July 2013 Archives

July 31, 2013

Employee Benefits-IRS Provides Examination Tips For Hardship Distributions

In Employee Plans News, Issue 2013-2, June 24, 2013, Monika Templeman, Director of EP Examinations, provides- in response to questions- examination tips for hardship distributions. Here is what she says:

Question: What are the most common hardship distribution errors that Employee Plans agents find during plan audits?

Answer: Often, the agent finds that the plan made hardship distributions to participants, even though the plan document didn't permit these distributions. We also find plans that allow hardship distributions but don't follow the plan document's specific hardship criteria and distribute the money for another reason. For example, if the plan states hardships distributions can only be made to pay tuition, then it can't permit a hardship distribution for any other reason, such as a home purchase.

Read the plan document to ensure that it allows hardship distributions. If the plan doesn't allow them, then the plan must be amended. Fortunately, a retroactive amendment is permitted under the IRS' Self-Correction Program if a plan made hardship distributions, but didn't have provisions authorizing them. Review the terms of the plan, including:
• whether the plan allows hardship distributions;
• the procedures the employee must follow to request a hardship distribution;
• the plan's definition of a hardship; and
• any limits on the amount and type of funds that can be distributed for a hardship from an employee's accounts.

If plan language allows hardship distributions only under specific circumstances, the plan can't be more liberal in its operation. While the law permits hardships for funeral expenses, a plan can't distribute funds for these expenses unless the plan has payment of funeral expenses as a stated hardship. Again, if a plan sponsor decides to be more liberal in its definition of a hardship, they must amend their plan.
Keep records of information that you used to determine a participant's eligibility for a hardship distribution.

Keep in mind, the hardship distribution should only be made because of a participant's (employee, employee's spouse, dependent or the employee's beneficiary) immediate and heavy financial need and should only be made in an amount necessary to satisfy that need. A distribution won't be considered necessary to satisfy an immediate and heavy financial need if:
• it exceeds the amount needed to relieve the person's financial need, or
• the participant can obtain money from other reasonably available resources.

Question: If a plan allows loans, what are the required steps before granting a hardship distribution?

Answer: If the plan allows loans, it may require you to document that the employee has exhausted any loans or distributions, other than hardship distributions, available under the plan or any other plan of the employer in which the employee participates.

Tip: The plan sponsor should have procedures in place to review hardship applications and loans.

Question: What do agents look for when they examine hardship distributions?

Answer: Agents examine hardship distributions to confirm they comply with the plan language and the law.

• Good internal controls - will reduce or eliminate hardship distribution errors. When a plan has a strong internal control system, agents will usually check a sample of hardship distributions and move on to another area if they don't find errors. Good internal controls lead to a smoother and more efficient overall examination.
• Recordkeeping - The plan sponsor, and not the plan participant, is responsible for verifying hardship requests and making hardship distributions only if they satisfy the plan rules and the law. For example, the agent will look for documentation that the:
• plan sponsor confirmed that the employee requesting the hardship had exhausted other permitted plan distributions, such as loans.
• hardship distribution didn't exceed the amount necessary to satisfy the participant's immediate and heavy financial need.
Electronic hardship application - I've heard about the growing trend for plans to grant hardships to participants who electronically apply for them. Participants use their PIN and self-certify that they meet the hardship criteria. While this seems to be an easy process for the participant, enabling them to quickly receive their distribution, I stress that this process doesn't relieve the plan sponsor's need for verification and recordkeeping. The agent will still look for the same documentation I mentioned above to ensure that the plan made hardship distributions according to its terms and the law.

We commonly see hardship distribution errors. However, a plan sponsor may reduce or even eliminate these errors by reading the plan, maintaining strong internal controls and having the proper documentation.

July 30, 2013

Employee Benefits-IRS Provides Guidance On SEP Eligibility Requirements

In Employee Plans News, Issue 2013-2, June 24, 2013, the IRS provides guidance on SEP Plan eligibility requirements. Here is what the IRS said:

Question: Which employees must participate in my company's SEP plan?
Check your SEP plan document for your plan's specific eligibility requirements. If your SEP plan has the most restrictive eligibility requirements the law permits, your company would only make a plan contribution for employees who have:
• reached age 21,
• worked for your company in at least 3 of the last 5 years, and
• received at least $550 in compensation from your company for the year (subject to annual cost-of-living adjustments in later years).
However, your SEP plan may use less restrictive requirements. For example, you could allow employees to participate who:
• are at least age 18, and
• earn at least $550 for the year.

