First Crack in the Armor of the Segal Blend?

The Segal Group is the premier actuarial firm in the country providing services for hundreds of multi-employer pension funds.  For almost 40 years it has used its own methodology, known as the “Segal Blend” to calculate employers’ withdrawal liability successfully without an adverse ruling by either a court or an arbitrator in hundreds of cases.

The Segal Blend calculates the discount rate used in determining the present value of pension benefits for payment by a pension fund in the future.  This methodology has been the basis for the discount rate used in calculating withdrawal liability for hundreds of multi-employer plans.  Because the Segal Blend typically results in using a lower interest rate to calculate withdrawal liability than is typically used for funding purposes, a calculation of withdrawal liability is generally greater using the Segal Blend rate.  This has permitted pension funds to collect additional withdrawal liability from hundreds of employers.

Despite being challenged often by employers, the Segal Blend had enjoyed a perfect record of being upheld in every arbitration and court decision until March 26, 2018.  In a decision by the United States District Court for the Southern District of New York, Judge Sweet in New York Times Company and the Newspaper and Mail Deliverers ‘-Publishers ‘ Pension Fund found that the Segal Blend violated ERISA.  Specifically, the District Court found that the actuary’s “best estimate” of anticipated experience under the plan would have required an interest rate assumption of 7.5%, the rate used for funding purposes, rather than the 6.5% interest rate produced by the Segal Blend.  The District Court ordered the Pension Fund to recalculate the withdrawal liability using the higher interest rate.

The matter was appealed to the United States Court of Appeals for the Second Circuit.  In May 2019, oral argument was held.  Last week the case ended.  Surprisingly, the parties stipulated by which the appeal was withdrawn with prejudice and counsel fees were not sought.    Importantly, for employers the stipulation left intact Judge Sweet’s decision that using the Segal Blend violated ERISA.  The Second Circuit approved that settlement on September 16, 2019.

What are the implications of that stipulation for employers and what factors in Judge Sweet’s decision contributed to the resolution?  In New York Times, the decision reduced a withdrawal liability assessment of $26,000,000 to zero.  Employers contributing to funds using the Segal Blend should not hesitate to retain actuaries to calculate the withdrawal liability using the rate for funding purposes.

Although the ruling does provide another arrow in an employer’s quiver to use in combatting the predominantly fund favored withdrawal liability process, it does not resolve or even clarify the issue.

Almost concurrently with Judge Sweet’s ruling, District Judge McNulty of the United States District Court for the District of New Jersey in Manhattan Ford Lincoln, Inc. v. UAW Local 259 Pension Plan (“Manhattan Ford”) upheld an arbitrator’s ruling that using a plan’s funding assumption is not required to determine withdrawal liability.  In so ruling, the Court determined that the employer had failed to prove that the Pension Fund’s use of the Segal Blend in calculating withdrawal liability was not reasonable.  Notably, use of the 7.5% interest rate for funding purposes would have resulted in no withdrawal liability.

Manhattan Ford was appealed to the United States Court of Appeals for the Third Circuit but was settled before the court reached a decision.

Although the Segal Blend issue has not been resolved, the recent resolution should provide an incentive for employers to conduct additional research into the funds to which they contribute and to retain ERISA counsel with specific experience and expertise in withdrawal liability.  Jackson Lewis can assist you with all multi-employer pension fund issues.

Don’t Overlook Your Employee Benefit Plans as You Evaluate the Effect of the Final Overtime Rule

Before employers implement their proposed workforce changes resulting from the finalization of the new overtime rule, released September 24, 2019, see our article for more information, employers should consider what impact those proposed workforce changes may have on their employee benefit plans.

Employee benefit plans with criteria for eligibility, contribution, etc. based on the classification of salary/hourly or exempt/non-exempt may see participant shifts, e.g., a currently exempt employee, participating in the salary only retirement and welfare plans, makes $475 a week in 2019.  On January 1, 2020, that employee, still making $475 a week, is a non-exempt employee and no longer eligible for the salary only employee benefit plans.

