Regulatory Potpourri

Transcription

1 Regulatory Potpourri Nancy G. Hilu, Senior Counsel Liz Masson, Senior Counsel Hanson Bridgett LLP Hanson Bridgett LLP Phone: Phone: Agenda Determination Letter Program Update Changes to Employee Plans Compliance Resolution System ( EPCRS ) Other IRS Guidance Affecting Governmental Defined Contribution Plans New Fiduciary Rule Issued by Department of Labor Recent Case Law to Consider Auto Enrollment 1

2 Determination Letter Program Update Determination Letter Program Update Determination Letters IRS opinion regarding whether a written plan document satisfies the qualification requirements Previously available for individually designed plans = Five Year Cycles Also available for pre approved plans = Six Year Cycles Master and Prototype Plans or M&P Volume Submitter or VS IRS publishes annual Cumulative List that IRS will use in reviewing plan during determination letter application process 2

3 Determination Letter Program Update IRS Announcement Effective 1/1/2017, IRS eliminates determination letter filing program for individually designed plans Determination letters are now available only upon Initial qualification even for existing plans, if no determination letter has been issued Plan termination Possibly other limited circumstances Effective 7/21/2015, IRS no longer accepts off cycle filings Determination Letter Program Update IRS Notice Expiration dates on determination letters issued prior to 1/4/2016 no longer operative Extends deadline for employers to establish or adopt a current pre approved defined contribution plan and apply for a determination letter to April 30, 2017 Only applies to plans adopted on or after January 1, 2016, not including modification or restatement of existing plan Intended to make it easier for plan sponsors to convert an existing individually designed plan to a pre approved plan Current defined contribution pre approved plan means one approved with respect to 2010 Cumulative List 3

4 Revenue Procedure For Individually Designed Plans Beginning in 2017, IRS will issue annually: Required Amendments List = changes to qualification requirements that require a plan amendment Operational Compliance List = required changes to operations, even if plan has not been amended yet Revenue Procedure For Individually Designed Plans Extends remedial amendment period For governmental plan sponsors, three rules, depending on the type of amendment: First: a plan amendment related to a change in qualification requirements that will require a new provision must be adopted by the later of: the end of the second calendar year that begins after the Required Amendments List that contains the change is issued or 90 days after the close of the third regular legislative session of the entity with authority to amend the plan that begins on or after the Required Amendments List is issued 4

5 Revenue Procedure For Individually Designed Plans For governmental plan sponsors, three rules for making plan changes, depending on the type of amendment: Second: a plan amendment to change a prior amendment that would otherwise be a disqualifying provision must be adopted by the later of: the end of the second calendar year following the calendar year in which the disqualifying amendment was adopted or effective, whichever is later 90 days after the close of the third regular legislative session of the entity with authority to amend the plan that begins after the disqualifying amendment was adopted or effective, whichever is later Revenue Procedure For Individually Designed Plans For governmental plan sponsors, three rules for making plan changes, depending on the type of amendment: Third: a discretionary amendment must be adopted by the later of: the end of the plan year in which the plan amendment is operationally put into effect 90 days after the close of the second regular legislative session of the entity with authority to amend the plan that begins on or after the date the plan amendment is operationally put into effect 5

6 Revenue Procedure Reliance on Determination Letters Letters issued after January 4, 2016 will not have an expiration date Expiration dates in letters issued before January 4, 2016 are no longer operative Plan sponsors may rely on favorable determination letter for provisions that are not amended or affected by a change in law Plan sponsors may not rely on favorable determination letter for provisions that are subsequently amended or affected by a change in law Revenue Procedure For Pre Approved Plans (M&P and VS Plans) Six year remedial amendment cycle continues to apply Cumulative lists will be published each year and changes must be incorporated before requesting opinion, advisory or determination letter For DC plans, third cycle submission period changed from between February 1, 2017 and January 31, 2018 to between August 1, 2017 and July 31, 2018 For newly approved plans, employers will have a two year window to adopt the plan 6

