For the many employers that use a pre-approved 401(k) plan (or another type of defined contribution plan), the deadline to execute a restatement of the plan was July 31, 2022.  An employer that missed the deadline will need to (i) review whether a correction will be required to maintain the plan’s favorable tax status and (ii) implement any required correction.  Depending on the circumstances, some failures may require obtaining formal approval from the IRS through its Voluntary Correction Program, while others may be eligible for self‑correction.

Pre-approved Plans

The terms of all traditional retirement plans (such as 401(k) plans) must meet the requirements of Internal Revenue Code Section 401(a) and related regulations.  Retirement plans with language already pre-approved by the IRS to satisfy these requirements may be purchased from a third-party such as a service provider or financial institution.  The most common format of a pre-approved plan consists of an adoption agreement and a basic plan document.  The adoption agreement includes many design options for the employer to select from (such as eligibility, types of contributions, and vesting).  The basic plan document contains all the non-elective provisions of the plan and generally includes more technical language regarding the plan’s operation.

Generally, to keep up with changes in the tax law, the pre-approved plan providers must update their plan documents and obtain approval letters from the IRS every six years.  The adopting employers then have a set period of time (generally two years) to adopt the updated plan document.  The adoption deadline for the latest plan remedial amendment cycle (Cycle 3) was July 31, 2022.

Impact of Missed Deadline for Restatement of Pre-approved Plans

On May 23, 2022, the IRS issued an edition of Employee Plans News addressing the impact of missing the deadline to restate a pre-approved defined benefit or 403(b) plan.  This same IRS guidance may be used in analyzing the failure to restate a pre-approved defined contribution plan timely.  Based on this IRS guidance:

  • Loss of Pre-Approved Plan Status: Failure to timely restate a pre-approved plan results in the plan’s loss of status as a pre-approved plan.  This means the employer could no longer rely on the pre-approved plan’s opinion letter from the IRS approving the plan document’s compliance with the tax code.  However, it does NOT mean that the plan is automatically out of compliance with the tax code.  Being a pre-approved plan is only one method of meeting the requirement to have an updated written plan document.
  • Individually Designed Plan Status: If it’s not a pre-approved plan, the plan is an individually designed plan.  An individually designed plan can still satisfy the tax qualification requirements for a retirement plan.  However, without the favorable IRS opinion letter from the pre-approved plan to rely on, the plan must be reviewed to determine whether there are form defects, especially with any prior interim or discretionary amendments.  In determining whether the interim and discretionary amendments were timely and proper, the rules for individually designed plans would apply.

Correction for Missed Deadline

If failing to timely restate a pre-approved plan results in any interim or discretionary amendments being defective, the plan may be corrected through the IRS Employee Plans Compliance Resolution System (EPCRS).  EPCRS includes two correction programs: (i) the Voluntary Correction Program (VCP), which permits a plan sponsor to pay a fee and receive the IRS’s approval for correction, or (ii) the Self-Correction Program (SCP), which allows plan sponsors to voluntarily correct failures without formal IRS approval and without payment of fees or sanctions to the IRS.  SCP is available only to correct defects that have existed for less than the past three years (see IRS Rev. Proc.  2021-30, Part IV).  Form defects older than three years may be corrected only under VCP.

Conclusion

Failing to qualify as a pre-approved plan is not a qualification issue by itself.  If an employer did not timely adopt the restatement of its pre-approved plan, it could still meet the written document requirements as an individually designed plan.  Individually designed plans that fail to meet these requirements can be self-corrected under certain circumstances detailed in Rev. Proc. 2021-30, Part IV (mainly that the defective amendment or plan language lasted for less than three years).

Please contact the author or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

Earlier this week, Senators Manchin and Schumer reached an agreement securing the former’s support for a tax bill proposed by Senate Democrats entitled the “Inflation Reduction Act of 2022” (the “Act”).  Included in the Act are several provisions intended to increase tax revenue, among them a provision designed to raise $14 billion in tax revenue over 10 years by closing the so-called “carried interest loophole.”

The term “carried interest” generally refers to a profits interest in an investment-focused partnership or limited liability company taxed as a partnership for federal income tax purposes (each, an “Investment Pass-Through Entity”) that is held by a manager providing investment management services to such entity for a fee (the “Fund Manager”) (e.g., the general partner of the partnership or the managing member of the limited liability company).  Under current federal income tax law, the Fund Manager generally can qualify for long-term capital gains treatment on distributions to it by the Investment Pass-Through Entity if the assets giving rise to such distributions have been held for over three years before being sold.  That means taxation at a maximum rate of 23.8%, as opposed to the 37% maximum rate that ordinarily applies to compensation paid for the performance of services.  It is this differential treatment in tax rates that proponents of the Act argue creates a “loophole.”

