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SEC Guidance on Registration of 401(k) Plan Interests when Brokerage Windows are Offered

secThe Securities Act of 1933 prohibits the offer or sale of securities unless either a registration statement has been filed with the SEC or an exemption from registration is applicable. Although most qualified plan interests qualify for an exemption from the registration requirement, offers or sales of employer securities as part of a 401(k) plan generally will not qualify for such an exemption.  Accordingly, 401(k) plans with a company stock investment option typically register the shares offered as an investment option under the plan using Form S-8.

On September 22, 2016, the SEC released a Compliance and Disclosure Interpretation addressing the application of the registration requirements to offers and sales of employer securities under 401(k) plans that (i) do not include a company securities fund but (ii) do allow participants to select investments through a self-directed brokerage window.  Open brokerage windows typically allow plan participants to invest their 401(k) accounts in publicly traded securities, including, in the case of a public company employer, company stock.  The SEC determined that registration in this situation would not be required as long as the employer does no more than (i) communicate the existence of the open brokerage window, (ii) make payroll deductions, and (iii) pay administrative expenses associated with the brokerage window in a manner that is not tied to particular investments selected by participants.  This means that the employer may not draw participants’ attention to the possibility

Investment Plus Partnership-in-Fact = Withdrawal Liability

Org ChartPreviously, we wrote about the First Circuit decision that a private equity fund constituted a “trade or business” under ERISA as amended by the Multiemployer Pension Plan Amendments Act (“MPPAA”). That dry description is actually very significant since it would mean that private equity funds and their other portfolio companies could be responsible for withdrawal liability, potentially in the millions of dollars, when a portfolio company withdraws from a multiemployer plan. Based on a recent District Court case in that same dispute, it may be even harder for private equity funds and their portfolio companies to escape liability, which could have implications for those companies and the companies that buy them.

By way of background, multiemployer pension plans are pension plans into which (as the name implies) many employers contribute pursuant to collective bargaining agreements. If a multiemployer plan is underfunded, and an employer withdraws, the plan is allowed to assess liability on that employer pursuant to a formula to help make up the underfunding. As we detailed previously, MPPAA imposes liability on any “trade or business” that is under “common control” with the withdrawing employer. In prior iterations of this case, Sun Capital Partners had alleged that none of the three investing funds (Sun Fund IV, Sun Fund III, and Sun Fund III QP) was a trade or business since each was merely a

Do You Know Where Your Participants Are?

Missing ParticipantThe Department of Labor (“DOL”) has recently implemented an initiative to investigate the manner in which defined benefit plans of large employers comply with the required minimum distribution rules set forth in Section 401(a)(9) of the Internal Revenue Code (“Code”). The initiative is focused on the extent to which large employers have processes in place to (i) locate missing plan participants, (ii) inform deferred vested participants that a benefit is payable, and (iii) commence benefit payments in a timely fashion by each participant’s “required beginning date” (generally, the April 1 following the later of the calendar year in which the participant reaches age 70½ or the calendar year in which the participant terminates employment).

In light of the DOL’s audit initiative, employers will want to assure that they have procedures in place to (i) locate missing plan participants, (ii) inform terminated vested participants regarding their right to elect benefits, and (iii) commence benefit payments on or before each participant’s required beginning date. In addition, employers will want to confirm that such procedures are consistently followed in practice, and that documentary evidence regarding compliance is being maintained and preserved. For example, employers will want to retain evidence of all certified mailings to terminated vested participants and lost participants, as well as efforts made through locator services to locate lost participants.

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Congress Engages in Some Holiday Spending on Benefits

Congress’s recent $1.8 trillion holiday shopping spree (aka The Consolidated Appropriations Act, 2016, which became law on December 18, 2015) included a few employee benefit packages. We recently unwrapped the packages. Here is what we found.

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1.   Cadillac Tax Delayed. The largest present under the employee benefits tree is a delay in the so-called “Cadillac” tax, which as originally enacted imposed a 40% nondeductible excise tax on insurers and self-funded health plans with respect to the cost of employer-sponsored health benefits exceeding statutory limits. The tax is now scheduled to take effect in 2020 rather than 2018. Once – or if – the delayed tax provision becomes effective, it will be deductible. The cost of this gift is $17.7 billion.

