Court Finds Union’s Withdrawal Liability Indemnification Obligation of Limited Duration

Congress enacted the withdrawal liability provisions of the Multiemployer Pension Plan Amendments Act (MPPAA) with the ultimate goal of protecting participants and beneficiaries entitled to benefits from multiemployer pension plans.  Congress observed that such plans are financially burdened whenever an employer withdraws and permanently ceases to pay contributions and decided that the burden should be borne by the withdrawn employer.  Consistent with this remedial purpose, the statute often produces seemingly harsh and/or unfair results (at least from the employer perspective.)  The Third Circuit’s recent non-precedential decision in Nitterhouse Concrete Products, Inc. v. Glass, Molders, Pottery, Plastics & Allied Workers International Union aptly illustrates this principle.

The employer in Nitterhouse had entered into a series of collective bargaining agreements with the union over a period of forty-four years, during which time it was obligated to contribute to a union-affiliated multiemployer pension plan.  Five days before the expiration of the final CBA in February 2014, the union disclaimed interest in represented the employer’s bargaining unit members and notified the employer it would not be renewing the CBA upon its expiration.  This resulted in the employer permanently ceasing to have an obligation to contribute to the plan, resulting in a withdrawal from the plan and the assessment of withdrawal liability against the employer in excess of $680 thousand dollars.

This alone would seem to be an unfair and inequitable result, with the union’s unilateral actions (in disclaiming interest) directly resulting in imposing significant withdrawal liability.  It gets worse, however.

For much of the parties’ collective bargaining history through its conclusion, the CBA contained the following provision:

Section 17.07 – Company Indemnification. The Company shall have no liability for the payment of benefits other than to make contributions to the Plan as above required. The parties hereto recognize that, as between the Union, and the Company, the operation of the Pension is within the control of the Union. Therefore, the Union specifically agrees that the structure and operation of the Pension Plan shall comply with all laws applicable to it, including by way of example, and not limitation, the Employee Retirement Income Security Act of 1974, as amended from time to time and further agrees to indemnify and save harmless the Company from any claim or liability which may arise by reason of the existence of the Plan.

In reliance on this provision, the employer sued the union, claiming that the indemnification provision covered the withdrawal liability incurred.  The district court first looked at whether withdrawal liability fell within the scope of the union’s indemnification obligation, concluding that “any claim or liability which may arise by reason of the existence of the Plan” is broad enough to include withdrawal liability under the MPPAA.

The district court next considered the duration of the union’s indemnification obligation, specifically whether it survived the expiration of the CBA.  Citing the general principle of contract law regarding a collective bargaining agreement that contractual obligations will generally cease upon termination of the bargaining agreement and the lack of any recognized exception, the district court concluded that the union’s indemnification obligation ended when the contract expired.  Since the withdrawal liability accrued after this (“even if by a mere nano-second”), the district court found for the union.

The sole issue before the Third Circuit on appeal was whether the district court properly held that the union’s indemnification obligation did not cover withdrawal liability imposed after the expiration of the CBA.  The Third Circuit affirmed.  The Court found that the employer could not withdraw and trigger withdrawal liability until it “permanently ceased to have an obligation to contribute,” and that such cessation could not occur until the termination of the CBA.  The Court analogized withdrawal liability to a chain of dominoes, with liability only imposed when the obligation to contribute ceased.  The court also found that the obligation to contribute only ceased when the CBA expired, which only happened if the CBA was not renewed after expiration.  As a result, the chain of dominoes came crashing down on the employer.

What can we learn from Nitterhouse?  It is easy to envision how the case could have been decided differently.  The withdrawal liability incurred by the employer seems to be a “claim or liability which may arise by reason of the existence of the Plan,” and the reference to the plan “being within the control of the union” at least arguably should encompass withdrawal liability triggered by the union’s unilateral conduct in disclaiming interest.  Unfortunately for the employer, the Court did not so find.  In sum, Nitterhouse highlights the pro-fund skew of MPPAA and the seemingly unfair results it often generates.  The case further illustrates the importance of good contract language drafting, since the result almost certainly would have been different had the indemnification provision been better crafted.

Wellness Programs Continue to Face Compliance Challenges

The rules for employer-sponsored wellness programs continue to be a moving target; most recently, regulations issued by the Equal Employment Opportunity Commission (“EEOC”) intending to address issues under the Americans with Disabilities Act (“ADA”) and the Genetic Information Non-Discrimination Act (“GINA”). Many employers are already well aware of the wellness regulations under the Affordable Care Act that for some years now have permitted incentives for certain health contingent programs, such as biometric screenings and tobacco cessation programs, in some cases allowing incentives of up to 50% of the applicable premium. But some of the same wellness incentives permissible under the ACA raise issues under the ADA and GINA. The EEOC tried to address some of those issues through regulation, but wound up losing in court against the AARP (formerly the American Association of Retired Persons) which challenged the EEOC’s methods for developing the regulations. So, we are basically back where we started, namely, what to do with wellness programs that are permissible with the ACA regulations, but may not be consistent with rules under the ADA or GINA (or programs that do not raise ACA issues at all, but still have compliance requirements under the ADA and/or GINA).