Putting aside whether a “loophole” genuinely exists (the private equity industry certainly would disagree with such assessment and perhaps argue that other policy concerns, e.g., the cost of investment in business, have not been adequately considered by Congress), the Act seeks to expand the holding period to qualify for long-term capital gains treatment to over five years.  In addition, the holding period would be calculated in a manner potentially making it more difficult for a Fund Manager to qualify for long-term capital gains treatment.

The Act, if enacted into law, would not end carried interest, but it would make the tax benefits of carried interest more difficult for the Fund Manager to achieve.  It is unclear whether the Act will pass, as Senate Republicans appear united in their opposition to it.  Senator Kyrsten Sinema has not indicated whether she will vote for it.  Senator Sinema previously has noted her opposition to tax increases, including those related to carried interest.

Stay tuned!

The Patient-Centered Outcomes Research Institute (“PCORI”) is an independent nonprofit research organization that funds comparative clinical research, among other things.  PCORI is funded through annual fees — provided for in the Affordable Care Act — paid by insurers of fully-insured health plans and sponsors of self-insured health plans, including health reimbursement arrangements (“HRAs”) that are not excepted benefits (i.e., that do not reimburse certain coverage premiums and limit contributions to no more than $1,800 annually, as indexed, among other requirements).  The PCORI fee originally applied only to health plans with plan years ending after September 30, 2012, and before October 1, 2019.  However, the Bipartisan Budget Act of 2019 extended PCORI fees through 2029.

Dental plans and vision plans that are excepted benefits (i.e., are offered through a stand-alone insurance policy or are not integrated with a health plan), are not subject to PCORI fees.  Similarly, health flexible spending accounts that are excepted benefits (i.e., the maximum benefit payable does not exceed two times the participant’s salary reduction election or $500 plus the participant’s salary reduction election and other qualifying health plan coverage is made available to participants) are also excepted benefits not subject to PCORI fees.

PCORI fees usually are due on July 31.  However, for plan years ending in 2021, the PCORI fee due date is August 1, 2022, because July 31, 2022, falls on a Sunday.

IRS Notice 2022-4 recently provided adjusted PCORI fees.  For plans with plan years that ended on or after January 1, 2021, through September 31, 2021, the fee is $2.66 per covered life.  For plans with plan years that ended on or after October 1, 2021, through December 31, 2021, the fee is $2.79 per covered life.  Covered lives are employees, spouses, and dependents covered by the health plan.  Employers who maintain self-insured health plans and HRAs (both with the same plan year) do not have to pay a separate PCORI fee for HRA covered lives.  However, employers who provide coverage through a fully-insured plan (the PCORI fee for which will be paid by the insurer) and an HRA must pay a PCORI fee based on the HRA, but covered lives are limited to employees.

The IRS has provided helpful FAQs about PCORI fees, including information about permitted methods for counting covered lives.  See PCORI Fee FAQs.  Permitted methods include:

  • Actual count method. Add the total number of lives covered under the plan for each day of the plan year and divide by the total number of days in the plan year.
  • Snapshot method. Add the total lives covered on one or more days during each quarter of the plan year and divide by the number of days used. 
  • Snapshot factor method. The number of lives covered on a date equals:  (a) the number of employees with self-only coverage and (b) the number of employees with other than self-only coverage multiplied by 2.35.
  • Form 5500 method. The method used for calculating participants for Form 5500 reporting.  

The PCORI fee is reported using IRS Form 720, Quarterly Federal Excise Tax Return.  The PCORI fee can be remitted to the IRS electronically or by mail.

 If you need more information about PCORI fees, please contact the author or the Jackson Lewis attorney with whom you normally work.

The recently published final regulation implementing last year’s massive multiemployer pension plan bailout contains a very thin silver lining, but overall, more bad news for already overburdened employers.

Last year, the Pension Benefit Guaranty Corporation (PBGC) issued its interim final rule on the process for eligible troubled Multiemployer Pension Plans (MEPPs) to apply for and obtain Special Financial Assistance (SFA) under the American Rescue Plan Act of 2021 (ARPA).  On July 8, 2022, the PBGC published its final rule, which takes effect on August 8, 2022.  The PBGC also published a fact sheet highlighting the rule’s key provisions and impact.

The PBGC still expects approximately 100 of the most critically underfunded plans (plans that would have otherwise become insolvent during the next 15 years) will instead forestall insolvency as a direct result of receiving SFA.  The PBGC’s updates decreased the projected total nominal SFA estimate from $93.98 billion to about $86.15 billion (about a $17.3 billion decrease).

