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Five Common 409A Design Errors: #1 Employment Claims Releases

Five Common 409A Design Errors: #1 Employment Claims Releases

February 15, 2012

Authored by: benefitsbclp

Over the next several weeks, we will be writing about five common Code Section 409A design errors and corrections.  This is the first of those posts.

You are designing an executive employment agreement with a substantial severance component. For the amount of severance, it seems fair to condition payment upon execution of an agreement waiving all employment claims (ADA, age discrimination, etc.). Why not just say that severance payments don’t begin until the executive returns the claims release? The answer – Code Section 409A.

Incredulous? Here’s the concern. An employee who will begin to receive severance upon return of a release could potentially hold on to the release until the year following his or her termination. What does that achieve? Because the severance is taxable when actually paid, the employee could hold on to a release, defer taxation, and ultimately pay fewer taxes on the severance. Employee discretion as to the timing of taxation exercised opportunistically upon termination of employment is anathema to Code Section 409A.

There are two common solutions to this design problem, both with advantages and disadvantages.

Will Presumption of Prudence Withstand DOL Challenge?

Will Presumption of Prudence Withstand DOL Challenge?

February 6, 2012

Authored by: benefitsbclp

The DOL recently filed an amicus brief in two companion “stock drop” cases on appeal to the Second Circuit Court of Appeals. In re Citigroup ERISA Litigation, 2d Cir., No. 09-3804-cv,. The DOL’s amicus brief urges the Second Circuit to reject the “presumption of prudence” first adopted in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995).

In Moench, the Third Circuit ruled that an ESOP fiduciary who invests plan assets in employer securities is entitled to a “presumption” that it acted consistently with ERISA in making that decision. A challenging party may rebut that presumption, however, “by establishing that the fiduciary abused its discretion by investing in employer securities.” Id.

Over the years, Moench has been adopted by a majority of the circuits that have addressed the issue, and its presumption has been applied not only to ESOPs but also to eligible individual account plans holding employer securities, such as 401(k)s. In recent years, the DOL has begun attacking this presumption of prudence and has filed numerous amicus briefs in so-called “stock-drop” cases. The Department’s general position is that there is no support for the Moench presumption in ERISA.

In its most recent amicus brief, the DOL expressed strong support in favor of plaintiff-appellants’ petition for a panel or “en banc” rehearing of the Second Circuit’s application of the Moench presumption in the Citigroup companion cases. The majority in each case held the presumption of prudence can be overcome only where there is a “dire situation” that was

The Final Rule for 408(b)(2) – Fee Disclosures

Yesterday, the Department of Labor (“DOL”) issued the final rule on the disclosures that a covered service provider must furnish to a plan fiduciary in order for a contract or arrangement for services for a covered plan to be “reasonable” as required under ERISA §408(b)(2).  These fee disclosure requirements become effective July 1, 2012 and apply not only to service contracts and arrangements entered into on or after that date but existing contracts and arrangements entered into prior to July 1, 2012.

For those of you who remember in detail the disclosure requirements under the interim rules issued in July, 2010, the DOL has posted an overview of the changes from the interim final rule its website.  For everyone else, the disclosure requirements under the final rule are briefly described below.

Covered Plans

The final rule generally applies to ERISA-covered defined benefit and defined contribution pension plans.  However, simplified employee pension plans, simple retirement accounts, individual retirement accounts, individual retirement annuities and certain Keogh plans and 403(b) annuity contracts and custodial accounts are excluded.