Question: What is the 3-of-5 eligibility rule?
The 3-of-5 eligibility rule means you must include any employee in your plan who has worked for you in any 3 of the last 5 years. SEP plans can choose not to use the 3-of-5 eligibility rule. Instead, your SEP plan may allow employees to participate immediately or after a shorter period of employment (for example, after working for only 1 year). If you use this 3-of-5 eligibility rule, you must count any service, no matter how little, in the 5 years immediately before the current year.

Example: If your SEP plan uses the 3-of-5 eligibility rule and has no other conditions for participation, you must make a 2013 plan contribution for an employee who has worked for you for any length of time in any 3 years from 2008 to 2012.

Question: If we use the 3-of-5 eligibility rule, do we have to make a 2013 SEP plan contribution for an employee who reached his 3-year employment anniversary on March 15, 2013?
No. If your SEP plan uses the 3-of-5 eligibility rule, a SEP contribution isn't required for the employee until the year that contains his 4-year anniversary of employment with your company. For the 3-of-5 eligibility rule, only plan years are counted, not years based on the date the employee started working for you. If this employee performed any service in any 3 years from 2009 through 2013, and meets any other plan eligibility requirements in 2014 (for example, age or compensation requirements), you must make a 2014 SEP contribution for the employee.

Question: If our SEP plan's only eligibility requirement is age 21, can we prorate an employee's compensation from the date he turns 21 in 2013 for his 2013 SEP contribution?
No. You must base your 2013 SEP plan contribution for the employee on his entire 2013 plan-year compensation.

Question: Our SEP plan requires employees to earn at least $550 in compensation for 2013 to participate in the plan. Can we prorate an employee's compensation from the date he earns more than $550 in 2013 for his 2013 SEP contribution?
No. Once the employee earns at least $550 in 2013 and meets any other plan eligibility requirements, you must base his 2013 SEP plan contribution on his entire plan-year compensation.

Question: Are the eligibility requirements the same for all employees in a SEP plan, including owners?
Yes. The eligibility provisions stated in the SEP plan document must apply equally to owners and employees.

Question: If my spouse and I own the business we work for, must we both meet the SEP plan's eligibility requirements to receive a plan contribution?
Yes. Each of you must meet the plan's eligibility requirements to participate in the plan. For example, if your plan uses the 3-of-5 eligibility rule, even if you're eligible for a 2013 SEP contribution, your wife isn't eligible if she only worked in 2011 and 2012 for the business because she didn't meet the 3-of-5 eligibility rule.

Question: Is my new employee eligible to participate in our SEP plan immediately?
Maybe, if your SEP has no service requirement and the employee meets any other eligibility requirements stated in your SEP plan document. Review your plan document to determine the plan's eligibility requirements.

Question: I'd like to establish a SEP plan that allows me to participate immediately. Can I establish different SEP plan eligibility requirements for future employees?
Yes. You can initially establish the SEP plan so that you are immediately eligible to participate in the plan. Later, you can amend the plan to have more restrictive eligibility requirements, but you must also meet the new eligibility requirements to participate in the plan.

July 29, 2013

ERISA-First Circuit Rules That Investment Fund Could Be Liable For The Withdrawal Liability Of A Portfolio Company

In Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, No. 12-2312 (1st Cir. 2013), the First Circuit Court of Appeals (the "Court") was presented with the issue as to whether the withdrawal liability to a multiemployer pension plan (the "Plan") of a bankrupt company, here, Scott Brass, Inc. ("SBI") could be imposed on two private equity funds that had invested in and had operated SBI. The private equity funds had argued that they were merely passive investors, and so could not be aggregated with SBI for purposes of imposing the withdrawal liability on them.

In order to be aggregated with SBI for such purposes, the private equity funds must satisfy the two prong "control group" test, under which they must (1) be a "trade or business" and (2) be under "common control" with SBI. As to prong (1), the Court concluded that at least one of the private equity funds which operated SBI, albeit through layers of fund-related entities, was not merely a "passive" investor, but sufficiently operated and managed SBI, and was advantaged by its relationship with its portfolio company, the now bankrupt SBI. Thus, that fund was a "trade or business" , meeting prong (1). The Court further concluded that factual development is necessary as to whether the other equity fund is a "trade or business".

