In Private Letter Ruling, IRS Approves 401(k) Student Loan Repayment Benefit

The IRS has released a Private Letter Ruling (“PLR”) 201833012, in which it approved a student loan repayment program as a 401(k) benefit.  Although the PLR can only be applied by the taxpayer/plan sponsor requesting it, it is a promising development for employers seeking to provide stronger incentives for a workforce increasingly saddled with student loan debt.

The PLR allows student loan payments made by employees to be treated as if they were 401(k) elective contributions which are matched by the employer.  The 401(k) student loan repayment (“SLR”) benefit effectively gives employees with significant student loan debt an opportunity to participate in the 401(k) Plan and receive matching retirement funds without requiring compensation deferrals.

The approved design was part of a 401(k) Plan that already provides employees the opportunity to make pre-tax, Roth, and after-tax elective deferral contributions. The employer provides matching contributions equal to 5% of the employee’s compensation for each pay period an employee’s elective contribution equals 2% or more of eligible compensation for the pay period.  The SLR benefit, proposed as a plan amendment, provides a nonelective employer matching formula with the following features:

  • Participation is voluntary.
  • Any participant who makes a student loan payment equal to 2% or more of eligible compensation for a pay period is eligible to receive non-elective employer contributions equal to the amount of matching contribution that would have been provided had an elective deferral been made.
  • The SLR benefit replaces employer matching contributions for those participating in the program.  Thus, any elective deferrals made while participating in the SLR program would not be eligible for matching contributions.
  • SLR contributions are subject to the plan qualification requirements such as vesting, coverage and nondiscrimination testing, contribution limits, and eligibility and distribution rules; however, SLR benefits are not considered a regular matching contribution for 401(m) testing purposes.
  • The Plan Sponsor does not and will not provide student loans to participants.

The IRS found that this particular arrangement does not violate the “contingent benefit rule” under applicable Treasury regulations.  The contingent benefit rule generally prohibits employers from making benefits conditional upon participant elective deferral contributions to a qualified cash or deferred arrangement under a Code § 401(k) plan.  The SLR nonelective contribution benefit did not violate the rule because benefits are conditioned on student loan repayments instead of elective deferrals, and participation in the SLR program does not impact participants’ ability to make elective deferrals.

As a reminder, PLRs are only binding on those taxpayers requesting rulings and are limited to specific arrangements proposed by them.  Employers interested in incorporating student loan repayment benefits into their 401(k) plans should consult with their preferred Jackson Lewis attorney for assistance.

The President Urges Regulatory Action to Expand Access to Employer-Sponsored Retirement Plans

On August 31, 2018, President Trump issued an Executive Order (the “Order”) calling on the Department of Labor (“DOL”) and the Internal Revenue Service (“IRS”) to consider issuing regulations and guidance directed at expanding the availability of employer-sponsored retirement plans.  The Order mainly takes aim at the availability of retirement plans to all employees, noting that one-third of workers in the private sector have no access to workplace retirement plans.

Amongst the Order’s directives are expanding access to retirement plans for American workers by allowing employers to join together to offer Association Retirement or Multiple Employer Plans (“MEPs”), revising required notices associated with plans, and assessing the accuracy of current mortality tables used to calculate Required Minimum Distributions (“RMDs”) for retirees age 70 ½ and older.

In particular, the DOL is tasked with considering the expansion of MEPs, enabling groups of smaller employers to band together to offer a retirement plan to their employees while sharing the cost and responsibility of sponsorship with other employers.  According to the Order, such guidance will allow small employers to avail themselves of the benefits and purchasing power available to larger qualified retirement plans.

The DOL has 180 days from the execution of the Order (February 27, 2019) to consider issuing proposed rulemaking and guidance on whether a group or association of employers can be considered a single employer under ERISA.  The IRS has the same 180 days to consider amendments to regulations and other guidance regarding the qualified status of MEPs, including the consequences of a participating employer failing to do all that is required for the MEP to be qualified under the Code.  The Order dictates coordination and consultation between the DOL and IRS before issuing any proposed guidance.

The DOL, in coordination with the IRS, has one year from the issuance of the Order (August 31, 2019) to consider improvements to notice and disclosure requirements for qualified retirement plans, including expanding the use of electronic delivery.  If the DOL determines improvements are possible, it will work with the IRS to produce regulations and guidance for improved and less burdensome notice and disclosure requirements.

The Order also directs the IRS to evaluate the soundness of the current mortality tables upon which RMDs are calculated.  Within 180 days of issuance of the Order, (February 27, 2019), the IRS must evaluate the current mortality tables and make a recommendation on the applicability of the current tables, whether tables should be updated, and how often tables should be evaluated on a prospective basis.

