Important Guidance and Relief for 403(B) Plan Sponsors Who Exclude Part-Time Employees

In the spirit of the holidays, the Internal Revenue Service gave a gift to sponsors of 403(b) tax-deferred annuity plans on December 4, 2018, by issuing IRS Notice 2018-95.  For plan sponsors that exclude part-time employees from their 403(b) plans, this gift provides a 10-year nod on their historical plan administration, despite noncompliance with the once-in-always-in part-time exclusion condition.

The Notice contains many conditions to qualify for the relief.  It also does not provide blanket relief covering all potential administrative issues involving the exclusion of part-time workers.  So, just as important as the relief itself is what the relief does not cover, serving as an important reminder to plan sponsors about the circumstances in which part-time employees may be excluded from 403(b) plans.

The 403(b) Plan Universal Availability Requirement

One of the tax-law based nondiscrimination requirements applicable to 403(b) plans is the “universal availability” requirement.  This requirement means what is says – generally, if any employee is allowed to make elective deferrals into the plan, every employee must be permitted to do so.  The plan must be universally available.

There are some important exceptions to this requirement, one of which relates to part-time employees.  Your Section 403(b) plan can exclude part-time employees from participating.

Importantly, this exclusion of part-time workers must be in your written plan document.  You cannot simply exclude part-time employees or classes of employees who typically work part-time hours operationally, taking the position only full-time employees are eligible.  This is a legal compliance issue requiring correction and to which IRS relief is not available.

Who Qualifies as a Part-Time Employee?

Like most employee benefit rules, there is a technical legal meaning to the term “part-time.”  This definition may not jive with your employment practices, and it is not the opposite of “full-time” as under the Affordable Care Act (“ACA”).  So, this tends to be an area ripe for legal compliance issues.

Under the Section 403(b) regulations, an individual is part-time if:

  • Looking forward from their first date of hire, you do not expect them to work at least 1,000 hours during their first year of employment (the “first-year exclusion”); and
  • Looking backward for each year ending after the initial year, the employee did not actually work 1,000 hours (the “look back exclusion”). The plan can use either anniversary dates or the plan year when applying these rules.

These concepts are similar to the ACA measurement methods involving variable hour employees.  However, it should be noted, they use the retirement plan 1,000 hours of service requirement, in lieu of the 30- hour requirement used for group medical plans.

The Once-In-Always-In Condition

Simply applying the above rules for excluding part-time employees is not enough to meet the universal availability requirements.  Instead, there is a third requirement — the once-in-always-in condition, which says:  Once an employee meets the 1,000-hour requirement, that employee no longer can be excluded from the 403(b) plan based on being a part-time employee.

For example, say you hire Joe Blow in June of 2016, expecting Joe to work 750 hours per year.  But, Joe actually works 1040 hours during his first year of employment and 750 hours every plan year after that.  The ONLY year for which you would be permitted to exclude Joe from your plan is Joe’s first year when you reasonably expected him to work under 1,000 hours.  Because Joe actually worked 1,040 hours during that first year, Joe can no longer be excluded from the plan based on being a part-time employee for succeeding years.  This is true even though Joe never again works 1,000 hours.

Note how different this rule is from the ACA regulations, which enable employers to apply the look-back rules during measurement periods on a year-by-year basis, resulting in employees coming in and out of group medical plans during their periods of employment.

Many employers have administered their 403(b) plans like their group medical plans where part-time employees come in and out of eligibility based on the number of hours they worked during the prior year.  So in the case of Joe Blow, many employers would have let Joe into the 403(b) plan based on his actually working 1,040 hours during his first 12-months of employment.  Yet after that first plan year of participation, they would have excluded Joe from the 403(b) plan by virtue of his working only 750 hours per year.  This is not allowed by the once-in-always-in condition and is what the IRS relief specifically addresses.