Also, the Court ruled that the district court needed to develop facts to determine whether the private equity funds met prong (2). As such, the Court remanded the case back to the district court for further factual development on these matters. The Court did rule, however, that the district court was correct to enter summary judgment in favor of the private equity funds on the Plan's claim of liability, on the ground that the funds had engaged in a transaction to evade or avoid withdrawal liability.

July 26, 2013

ERISA-DOL Provides Guidance On Whether Revenue Sharing Payments Are "Plan Assets"

In Advisory Opinion 2013-03A, the Department of Labor provides guidance on whether revenue sharing payments that Principal Life Insurance Company ("Principal") receives for services are "plan assets" for purposes of ERISA.

The following facts were presented. Principal provides recordkeeping and related administrative services to retirement plans subject to Title I of ERISA, including 401(k) and other participant-directed defined contribution plans. Principal also makes available to plans a variety of investment options, including its own insurance company separate accounts and affiliated and unaffiliated mutual funds. Principal receives revenue sharing payments from these investments in the form of Securities and Exchange Commission Rule 12b-1fees, shareholder and administrative services fees or similar payments. Although Principal retains all of the payments, it may agree with a client plan to maintain a bookkeeping record of revenue sharing received in connection with the plan's investments.

Principal deposits the revenue sharing payments into its general asset accounts. It does not establish a special bank or custodial account to hold the revenue sharing payments. None of its agreements with the client plans call for Principal to segregate any portion of the revenue sharing payments for the benefit of any plan. Principal makes no representations to the plan fiduciaries or to any plan participants or beneficiaries that revenue sharing amounts it receives will be set aside for the benefit of the plan or represent a separate fund for payment of benefits or expenses under the plan.

In analyzing the facts, the DOL said that the assets of a plan generally include any property, tangible or intangible, in which the plan has a beneficial ownership interest. The identification of plan assets therefore requires consideration of any contract or other legal instrument involving the plan, as well as the actions and representations of the parties involved. Similarly, whether a plan has acquired a beneficial interest in specific assets also depends on whether an intent has been expressed to grant such a beneficial interest or a representation has been made sufficient to lead participants and beneficiaries of the plan reasonably to believe that such funds separately secure the promised benefits or are otherwise plan assets. On the other hand, the mere segregation of a service provider's funds to facilitate administration of its contract or arrangement with a plan would not in itself create a beneficial interest in those assets on behalf of the plan.

The DOL said that nothing in the facts presented would lead it to conclude that amounts recorded in the bookkeeping account as representing revenue sharing payments are assets of a client plan before the plan actually receives them. However, the DOL continued, the assets of a plan may include any type of property, tangible or intangible. Thus, the client plan's contractual right to receive the amounts agreed to with Principal, or to have them applied to plan expenses, would be an asset of the plan. Similarly, if Principal should fail to pay amounts as required by the contract or arrangement with the plan, the plan would have a claim against Principal for the amount owed and the claim itself would be an asset of the plan.

July 25, 2013

ERISA-EBSA Extends Time For Furnishing The Comparative Charts Required By Disclosure Rules.

In Field Assistance Bulletin No. 2013-02 (the "FAB"), the Employee Benefits Security Administration (the "EBSA") extends the time for furnishing the comparative charts required by disclosure regulations.

By way of background, on October, 20, 2010, the EBSA issued a final regulation on disclosure requirements for participant-directed individual account plans (29 CFR § 2550.404a-5). This regulation requires that plan administrators disclose detailed investment-related information to plan participants and beneficiaries about the plans' designated investment alternatives. Covered plans operating on a calendar-year basis had to furnish a comparative chart of the investment alternatives for the first time by no later than August 30, 2012, and subsequently at least annually thereafter. The regulation defines "at least annually thereafter" to mean at least once in any 12-month period, without regard to whether the plan operates on a calendar or fiscal year basis. For example, a plan administrator that furnished the first required chart on August 25, 2012, must furnish the next comparative chart no later than August 25, 2013.

To provide plan administrators with some flexibility, the FAB provides that the EBSA, as an enforcement matter, will treat a plan administrator as satisfying the "at least annually thereafter" requirement, if the plan administrator meets the following deadlines, and otherwise reasonably determines that doing so will benefit participants and beneficiaries:

--a plan administrator may furnish the 2013 comparative chart (i.e., the second comparative chart to be provided) no later than 18 months after the first comparative chart was furnished; and

--a plan administrator may furnish the 2014 comparative chart (i.e., the third comparative chart to be provided) no later than 18 months after the second comparative chart was furnished, if the second chart was furnished by the time required by the regulation (that is, within 12 months after the first chart was provided).

