet, he focused on case law developed under the minimum funding standards for single-employer pension plans.  Judge McNulty found this precedent established that the “best estimate” requirement “ is “basically procedural in nature and is principally designed to insure that the chosen assumptions actually represent the actuary’s own judgment rather than the dictates of plan administrators or sponsors.”  This, Judge McNulty found, mandated a “deferential analysis” on whether the “actuarial assumptions chosen were reasonable in the aggregate.”  This deference allowed Judge McNulty to conclude that the arbitrator did not clearly err in finding that the employer did not meet its burden to rebut the reasonableness of the actuary’s approach, and therefore hold that using the Segal Blend to calculate the employer’s withdrawal liability was permissible.

This figures to be a hot area of litigation in the years to come.  Many multiemployer plans currently use different interest rate assumptions for funding and withdrawal liability purposes.  In addition to the plans that use the Segal Blend for withdrawal liability purposes, many others use the PBGC Rates to do so.  These lower rates generate even higher withdrawal liability amounts than those generated by using the Segal Blend.  The law in this area is evolving, and we will continue to monitor this situation for you.

Association Health Plans – Update

As we advised was likely during our June 29, 2019 webinar, Association Health Plans—Are They Really an Option to Consider?, at least two states were likely to challenge the enforceability of the new regulations issued by the Department of Labor that expand the definition of “employer” for groups who are qualifying association health plans (“AHP’s”).  Today, the Attorney Generals of New York, Massachusetts, California, D.C. and six other states have now sued in the D.C. Federal District Court to enjoin the implementation of the AHP Final Rule and declare it invalid primarily because it directly conflicts with the express terms of the Affordable Care Act of 2010 (“ACA”) and increases the risk of fraud and harm to consumers who will lose coverages mandated under the ACA and jeopardize states’ efforts to protect their residents through stronger regulation.

It is far too soon to predict the outcome of this litigation but at the very least this litigation effort will likely cause insurers to move cautiously in the offering of new coverage options under the AHP model until greater clarity is provided, either through the courts or through new regulation issued within these and other states who perceive these types of programs as a threat to their constituents.  We will continue to keep you updated on any developments that continue to occur in this emerging area of focus.

You’ve Discovered A Mistake in Your Plan Administration – Now What?

Occasionally qualified plan administrators discover that their plans have incurred an operational error.  The Internal Revenue Service (“IRS”) recognizes that it needs the help of plan administrators to police the administration of qualified plans and has correspondingly published guidance to help plan administrators take appropriate corrective action where necessary.

IRS Correction Alternatives

Revenue Procedure 2016-51, known as the Employee Plans Compliance Resolution System (“EPCRS”) provides guidance to plan sponsors regarding how to correct plan failures.

Self-Correct:  EPCRS provides that a plan sponsor may, paying no fee or sanction, correct certain operational plan failures in a qualified plan if the correction is substantially completed by the last day of the second plan year following the plan year in which the failure occurred and in certain other circumstances as described below.  This method is known as self-correction.

Voluntary Correction Program:  EPCRS also offers a Voluntary Correction Program (“VCP”) through which a plan sponsor, at any time before audit, may pay a fee and receive the IRS’s approval for correction of an error.  VCP requires a written application to the IRS and a filing fee of between $500 and $3,500 (depending on the assets in the plan.)  (For more information about filing fees, see Jackson Lewis’s prior blog here.  Plan administrators must determine whether that correction can be self-corrected or whether it must be included in the VCP.

  • The first step in the analysis is to determine whether the error can be self-corrected by the last day of the second plan year following the plan year in which the failure occurred.
  • Next, a plan administrator should analyze whether the error was “significant” in which case it requires a VCP.  If an error was “insignificant”, it can be self-corrected.  The factors to be considered in determining whether a failure under a plan is insignificant are set forth below.  No single factor is determinative.
    1. Whether other failures occurred during the period being examined (for this purpose, a failure is not considered to have occurred more than once merely because more than one participant is affected by the failure);
    2. The percentage of plan assets and contributions involved in the failure;
    3. The number of years the failure occurred;
    4. The number of participants affected relative to the total number of participants in the plan;
    5. The number of participants affected because of the failure relative to the number of participants who could have been affected by the failure;
    6. Whether correction was made within a reasonable time after discovery of the failure; and
    7. The reason for the failure (for example, data errors such as errors in the transcription of data, the transposition of numbers, or minor arithmetic errors).

 

Approval of a VCP filing often takes between three and twelve months.

No Correction – Audit CAP:  If no correction is performed regarding an error and the failure is later identified in an IRS audit, the plan sponsor will have to correct the failure at that time and pay a sanction.  The IRS guidance regarding the amount of the sanction states, “the sanction imposed will bear a reasonable relationship to the nature, extent, and severity of the failure, taking into account the extent to which correction occurred before audit.”  The IRS generally takes the position that the tax could be as high as the fees that would be paid if the plan were disqualified (which depends on the amount of assets in the plan) and negotiates from there.

 

Please contact Natalie Nathanson or your local Jackson Lewis Employee Benefits attorney to discuss whether your 401(k) plan must take corrective action.