The effects of employees shifting from one plan to another effective January 1, 2020, could create issues with non-discrimination testing, top-heavy results, or a reduction in certain benefits going forward (which may require advance notice to the affected participants).  Less obvious effects could be hiding in the compensation definition.  As employers grapple with how to boost an employee into the exempt compensation tier, employers need to consider whether that classification of compensation is in the definition of compensation in the plan document and if so, is the payroll system considering it for the plan-related calculations based on compensation?

The overtime rule change could affect more than the status of an employee as either exempt or non-exempt, but it may be overwhelming to consider all the ancillary areas the new rule touches.  Contact a Jackson Lewis Employee Benefits attorney for guidance as you evaluate your workforce under the new overtime rule.

District of Columbia Commuter Benefits: New Penalties, Fines

Penalties and fines for non-compliance with Washington, D.C.’s law requiring D.C. employers to offer commuter benefits to their D.C. employees will take effect beginning on November 14, 2019.  The law, which became effective on January 1, 2016, requires employers with at least 20 employees in D.C. to offer commuter benefits to their covered employees.  Please see our in-depth article for a full discussion of the law’s requirements.

The Final Regulations For 401(k)/403(b) Hardship Distributions

On September 23, 2019, the Treasury Department and IRS published final regulations for hardship distributions from both 401(k) and 403(b) plans (the “Final Regulations”).  Essentially the hardship distributions changes relax the hardship distribution requirements (i.e., making it easier for participants to obtain hardship distributions) and eliminate many burdens following a hardship distribution (i.e., allowing participants the flexibility to contribute to their retirement plan account shortly after obtaining a hardship distribution).

The Final Regulations respond to comments on the earlier proposed regulations issued in November 2018 (see our previous blog here).  As expected, the Final Regulations closely mirror the proposed regulations.  So, any 401(k) or 403(b) plans amended to comply with the proposed regulations will most likely satisfy the Final Regulations.

The Final Regulations make the following required and permissive changes to the hardship distribution requirements:

  • Elimination of 6-Month Suspension – The Final Regulations remove the 6-month suspension rule which prevents participants who have taken hardship distributions from contributing to the plan for 6 months following the hardship distribution.
    • This is a required change on or after January 1, 2020, but a plan may elect to remove the 6-month suspension requirement as early as January 1, 2019.
  • Expansion of Available Hardship Sources to include elective contributions, QNECs, QMACs, safe harbor contributions, and earnings – The Final Regulations remove the restriction against hardship distributions from qualified non-elective contributions (QNECs), qualified matching contributions (QMACs), earnings on these amounts, and earnings on elective contributions no matter when contributed or earned.  But for Section 403(b) plans, the Final Regulations only permit hardship distributions on qualified non-elective contributions (QNECs) and qualified matching contributions (QMACs) that are not in a custodial account (i.e., they are held in an annuity).  For 403(b) plans, earnings on elective deferrals remain ineligible for hardship withdrawal.
    • This is a permissive change. 
  • Elimination of the Plan Loan Requirement – The Final Regulations remove the requirement that participants take all available plan loans before taking a hardship distribution (although participants still must exhaust all other in-service withdrawals available under the plan).
    • This is a permissive change.
  • Creation of a General Financial Need Standard – The Final Regulations eliminate the rule under which the determination of whether a distribution is necessary to satisfy a financial need is based on all the relevant facts and circumstances and provide one general standard for determining whether a distribution is necessary to satisfy an immediate and heavy financial need.  Under this general rule, (1) a hardship distribution may not exceed the amount of the need, (2) the employee must have obtained other available distributions under the employer’s plans, and (3) the applicable employee must represent (in writing, electronically, or in another form permitted by the IRS) that he/she has insufficient cash or other liquid assets to satisfy the immediate and financial need for which the hardship is being sought.  The Final Regulations provide that a plan may provide additional conditions for employees to demonstrate that a distribution is necessary to satisfy an immediate and heavy financial need; however, the Final Regulations do not permit a suspension of elective contributions or employee contributions as a condition of obtaining a hardship distribution.
    • This is a required change for hardship distributions on or after January 1, 2020, and may be a permissive change for hardship distributions as early as of January 1, 2019.
  • Creation of New Safe Harbor Circumstance for Immediate and Heavy Financial Need – The Final Regulations expand the situations deemed to create an “immediate and heavy financial need” to include expenses and losses incurred by the employee 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.  Of note, there is no deadline by which a disaster-related hardship distribution must be made following the federal disaster.
    • This is a permissive change. 
  • Expansion of Safe Harbor Circumstances for Qualified Beneficiary Expenses – The Final Regulations expand the safe harbor circumstances to include qualifying medical, educational, and funeral expenses for a participant’s “primary beneficiary under the plan” (i.e., an individual named as beneficiary under the plan that has an unconditional right upon the participant’s death, to all or a portion of the participant’s account balance under the plan)
    • This is a permissive change. 
  • Clarification of Safe Harbor Circumstances for Casualty Loss Reason – The Final Regulations provide clarification that home casualty losses (under Code Section 165) do not have to be tied to a federal disaster to be eligible for a hardship distribution.
    • This is a permissive change.

