As discussed in an earlier blog post, the SECURE 2.0 Act of 2022 (the Act) expanded the Employee Plans Compliance Resolution System (EPCRS), a comprehensive IRS program for correcting common qualified retirement plan failures.  Plan sponsors have three ways to correct mistakes under EPCRS: the self-correction program (SCP), the voluntary correction program (VCP), and the Audit Closing Agreement Program (Audit CAP). 

The Act requires the IRS to update EPCRS consistent with the Act no later than December 29, 2024.  On May 25, 2023, the IRS issued Notice 2023-43 to provide interim guidance on the expansion of EPCRS. 

The Act significantly expands the types of retirement plan failures that can be self-corrected under SCP.  Many plan sponsors prefer SCP over the other programs because it does not involve the IRS or a fee.  Under the expanded program, plan sponsors may self-correct an “eligible inadvertent failure” (EIF) unless the plan or plan sponsor is under examination by the IRS and the plan sponsor has not demonstrated a specific commitment to self-correct it.  However, insignificant failures may be self-corrected even if the plan or plan sponsor is under examination and the plan sponsor has not taken action to correct the failure.  The expanded program is not limited to failures that occurred on or after the Act was adopted; failures that occurred before December 29, 2022, may also be self-corrected under the expanded EPCRS.

Until EPCRS is formally updated, plan sponsors may rely on the Notice and self-correct failures if these conditions are met:

  • The plan sponsor has actively pursued action to self-correct the failure before the plan or plan sponsor is under examination (except for insignificant failures, which may be self-corrected while the plan is under examination).
  • The failure is self-corrected by the last day of the 18th month following the date the failure was identified.  Except for failures related to employer eligibility failures, which must be corrected by the last day of the 6th month following the date the failure was identified.
  • The failure is not egregious, does not directly or indirectly relate to an abusive tax avoidance transaction, and does not relate to the diversion or misuse of plan assets.
  • The self-correction satisfies EPCRS’ provisions for self-correction, except these requirements in the current EPCRS procedure which no longer apply when self-correcting an EIF:
    • The plan must have a favorable determination letter.
    • The prohibition of self-correction for demographic failures and employer eligibility failures.
    • The prohibition of self-correction of certain loan failures.
    • The provisions relating to self-correction of significant failures that have been substantially completed before the plan or plan sponsor is under examination.
    • The requirement that significant failures must be completed or substantially completed by the last day of the third plan year following the plan year in which the failure occurred.

    However, the following are some, but not all, failures that may not be self-corrected until EPCRS is formally updated:

    • A failure to initially adopt a written plan.
    • A failure in an orphan plan.
    • A significant failure in a terminated plan.
    • A demographic failure that is corrected using a method other than a method in Treas. Reg. §1.401(a)(4)-11(g).
    • Plan amendments to conform the terms of the plan to the plan’s past operations if such amendment is less favorable for a participant or beneficiary than the original plan terms.
    • A failure in an ESOP that involves section 409 (other than plan disqualification).

    What Plan Sponsors Should Do:

    • Identify and correct errors before the IRS discovers them.
    • Establish practices and procedures designed to promote and facilitate compliance with IRS requirements.
    • Before filing a VCP application with the IRS, determine whether the failure qualifies for self-correction under the expanded program.
    • Keep adequate records showing when the failure was identified, the participants affected, and how and when the failure was corrected.

    Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance. 

    The February 24, 2023, issuance by the IRS of proposed regulations on the use of forfeitures in qualified retirement plans provides some welcome clarity, regulatory house cleaning, and relief for plan sponsors.  With a proposed effective date of January 1, 2024, these regulations should prompt plan sponsors to review their plan language and procedures for compliance and to consider plan amendments to take advantage of the new rules.