What’s the problem? We focus here on the ADA. In general, the ADA prohibits employers from subjecting employees to disability-related inquiries or medical examinations. One exception from this rule is that the inquiry or examination is part of a voluntary health program. However, the EEOC had not formally defined the term “voluntary” or explained what constitutes a “health program.” Thus, it had been unclear whether employers could offer incentives to encourage employees to participate in programs that involved such inquiries or examinations, something the ACA clearly permitted. The EEOC finally issued regulations to permit certain incentives for employees to answer disability-related questions or undergo medical examinations that would not cause the program to be involuntary. As noted, those regulations have been vacated.

EEOC modifies its regulations. On December 20, 2018, in response to the AARP decision, the EEOC revised its regulations to remove the incentives that had been permitted.  What remains in the regulations presently is that a health program that includes disability-related inquiries or medical examinations (such as a health risk assessment or biometric screening) is voluntary as long as the program meets certain requirements:

  • Employees may not be required to participate;
  • The employer may not deny coverage or limit the extent of benefits under any of its group health plans or package options for employees who do not participate;
  • The employer does not take any adverse employment action or retaliate against, interfere with, coerce, intimidate, or threaten employees; and
  • The employer provides employees with a confidentiality notice that: (i) is understandable; (ii) explains the type of medical information that will be obtained and the specific purposes for which the medical information will be used; and (iii) describes the restrictions on the disclosure of the employee’s medical information, the employer representatives or other parties with whom the information will be shared, and the methods that the covered entity will use to ensure that medical information is not improperly disclosed (including whether it complies with the HIPAA privacy and security regulations).

What remains unclear is whether offering an incentive to an employee to participate in a disability-related inquiry or medical examination as part of an otherwise compliant program would be viewed by the EEOC to be impermissible. Notably, prior to issuing its wellness program regulations, the EEOC had sued employers over the design of their health plans, including in cases where the programs appeared to be more consistent with typical program offerings and incentives.

Note that the EEOC made similar changes to its regulations under GINA that had permitted inducements to an employee for the employee’s spouse to provide his or her current health status information as part of a health risk assessment administered in connection with an employee-sponsored wellness program. Employers should review their wellness programs carefully, and not just those that are tied to their group health plans, to see whether they are compliant with the ADA and GINA.



Interim IRS Guidance Addressing Taxation Impact of Transportation and Parking Fringe Benefits Creates Planning Opportunities for Employers

In Notice 2018-99, the Internal Revenue Service sets forth interim guidance for taxpayers to determine parking expenses for qualified transportation fringes (QTFs) that are nondeductible and for tax-exempt organizations to determine the increase in unrelated business taxable income (UBTI) attributable to nondeductible parking expenses.  The Tax Cuts and Jobs Act (Act) amended these tax provisions effective for amounts paid or incurred after December 31, 2017.


As you may already know, the Act changed the tax law to disallow a deduction for expenses regarding QTFs, which are pre-tax benefits, provided to employees for transportation in commuter highway vehicles, transit passes, and qualified parking.  Because tax-exempt organizations do not take deductions for QTFs, the Act also increases a tax-exempt employer’s UBTI by the QTF expense that is not deductible – in an effort to put taxable and tax-exempt employers on equal footing.  The Notice explains how employers can determine the portion of the QTF expense that is not deductible or is treated as an increase in UBTI.

Determination of Nondeductible Parking Expense or Increase in UBTI

The method used to determine the nondeductible amount depends on whether the employer pays a third party to provide the parking facility, or leases or owns the parking facility.

Pays a Third Party – If the employer pays a third party to provide parking for the employer’s employees, the amount disallowed as a deduction under Section 274 of the tax code generally is the employer’s total annual cost of employee parking paid to the third party.

  • Note that if this amount exceeds the monthly limitations to provide the benefit to employees on a tax-free basis ($260 per month in 2018, $265 in 2019); the excess amount is treated as compensation and wages to the recipient employee.
  • The amount treated as compensation wages is not subject to the disallowance deduction.

For example, if an employer pays a third party $300 per month for each parking spot it uses for employees, the annual amount disallowed normally would be $300 x 12 months for each spot.  But because this exceeds the monthly limitation by $35 (the excess of $300 over $265 for 2019), the $35 must be included in the employee’s taxable wages and is deductible by the employer.  The amount disallowed to the employer under Section 274 is limited to $265 per month.