It is also important to note that the legislative calendar includes the Retirement Enhancement and Savings Act of 2018 (“RESA”), which has the support of both parties.  RESA has the same ultimate goal of improving retirement plan access and lowering the costs and administrative burdens associated with sponsoring qualified retirement plans.  While the ultimate impact of the Order is not certain, it may also spur Congress to address and reconcile the House and Senate versions of RESA before mid-term elections.  We will, of course, continue to monitor these legislative and regulatory developments.  Please contact your Jackson Lewis attorney with any questions.

The IRS Doesn’t Disappoint

As anticipated by plan sponsors of closed defined benefit pension plans, the IRS issued Notice 2018-69, the fourth extension for an additional year of the temporary nondiscrimination relief for “closed” defined benefit pension plans originally announced by the IRS during 2014.  The extended relief applies to plan years beginning before 2020 for those “closed” plans that satisfy certain conditions in Notice 2014-5.  The relief for “closed” defined benefit plans refers to those defined benefit plans amended prior to December 13, 2013, to limit ongoing accruals to some or all employed participants in the plan as of a particular date, thus no longer admitting new participants into the plan.

Each extension has been in anticipation of finalization of the proposed regulations issued in January 2016.  The IRS received many comments on the proposed regulations and expects the final regulations to include several significant changes in response to the comments.  By extending the relief another year, the IRS acknowledges the plans will need sufficient time to make plan design decisions based on the final regulations, yet to be published, before the end of the most recent extension which is December 31, 2018.

Notice 2018-69 does not indicate when to expect the final regulations but states an expectation the final regulations will allow reliance on the proposed regulations for plan years beginning before 2020.  Stay tuned as we continue to monitor the status of the final regulations.

IRS Finalizes Regulations Allowing Plan Forfeitures to Fund QNECS and QMACS

The IRS recently finalized regulations that allow 401(k) plans to use forfeiture money to fund qualified non-elective contributions (“QNECs”) and qualified matching contributions (“QMACs”).  These regulations finalize proposed regulations issued last year (you can read our prior coverage of the proposed regulations here).

By way of background, QNECs and QNECs are types of employer contributions used by many 401(k) plans to help pass annual nondiscrimination testing (also known as ADP and ACP testing).  QNECs and QMACs are also used by safe-harbor 401(k) plans, which are automatically deemed to pass the ADP and ACP tests if certain requirements are followed.  QNECs and QMACs cannot be subject to a vesting schedule, which means that participants are fully vested in those contributions when allocated to them.

Prior to issuing the proposed regulations last year, plans could not use money in the plan’s forfeiture account to fund QNECs and QMACs.  This is because prior regulations required that QNECs and QMACs be non-forfeitable when contributed to the plan.  There is no way that money in a forfeiture account would be vested when contributed to the plan (because it is money that a participant forfeited for not satisfying the vesting schedule), so the IRS has long held the position that forfeiture money could never be used to fund QNECs or QMACs.

The final regulations change the requirements to provide that QNECs and QMACs must be vested when allocated to participants.  This means that unvested money in the plan’s forfeiture account can fund QNECs and QMACs, as long as those contributions become vested when allocated to participants.

The new regulations apply to plan years ending on or after July 20, 2018.  However, plans have been allowed to rely on the relaxed restrictions of the new rules since the proposed regulations were issued last year.  Keep in mind that these changes are permissive, so plans need not be amended to allow for these relaxed restrictions if the plan will not use forfeitures in this way.  However, plans that want to begin using forfeiture money to fund QNECs and QMACs may need to be amended, since the plan may still contain language stating that QNECs and QMACs cannot be funded from the plan’s forfeiture account.

If you would like assistance with amending your plan to incorporate the relaxed restrictions of the new regulations, or if you have questions about the information discussed here, please contact your preferred Jackson Lewis attorney for assistance.

Illinois Secure Choice Retirement Savings Program No Longer Mandatory?

The future of the Illinois Secure Choice Savings Program Act (Secure Choice) is uncertain following Governor Bruce Rauner’s amendatory veto which could make employer participation in the Secure Choice program optional.

The legislation, as enacted, makes participation in the Secure Choice program mandatory for covered employers that do not offer employees a qualified retirement plan. These employers are required to automatically withhold five percent of an employee’s compensation (up to the IRS annual maximum allowed for IRA contributions each year), unless the employee elects a different amount or opts out of the program entirely. Employers then remit those contributions to the Secure Choice program. The program is set to roll out in November 2018.

On August 14, 2018, Governor Rauner issued an amendatory veto to a bill that makes several technical changes to the program. The veto makes the Secure Choice program permissive, rather than mandatory. It is unclear whether the veto will stand or whether a majority of the Illinois Legislature will override it. A vote by the Legislature may not occur until November, when the body is scheduled next to be in session.

For more information, see our legal update here.

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.

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