    Defined Contribution (DC) Plans.  The proposed regulations expand and amend the general regulation on forfeitures, Section 1.401-7, to clarify that forfeitures in defined contribution plans (e.g., 401(k) and profit-sharing plans) must be used or allocated under the terms of the plan no later than 12 months following the close of the plan year in which the forfeitures occurred.  Under a transition rule, any forfeitures incurred before January 1, 2024, will be treated as if they were first forfeited in the first plan year beginning on or after January 1, 2024.  The new regulation states that a DC plan may use forfeitures for one or more of these purposes:  

    • Payment of plan administrative expenses; 
    • To reduce employer contributions; and
    • To increase benefits in other participants’ accounts under the plan’s terms.

    These revised forfeiture rules would essentially formalize what in the past has been informal IRS guidance for DC plan forfeitures.  That guidance, expressed in a 2010 IRS Retirement News for Employers, generally required that forfeitures be used no later than the year in which the forfeitures arose while vaguely allowing an additional year to use the forfeitures where the situation demanded it.  Unclear regulatory and informal guidance has resulted in many plans carrying forward forfeitures that are even older than two years.  The transition relief offered for pre-2024 incurred forfeitures is welcome, but many sponsors may need plan amendments and revised administrative procedures to use or allocate their “legacy forfeitures” in order to take advantage of it.

    Defined Benefit (DB) Plans.  For defined benefit pension plans, the proposed regulations correct an inconsistency or conflict in the Treasury Regulations.  The current general regulation on the use of forfeitures requires that pension plan forfeitures be used as soon as possible to reduce the employer’s contributions under the plan, but may not be used to increase employee pension benefits.  Further, it provides that a pension plan may “anticipate the effect of forfeitures in determining the costs under the plan.” By contrast, the current minimum funding standards for defined benefit plans under Internal Revenue Code Sections 430, 431, and 433 do not provide that forfeitures may directly offset required employer plan contributions; rather those Sections instead require the use of reasonable actuarial assumptions to determine the effect of expected forfeitures on plan liabilities.  The new proposed regulation deletes the provision allowing a direct reduction of employer pension plan contributions by the amount of forfeitures.  It now simply states that the effect of forfeitures may be anticipated in actuarially determining the costs under the plan under the Code’s defined benefit plan funding standards.

    If you have any questions, the Jackson Lewis Employee Benefits Practice Group members are available to assist.  Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

    We previously wrote about President Biden’s announcement to end the COVID-19 Public Health Emergency (PHE) and National Emergency (NE) periods on May 11, 2023, and the practical ramifications for employer group health plan sponsors as they administer COBRA, special enrollment, and other related deadlines tied to the end of the NE. As discussed, this action generally meant that all applicable deadlines were tolled until the end of the NE plus 60 days, or July 10, 2023, with all regular (non-extended) deadlines taking effect for applicable events occurring after that. 

    A Change in the National Emergency End Date

    A new wrinkle recently added a potential complication to calculating these deadlines. President Biden signed H.R. Res. 7 into law on April 10, 2023, after  Congress jointly introduced H.R. Res. 7 as a one-line action to end the NE, effective immediately. The consequence is that the applicable end of the transition relief is now June 9, 2023 (60 days following April 10, 2023) instead of July 10, 2023, as previously anticipated. The Department of Labor (DOL), however, has informally announced that despite the statutory end of the NE being 30 days earlier than expected, to avoid potential confusion and changes to administrative processes already in progress, the deadline of July 10, 2023, will remain the relevant date for COBRA, special enrollment, and other related deadlines under previous guidance. Prophetically, updated FAQs, released March 29, 2023, by the DOL, Department of Treasury, and Department of Health and Human Services (the Agencies), provide, “the relief generally continues until 60 days after the announced end of the COVID-19 National Emergency or another date announced by DOL, the Treasury Department, and the IRS (the “Outbreak Period”). [emphasis added]”  Further clarification and formal guidance are still expected.

    Updated DOL FAQ Guidance

    As discussed in our previous article on this topic, most employers rely on third-party vendors and consultants to help administer COBRA, special enrollments, claims, appeals, etc. All should be aware of the impact the end of the NE and PHE has on all applicable deadlines. The FAQs provide at Q/A-5 specific examples to help employers, consultants, and administrators apply the end of NE and PHE deadlines and different scenarios related to COBRA elections and payments before and after the end of the Outbreak Period, special enrollment events, Medicaid election changes, etc. The FAQs also make clear that employers are encouraged to consider extending these deadlines for the current plan year. Employers should discuss the impact of this guidance with their vendors and consultants to ensure all parties comply with the upcoming transitional periods.