July 24, 2013

Employee Benefits-IRS Says A Frozen Defined Benefit Plan Is Subject to the Top-Heavy Minimum Benefit Rules

In Employee Plans News, Issue 2013-2, June 24, 2013, the IRS says that a frozen defined benefit plan must meet the top-heavy minimum benefit rules. It provided the following guidance:

A frozen plan may be one in which benefit accruals have ceased but all assets have not been distributed to participants or their beneficiaries. A defined benefit plan is top-heavy if, as of the determination date, the present value of the accrued benefits under the plan for the key employees is more than 60% of these benefits under the plan for all employees. If a frozen DB plan is top-heavy, it must provide top-heavy minimum benefit accruals to all non-key employees.

Many employers sponsor both a defined contribution and a defined benefit plan. In many instances, these plans' provisions require the defined contribution plan to provide an extra minimum top-heavy contribution covering employees in both plans instead of the defined benefit plan crediting top-heavy minimum benefit accruals for these employees.
Employers that are amending a defined benefit plan to freeze benefit accruals should carefully review the plan's top-heavy language. If these employers also maintain a defined contribution plan, they may want to amend both plans so that any top-heavy minimums are provided under the defined contribution plan. These amendments would avoid the frozen defined benefit plan having to provide minimum benefit accruals if the plan becomes top-heavy.

July 23, 2013

Employee Benefits-IRS Provides Guidance On Contribution Limit

In Employee Plans News, Issue 2013-2, June 24, 2013, the IRS provides guidance on salary deferral limits when you participate in more than one retirement plan. Here is what the IRS said:

The amount you can contribute to retirement plans is your individual limit each calendar year no matter how many plans in which you participate. This limit must be aggregated for these plan types:
• 401(k)
• 403(b)
• SIMPLE plans (SIMPLE IRA and SIMPLE 401(k) plans)

If you're eligible to defer to a 457(b) plan, you have a separate limit that includes both employee and employer contributions.

Make sure you don't exceed your individual limit. If you do and the excess isn't returned by April 15 of the next year, you could be subject to double taxation:
• once in the year you deferred your salary, and
• again when you receive a distribution.

Individual limit

The amount you can defer as pre-tax or designated Roth contributions to all your plans (not including 457(b) plans) is $17,500 for 2013. Although your limit is affected by the plan terms, it doesn't depend on how many plans you belong to or who sponsors those plans.


You're 40 years old and defer $2,500 in pre-tax and designated Roth contributions to your company's 401(k) plan in 2013. You terminate employment and go to work for an unrelated employer and participate in your new employer's 401(k) plan immediately. The maximum you may defer to your new employer's plan in 2013 is $15,000 (your $17,500 individual limit - $2,500 that you've already deferred to your former employer's 401(k)). The amount you can defer to both plans can't exceed your individual limit for that year.

Optional plan terms

• age-50 catch-ups - If you'll be 50 years or older by the end of the year, your individual limit is increased by $5,500 (in 2013). This means your individual limit increases from $17,500 to $23,000 in 2013 even if one plan doesn't allow the catch-ups.


You're 50 years old and participate in both a 401(k) and a 403(b) plan. Both plans permit the maximum contributions for 2013, $17,500; but the 403(b) doesn't allow age-50 catch-ups. You can still contribute a total of $23,000 in pre-tax and designated Roth contributions to both plans. Your contributions can't exceed either:

• your individual limit plus the amount of age-50 catch-up contributions, or
• the maximum contribution in 2013 for that plan type (for example, you couldn't contribute the entire $23,000 to the 403(b) plan because that 403(b) plan only allows a maximum contribution of $17,500 in 2013).

Compensation - Although plans may set lower deferral limits, the most you can contribute to a plan is the greater of:

• the allowed amount for that plan type for the year, or
• 100% of your eligible compensation defined by plan terms (includible compensation for 403(b) and 457(b) plans).
If you're self-employed, generally your compensation is your net earnings from self-employment.


You are 52 years old and participate in a 401(k) plan with Company #1 and a SIMPLE IRA plan with an unrelated employer Company #2. You'll receive $10,000 in compensation in 2013 from Company #1 and another $10,000 from Company #2. The most you can contribute to each plan is $10,000 because your deferrals to each employer's plan can't exceed 100% of your compensation from that employer, even though your individual contribution limit for 2013 is $23,000 ($17,500 individual limit + $5,500 age-50 catch-up limit). You can't defer more than $10,000 to either plan (for example, $12,000 to the 401(k) plan and $8,000 to the SIMPLE IRA plan) because your deferrals to each employer's plan can't exceed 100% of your compensation from that employer.

