Employee Benefits Law Report

Who is “participant” in a nonqualified plan? Second Circuit case highlights importance of defined terms

One issue that sometimes arises when drafting a nonqualified plan document (or qualified plan for that matter) is how to define a “participant” in the plan. Typically, a plan will define “participant” broadly to include anyone who has an account balance or an accrued benefit under the plan and who has yet to be paid his or her complete benefit. This broad definition includes both active employees who generally are accruing additional benefits as well as former employees who no longer are accruing benefits but still are entitled to payments under the plan. Sometimes, however, an employer may not think in broad terms and instead want to use the term “participant” interchangeably with “employee.” Although courts typically show a certain measure of deference to employers in how they interpret their plans, a recent Second Circuit decision (Gill v. Bausch & Lomb, 14-1058, 2d Cir. 2014) reminds us that plan administrators should not get too carried away with relying on administrative discretion and should be mindful of the specific terms they use to define a participant.

Case Background

Bausch & Lomb (the “Company”) maintained a nonqualified deferred compensation plan (the “Plan”) that covered three retired executives. The Plan contained a change of control provision, pursuant to which a “participant’s” benefit would be converted to a cash lump-sum and paid within 15 days following a change in control of the Company. The applicable provision expressly referred only to “participants.” This latter point proved to be important because the Plan contained definitions of both “participants” and “retired participants.” In May 2007, a private equity firm acquired all of the outstanding shares of the Company, which triggered the change in control payments under the Plan. After the change in control, the Company’s Compensation Committee instructed the Plan’s trustee not only to provide lump sum payments to active participants but also to discontinue installment and annuity payments to the “retired participants” and instead pay them any remaining benefits in a lump sum as well.

The retired participants cried foul, in part because they alleged that the lump sum payments had actuarial values that were less than the actuarial equivalent of their remaining monthly benefits. They brought suit, alleging that the termination of the monthly benefits and the payment of the reduced lump-sum violated ERISA. The district court held that the Plan prohibited the cancellation of monthly benefits for retirees. The court allowed the retirees to retain the lump-sum payments they previously received and ordered the reinstatement of the monthly benefits to the retired participants, albeit at a lesser amount to reflect the lump sum payment the participants retained. The Second Circuit affirmed.

Interpretation of the Plan’s Defined Terms

The appeals court’s decision relied on the plain language of the Plan. The Company had tried to argue that retired participants should be viewed as a “subset” of participants, and thus subject to the lump sum cash-out provision upon a change in control.  In fact, many employers often view “participants” as covering both active employees as well as former employees or retirees who have not received full payment under the plan. The court rejected the Company’s argument, however, stating that the Plan clearly defined a “participant” as an active employee and a “retired participant” as a retiree. Even if the Company never intended to distinguish active and former employees in this manner, the court concluded it could not ignore the clear text of the Plan. The plain text clearly defined retirees as not being “participants” under the Plan. Because of that, the Company could not cash out their benefits upon a change in control.


The lesson from the case is a straightforward one. It may be easy to think of “participants” interchangeably with employees, but it is important for employers to remember that until a final payment is made under a plan, former employees have rights under a plan too. Consequently, employers should be mindful of how a plan is designed to treat both active and former employees.

Obama administration budget proposals could affect employee benefit programs

The Obama administration recently released its budget proposals for Fiscal Year 2015 and as in past years those proposals contained a number of provisions that would affect employee benefit plans. A helpful explanation of the administration’s proposals can be found in the Administration’s Fiscal Year 2016 Revenue Proposals (sometimes referred to as the “Green Book”), which was issued by the Department of the Treasury.

A brief explanation of provisions contained in the proposed budget that affect employer benefit plans (directly or indirectly) are as follows:

1.    Revisions to child care tax incentives. Effective for taxable years beginning after December 31, 2015, this proposal would increase the child and dependent care credit, and create a larger credit for taxpayers with children under age five. Related to these changes, the proposal would repeal dependent care flexible spending accounts and thus require changes to many employer-sponsored cafeteria plans.

2.    Revisions to Tax Credit to Qualified Small Employers for Non-Elective Contributions to Health Insurance. The Affordable Care Act created a tax credit to help small employers provide health insurance for employees and their families. Without going into the mechanics of that credit, the proposal would expand the group of employers eligible for the credit to include employers with up to 50 full-time equivalent employees and would begin the phase-out of the credit at 20 full-time equivalent employees. In addition, the proposal would change the coordination of the phase-outs based on average wage and the number of employees so as to provide a more gradual combined phase-out. The proposal also would eliminate the requirement that an employer make a uniform contribution on behalf of each employee (although nondiscrimination laws still will apply). These proposals would be effective for taxable years beginning after December 31, 2014.