Operational Relief from the Once-In-Always-In Condition

During the relief period (defined below), the IRS has said that a plan will not be treated as failing to satisfy the requirements for the part-time employee exclusion simply because the plan did not apply the once-in-always-in condition.  Stated differently, the relief applies only if:

  • The plan contains an express exclusion of part-time employees;
  • The plan administrator applied the first year exclusion rule correctly;
  • The plan administrator applied the look back exclusion rule correctly for subsequent plan years;
  • No employees working part-time hours received different or special treatment (such as allowing an executive’s child working 10 hours per week to participate in the 403(b) plan when others working similar hours are excluded); and
  • The only mistake is that the plan had part-time employees coming in and out of participation based on the number of hours they worked each year.

Section 403(b) plans that are individually designed also must be amended on or before March 31, 2020, to reflect that the once-in-always-in condition was not applied.  Comparatively, pre-approved Section 403(b) plans, such as those that use an Adoption Agreement platform, are not required to be amended as a condition of this relief.

Take the example above where Joe Blow was hired in June of 2016 with the expectation of his working 750 hours per year.  But Joe Blow actually worked 1040 hours during his first year of employment and 750 hours every year after that.  If the employer allowed Joe Blow to participate after he actually worked 1040 hours, but then excluded Joe thereafter based on his working 750 hours per year (in violation of the once-in-always-in condition), then the plan should qualify for the operational relief described in the IRS Notice, assuming the plan is amended, as needed.

Relief Period

The relief period begins with tax years beginning after December 31, 2008, (January 1, 2009, for calendar year plans).  This is the general effective date for the Section 403(b) regulations, which set forth the once-in-always-in requirements.  The relief period ends on one of two dates:

  • For plans that use a plan year basis of measurement, the last day of the last exclusion year that ends before December 31, 2019, (December 31, 2018, for calendar year plans);
  • For plans that use an anniversary date basis of measurement, the last day of the employee’s last exclusion year that ends before December 31, 2019, (e.g., July 19, 2019, for an employee hired on July 20, 2015).

Fresh Start Opportunity

The IRS Notice also contains a special rule, allowing plans essentially to start over and have a fresh start on the administration of the once-in-always-in condition.  This enables employers to apply the once-in-always-in condition for years that begin on and after January 1, 2019, as if the condition first became effective January 1, 2018.  This means that the plan can ignore the prior application of the once-in-always-in condition in determining whether an employee should be offered an elective deferral opportunity during the 2019 plan year.

Back to our example:  Because Joe worked only 750 hours during 2018, Joe may be excluded during the 2019 plan year, even though Joe worked over 1,000 hours during his first year of eligibility beginning in June of 2016.  The plan gets a fresh start and need only look back to the 2018 exclusion year in determining whether Joe should be offered an elective deferral opportunity during the enrollment period for 2019.

Plans need not be amended to reflect the use of this fresh start opportunity. 


Employers who sponsor 403(b) plans that exclude part-time employees, but which have been administered in contravention of the once-in-always-in condition just received a significant gift.  This relief has the potential for saving employers material amounts in the form of corrective contributions.  That said, it is crucial that employers who qualify for this relief act now to ensure they administer their plans correctly starting in 2019 and, for individually designed plans only, amend their plans on or before March 31, 2020, to reflect plan’s actual operations.

The relief is very narrow and does not extend to more general failures to comply with the terms of the plan.  For example, employers who have been excluding part-time employees from their 403(b) plans when the plan does not contain this explicit exclusion and employers who have excluded employees who normally work fewer than 30-hours per week from their 403(b) plans (rather than applying the 1,000 hours of service rules) are not covered by this relief.  These employers should seek counsel on the correction of the operational failures under the IRS Employee Plans Compliance Resolution System (“EPCRS”), the latest version of which is IRS Revenue Procedure 2018-52.

Ho! Ho! Ho! Where Did It Go?

On December 14, 2018, a federal district judge sitting in Texas ruled that, without the so-called “individual mandate” which requires individual taxpayers to maintain minimum essential coverage, the rest of the Patient Protection and Affordable Care Act as amended (widely known as the “ACA”) is “INVALID”.

What was the case about?

Texas v United States was brought in Judge Reed O’Connor’s court by numerous states and two individual plaintiffs seeking the court’s declaration that the individual mandate is unconstitutional and that the remainder of the ACA is inseverable from the individual mandate.