• 15-year catch-up deferrals in 403(b) plans - your individual limit may be increased by as much as $3,000 if your 403(b) plan allows a 15-year catch-up contribution.


If you're 51 years old in 2013 and participate in both a 401(k) plan and a 403(b) plan, you may contribute $23,000 in total to both plans, and up to an additional $3,000 to the 403(b) plan if the plan allows and you work for the same employer for 15 years. The 15-year catch-up is separate from the age-50 catch-up. If you're eligible and the plan allows both types of catch-ups, your contributions above your annual limit are considered to have been made first under the 15-year catch-up.

• reduced deferral limit - Although rare, your plan may limit the amount you can defer to an amount less than the allowed deferrals for that plan type for the year.


You are 52 years old and participate in two 401(k) plans. Each plan limits salary deferrals to the lesser of $5,000 or 100% of your eligible compensation. Although your eligible compensation is $10,000 from each employer sponsoring the plan and your individual limit allows you to contribute $23,000 for 2013 ($17,500 + $5,500 age-50 catch-up limit), the most you may contribute is $5,000 to each plan because of the plans' deferral limits set by their terms.
A plan with a 401(k) feature may also reduce the amount you can defer to ensure the plan meets nondiscrimination requirements. The plan may return some of your deferrals even if they don't exceed your individual limit.

457(b) plan

You have a separate deferral limit if you're also eligible to participate in a 457(b) plan. The amount of employee and employer deferrals allowed to a 457(b) plan depends on:
• if you're in a governmental or a tax-exempt 457(b) plan, and
• the plan's terms.
In 2013, you may defer the greater of $17,500 or 100% of your includible compensation to a 457(b) plan. The plan may also permit:
• a special "last 3-year catch-up," which allows you to defer in the three years before you reach the plan's normal retirement age:
• twice the annual 457(b) limit (2013, $17,500 x 2 = $35,000), or
• the annual 457(b) limit, plus amounts allowed in prior years that you didn't contribute; and
age-50 catch-ups of an additional $5,500, if it's a governmental 457(b) plan. Tax-exempt organizations are not eligible for the age-50 catch-ups.
If a governmental 457(b) allows both the age-50 catch-up and the 3-year catch-up, you can use the one that allows a larger deferral but not both.


You're in a 457(b) and a 403(b) plan, each plan allows the maximum deferrals for 2013 and you have enough includible compensation, you may be able to defer:
• $17,500 to each plan, regardless of your age
• 23,000 to the 403(b) plan and $17,500 to the 457(b) plan if you're age 50 or older by the end of 2013 and the 403(b) plan allows age-50 catch-ups
• $23,000 to each plan if you're in a governmental 457(b) plan and both plans allow age-50 catch-ups
• $23,000 to the 403(b) plan if it allows and you're eligible to make age-50 catch-up, and $35,000 to the 457(b) plan if it allows catch-up contributions and you're eligible for the last 3-year catch-up.
• an additional $3,000 to the 403(b), if you've worked for a qualified organization at least 15 years and the plan terms allow these catch-ups.

You should track your deferrals to ensure that you don't exceed the individual limit and 457(b) limits. Be especially careful if you participate in more than one plan.

Distribution of excess contributions

f you do exceed your individual and 457(b) limits, to avoid double taxation, contact your plan administrator and ask them to distribute any excess amounts. The plan should distribute the excess contribution to you by April 15 of the following year (or an earlier date specified in the plan).

When deciding from which plan to request a distribution of excess contributions keep in mind:
• getting the maximum matching contribution that may be offered
• type of investments
• plan fees

July 19, 2013

Employment -New York Court Of Appeals Discusses The Employees Who May/May Not Share Tips In A Restaurant

In Barenboim v Starbucks Corp., 2013 NY Slip Op 04754 (NY Court of Appeals 2013), the NY Court of Appeals was asked by the U.S. Second Circuit Court of Appeals to answer two questions regarding the legality of Starbucks s tip-splitting policy under NYS Labor Law § 196-d.