7 Revenue Procedure For Pre Approved Plans (M&P and VS Plans) Interim amendments will be required For governmental plans, the adoption deadline will be the later of: the last day of the plan year that includes the date on which the remedial amendment period begins, or 90 days after the close of the third regular legislative session of the entity with authority to amend the plan that begins on or after the date the amendment becomes effective Revenue Procedure For Pre Approved Plans (M&P and VS Plans) Discretionary amendments may be adopted For governmental plans, the adoption deadline will be the later of: the last day of the plan year in which the amendment is operationally put in to effect or 90 days after the close of the second regular legislative session of the entity with authority to amend the plan that begins on or after the date the amendment becomes effective 7

8 Revenue Procedure For Pre Approved Plans (M&P and VS Plans) Cumulative list and remedial amendment period will continue to permit retroactive amendment where applicable Operational compliance will still be required in the meantime Plans may use Operation Compliance List that IRS will publish each year Pre Approved Plans Fix It Kit Pre approved plan sponsors had until April 30, 2016 to adopt a new plan document for 2010 Cumulative List (see Ann ) IRS posted Voluntary Correction Program (VCP) submission kit for preapproved defined contribution plans that failed to meet deadline Available on IRS Website If the provider of the plan requested an umbrella closing agreement, no individual VCP is required check with plan sponsor first 8

9 Employee Plans Compliance Resolution System Update ( EPCRS ) Changes to EPCRS Revenue Procedure (March 27, 2015) Correcting Overpayment Failures Must take reasonable steps to recoup overpayment + interest Clarify available alternatives Employer/other person contributes the overpayment Amend retroactively to conform to operation (w/ IRS approval) 9

10 Changes to EPCRS 415(c) Failures Self Correction available for recurring annual addition failures Corrective distributions made within 9 ½ months Reduced Voluntary Correction program ( VCP ) Fees Failure to Timely Make Required Minimum Distributions Less than 300 affected participants $500 for 150 or fewer affected participants $1,500 for 151 to 300 affected participants Over 300 affected participants fee based on number of participants (see Rev. Proc discussion below) Loans Fee based on number of loan failures rather than participant count Fee range: $300 $3,000 Changes to EPCRS Revenue Procedure (Apr. 2, 2015) Auto Enrollment Failures Elective Deferral Failures Generally, exclusion of eligible employees from 401(k)/ 403(b) is corrected by making a QNEC equal to 50% of ADP (employee s group) x employee s compensation Alternative safe harbor corrections added 10

11 Changes to EPCRS 1st Modified Safe Harbor Correction No QNEC required if: The failure to implement automatic enrollment does not extend beyond 9½ months after the end of the plan year of the failure, Correct deferrals begin by the earlier of: the first pay on or after the 9½ month period, or the first pay on or after the end of the month after the month the employee notifies the employer of the failure, The employer gives a notice of the failure to affected employees within 45 days after correct deferrals begin, and Corrective matching contributions + earnings are made by the end of the second plan year after the plan year of the failure. Available only for auto enrollment failures (including failure to implement autoescalation) beginning on or before 12/31/2020 Changes to EPCRS 2nd Modified Safe Harbor Correction No QNEC required if: Elective deferral failure does not exceed three months, Correct deferrals begin by the earlier of: the first pay on or after the three month period, or the first pay on or after the end of the month after the month the employee notifies the employer of the failure The employer gives a notice of the failure to affected employees within 45 days after correct deferrals begin, and Corrective matching contributions + earnings are made by the end of the second plan year after the plan year of the failure Available to correct any elective deferral failure, whether affirmative election or auto enrollment 11

12 Changes to EPCRS 3rd Modified Safe Harbor Correction Method Plan Sponsor may make a QNEC equal to 25% of missed deferrals if: Correct deferrals begin by the earlier of: the first pay on or after the second plan year after the plan year of the failure, or the first pay on or after the end of the month after the month the employee notifies the employer of the failure The employer gives a notice of the failure to affected employees within 45 days after correct deferrals begin, and Corrective contributions (QNEC & match) + earnings are made by the end of the second plan year after the plan year of the failure Available to correct any elective deferral failure, whether affirmative election or auto enrollment Changes to EPCRS Alternative Safe Harbor for Calculating Earnings Available for all three modified safe harbor correction methods Can use plan s default investment if employee never made investment election, but Cumulative losses can t reduce corrective matching contributions 12