3.    Automatic Enrollment in IRA’s (Including Small Employer Tax Credit), Increase Tax Credit for Small Employer Plan Start-Up Costs, and Provide Additional Tax Credit for Small Employer Plans Newly Offering Auto-Enrollment. The proposal would require employers in business for at least two years that have more than ten employees but do not sponsor a qualified retirement plan, SEP, or SIMPLE for their employees to offer an automatic IRA option to those employees, under which regular contributions would be made to an IRA on a payroll-deduction basis. However, if the qualified plan excluded from eligibility a portion of the employer’s work force or a class of employees such as all employees of a subsidiary or division, then the employer would be required to offer the automatic IRA option to those excluded employees. An opt-out feature would be available to employees. Employees could choose either a traditional IRA or a Roth IRA, with Roth being the default.

Contributions by employees to automatic IRAs would qualify for the saver’s credit to the extent the contributor and the contributions otherwise qualified. Small employers (those that have no more than 100 employees) that offer an automatic IRA arrangement could claim a temporary non-refundable tax credit up to $1,000 per year for three years, and they would be entitled to an additional non-refundable credit of $25 per enrolled employee up to $250 per year for six years.

To encourage employers not currently sponsoring a qualified retirement plan, SEP, or SIMPLE to do so, the non-refundable “start-up costs” tax credit for a small employer that adopts a new qualified retirement plan, SEP, or SIMPLE would be tripled from the current maximum of $500 per year for three years to a maximum of $1,500 per year for three years and extended to four years (rather than three) for any employer that adopts a new qualified retirement plan, SEP, or SIMPLE during the three years beginning when it first offers (or first is required to offer) an automatic IRA arrangement. Finally, small employers would be allowed a credit of $500 per year for up to three years for new plans that include auto enrollment (which would be in addition to the “start-up costs” credit referenced just above). Small employers also would be allowed a credit of $500 per year for up to three years if they added auto enrollment as a feature to an existing plan.

These proposals would become effective after December 31, 2016.

4.    Expand Penalty-Free Withdrawals for Long-Term Unemployed. This proposal would expand the exception from the 10-percent additional tax to cover certain distributions to long-term unemployed individuals from IRAs and from 401(k) or other tax-qualified defined contribution plans. An individual would be eligible for this expanded exception with respect to distributions if (1) the individual has been unemployed for more than 26 weeks by reason of a separation from employment and has received unemployment compensation for that period (or, if less, for the maximum period for which unemployment compensation is available to the individual), (2) the distribution is made during the taxable year in which the unemployment compensation is paid or in the succeeding taxable year, and (3) the aggregate of all such distributions does not exceed the annual limits described below.

To be eligible for the exception, the aggregate of all such distributions received by an eligible individual from IRAs with respect to the separation from employment generally may not exceed half of the aggregate fair market value of the individual’s IRA and the aggregate of all such distributions received by the eligible individual from 401(k) or other tax-qualified defined contributions plans with respect to the separation from employment may not exceed half of the aggregate fair market value of the individual’s non-forfeitable accrued benefits under those plans as of the date of the first distribution. A special rule exempts the first $10,000 of otherwise eligible distributions (even if that is greater than half of the aggregate fair market value of the individual’s IRAs or non-forfeitable defined contribution plan benefits). Eligible distributions with respect to any separation from employment would be limited to a maximum of $50,000 per year during each of the two years when distributions would be permitted under this exception (for a total of $100,000 with respect to any single period of long-term unemployment).

This proposal would apply to eligible distributions occurring after December 31, 2015.

5.     Require Retirement Plans to Allow Long-Term Part-Time Workers to Participate. This proposal would require 401(k) plans to make employees who have worked at least 500 hours per year for at least three consecutive years eligible to make salary reduction contributions. This proposal would not apply to the eligibility to receive employer contributions, including employer matching contributions. The proposal also would require a plan to credit, for each year in which such an employee worked at least 500 hours, a year of service for purposes of vesting in any employer contributions. With respect to employees newly covered under the proposed change, employers would receive nondiscrimination testing relief, including permission to exclude these employees from top-heavy vesting and top-heavy benefit requirements. This proposal would apply to plan years beginning after December 31, 2015.

