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Breaking – IRS Guidance on Same-Sex Marriage

Today the IRS release Revenue Ruling 2013-17 generally providing that same-sex marriages would be recognized for Federal tax purposes if they were recognized under the laws of the state in which the marriage occurred.  This has generally been referred to as the “place of celebration” rule.

In addition, the IRS released FAQs on both same-sex marriage and domestic partnerships and civil unions.  These FAQs provide additional guidance on some relevant issues for plan sponsors, including qualified retirement plans, the tax impacts of health coverage for same-sex spouses, and cafeteria plans.

We’ll provide additional analysis in future posts, so stay tuned!

FMLA Rights for (Some) Same-Sex Spouses

On August 9, 2013, the Department of Labor (DOL) took its first action in response to the Supreme Court decision in United States v. Windsor, which struck down those provisions of the Defense of Marriage Act (DOMA) prohibiting the treatment of same-sex couples who were legally married under applicable state law as spouses for purposes of federal law.  In an e-mail to DOL staff, Secretary of Labor Thomas Perez announced that several guidance documents had been updated to remove references to DOMA and provide that employees residing in states in which same sex marriage is legal would be entitled to leave under the Family and Medical Leave Act (FMLA) to care for a same-sex spouse with a serious health condition.  Specifically, a DOL Fact Sheet which describes the qualifying reasons for FMLA leave was revised to provide that a spouse is “a husband or wife as defined or recognized under state law for purposes of marriage in the state where the employee resides, including…same-sex marriage.”

While significant as an explicit statement of policy, the DOL’s action in effect simply confirms the general approach previously taken in the regulations under FMLA, which have always provided that an employee’s spouse is determined under the law of the state of residence.  Without the overlay of DOMA, that regulation leaves the determination of who is a spouse for purposes of FMLA with the state where the employee resides.  Accordingly, whether this is a signal of how same-sex marriages will be recognized for purposes of

HRAs and Exchange Coverage: Do As We Say Not as We Do

As noted in this New York Times article, the Office of Personnel Management issued a rule recently that will allow Congressional Representatives and Senators and their staff to receive payments from the federal government to help them defray the cost of insurance through the exchange.  This was designed to alleviate some fears of a Congressional “brain drain” that could have occurred if long-time Congressional aides left their posts due to concerns over the cost of insurance.  The Obama Administration sought to solve this problem by saying that the Federal Employees Health Benefit Program will provide cash to help offset the cost of insurance purchased through the exchanges.

This is, functionally, a premium-only health reimbursement arrangement run by the Federal government.  Interestingly, if a private employer (or even another governmental employer) sought to set up such an arrangement with public exchange coverage, it would expressly be forbidden.  Pursuant to FAQ guidance issued by the Departments of Labor, Treasury, and Health and Human Services (see Q2 here), an HRA may not be considered integrated with individual market coverage.  This would mean that the employer would be treated as not sponsoring a health plan providing minimum essential coverage, subjecting them to play or pay penalties. The HRA itself would likely violate other provisions of health care reform.

Now employers can achieve a somewhat similar result by creating a private exchange, so it is not as though employers are without options.  However, the inherent contradiction here should not be lost

After Liberty, Pruitt and Halbig Challenges Threaten PPACA

Last year the nation awaited the fate of the Patient Protection and Affordable Care Act (“PPACA”) as the U.S. Supreme Court considered National Federation of Independent Business v. Sebelius. Today, two lesser-known Federal cases threaten to undermine not just the individual mandate but possibly the entire PPACA structure for expanding health care coverage for all Americans.

PPACA requires the creation of a health insurance exchange (“Exchange”) in each State that will serve as a competitive marketplace where individuals and small businesses can purchase private health insurance. If a State refuses to establish an Exchange then the Federal government must implement and operate one.

Section 1401 of PPACA provides that premium assistance is available to taxpayers who are enrolled in coverage through an Exchange established by the State under Section 1311 of PPACA. Nonetheless, the Internal Revenue Service (“IRS”) promulgated a regulation that bases eligibility for premium assistance subsidies on enrollment in coverage through any Exchange, including a Federally-established Exchange. Specifically, the regulation states that subsidies shall be available to anyone “enrolled in one or more qualified health plans through an Exchange,” and subsequently defines an “Exchange” to mean “a State Exchange, regional Exchange, subsidiary Exchange and Federally-facilitated Exchange.”

Pruitt v. Sebelius (U.S. District Court for the Eastern District of Oklahoma) and Halbig v. Sebelius (U.S. District Court for the District of Columbia) challenge the IRS regulation expanding the availability of premium subsidies to individuals enrolled in a Federally-operated Exchange. The plaintiffs claim that

409A – Is Your Compensation Arrangement Subject to These Rules?

The 409A rules do not provide a clear roadmap to determine what compensation arrangements are subject to their regime of requirements and restrictions.  In this brief video, Brian Berglund provides a description of the approach you should take to evaluate whether your compensation arrangement should be structured to comply with the 409A rules regarding deferral elections, timing of payments and other requirements.

(You can also view the video by going here.)

Governance of Tax-Qualified Retirement Plans

Governance of Tax-Qualified Retirement Plans

August 7, 2013

Authored by: benefitsbclp

Governance of tax-qualified retirement plans should focus on protecting participants and reducing the risk of liability for plan fiduciaries.  In the attached video, Sheldon Smith provides a brief outline of the duties imposed on plan fiduciaries and best practices fiduciaries should follow regarding plan governance.

(You can also find the video here.)

