employee benefits update october/november 2012

Transcription

1 employee benefits update october/november 2012 Employees seek more security, yet take more responsibility Highlights of MetLife s benefits trends study Does your plan have the right vesting schedule? The DOL issues opinions on open multiple employer plans REFORMATION AND SURCHARGE UNDER ERISA Expanding on a Supreme Court theory ATTORNEYS AT LAW ONE INTERNATIONAL PLACE BOSTON, MASSACHUSETTS (617) FAX (617)

2 Employees seek more security, yet take more responsibility HIGHLIGHTS OF METLIFE S BENEFITS TRENDS STUDY MetLife has released its 10th Annual Study of Employee Benefits Trends. The study is a compilation of the results of surveys of employers and employees about issues facing the U.S. benefits industry today. The following are some of the study s highlights. Types of benefits Current economic conditions and a greater shift to employee-sustained benefits have affected both employees reaching retirement age and the younger generation. For example, the study found that one in three baby boomers plans to postpone retirement because of current economic conditions, and about one-quarter of this generation is now significantly behind in saving for retirement. For younger generations, the fear of Social Security dissolving has instilled feelings of higher financial insecurity. Nevertheless, employee benefits no longer focus primarily on retirement savings. Rather, they now include income-protection programs that can impact an employee before reaching retirement. Almost half of the employees surveyed stated that, because of the economy, they are counting on their employer to help them achieve financial security through a range of employee benefits such as dental, disability and life insurance. Nearly two-thirds of younger workers surveyed stated they re willing to pay more of their benefits costs rather than lose them. Yet the study indicated that 63% of employees agree that they must take on more individual responsibility for their financial security. Younger employees don t seem to have a sense of entitlement for employer-paid benefits as much as older workers, but they re still looking to their employer for assistance. Generation Y (born ) has a greater interest in employersponsored voluntary benefits than do the older employees (born ). For example, nearly twothirds of younger workers surveyed stated they re willing to pay more of their benefits costs rather than lose them. And they re willing to share in the cost of voluntary 2

3 benefits if it allows them to obtain lower rates than if they purchased the coverage on their own. Types of voluntary benefits that were indicated in the study range from auto and home insurance to disability and health insurance. Employee loyalty Employers face higher employee turnover and lower employee loyalty because of benefits offered by other employers. MetLife noted that employee loyalty has reached a seven-year low. MetLife s 2011 Study of the American Dream found that 87% of Generation Y would seek a new job if they believed they could achieve a stronger financial safety net as opposed to 67% of the boomer generation. In fact, 58% of employees surveyed stated that employer benefits are one of the top factors they seek. The study showed that 54% of Generation Y workers hoped to leave their current employer in 2012 as opposed to 21% of older boomers. The study makes it clear that, as the older generation begins to retire, it s especially important for employers to retain younger employees and offer the benefits these employees are seeking. 3 steps you can take to make your benefits more effective MetLife listed several benefits-related steps an employer can take to increase employees job satisfaction and loyalty. Here are three to consider: 1. Educate to engage. Look for providers who offer online tools, calculators, webinars and periodic conference calls to allow employees to be more engaged in their retirement benefits. 2. Provide nontraditional benefits. Benefits needs vary by age group and gender, so tailor your benefits package to workplace diversity. Consider offering long-term care insurance, auto and home insurance, or wellness programs to retain and attract new employees. 3. Increase face time. Never underestimate the power of face-to-face interaction. Hold periodic meetings on benefits, bringing in advisors to discuss updates and answer questions. The study found that almost two-thirds of employees endured financial and job-related stress that caused them to be less focused at work. Because unhappy employees can be a productivity drain, it s more important than ever for employers to offer a competitive benefits package. By doing so, employers may be able to increase employee loyalty and productivity and retain key employees. Due to greater stress in the workforce from job insecurity, financial worries and personal matters, an increasing focus on wellness programs has surfaced. Companies are realizing that wellness benefits result in healthier employees, which can improve productivity and reduce health costs. Stay competitive Over the last 10 years, employee benefits trends have changed. The focus today is more on employee responsibility with assistance from the employer. Employees are encouraged to save for retirement, with employers matching or making additional contributions on the employee s behalf. Employers have passed along some of the costs of nontraditional benefits to employees, and it appears employees are fairly accepting of this change. However, to stay competitive in attracting and retaining quality employees, companies will need to tailor and incorporate new benefits on an ongoing basis. 3