13 Changes to EPCRS Revenue Procedure Significant fee reduction for Voluntary Correction Program (VCP) filings Effective February 1, 2016, participant based VCP fees are as follows: Participant Count Filing Fee before 2/1/2016 Filing Fee on or after 2/1/ or fewer $750 $ $1,000 $ $2,500 $1, $5,000 $5, ,000 $8,000 $5,000 1,001 5,000 $15,000 $10,000 5,001 10,000 $20,000 $10,000 Over 10,000 $25,000 $15,000 Potential for annual adjustments, effective February 1 st of each year Other IRS Guidance 13

14 Other IRS Guidance New Proposed Code 457 Regulations Eligible Code 457(b) Plans Clarify First Day of the Month Rule for eligible plan deferrals Regulatory amendments to reflect Statutory changes: Incorporates the rules that allows eligible governmental plans to include a Roth contribution program (Small Business Jobs Act of 2010, PL ) Survivors of participants performing qualified military service are entitled to certain additional benefits provided under the plan when participant dies during employment; differential wages treated as compensation; serving in the uniformed services treated as severance from employment for purposes of plan distribution requirements (HEART Act of 2008, PL ) Income exclusion for public safety officers $3,000 cap; Non spouse beneficiary rollovers (Pension Protection Act of 2006, PL ) Other IRS Guidance New Proposed Code 457 Regulations (con t) Ineligible Deferred Compensation Arrangements Code 457 The rules apply to all deferred compensation arrangements that are not made under a qualified plan or eligible plan Affects executive pay, severance plans, early retirement windows, paid time off programs, etc. Proposed rules clarify which plans are not subject to Code 457(f) or are not treated as providing a deferral of compensation Restrict nonqualified deferred compensation plan structure and addresses tax treatment of nonqualified deferred compensation arrangements that do not meet those requirements Works in conjunction with nonqualified deferred compensation rules under Code 409A 14

15 Other IRS Guidance Defending Public Safety Employees Retirement Act (PL ) Eliminates 10% early distribution penalty for qualified safety employees who are at age 50 Distributions from governmental defined contribution plan after separation from service qualify for the exemption Applies to distributions after 12/31/2015 Final Roth Rollover Regulations Issued (T.D. 9769, May 18, 2016) No significant change from Notice and proposed regulations issued in 2014 When disbursements are rolled over to multiple destinations, participants may direct the allocation of the after tax and pre tax portions of the distribution to specific destinations Confirms elimination of the requirement that a distribution from a Roth account directly rolled over to an eligible plan be treated as separate distribution from an amount paid to the participant Other IRS Guidance 2016 IRS Limits Retirement Plans Elective deferral limit (401(k), 403(b) and eligible 457(b)) $18,000 $18,000 Catch up contribution limit age 50 or older $6,000 $6,000 Dollar limit on annual benefit under defined benefit plan $210,000 $210,000 Dollar limit on annual allocations under defined contribution $53,000 $53,000 plan 401(a)(17) annual compensation limit $265,000 $265,000 Annual compensation limit for eligible participants in certain $395,000 $395,000 governmental plans Highly compensated employee $120,000 $120,000 Key employee $170,000 $170,000 Social security wage base $118,500 $118,500 15

16 New Department of Labor Fiduciary Rule Department of Labor (DOL) Fiduciary Rule Department of Labor issued final regulation in April 2016 Effective April 10, 2017 Transition rule applies as of June 7, 2016 Expands liability under ERISA with respect to fiduciaries who provide investment advice ERISA does not apply to governmental plans BUT Plan advisors and investment managers may change their business practices for all clients, including governmental plans Many states impose fiduciary standards on governmental plan sponsors that are similar to ERISA 16

17 DOL Fiduciary Rule Fiduciary standards apply to investment advice for which the adviser (or its affiliate) receives direct or indirect compensation Investment advice means a recommendation about either: 1) The advisability of buying, holding, selling or trading securities or other investments, including how to invest after being rolled over, transferred or distributed from a plan or IRA, or 2) As to the management of securities or other investment property, including Advice about rollovers, including whether, in what amount and form, to what destination Investment policies or strategies Portfolio composition Selection of investment managers (fund line up) Selection of investment account arrangements DOL Fiduciary Rule Recommendation means A communication that would reasonably be viewed as a suggestion that the recipient engage in or refrain from taking a particular course of action Applies to recommendations made to: Plans, plan fiduciaries, participants and beneficiaries and IRA owners Applies to recommendations made by a person (or entity) who: Represents or acknowledges that they are acting as a fiduciary Provides advice based on particular investment needs of the recipient under a written or oral agreement Directs advice to a specific recipient about a particular investment or management decision under a plan or IRA 17