Since the Cadillac tax is basically unadministrable in its current form, we can’t imagine there is even one person at Treasury who would champion it. Expect a full repeal of the tax shortly after a new administration, whether Republican or Democrat, takes office in January 2017.

2.  Medical Device Excise Tax Suspended for 2016 and 2017 and Health Insurance Tax Suspended for 2017. The Affordable Care Act, as adopted in 2010, imposes an excise tax equal to 2.3% of the sales price of certain medical devices. Opponents of the medical device tax argued that it has been a drain on the economy and has halted investment in research and development for life-saving technologies. Many members of Congress agreed. Thus, a two-year

A Small PACE in the Right Direction

Overview. On October 8, 2015, President Obama signed the Protecting Affordable Coverage for Employees Act (“PACE”). As originally enacted, the Affordable Care Act (“ACA”) included a provision which, beginning in 2016, would have expanded the universe of employers considered “small employers” to include those employers with 51 to 100 employees. PACE eliminates this provision and instead leaves each state with the option of defining a small employer as an employer with up to 100 employees. As a result, the existing ACA definition of “small employer”, which currently includes only groups with 50 or fewer employees, will remain in effect after 2015, except in those states that choose to expand the definition.

Staying in the large group market is significant for employers with 51-100 employees because several ACA requirements apply in the small group market that do not apply in the large group market. These small group requirements would have increased premiums and caused administrative issues for most employers with 51-100 employees. The three most significant differences between small group insured plans and large group insured plans are as follows:

  1. Small group insured plans must cover ten essential health benefits (e.g., pediatric dental care, mental health and substance use disorder services, behavioral health treatment).
  2. A small group insured plan must meet specified actuarial values, while a large group insured plan can provide any actuarial value as long as the plan meets the 60% minimum value requirement.
  3. As more fully described below, small group insured plans are

How to Avoid the “Kitchen Sink” Appeal and Other Nuances for A Self-Insured Health Plan

For many years, medical plan drafting was viewed as a commodity. Insurance companies, third-party administrators and brokers often prepared summary plan descriptions and plan documents for self-insured medical plans using form documents. With the passage of the Affordable Care Act and other health-care related laws, however, medical claims, appeals and litigation have increased exponentially. In many instances, the terms of the plan documents have been outcome-determinative with respect to these disputes. There never has been a better time for an employer to step back and take a comprehensive review of the terms of the employer’s self-insured medical plan document and summary plan description, not only for compliance reasons but also to put the employer in the best position in the event of any dispute. The following are three drafting tips which might be considered during such a review.

Kitchen SinkAvoiding the “Kitchen Sink” Appeal. Increasingly, our clients have been receiving lengthy appeals of denied claims for benefits. We refer to these epistles as “kitchen sink appeals” because the authors of the letters seemingly throw in everything but the kitchen sink. A typical kitchen sink appeal is prepared on behalf of an out-of-network provider who claims standing to appeal based on an assignment of benefits by a plan participant. A kitchen sink appeal is often a “cut-and paste” compilation of 25 pages or more, usually containing long passages and references to cases which appear

The Moench Presumption is Dead – Long Live the Dudenhoeffer Presumption

On June 25, 2014, a unanimous United States Supreme Court weighed in on the legal standards applicable in stock drop cases in Fifth Third Bancorp v. Dudenhoeffer.

Facts. Beginning in 2007, Fifth Third Bank began experiencing a large number of mishaps, most of them associated with borrowers not repaying their loans when due. As a result, Fifth Third’s stock price suffered the same phenomenon as that of virtually every other publicly traded financial institution in the world during the great recession: it dropped precipitously, falling 74% from July 2007 to September 2009. With the benefit of hindsight, plaintiffs brought a class action lawsuit against the fiduciaries of the Fifth Third 401(k) Plan, alleging that all of this should have been patently obvious based on public and nonpublic information allegedly possessed by the fiduciaries. The plaintiffs asserted that the fiduciaries should have taken one or more of the following actions with respect to the company stock fund in the 401(k) Plan: (1) sell the stock before it declined; (2) refrain from purchasing any more Fifth Third stock; (3) cancel the Plan’s company stock option; and (4) disclose the inside information allegedly in their possession so that the market would appropriately adjust its valuation of Fifth Third stock downward and the Plan would as a result no longer be overpaying for it.