For context, remember that this case followed –

  1. the Supreme Court’s 2012 decision in National Federation of Independent Businesses v. Sebelius that the individual mandate is unconstitutional under the Commerce Clause but could fairly be read as exercising Congress’s power to tax because failure to comply with it would trigger a tax under the individual shared responsibility penalty provision of the ACA; and
  2. Congress’ passage of the Tax Cuts and Jobs Act of 2017 (“TCJA”) which reduced to zero (for tax years after 2018) the individual shared responsibility penalty otherwise triggered by failing to comply with the individual mandate.

What did the judge decide?

Judge O’Connor filled the plaintiffs’ stockings:  He held that the individual mandate could “no longer be fairly read as an exercise of Congress’s Tax Power” because Congress nullified its revenue raising potential by reducing the individual shared responsibility penalty amount to zero.  Thus, the only basis on which the Supreme Court upheld the individual mandate’s constitutionality in the 2012 case went up the chimney with the TCJA in 2017.

With visions of sugar plums dancing in plaintiffs’ heads, Judge O’Connor held that the individual mandate is “essential to and inseverable from the remainder of the ACA.”  This, he based on Congress’ own words about the individual mandate:  “The requirement is an essential part of this larger regulation of economic activity, and the absence of the requirement would undercut Federal regulation of the health insurance market.”  He pointed out also that Congress itself had explained in multiple contexts how the individual mandate was the keystone of the ACA.  He also reminded us that each of the nine Supreme Court justices in the 2012 case had agreed that the individual mandate was inseverable from at least some other ACA provisions (for example, the prohibition against pre-existing condition limitations).

In other words – the judge’s own words – with the individual mandate unconstitutional, the remaining provisions of the ACA “are INSEVERABLE and therefore INVALID.”

What happens now?

Most likely, the (for some) nightmare before Christmas case will not have immediate effect and will be appealed to the Supreme Court, making it the third case challenging the constitutionality of the ACA to reach the Supreme Court.  Although it’s unlikely that the government defendants will be the ones appealing.  Instead, it will be the states that intervened in the case when it became apparent that the United States Justice Department under President Trump would not defend the constitutionality of the individual mandate or its severability from other provisions like the prohibition against pre-existing condition limitations.

In response to the ruling on December 14, 2018, President Trump tweeted “As I predicted all along, Obamacare has been struck down as an UNCONSTITUTIONAL disaster! Now Congress must pass a STRONG law that provides GREAT healthcare and protects pre-existing conditions.”

We will continue to follow the court and legislative developments closely and post updated information on our blog.

IRS Announces Filing Extension for Furnishing 2018 Forms 1095-B and 1095-C and Continued Good Faith Transition Relief

In IRS Notice 2018-94, the IRS announced an extension for furnishing 2018 IRS Forms 1095-B (Health Coverage) and 1095-C (Employer-Provided Health Insurance Offer and Coverage), from January 31, 2019, to March 4, 2019.  The IRS issued this extension in response to requests by employers, insurers, and other providers of health insurance coverage that additional time be provided to gather and analyze the information required to complete the Forms and is largely identical to the extension the IRS provided for furnishing the 2016 and 2017 Forms.  Despite the extension, the IRS encourages employers and other coverage providers to furnish the Forms as soon as possible.

Consistent with the prior Notices, Notice 2018-94 does not extend the due date for employers, insurers, and other providers of minimum essential coverage to file 2018 Forms 1094-B, 1095-B, 1094-C and 1095-C with the IRS.  The filing due date for these forms remains February 28, 2019 (April 1, 2019, if filing electronically), unless the due dates are extended under other available relief.

The IRS also reveals in Notice 2018-94 that, while failure to furnish and file the Forms on a timely basis may subject employers and other coverage providers to penalties, such entities should still attempt to furnish and file even after the applicable due date as the IRS will consider such action when determining whether to abate penalties.

Notice 2018-94 also provides that good faith reporting standards will apply once again for 2018 reporting.  This means that reporting entities will not be subject to reporting penalties for incorrect or incomplete information if they can show that they have made good faith efforts to comply with the 2018 Form 1094 and 1095 information-reporting requirements.  This relief applies to missing and incorrect taxpayer identification numbers and dates of birth, and other required return information.  However, no relief is provided where there has not been a good faith effort to comply with the reporting requirements or where there has been a failure to file an information return or furnish a statement by the applicable due date (as extended).

