Staring at the Stars Above, Wonder What [Fiduciary Duties] Are We Made Of – Cybersecurity for Retirement Plans

by John Ludlum

Noting that there has been an increase in computer crime in connection with the economic disruption caused by COVID-19, companies should remember that retirement plan accounts are attractive targets for cyber thieves because of the often larger account balances relative to ordinary financial accounts, the infrequency of checking on accounts by many of their owners, and the potential for some account owners to rely on the plan sponsor and record-keeper to provide security.

ERISA fiduciaries generally are subject to the prudent expert standard of care, and they owe a duty of loyalty to the plan participants. A prudent expert acts with the care, skill, and diligence that the circumstances call for a person of like character and like aims to use.

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That’s Life . . . New Defined Contribution Plan Disclosures

By Kevin Selzer 

What’s in a number?  Retirement plan participants may soon better understand how account balances translate to retirement readiness.  The SECURE Act enacted last December requires defined contribution plans to show participants the value of their account balances if converted into a monthly lifetime stream of income.  The disclosures are aimed at reminding participants that retirement plan balances are meant to last for life – and busting the “wealth illusion” that single sum account balances present.  

The details on the disclosures are starting to take form following an interim final rule recently released by the Department of Labor (“DOL”).  Under the interim final rule, plans must provide participants with two lifetime income illustrations: the value of the benefit converted to (1) a single life annuity, and (2) a qualified joint and 100% survivor annuity (assuming the participant is married with a spouse of equal age). The DOL clarified in the final rule that the projections will be based on the participant’s current account balance (rather than a future projected value) and will show what that balance would buy purchasing an annuity at age 67 (or the participant’s actual age, if older).

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Wait a Minute Mr. Postman . . . COBRA Litigation Update

by Kevin Selzer

We have been monitoring an increase in litigation relating to COBRA election notices in recent months.  The plaintiffs in these cases allege that COBRA election notices are deficient, and as a result, the plaintiffs, on a class basis, should be awarded a $110/per day per participant penalty (among other relief).  Many of these cases allege deficiencies on notices that are substantially similar to the Department of Labor’s model notice. 

While none of these cases have fully worked through the courts, a number have settled for significant sums.  The settlement success has predictably spurred more complaints and suits.

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Into the Mystic . . . Employee Benefit Considerations for Returning Workers

by Kevin Selzer

Many employers are venturing into uncharted waters as significant numbers of employees are being rehired or returning from extended leaves of absence (e.g., furloughed employees). In this environment, it can be easy to overlook the employee benefit plan implications of this workforce shift. Below are some best practices for employers faced with employees returning to work.

Ensure that retirement plans are crediting service for returning employees correctly. In most cases, employers will not be able to treat a rehired employee as a new employee for retirement plan purposes. This means that the employer will have to consider the employee’s prior service for purposes of determining proper eligibility and vesting credit. This is a good time for employers to check and confirm that any systems that track service (e.g., payroll systems and the retirement plan administrator’s systems) are configured correctly to credit prior service.

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Might as Well Face It… Your Annual Retirement Plan Audit is Not a Clean Bill of Health

by Ben Gibbons

With calendar year-end Form 5500s due on July 31, or October 15 with an extension (and still no COVID-19 filing relief as of the date this blog was published), it’s that time of year where plan sponsors begin thinking about their annual retirement plan independent audits.  However, these are not the only audits companies should be thinking about.

Both the Internal Revenue Service (IRS) and the Department of Labor (DOL) routinely select qualified retirement plans for examination.  In the event of an audit by either agency, a plan’s records, procedures and processes will be examined.  If errors or deficiencies are found, at a minimum, corrections will be required, and in some instances, fines or sanctions will be levied.

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Relief . . . Just a Little Bit – IRS Notice 2020-23: Limited Extensions of Form 5500

By Kevin Selzer and Lyn Domenick

In the midst of everything going on, we wanted to point out a few “under the radar” implications of IRS Notice 2020-23.  The Notice, issued on April 9th, provides that tax-related deadlines that fall between April 1, 2020 and July 14, 2020 (the “delay period”) are automatically extended to July 15, 2020. 