Association Health Plans—Are They Really an Option to Consider?

As discussed during our recent webinar, the finalized DOL regulations for qualifying “association health plans” will likely create new opportunities for sole proprietors and other primarily small businesses and other trade groups to band together in a coordinated manner to purchase more affordable health insurance as a “single employer” in 2019 and beyond.  That said, business and state regulatory challenges remain that could impact the realistic viability of these arrangements in the short-term unless and until further DOL guidance is released.  Insurance carrier receptivity to offering coverage options to qualifying association plans remain uncertain and state regulatory response to these new regulations are also beginning.  As an example, Vermont has already announced emergency plans to amend existing regulations to immediately impose additional requirements on association plans under that state’s jurisdiction and control.  New York and Massachusetts have also threatened to sue to prevent implementation of these new rules in their states.  We are actively watching all developments in each state, and assisting organizations in evaluating the feasibility of these arrangements given the context of current circumstances.

Blockchain Tokens as Compensation

Blockchain is a revolutionary technological tool in the way it tracks and stores data, decentralizes information, establishes trust in electronic files, and dispenses of intermediaries. This technology powers virtual currencies, also known as cryptocurrency or virtual tokens. Companies are raising money using “initial coin offerings” (ICOs) and using tokens to compensate and incentivize founders, directors, employees, and consultants. This raises legal questions as to how the tokens will be viewed and regulated by the Internal Revenue Service (IRS) and the U.S. Securities and Exchange Commission (SEC).

How are employers using tokens in an employment context? They are being used like equity or phantom-equity awards, granted as compensation for past or future services. They may be subject to vesting based on continued service or achievement of performance targets, and acceleration of vesting can be triggered based on designated events, such as the occurrence of a change of control transaction, the termination of an employee without cause, or the achievement of technical milestones. If an employee quits, the employer has the right to repurchase any remaining restricted tokens that have not yet vested.

Token-based awards tend to copy traditional equity-based awards. The standard token award grants tokens outright to the recipient or gives the recipient the right to ­­­buy tokens. “Restricted tokens” are not accessible until vested. “Token options” provide the employee the right, but not the obligation, to purchase a pre-determined number of tokens at a pre-set price, which can be subject to vesting. Finally, employers can issue “restricted token units,” which are promises to pay property (typically, tokens) to the employee in the future, usually after time or performance-based vesting conditions are met.

As with any form of innovation, there are challenges. The IRS has released guidance indicating that tokens issued to individuals in exchange for services would generally be treated as compensation subject to income and payroll taxes under the Internal Revenue Code and reported on Form W-2. Therefore, employers issuing tokens to employees and other service providers must determine the fair market value of the tokens in US dollars to properly report it.

However, it is interesting to note that the IRS does not treat tokens as currency; rather, the IRS views tokens and other cryptocurrencies as property. Therefore, depending on the type of award, the recipient may want to file an election with the IRS to tax the award at the time of grant (an “83(b) election”), although this can be risky if the tokens are later forfeited or fall in value.

The IRS has not issued guidance regarding whether token options are subject to Section 409A of the Internal Revenue Code, so issuers should assume that token options are subject to Section 409A, and should comply with Section 409A. Restricted token units should also be designed with Section 409A compliance in mind.

In addition, the SEC broadly categorizes all token offerings issued to raise money as securities. Therefore, employers who issue token-based compensatory awards should follow Rule 701 or other exemptions from registration under the Securities Act, as well as applicable state securities laws.

The takeaway is that the same tax, securities, and other rules that apply to compensatory equity awards may apply to compensatory tokens.

Arbitration of ERISA Claims – Update

Some of you may remember that back in 2015, we published an article entitled Arbitration of ERISA Claims – Yes You Can!  A link to that article can be found here.  In that article, we suggested that one key reason for adding ERISA claims to your arbitration agreement was to avoid class actions through the inclusion of a class action waiver in the arbitration agreement.  Particularly on the pension side, ERISA class actions can involve millions of dollars of exposure and litigation costs.

Last week, the Supreme Court confronted head on whether the inclusion of a class action waiver in an arbitration agreement violated the National Labor Relations Act.  Ultimately, the Court concluded that class action waivers in employment arbitration agreements are enforceable under the Federal Arbitration Act.  (See our article here for an in-depth discussion of the Supreme Court’s decision).

Based on this decision, employers can be even more confident that class or collective action waivers in arbitration agreements are permissible.  Be on the lookout, however, for our post on the upcoming decision from the Ninth Circuit in the ERISA class action against USC, Munro v. University of Southern California.  The Ninth Circuit heard argument on May 15 on whether a class action waiver in an arbitration agreement is enforceable to prevent a class claim brought on behalf of the plan under Section 502(a)(2) of ERISA.

Excessive Executive Compensation and the Tax Cuts and Jobs Act of 2017: Widening the Net of Negative Tax Consequences for For-Profit and Non-Profit Corporations

With all the national press coverage about tax savings, tax cuts and company bonus payments associated with the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), it is easy to miss the changes in federal tax laws that impose substantial negative tax consequences on employers that pay certain executives an amount of compensation that Congress has deemed “excessive.” In this particular area, the changes brought about by the Tax Act do not cut taxes. Rather, for many for-profit and non-profit corporations, the Tax Act creates new taxes.