6.     Facilitate Annuity Portability. A section 401(k) plan generally cannot distribute amounts attributable to an employee’s elective contributions before (a) the employee’s death, disability, severance from employment, attainment of age 59½, or hardship or (b) termination of the plan. In addition, and subject to certain exceptions, distributions from a qualified retirement plan are subject to a 10-percent withdrawal penalty. The proposal would permit a plan to allow participants to take a distribution of a lifetime income investment through a direct rollover to an IRA or other retirement plan if the annuity investment no longer can be held under the plan, without regard to whether another event permitting a distribution has occurred. Any such distribution would not be subject to the 10-percent withdrawal penalty. This proposal would be effective for plan years beginning after December 31, 2015.

7.     Simplify Minimum Required Distributions Rules. The proposal would exempt an individual from the minimum required distribution rules if the aggregate value of the individual’s IRA and tax-favored retirement plan accumulations does not exceed $100,000 (indexed for inflation after 2016). For this purpose, benefits under qualified defined benefit pension plans that have already begun to be paid in life annuity form would be excluded in determining the dollar amount of the accumulations. The minimum required distribution rules would phase in ratably for individuals with aggregate retirement benefits between $100,000 and $110,000. This proposal would be effective for taxpayers attaining age 70½ on or after December 31, 2015 and for taxpayers who die on or after December 31, 2015 before attaining age 70½.

8.     Allow All Inherited Plan and IRA Balances to be Rolled over Within 60 Days. The proposal would expand the options available to a surviving non-spouse beneficiary under a tax-favored employer retirement plan or IRA for moving inherited plan or IRA assets to a non-spousal inherited IRA by allowing 60-day rollovers of such assets. This treatment would be available only if the beneficiary informs the new IRA provider that the IRA is being established as an inherited IRA. This proposal would be effective for distributions made after December 31, 2015.

9.     Require Non-Spouse Beneficiaries of Deceased IRA Owners and Retirement Plan Participants to Take Inherited Distributions Over No More than Five Years. Under the proposal, non-spouse beneficiaries with respect to retirement plans and IRAs generally would be required to take distributions over no more than five years. Exceptions would be provided for certain eligible beneficiaries, for whom distributions would be allowed over the life or life expectancy of the beneficiary beginning in the year following the year of the death of the participant or owner. Special rules would apply to distributions to children who have not reached the age of majority. Any balance remaining after the death of a beneficiary (including any beneficiary excepted from the five-year rule or a spouse beneficiary) would be required to be distributed by the end of the calendar year that includes the fifth anniversary of the beneficiary’s death. The proposal would be effective for distributions with respect to plan participants or IRA owners who die after December 31, 2015. The requirement that any balance remaining after the death of a beneficiary be distributed by the end of the calendar year that includes the fifth anniversary of the beneficiary’s death would apply to participants or IRA owners who die before January 1, 2015, but only if the beneficiary dies after December 31, 2015.

10.     Limit the Total Accrual of Tax-Favored Retirement Benefits. The proposal would prohibit any taxpayer who has accumulated amounts within the tax-favored retirement system (including IRAs, section 401(a) plans, section 403(b) plans, and funded section 457(b) arrangements maintained by governmental entities) in excess of the amount necessary to provide the maximum annuity permitted for a tax-qualified defined benefit plan under current law (currently $210,000) generally would be prohibited from making additional contributions or receiving additional accruals under any of those arrangements. Plan sponsors and IRA trustees would be obligated to report each participant’s account balance as of the end of the year as well as the amount of any contribution to that account for the plan year. If a taxpayer reached the maximum permitted accumulation, no further contributions or accruals would be permitted, but the taxpayer’s account balance could continue to grow with investment earnings and gains. The proposal would be effective with respect to contributions and accruals for taxable years beginning after December 31, 2015.

11.     Limit Roth Conversions to Pre-tax Dollars. The proposal would permit amounts held in a traditional IRA to be converted to a Roth IRA (or rolled over from a traditional IRA to a Roth IRA) only to the extent a distribution of those amounts would be includable in income if they were not so rolled over. Accordingly, after-tax amounts held in a traditional IRA could not be converted to Roth amounts. A similar rule would apply to eligible retirement plans. This proposal would apply to distributions occurring after December 31, 2015.

12.     Eliminate Deduction for Dividends on Stock of Publicly-Traded Corporations Held in Employee Stock Ownership Plans. The proposal would repeal the deduction currently available for dividends paid with respect to employer stock held by an ESOP sponsored by a publicly traded corporation. Rules allowing for immediate payment of an applicable dividend and permitting the use of an applicable dividend to repay loans used to purchase the stock of the publicly traded corporation would continue to apply. This proposal would apply to dividends and distributions that are paid after the date of enactment.