18 DOL Fiduciary Rule Recommendation does not include: Education about the plan, retirement and investing in general For plans, advice can include asset allocation models that include specific investment advice if an independent plan fiduciary oversaw selection of alternatives This does not apply for IRAs because there is no independent fiduciary General communications, such as newsletters, research, performance reports and prospectuses Information from platform providers to independent fiduciary Identification of alternatives that meet request of independent fiduciary Responses to RFPs that include sample investment alternatives DOL Fiduciary Rule Some recommendations are not investment advice A recommendation made in arm s length transaction to a sophisticated fiduciary = independent plan fiduciary that is: a bank, registered investment adviser, insurance company or broker dealer OR responsible for management of at least $50M in assets A recommendation about swaps or security based swap transactions A recommendation made by an employee of the plan sponsor, plan, or sponsoring union that does not receive any compensation in connection with the advice, beyond normal compensation An appraisal or statement of value of employer securities provided to an ESOP 18

19 DOL Fiduciary Rule Best Interest Contract Exemption Permits investment advisers to continue providing investment advice under typical compensation arrangements (commissions) if contract includes provisions regarding: Acknowledgment of fiduciary status Agreement to give prudent advice in the customer s best interest Avoidance of misleading statements Disclosures of conflicts of interest and costs ERISA plan advisers must adopt standards but need not use contract Provides for breach of contract claim for non ERISA plans Case Law Update 19

20 Tibble v. Edison Int l, 135 S.Ct (2015) Fiduciaries Are Liable For Failure to Monitor Investments Edison sponsored a 401(k) plan with a menu of investment options, including mutual funds Relying solely on the advice of their investment advisor, Edison included three retail class mutual funds in the plan menu that were available in much cheaper institutional class shares with virtually the same features Two sets of claims = funds added in 1999 and funds added in 2002 Participants lawsuit alleged breach of fiduciary duty, challenging inclusion of retail class mutual funds as imprudent for both sets of claims Tibble (continued) The Ninth Circuit concluded that Edison Breached its fiduciary duty of prudence, not merely by including retail class mutual funds, but by not investigating the possibility of institutional class alternatives Unreasonably relied on its investment advisor s recommendation without reviewing the relative cost of all available share classes as an experienced investor would Couldn t prove that it considered institutional class shares or the steps it took to evaluate investment advisor s recommendations BUT also held that: Claims as to funds added in 1999 were time barred because the initial selection in 1999 started ERISA s six year limitations period running No significant change in circumstances occurred since 1999 that would have triggered an obligation to review the investment 20

21 Tibble (continued) The Supreme Court disagreed regarding the statute of limitations: The Court held the statute of limitations applied to Edison s continuing duty to monitor the investment, not just the initial selection The claims were timely if based on a continued breach of duty to monitor within 6 years of filing suit The Court s reasoning was based on common law of trusts, which requires systematic consideration of investments at regular intervals Mirza v. Insurance Administrators of Am., Inc. 800 F.3d 129 (3rd Cir. 2015) Plans Must Give Notice of Limitations Period Claims administrator denied a participant s doctor s assigned claim for unpaid medical benefits The final denial informed the doctor of his right to sue, but not of the planimposed one year deadline for doing so The doctor sued the administrator almost 19 months after he received the denial The district court granted the administrator s motion for summary judgment on the basis that the claim was time barred The Third Circuit reversed, concluding that the plan s one year deadline to sue was unenforceable because the claim denial failed to inform the doctor of the deadline 21

