Approximately a quarter of the workforce covered by a traditional pension plan is in a multiemployer plan, according to the U.S. Bureau of Labor Statistics. Many manufacturers that participate in such plans are unaware their largest contingent liability may stem from their allocable share of unfunded vested benefits or withdrawal liability. More info…
Section 162(m) of the Internal Revenue Code (“Code”), which disallows the deduction by any publicly held corporation with respect to certain compensation paid to a covered employee over $1,000,000, was amended by the 2017 Tax Cuts and Jobs Act (“TCJA”). One change made to Section 162(m) of the Code as part of the TCJA was that if an individual is a “covered employee” for a taxable year, the individual continues to be a covered employee for all future taxable years, including after termination of employment.
Separately, notwithstanding the general prohibition on the discretionary delay of payments under Section 409A of the Code, the Treasury Regulations under Section 409A provide that an employer may choose to delay a payment under a plan if it reasonably believes the deduction with respect to the payment will not be permitted under Section 162(m) of the Code (the “Delay Exception”). While such discretion is not required to be included within a plan document, some plans do mandate deferral of payment where it is reasonable to believe the payment will not be deductible under Section 162(m) of the Code. As a result of the change made by the TCJA noted above, such a provision could effectively prevent a payment from ever becoming payable because once an individual is a covered employee the individual never loses that status, even after termination of employment.
In response, in the Preamble to proposed Treasury Regulations under Section 162(m) of the Code, the Internal Revenue Service announced that if a plan subject to Section 409A of the Code is amended to remove any Delay Exception language, the amendment will not result in an impermissible acceleration of payment under Section 409A of the Code (normally such an amendment would cause a Section 409A of the Code violation). However, the plan amendment must be made no later than December 31, 2020. The Preamble clarifies that the amendment can be made to apply to amounts that are not grandfathered for Section 162(m) of the Code purposes only or that it can apply to all amounts deferred (both grandfathered and non-grandfathered for Section 162(m) of the Code purposes).
The Preamble indicates this special rule will be incorporated into Treasury Regulations under Section 409A of the Code and that taxpayers may rely on the guidance in the Preamble until certain future guidance is issued.
We recommend that employers review their nonqualified deferred compensation plans as soon as possible to determine if an amendment is necessary. Please contact a team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.
This term, the U.S. Supreme Court returns to a challenge to the Affordable Care Act (ACA). In the consolidated cases of California v. Texas (No. 19-840) and Texas v. California (No. 19-1019), the Court will consider whether a group of states and private individuals have standing to challenge the ACA. If that procedural hurdle is cleared, the Court then must consider whether the ACA’s individual mandate is constitutional, and, if it is not, whether that requirement can be severed from the ACA or whether the entire ACA must fall. More…
The U.S. Supreme Court will hear the second of several ERISA disputes this term, the first issue we discussed as the term began, October 5, 2020. Monday, November 2, 2020, the Justices will consider whether the Railroad Retirement Board’s denial of a claimant’s request to open a prior benefits decision is a “final decision” reviewable by the courts in Salinas v. U.S. R.R. Ret. Bd. (No. 19-999).
The issue before the Court is a straightforward question of statutory interpretation. Section 355(f) of the Railroad Unemployment Insurance Act (RUIA) provides that any claimant, certain railway labor organizations, certain of the claimant’s employers, “or any other party aggrieved by a final decision under [§ 355(c)]” may obtain a court review of “any final decision of the Board” if they follow the prescribed claims procedures.
The Board construes the provision as limiting court review to the types of final decisions listed in § 355(c) of the RUIA. In support of its position, it argues that the term “other” in the phrase “any other party aggrieved by a final decision under [§ 355(c)]” indicates the other categories in the list of individuals or entities that can seek review also must have been “aggrieved by a final decision under [§ 355(c)].” Since § 355(c) does not encompass decisions regarding reopening claims, there is no right to appeal such a decision. This construction is appropriate, the Board said, because reopening of claims is a matter of “agency grace,” not a statutory requirement.