    The FAQs also confirm (at Q/A 1-4) the impact of the end of the PHE on COVID-19-related testing and diagnostic procedures, noting that as of the end of the PHE on May 11, 2023, group health plans are no longer required to provide certain COVID-19 related coverage at 100 percent under the plan, but can revert to previous cost-sharing and deductible limitations that existed before the COVID-19 pandemic. Note that President Biden’s recent action approving the end of the NE on April 10, 2023, has no impact on the previously communicated end to the PHE on May 11, 2023. Employers should review changes in coverage of COVID-19 testing and other related treatment or procedures with their insurance carriers, consultants, and advisors, including any notices that may be required in connection with those changes. The DOL confirmed that while encouraged to do so, employers do not have to provide any separate notification of any changes in current coverage limits before the PHE end date unless the employer had previously disclosed a different level of coverage in its current Summary of Benefits and Coverage (SBC) provided during the most recent open enrollment period.

    COVID-19 Testing and Treatment Under High Deductible Health Plan/Health Savings Accounts

    Q/A-8 of the FAQs provides interim clarification regarding the impact of the end of the PHE on high-deductible health plans (HDHPs) that are tied to health savings accounts (HSAs) and the ability to provide medical coverage for COVID-19 testing or treatment without requiring an employee to satisfy applicable HDHP deductibles for HSA contribution purposes. Even though IRS Notice 2020-15 provided relief from general deductible limitations under Code Section 223(c)(1) through the end of the PHE, the Agencies have determined this relief will remain in effect after the end of the PHE and until the IRS issues further guidance. 

    This area is quickly evolving, with compliance deadlines rapidly approaching. If you have any questions, please contact the Jackson Lewis attorney with whom you regularly work or any member of the Employee Benefits group.

    baseball-bat-ball

    Baseball season has just started, and retirement plan auditing season will soon kick into high gear. Many plan sponsors don’t see the value of a good auditor; they just see the audit as a cost of doing business. That’s too bad because these days when a plan sponsor becomes aware of an operational problem in the plan, it’s frequently the auditor who discovers it. The longer a plan mistake goes on without being caught, the more expensive it is to fix it, so a good auditor can save a plan sponsor a lot of money by catching errors sooner than later. Unfortunately, like with any other business, not everyone doing benefit plan audits is good at it. The Department of Labor released a study in 2015 that found that the fewer plan audits a CPA firm does, the more likely it is that there will be significant deficiencies in its audit process. That, of course, increases the risk to the plan and its sponsor. An updated study should be released this year, and the results aren’t expected to be much better.

    Last year in its Employee Plans News (the June 3, 2022, issue), via an online post with very few details, the IRS announced a new pilot program that gives plan sponsors an advance warning of a potential audit. The IRS will send the sponsor a notice that it intends to audit the plan, and the sponsor has 90 days to look into the plan’s document and operational compliance and report its findings back to the IRS. From there, the IRS can decide whether it will go ahead with a full audit, a limited audit, or no audit. The advantage of this pilot program is that any issues that the plan sponsor discovers during the 90-day period can be fixed via the Employee Plans Compliance Resolution System (EPCRS) using either the Self-Correction or the Voluntary Correction Program. This approach is much less expensive than paying the penalties that the IRS would assess if they discovered the issue during an audit.

    The 90-day window seems like a decent amount of time to get a handle on whether the plan has any operational problems, but it doesn’t consider how long it takes to prepare for and perform the annual plan audit. This makes having a good plan auditor more important than ever. A sponsor who gets a pre-audit notice from the IRS will be in a much better place because the auditors will have looked closely at how the plan runs every year. It’s also a good idea for a sponsor who gets one of these notices to, if possible, bring the auditor back in during those 90 days to do some additional testing of the plan’s operations. Needless to say, the plan’s legal counsel needs to be involved too.