As with the interim rule, the final rule details the eligibility criteria, the application process, and the restrictions and conditions associated with the MEPPs’ use of the SFA.  Similar to the interim rule, the final rule reiterates the PBGC’s view that “payment of an SFA was not intended to reduce withdrawal liability or to make it easier for employers to withdraw.”

Like the interim rule, the final rule requires a MEPP to use the “mass withdrawal interest assumptions” for a minimum of 10 years after receiving SFA.  The interest rates prescribed for a mass withdrawal often are lower (in many instances, significantly lower) than the withdrawal liability interest rate currently being used by many MEPPs.  As a result, this requirement (which is effective for withdrawals occurring after the plan year in which the plan receives SFA) is expected to increase the amount of many employers’ withdrawal liability.

However, in the final rule, the PBGC expressed concern that even these low interest assumptions may spike because of current economic conditions.  In response to its concerns about rising interest rates, the PBGC changed the rule concerning the status of SFA as a plan asset in the calculation of withdrawal liability.  Under the interim rule, the entire amount of SFA was included as a plan asset for all recipients.  The final rule changes this by including a “phase-in” approach for certain SFA recipients.  These calculations can be complex, even more so now, but the concept is fairly simple.  For a period of ten years, the amount of the SFA will be phased in as a plan asset.  This modification of the interim rule is expected to substantially increase the nominal amount of employer withdrawal liability assessed by some SFA recipients but does not change the application of the 20-year cap on payments.  This phase-in approach applies to withdrawals occurring after the plan year in which the MEPP receives SFA.  The phase-in does not apply to MEPPs that received SFA under the terms of the interim rule (e.g., before August 8, 2022) unless the plan files a supplemented application for SFA.  The final rule includes a 30-day request for additional public comments related to the phase-in withdrawal liability condition.  We anticipate that this will stimulate heated discussion and comment, especially in the employer community.

The sole silver lining for employers is the PBGC’s stance regarding the interest rate used for the withdrawal liability payment amortization schedule.  Currently, many MEPPs charge a significantly higher rate of interest on the balance of withdrawal liability due than is used to calculate the amount of withdrawal liability.  After acknowledging that this area of law is “unclear,” the PBGC concluded in the final rule that SFA recipients must use the same interest rate to determine the amortization period as they use to calculate withdrawal liability (the mass withdrawal interest assumptions.) It is expected that using these lower amortization rates will reduce the payment period for some employers.

Another noteworthy provision in the final rule includes the PBGC’s condition that MEPPs receiving an SFA over $50 million obtain PBGC approval.  At a minimum, this condition creates an additional and significant hurdle for large withdrawal liability settlements.  It remains unclear how trustees’ fiduciary duty will be affected if they and the PBGC cannot agree on a resolution.

The final rule, like the interim rule, seemingly ignores the existing and ongoing burden imposed on contributing employers, specifically as it relates to contribution rates.

In the final rule, the PBGC did not expand its previous footnote that seemed to infer a rule of general application (not just applicable to SFA recipients) was in the works.  Specifically, the PBGC previously announced it “intends to propose a separate rule of general applicability under section 4213(a) of ERISA to prescribe actuarial assumptions which a plan actuary may use in determining an employer’s withdrawal liability.” As Judge Joan Larsen acknowledged in Sofco Erectors, Inc. v. Trustees Ohio Operating Engineers Pension Fund, the PBGC has not taken up its own invitation to address withdrawal liability calculations under the Segal Blend and other manipulative funding assumptions.  The issue will remain with the Courts (at least for now.)

We will continue to monitor this dynamic situation as it develops.  Please contact the authors or the Jackson Lewis attorney with whom you normally work with any questions.

As many expected based on the draft opinion that was leaked months ago, the U.S. Supreme Court has held the U.S. Constitution does not protect the right to obtain an abortion. Dobbs v. Jackson Women’s Health Organization, No. 19-1392 (June 24, 2022).

Dobbs overturns nearly 50 years of precedent from the Court’s decision in Roe v. Wade and Planned Parenthood Pennsylvania v. Casey on the issue.

The impact of Dobbs will vary, as states are now at liberty to enforce and create abortion legislation without restrictions arising out of constitutional protections.

What does this mean for employers?  More…

Investment, private equity, and real estate fund managers should consider becoming familiar with the complex final regulations on the preferential tax treatment of “carried interest” under Section 1061 of the Internal Revenue Code (Code) that are generally effective for taxable years beginning on or after Jan. 1, 2022.  More…

On March 29, 2022, the House of Representatives passed the Securing a Strong Retirement Act of 2022 (SECURE 2.0, HR 2954).  SECURE 2.0 is a comprehensive bill designed to increase access to retirement savings and includes a variety of provisions that would affect employer-provided retirement plans.

