Retirement Practice Legal Consulting & Compliance Quarterly Update

Transcription

1 Retirement Practice Legal Consulting & Compliance Quarterly Update Notes From the Editor By Jennifer Ross Berrian Welcome to the Retirement Practice Legal Consulting & Compliance Quarterly Update. This Quarterly Update is published by the Aon Hewitt Retirement Legal Consulting & Compliance Group, an organization within Aon Hewitt consisting of experienced attorneys who consult with clients regarding their qualified and nonqualified retirement plans, plan designs and new legislative and regulatory developments. The purpose of the Quarterly Update is to alert you to topics that may impact your programs, or present creative ideas for your consideration. The hottest topic currently facing retirement programs is the U.S. Supreme Court s decision on the Defense of Marriage Act. In this issue we update you on guidance that has been received from the IRS and DOL, and provide our perspective on how employers should be responding. Also in this issue are updates on the U.S. Foreign Account Tax Compliance Act, and a recent court decision that may significantly impact private equity firms and their investments in portfolio companies. We have also included brief descriptions of recent developments impacting determination letter filings, and a practice tip to simplify benefit plan operations for companies engaging in merger and acquisition transactions. If you have any questions or need any assistance with the topics raised, please contact the author of the article or any of the individuals identified at the conclusion of this Quarterly Update. Multinational Employers Are Your Long-Term Benefit Plans FATCA-Compliant? By Elizabeth Groenewegen Non-U.S. long-term benefit programs must comply with the provisions of the U.S. Foreign Account Tax Compliance Act In this Edition Multinational Employers Are Your Long-Term Benefit Plans FATCA-Compliant? New Plan Sponsor Considerations Following Recent DOMA Guidance New Development Regarding Investments in Private Equity Funds M&A Practice Tip: Mind Those Plan Mergers Determination Letter Filing Update for Cycle C Filers ( FATCA ), lest their U.S.-source income (including certain capital proceeds) be subject to a 30% U.S. withholding tax beginning July 1, Exemptions are available for certain retirement and savings programs. The withholding tax, however, is applicable regardless of whether the benefit program actually covers any U.S. taxpayers. Employers need a FATCA-effective compliance strategy for their non-u.s. benefit programs, in particular, those programs that could hold assets for the benefit of individuals who may be U.S. taxpayers. FATCA was enacted in 2010 to combat federal income tax evasion by U.S. taxpayers through the use of accounts at foreign financial institutions. The intent is to ensure U.S. taxpayers report their non-u.s. financial accounts and related investment income/capital gains to the IRS. This tax law will have a significant impact on all multinational employers. The law, the applicable regulatory guidance, and the related intergovernmental agreements cast a very broad net that may require multinational employers to report information to the IRS about their non-u.s. long-term employee benefit plans (including pension plans, deferred compensation arrangements, and non-u.s. stock programs). You may find more detailed information here. Retirement Practice Legal Consulting & Compliance Quarterly Update Page 1