22 Mirza (continued) The court held that the DOL requirement that claim denials describe the plan s review procedures and applicable time limits applies to a plan s deadline for bringing a lawsuit The Third Circuit follows the First and Sixth Circuits in reaching this conclusion (see, e.g., Moyer v. Metro. Life Ins. Co. (2014)) A Ninth Circuit appellate court has enforced a plan imposed limitation period disclosed in a plan s SPD, but not in the denial notice (see Scharff v. Ratheon Co. (2009)) BUT a Ninth Circuit district court reached the opposite conclusion under DOL claims regulations (see Solien v. Raytheon Long Term Disability Plan (2008)) Prichard v. Metro. Life Ins. Co., 783 F.3d 1166 (9th Cir. 2015) The SPD is Not the Plan MetLife terminated a participant s disability benefits because of insufficient evidence of continuing disability The SPD, but not the plan, gave the administrator the discretion to decide claims Under ERISA, a reviewing court may give deference to a plan administrator s claims decision if the plan document confers discretionary authority on the plan administrator to decide claims The district court gave deference to MetLife s decision, based on language in the SPD Issue: What is the plan? 22

23 Prichard v. Metro. Life Ins. Co. (continued) Cigna v. Amara Statements in an SPD alone are not enforceable as an ERISA plan s terms if in conflict, the plan controls Following Amara, the Ninth Circuit concluded that The plan consisted of the insurance policy, certificates and application, none of which incorporated the SPD by reference The SPD s grant of discretion was not an additional plan term The district court erred in giving MetLife s decision deference because discretionary authority was not conferred by the plan (only by the SPD) What should plan sponsors do? Review the plan document, SPD and other documents to ensure that the plan is consistent with, and includes, all terms reflected in the SPD Estate of Barton v. ADT, 800 F. 3d 1060 (9th Cir. 2016) Employer May Have Burden of Providing Plan Records About Benefits Facts Former employee filed claim for pension benefits based on years of service with the plan sponsor and its affiliates Claimant supplied evidence of employment from 1967 to 1986, but records didn't show which affiliates were participating employers or number of hours worked each year Plan administrator denied claim because the employer did not have sufficient records to show that claimant s employment resulted in a vested benefit Holding Where a participant can show that he or she is entitled to a benefit but lacks access to key information needed to substantiate his or her claim and the plan sponsor/ administrator controls such information, the burden shifts to the plan sponsor/ administrator to produce the relevant records to support a denial of benefits Remanded to trial court for rehearing 23

24 Estate of Barton v. ADT (continued) Bottom Line: Plan sponsor may bear the risk of insufficient plan records May undercut discretion often conferred upon plan administrators What Can Employers Do? Revisit record retention policies Assess whether data gaps exist and take steps to fill gaps discovered Automatic Enrollment 24

25 Automatic Enrollment Automatic Enrollment (Auto Enrollment) Allows employers to automatically enroll employees into its defined contribution plan and automatically deduct a specified percentage from the employee s wages unless he or she makes an affirmative election not to contribute AND either 1) Employees must be given the opportunity to opt out or elect a different contribution level before any amounts are deducted from wages OR 2) Employees must be able to withdraw automatic contributions within 90 days of the date the first automatic contribution is made Which plans can have an auto enrollment feature? Code 401(k) plans Eligible governmental Code 457(b) plans Code 403(b) plans Automatic Enrollment Increasing importance of auto enrollment feature in aftermath of pension reform Potential Challenges to Adopting an auto enrollment feature Political/ Perception barriers Fear that prominence of defined contribution plans will cause the elimination of pension plans Mandatory deferrals are not needed because defined contribution plans are just supplemental benefits Places a burden on lower wage earners Administrative barriers Cost (e.g., matching contributions) Administrative feasibility Increased fiduciary diligence required (e.g., selecting default investments when there are multiple 403(b) plan and/ or 457(b) plan vendors) 25

26 Automatic Enrollment Potential Challenges to Adopting an auto enrollment feature (con t) Legal barriers State laws prohibitions (e.g., anti garnishment laws) Potential Solutions Political/ Perception barriers may be addressed by Increase awareness through education initiatives, targeted communications, etc. Administrative barriers require a significant amount of diligence Is consolidation of plan vendors an option? Where there is an employer match, can the increase in employer matching contributions auto enrollment will create be budgeted for? Legal barriers may be the most difficult to overcome Legislative reform Bargain for automatic enrollment where possible Questions? 26

27 Thank You! 27