Covered Service Providers

Disclosure is required in the case of a service provider who enters into a contract or arrangement with the covered plan and reasonably expects to receive at least $1,000 in direct or indirect compensation in connection with the provision of services in one or more of the following categories:

  • Services as an ERISA fiduciary or as an investment advisor registered under either the Investment Advisors Act of 1940

Treasury Department Offers Proposed Lifetime Income Guidance

Treasury Department Offers Proposed Lifetime Income Guidance

February 2, 2012

Authored by: benefitsbclp

Today, the Treasury and Internal Revenue Service (IRS) released proposed regulations along with a series of rulings intended to reduce regulatory barriers and increase the employer’s ease in offering lifetime income choices (i.e., annuities) to retirees to help them avoid outliving their retirement savings.  As described in the “fact sheet” issued by the Treasury, these proposed regulations aim to offer workers more accessible options as to how they receive their retirement benefits, including:

  • a combination retirement benefit option, which would allow an individual to take a portion of their income as a lifetime annuity while taking the remainder in another form (e.g., a lump-sum);
  • a “longevity annuity” option, which would allow employees to use a portion of their account balance (the lesser of 25% or $100,000) to provide a life annuity that would not begin until the retiree had reached age 80 or 85, to protect those individuals who live beyond their life expectancy;
  • the opportunity for employees to receive lump-sum cash payouts from their employer’s 401(k) plan that can be transferred (partially or in full) to the employer’s defined benefit plan—so long as the employer maintains a defined benefit plan and allows for the transfer—so the employee could receive an annuity from the plan with the defined benefit plan’s “reduced” annuity purchase rate; and
  • the use of deferred annuities (including longevity annuities) despite the requirement of written, notarized spousal consent for optional forms of benefits.

For the employer, the difficulty in offering these

“Retire” Doesn’t Mean “Rehire”

“Retire” Doesn’t Mean “Rehire”

January 23, 2012

Authored by: benefitsbclp

In Private Letter Ruling 201147038, the Internal Revenue Service addressed an issue that surfaces frequently when an employer offers a voluntary retirement program. An employee may want to take advantage of the incentives offered under the program, but he or she may also want to continue working for the employer, and the employer may want the employee to continue working.

In this ruling, a plan proposed a funding rehabilitation plan which included eliminating unreduced early retirement benefits for participants with 20 or more years of service. Once the rehabilitation plan was effective, a participant would no longer be able to retire after 20 years of service with an unreduced benefit. The taxpayer proposed giving participants advance notice of the elimination of this right, along with the ability of affected participants to elect to retire during the notice period and then immediately return to employment. Upon reemployment, their pension benefits would be suspended, but they would have secured their eligibility for the 20-year unreduced early retirement benefit.

A 401(k) plan may not distribute salary deferral amounts until certain defined events, including severance from employment. A defined benefit plan must be a “pension plan,” which the IRS has defined in regulations to be a plan that is established and maintained to provide benefits to an employer’s employees over a period of years after retirement. While the term “retirement” is not defined in those rules, in Revenue Ruling 56-693, the IRS held that a plan would not be a pension plan if

E.D. of Michigan Retirees Must Arbitrate Claim for Medical Benefits, Despite Anti-Arbitration Provision in CBA

January 13, 2012

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An Eastern District of Michigan court recently ruled that retired union members must arbitrate their claims seeking a lifetime of fully-paid retiree medical benefits under a CBA (UAW v. Kelsey-Hayes Co., E.D. Mich., No. 2:11-cv-14434-JAC-RSW, 12/22/11).

Prior to the plaintiffs’ retirement in the late 1990s, their collective bargaining unit and their employer entered into a CBA which required that the employer would pay the full cost of medical coverage for eligible retirees and their spouses. However, in September 2011, the employer’s successor announced that, effective January 1, 2012, it would discontinue its current healthcare plan for Medicare-eligible retirees and surviving spouses.

The union, on behalf of the retirees, filed this lawsuit alleging that they were entitled to a lifetime of fully-paid medical benefits and that the defendant employers’ conduct breached the terms of the parties’ CBA as well as their fiduciary duties under ERISA. In response, the defendants filed a motion seeking to compel arbitration of the plaintiffs’ claims pursuant to a “plant closing agreement” which was entered into in 2001 and contained a broad arbitration clause.

