ESOPs are increasingly a popular succession planning vehicle, and well they should be. When formed properly, an ESOP transaction preserves the legacy of the business that an owner helped create, while providing tax and financial benefits to the former business owner, the company and the employees. Continue Reading
Unanimous Supreme Court provides victory to plaintiffs in ERISA fee litigation
But just how big of a win is it?
The U.S. Supreme Court recently issued a unanimous decision in Hughes v. Northwestern University, reversing and remanding a lower court ruling that had dismissed the case against a retirement plan sponsor. This decision reaffirms that the Employee Retirement Income Security Act’s (ERISA) fiduciary duty of prudence requires continuous monitoring of all investment options under a plan, especially when lower-cost share classes are available for funds. Continue Reading
DOL proposes new ERISA fiduciary ESG and proxy voting rules
In what some commentators are describing as the latest volley in a game of regulatory ping-pong, the Department of Labor (DOL) published proposed regulations that would change the way an ERISA fiduciary should consider environmental, social and governance (ESG) issues and related proxy voting decisions with respect to plan investments (the proposed regulations). The proposed regulations would provide more flexibility than prior guidance and greater encouragement to fiduciaries to consider taking ESG factors into account for their investment decisions. They also would encourage fiduciaries to vote on more shareholder activist types of proxy proposals. Although this guidance is new, tried-and-true best practices such as documenting investment decisions and having (and following) an investment policy should remain best practices throughout this evolving guidance. Continue Reading
Plan sponsors now have a deadline for providing lifetime income illustrations
Employers who sponsor 401(k) plans and other defined contribution plans in which participants may direct the investments of their accounts now have a deadline to provide lifetime income illustrations in those plans’ benefit statements. The Department of Labor (DOL) recently published guidance addressing these requirements. While helpful, the guidance is still subject to change in a potential final regulation. As such, employers should work closely with their plan administrators and legal counsel to navigate the contours of the evolving lifetime income rules. Continue Reading
IRS updates Nonqualified Plan Audit Technique Guide—Is a new enforcement initiative on the horizon?
The Internal Revenue Service (IRS) recently updated its Nonqualified Deferred Compensation Audit Techniques Guide (NQDC). It released Publication 5528 (NQDC guide) on June 1, 2021. The IRS last updated the NQDC Guide in 2015. Interestingly, the 2015 NQDC Guide was published shortly after the IRS sent information document requests to publicly traded companies to determine how well companies were complying with Internal Revenue Code (IRC) Section 409A. This latest update to the NQDC guide contains much more detailed guidance than the prior version. That is noteworthy because President Joe Biden and many members of Congress have been proposing to increase the IRS’s budget in order to provide more resources for audit initiatives. Could a new executive compensation enforcement initiative be on its way?
DOL confirms cyber security is an ERISA fiduciary issue and issues guidance for retirement plan sponsors, service providers and participants
The U.S. Department of Labor (DOL) recently announced new guidance for plan sponsors, fiduciaries, record keepers and participants on best practices for maintaining cyber security. This is the first time the DOL has issued such guidance, and it comes in response to a recent General Accounting Office (GAO) report responding to increased cybersecurity risks to retirement plan participant data and plan assets. If there is one central message to the guidance, it is this: The DOL now considers cybersecurity to be an ERISA fiduciary function. Stated another way, part of the fiduciary decision of the selection and monitoring of service providers requires an evaluation of the service providers’ cybersecurity program.
For public companies, the time to update executive compensation practices is now: Final regulations issued under IRC Section 162(m) and American Rescue Plan Act further expands class of covered employees
At long last, the Department of the Treasury and Internal Revenue Service published final regulations to explain how changes to Internal Revenue Code Section 162(m) under the Tax Cuts and Jobs Act of 2017 (TCJA) affect the deductibility (or lack thereof) of compensation in excess of $1 million paid to covered employees. We have blogged about these changes and made recommendations to public companies in the past about how to manage these changes. For the most part, the final regulations did not change any prior guidance. We will not repeat these prior summaries here. Instead, we will highlight the items that we expect will result in the biggest changes or challenges to public companies and the administration of their executive compensation plans.
Public companies may need to amend nonqualified and incentive compensation plans by Dec. 31, 2020
Public company nonqualified plans and incentive plans may need to be amended to avoid a potential violation of Internal Revenue Code (IRC) Section 409A as a result of changes to IRC Section 162(m) under the Tax Cuts and Jobs Act. This amendment most likely is required for employers that mandated deferrals of amounts that exceeded the limit under IRC Section 162(m) but not those whose plans permitted but did not require deferrals of such amounts. Nevertheless, an employer that actually exercised such discretion with respect to non-grandfathered amounts may need to amend such arrangements as well. That is because the act eliminated the performance-based exception to the $1 million deduction limit under IRC Section 162(m) for “covered employees” of publicly traded companies, along with other related changes. Proposed regulations under IRC Section 162(m) indicate that companies may need to amend their nonqualified plans or incentive compensation plans (or potentially both) to avoid an inadvertent violation of IRC Section 409A’s anti-acceleration rules. Otherwise, payment of non-grandfathered incentive awards could subject participants to additional taxes and penalties of 20% or more. We explain further in this blog.
New IRS guidance reminds employers about new long-term part-time employee eligibility rules for 401(k) plans
Much of the employee benefits news this year has related to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, particularly with respect to the greater flexibility it provided 401(k) plan participants with respect to requesting in-service distributions and loans. That is not a surprise during this year of economic upheaval. Updating plan administrative procedures to reflect these CARES Act terms has kept employers busy, but it is important that employers remember that they will need to update their procedures to reflect the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The Internal Revenue Service (IRS) recently reminded employers about these SECURE Act issues in Notice 2020-68. Foreshadowing some of the administrative complexities that employers may face, the notice states that the IRS did not intend to provide “comprehensive” guidance, but instead, simply is trying to assist employers with implementation of key SECURE Act terms.
Process matters: IRS issues guidance on recognition of income and FICA taxes for stock-settled awards
On May 22, 2020, the IRS released an Office of Chief Counsel Memorandum that addresses (i) the date that fair market value is determined and when gross income and federal income tax withholding liability arises for stock-settled awards and (ii) the timing for remitting FICA taxes for such awards. This question comes up frequently and has not always had a clear answer, and so the memo provides important guidance for employers who sponsor equity award plans.