Piercing the Veil: Private Equity Fund Found to be “Trade or Business” Under MPPAA

On July 24, 2013, in a case of first impression (Sun Capital Partners III LP vs. New England Teamsters & Trucking Indus. Pension Fund, No.12-2312), the First Circuit held that a private equity fund was a “trade or business” under ERISA as amended by the Multiemployer Pension Plan Amendment Act (“MPPAA”), and thus potentially liable for withdrawal liability incurred by its portfolio company if that company was under common control with the fund.* The court applied an “investment plus” test and found that the private equity fund was not merely a “passive investor” but had sufficient management and operational involvement with its portfolio company so as to make it a trade or business.

Sun Fund IV and Sun Fund III (collectively, the “Sun Funds”) are two funds held by private equity firm Sun Capital Advisors, Inc. Together, the Sun Funds held 100% of the interests of Scott Brass, Inc. and planned to turn around the struggling company within two to five years and sell it. Scott Brass contributed to a multiemployer pension plan. When declining copper prices created a credit crisis about a year and half after its purchase by the Sun Funds, Scott Brass ceased making its required contributions to the pension plan, and was forced into Chapter 11 bankruptcy. Withdrawal liability for Scott Brass was assessed in the amount of $4.5 million, and the pension fund demanded payment from the Sun Funds, which prompted the Sun Funds to seek a declaratory judgment

Lessons to be Learned From a Flawed 401(k) Fee Study (Part 2)

Lessons to be Learned From a Flawed 401(k) Fee Study (Part 2)

August 5, 2013

Authored by: benefitsbclp

In our prior post, we detailed some significant deficiencies in the study that Yale Law School Professor Ayers is planning to release and the far less threatening Yale official response.  But what steps, if any, should plan administrators take now to mitigate exposure, even if wrongly asserted, that might result from a breach of fiduciary duty action?  And what kind of opportunity does this present for other 401(k) sponsors who are not included in the study?  Recognizing that most 401(k) plan fiduciaries must determine, through proper prudence and process, that plan expenses are reasonable in view of the services provided to participants and that those services are necessary for the proper operation of the plan and in the best interests of the participants, now is a good time to revisit “reasonable and necessary.”

Many of our clients’ plan administrative committees avail themselves of the services of competent, independent investment advisors to assist them in performing the “reasonable and necessary”  analysis and in making these important decisions.  The advisors assist in understanding the 408(b)(2) disclosures, providing cost and service comparisons, negotiating fees, structuring and administering requests for proposal programs, confirming that there are no conflicts of interest with respect to the provisions of investment choices, and providing quarterly reports that assist the committees in fulfilling their duties.  Plan administrators that do not use the services of these independent advisors should conduct similar reviews themselves and be certain that they are capable of fulfilling their obligations in doing

The ESOP as a Solution

The ESOP as a Solution

August 2, 2013

Authored by: Steven Schaffer and Chris Rylands

Employee Stock Ownership Plans (“ESOPs”) can be a good choice for the right company because they can generate liquidity for the owners in a tax-advantaged form, allow the owners to retain de facto, if not legal, control, and provide employee ownership and the resultant productivity and retentive benefits to the business.  Common uses of ESOPs include can have other uses as well, such as:

  • Allowing an owner to exit his or her business but provide an incentive to retain existing management (who may be unable to buy)
  • Allowing a shareholder to diversify his or her holdings through a partial (or total) sale to an ESOP;
  • Providing a vehicle to efficiently redeem unwanted shareholders;
  • Structuring management buy-outs;
  • Providing a buyer for an estate holding closely-held stock;
  • Closing out a private equity fund by selling a portfolio company to an ESOP; and
  • Selling a division to employees.

Using an ESOP has certain advantages over more traditional approaches to address these issues, including:

  • Both principal and interest paid on any leveraging required for the ESOP transaction are tax-deductible.
  • In many circumstances, owners can rollover the proceeds resulting from a sale of their stock to an ESOP into other corporate securities free of federal (and most often, state) income taxes.
  • Even in situations which are not eligible for the tax-free rollover, sellers can get capital gain treatment, rather than dividend treatment, on the sale to an ESOP.
  • Unlike private equity, the ESOPs tend to be passive, longer-term investors.
  • Since

Lessons to be Learned From a Flawed 401(k) Fee Study (Part 1)

Lessons to be Learned From a Flawed 401(k) Fee Study (Part 1)

August 1, 2013

Authored by: benefitsbclp

Typically, academics do research and then write about their findings and conclusions.  However, as has been reported elsewhere, Professor Ian Ayers, the William K. Townsend Professor at Yale Law School, decided to take his findings and conclusions a step further.  He sent a letter to some 6,000 401(k) plan sponsors essentially accusing them of potentially violating ERISA fiduciary duties.   He then went even further and threatened to publicize their identities and advised them that he would assign each of the 6,000 of them with their own hashtag on Twitter when he publicized his study next year in periodicals including the New York Times and the Wall Street Journal.  His threats  have been garnering substantial attention in the popular press.  Needless to say, Professor Ayers has created quite an uproar in the 401(k) plan advisor and consultant communities.  You can read a redacted copy of the letter here.

The Study (and its Flaws)

Professor Ayers indicates in his letter, and in the draft study  that he and Professor Quinn Curtis of the University of Virginia School of Law co-authored, that he used 2009 data from Forms 5500 and from 2009 data compiled by Brightscope, Inc.  Brightscope has advised ASPPA that it had nothing to do with the study and Yale has confirmed that Brightscope’s 2009 information was used with no direct participation by Brightscope.

The draft of the study posted online is already coming under fire from other sources for a

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