Please contact your preferred Jackson Lewis attorney for assistance applying the Final Regulations to your plan and preparing or reviewing necessary amendments.

COBRA Notice Litigation Resulting in Big Dollar Claims

Can you imagine something as simple as a COBRA Notice missing a few technical requirements resulting in an employer needing to pay a 6 or 7-digit damages award?  That is happening in Florida.  Employers in and out of Florida should pay attention to this news, as what doesn’t start in California often starts in Florida.

There have been a flurry of cases in Florida over the past year.  In these cases, a COBRA notice is provided to covered persons experiencing a qualifying event, albeit sometimes late.  Yet the notice is alleged to be missing key details that are required by the COBRA regulations, such as the name and contact information of the Plan Administrator or the address for the remittance of payments.  Much of the missing content is called for by the Department of Labor’s model notices.  Yet, in our experience, these fields are often unknown or overlooked and therefore omitted.

Because of these deficiencies, the Plaintiffs allege they are entitled to the statutory penalty.  There are few instances in the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) that a plaintiff can receive cash damages.  ERISA typically provides for a “make whole” recovery – providing the benefits that were due.  However, the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), which amended and supplemented ERISA, included an avenue under ERISA Section 502(c)(1) for qualified beneficiaries to receive up to $110 per day per person for plan administrator’s failure to provide the required initial COBRA notice or the COBRA election notice.  Plus, the court has the discretion to award legal fees under ERISA Section 502(g)(1).

So, although $110 per person per day does not sound terribly bad, imagine a class of qualified beneficiaries consisting of 100 people who lost their coverage as part of a reduction in force (RIF) 2 years ago and whose COBRA notices were arguably deficient.  That math is $110 x 365 days x 2 years = $80,300.  Now imagine several RIFs over the course of several years or simply adding a zero with a failure affecting 1000 or more people.  This is how the numbers get so big.    Plus, when you add in the prospect of receiving a legal fee award, you have a stimulus.

There are steps employers can take today to mitigate the risk of being the next target for this litigation.  Simply using the Department of Labor’s model notices often is not enough if they are incomplete or not provided timely.  We recommend employers ensure they understand what is required, including knowing what notices are needed and when, examine their notices and their administrative practices for conformity with the regulations, and know compliance soft spots so they can proactively protect themselves against a claim.

Department of Labor Provides Guidance on Retirement Plan Obligations When Employees Return From Military Service

The Department of Labor recently issued a fact sheet intended to help employers understand their retirement plan obligations under the Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”).  The law provides that eligible employees that return to employment following qualified military service must be treated as though their military service was not a break in service for purposes of participation, vesting and benefit accrual under their employer’s retirement plan.[1]

Among other things, USERRA requires the following for retirement plans:

  • Service credits:
    • The plan generally must credit the entire period of the employee’s absence for qualified military service as it would credit service by the employee if he/she had not been out on military leave.
  • Employee contributions:
    • The employee is entitled (but not required) to make up all or part of their missed contributions. The employee has up to three times the duration of the military service (not to exceed 5 years) to contribute those makeup contributions to the plan.
  • Employer contributions:
    • Plans with employee contributions – the employer must make all contributions that are contingent on an employee’s contributions to the plan, but only to the extent of the employee’s makeup contributions. For instance, an employer need not provide employer matching contributions to the employee for the period of military service unless the employee contributes makeup matching eligible contributions to the plan.
    • Plans without employee contributions – any required employer contribution attributable to the employee’s absence must be made within 90 days after reemployment, or when plan contributions are made for the year of the military service, whichever is later.