    It was already smart to hire a CPA firm with a lot of knowledge and experience in benefit plan audits – now, it could help save a plan sponsor from an IRS audit.

    If you have questions or need assistance, please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

    Cake-with-candles-1

    With another National Employee Benefits Day upon us, it is a good reminder for all involved in the world of Employee Benefits to pause (take three deep breaths) and use it as an opportunity to look back at where we’ve been over the last year and where we are going. While the challenges are many, the work is more valuable than ever.

    One constant over the last few tumultuous years is change. From the compliance perspective, employers like certainty (plan advisors do, too), and recently there has been anything but. This is true now more than ever across all areas of benefits and is likely to be the case for years to come.

    It is no surprise (pun intended) that health and welfare plan administration continues to occupy more time and attention than ever before. Plans continue to grapple with compliance with Mental Health Parity, Transparency in Coverage, the No Surprises Act, and other recent changes that define how group health plans need to operate (both at the federal and state level). Traditionally, an area in which plans operated more autonomously, health plan administration and compliance have become increasingly complex and will continue to grow more complicated, particularly for multi-state plans. Add to that already full plate the need to navigate the issues following the U.S. Supreme Court’s decision in Dobbs, many of which will continue to evolve for years to come, and recent state and federal attention on pharmacy benefits.

    As we approach the end of the Public Health Emergency and National Emergency, benefit plans should also pay close attention to unwinding the temporary relief provided at the outset of the pandemic. This includes close attention to COBRA, special enrollment and claims deadlines, and decisions on coverage of COVID-19 diagnostic testing, treatment, vaccines, and telehealth under group health plans. And for good measure, plans now need to consider a recent court decision invalidating the ACA’s preventative care mandate.

    Retirement plan design and administration are not immune from the wave of change. Eagerly awaited retirement plan legislation in the form of SECURE 2.0 finally arrived at the end of last year, bringing with it a panoply of mandatory and optional changes for the consideration of plan sponsors. With an eye toward increasing retirement savings and expanding coverage within the private plan system, SECURE 2.0 will spawn more guidance and implementation efforts for years to come. Plan fiduciaries are also confronting the push and pull of the role of ESG investments in retirement plan fund lineups – including trying to keep straight the regulatory, legislative, and judicial attempts to weigh in on the proper role of ESG investments, and for that matter, what even is an ESG investment. All of this change comes against the broader backdrop of market volatility and continued concerns of a recession/inflation, increasing the spotlight on financial wellness initiatives.

    Finally, and perhaps most important, well-being, balance, and mental health remain at the forefront. Clearly not confined to the pandemic, attention to the needs of all employees’ pursuit of the elusive “work-life balance” is more important now than ever, especially as the lines between work and home promise to be blurred for the foreseeable future given the persistence of remote/hybrid work. While many of these change-inducing events are far beyond our control, as benefits professionals, we have ridden this wave before and will continue to do so. We are reminded that change creates new opportunities to design important, sustaining benefits that serve the lives of employees and their families. Keep up the fight, and Happy Employee Benefits Day!

    President Biden announced that the COVID-19 Public Health Emergency (PHE) and the National Emergency declared by President Trump in 2020 will end on May 11, 2023.  The PHE relief issued in response to the pandemic affected group health plan coverage requirements related to COVID-19 prevention and treatment.  The National Emergency relief suspended deadlines that normally apply to certain employee benefit plans.  While seemingly simple in concept, the end of the PHE and National Emergency means employers soon will enter a murky transition period requiring special administrative attention. 

    Calculating Deadlines After the National Emergency

    The U.S. Department of Labor and the Department of the Treasury jointly issued deadline extension relief applicable to ERISA deadlines that normally apply to HIPAA special enrollment events, claims, appeals, COBRA elections, and COBRA premium payments, among others (the “Relief Events”).  The guidance included a transition rule such that once the National Emergency ends, the relief draws to a close. 

    Specifically, under the relief, the normal deadlines for the Relief Events are suspended until the earlier of:  (1) one year from the date the individual first qualifies for the relief; or (2) 60 days after the end of the National Emergency – which would be July 10, 2023, if the National Emergency ends on May 11, 2023.  Special rules apply for COBRA elections and premium payments, so employees do not benefit from stacked deadline relief. 