In granting the defendants’ motion to compel arbitration of the plaintiffs’ claims, the court rejected the plaintiffs’ contentions that (1) Sixth Circuit precedent clearly states that retirees cannot be forced to arbitrate their claims; (2) the plant closing agreement excludes retiree benefits from the general arbitration clause; (3) the terms of the CBA should govern since plaintiffs rely primarily upon the CBA and not the plant closing agreement for their claims; and (4)

Alert: New Form 8955-SSA Deadline Fast Approaching

Alert: New Form 8955-SSA Deadline Fast Approaching

January 13, 2012

Authored by: benefitsbclp

 New IRS Form 8955-SSA, the Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits, replaces the Schedule SSA of the Form 5500 annual report. Form SSA, will generally due at the same time as Form 5500 (i.e., the last day of the seventh month after the plan year ends); however, the IRS has extended the due date for Form 8955-SSA for the 2009 and 2010 plan years to January 17, 2012 or the generally applicable due date for 2010, whichever is later. No further extensions will be available for the January 17, 2012 deadline, so employers should make sure to get their filings done by next Tuesday!

 

W-2 Reporting of Health Coverage and EAPs, Wellness Programs, and On-Site Clinics

On Tuesday, the IRS released additional interim guidance on the health reform requirement to include the cost of health coverage on an employee’s Form W-2.  Employers are permitted, but not required, to report these amounts on 2011 W-2s issued by the end of this month, but reporting will be required for 2012 W-2s issued in January 2013.

Of particular interest in the guidance is the following Q&A:

Q-32: Is the cost of coverage provided under an employee assistance program (EAP), wellness program, or on-site medical clinic required to be included in the aggregate reportable cost reported on Form W-2?

A-32: Coverage provided under an EAP, wellness program, or on-site medical clinic is only includible in the aggregate reportable cost to the extent that the coverage is provided under a program that is a group health plan for purposes of § 5000(b)(1). An employer is not required to include the cost of coverage provided under an EAP, wellness program, or on-site medical clinic that otherwise would be required to be included in the aggregate reportable cost reported on Form W-2 because it constitutes applicable employer-sponsored coverage, if that employer does not charge a premium with respect to that type of coverage provided to a beneficiary qualifying for coverage in accordance with any applicable federal continuation coverage requirements. If an employer charges a premium with respect to that type of coverage provided to a beneficiary qualifying for coverage in accordance with any applicable federal continuation coverage requirements,

Payroll Tax Holiday Extended

Payroll Tax Holiday Extended

December 28, 2011

Authored by: benefitsbclp

 On Friday, President Obama signed a bill (H.R. 3765) that will temporarily extend the payroll tax holiday. The 4.2% Social Security payroll tax rate for individuals (historically 6.2%), which was set to expire on December 31, 2011, will continue though February 29, 2012. The IRS encouraged employers to implement the tax rate cut as soon as possible, but no later than January 31, 2012.   For any Social Security tax over-withheld in January, employers should adjust employees’ pay no later than March 31, 2012.

The legislation also extends unemployment insurance benefits without imposing any new qualifications and prevents reimbursement cuts to Medicare providers, which were scheduled to be cut by 27%. A joint conference committee with House and Senate members was established to negotiate further extensions of the tax cut, unemployment insurance benefits, and Medicare reimbursement provisions. The bill will be paid for by raising the guarantee fee charged by Fannie Mae and Freddie Mac to loan originators.

State Taxation of Former Residents’ Retirement Income

State Taxation of Former Residents’ Retirement Income

December 28, 2011

Authored by: benefitsbclp

Recently, the New York State Department of Taxation and Finance issued an Advisory Opinion regarding whether New York State may impose income tax on distributions from a nonqualified deferred compensation plan made to a former resident.  Under federal law, states may not impose income tax on these retirement payments. Plan sponsors that participate in nonqualified deferred compensation plans should be aware of the tax implications of this law.

Click here to view the Alert.

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