Finally, an individual taxpayer who files his or her tax return before receiving a 2018 Form 1095-B or 1095-C, as applicable, may rely on other information received from his or her employer or coverage provider to file his or her return.  If employers take advantage of the extension in Notice 2018-94 and receive employee requests for 2018 Forms 1095-C before the extended due date, they should refer their employees to the guidance in Notice 2018-94.

Notably, Notice 2018-94 states that “[b]ecause the individual shared responsibility payment is reduced to zero for months beginning after December 31, 2018, Treasury and the Service are studying whether and how the reporting requirements [regarding reporting by insurers, self-insured employers and other providers of minimum essential coverage] should change, if at all, for future years.”  We anticipate changes in the reporting requirements for 2019.  Stay tuned for further developments.

IRS Proposed Regulations Implementing Changes To Hardship Distribution Rules

Earlier this year we reported on legislative changes that modified the requirements related to hardship distributions from 401(k) plans.  Recently, the IRS issued proposed regulations that if finalized will implement those changes.


The Internal Revenue Code (the “Code”) and associated regulations generally place restrictions on participants’ ability to withdraw their elective deferrals from 401(k) plans.  Similar restrictions exist for Section 403(b) plans.

However, there are exceptions to those rules.  One such exception occurs if the plan allows for hardship distributions.  A hardship distribution is a distribution that a participant can take under certain circumstances of immediate and heavy financial need.  A hardship distribution can be taken only if it is necessary to satisfy that need.  Immediate and heavy financial needs include things like certain medical care expenses, the cost to purchase a principal residence, certain tuition and educational expenses, the amount necessary to avoid eviction, certain burial or funeral expenses, and certain expenses to repair damage to a principal residence.

Elective Deferral Restrictions Following a Hardship Distribution

Under current IRS regulations, participants that take hardship distributions generally are not allowed to contribute to the plan for a six-month period following the hardship distribution.  The proposed regulations would remove the six-month suspension rule for hardship distributions that occur on or after January 1, 2020.  In other words, as of that date, plans cannot contain the six-month suspension rule.

The plan would be allowed (but not required) to eliminate the six-month suspension rule as of the first day of the plan’s 2019 plan year.  The removal could be applied retroactively to those who took hardships prior to that date but are still in the six-month suspension period.

Prohibition on Hardship Distributions of Elective Deferral Earnings, QNECs and QMACs

The proposed regulations would remove the rule that prevents hardship distributions from elective deferral earnings, qualified non-elective contributions (QNECs) and qualified matching contributions (QMACs).  This is not a required change, so plan sponsors have the discretion to determine whether and to what extent to adopt these changes.

Section 403(b) plans are more limited in the changes that can be made.  Specifically, a Section 403(b) plan cannot eliminate the restriction preventing hardship distributions from elective deferral earnings, and hardship withdrawals of QNECs and QMACs are only allowed if those amounts are not held in custodial accounts.

Elimination of Plan Loan Exhaustion Requirement

In accordance with changes in the tax laws, the proposed regulations remove the requirement that participants take all available plan loans prior to taking a hardship distribution.  This is a permissive change that plans can adopt for the 2019 plan year and beyond.

Substantiation Requirements

The proposed regulations would require that for hardship distributions that occur on or after January 1, 2020, the applicable employee must represent (in writing, electronically or in another form permitted by the IRS) that he or she has insufficient cash or other liquid assets to satisfy the immediate and financial need for which the hardship distribution is being sought.  The plan administrator would be allowed to rely on this representation absent actual knowledge to the contrary.

Other Changes

As noted above, hardship distributions are only allowed in certain circumstances of immediate and heavy financial need, one of which is for expenses to repair damage to a principal residence that qualifies for a casualty deduction under the Internal Revenue Code.  Recent changes in the tax limit the casualty deduction to expenses related to certain federally declared disasters (through 2025), with the unintended consequence of limiting the situations in which a participant could qualify for a hardship distribution due to home damage.  The proposed regulations would clarify that the new limit on casualty loss deductions would not apply for purposes of hardship distributions.