    Practically, this means the calculation of normal deadlines will resume on July 10, 2023, for individuals whose Relief Event date was after July 10, 2022.  We estimate this date was selected to follow the week when many take vacations to celebrate the 4th of July. 

    Preparing for the End of the PHE and the National Emergency

    Employers rely on third-party vendors to administer many of the Relief Events.  Rarely are employers directly involved in administering claims, appeals, or requests for external reviews.  Further, many employers outsource COBRA administration.  In these cases, employers should contact their third-party administrators, insurers, or vendors to confirm they are prepared for the end of the deadline relief and understand what administration during this transition period will entail. 

    For employers who administer some or all of the COBRA functions in-house, now is the time to update notices to specify election periods and COBRA premium payment deadlines.  Clearly communicating the applicable election and premium payment deadlines will be key in mitigating COBRA litigation risk and compliance issues. 

    Employers would also be well served to review COBRA notices previously issued to determine if an updated notice or communication is merited in light of the impending end of the relief.  With COBRA notice litigation still swirling, time spent to clearly and accurately communicate applicable deadlines for elections and premium payment obligations will mitigate the risk of claims from disgruntled participants (or their lawyers) insisting that coverage should remain in effect.  Depending upon the circumstances, providing an updated notice to individuals informing them of the exact deadline that applies to them may be a worthwhile time and expense-saving measure. 

    Employers are also often involved with mid-year election change requests.  The deadline relief does not apply to all qualified status change events specified in Code Section 125 guidance – it only applies to special enrollment events under HIPAA. 

    As the relief period draws to a close, employers need to be mindful of the transition period when calculating enrollment deadlines.  It may be helpful to broadly and proactively communicate the end of the deadline relief on benefit websites and portals.  

    Communicating Coverage Changes

    When the PHE ends on May 11, 2023, the requirement that group health plans provide COVID-19 testing, testing-related services, and vaccinations without cost sharing, among other coverage requirements, will also end.  Employers should contact their insurers and third-party administrators regarding any needed amendments to their group health plans and the plan to communicate these changes to plan participants. 

    There are a number of moving targets that require close attention to individual deadlines on a participant-by-participant basis.  Employers should take steps now to discuss compliance strategies, including clear communications and implementing processes, with their vendors.  If you have any questions related to the ending of this relief or any other benefits-related questions, please contact the Jackson Lewis attorney with whom you regularly work.

    Welcome to Part 10 (of 10) of our series about the SECURE 2.0 Act of 2022 (SECURE 2.0) (our other articles are on our JL Employee Benefits Blog Page).  Among the many changes within SECURE 2.0, the following allow for increased flexibility for participants to access certain retirement plan accounts when faced with qualifying emergencies, hardships, and disasters.

    Sections 312 & 602 — Effective after December 31, 2022, an employer may rely on an employee’s self-certification that they have experienced an event that qualifies as a financial hardship.  Specifically, the new rules allow for self-certifications as to both (i) the fact that they have a hardship; and (ii) that the amount of the distribution is not in excess of the employee’s financial need.  This welcome change is expected to significantly streamline the plan administration of hardship applications.

    Section 312 of SECURE 2.0 also allows an employer to rely on an employee’s written certification for participants of a 457(b) plan experiencing an unforeseeable emergency.  The certification is similar to those for the 401(k) and 403(b) plans in that it must state (i) the participant faces an unforeseeable emergency and (ii) the requested amount is not greater than the emergency need. 

    Also, effective for plan years beginning after December 31, 2023, the new 403(b) plan hardship rules now align with similar rules for 401(k) plans.  Specifically, Section 602 eliminates the plan loan prerequisite to a hardship distribution for 403(b) plans, which now may also include certain employer contributions.

