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Fiduciary Responsibilities under ERISA in an Uncertain Market

If you are an ERISA fiduciary charged with management or investment of plan assets, and recent market activity has not tripped any alarm bells — or, if the alarm bells have been tripped, but you are are looking for a bit of guidance on how to respond, then keep reading.  Due to a combination of recent factors, including the spread of the Coronavirus (COVID-19), the stock market suffered its worst drop in over 30 years this past week. Moreover, the market outlook will likely continue to be uncertain for the near future as businesses around the world adjust and take action in response to the COVID-19 outbreak and many consumers are quarantined in their homes.

In this volatile market, it is important for fiduciaries of retirement and other funded plans governed by the Employee Retirement Income Security (ERISA) to keep their fiduciary duties in mind and take appropriate action. As a reminder, those duties under Sections 404 and 406 of ERISA include:

  • The duty to act prudently;
  • The duty to diversify assets of the plan;
  • The duty to comply with provisions of the plan;
  • The duty of loyalty;
  • The duty to pay only reasonable plan expenses; and
  • The duty to avoid prohibited transactions.

The first three of these are particularly relevant when the market is uncertain.

  • The duty to act prudently: It is important to remember that this duty requires the fiduciary to act with the care, skill, prudence, and diligence that a prudent person acting in

IRS Expands Determination Letter Program for Mergers of Qualified Plans Following Corporate Transactions

The IRS recently reversed course on the availability of the determination letter program for merged qualified retirement plans – thereby providing new alternatives for integrating qualified retirement plan benefits in the context of corporate transactions.

Merged Plan Relief:  Rev. Proc. 2019-20, released on May 1, 2019, expands the IRS’ determination letter program for individually designed qualified retirement plans (e.g., defined benefit plans or defined contribution plans) that result from a merger of two or more qualified retirement plans following a corporate merger, acquisition or other similar business transaction (a “Merged Plan”).  The newly expanded program will be available beginning September 1, 2019 and continuing on an ongoing basis.

Eligibility:  To be eligible for the determination letter program:

  • The Merged Plan must be a combination of two or more qualified retirement plans maintained by previously unrelated entities (i.e., entities that are not members of the same controlled group under Section 414 of the Internal Revenue Code);
  • The plan merger must occur no later than the last day of the first plan year that begins after the effective date of the corporate merger, acquisition or other similar business transaction (the “Corporate Transaction”); and
  • A determination letter application for the Merged Plan must be submitted by the last day of the first plan year that begins after the effective date of the plan merger.

Pre-approved or prototype qualified retirement plans are not explicitly covered by the procedure  — additional IRS guidance will be needed to determine the applicability

Glass Lewis Updates Proxy Voting Guidelines for 2019

Glass Lewis Updates Proxy Voting Guidelines for 2019

November 30, 2018

Authored by: Denise Erwin and Lisa Van Fleet

On October 24th, Glass Lewis published its updated proxy voting guidelines for 2019.  Some key compensation-related changes for reporting companies to keep in mind are highlighted below:

Excise Tax Gross-ups

When any new excise tax gross-ups are provided for in executive employment agreements, Glass Lewis may recommend against members of the compensation committee, particularly where a company previously committed not to provide gross-ups in the future.  Glass Lewis is particularly opposed to gross-ups related to excise taxes on excess parachute payments.  New gross-up provisions with respect to these excise taxes may lead to negative recommendations for a company’s say-on-pay proposal.

Contractual Payments and Arrangements

The new guidelines clarify the terms that may contribute to a negative voting recommendation on say-on-pay proposals.  When evaluating sign-on and severance arrangements, Glass Lewis will consider the size and design of any payments as well as U.S. market practice.  Glass Lewis will consider the executive’s regular target compensation level, the sums paid to other executives and, in special cases, whether the sums paid to departing executives were appropriate given the circumstances of the executive’s departure.  Excessive sign-on awards and multi-year guaranteed bonuses may result in negative recommendations.   In addition, key man clauses, board continuity conditions and excessively broad change in control triggers are also terms that could result in a negative recommendation.