13.     Repeal Exclusion of Net Unrealized Appreciation in Employer Securities. The proposal would repeal the exclusion of net unrealized appreciation in employer stock for participants in tax-qualified retirement plans who have not yet attained age 50 as of December 31, 2015. Participants who have attained age 50 on or before December 31, 2015 would not be affected by the proposal. The proposal would apply to distributions made after December 31, 2015.

14.     Require Form W-2 Reporting for Employer Contributions to Defined Contribution Plans. The proposal would require employers to report the amounts contributed to an employee’s accounts under a defined contribution plan on the employee’s Form W-2. This proposal would be effective for information returns due for calendar years beginning after December 31, 2015.

15.     Increase Certainty with Respect to Worker Classification. For both tax and nontax purposes, workers must be classified into one of two mutually exclusive categories: employees or independent contractors. Worker classification generally is based on a common-law test for determining whether an employment relationship exists. The main determinant is whether the service recipient has the right to control not only the result of the worker’s services but also the means by which the worker accomplishes that result. These determinations directly affect entitlement to employee benefit plan coverage. Under a special provision (section 530 of the Revenue Act of 1978), a service recipient may treat a worker as an independent contractor for Federal employment tax purposes even though the worker actually may be an employee under the common law rules if the service recipient has a reasonable basis for treating the worker as an independent contractor and certain other requirements are met. If a service recipient meets these requirements, then the IRS is prohibited from reclassifying the workers as employees. The special provision also prohibits the IRS from issuing generally applicable guidance addressing the proper classification of workers.

The proposal would permit the IRS to require prospective reclassification of workers who currently are misclassified and whose reclassification has been prohibited under current law. The Department of the Treasury and the IRS also would be permitted to issue generally applicable guidance on the proper classification of workers under common law standards. For this purpose, Treasury and the IRS would be directed to issue guidance interpreting common law in a neutral manner, and would be expected to develop guidance that would provide safe harbors and/or rebuttable presumptions. Service recipients would be required to give notice to independent contractors, when they first begin performing services for the service recipient, that explains how they will be classified and the consequences thereof, e.g., tax implications, workers’ compensation implications, wage and hour implications. The IRS would be permitted to disclose to the Department of Labor information about service recipients whose workers are reclassified.

This proposal would be effective upon enactment, but prospective reclassification of those covered by the current special provision would not be effective until the first calendar year beginning at least one year after date of enactment. The transition period could be up to two years for workers with existing written contracts establishing their status.

At this point it is difficult to predict whether any of these proposals, many of which are not new, will become law. As in previous years, the Obama administration’s budget proposals were labeled “dead on arrival” by the Republican-controlled Congress (or perhaps even more appropriately “dead even before arrival”). While uncertain, some of these proposals could find their way into a compromise package that ultimately might be negotiated, so some attention is warranted.

The Supreme Court unanimously says changes to retiree medical coverage a matter of contract analysis—but with a mild twist

In what perhaps can be best described as a win for traditional contract analysis, the United States Supreme Court (the “Court”) issued an opinion on January 25, 2015 in M&G Polymers USA, LLC, et al. v. Tackett et al, that may permit M&G Polymers USA, a chemical company, to force its retirees to help pay for the cost of retiree medical coverage. While technically a unanimous decision, the Court’s opinion , which was authored by Justice Clarence Thomas, seems to prefer a stricter standard for this sort of contract analysis than what is set forth in a concurring opinion authored by Justice Ruth Bader Ginsburg (and joined by Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan, the other three members of the so-called liberal wing of the Court).

This case relates to the Point Pleasant Polyester Plant in Apple Grove, West Virginia, which was purchased by M&G Polymers in 2000. At the time of that purchase, M&G Polymers entered into a collective bargaining agreement and a related pension and insurance agreement that extended retiree health care coverage to retirees at the plant, many of whom retired before M&G Polymers had bought the plant. Certain retirees who were eligible to receive a benefit under an applicable pension plan (while not clear in the Court’s opinion, the pension plan may have been a multiemployer pension plan) and whose accumulated number of years of age and service equaled or exceeded a specified number were entitled to retiree health care coverage completely paid for by the company. While the collective bargaining agreements were silent as to whether changes in the retiree health care coverage were permissible (silence on that question is not that unusual), the collective bargaining agreements themselves were subject to renegotiation every three years. In December, 2006, M&G Polymers announced that going forward it would begin to charge retirees for a portion of the cost of retiree health care coverage. The retirees responded by filing a court challenge to this decision—alleging that the decision to charge for retiree medical coverage constituted a violation of the applicable collective bargaining agreements. In essence, the retirees, supported by the United Steelworkers union, alleged that they had a vested right for life to no-cost retiree medical coverage.