    Section 331— Effective for disasters after December 27, 2020, SECURE 2.0 finally makes the exception to the 10% early withdrawal tax for federally declared disasters permanent.  Under the new rules, eligible distributions are up to $22,000 per disaster.  Individuals receiving eligible distributions are not subject to the early withdrawal penalty of 10% ordinarily applied to hardship withdrawals.  For the distribution to qualify for the exemption, the individual’s principal residence must be in a federally declared disaster area.  Also, there must be a corresponding economic loss to receive such a distribution.  Individuals are also eligible to repay the declared disaster distributions within three years.  While the recipients must pay tax on the distribution, if not repaid, they can spread the taxable income over three tax years.  

    Additionally, employers may permit larger loans (up to a maximum of $100,000 or 100% of the vested account balance) as part of the qualified disaster distribution.  Typically plan loans, not for the purchase of a principal residence, may not exceed a five-year payoff.  Qualified individuals may be eligible for a delay of certain repayments for up to one year, which is disregarded when calculating the five-year payoff timeframe.    

    Lastly, for qualified individuals who received a qualified distribution for the purchase or construction of a principal residence during a specified timeframe surrounding the declared disaster but could not purchase or construct the principal residence due to the qualified disaster, Section 331 allows them to re-contribute that distribution. 

    We are available to help plan administrators understand and implement the requirements of SECURE 2.0.  Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

    The Federal Trade Commission published a proposed rule[1] Jan. 5 that would effectively prohibit noncompete clauses for employees and other workers in all but very limited circumstances.[2]

    This article focuses on the impact the proposed rule could have on employee benefit and compensation arrangements, if it becomes effective in its current form.

    Golden Parachute Implications

    Sections 280G and 4999 of the Internal Revenue Code may impose excise taxes and a loss of deduction on golden parachute compensation and benefit packages paid out to executives upon a change in control of their employer.

    However, Section 280G does not apply to any reasonable compensation for services rendered by the employee after the date of a change in control. This includes compensation for refraining from performing services pursuant to a noncompetition provision.

    Thus, noncompetes have often been used to mitigate potential Section 280G excise taxes and deduction losses that would otherwise apply to change-in-control payments and benefits. 

    The proposed rule would eliminate this strategy.

    In such a case, employers that have recently undergone a change in control would also need to consider updating their Section 280G calculations and, potentially, conducting a supplemental Section 280G shareholder vote.

    Contractual Implications

    Many employment agreements and incentive arrangements provide that post-termination payments will cease — and, in the case of clawback provisions, that previous payments must be repaid — if the worker violates the agreement. This can apply to noncompete provisions. In many cases, post-termination payments exist, in part, to protect the employer from damaging competition following the departure of the worker.

    It is not entirely clear if these employee choice provisions — that is, to either comply with the noncompete requirements or forfeit future payments, and perhaps even repay prior ones — would be permitted under the proposed rule. The rule relies on a functional test to assert that provisions that effectively prohibit post-separation employment or business operation are de facto noncompetes.

    In the absence of additional clarification, it would be risky to use such provisions.

    Awards Subject to Substantial Risk of Forfeiture

    Pursuant to Section 83 of the Internal Revenue Code, the fair market value of property, such as certain equity grants, transferred for the performance of services is generally included in the recipient’s income in the year that the right to the property becomes transferable or not subject to a substantial risk of forfeiture, whichever occurs first.

    The Treasury regulations promulgated under Section 83 provide that

    An enforceable requirement that the property be returned to the employer if the employee accepts a job with a competing firm will not ordinarily be considered to result in a substantial risk of forfeiture unless the particular facts and circumstances indicate to the contrary.[3]

    The Treasury regulations provide a list of factors to be used in this analysis. Therefore, even before the proposed rule, how effective noncompete conditions were in deferring taxation of Section 83 property was questionable. But, even if an employer relies on a noncompete condition alone, without requiring continued employment, to defer the taxation on some Section 83 property, that property will become immediately taxable if the proposed rule takes effect in its current form.

    The proposed rule would similarly affect the timing of Federal Insurance Contributions Act taxation of amounts deferred under employers’ nonqualified deferred compensation plans pursuant to a special timing rule under Section 3121(v)(2) of the Internal Revenue Code, which generally follows the timing of tax recognition under Section 83.