2 New Plan Sponsor Considerations Following Recent DOMA Guidance By Tom Meagher and Jennifer Ross Berrian Plan sponsors of qualified retirement plans are now required to treat legally married same-sex spouses in the same manner as legally married opposite-sex spouses for certain purposes. Because federal law relies on state law when determining who is married, there was some initial uncertainty as to whether marital status should be based on the laws of the state where the marriage was performed (state of celebration) or the laws of the state where the couple currently resides. With the issuance of Revenue Ruling on August 29, 2013, the IRS adopted, effective September 16, 2013, a State of Celebration rule. For Internal Revenue Code purposes, a same-sex couple is treated as being legally married if the couple was legally married under the laws of a jurisdiction that permits same-sex marriage. Most noteworthy was the IRS conclusion that the current state of residence is not relevant to determining a same-sex couple s marital status. Domestic partnerships, civil unions and any other formalized relationship not treated as a marriage under the law of the jurisdiction where the union was celebrated do not qualify as marriages for federal tax law purposes. The Department of Labor followed with similar guidance in Technical Release , applicable to employee benefit plans covered by ERISA. Most recently, the IRS has issued further guidance (IRS Notice ) that provides direction for plan sponsors and their employees to make claims for refunds or adjustments of overpayments of payroll taxes with respect to certain benefits and remuneration provided to same-sex spouses. Adoption of the State of Celebration rule by the IRS and DOL takes some of the burden off plan sponsors of having to track where their active and former employees reside and whether or not they should be treated as married for employee benefit plan purposes. However, even plan sponsors that have all of their employees residing in a single state that does not recognize same-sex marriages will encounter these and other state income tax issues as individuals travel to other states that will perform same-sex marriages and then return to their home state. From a plan sponsor perspective, there are a number of actions that should now be considered. Since the IRS guidance was effective as of September 16, 2013, employers should be prepared to adjust any federal taxable income that is being imputed to employees having same-sex spouses. Plan sponsors should monitor any distributions or elections that involve spousal status and make certain that same-sex spousal status has been considered. More broadly, plan sponsors will want to consider issuing a communication to employees alerting them of new rights now being accorded to same-sex spouses and begin reviewing (but not yet amending) plan documents and plan policies and procedures to determine if any spouse-related changes may be necessary. While the guidance issued to date is helpful, it does not resolve all open issues. Thus, plan sponsors will have to await further guidance on outstanding questions, including the possible approach to adopting plan amendments and how to address retroactive benefit claims. New Development Regarding Investments in Private Equity Funds By Hitz Burton Private equity firms are following with keen interest a recent First Circuit Court of Appeals decision that could significantly impact how they do business in the future. While the decision is not binding on courts outside of the First Circuit, the decision may, nonetheless, have a significant impact on (1) how private equity funds ( PEFs ) structure their underlying portfolio investments; and (2) the nondiscrimination rules that are applicable to qualified retirement plans, including the ability of PEFs, through their portfolio companies, to continue to maintain multiple tax-qualified retirement plans providing different levels of benefits. On July 24, 2013, the First Circuit Court of Appeals, in Sun Capital Partners III, L.P. v. New England Teamsters & Trucking Indus. Pension Fund, held that an equity fund established by Sun Capital Advisers ( SCA ) constituted a trade or business exposing both the fund and SCA, under the particular facts (Continued on page 3) Retirement Practice Legal Consulting & Compliance Quarterly Update Page 2

3 (Continued from page 2) presented, to possible multiemployer pension plan withdrawal liability under ERISA for the plan sponsor and its controlled group affiliates. Importantly, the decision also applies to withdrawal liability arising from a single-employer plan where, for example, the single-employer plan terminates when it is less than fully funded. In reversing the determination of the district court, in part, the First Circuit adopted an investment plus test in determining whether the SCA fund constitutes a trade or business. Under this test, additional factors beyond making financial investments in a portfolio company must be present. While the court declined to establish a bright-line test and remanded the matter to the lower court for further factual development, the following set of factors, considered as a whole, would be sufficient for the SCA fund to be engaged in a trade or business rather than being a passive investor: 1. The fund was actively involved in the management of the portfolio company; 2. The applicable partnership agreements granted the general partners of the equity fund with broad authority regarding the staffing and compensation of employees of the portfolio company; and 3. The equity fund received a significant offset on management fees otherwise due from the fund to SCA for SCA s management of the portfolio company s operations. PEFs and the HR staff of portfolio companies should continue to monitor developments in the Sun Capital decision and related federal case law as the potential financial stakes involved could be significant. M&A Practice Tip: Mind Those Plan Mergers By Ron Gerard Many plan sponsors that have a significant volume of corporate transactions activity face the recurring issue of how to integrate qualified plans of acquired entities with their own pre-existing plans. Plan sponsors generally want to minimize the number of standalone arrangements and to limit the variations in substantive plan provisions. There are a number of structural alternatives in use by acquiring companies, but one of the more common methods of harmonizing different benefit schemes, particularly when it comes to 401(k) plans, is the plan merger. Plan mergers help to simplify administration, increase a plan s asset base (which may result in reduced record keeping fees) and establish a consistent plan design platform for companies that regularly engage in acquisitions, while preserving protected benefits. To minimize risk to plan sponsors of encountering problems with qualifying the newly merged plan, there is an important caveat to keep in mind when merging plans. Qualified plan determination letter procedures require that significant documentation be provided with respect to merging plans to ensure those plans complied with qualification requirements at the time of the merger. When a submitted plan is the result of a merger of two or more plans, a copy of the prior determination letter for all the plans that combined to result in the merged plan should be included in the submission. If a prior determination letter is not available, an explanation must be included with the application, and the employer must include a copy of the prior plan document and, if applicable, the opinion or advisory letter issued to the prototype plan sponsor of the merging plan. For each plan involved in a merger, all of the amendments adopted after the date of the most recent determination, opinion, or advisory letter for each of those plans, as well as the prior plan document, should be included with the application. The IRS has recently become much more aggressive in verifying merged plan compliance, going to some lengths to determine that prior plan amendments were executed and adopted in a timely manner and that the documentation requirements identified above are substantiated. Within the last few months, the IRS has indicated that if old documentation is not available to show timely compliance with applicable law, the plan sponsor would likely have to recognize a plan document failure and file an application under the IRS Employee Plans Compliance Resolution System, a not insignificant process that may cause a severe delay in the plan qualification process. The bottom line is that, when merging plans or when performing due diligence in anticipation of merging plans in the future, plan sponsors should obtain a complete record of prior plan documents and amendments through the date of the acquisition. Some of the amendments on the IRS s radar screen for merging plans go back more than 10 years, and it is always more difficult to try to locate documents after the transaction has closed, especially when service providers have changed and colleagues charged with maintaining those documents may no longer be with the merged companies. The more you can do in advance of the acquisition, the less you may have to do in later years. Retirement Practice Legal Consulting & Compliance Quarterly Update Page 3

