What You Need to Know About ERISA But Were Afraid to Ask Employee Benefits for Non Employee Benefits Attorneys

Transcription

1 What You Need to Know About ERISA But Were Afraid to Ask Employee Benefits for Non Employee Benefits Attorneys NAMWOLF This presentation is not legal advice and does not create an attorney client relationship or privilege. The views are those of the authors and not of the Sponsor of the presentation. This information is current as of the date presented. July 14,

2 ERISA The Basics 2

3 What is ERISA? The Employee Retirement Income Security Act of 1974, as amended ( ERISA ) is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry, and provides protections for individuals in pension and health plans. 3

4 ERISA s Statutory Framework Title I Sets forth the scope of ERISA Provides for reporting and disclosure requirements, imposes coverage, vesting, fiduciary and other structural rules for employee benefit plans, and contains certain healthcare rules. Title II Applies only in the case of tax qualified benefit plans. Title III Contains administrative and procedural requirements. Title IV Establishes a national pension insurance scheme, implemented by the Pension Benefit Guaranty Corporation (PBGC). 4

5 Employee Benefit Plans ERISA regulates employee benefit plans, which are defined as employee welfare benefit plans and employee pension benefit plans. Employee Pension Benefit Plans, examples of Traditional pension plan 401(k) plan Employee Welfare Benefit Plans, examples of Health Insurance Travel Accident Insurance Program Group Term Life Insurance Death benefit Severance plan 5

6 ERISA Requirements ERISA requirements include, but are not limited to, the following: ERISA sets minimum standards for participation, vesting, benefit accrual and funding. ERISA requires plans to establish a grievance appeals process for participants to get benefits from their plans and gives participants the right to sue for benefits and breaches of fiduciary duty. ERISA provides for extensive reporting and disclosure to regulators and participants. 6

7 ERISA Fiduciary Requirements Employee benefit plans are subject to ERISA s fiduciary rules. A person or entity s fiduciary status is based on the functions performed for the plan. Both ERISA and the Code contain statutory prohibited transaction rules which specifically bar certain transactions and conduct by fiduciaries, unless an prohibited transaction exemption (PTE) applies. Failure to meet the fiduciary requirements in ERISA and the Code can result in personal liability on plan fiduciaries, excise taxes on plan sponsors and disqualification of tax qualified plans. 7

8 DOL s New Fiduciary Rule The new fiduciary rule regulates the standards on providing investment advice to retirement plans and participants. Under the new rule, a person will be considered to provide fiduciary investment advice if the person provides covered recommendations to a plan, plan fiduciary, plan participant or beneficiary, IRA/HSA, or IRA/HSA owner for a fee or other compensation, direct or indirect. Covered recommendations include: Investing plan or IRA assets, and Managing plan distributions. 8

9 DOL s New Fiduciary Rule Once an advisor is a fiduciary, prohibited transaction rules prevent the adviser from being paid anything for investment advice unless a statutory or regulatory PTE applies. In addition to the current long standing PTEs, the DOL has issued a PTE for best interest contracts (BIC). The BIC allows advisers to receive reasonable compensation for giving investment advice to plan participants, IRA owners, or certain small plans. 9

10 Tips for Fiduciaries 10

11 Fiduciary Responsibilities Most employee benefit plans are subject to ERISA s fiduciary rules. Fiduciaries have many obligations: Duty to monitor the plan, disclose required information to participants and the government, follow the plan terms Violating these duties could result in penalties, fees, personal liability to fiduciaries, etc. Fees going up later this year on things like failure to file a plan s annual Form 5500 report (from a max $1,100 per day to $2,063 per day) 11

12 Fiduciary Responsibilities Examples of Fiduciary Decisions: Interpreting plan terms Making claims decisions/benefit calculations Selecting or removing plan investment options Selecting, hiring, or replacing service providers Being a good fiduciary is about the process (not necessarily the outcome) Develop, follow, and document the processes for: Plan administration and compliance Selecting and monitoring plan investments Selecting and evaluating service providers 12

13 Protecting Fiduciaries Fiduciary training Educate fiduciaries about their roles and responsibilities Document decisions Especially around investments, fees, and vendor selection Follow the plan s claims procedures Protect deference to the plan s decisions Establish a plan committee General plan committee, or split between administration and investments Charter should describe the function and scope of responsibilities of the committee Fiduciary liability insurance 13

14 Focus on Fees Plan Fees: The fees charged to a plan/paid by participants must be "reasonable." Not simply lowest cost Compare what the plan is paying vs. service (level, scope, bundled vs. a la carte) Determining reasonable fees can include: Reviewing several proposals during the initial setup or selection of the plan Periodically benchmarking the plan s costs among various vendors Continuing to monitor the fees and expenses over time 14