    Accordingly, if an employer relies on a noncompete condition alone, without requiring continued employment, to defer the FICA taxation of amounts deferred under its nonqualified deferred compensation plan, such amounts will become immediately taxable for FICA purposes if the proposed rule becomes effective.

    In our experience, most employers rely on continued employment, rather than a noncompete condition, to achieve Section 83 and FICA deferral. Therefore, the proposed rule would likely have limited impact in this area.

    Nonqualified Deferred Compensation Plans of Tax-Exempt Entities

    The proposed rule provides that employers exempt from coverage under the Federal Trade Commission Act are not subject to the proposed rule.

    Thus, it appears that Section 501(c)(3) entities, including large hospital systems and universities, would not be prohibited from using noncompete clauses by these rules. As long as these organizations are not covered by the FTC Act, their Section 457(f) plans that vest contingent on compliance with a noncompetition agreement should not be adversely affected.

    However, various questions remain, including whether broad noncompetes that cover the for-profit affiliates of Section 501(c)(3) entities could be subject to the proposed rule.

    Key Takeaways for Employers

    It is widely expected that the proposed rule will evolve before it becomes effective, if ever. However, to mitigate future risk, employers can consider taking the following proactive actions now.

    Take Inventory

    Take inventory of existing agreements and arrangements where vesting or payment is tied to compliance with — or a clawback obligation is tied to a breach of — noncompetition provisions. Consider how these agreements would be modified if the proposed rule becomes effective.

    Section 280G

    In the transactional context, when conducting a Section 280G analysis, consider the economics of the deal and the potential need to model alternative scenarios for a Section 280G shareholder vote if noncompetition provisions can no longer be used to mitigate the adverse tax treatment.

    Enforceability

    When entering new arrangements, keep in mind that you may not be able to enforce payments that hinge on employees complying with noncompetition provisions. Consider other alternatives, such as linking the compensation amount to how well the enterprise performs, which would indirectly discourage the post-termination employee from behaving in ways that could harm the company.

    Alternate Protections

    Tie the payment of compensation to compliance with nondisclosure, trade secret protections and narrowly tailored nonsolicit provisions, which the FTC indicates are not prohibited under the proposed rule.

    Make sure that such provisions have a tight scope to reduce the risk of their being characterized as de facto noncompete provisions.

    New Compensation Strategies 

    Develop new compensation designs that would offer creative alternatives to compensating employees for complying with noncompetition provisions.

    For example, European-style garden leave may become more popular, along with provisions that, though they don’t affirmatively prohibit competition, offer an incentive to former workers to avoid competitive activity. Still, these would also need to be carefully designed to avoid arguably functioning as noncompetes.

    Right to Rescind

    Reserve the right in new employment agreements or compensation arrangements to unilaterally rescind — to the extent permitted by law — payments and benefits given in consideration for a worker’s noncompete promise, in the event the noncompete is required to be rescinded.

    Conclusion

    The proposed rule will face significant pushback and legal challenges before it becomes final and effective — if it ever does — so employers should not rip up their noncompetes just yet. 

    Still, prudent employers should start thinking of how their compensation and benefits arrangements might differ in a world without noncompetes.

    Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

    This article first appeared in Law360. 

    [1] https://www.ftc.gov/system/files/ftc_gov/pdf/p201000noncompetenprm.pdf.

    [2] Jackson Lewis recently published a detailed overview of this proposed rule

    [3] See Treasury Regulation Section 1.83-3(c)(2).

    The SECURE 2.0 Act of 2022 (the Act) contains several provisions that liberalize the rules for fixing particular retirement plan administrative mistakes that happen occasionally.  The IRS has a comprehensive program for correcting retirement plan failures, the Employee Plans Compliance Resolution System (EPCRS), including a self-correction program and a voluntary compliance program (VCP).  Most sponsors prefer to self-correct because the VCP filing can be time-consuming and costly, and sponsors must suffer the indignity of admitting their mistakes to the IRS.  Three provisions in the Act provide employers with some relief for fixing retirement plan mistakes. 