In addition, the proposed regulations would expand the situations deemed to create an immediate and heavy financial need to include expenses and losses incurred by employees because of a federally declared disaster, if the employee’s principal residence or place of employment was in the disaster area at the time of the disaster.

Plan Sponsor Considerations

Plan sponsors may want to communicate with their third-party record keepers and document providers regarding changes in hardship distribution procedures.  Many employers use volume submitter or prototype plan documents, and many of those document providers are making default changes to the hardship rules of those plans.  Employers may need to determine whether they want to use the provider’s default changes or do something different.  Similarly, sponsors of individually designed plans may also want to speak with their third-party administrators about any changes being contemplated.

The exact date that plan amendments will be required to implement the changes described above is not yet known.  Generally, however, amendments will be required by the end of the second calendar year beginning after the IRS issues its annual “Required Amendments List” that includes changes in the hardship rules.

Plan administrators may also want to consider whether updates are needed to the plan’s summary plan description and other communications documents that describe the plan’s hardship rules, and to election forms and online election pages.

Please contact your preferred Jackson Lewis attorney for assistance in understanding these new rules and how they may affect your plan.

The Saga Continues for Multi-Employer Pension Funds

            This is another blog on our monitoring the status of defined benefit multi-employer pension funds.  Since this author last wrote to you, it has been revealed that the Central States Pension Fund is scheduled to become insolvent sometime in 2025.  Worse yet, it has been announced that the multi-employer fund of the Pension Benefit Guaranty Corporation (“PBGC”) which was structured to assist insolvent multi-employer pension funds is also projected to run out of money in 2025.

The future of those funds is dire.  In approximately six years, almost 400,000 participants in the Central States Pension Fund will find themselves in an insolvent plan without the benefit of the PBGC safety net.

Congress’ response to the multi-employer pension fund crisis was to form a bi-partisan committee on February 16, 2018, the Joint Select Committee on Solvency of Multiemployer Pension Plans (“JSC”) which is made up of sixteen members.  The chairmen of the JSC are Senator Sherrod Brown, a Democrat from Ohio and Senator Orin Hatch, Republican from Utah.

The JSC concluded its public hearings and submissions for public stakeholder input in October.  Considerable time was spent by the JSC in focusing on the solvency of large distressed funds and the financial solvency of the PBGC but less time was spent examining the impact of reform changes to health plans or creating a framework for sustainable retirement plans in the future.

Among the “solutions” being considered are “composite plans,” loans for plans headed to insolvency, changes to funding rules, and premium or contribution increases.

The JSC is projected to issue a report later this month.

We will continue to you apprised of future developments.

Puerto Rico Revises Form for Reporting Payments to Terminated Employees, Considers Credit History Ban

The Puerto Rico Department of the Treasury has announced changes to tax reporting for certain severance payments.

As a result of the Labor Transformation and Flexibility Act (Act 4-2017), adopted in 2017, certain limited payments made by an employer to an employee due to separation of employment are classified as “exempt income” under the Puerto Rico Internal Revenue Code. These are not taxable for purposes of Puerto Rico income tax, but the employer must report the payments to the employee and the Treasury Department on an official informative return. …read the full article here.


2019 Cost of Living Adjustments for Retirement Plans

The Internal Revenue Service recently announced its cost-of-living adjustments applicable to dollar limitations for retirement plans and Social Security generally effective for Tax Year 2019 (see IRS Notice 2018-63). Most notably, the limitation on annual salary deferrals into a 401(k) plan will increase from $18,500 to $19,000. The dollar limits are as follows:


LIMIT 2018 2019
401(k)/403(b) Elective Deferral Limit (IRC § 402(g))The annual limit on an employee’s elective deferrals to a Section 401(k) or 403(b) plan made through salary reduction. $18,500 $19,000
Governmental/Tax Exempt Deferral Limit (IRC § 457(e)(15))The annual limit on an employee’s elective deferrals to Section 457 deferred compensation plans of state and local governments and tax-exempt organizations. $18,500 $19,000
401(k)/403(b)/457 Catch-up Limit (IRC § 414(v)(2)(B)(i))In addition to the regular limit on elective deferrals described above, employees age 50 or over generally can make an additional “catch-up” contribution not to exceed this limit. $6,000 $6,000
Defined Contribution Plan Limit (IRC § 415(c))The limitation for annual contributions to a defined contribution plan (such as a 401(k) plan or profit sharing plan). $55,000 $56,000
Defined Benefit Plan Limit (IRC § 415(b))The limitation on the annual benefits from a defined benefit plan. $220,000 $225,000
Annual Compensation Limit (IRC § 401(a)(17))The maximum amount of compensation that may be taken into account for benefit calculations and nondiscrimination testing. $275,000 ($405,000 for certain gov’t plans) $280,000 ($415,000 for certain gov’t plans)

Highly Compensated Employee Threshold (IRC § 414(q))The definition of an HCE includes a compensation threshold for the prior year. A retirement plan’s discrimination testing is based on coverage and benefits for HCEs.


$120,000  (for 2019 HCE determination)


$125,000 (for 2020 HCE determination)

Key Employee Compensation Threshold (IRC § 416)The definition of a key employee includes a compensation threshold. Key employees must be determined for purposes of applying the top-heavy rules. Generally, a plan is top-heavy if the plan benefits of key employees exceed 60% of the aggregate plan benefits of all employees. $175,000 $180,000
SEP Minimum Compensation Limit (IRC § 408(k)(2)(C))The mandatory participation requirements for a simplified employee pension (SEP) includes this minimum compensation threshold. $600 $600
SIMPLE Employee Contribution Limit (IRC § 408(p)(2)(E))The limitation on deferrals to a SIMPLE retirement account. $12,500 $13,000
SIMPLE Catch-up Limit (IRC § 414(v)(2)(B)(ii)))The maximum amount of catch-up contributions that individuals age 50 or over may make to a SIMPLE retirement account or SIMPLE 401(k) plan. $3,000 $3,000
Social Security Taxable Wage BaseSee the 2019 SS Changes Fact Sheet.

This threshold is the maximum amount of earned income on which Social Security taxes may be imposed (6.20% paid by the employee and 6.20% paid by the employer).

$128,400 $132,900

Court Rules that One-Time Voluntary Separation Program is Not an ERISA Plan

Whether a one-time voluntary separation program should be treated as an ERISA-covered severance plan depends on whether the program requires an “ongoing administrative scheme” – a requirement first established by the Supreme Court in Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987).

In Fort Halifax, the Supreme Court held that ERISA does not apply to a one-time severance payment —such as one dictated by a state plant-closing law ― that is triggered by an external event and requires no administration or administrative interpretation to make payments.  The subsequent court decisions understandably have not established a hard and fast rule regarding how much administration is required to trigger ERISA plan status.  As a result, the rulings have been unpredictable in determining whether an employer has established an “administrative scheme” to provide benefits in situations that fall between one-time corporate events and ongoing benefit payments.

Recently, in Girardot v. The Chemours Company, 2018 WL 2017914 (04/30/2018), the Third Circuit held that a one-time voluntary separation program required no ongoing administrative scheme and dismissed the ERISA complaint of former employees who had separated under the program.  The terms of the program were common to many current programs:

  • Eligible employees could elect to be considered for the program during a short window period;
  • The company had the discretion to determine whether an employee could separate and receive the program severance benefits;
  • The company had the discretion to determine a participating employee’s separation date;
  • Participants had to sign a general release and a restrictive covenant agreement;
  • Participants could receive a lump sum severance payment based on years of service plus a lump sum payment equal to the cost of 3 months of COBRA medical coverage, and a pro-rated bonus for the year of separation; and
  • Participants were ineligible to be rehired within 12 months following separation.

The Third Circuit stated that the crucial factor in determining whether a program constitutes an ERISA plan is whether the employer expresses the intention to provide benefits on a regular and long-term basis.  But here, the Court found that the company merely had entered into an obligation to provide lump-sum payments to a class of employees over a defined and relatively brief period.  According to the Court, determining these lump sum payments required no new administrative body or exercising discretion – rather, it involved the mechanical application of a simple formula based on time of employment with the company.  The Court found that this was generally akin to a Fort Halifax plan and held that the voluntary separation program was not subject to ERISA.