The DOL fact sheet provides examples that discuss how to deal with difficult scenarios related to pension accruals for periods of military leave.  Many pension plans calculate accruals based (at least in part) on an employee’s compensation, and the examples focus on how to calculate the compensation an employee would have earned had the employee not been out on military leave.   The compensation used to calculate the accruals must be based on what the employee would have received but for the leave, if that can be determined with reasonable certainty.  If it cannot be determined with reasonable certainty, the employer generally must use the employee’s average rate of compensation for the 12 months before the military leave.

  • An employee receiving pension accruals based on her compensation is scheduled for 40 hours a week but works 50 hours per week (with overtime) in the 9 weeks leading up to her 2-week deployment.

In that case, the DOL says the pension accrual should be calculated as though the employee had worked 50 hours (with overtime) for each week of the absence.

  • An employee receiving pension accruals based on her compensation is guaranteed to be paid for 75 hours per month. For the 8 months before her 1-month military leave, the employee worked 80 hours per month.

In that case, the DOL says the pension accrual should be calculated based on working 80 hours per month (not the guaranteed 75 hours).

  • An employee receiving pension accruals based on her compensation is guaranteed to be paid for 75 hours per month. For the 8 months before her 3-year military leave, the employee worked 80 hours per month.  Upon reemployment, the employee’s position is a promoted position earning a higher rate of pay than before her deployment.

In that case, the DOL says the pension accrual should be calculated considering the point in time the promotion is reasonably certain to have occurred.  For instance, if the promotion would have occurred after 1-year of deployment, the pension accrual should use the rate of pay before the military service for the first year.  For the second and third years, the accrual should be based on the post-promotion rate of pay.

  • An employee receiving pension accruals based on her compensation is scheduled to work 40 hours per week. After being employed for 6 weeks, she is absent for 1 week of military service.  In the 6 weeks leading up to the military service, the employee had a varying number of hours each week (ranging from 30-50 hours per week).

In that case, the DOL says the pension accrual should be based on the average number of hours the employee worked per week before the military service.

  • An employee receiving pension accruals based on her compensation works 40 hours per week and earns base pay plus commission. The amount of commission varies each week.  After 2 years of employment, the employee goes on military leave for 1 month.

In that case, the DOL says the pension accrual should be calculated based on the average of the employee’s compensation for the previous 12 months.  This is because the employer cannot calculate the compensation the employee would have earned but for the military leave with reasonable certainty due to the variable nature of her commission earnings.

  • An employee receiving pension accruals based on her compensation works 40 hours per week and earns commission only. The amount of commission varies each week.  The employee has been employed for 6 years with the employer.  She returned from a previous one-year deployment 6 months ago.  Now she is going on military leave for 2 weeks.

For the 2-week absence, the DOL says the pension accrual should be calculated based on the average rate of compensation earned during the previous 12 months. However, because of the previous military leave, the first 6 months of that 12-month period should be ignored.  The next 6 months of compensation should be averaged to determine the average rate of compensation.

  • An employee receiving pension accruals based on her compensation is scheduled to work 40 hours per week, but the hours actually worked were variable. The employee has been employed for 10 years with the employer.  She returned from a previous 1-week military leave 3 months ago.  Now she is going on military leave for 1 month.

For the 1-month absence, the DOL says the pension accrual should be calculated based on the average rate of compensation earned during the previous 12 months, excluding the previous 1-week of military leave.

If you would like assistance regarding your obligations under USERRA, please contact your preferred Jackson Lewis attorney.

[1] USERRA affects benefits other than retirement plans and affects other aspects of the employment relationship.  This blog post is not a broad discussion of all aspects of USERRA but focuses on some of the issues discussed in the recent Department of Labor guidance.

