Author: ericgregory

The Sixth Circuit Reminds Plan Sponsors of the Importance of Firestone “Magic Words” for ERISA Plan Interpretation

A recent ruling by the Sixth Circuit Court of Appeals acts as an important reminder to ERISA plan sponsors that reserving the written right to interpret plan documents may be critical in interpreting otherwise ambiguous language. The Firestone Language In the 1989 case Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), the United States Supreme Court conclude that an ERISA plan administrator’s decision will be reviewed under a de novo (i.e., without deference) standard, unless the ERISA plan document confers discretion on that administrator to determine eligibility for benefits and construe terms of the plan. Since then, many plan administrators are sure to incorporate the so-called “Firestone language” in plan documents that explicitly grants the plan administrator such authority. With Firestone language, courts have typically granted a much more lenient “arbitrary and capricious” standard of review. The Norton Healthcare Challenge to Firestone Language In 2013, a Kentucky federal judge found that Norton Healthcare, Inc. shortchanged early retirees’ pensions and ordered the company to recalculate their monthly retirement income and lump-sum benefits, based on unclear plan language. That court held that the common-law doctrine of contra proferentum should apply. That is a doctrine of contractual interpretation providing that, where a promise, agreement or term is ambiguous, the preferred meaning should be the one that works against the interests of the party who drafted the contract. In other...

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The PBGC’s Missing Participant Program Now Allows Terminating Defined Contribution Plans to Participate

Especially upon plan termination, locating missing participants can be a major headache for plan sponsors, who have a fiduciary obligation to locate participants and distribute benefits under the terminating plan. In one development that may help in this regard, the Pension Benefit Guaranty Corporation (“PBGC”) issued final regulations that expand, revise and simplify its Missing Participant program. Most importantly, it now allows defined contribution plans (e.g., 401(k) and profit sharing plans) to participate on a voluntary basis, either by transferring the missing participant’s benefit to the PBGC or informing the PBGC of the missing distributee. “Missing Participants” For terminating defined contribution plans, the PBGC considers a participant as “missing” if they fail to elect a method of distribution on close-out of the plan, the plan does not know with reasonable certainty the location of the participant, or the participant did not accept a lump sum payment of his or her benefit. The PBGC regulations provide that if a participant’s check remains uncashed by a “cash-by” date that is at least 45-days after the issuance of the check, the distribution is considered uncashed and the participant is considered missing. “Diligent Search” A defined contribution plan may only represent that it does not have reasonable certainty about the location of a participant without a “diligent search.” The PBGC defines a “diligent search” as: Searching the records of the plan, related plans,...

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The Good News and the Bad News: IRS Changes Fee Schedule for the Voluntary Correction Program for Tax-Qualified Retirement Plans

Buried under the news of tax reform and deep within an annual bulletin, the IRS has announced reduced fees for corrections made pursuant to its Voluntary Correction Program (“VCP”). However, fees will not be lower in every circumstance.  The EPCRS Program  Plan sponsors that make mistakes with respect to the operation or documentation of their qualified retirement plan can take advantage of the IRS’ Employee Plans Compliance Resolution System (“EPCRS”) to avoid the consequences of plan disqualification. The VCP is part of the EPCRS program where employers can self-report errors, pay a fee, and receive a compliance statement from the IRS.   The Good News: Reduced Fees Generally  On January 2, 2018, in its annual fee and procedures bulletin, the IRS announced new fees for VCP. As opposed to past practice, where VCP fees have been based on the number of plan participants, the new VCP fee schedule is based on “net plan assets,” as reflected on the most recently filed Form 5500-series return for the plan.   These fees now range from $1,500 to $3,500, as opposed to the fees in 2016 which ran as high as $15,000. The Bad News: No More Reduced-Fee Loan and Other Specific Corrections  In the recent past, the IRS has offered reduced-fee corrections for specific types of failures, such as plan loan failures and failure to make required minimum distributions. Fees for these...

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Tax Reform: The Five Big Changes Affecting Employee Benefits

On December 22, 2017, President Trump signed H.R. 1 (formerly, the “Tax Cuts and Jobs Act” (the “Act”)) into law. While the Act was primarily focused on business tax cuts and individual tax reform, the Act includes several provisions that have implications for employee benefits and executive compensation. 1.  Compensation Deduction Limits for Publicly Traded Employers Prior Law Under Code Section 162(m), publicly held corporations are limited to a $1 million cap on the deductibility of compensation paid to a single “covered employee.” Prior to the Act, “covered employees” included the CEO and the three highest paid officers. Additionally, there was an exception that generally allowed compensation to be deductible (without regard to the $1 million cap) if it was “performance-based compensation,” based on performance goals set by a compensation committee with shareholder approval. Changes in the Act The Act repeals the performance-based compensation exception, and expands the definition of covered employees to include the CEO, CFO, and three highest paid employees. Additionally, once an employee qualifies as a covered employee, the deduction limitation applies so long as that employee or any beneficiary is being paid by the corporation. The Act also expands the definition of “publicly traded corporation” to include all companies that file SEC reports. Implications and Action Steps The Act’s changes for the compensation deduction limits go into effect for taxable years beginning after December 31,...

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Penalties are Coming: The IRS to Begin Enforcing the Affordable Care Act’s Employer Mandate

The IRS has taken actions indicating that the employer mandate penalties under the Affordable Care Act are about to be enforced. Employers should expect to begin receiving letters from the IRS indicating penalties are due for the 2015 year in the coming weeks. There are a few things that employers can do to be prepared for these letters, which require a quick 30-day response. The IRS recently updated its Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act to include Q&As 55-58, “Making an Employer Shared Responsibility Payment.”  The Q&As indicate that if the IRS believes that an Applicable Large Employer (“ALE”) owes an employer mandate penalty under the Affordable Care Act, the ALE will receive a Letter 226J. The IRS plans to issue Letter 226J to an ALE if it determines that, for at least one month in the year, one or more of the ALE’s full-time employees was enrolled in a qualified health plan for which a premium tax credit was allowed (and the ALE did not qualify for an affordability safe harbor or other relief for the employee). The IRS will make the determination as to the liability for an employer mandate penalty based on information reported to the IRS on Forms 1094-C and 1095-C and whether full-time employees received a premium tax credit. Actions Employers Should Take Now  The IRS has...

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The HR Blog is published by Dickinson Wright PLLC to inform the public of important developments within the firm and practice areas. The content is informational only and does not constitute legal or professional advice. We encourage you to consult a Dickinson Wright attorney if you have specific questions or concerns relating to any of the topics covered in this blog.

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