Delayed 5500s.  Most plan sponsors hoping for Form 5500 relief will have to wait for additional guidance since only a small group of plans have Form 5500 deadlines fall during the delay period.  For example, the regular Form 5500 due date for calendar year plans (July 31st) falls just outside of the delay period.  We note that the DOL has authority under the CARES Act to provide additional Form 5500 relief.

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We Interrupt This Program – Is a Multiple Employer Plan In Your Future?

by Kevin Selzer

We interrupt our usual Benefits Dial programming – to take a closer look at developments affecting multiple employer plans (MEPs) as part of our series of posts on the recently enacted benefit plan legislation, including the SECURE Act (background here).  The reform to MEPs is seen by many as the biggest disruptor to the retirement plan industry.  Why?  It facilitates the banding together of retirement plan assets from unrelated employers, helping employers punch above their weight.  By combining together to form a larger plan, smaller employers can leverage assets with regard to plan services, and maybe most importantly, investment fees paid by participants. 

MEPs have long been permitted but many employers have been unwilling to participate in those plans.  The biggest deterrent has been the “one bad apple rule.”   That rule provides that a defect in any participating employer’s portion of the MEP can impact the tax qualification of the entire MEP for other participating employers.  In other words, if one participating employer in the MEP is unwilling (or maybe unable) to correct an error, the whole plan can be disqualified by the IRS.  The SECURE Act helps solve this issue with a special kind of MEP called a pooled employer plan (PEP).  PEPs have a specific procedure for dealing with tax qualification defects.  In short, a participating employer in a PEP who refuses to correct the error, can be discharged (spun off) from the PEP to isolate the disqualification impact. The SECURE Act grants relief under ERISA to boot.  Historically, MEPs were treated as a collection of separate plans unless the underlying employers met a commonality standard.  A PEP (called a “Group of Plans” under ERISA) is also treated as a single plan for ERISA purposes under the SECURE Act.  This means, for example, that such plans would be allowed to file a single Form 5500. 

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Walk this way…to avoid the pitfalls of ERISA

by John Ludlum

Companies implement bonus plans to meet a variety of business objectives:  retention, specific company business goals, change of control, and others.  In designing bonus plans, there are a variety of legal fields that must be understood for exemption or compliance including securities, tax, ERISA, and employment.  Many times, bonus plans that pay only in cash for achieving specific corporate objectives and which require services through the date of payment are exempt from onerous compliance mandates; however, if a bonus plan is found to provide retirement income or “results in a deferral of income by employees for periods extending to the termination of covered employment or beyond,” then that arrangement may be found to be a “pension plan” under ERISA Section 3(2) (29 U.S.C. § 1002(2)(A)).  Once a bonus plan is subject to ERISA, it must comply with ERISA’s annual reporting, participant communications, funding, participation, vesting, and fiduciary duty requirements. 

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Friends in Low Places . . . IRS focusing on late contributions too

by Kevin Selzer

“I was the last one you’d thought you’d see there…”

We tend to think of untimely remittances to retirement plans as primarily an ERISA issue, and certainly, the cause of many DOL audits. Lately, however, it seems the IRS also sees late contributions as an invitation to examine the plan. 

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I can’t drive 55 – or classify my workers

by John Ludlum

Making correct classifications between independent contractors and employees is not getting simpler with flexible, geographically-distributed workforces.  For those with long memories, a key case in the area of worker classification was issued by the Ninth Circuit in Vizcaino v. Microsoft Corporation, 97F.3d 1187 (CA-9, 1996).  Vizcaino v. Microsoft held that certain workers, originally hired as independent contractors, were actually employees who were entitled to benefits under Microsoft’s 401(k) plan and Microsoft’s Employee Stock Purchase Plan.  Determinations like this can lead to substantial corrections costs to fix tax-qualified benefit plans as well as to make the contributions required under plan terms to the improperly excluded employees. 

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