COMMENT:  The Second Circuit has applied similar factors in determining whether a severance benefits plan requires an administrative scheme that is sufficient to trigger ERISA plan status.  See Okun v. Montefiore Medical Center, 793 F.3d 277 (2015).  Based on these factors, one-shot involuntary reductions in force and voluntary separation programs usually will not be subject to ERISA.  Nevertheless, even if ERISA does not apply, clear drafting and communications to affected employees resolve many issues under these types of programs.

Notice 2018-76: Taking a Bite Out of the Business Expense Deductions for Meals, Entertainment

On October 3, 2018, the IRS issued transitional guidance in Notice 2018-76 concerning the business expense deductions for meals and entertainment following the changes made by the Tax Cuts and Jobs Act (“TCJA”) — which generally disallowed a deduction for expenses related to entertainment, amusement or recreation, but did not specifically address the deductibility of business meal expense.

The Notice explained that, under Code Section 274(k), no deduction is allowed for food and beverage expense unless the expense is not lavish or extravagant under the circumstances and the taxpayer or an employee of the taxpayer is present at the furnishing of the food and beverage. If those requirements are satisfied, the amount of the deduction is limited to 50 percent of the amount of the food and beverage expense under Code Section 274(n)(1).

Under pre-TCJA law, a deduction for entertainment expense was allowed if the entertainment was directly related to the active conduct of the taxpayer’s trade or business or in the case of entertainment directly proceeding or following a substantial and bona fide business discussion, the entertainment was associated with the active conduct of the taxpayer’s trade or business. The amount of the deduction was limited to 50 percent of the amount of the entertainment expense under Code Section 274(n)(1).

The TCJA did not address the circumstances under which food and beverages might constitute entertainment — and would, therefore, not be deductible. The Notice announced that the Treasury Department and IRS intended to publish proposed regulations under Code Section 274 clarifying when business meals might constitute nondeductible entertainment expense. Until the proposed regulations become effective, taxpayers may rely on the Notice and may deduct 50 percent of food and beverage expense if:

• The expense is ordinary and necessary under Code Section 162(a) or incurred in carrying on a trade or business;

• The expense is not lavish or extravagant;

• The taxpayer or an employee of the taxpayer is present at the furnishing of the food and beverage;

• The food and beverage are provided to current or potential customers, clients, consultants or similar business contacts; and

• In the case of food and beverage provided during or at an entertainment activity or event, the food and beverages are purchased separately from the entertainment or the cost of the food and beverages is stated separately from the cost of the entertainment on the bill, invoice or receipt.

The Notice stated that the Treasury Department and IRS intend to issue separate guidance concerning the treatment of food and beverages furnished primarily to employees on the employer’s business premises.

Key Take Away: Whether sitting with clients in the cheap seats or a luxury party box, make sure those ballpark beers and hot dogs are paid for or itemized separately from the ballgame itself.

Are You “Doing Enough” to Avoid ERISA Statutory Penalties?

Clients often are surprised to learn they are liable for ERISA statutory penalties associated with participant document requests even though they have retained an independent third party to administer their ERISA welfare benefits plans (such as disability, life, and health plans). It is fairly well established in most of the federal circuits that only the plan administrator, as defined by ERISA, can be penalized for failure to respond to document requests. In virtually all circumstances, the plan administrator will be the employer/plan sponsor or a particular employee of the plan sponsor. Many employers, by handing off plan administration to an insurer or other third-party administrator – arrangements usually handled by their insurance broker, assume they have what amounts to a “turnkey” plan, and that mundane plan chores, such as responding to participant document requests, are not any concern of theirs. Members of the ERISA plaintiff’s bar are well aware of this dangerous complacency among many uninformed employers and are ready, willing, and able to take advantage of it.

The issue commonly arises when a plaintiff’s attorney addresses a letter requesting copies of plan documents to both the employer and the plan insurer. The insurer usually knows it has no liability for ERISA statutory penalties, and may simply ignore the request. Meantime, the employer assumes the insurer is taking care of things and also ignores the letter.