The challenge by retirees was rejected by the United States District Court for the Southern District of Ohio for failure to state a clam. However, the United States Court of Appeals for the Sixth Circuit later reversed the lower court’s decision based on that appeal court’s previous decision in International Union, United Auto, Aerospace, & Agricultural Implement Workers of America v. Yard-Man, Inc. As applied to ambiguous contract provisions, the approach in Yard-Man looks to the “context” of labor negotiations in general to resolve any ambiguity—and in this case the Court felt that the context of the case established a plausible claim by the retirees. The case was remanded back to the District Court for trial consistent with Yard-Man principles, and that lower court ultimately rendered a decision in favor of the retirees. The Court of Appeals subsequently affirmed the District Court’s decision. The Supreme Court accepted the case on certiorari, and thus this matter landed in the laps of the justices.

The Court took what can only be described as a very dim view of the contextual analysis favored in Yard-Man and its progeny. The Court, both in the opinion of the Court and in the concurrence, rejected the inappropriate tilt that this sort of contextual analysis can create in favor of the retirees. The Court’s opinion goes to considerable length to eviscerate the contextual approach favored in Yard-Man, with Justice Thomas concluding that approach violates ordinary contract interpretation principles by “placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements.” The Court takes a fairly hard line on these issues by concluding that courts generally should not construe ambiguous contract language to create lifetime promises.

The Court remanded the case back to the lower courts for a decision consistent with the opinion written by Justice Thomas. Towards the end of his opinion, Justice Thomas offered a strong hint as to how he thinks the case should be resolved by the lower courts with the admonition “…when a contract is silent as to the duration of retiree benefits, a court may not infer that the parties intended those benefits to vest for life.” The concurring opinion, while also dismissive of the notion of a thumb on the scale, is less dismissive of the claims of the retirees and suggests that there might be arguments that could support those claims even under a stricter contractual analysis favored by the Court (Justice Ginsburg suggests the fact that no-cost retiree medical coverage is tied to eligibility for a vested pension benefit could indicate the retiree medical coverage also is vested). It now is up to the lower courts to sort all of this out, and it should be interesting to see how that decision unfolds.

The Supreme Court’s decision in M&G Polymers certainly seems to invalidate the contextual analysis favored by the Sixth Circuit in Yard-Man and its progeny, and that development likely will be cheered by many employers. Having said that, the results of a contractual analysis of ambiguous contract provisions even under the Supreme Court’s stricter approach can be unpredictable, and thus employers may be well served to ensure whenever possible that explicit language providing for the ability to amend (or even terminate) employee benefits coverage be inserted in all contractual arrangements, including collective bargaining agreements, to avoid unpleasant surprises.

2015 is lurking: are your health and welfare and cafeteria plans up-to-date?

The snow falling outside my window right now is a stark reminder that the end of 2014 is right around the corner. With 2015 approaching, employers should take a moment to ensure their health and welfare plans and cafeteria plans are up-to-date. While very few changes are mandatory, there have been several legal developments over the past year that present the opportunity to make design changes to these plans. So curl up by the fire with a hot cup of cocoa and those plan documents and review this list of potential year-end health and welfare and cafeteria plan amendments. And, if changes are required (or prudent), we would recommend working with your insurer, third-party administrator, or legal counsel to ensure that they are appropriately reflected in plan documents.

 Amendments Impacting Health and Welfare Plans and Cafeteria Plans

  • Spouse Definition (Optional): Under the Supreme Court’s recent Windsor decision and subsequent IRS guidance, for federal law purposes, the term “spouse” includes same-sex spouses who are married in a jurisdiction that recognizes same-sex marriage, even if the individual resides in a state that does not recognize such marriages. In other words, if a participant resides in Ohio (which does not recognize same-sex marriage) but married a same-sex spouse in Maryland (which does recognize same-sex marriage), that participant’s spouse would need to be recognized as a “spouse” for federal law purposes.

While neither the IRS nor the Department of Labor have issued guidance specifically requiring amendments to health and welfare plans or cafeteria plans in response to this ruling, the Windsor decision impacts health and welfare and cafeteria plans in a variety of ways, many of which may require amendments. For example, the cost of employer-provided health coverage for same-sex spouses is now excluded from federal income tax and employment tax. So, while this ruling and subsequent guidance do not require plans to offer coverage to same-sex spouses, many employers are using this ruling as an opportunity to extend health coverage to same-sex spouse. And if an employer does offer coverage to same-sex spouses, the Windsor decision would also dictate that covered same-sex spouses be considered qualified beneficiaries entitled to COBRA. Regardless of whether coverage is extended to same-sex spouses, health plan and cafeteria plan amendments may be needed to clarify coverage and eligibility of same-sex spouses and to ensure that plan language matches plan administration.