15 Follow Plan Terms If plan operations are not consistent with the plan document, there may be an operational failure Plan fiduciaries are responsible, even if the vendor erred Examples of some common mistakes Inaccurate definition of compensation: What definition(s) are in the plan document? What definitions are actually being used for making employee deferrals, employer match, etc.? Plan enrollment errors: getting the right people in the plan at the right time Contributing too much, too little, or too late to the plan Some fixes require IRS/DOL approval Better to be proactive 15

16 Affordable Care Act 17

17 Basics Affordable Care Act: Employment Law Issues Any employer with 50 or more full time employees must offer affordable minimum essential health coverage or pay penalties Full time employees includes full time equivalents Definition of Employee ERISA definition of employee (common law standard) applies 18

18 Penalties Affordable Care Act: Employment Law Issues Failure to offer minimum essential coverage to at least 95% of your full time employees: $2000 x total number of full time employees Offering minimum essential coverage that is not affordable: $3000 x number of full time employees who received subsidized coverage through a government exchange 19

19 Staffing agencies Affordable Care Act: Employment Law Issues Who is the ACA employer? Co employment relationships common in staffing/peo arrangements IRS approach: look to the common law employment test Behavioral control Financial control Facts of the relationship Can employer take credit for coverage offer made by staffing agency? Possibly! 20

20 Affordable Care Act: Employment Law Issues Independent contractors Adds another potentially large risk to worker misclassification Failing to identify as an ACA large employer Failing to offer coverage to at least 95% of full time employees Failing to offer affordable coverage to a full time employee who then receives an exchange subsidy Penalties May be wholly disproportionate to number of workers actually misclassified No Section 530 relief 21

21 Affordable Care Act: Employment Law Issues Very broad whistleblower/anti retaliation protections under the ACA FLSA Section 18C claims ERISA Section 510 claims 22

22 ERISA in the M&A Context 23

23 ERISA in the M&A Context 1. 3 Stages of a deal: a) Due Diligence b) Negotiation/Signing the deal be sure your standard reps & warranties are reviewed & updated regularly c) Post Closing/transition 2. 3 Types of ERISA Issues: a) Potential liabilities pre deal, e.g., pension underfunding b) Potential liabilities as a result of the deal, e.g. CIC agreements c) Potential liabilities post closing, e.g., loss of transition period, plan mergers, plan terminations and partial terminations 24

24 Due Diligence Tips 1. Use available public Information: a) SEC b) Form 5500s (EBSA Website) c) Internet Searches 2. Requested/negotiated/disclosed a) Customize to deal (Stock/Asset) b) Customize to plans (e.g. no pension or union) c) Look for red flags (see next slide) 3. Follow up often deals often close w/o full information, will need to coordinate efforts post closing 25

25 Due Diligence Red Flags 1. Types of plans a) Defined benefit pension plan of any type (funding) b) Multi employer plan of any type (withdrawal liability) c) Retiree medical plan of any type d) ESOP/Employer securities e) Church plan hotly litigated for hospitals, etc. 2. Types of structures a) Controlled group/non controlled group issues/mewa b) International benefits check reps & warranties, may need local counsel c) Not for profit special rules apply 26

26 Due Diligence Exec. Comp.: Executive Compensation (409A/280(g)): 1. Deferred Compensation/Non Qualified Plans/SERPS 2. Employment/Severance Agreements 3. Retention/Success Bonus Agreements 4. Change in Control Agreements 5. Equity & Phantom Equity Compensation Plans 27

27 Negotiating the Deal Although benefit is heavily regulated, case law also matters: Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, No DPW (D.C. Mass., Mar. 28, 2016) (PE fund liable for pension withdrawal liability of portfolio company) See article in the NAMWOLF newsletter from earlier this year: February Newsletter.html?soid= &aid=eCNPx00Kv1g#ERISA Halliburton v. Graves, 463 F. 3rd 360 (5th Cir. 2006)(covenants in a merger agreement = plan amendment) 28

28 Post Closing 1. Mid year amendments to safe harbor 401(k) plans (new guidance in 2016) 2. ACA compliance pre/post closing & reporting (no transition period, little guidance) 3. DOL s new Fiduciary Rule (takes effect in 2017) A/280(g) (new guidance in 2016) 5. H&W (non compliance/increased enforcement, including litigation) 6. Cybersecurity (DOL advisory council) 29

29 Thank you for attending today! 30

30 Our Speakers: Maggi Bixler Senior Counsel, Wells Fargo Sherrie Boutwell Partner, Boutwell Fay LLP Evan Giller (Moderator) Of Counsel, Boutwell Fay LLP Sherene Jodrey Assistant General Counsel Executive Compensation and Employee Benefits, Aon Corporation Jennifer Kobayashi Partner, Wang Kobayashi Austin, LLC 31