Owns or Leases Parking Facility – If the employer owns or leases the parking facility where its employees park, the disallowance may be calculated by using any reasonable method.  The Notice then describes a four-step process the IRS deems is a reasonable method.

Step 1 – Calculate disallowance for reserved spots. 

The employer must identify the number of spots reserved for employees and determine the percentage of reserved spots as compared to total spots.  The employer then multiplies this percentage by the employer’s parking expense for the facility – this is the disallowed deduction amount.

  • Employer Note: Until March 31, 2019, employers that have reserved employee spots may decrease or eliminate them and treat them as not reserved retroactively to January 1, 2018.  This creates a significant planning opportunity to change signage or access to parking spaces to mitigate the impact of these tax law changes.
  • Planning Opportunity Illustration: Assume a tax-exempt organization leases space in a parking garage for $150,000 per year ($250 per month per space) and designates 10 of the 50 spaces as “Employee Parking Only.”  This organization will be subject to UBIT on an amount equal to $30,000, which is calculated by multiplying $150,000 by the ratio of 10 reserved employee spaces to 50 total spaces.  If the tax-exempt organization simply removes the sign to eliminate the reserved employee parking, it may avoid UBIT if, under Step 2 below, the primary use of the parking garage is to provide parking to the general public.  The same adjustment by a for-profit employer may make the nondeductible expense deductible.

Step 2 – Determine the primary use of remaining spots. 

If the primary use of the remaining spots is for use by the general public, the remaining expenses may be deducted.  “Primary use” means greater than 50% of the estimated or actual usage of the parking.  The general public includes, but is not limited to, customers, clients, visitors, patients, and students.

Step 3 – Calculate allowance for reserved nonemployee spots. 

If the primary use of remaining spots is not to provide parking to the general public, the employer may identify the number of spots reserved for nonemployees (e.g., visitors, customers, partners, sole proprietors).  These spots might be reserved with signage (“Customer Parking Only”), barriers, or a separate entrance.  An employer then may determine the ratio of reserved nonemployee spots in relation to total parking spots and multiply this percentage by the total remaining parking expenses to determine the amount that is not disallowed.

Step 4 – Determine the remaining use and allocable expenses.  The Notice provides a final step to allocate remaining parking expenses to employee or nonemployee use.

Employer Takeaway – If an employer provides parking to its employees, it should review the information in the Notice carefully.  If practical, it may want to eliminate reserved spots for employees and make over 50% of the spots available to the general public.

Making the Loss of the SALT Deduction Sting a Little Less

As tax time rapidly approaches, taxpayers in states with high state and local income taxes (such as New York) are about to learn, up close and personal, just how much the loss of the deduction for state and local taxes (SALT) will affect their personal tax liability.  A little-publicized provision of the New York Tax Law, however, may take away some of the sting of losing the SALT deduction.

Under Section 612(c)-3(a) of the New York Tax Law, taxpayers age 59½ or older may exclude up to $20,000 of qualified pension and annuity income from their Federal adjusted gross income for purposes of determining their New York adjusted gross income.  The full $20,000 exclusion is also available in the year the taxpayer attains age 59½ with respect to pension and annuity income received on or after you became 59½.  And married couples age 59 ½ may each capitalize on the exclusion even if they file a joint return.  As a result, up to $40,000 per year can potentially be excluded from New York State income taxation.  Note that these taxes are not deferred; they will never be paid.

It should be noted that taking advantage of the New York state exclusion would result in some acceleration of Federal income tax, since the exclusion only applies to amounts included in the taxpayer’s Federal adjusted gross income.  The benefits of deferring taxation on the investment earnings prior to distribution must also be factored in.  (This may be ameliorated somewhat by using a “Roth” conversion along with the taxable distribution.  Roth accounts are taxed up front, but future investment earnings and distributions are not subject to income tax.)

There are many variables at work here, and everyone’s tax situation is unique.  Even so, the provisions of the New York State Tax Law (and those of several other states, including South Carolina and Colorado) may provide an opportunity to limit the state and local tax bite on your retirement assets.  We suggest that you discuss this with your tax advisor.

New Interim Guidance for Tax-Exempt Organizations Paying Excess Executive Compensation

As we previously reported, under the Tax Cuts and Jobs Act, starting in 2018, tax-exempt organizations are subject to a 21% excise tax on (i) remuneration exceeding $1 million paid to a “covered employee” in a tax year, and (ii) any “excess parachute payment” paid to a covered employee.  The IRS has recently published Notice 2019-9 which provides interim guidance for the application of this new excise tax.  Please see our Special Report – IRS Notice 2019-9 Provides Interim Guidance for Tax-Exempt Organizations Paying Excess Executive Compensation – which provides a high-level summary of the Notice.

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.