BAM! – the employer is served with a lawsuit demanding ERISA statutory penalties, and possibly consequential damages. The penalties, alone, can run as high as $110.00 per day, with no statutory outer limit to the total accrued amount. The clock starts ticking 30 days after the date of the request and will continue ticking for however many weeks, months, or even years it takes for the plaintiff to finally receive the requested documents. Further, if the insurer denies the plaintiff’s benefit claim because the claim was untimely, or for some other reason the plaintiff could have avoided but did not know about because he did not have the plan document containing the necessary information, the plaintiff may seek to charge the employer with the value of the lost benefits as a remedy that is within the “such other relief” the court may grant in its discretion under the ERISA penalty statute.

What if the document sought by a plaintiff was not created or maintained by the employer, but is a proprietary internal document created by the plan’s insurer or third-party administrator – is an employer liable for ERISA penalties if the insurer or administrator refuses to produce such a document?

The Seventh Circuit Court of Appeals thinks so. That Court has sustained an award of substantial daily penalties, and interest on delayed payment of health benefits imposed upon the plan sponsor of a health plan for failure to produce proprietary documents created, and owned by, its third-party claims administrator. There, the health plan was funded entirely by the employer.  However, to ensure against even the appearance of a conflict of interest, the employer retained an insurance company to act as claims administrator, ceding complete and final authority to the insurance company for all claim decisions. The claims administrator initially denied the plaintiff’s claim for speech therapy benefits, relying upon certain “Resource Tools” it had developed internally for evaluation of speech therapy claims. After the claims administrator refused the plaintiff’s requests for copies of the Resource Tools, she went to the employer for help. However, the claims administrator also refused to provide these documents to the employer, advising, among other reasons, that the documents were proprietary. The claims administrator eventually relented, after over 300 days, and Plaintiff’s counsel submitted an appeal letter arguing that the Resource Tools contained requirements not specified in the plan documents. The claims administrator reversed its decision and paid the claim.  The plaintiff then sued the employer, seeking $1,000,000.00 in statutory penalties for failure to provide the Resource Tools, and other documents, within 30 days of the plaintiff’s request.

After seven years of litigation, including two trips to the Court of Appeals, the employer was ultimately slapped with a penalty of almost $10,000.00, plus an award of interest to compensate for the claims administrator’s delay in paying the health benefit claim. The latter relief arose from a finding that the employer’s failure to provide the requested documents not only violated the penalty provision, but it was also a separately compensable breach of fiduciary duty. The Court also ordered the employer to pay almost $40,000.00 towards the plaintiff’s attorneys’ fees and costs.

Significantly, the Court of Appeals conceded the fact that the claims administrator created, owned, and had sole possession of the Resource Tools may have presented “a bit of a challenge” to the employer. The Court concluded, however, “[a]ny dilemma this may have posed for [the employer] did not excuse its statutory obligation to [the plaintiff]” to respond to lawful document requests. The Court noted it was the employer’s decision to engage a third party to administer claims as its agent. The Court concluded the employer could have, and should have, ensured its contract with the claims administrator gave the employer the right to require the production of “internal documents” when necessary to respond to ERISA document requests.  The Court remanded to the district court for the determination of the amount of penalties and damages to award.

On remand, the district court recognized the employer “made many efforts” to assist the plaintiff, “both to improve her chances of persuading [the claims administrator that the] speech therapy was medically necessary as well as to obtain the documents she wanted.” Ultimately, however, the court concluded the employer “could have done more” to assist the plaintiff to obtain copies of the Resource Tools timely, and awarded penalties at a rate of $30.00 per day for 309 days.

Determining how to ensure one is “doing enough” to comply with the “could have done more standard” is a daunting task. But for a start, employers must consciously accept there is no such thing as a “turnkey” ERISA plan. Insurers or third-party administrators will rarely assume certain basic legal, fiduciary responsibilities placed upon the Plan Administrator by ERISA, such as responding to document requests. This fact, in our experience, is often not appreciated by employers or the insurance brokers employers often rely upon to set up their benefit plans. Before signing up for such plans, ask your benefits lawyer to review the proposed contract or service agreement.

And never, ever, ignore a letter asking for plan documents.