Keep in mind that this ruling impacts other arrangements as well, including health and dependent care flexible spending accounts, health reimbursement accounts, and health savings accounts. Accordingly, we suggest that all health and welfare arrangements and cafeteria plan arrangements be examined to make sure that they are operated and administered properly in light of the Windsor decision, and to determine if any amendments are appropriate.

  • Eligibility (Optional): If any eligibility changes are being made for the 2015 plan year to comply with the Affordable Care Act employer coverage mandate (e.g., if an average of 30 hours per week will be considered “full-time” for eligibility purposes), amendments to health plans and cafeteria plans may be needed to reflect this change.

Amendments Impacting Cafeteria Plan Features Only

  • $2,500 Health Flexible Spending Account Limit (Required): The Patient Protection and Affordable Care Act imposed a $2,500 limit on pretax employee contributions to health FSAs. The change took effect for plan years beginning on/after January 1, 2013, but IRS guidance allows employers to adopt retroactive amendments to impose the $2,500 limit any time before December 31, 2014. If you haven’t already amended to incorporate this change, now is the time to do so.
  • Health Flexible Spending Account Carryover Rule (Optional): The IRS has issued guidance providing that cafeteria plans may be amended to allow up to $500 of unused health FSA funds remaining at the end of a plan year to be paid or reimbursed to plan participants for qualified medical expenses incurred during the following plan year, provided that the plan does not also incorporate the grace period rule. The amendment must be adopted on or before the last day of the plan year from which amounts may be carried over and may be effective retroactively to the first day of that plan year. A plan may be amended to adopt the carryover provision for a plan year that begins in 2013 at any time on or before the last day of the plan year that begins in 2014.
  • Expanded Change in Status Rules (Optional): The IRS recently issued guidance adding two new change in status rules for cafeteria plans. The first rule allows an employee who has a reduction in service per week to below 30 hours to change a cafeteria plan election if he intends to enroll in another plan that provides minimum essential coverage with the new coverage effective no later than the first day of the second month following the month in which the prior coverage was revoked. The second rules allows an employee who becomes eligible to enroll in a Qualified Health Plan in the Marketplace under a Special or Open Enrollment Period to revoke his or her coverage in the employer group health plan if the employee intends to enroll in a Qualified Health Plan through a Marketplace for new coverage that is effective immediately on the day following the last day that the employer group medical plan is effective. A plan that incorporates these rules must be amended on or before the last day of the plan year in which the elections are allowed. However, a plan may be amended to allow the election changes for a plan year that begins in 2014 at any time on or before the last day of the plan year that begins in 2015.

ERISA plan service provider avoids fiduciary status—what it means for service providers and plan sponsors

A recent Third Circuit decision (Santomenno v. John Hancock, et. al.) has been described as a win for service providers to ERISA plans. It certainly is important because this decision, along with other fairly recent decisions, helps to illustrate when service provider actions become significant enough to make them fiduciaries. A somewhat less discussed point, however, is that this decision also serves as a reminder to plan sponsors about their fiduciary duties and the need to be vigilant in monitoring fees. This blog will provide a brief summary of the decision and the lessons it offers both to service providers to plans and plan sponsors.

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Windsor decision on DOMA–does your plan have a year-end plan amendment deadline?

In April, 2014, the Internal Revenue Service (“IRS”) issued Notice 2014-19, which provided additional guidance addressing the impact on tax-qualified retirement plans of the Supreme Court’s decision in United States v. Windsor, 133 S. Ct. 2675 (2013). In the Windsor decision, the Supreme Court struck down as unconstitutional Section 3 of the Defense of Marriage Act (“DOMA”), which had defined marriage for federal law purposes as a legal union between one man and one woman. Before the Windsor decision, the term “spouse” did not include a same-sex spouse under federal employee benefit laws. After Windsor, same-sex marriages that are recognized under state or foreign law generally must be recognized for federal law purposes.

In Revenue Ruling 2013-17, the IRS ruled that the determination of who is a spouse would be determined by whether the marriage was valid in the state or foreign jurisdiction where that marriage was celebrated without regard to where the individual was domiciled (this standard often is referred to as the place of celebration rule). The Department of Labor also issued guidance adopting this place of celebration rule for ERISA purposes.