The Supreme Court’s Ruling. Much of the decision focuses on whether the so-called “Moench” presumption of prudence attaches to a fiduciary’s decision to allow or continue

New IRS Guidance on Retiree Health Benefits Funded Through Captive Insurance Subsidiaries

Risk InsuranceAn employer will sometimes form a captive insurance subsidiary to provide insurance coverage for workers compensation and a variety of other risks associated with the employer’s business.  For premium payments to a captive insurance company to be currently deductible, the underlying policy issued by the captive generally must constitute insurance under the tax laws.  To constitute insurance, the arrangement must, among other requirements, shift the risk of loss from the employer to the captive, and the captive must distribute that risk of loss among other insured parties.  To satisfy the “risk distribution” requirement, some captive insurance companies have issued policies to employee medical plans insuring the medical benefit risks associated with employees and retirees (and their dependents).

In Revenue Ruling 2014-15, the IRS addressed the application of the risk shifting and risk distribution requirements involving retiree health benefits and a voluntary employee’s beneficiary association (“VEBA”).  An employer voluntarily provided health benefits to its retirees by making contributions to a VEBA. The VEBA provided the health benefits, but instead of self-insuring, it entered into a contract with an unrelated insurance company.  That insurance company then reinsured the risks with a captive insurance company wholly-owned by the employer. The IRS concluded that it was the risks of the retirees (and not the employer) that were being insured. As a result, sufficient risk shifting and risk distribution existed such that this arrangement

409A Day Comes a Day Early This Year

As we have noted previously, March 15 is tax “Code Section 409A Day.”  For employers with calendar fiscal years, that is generally the last day an amount can be paid and still qualify as a short-term deferral that is exempt from 409A’s stringent timing and form of payment requirements.  But what does one do when March 15 falls on a weekend, as it does this year?  You likely aren’t cutting payroll checks on a Saturday.  Can you wait until Monday to pay?

The answer is no.  The rules are clear that the payment generally has to be made by the 15th day of the 3rd month (hence, March 15) of the year following the year in which either the right to the compensation arises or the compensation is no longer subject to a substantial risk of forfeiture (and note that for this purpose, the 409A definition is different than the Section 83 definition).  (The deadline can be different if an employer has a non-calendar year fiscal year, but the concept is essentially the same.)

There are a few exceptions.  First, if making the payment by the deadline is administratively impracticable and such impracticability was not reasonably foreseeable when the right to the compensation arose, then payment can be made after the deadline, as long as payment is made as soon as practicable.  Of course, for 2014 it is difficult to argue that the impracticability wasn’t foreseeable simply because you didn’t happen to look into next March

Proposed Excepted Benefits Regulations Have Good News for EAPs & Self-Insured Vision & Dental Plans

January 15, 2014

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Benefits that are considered limited or ancillary to comprehensive health coverage are excepted from HIPAA’s portability and nondiscrimination requirements as well as many of the Affordable Care Act’s marketplace mandates and insurance reforms.

Under an initial set of regulations, fully-insured dental and vision benefits qualified as excepted benefits as long as they were offered under a separate insurance policy.  In contrast, self‑insured dental and vision benefits were only considered excepted benefits if (1) participants could opt out of the coverage, and (2) participants who enrolled in the coverage were required to pay a separate premium or contribution for that coverage.  Recognizing the inequity between the treatment of fully-insured and self-insured dental and vision benefits, the regulators issued proposed regulations published in the Federal Register on December 24, 2013 that level the playing field by removing requirement (2) in the preceding sentence.  Under the proposed regulations, self-insured dental and vision benefits will qualify as excepted benefits as long as participants have the option to opt out of such benefits.

The proposed regulations also clarify the requirements for employee assistance plans (“EAPs”) to qualify as excepted benefits beginning in 2015.  An EAP will constitute an excepted benefit as long as (1) the EAP does not provide “significant” benefits that consist of medical care, (2) the EAP benefits are not coordinated with benefits under another group health plan (e.g., participants are not required to exhaust EAP benefits before becoming eligible for benefits under the medical plan), (3) employees do

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