The IRS Doesn’t Disappoint…Again

As imagined by plan sponsors of closed defined benefit pension plans, the IRS issued Notice 2019-49, the fifth extension for an additional year of the temporary nondiscrimination relief for “closed” defined benefit pension plans originally announced by the IRS during 2014.  The extended relief applies to plan years beginning before 2021 for those “closed” plans that satisfy certain conditions in Notice 2014-5.  The relief for “closed” defined benefit plans refers to those defined benefit plans amended prior to December 13, 2013, to limit ongoing accruals to some or all employed participants in the plan as of a particular date, thus no longer admitting new participants into the plan.

Each extension has been in anticipation of finalization of the proposed regulations issued in January 2016.  The IRS received many comments on the proposed regulations and expects the final regulations to include several significant changes in response to the comments.  By extending the relief another year, the IRS acknowledges the plans will need sufficient time to make plan design decisions based on the final regulations, yet to be published, before the end of the most recent extension which is December 31, 2019

Notice 2019-49 does not indicate when to expect the final regulations but states an expectation the final regulations will allow reliance on the proposed regulations for plan years beginning before 2021.  Congress is considering legislation that would include both permanent and partial types of targeted relief from nondiscrimination testing for qualifying closed DB plans.  Both a Bill passed by the House earlier in the year and a new recently proposed stand-alone Senate Bill are now pending before the Senate.  Stay tuned as we continue to monitor Congress and the status of the final regulations.

Beginning in 2020, Employers May Reimburse Health Insurance Premiums as an Alternative to a Traditional Group Health Plan (Subject to Several Requirements)

Many employers have contacted us over the years asking whether they may offer an “employer–payment plan” rather than offer a traditional group health insurance plan.  An employer-payment plan is a type of account-based plan that provides an employee reimbursement for all or a portion of the premium expense for individual health insurance coverage or other non-employer hospital or medical insurance.  Until now, the answer has generally been no.  But beginning in 2020, subject to the satisfaction of several requirements, employers may offer employer payment plans as an alternative to traditional group health insurance plans.

Under final regulations, beginning in 2020, employers may offer individual coverage health reimbursement accounts (“ICHRAs”) that reimburse employees for individual health insurance premiums, subject to satisfaction of several conditions.

To fulfill these conditions:

  • The participant and any dependents must actually be enrolled in qualifying individual coverage for each month the individuals are covered by the ICHRA.
  • The employer may not offer a traditional group health plan to the same participants covered by the ICHRA for the same plan year. A traditional group health plan is any group health plan other than an account-based group health plan or a plan consisting solely of excepted benefits.
  • If an employer offers an ICHRA to a class of employees, all employees in that class must receive the same terms for the ICHRA, subject to specific exceptions. These exceptions include permitted variation in the benefit because of the number of dependents and age of the participant.  That said, the maximum dollar amount provided to the oldest participant may not exceed three times the maximum available to the youngest participant.  Special rules apply to new hires and there may be a variation related to HSA and non-HSA compatible ICHRAs.
  • Otherwise eligible participants must be able to opt-out of the ICHRA annually.
  • The ICHRA must implement and comply with reasonable procedures to confirm that participants and dependents have coverage under the ICHRA. To accomplish this, the employer may require that a participant provide either a document from a third-party showing coverage or an attestation to having other coverage.  The DOL created a model “Attestation” for employers to use.  And after the initial substantiation, the participant must confirm coverage with each reimbursement.
  • The employer must provide certain information about the ICHRA in a written notice to each participant, generally at least 90 days before the plan year begins. The employer may use the model notice provided in the regulations for this purpose.

While an employer may not offer the same “class” of employees both an ICHRA and a traditional group health plan, an employer may offer one or more classes of employees an ICHRA and another class(es) a traditional group health plan. The delineated classes include:

  • Full-time employees
  • Part-time employees
  • Employees paid on a salaried basis
  • Employees paid on an hourly basis
  • Employees whose primary site of employment is in the same rating area
  • Seasonal employees
  • Employees covered by a particular collective bargaining agreement
  • Employees who have not satisfied a waiting period
  • Non-resident aliens with no U.S. source income
  • Employees who are employees of a staffing agency
  • A combination of the foregoing.