4 Determination Letter Filing Update for Cycle C Filers By Hitz Burton Private employers sponsoring individually designed retirement plans that are designated Cycle C filers (i.e., the plan sponsor s EIN ends in a 3 or 8 ) have until January 31, 2014, to restate their plan documents and submit them to the IRS to obtain determination letters regarding their qualified status. The plan documents must include all of the information required in the Cumulative List of Changes in Plan Qualification Requirements set forth in IRS Notice In addition, the submission to the IRS must follow the procedure outlined in Revenue Procedure You can read more in the Aon Hewitt Retirement Legal Consulting & Compliance Group s annual white paper concerning the cumulative list of required qualified plan amendments for the next letter filing cycle. As detailed in the white paper, plan sponsors should be aware of a couple of noteworthy changes to the submission process set forth in Revenue Procedure First, the guidance clarifies which documents must be submitted with the application. Second, the plan document included with the submission must be restated so that all amendments to the plan are contained in a single, properly authorized and executed plan document. Previously, the IRS accepted working copies of plan documents in which executed amendments were added to the prior executed plan document, even if the final document was not itself executed by the plan sponsor. This is a major change that should be kept in mind when preparing the submission to be sent to the IRS. The white paper also includes information on: Cycle C filings and filings on terminating plans Puerto Rico plans Normal retirement age requirements for governmental plans Automatic revocation of beneficiary designations upon legal separation Rollovers from defined contribution to defined benefit plans ESOP dividends QJSA and QPSA requirements for certain defined contribution plans Transfers of excess pension assets to retiree health accounts Funding-based benefit restrictions Group trusts Certain discretionary amendments Annual funding notices for defined benefit plans required by the Moving Ahead for Progress in the 21 st Century Act Please contact any member of the Aon Hewitt Retirement Legal Consulting & Compliance Group (contact information can be found on the last page of this Quarterly Update) for assistance with your Cycle C determination letter filing or any questions regarding the amendments that may need to be adopted before year end. Recent Publications How Safe Is Your ADP/ACP Safe Harbor? by Dan Schwallie, to be published in Benefits Quarterly (Fourth Quarter 2013) U.S. Foreign Account Tax Compliance Act (FATCA): Compliance by Non-U.S. Retirement/Deferred Compensation Programs by Elizabeth Groenewegen, Chris Christiansen, Richard Lawrey, Lynne Wozniak (August 2013). Click here to download. The Split Personalities of 457(b) Nonqualified Plans by Dan Schwallie, Journal of Pension Planning & Compliance (Fall 2013). Click here to download. Nondiscriminatory Matching Contributions: More Than Simply ACP Testing by Dan Schwallie, Benefits Quarterly (First Quarter 2013). Click here to download. Retirement Practice Legal Consulting & Compliance Quarterly Update Page 4

5 Contact Information Tom Meagher, Practice Leader (732) Sandra Allende Benefits Consultant Somerset,NJ (732) David Alpert (732) Hitz Burton Newport Beach, CA (949) Ron Gerard Norwalk, CT (203) Elizabeth Groenewegen (415) Dick Hinman (415) Clara Kim (732) Jack Laufer Newport Beach, CA (949) Meghan Lynch Lincolnshire, IL (847) Beverly Rose Austin, TX (512) Jennifer Ross Berrian (415) Dan Schwallie Hudson, OH (330) John Van Duzer Lincolnshire, IL (847) About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit Aon plc This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Hewitt's preliminary analysis of publicly available information. The content of this document is made available on an as is basis, without warranty of any kind. Aon Hewitt disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Hewitt reserves all rights to the content of this document. This Quarterly Update is intended to bring recent developments to the attention of our interested colleagues. The materials have been prepared for informational purposes only and do not constitute consulting, legal, or tax advice. Readers should consult with members of the Legal Consulting & Compliance group if they have any questions in connection with the subjects discussed in this Quarterly Update. Retirement Practice Legal Consulting & Compliance Quarterly Update Page 5