The petitioners disagree, contending the phrase “any final decision” in § 355(f) means just that – every decision is a claimant’s “last stop” at the administrative level, including a denial of a request to reopen a claim. They argue that the Board’s limited reading of the statute cuts off claimants’ recourse in the courts prematurely, potentially depriving them of benefits owed to them but mistakenly denied and violating “bedrock principles of agency accountability.”
The issue before the Court is narrow but significant. The Board administers billions of dollars of retirement, disability, sickness, and unemployment benefits each year for hundreds of thousands of claimants under the RUIA and Railroad Retirement Act. A Supreme Court order limiting the availability of judicial review to a discrete list of decisions, as the Board argues is appropriate, would have a profound impact on those claimants.
The Internal Revenue Service recently announced its cost-of-living adjustments applicable to dollar limitations on benefits and contributions for retirement plans generally effective for Tax Year 2021 (see IRS Notice 2020-79). Most notably, many of the retirement plan limitations, including the limitation on annual salary deferrals into a 401(k) or 403(b) plan, remain unchanged. The more significant dollar limits for 2021 are as follows:
|401(k)/403(b) Elective Deferral Limit (IRC § 402(g))
The annual limit on an employee’s elective deferrals to a 401(k) or 403(b) plan made through salary reduction.
|Government/Tax Exempt Deferral Limit (IRC § 457(e)(15))
The annual limit on an employee’s elective deferrals concerning Section 457 deferred compensation plans of state and local governments and tax-exempt organizations.
|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 over the age of 50 generally can make an additional “catch-up” contribution not to exceed this limit.
|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).
|Defined Benefit Plan Limit (IRC § 415(b))
The limitation on the annual benefits from a defined benefit plan.
|Annual Compensation Limit (IRC § 401(a)(17))
The maximum amount of compensation that may be taken into account for benefit calculations and nondiscrimination testing.
($425,000 for certain gov’t plans)
($430,000 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.
(for 2021 HCE determination)
(for 2022 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.
|SEP Minimum Compensation Limit (IRC § 408(k)(2)(C))
The mandatory participation requirements for a simplified employee pension (SEP) includes this minimum compensation threshold.
|SIMPLE Employee Contribution (IRC § 408(p)(2)(E))
The limitation on deferrals to a SIMPLE retirement account.
|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.
|Social Security Taxable Wage Base
See the 2021 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).
The Supreme Court, whose new term begins today, the first Monday in October, will consider a number of cases impacting employee benefits and benefits litigation. This is the first in a series analyzing these cases as they are heard by the Court. The first issue up concerns prescription drug benefit regulation, and later in the series, we will address the hot button issue of the constitutionality of the Affordable Care Act, benefits for railroad workers, and considerations when including arbitration provisions in benefit plans.
On October 6, 2020, the U.S. Supreme Court will hear argument on ERISA’s preemptive effect on a state law regulating pharmacy benefit managers’ (PBMs) generic drug reimbursement rates in Rutledge v. Pharmaceutical Care Management Association (No. 18-540). The case considers regulation of PBMs under Arkansas law, but because a majority of states have enacted similar laws, the decision in Rutledge will extend beyond Arkansas. More…
Notice 2020-68 from the IRS provides valuable clarification for sponsors of qualified plans, 403(b) plans, and 457(b) governmental plans, as well as IRA holders, related to certain provisions in the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and the Bipartisan American Miners Act of 2019.
A new tax credit under the SECURE Act aims to offset the costs of establishing and maintaining a qualified employer plan that provides an eligible automatic enrollment arrangement (EACA). The $500 credit is also available to eligible employers that amend an existing plan to add an EACA. More…
The Internal Revenue Service has issued Notice 2020-65 to provide guidance on the employment tax deferral that is the subject of President Donald Trump’s August 8, 2020, Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.