Executive Compensation Disclosure for Smaller Reporting Companies

When assessing the performance of compensation committees, Glass Lewis indicates that it will consider the impact of materially decreased CD&A disclosure for smaller reporting companies when

A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

Last week, we discussed four of the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself.

On Monday, we discussed failures to timely update plan documents.

On Tuesday, we discussed an SPD’s failure to accurately describe the terms of a plan.

On Wednesday, we discussed a plan’s definition of compensation.

On Thursday, we discussed delinquent contributions.

We hope you enjoyed this refresher on best compliance practices.  For our last post in this five-part series, we discuss a topic that never goes out of style…

Plan Governance

Description

Plan governance generally encompasses the oversight policies and procedures that plans enact to ensure good process and operational compliance. The following discussion addresses two specific aspects of plan governance—those which are among the most commonly neglected.  Fortunately, these requirements for good plan governance are also extremely easy to satisfy.

Potential Liability

Errors stemming from poor plan governance can result in plan operational failures with potential consequences ranging from minor to loss of a plan’s qualified status.  To the extent poor plan governance stems from or results in a fiduciary breach, fiduciaries may be held personally liable.

Examples

Fiduciary Training. Plan fiduciaries should receive regular and thorough training on best practices in plan governance. Common errors resulting from a failure to receive such training include failure to properly establish and engage

A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

This week, we are discussing the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself.

On Monday, we discussed failures to timely update plan documents.

On Tuesday, we discussed an SPD’s failure to accurately describe the terms of a plan.

On Wednesday, we discussed a plan’s definition of compensation.

In this, our penultimate post, we discuss the most common mistake of all: delinquent contributions.

Delinquent Contributions

Description

Employers are required to contribute employees’ elective deferrals to the plan on the earliest date that the contributions can reasonably be segregated from the employer’s general assets, and in no event later than the fifteenth (15th) business day of the month following the month in which the participant contributions are withheld or received by the employer. The Department of Labor takes the position that this rule requires the employer to deposit elective deferrals into the plan trust as soon as reasonably practicable – which would in virtually all cases be significantly sooner than the above described outside limit. An employer’s deposit history may establish a basis for what is possible. When employers contribute withheld amounts later than the time frame described above, the contributions are considered delinquent.

Potential Liability

When an employer mixes an employee’s contribution to a 401(k) plan with its general assets longer than necessary, it engages in a prohibited transaction. To

A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

Welcome to the third installment of this series! This week, we are discussing the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself. Each day we will discuss a new compliance mistake. So far, we have discussed failures to timely update plan documents and an SPD’s failure to accurately describe plan terms. Today we discuss a plan’s definition of compensation.

Wrong Definition of Compensation

Description

401(k) plans may use different definitions of compensation for different purposes. For instance, plans may use any definition of compensation for certain purposes, but must use one of two statutory definitions of compensation found in the Internal Revenue Code (“IRC”) for certain other purposes. For example, (i) the IRC § 415 definition of compensation must be used when calculating the employer’s deduction for contributions and determining which employees are considered highly compensated, and (ii)  the IRC § 414 definition of compensation must be used for safe harbor plans and for determining if a plan meets nondiscrimination requirements. An operational failure occurs when the administrator uses a definition of compensation other than the definition specified in the plan documents. Even if the definition used for the calculation is legally permissible, the definition must match the definition contained in the plan’s terms.

Potential Liability

If the error is discovered by the plan sponsor, it may generally be corrected as described below. 

A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

This week, we are discussing the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself. Each day we will discuss a new compliance mistake. Yesterday, we discussed failures to timely update plan documents. Today, we are discussing an SPD-related failure. Check in through the end of the week for more compliance mistakes!

SPD Fails to Accurately Describe Plan Terms

Description

A Summary Plan Description (“SPD”), by definition, must accurately summarize a plan. This means that all descriptions in the SPD must accurately describe the terms of the underlying plan document.

Potential Liability

If an SPD includes different provisions than the corresponding plan document, a court may enforce the provisions of the SPD rather than those of the plan. The facts that a plaintiff must prove to receive this relief varies from circuit to circuit.

Examples

The plan requires that a participant be employed on the last day of the plan year to receive a matching contribution.  The SPD indicates that participants will receive a matching contribution regardless of whether they are in the employer’s employment on the last day of the year. The SPD does not accurately describe the of plan’s eligibility provisions.