The facts of the case are as follows. In each of its stores, Starbucks employs four categories of employees: baristas, shift supervisors, assistant store managers and store managers. Baristas are the lowest rung and work on a part-time, hourly basis. Shift supervisors are the next lowest rung, work on a part-time, hourly basis and have some supervisory responsibilities over the baristas. Assistant store managers represent the third rung in the Starbucks hierarchy. They work full-time, are paid on a salary basis, and possess greater managerial and supervisory authority than shift supervisors. Finally, the store managers are the highest ranking employees. They work full-time, are paid on a salary basis, and have the authority to hire and fire employees.

Starbucks maintains a written policy governing the collection, storage and distribution of customer tips. Pursuant to this policy, each Starbucks store places a plexiglass container at the counter where patrons may deposit tips. Once these tip canisters become full, Starbucks requires that they be emptied into a bag and the money is stored in a safe. At the end of each week, the tips are tallied and distributed in cash to two categories of employees, the baristas and shift supervisors, in proportion to the number of hours each such employee worked. Starbucks does not permit its assistant store managers or store managers to share in the weekly distribution of tips. The company's decision to include shift supervisors in these tip pools was the impetus for the first question, namely, whether such inclusion violates Labor Law § 196-d ("Question 1"). The company's exclusion of assistant store managers created the second question, namely, whether such exclusion violates that provision ("Question 2").

In analyzing the case, the Court noted that Labor Law § 196-d states in relevant part: "No employer or his agent or an officer or agent of any corporation, or any other person shall demand or accept, directly or indirectly, any part of the gratuities, received by an employee, or retain any part of a gratuity or of any charge purported to be a gratuity for an employee. . . . Nothing in this subdivision shall be construed as affecting the . . . sharing of tips by a waiter with a busboy or similar employee."

As to Question 1, the Court said that an employee whose personal service to patrons is a principal or regular part of his or her duties may participate in an employer-mandated tip allocation arrangement under Labor Law § 196-d, even if that employee possesses limited supervisory responsibilities. But an employee granted meaningful authority or control over subordinates can no longer be considered similar to waiters and busboys within the meaning of section 196-d and, consequently, is not eligible to participate in a tip pool. The Court left it to the federal courts-where the litigation pertaining to Question 1 currently resides- to apply these principles to the specific facts of the case. As to Question 2, the Court concluded, without much additional elaboration, that Starbucks' decision to exclude assistant store managers from the tip pool is not contrary to Labor Law § 196-d. It indicated that, with some limitation (not applicable here), employees-even if eligible- can be excluded from the tip pool.

July 17, 2013

Employment-Seventh Circuit Rules That Plaintiff Has Made Out A Case Of A Violation Of The Pregnacy Discrimination Act

In Hitchcock v. Angel Corps, Inc., No. 12-3515 (7th Cir. 2013), the plaintiff Hitchcock had alleged that the defendant Angel Corps, a home care agency, firedher because she was pregnant, in violation of the Pregnancy Discrimination Act. Angel Corps proffered multiple explanations for why Hitchcock was fired, all revolving around a bizarre incident involving the death of a 100-year-old potential client. After both parties consented to adjudication of the matter before a magistrate, he granted Angel Corps's motion for summary judgment. Hitchcock appeals.

In analyzing the case, the Seventh Circuit Court of Appeals (the "Court") found that Hitchcock had submitted evidence that the supervisor who fired her expressed animus towards pregnant women and treated Hitchcock differently after learning she was pregnant, only a few weeks before she was fired. Angel Corps's many explanations for Hitchcock's termination were shifting, inconsistent, facially implausible, or all of the above. The Court said that a reasonable jury could conclude that Angel Corps's explanations were lies, and that Hitchcock was fired because she was pregnant. As such, the Court overturned the summary judgment, and remanded the case back to the lower court.

July 16, 2013

ERISA-Second Circuit Rules That Plaintiffs' Claims of Breaches Of ERISA Fiduciary Duties Of Prudence And Loyalty Were Properly Dismissed

In Majad v. Nokia, Inc., No. 12-4064-cv (2nd Cir. 2013) (Summary Order), the plaintiffs, suing on behalf of a putative class of Nokia, Inc. employees who invested in the Nokia Retirement Savings and Investment Plan (the "Plan"), were appealing the dismissal by the district court of their claims for compensatory and equitable relief under ERISA § 502(a)(2) and (a)(3). The plaintiffs had alleged that the defendants had breached the fiduciary duties of prudence and loyalty owed under ERISA, with respect to the Plan's offering of an investment fund consisting of American Depository Shares of common stock of Nokia Corp. ("Nokia"). Nokia is the Finnish parent company of the plaintiffs' employer. The plaintiffs' complaint centered on the decrease in the price of Nokia stock.