For example, the Tax Act provides for a new Section 4960 of the Internal Revenue Code. This statutory provision creates an excise tax that will be imposed upon certain tax exempt organizations that pay their covered employees remuneration in excess of $1 million annually or that make an excess parachute payment to a covered employee. This new excise tax impacts 501(a) tax exempt entities (i.e., charitable organizations); farmers’ cooperative organizations; states, political subdivisions and public utilities with income excluded from taxation under Code section 115; and political organizations as defined by Code § 527(e)(1). “Covered employees” are the five highest compensated employees of the organization for the tax year, or a person who was a covered employee for any preceding tax year beginning after December 31, 2016.

The Code § 4960 excise tax payment may be triggered by an excess parachute payment. The term “excess parachute payment” is a payment, triggered by a covered employee’s separation from employment, that is equal to or greater than the base amount determined under the golden parachute rules of Code § 280G(d)(3). Tax exempt organizations may also be surprised to find that they can become liable for excise tax under Code § 4960 because the $1 million compensation threshold is exceeded due to the vesting (rather than payment) of ineligible deferred compensation under Code § 457(f). Thus, a covered employee need not actually receive payment of compensation for a tax exempt organization to incur excise tax liability under the new law.

The excise tax under Code § 4960 is 21% of the sum of the remuneration received by the covered employee in excess of $1 million, plus any excess parachute payment paid to a covered employee.

For-profit corporations may be surprised by the Tax Act’s additions to Code § 162(m), which broaden both the application of the excessive employee remuneration rules in terms of what type of entity is subject to Section 162(m) and in terms of who is a “covered employee under” that statutory provision.

Code § 162(m)(1) provides that a publicly held corporation may not take a deduction for any applicable employee remuneration with respect to any covered employee that receives such remuneration in excess of $1 million annually. The Tax Act expands the scope of the terms “publicly held corporation” beyond those entities that issue classes of common equity securities that must be registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”). Code § 162(m) now also applies to corporations that are issuers as defined in Section 3 of the Exchange Act, and are required to file reports under Section 15(d) of the Exchange Act. Consequently, any company that is an “issuer” required to file a registration statement for debt or equity securities is subject to Code § 162(m), whether or not they are listed on an exchange. As a result, the $1 million deduction limit on remuneration paid to covered employees now applies to foreign companies that are publicly traded through American depository receipts as well as all domestic publicly traded companies. Certain large private corporations may also fall within Code § 162(m).

The term “covered employee” has also been expanded under Code § 162(m) beyond the CEO or the four most highly paid officers of the company. Under the Tax Act, Code § 162(m) applies to the CEO, the CFO and the three other highest compensated company officers for the tax year.

The Tax Act’s provisions do not apply to remuneration paid pursuant to a written binding agreement in effect on November 2, 2017, and which has not been substantially modified in any material respect on or after that date. Contracts that are subject to cancellation by either party, or which expire on or before November 2, 2017, and are renewed on or after that date, will likely be treated as a new agreement subject to the amended Code § 162(m), according to the Committee Reports commentary under the Tax Act.

Given the new and broadening regulation of excess compensation under the Tax Act, non-profit organizations and large corporations are encouraged to review their executives’ compensation packages with their tax advisors to determine the impact on income received by the executives due to vesting and forfeiture provisions in deferred compensation plans, payments made under severance agreements and compensation packages described in employment agreements.

IRS Reverses the $50 HSA Reduction for 2018

We recently informed you that the IRS reduced the 2018 health savings account (“HSA”) contribution limit for individuals with family coverage to $6,850.00 despite having previously announced that such limit was $6,900.  Because of compelling comments from stakeholders, the IRS reversed this decision in Revenue Procedure 2018-27 and the contribution limit for individuals with family coverage has reverted back to $6,900 for 2018.  The Revenue Procedure contains helpful guidance regarding how any distributions made in response to the reduced limit published in Revenue Procedure 2018-18 can be undone.

Ultimately, the IRS acknowledged the hardship and cost associated with the lower limit and reasonably reverted to the higher, previously announced, limit.

IRS Issues Guidance FAQs Regarding the Paid Family Leave Federal Tax Credit

This week, the Internal Revenue Service (IRS) issued FAQ guidance regarding the employer tax credit for paid family and medical leave. As a reminder, the Tax Cuts and Jobs Act of 2017 (the Act) provides a tax credit to employers that voluntarily offer paid family and/or medical leave to employees. The FAQs clarify some of the requirements in Section 45S of the Act that an employer’s paid family and/or medical leave policy must include. The FAQs also clarify other details, such as the basis for the credit and the tax credit’s impact on an employer’s deduction for wages paid to an employee who is on a qualifying leave.

For information on how to determine if your company can take advantage of the paid family and medical leave tax credit, read our earlier article on this topic. You can estimate your company’s potential annual tax savings using the Jackson Lewis Paid Family Leave Tax Credit Calculator.

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