On June 14, 2022, the Senate Health, Education, Labor, and Pensions (HELP) Committee unanimously approved its version of SECURE 2.0, the Retirement Improvement and Savings Enhancement to Supplement Health Investments for the Nest Egg (RISE and SHINE, S. 4354) Act.

RISE and SHINE v. SECURE 2.0

The RISE and SHINE Act builds on SECURE 2.0, with some key differences.  Provisions in the RISE and SHINE Act not in SECURE 2.0 include:

  • Allowing the use of plan assets to pay some incidental plan design expenses;
  • Raising the limit on mandatory cash-out distributions from $5,000 to $7,000; and
  • The inclusion of the Emergency Savings Act of 2022 (the Emergency Savings Act). Under Emergency Savings Act, 401(k) plans could include emergency savings accounts.  Participants could make pre-tax contributions to their emergency savings accounts.  Employers could match those contributions, but the total amount in a participant’s emergency savings account could not exceed $2,500.  Participants could withdraw amounts from their emergency savings accounts generally at any time, without the requirements imposed on hardship withdrawals.

Provisions in SECURE 2.0 not in RISE and SHINE include:

  • Increasing the catch-up contribution limit;
  • Permitting matching contributions on student loan payments; and
  • Raising the required minimum distribution age.

WHAT’S NEXT? 

The Senate Finance Committee anticipates releasing its retirement reform bill by July 4.  The expectation is for the Finance Committee bill and the HELP Committee bill to merge into a final bill, which the Senate will vote on later this year.  The Senate bill will then be reconciled with SECURE 2.0, and both chambers will vote on the combined bill.

We will continue to monitor retirement reform bills as they move through Congress and will have additional updates as information becomes available.  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.

On May 2, 2022, a draft opinion from the U.S. Supreme Court case Dobbs v. Jackson Women’s Health was leaked to the press, and as a result the Court is expected to overturn Roe v. Wade and Planned Parenthood v. Casey, effectively leaving the issue of abortion rights to the states. Thirteen states currently have laws in place that will automatically ban at least some forms of abortion in their state if Roe v. Wade is overturned, and it is expected that thirteen or more additional states will quickly follow suit.  More…

Whether because of the tight U.S. labor market or flawed onboarding processes, many undocumented workers are becoming participants and accruing benefits in ERISA-governed employee benefit plans. Dealing with such plan participation adds yet another layer of administrative difficulty and legal exposure for employers who hire employees not authorized to work in the U.S.

ERISA does not exclude individuals otherwise qualifying as common law employees from plan rights and protections simply because of their immigration status.

However, although the Department of Labor (“DOL”) has affirmed that other federal statutes, such as the FLSA, protect undocumented workers, it has conspicuously failed to formally state that ERISA does too.

And the court decisions have not been consistent. For example, one federal district court opinion held in 2016 that trustees of ERISA benefit funds could enforce collection from employers of unpaid plan contributions for illegal aliens to collectively bargained welfare and pension plans. But another federal district court decision in 2009 held that the wife of a deceased undocumented worker could not recover death benefits under an ERISA group life insurance plan.

These individuals understandably desire to stay under all governmental radar, usually because they have either no social security number or a false one. As a result, tax and related difficulties arise when administering their participation in a plan.  For example, under the annual reporting requirements of the Affordable Care Act, large employers must now provide to the IRS the employee social security numbers of their group health plan participants. When an undocumented employee terminates employment, a 401(k) or another qualified retirement plan will usually need to report the distribution of accrued benefits to the employee for tax purposes.

Nontaxable rollovers are generally not elected by these employees. Taxable distributions could be properly reported on form 1099-R if the undocumented employee obtains and gives the employer a valid Individual Taxpayer Identification Number (“ITIN”). An ITIN can be used for 1099 reporting and the personal filing of taxes by undocumented employees, even though the employer may not use it for Form W- 2 reporting.

But many undocumented employees simply will not file the Form W-7 to get an ITIN. This is unfortunate since, in general, the IRS and the Social Security Administration do not share tax or wage reporting information with immigration authorities.

Of course, given the tax and other difficulties of paying compensation and providing benefits to undocumented employees many employers simply terminate an undocumented worker when they learn that the social security number is missing or false (including where the number belongs to someone else). But note that in certain circumstances, an ERISA Section 510 discrimination action could be brought by the worker, assuming the worker chose to go public with his or her illegal status.

Some employers may choose, for business reasons, to keep an undocumented individual employed but discourage plan enrollment by requiring a valid social security number.  Other employers draft a categorical coverage exclusion into the plan document for employees who are not authorized to work under U.S. immigration laws or who gain employment with false documentation.

The absence of controlling court precedents, clear DOL administrative guidance, and more accommodating federal tax reporting for actual and potential employee benefit plan participation by undocumented workers require careful consideration of the facts and circumstances of any scenario.

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.