The Second Circuit Court of Appeals (the "Court") first dealt with the duty of prudence. The Court said that, mindful that a fiduciary must discharge his duties in accordance with the documents and instruments governing the plan insofar as ERISA requires (ERISA § 1104(a)(1)(D)), the Court has recognized that fiduciaries may face conflicting demands with respect to offering employer stock as an investment option to employees. Thus, the Court affords such an offer a presumption of prudence, reviewing related fiduciary conduct only for abuse of discretion. The Court added that, if plan terms require or strongly favor investment in employer stock, then only circumstances placing the employer in a dire situation that was objectively unforeseeable by the settlor could require fiduciaries to override plan terms. However, the Court ruled that here, the plaintiffs' allegations, including a proposed amended complaint, fails to state an ERISA prudence claim under any standard of review. This obtains because the plaintiffs have not alleged, and would not allege in the amended complaint, any circumstances under which the Plan fiduciaries could have predicted-based on secret information or otherwise- a fall in the price of Nokia stock.

As to the claim of breach of loyalty, the Court noted that the plaintiffs alleged that the defendant fiduciaries also breached this duty of loyalty in failing to relay complete and accurate information about Nokia's business prospects to Plan participants (relying on ERISA § 404(a)(1), which requires ERISA fiduciaries to act solely in the interest of the participants and beneficiaries). The Court said that the district court correctly dismissed this disclosure-based claim because: (1) ERISA imposed no affirmative obligation on defendants to update Plan participants about Nokia's financial condition, and (2) any alleged misstatements were not made in a fiduciary capacity. Further, since plaintiffs' appellate briefing contains no specific argument regarding this claim, the Court deems it abandoned.
Accordingly, the Court ruled that the plaintiffs' ERISA prudence and loyalty claims were appropriately dismissed.

July 15, 2013

Employee Benefits-Reminder: Self-Employed Group Health Plans May Have To Pay PCORI Fees By July 31

A reminder: If you are an employer maintaining a self-insured (wholly or partly) group health plan, with a plan year that ends on or between October 1 and December 31, then your first PCORI fees are due by this coming July 31. These fees are required by the Affordable Care Act. The term "PCORI" stands for Patient Centered Outcomes Research Institute. The total fee for the first year is $1 per covered life. Certain plans (e.g., those offering only HIPAA excepted benefits) are excepted from PCORI fee requirements. The PCORI fees are paid with IRS Form 720. See Form 720 and its instructions for more details.

By the way, the PCORI fees should not be confused with the Reinsurance fees. Those fees do not apply until 2014, and for that year will be $63 per covered life. More on the Reinsurance fees later.

July 12, 2013

Employee Benefits-IRS Issues A Notice Providing Transitional Relief From Pay or Play Rules And Related Information Reporting

Last week, the IRS announced that the Pay or Play Rules under section 4980H of the Code and related reporting requirements under sections 6055 and 6056 of the Code, all introduced to the Code by the 2010 Afforable Care Act, are being postponed for one year. The IRS has followed up that announcement by issuing Notice 2013-45, which provides transition relief for the postponed requirements. Here is what the Notice says:

In General. Both the information reporting and the Pay or Play Rules will be fully effective for 2015. The transition relief through 2014 for the information reporting and the Pay or Play Rules has no effect on the effective date or application of other Affordable Care Act provisions.

Transition Relief For Information Reporting. Section 6055 requires information reporting byinsurers, self-insuring employers, government agencies, and certain other parties that provide health coverage. Section 6056 requires information reporting by applicable large employers with respect to the health coverage offered to their full-time employees.Proposed rules for the information reporting provisions are expected to be published this summer. The proposed rules will reflect the fact that transition relief will be
provided for information reporting under §§ 6055 and 6056 for 2014. Employers, insurers, and other reporting entities are encouraged to voluntarily comply with these information reporting provisions for 2014 (once the information reporting rules have been issued).However, information reporting under §§ 6055 and 6056 will be optional for 2014; accordingly, no penalties will be applied for failure to comply with these information reporting provisions for 2014.