    1. Expansion of EPCRS – Eligible Inadvertent Failures.  The Act significantly expands the types of retirement plan failures that can be self-corrected.  Instead of identifying the types of failures that can be self-corrected, the Act provides that a retirement plan can self-correct for an “eligible inadvertent failure” (EIF) unless the IRS discovers the failure before the sponsor has demonstrated a specific commitment to self-correct it.  In other words, once the self-correction has started, it can be self-corrected even if the IRS discovers the failure before the employer completes the correction.  To take advantage of the new rule, the employer must correct the failure within a reasonable period.  Under the current EPCRS, the IRS defines a reasonable period as the last day of the third plan year after the plan year in which the error occurs, but the Act extends the deadline indefinitely unless the IRS discovers the failure before the sponsor begins the self-correction process.  The moral of the story is that if employers want to take advantage of the new liberal self-correction rules, they need to find the failure before the IRS does and start making the correction. 

    To qualify for self-correction under the new rule, an employer must also have established practices and procedures reasonably designed to promote and facilitate overall compliance in form and operation with the Internal Revenue Code’s requirements.  In addition, self-correction is not available for egregious failures or failures involving diversion or misuse of plan assets or whose purpose is tax avoidance. 

    Self-correction is also available for several specific types of failures. 

    • Participant Loan Failures.  The Act provides that EIFs related to participant loan failures can be self-corrected if the failure is corrected following existing EPCRS procedures for that type of failure.  The failure will also be considered corrected under the DOL’s separate correction procedures, subject to any reporting or procedural requirements the DOL may decide to impose. 
    • IRA Failures.  The Act expands self-correction to include failure where the employer is seeking a waiver of the excise tax associated with certain IRA failures and failures related to non-spouse beneficiaries’ distributions to inherited individual retirement plans as long as the beneficiary had reason to believe the funds could be rolled over without tax liability. 

    The Act requires the Treasury Secretary to issue guidance regarding the correction of EIFs, including corrections for specific failures and general correction principles for failures for which there is no specific correction.   The Secretary must also revise EPCRS revenue procedure to reflect the above changes within two years. 

    1. Retroactive Amendments Increasing Benefits.  The Act also extends the deadline for amending plans to increase benefit accruals until the due date of the plan sponsor’s tax return (including extensions).  Under prior law, amendments not required by law to retain the plan’s qualified status had to be made by the last day of the plan year.  Under the new law, an employer could adopt an amendment that retroactively increases benefits to participants under the plan after the plan year is over but before the sponsor must file its tax return.  For a calendar year corporation with a filing extension, the deadline would be September 15th of the subsequent year.  This rule does not apply to matching contributions.  This provision will be helpful only to a small group of plan sponsors who want to increase benefits retroactively after the plan year ends.  This provision is effective for plan years beginning after December 31, 2023.   
    1. Safe Harbor Corrections for Employee Elective Deferral Failures.  The Act provides relief to plans with failures related to automatic enrollment or escalation features and plans that fail to offer an eligible participant an opportunity to make an affirmative deferral election because the plan improperly excluded them.  Under prior law, employers with these types of plan failures did not have to make up for missed employee elective deferrals if they made the corrections within a specified time period.  Still, that rule was set to expire on December 31, 2023.  The Act makes the relief permanent. 

    To take advantage of the relief, a plan sponsor must correct the failure by the earlier of:

    • The date of the first payment of compensation to the employee on or after the last day of the nine-and-a-half month-period after the end of the plan year during which the error occurred; or
    • The first compensation payment date on or after the last day of the month following the month in which the employer receives notification of the error.

      The employer still must make up any matching contributions associated with the missed deferrals (plus earnings) but may forego making up for missed elective contributions.

      What Plan Sponsors Should Do.  To take advantage of the new law, plan sponsors should:

      • Identify and correct errors before the IRS discovers them – the race is on
      • Establish practices and procedures designed to promote and facilitate compliance with IRS requirements
      • Before filing a VCP application with the IRS, determine whether the failure qualifies for self-correction under the new law
      • If employers want to increase benefits for the prior year based on better-than-expected financial results, they have until the due date of their tax return to do so

      Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.