4 Upcoming compliance deadlines: 10/1 Deadline for setting up a SIMPLE for /15 Extended deadline for filing 2011 Form /15 Extended deadline for filing 2011 individual tax returns 11/ SIMPLE notice due to current SIMPLE participants 12/1* 2013 safe harbor plan notice due to participants COMPLIANCE ALERT * Even though this date falls on a Saturday this year, the American Society of Pension Professionals & Actuaries (ASPPA) recommends providing this notice as scheduled. Does your plan have the right vesting schedule? A plan sponsor s predetermined vesting schedule defines the amount of ownership a plan participant has in employer contributions. Vesting schedules can vary by retirement plan. One of the main reasons a plan sponsor may choose to add or change a vesting schedule is to attract and retain employees. Vesting basics When thinking about vesting, remember that participants are always 100% vested in their own plan contributions. Vested money is the amount the participant is legally entitled to at the time of employment termination. For employer contributions, vesting generally is computed based on the number of years of service worked with over 1,000 earned hours. Plan documents can vary in the computation period: Some use the anniversary of the participant s participation, while others use the plan year after the first anniversary. Not all employer contributions are subject to a vesting schedule. For example, a safe harbor match is always immediately 100% vested when it s allocated. But both regular matching and profit sharing contributions may be subjected to a vesting schedule. Schedule types There are three types of vesting schedules: 1. Immediate vesting. This is exactly what it sounds like participants are immediately 100% vested in the employer money allocated to them. Vested money is the amount of money the participant is legally entitled to at the time of termination of employment. Immediate vesting can help attract employees, and it s the simplest type of vesting to administer. But it doesn t provide an incentive for employees to stay with the company, and it can be costly when employees depart after a relatively short period of employment. 4

5 2. Graded vesting. This kind of vesting schedule can vary, but under the Pension Protection Act of 2006 (PPA), graded vesting schedules cannot be more than six-year graded. A graded vesting schedule can be more, but not less, generous than the following schedule: Least-generous graded vesting schedule Years of service % vested 1 0% 2 20% 3 40% 4 60% 5 80% 6 100% Some plan sponsors opt for a more-generous graded vesting schedule in which a participant is vested 20% after the first year, with 20% vesting each year afterward until the participant is 100% vested at five years. Others are even more generous, vesting participants with 25% after the first year, and an additional 25% for the next three years, resulting in 100% vesting after the fourth year. More-generous vesting schedules can attract employees but may be less effective in retaining them and can increase costs when employees depart. Less-generous vesting periods may be less effective in attracting employees, but they can be more effective in retaining them and reduce costs if employees leave before the vesting period is over. 3. Cliff vesting. Under this type of vesting, a participant isn t vested at all in employer contributions and then, like falling off a cliff, becomes 100% vested all at once. Under the PPA, a cliff vesting schedule can t be more than a three-year cliff as follows: Least-generous cliff vesting schedule Years of service % vested 1 0% 2 0% 3 100% A two-year cliff would be another option, under which a participant would be 0% vested after the first year and 100% vested after the second. Cliff vesting might be used by employers that want to retain employees for a certain period of time before vesting, such as restaurant or retail businesses that can have high turnover rates. Other vesting issues Determining the vested portion of a participant s account is important when calculating amounts available for loans and hardship distributions. For example, a participant cannot take more than 50% of his or her vested account balance up to $50,000 for a loan. Plan sponsors must provide an annual notice to participants indicating the employer matching provisions. You can change a vesting schedule, but benefits cannot be taken away from a participant. For example, if you have an employer match using a five-year graded vesting schedule, you can t amend the plan to a six-year graded vesting schedule. However, you could amend the plan to a four-year graded vesting schedule or even to immediate vesting. If you decide to change a vesting schedule to allow for a shortened grade, set up a new source bucket for the employer match money that s deposited after the amendment. This segregates the employer match money by vesting schedule so it s clear which vesting schedule is applicable to the new source money. Getting it right Keep in mind that a plan sponsor can have either a graded vesting schedule or a cliff vesting schedule on an employer contribution source, but not both. All vesting schedules must be in the plan document, available to participants on their request. By choosing the right vesting schedule, you can help ensure your plan will meet your goals. 5

6 The DOL issues opinions on open multiple employer plans Earlier this year, the Department of Labor (DOL) issued two advisory opinions that address the legitimacy of open multiple employer plans (MEPs). An open MEP acts as plan sponsor and plan administrator of a plan under which unrelated employers participate. The DOL concluded that an open MEP isn t a single retirement plan under ERISA. Instead, it found that an open MEP is a compilation of separate plans individually established and maintained by each employer. The opinions In one of the scenarios before the DOL, a plan sponsor was proposing to take over abandoned retirement plans and merge them into a single plan that it would manage and administer. In the other, an open MEP already existed. The DOL reached similar conclusions in both cases: It found that there wasn t sufficient commonality and control between the abandoned plans or the different groups of employees that participated in the plans to form an open MEP. The DOL opinions may spur some employers to reassess participation in open MEPs because the cost savings could be reduced. The DOL also concluded that under ERISA the sponsor taking over the abandoned plans wouldn t constitute an employer, and therefore the MEP wouldn t constitute a single-employer plan. The DOL viewed this plan as a collection of separate, albeit apparently abandoned, employee benefit plans. The ramifications Employers who participate in MEPs should review their arrangements to determine whether their separate plans would comply with ERISA if the DOL advisory opinions were to apply to their MEP. For example, even though some aspects of the MEP arrangement may be permissible (assets of each plan could be invested in a commingled trust, for example), the employer would need to: K File a separate Form 5500, K Perform an annual audit if there were 100 or more plan participants, and K Have a separate fidelity bond to cover each plan. 6