Effect On The Pay Or Play Rules. Under the Play or Pay Rules , an applicable large employer generally must offer affordable, minimum value health coverage to its full-time employees or a penalty may be imposed if one or more of its full-time employees receive a premium tax credit under section 36B of the Code. The section 6056 information reporting is integral to the administration of the Play or Pay Rules. In particular, because an employer typically will not know whether a full-time employee received a premium tax credit, the employer will not have all of the information needed to determine whether must pay a penalty. Accordingly, the employer is not required to calculate the penalty under the Play or Pay Rules or file returns submitting such a payment. Instead, after receiving the information returns filed by applicable large employers under section 6056 and the information about employees claiming the premium tax credit for any given calendar year, the IRS will determine whether any of the employer's full-time employees received the premium tax credit and, if so, whether a penalty should be imposed. If it determines that a penalty should be imposed, the IRS will contact the employer about the penalty due.

As such, the transition relief from section 6056 information reporting for 2014 is
expected to make it impractical to determine which employers owe a penalty under the Play or Pay rules, so the IRS will not assess any penalty for 2014. However, employers and other affected entities are encouraged to voluntarily comply with the Play or Pay Rules for 2014, and in particular with the information reporting provisions (once the information reporting rules have been issued) and to maintain or expand health coverage in 2014.

Effect On The Premium Tax Credit. Individuals will continue to be eligible for the premium tax credit by enrolling in a qualified health plan through the Affordable Insurance Exchanges if their household income is within a specified range and they are not eligible for other minimum essential coverage, including an eligible employer-sponsored plan that is affordable and provides minimum value.

July 3, 2013

Employee Benefits-IRS Postpones Play Or Pay For One Year

The Treasury Department has announced that the employer Play or Pay requirements, as well as the related employer and insurer health care reporting requirements, have been postponed for one year. Thus, those requirements, originally becoming effective in 2014, will not apply until 2015. These requirements were enacted as part of the Affordable Care Act. More to follow as the Treasury gives us more details.

July 2, 2013

Employee Benefits-IRS Provides Guidance For 403(b) Plans

In Employee Plans News, Issue 2013-2, June 24, 2013, the IRS provides guidance pertaining to the pre-approved plan program for, and the correction of errors made in the operation of, 403(b) plans. The following specific topics are included:

403(b) pre-approved plans
• Phone forum (June 25 at 1 p.m. EDT)
• Summary of key provisions of the program
• Apply for an opinion/advisory letter for a 403(b) pre-approved plan
• FAQs - 403(b) Pre-Approved Plan Program
• Why you may want to adopt a 403(b) pre-approved plan

Correcting plan errors
• Correct certain 403(b) plan operational failures under IRS correction programs
• New 403(b) Fix-It Guide
• Do you qualify for a discounted VCP fee?
• New phone number to check your VCP submission status
• Tips to avoid processing delays for your VCP submission
• Updated submission kits for plans that missed the EGTRRA deadlines

If your organization has a 403(b) plan, take a look!

July 1, 2013

Employment -Supreme Court Defines "Supervisor" For Purposes Of Imposing Vicarious Liability On Employers Under Title VII

The case of Vance v. Ball State University, No. 11-556 (S. Ct. 2013) may be summarized as follows. Under Title VII, an employer's liability for workplace harassment may depend on the status of the harasser. If the harassing employee is the victim's co-worker, the employer is liable only if it was negligent in controlling working conditions. In cases in which the harasser is a "supervisor," however, different rules apply. If the supervisor's harassment culminates in a tangible employment action (i.e., a significant change in employment status, such as hiring, firing, failing to promote, reassignment with significantly different responsibilities, or a decision causing a significant change in benefits) the employer will be strictly liable. But if no tangible employment action is taken, the employer may escape liability by establishing, as an affirmative defense, that: (1) the employer exercised reasonable care to prevent and correct any harassing behavior and (2) that the plaintiff unreasonably failed to take advantage of the preventive or corrective opportunities that the employer provided (the "Faragher/ Ellerth Defense").

In this case, plaintiff Vance, an African-American woman, sued her employer, Ball State University ("BSU"), alleging that a fellow employee, Saundra Davis, created a racially hostile work environment in violation of Title VII. The district court granted summary judgment to BSU. It held that BSU was not vicariously liable for Davis' alleged actions because Davis, who could not take tangible employment actions against Vance, was not a supervisor. The Seventh Circuit affirmed, and Vance appeals.

Upn reviewing the case, the Supreme Court held (5-4¬) that an employee is a "supervisor", for purposes of imposing vicarious liability on an employer under Title VII, only if he or she is empowered by the employer to take tangible employment actions against the victim. This holding rejects the definition of "supervisor" for such purposes found in the EEOC's Enforcement Guidance. Accordingly, the Supreme Court affirmed the Seventh Circuit's judgment.