The Fix

Regularly review the SPD for consistency with applicable plan terms and plan operation.

A Mistake a Day: Top 5 401(k) Compliance Mistakes & Best Practices

Mistakes are all too easy to make, but fortunately, they are also easy to prevent! This week, we are discussing the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself. Each day we will discuss a new compliance mistake, so stay tuned.

Failure to Timely Update Plan Document

Description

Statutes and regulations establishing qualification requirements change relatively frequently. Plans must be modified to conform to the requirements as required by each statute and regulation.

Potential Liability

Potential liability will differ based on the statute or regulation in question. In some circumstances, failure to timely adopt legislative and/or regulatory changes may result in disqualification of the plan.

Examples

Most recently, the Department of Labor updated the regulation governing the process for disability claims. The new regulations provide participants with enhanced rights, and require, among other things, that claims administrators provide claimants with more thorough descriptions and information supporting their denial of benefits. If a plan fails to conform to the regulations, claimants will be deemed to have exhausted all of their administrative options immediately, meaning that they may file a lawsuit without following the plan’s disability claims appeal procedures.

The Fix

Most 401(k) sponsors rely on their benefits lawyer, plan provider or plan administrator to keep them apprised of new documentation requirements.  In the absence of such an arrangement, plan sponsors should check on an annual basis to determine whether there

FAQs on the New 162(m) Guidance

FAQs on the New 162(m) Guidance

September 13, 2018

Authored by: Lisa Van Fleet and Adam Braun

We previously blogged about the guidance released by the IRS in Notice 2018-68 (the “Notice”), which addressed some of the changes made to Section 162(m) of the Internal Revenue Code (“Section 162(m)”) in the 2017 tax reform law (the “Act”).  In that post, we focused on the general changes in the definition of covered employee and guidance as to what constitutes a written binding contract eligible for grandfather relief.   In this post, we will address 5 of the most common questions we’ve heard companies ask about the guidance and describe potential next steps.

Q 1:   If a performance based compensation arrangement permits negative discretion to zero, are all payments made pursuant to that arrangement subject to 162(m)’s $1 million deduction limit? 

A:  Most likely, yes.  The Notice clarifies that a compensatory arrangement is not a written binding contract to the extent that any amounts payable under the arrangement may be reduced to $0 upon the company’s exercise of negative discretion.  However, if a portion of that amount is required to be paid under state law, then that portion of the payment would be grandfathered under Section 162(m) and would not be subject to its $1 million deduction limit.  Companies covered by Section 162(m) should review their current compensation arrangements now to identify the contracts and plans that may be impacted by this guidance.

Q 2:   What changes will constitute material modifications of grandfathered arrangements?  

A:   The Notice states that a material modification

The 162(m) Grandfather Reveal Party: IRS Releases Limited Guidance on Internal Revenue Code Section 162(m)

It took roughly nine months, but you may now be in a position to identify and reveal the status of contracts as 162(m) grandfathered – or not.  Last week, in IRS Notice 2018-68, the IRS provided long-awaited, albeit limited, guidance concerning the changes made to Internal Revenue Code Section 162(m) by the Tax Cuts and Jobs Act. Specifically, the notice includes additional information about the new definition of “covered employee” (i.e., an employee with respect to whom the compensation deduction is capped at $1 million) and…drum-roll please…. the meaning of “written binding contract” for purposes of determining whether a contract is grandfathered under Section 162(m).

Notice 2018-68 anticipates that future regulations will incorporate its contents, but that any such regulations will only apply to taxable years ending on or after September 10, 2018. The notice further specifies that any future guidance, including regulations, addressing the issues covered by Notice 2018-68 in a manner that would broaden the definition of “covered employee” will apply prospectively only.

Read on for a brief summary of the guidance provided by the notice – and stay tuned for our next post which will explore the most common questions companies are asking about the guidance, including questions about equity and deferred compensation arrangements, and steps companies can take in response to it.

Covered Employees 

End of Year Requirement: Before we address the grandfather guidance, we want to explore the expanded the definition of covered employee as this may impact the employees with respect

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