7 Employers also need to consider the risk of potential liability for any failure to file a Form 5500 or obtain an annual plan audit. Generally, employers had been attracted to open MEPs because they were able to take advantage of lower plan costs by joining forces with other employers. The DOL opinions may spur some employers to reassess participation in open MEPs because the cost savings could be reduced. Looking ahead Because these are purely advisory opinions, they apply only to the individual facts and circumstances of each case. Whether the DOL will apply the same position prospectively to new plans or pursue employers participating in existing open MEPs isn t clear. If you re part of an open MEP, contact your benefits specialist to learn more. Reformation and surcharge under ERISA Expanding on a Supreme Court theory Last year, the U.S. Supreme Court ruled that a summary plan description (SPD) isn t a plan document subject to enforcement under the Employee Retirement Income Security Act of 1974 (ERISA). The Court did, however, state that, if an employer issued an intentionally misleading SPD, a plan participant may have an ERISA claim under equitable doctrines, such as reformation and surcharge. Earlier this year, the U.S. Court of Appeals for the Ninth Circuit tackled this issue. In Skinner v. Northrop Grumman Retirement Plan B, two participants sued the successor to the company they worked for along with the retirement plan. The claims were based on the ambiguity between SPDs issued to employees in earlier years and the master plan documents it was currently enforcing. Specifically, an annuity equivalent offset reduced annual benefit amounts payable to retirees based on their age at retirement. Both participants testified, however, that they d received accurate information before making retirement decisions and that the SPDs they d relied on weren t the inaccurate SPDs. Nevertheless, one claim was for reformation of the plan document. Reformation is the re-forming of a contract to meet the parties intent. The two participants wanted the terms of the plan reformed to be consistent with an earlier SPD. But because the court found no evidence of fraud or mistake, reforming the plan document was deemed unnecessary. Another claim was for surcharge, which holds plan fiduciaries liable for benefits gained through unjust enrichment or for harm caused as the result of a breach by the fiduciary. The court found that the plan fiduciaries didn t benefit by failing to ensure that participants received an accurate SPD, so it denied the surcharge claim. While the Ninth Circuit s ruling in favor of the defendant retirement plan is good news for plan sponsors, it s also a reminder that you should review all plan documents and communications to employees regarding plan benefits for accuracy and clarity before distributing them to employees. This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use EBUon12 7

8 THE FIRM: M&J has been a recognized member of the Boston legal community for over two decades. The firm has purposely limited its growth, priding itself on personalized service to its sophisticated and diverse client base. In years , W. Terence Jones was selected by his peer group as a Massachusetts and/or New England Super Lawyer, a distinction awarded to top 5% of practicing lawyers in Massachusetts. The firm provides comprehensive legal services for businesses, high net worth individuals and closely held business owners in the following areas: K Employee Benefits/ERISA, including Qualified pension and profit sharing plan, fringe and welfare benefit plan implementation and problem remediation ESOPs and ownership succession planning and implementation Assisting fiduciaries to reduce liability and comply with legal requirements Transitioning benefit plans in mergers and acquisitions K Tax and Business Planning/Corporate and Business Representation K Business Mergers and Acquisitions K Tax and Regulatory Dispute Resolution K Trusts, Estate Planning and Probate K Corporate and Individual, Domestic and International Taxation K Acquisitions and Sales of Businesses/Ownership Succession K Entity Formation and Counseling, including non-profits and private foundations FIRM PHILOSOPHY: M&J s philosophy of practice is to communicate and collaborate with the client, recognizing strategic goals and objectives, to solve the client s matters at a reasonable cost. Personal attention, efficiency, and creative approaches to complex problems, regardless of the magnitude of the project, are the hallmark of the firm s approach in serving its clients. MISSION STATEMENT: M&J is committed to continuing its tradition of delivering personalized legal services by working together to provide effective solutions for its clients. W. Terence Jones has over 30 years experience in benefits and corporate matters. He received his B. A. from Yale University and received his law degree cum laude and a Master in Laws (in Taxation) from Boston University School of Law. He may be reached at tjones@maselanjones.com or The material in this newsletter is offered for information purposes only and may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. Do not act or rely upon any of the resources and information available in this newsletter without seeking professional legal advice.