Among other things, Notice 2014-19 dealt with the need for tax-qualified retirement plans to adopt plan amendments to conform to the new Windsor standard (the Notice also covered various operational issues that are beyond the scope of this article). Whether or not a tax-qualified retirement plan needs to be amended to conform to Windsor depends on plan design. Any plans that have provisions that are inconsistent with Windsor (e.g., if the term “spouse” is defined under a retirement plan by citing to the old DOMA standard or by referring to the laws of the state of domicile) will have to be amended. On the other hand, plans that currently have provisions that are consistent with the new Windsor standards (e.g., the term “spouse” means the legal spouse of the participant and the plan refers to federal law as the guiding law in that context) do not need to be amended. It seems likely that some plan sponsors will opt to make conforming amendments if there is any uncertainty (e.g., if a “spouse” is defined by reference to a marriage under state law but the plan has in the past been interpreted to follow DOMA). Of course, a retirement plan may refer to a spouse but not specifically define the term. In that case, a plan amendment might not be necessary.

Under the Notice, an amendment to conform a tax-qualified retirement plan to Windsor must be adopted by the latest of (i) the last day of the plan year in which the amendment is first effective; (ii) the due date of the employer’s tax return for the tax year that includes the date that the amendment is first effective; or (iii) December 31, 2014. For calendar year plans, the deadline will be December 31, 2014—not too far down the road. Please note that for 403(b) plans, amendments must be adopted not later than the general amendment deadline specified in IRS Revenue Procedure 2013-22, which has not yet been announced.

Electronic filing requirements take another step –this time it’s top hat plans

Section 110(a) of ERISA authorizes the Department of Labor (the “DOL”) to permit an alternative form of compliance with the reporting and disclosure obligations of Part 1 of Title I of ERISA for “top hat” plans (i.e., “unfunded” plans established for a select group of management or highly compensated employees). Under that authority, the DOL issued a regulation way back in 1975 (29 CFR 2520.104-23) to provide such an alternative method of compliance with reporting and disclosure requirements for top hat plans. Under that guidance, top hat plans are not required to file annual reports (tax-qualified plans use Form 5500 to file those reports). Under this alternative method, a plan administrator must file with the DOL a statement that sets forth the name and address of the employer and its employer identification number; a statement that the employer maintains a plan or plans primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, the number of such plans and the number of participants in each plan. This statement generally must be filed within 120 days of plan adoption.

On September 30, 2014, the DOL proposed new regulations that would require these top hat statements to be made electronically. The stated goal of the DOL is to make the filing of these statements easier—both for plan administrators and for the DOL. The DOL no longer believes making the filings via regular mail or personal delivery is efficient or cost-effective, and noted that it annually receives approximately 2,000 top hat plan statement filings. To make the information on these statements accessible, the DOL has been converting the paper filings to electronic format. Apparently, the DOL wishes to save itself from that work in the future in a way that should not impose undue burdens on plan administrators. Under the proposed regulation as currently drafted, electronic filing for all new top hat plans would become mandatory 120 days after the final regulation is published in the Federal Register. Filings with the DOL via mail or personal delivery no longer would be acceptable.

On the same day the proposed regulations were issued the DOL launched a new web-based filing system for the notices described above, which can be found here. Use of this new system is voluntary pending the adoption of a final regulation, but the DOL stated it will treat plan administrators who use the new system as having satisfied the requirement to provide the statement.

The preamble to the proposed regulations states that these new filing rules are not intended to change the content requirements for top hat statements. Of course, an email address would have to be provided with electronic filings (email addresses are not currently required). If adopted, the electronic filing process would include an email confirmation back to the plan administrator that the filing has been received. All filed statements would be posted on the DOL’s website.

Employee Benefit Plan Limits – Reference Chart for 2015 and Prior Cost-of-Living Adjustments

The Internal Revenue Code sets forth various dollar limitations on benefits, contributions, compensation under employee benefit plans. The IRS has announced limits for 2015 tax years. For your reference, the IRS Cost-of-Living Adjustments summarizes these dollar limitations, as modified by the IRS for cost-of-living adjustments (COLAs), for 2015 and prior years.

Here we go again: Does the DOL’s request for information regarding self-directed brokerage accounts mean new fee disclosure requirements are coming soon?