To prevent discrimination, the final regulations include minimum class size requirements if the class is based on full or part-time status, salaried or hourly status, or location within the same rating area, subject to certain exceptions.   The minimum class size requirement does not apply to the classes of employees offered traditional coverage or no coverage.

Generally, if the minimum class size applies, the minimum number of employees that must be in a class is based on the number of employees in the class before the plan year begins and is:

  • 10 employees, if the employer has fewer than 100 employees
    • 10% of the total number of employees, if the employer has between 100 to 200 employees, and
    • 20 employees, if the employer has over 200 employees

As to how the employer pay or play penalties apply to employers who offer ICHRAs rather than traditional group health coverage, IRS Notice 2018–88 explains how Section 4980H of the Internal Revenue Code (which imposes the employer “pay or play” penalties) applies to an applicable large employer that offers an ICHRA, describes potential additional affordability safe harbors and requests comments. The IRS intends to issue proposed regulations under Section 4980H to address these issues.

Employer Takeaway

Ultimately, the ICHRA presents new and exciting planning opportunities for those employers who wish to provide premium reimbursements rather than a traditional group health plan to some or all of their employees.  Employers generally must provide ICHRA notices at least 90 days before the plan year begins.  Thus, employers who wish to implement ICHRAs in 2020, should make this decision soon.

Benefits Outside the Box: Using a Charitable Foundation to Enhance Your Culture and Community

If your Company leadership is looking for an innovative employee benefit – something outside the standard employee benefit package of retirement, health, and welfare benefits, a Company-sponsored charitable foundation might be your answer.   A charitable foundation not only can further your Company culture while serving the community, but it also has tax benefits to boot.

A Company’s culture is the tie that binds.  No matter how much pay or how lucrative the benefits package, if the employee feels like just a number or that the employee’s opinion does not matter, that employee will forever be on the lookout for a better fit.  The world is changing, and social causes are all over the news.  Imagine the impact it would have if you could put your employees in the driver’s seat of choosing from a litany of social causes that matter most to them.  Imagine the positive public relations that would come from the Company’s foundation making sizable gifts of support in the community.

What does a Company-Sponsored Charitable Foundation Do?

Most are designed as grant-making organizations, as opposed to operational entities.  The purpose of the charitable foundation could be:

  • To make grants to other 501(c)(3) charities or governmental entities in the community who are furthering causes that are important to the Company. For example, a manufacturing company might choose to focus on environmental causes.  A company in the healthcare field might choose to focus on healthcare education or support causes combatting the opioid crisis.
  • To make grants to individuals in the community who have experienced a severe financial hardship. For example, if a family in the community loses their home to a fire or a flood, or the breadwinner in the family dies unexpectedly while in the line of duty leaving behind 4 little hungry mouths to feed, the Company’s foundation could be there to provide financial support.
  • To provide educational scholarships to employees and their family members. Note that, unlike the two foregoing, there are additional, rigid tax law requirements in IRS Revenue Procedure 76-47 with which the charitable foundation must comply to get this type of entity to work.  For example, the selection committee must be unrelated to the employer and foundation (e.g., no employees, former employees, officers, directors may serve on it).

How Could Employees Be Involved?

Absent a foundation, when the Company wants to support an identified cause, funds are raised and provided directly to that charity.  Once given, control over the ultimate expenditure of the funds is ceded to the charitable organization.

With a Company-sponsored charitable foundation, your employees can be more involved in the promotion of the foundation and have more say in how and when the charitable funds are used.

For example, the Board of Directors of the non-profit corporation could consist of your employees.  They could have oversight responsibility over the foundation and have the ultimate say in which charities or individuals are chosen for support.  Employees could serve on a selection or nominating committee or simply promote the foundation in its giving efforts.

How Is the Foundation Funded?