Pursuant to the Notice, the due date for the withholding and payment of the employee share of Social Security taxes on certain wages is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021. While the Notice provides additional details as to how to determine which wages are subject to the deferral and when the deferred taxes must be repaid, it leaves many questions unanswered and creates potential liability for employers. More…
A 401(k) plan and its administrators are defending the administrator’s decision to require a special valuation of former employees’ account values, given extraordinary market changes due to the COVID-19 pandemic. Under the terms of the plan at issue, when a former employee seeks a distribution of his or her plan account, the account is typically valued as of December 31 of the prior year. The plan invests in a pooled investment account so the money paid in distributions lessens the funds available to pay the remaining participants. Plaintiffs are former employees who were eligible for a full distribution of their accounts in 2019 but, because the market was rising in 2019, delayed their distribution requests until January 2020, after the December 31, 2019 valuation. While the 2019 valuation occurred, the plan administrator set a special valuation date of April 30, 2020, given the extraordinary market volatility in the first quarter of 2020.
Plaintiffs filed an ERISA claim for benefits and breach of fiduciary duties arguing that the administrator’s decision improperly locked them into the market’s 2020 losses. The plan and administrator are defending their decision arguing that the suit should be dismissed because the plan provides discretion to set a special valuation date under extraordinary circumstances such as a major change in economic conditions and because allowing plaintiffs to rely on a pre-pandemic valuation would cause a windfall for plaintiffs at the expense of current participants. The case is Lipshires, et al. v. Behan Bros., et al., No. 20-cv-252 (D.R.I.).
This is necessarily a new type of case with case-specific facts. That said, many plan administrators – and not just 401(k) administrators – may face similar issues as the pandemic persists and the market reacts. It is too soon to know whether defendants will succeed in having the case dismissed on the pleadings but this case shines a light on some best practices for a fiduciary considering an interim valuation to reflect subsequent material adverse events like the COVID-19 pandemic, including: (1) working with the plan sponsor and plan counsel to make sure the plan documents permit this or are revised to permit this, before proceeding, and (2) considering whether not setting a special valuation increases the risk of loss for the plan trust so failing to conduct interim valuations could be a fiduciary breach in itself.
We are available to advise plan administrators about the implications of this case on their plans. Please contact a team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.
Deadlines are a large part of employee benefit plan administration. The past 12 – 18 months have contributed to potential confusion about standard deadlines and added new deadlines plan administrators will not want to overlook. During this period, the IRS created a one-time window deadline, published extensions for some plans’ deadlines, and other deadlines were not extended but are rapidly approaching. July and August 2020, bring the most immediate deadlines for plan administrators.
In March, as part of the COVID-19 relief, the IRS extended the deadline for the end of the second six-year remedial amendment cycle for pre-approved (including volume submitter) defined benefit plans to July 31, 2020. The same relief postponed the beginning of the Cycle 3 remedial amendment period to August 1, 2020, but the end date for Cycle 3 remains January 1, 2025. We initially discussed this extension in a March 2020, blog.
The IRS opened the determination letter program through its Revenue Procedure 2019-20, published in May of 2019. The revenue procedure permanently opened the determination letter program for Individually Designed Plans (IDP) that meet the requirements of a “merged plan” as defined in the revenue procedure. The procedure also opened a limited, 12-month window for statutory hybrid plans, e.g., cash balance plans, to submit for a determination letter. That 12-month window ends August 31, 2020. As we stated in our May 2019, blog, plan sponsors and practitioners would welcome additional, periodic opportunities to obtain determination letters on other plans.
The IRS also issued COVID-19 relief extending Form 5500 filing deadlines for some plans based on the plan year-end date. The relief ended on July 15, 2020, and DID NOT extend filing deadlines for calendar year plans. The Form 5500 or Form 5558 extension filing deadline for a 2019 calendar year plan remains July 31, 2020. All other filing deadlines associated with Form 5500 filings for plan years ending after December 31, 2019, are not extended and should be filed timely as in prior years according to the plan year-end date.
The Bottom Line:
- Pre-approved defined benefit plans’ second six-year remedial amendment period ends July 31, 2020;
- The determination letter submission window for statutory hybrid plans, e.g., cash balance plans, ends August 31, 2020; and
- Calendar year plans required to file Form 5500s must still file the Form 5500 or the Form 5558 extension by July 31, 2020.
We are available to help plan administrators sort through applicable deadlines. Please contact a team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.