If you’re a fan of the tv show “The Simpsons,” you might remember an early episode where Homer Simpson launched a crusade against every public safety issue in the city. The result was practically every square inch of the town contained signs alerting people to every dip, pothole, and other nuisance on the roads. After watching that episode again recently (we won’t admit which one of us got sucked into the tv marathon), we were reminded of a first year torts class in law school that discussed the efficacy of public safety notices. The professor made the comment, “A wealth of information leads to a poverty of attention.”

That comment is especially fitting with respect to ERISA fee disclosures, particularly regarding defined contribution plans. Recently, the DOL requested information and comments about self-directed brokerage accounts (“SDBAs”). The DOL’s history with trying to provide guidance on SDBAs provides a great illustration of the difficulty of determining how much information is too much. On one hand, the DOL has been concerned that defined contribution plan participants will be unable to navigate the wide universe of investment options available under SDBAs unless strict procedural rules are in place. On the other hand, the plan sponsor community has tried to make clear that rank-and-file employees typically are not interested in SDBAs. Instead, more sophisticated investors request this feature, and they do not need a detailed protective regime. The DOL, to its credit, has recognized the different points of view on this issue and has sought input to help develop a balanced approach to regulating SDBAs.

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ERISA contractual time limitations for filing civil actions: why you may want to add these provisions to your benefit claim denial letters

ERISA plan sponsors were given what was described in our earlier post as a “holiday gift” last December with respect to plan-based statutes of limitation when the Supreme Court decided Heimeshoff v. Hartford Life & Accident Insurance Co. There, the Court declared a three-year plan-based (or contractual) time limitation for the filing of an ERISA civil action based on a benefit claim denial to be reasonable. Recently, the Sixth Circuit returned to the subject of plan-based statutes of limitation in Moyer v. Metropolitan Life Insurance Co., decided in August.

In Moyer, a divided panel of the U.S. Court of Appeals for the Sixth Circuit declined to enforce the contractual time limitation expressed in the plan documents, holding that the plan’s administrators did not substantially comply with ERISA Section 503 when they failed to include the plan’s own limitations period for filing an action based on a claim denial in the plan’s denial letter to the participant. ERISA’s Section 503 claims procedures and its explanatory regulations provide that claim denial letters must include a “description of the plan’s review procedures and the time limits applicable to such procedures, including a statement of the claimant’s right to bring a civil action.” 29 C.F.R. 2560.503-1(g)(iv). Some courts have interpreted this provision to simply require a statement instructing the participant or beneficiary of his/her general right to sue.

However, the Moyer majority did not adopt this view, finding that the inclusion of the time limitation within the plan document did not equate to constructive notice to the participant or beneficiary. Instead, the court held, “[t]he exclusion of the judicial review time limits from the adverse benefit determination letter was inconsistent with ensuring a fair opportunity for review and rendered the letter not in substantial compliance….” with the ERISA requirements. As a result, the Sixth Circuit found that the notice was insufficient to trigger the plan-based limitations period for filing the civil action.

The opinion itself was delivered along with a dissent, positing that majority oversimplified the issue and, in fact, relied upon inadequate briefing as the issue of sufficiency of notice under Section 503 was not central to the appeal. Further, many courts outside of the Sixth Circuit have found that the text of this regulation does not require claims letter disclosure of limitations periods for bringing civil actions. In addition, the dissent opined that the majority gave short shrift to considering whether the Section 503 “substantial compliance test” was satisfied, even if the limitations period was required to be stated. As a result, the Moyer decision does not necessarily suggest a changing of the tide on the issue, but does indicate that the Sixth Circuit takes seriously the need to communicate these provisions to participants in at least some manner other than simply including them in the plan document.

It is important to note here that the summary plan description for the plan at issue in Moyer did not include the plan-based limitations period for filing a civil action. Had the summary plan description disclosed this information (and presuming the summary was properly provided to the participant), the issue may not have progressed to the Sixth Circuit at all. Further, this particular limitations period began running when proof of claim was required, rather than upon adverse determination or upon final determination upon review. Had the statute of limitations run from the final determination upon review, the limitations would not have been pertinent yet at the time of the initial claim denial letter.


Even if the majority opinion in Moyer fails to apply in other fact scenarios or garner broad support across circuits, at the very least, the decision represents the current interpretation of the law within the Sixth Circuit. For plan administrators of benefits plans governed by the Sixth Circuit and beyond, we’d recommend the same course of action – in drafting future denial of claims letters, any plan-based limitations period should be added to the explanations regarding a participant’s right to bring suit, even if you already include this information in your summary plan descriptions. This is a belt and suspenders approach to compliance, but it is a simple step that could save much consternation and expense down the road. In short, add it to the to do list — the sooner, the better.