Employees also can be involved by providing financial support to the foundation.  For example, the Company could do one or more of the following:

  • Allow employees to have a percentage of their after-tax pay payroll deducted and contributed to the foundation;
  • Offer to match employee contributions according to a specified formula or up to a certain amount;
  • Have all unused paid time off that normally would be forfeited at year-end converted to a charitable contribution to the foundation, giving employees the feel-good knowledge that if they work more, they also will do more for the community.

Amounts contributed to the foundation would be tax-deductible up to the legal limits allowed under Section 170 of the Internal Revenue Code.  Company-sponsored charitable foundations often are classified as “private foundations,” rather than “public charities,” which simply means additional tax rules apply, and the deduction limit is reduced.  Even so, this reduced deduction limit applies only with those giving substantial amounts to charity.

Unlike your normal charitable giving, a Company-sponsored foundation is different.  Here, funds can be raised, but do not all need to be expended each year.  Some distributions will have to comply with applicable tax law.  However, the foundation could serve as a charitable endowment that grows over time so that when the right cause comes your way, the foundation will have the resources to make a substantial impact.

What is Involved in Setting One Up?

Charitable foundations are like most corporate entities.  First, the separate legal entity would need to be formed under applicable state law.  Typically, non-profit corporations are the best fit for the entity form.  The charitable foundation would need to abide by all the requirements under state law to be a viable entity and for its corporate separateness to be respected.  This means that the foundation should have bylaws, regular board meetings with minutes, and separate bank accounts, to name a few.

The foundation also would file an exemption application with the Internal Revenue Service using the Form 1023 series to seek a determination that the foundation is exempt from taxation under Section 501(c)(3).

And the foundation may be subject to state charitable registration requirements if it will be soliciting charitable donations.   It also may need to register in other states if its activities will be crossing state lines.  Foundations, like other corporate entities, are subject to annual filing and reporting requirements with the state and federal governments.

Thus, like all other employee benefits that require on-going maintenance and attention, a charitable foundation is no different.  There are start-up costs, and on-going costs.  But, for your employees, this atypical “benefit” really could make a difference both inside and outside your Company.

Third Circuit Joins Majority in Rejecting “De Facto Administrator” ERISA Theory

The U.S. Court of Appeals for the Third Circuit joins the Second, Seventh, Eighth, Ninth, and Tenth Circuits in declining to impose liability on alleged de facto plan administrators.  Under Section 502(c) of ERISA, a plan administrator may be liable and subject to penalties for failing to comply with a participant’s request for information which the administrator must provide within 30-days from the request.  The Third Circuit addressed whether a participant could sue a “de facto plan administrator” for failing to provide information timely.

Under ERISA, “administrator” is defined as “the person specifically so designated by the terms of the instrument under which the plan is operated.”  In this case, the plan administrator was the board of trustees, who delegated to its executive pension director (“director”) the authority to process and approve all non-disputed applications for benefits and to begin timely payment of benefits.  The board, however, specifically noted that all actions and decisions by the director were subject to board ratification.

The participant claimed that the director’s failure to respond adequately to document requests violated Section 502(c) of ERISA, arguing that the director appeared to function as the plan administrator in responding to questions, providing summary plan descriptions, and most notably, never disavowing the plan administrator title.

After acknowledging the weight of authority from its sister courts denying the de facto theory, the Third Circuit rejected the de facto administrator theory for three reasons.  First, the Supreme Court advises courts to avoid reading remedies into ERISA’s carefully crafted enforcement statute.  Second, as a penal provision, Section 502(c) of ERISA should be leniently and narrowly construed.  Finally, the Third Circuit noted that it has consistently construed this statutory provision narrowly and that it saw no reason to depart from that approach.  The Third Circuit thus concluded that it “must restrict application of the title ‘administrator’ to those who fit the statutory definition and not stretch the term to authorize penalties against others whom a disappointed participant might like to reach.”

Although most circuits align with the Third, the de facto administrator theory remains jurisdictionally sensitive, as the First and Eleventh Circuits have accepted the theory in some capacity.

The case is:  Bergamatto v. Bd. of Trs. of the Nysa-Ila Pension Fund, No. 18-2811 (3d Cir. Aug. 6, 2019).