Defined Benefit Plans – Page 4

A Retirement Plan Established by a Church-Affiliated Organization is not an ERISA-Exempt Church Plan (at least in the 9th, 3rd and 7th Circuits)

The 9th Circuit Court of Appeals recently held that, to qualify for the church plan exception to the requirements of the Employee Retirement Income Security Act (ERISA), a church plan (i) must be established by a church or by a convention or association of churches and (ii) must be maintained either by a church or by a church-controlled or church-affiliated organization whose principal purpose or function is to provide benefits to church employees.

The specific holding in in Rollins v. Dignity Health, 2016 WL 3997259 (9th Cir. 2016) was that Dignity Health’s pension plan was subject to the requirements of ERISA and did not qualify for ERISA’s church-plan exemption because it was not originally established by a church, even if it was maintained by a “principal purpose” organization. The 3rd and 7th circuits have reached the same conclusion when confronted with this question. See Kaplan v. Saint Peter’s Healthcare Sys., 810 F.3d 175, 180–81 (3d Cir. 2015); Stapleton v. Advocate Health Care Network, 817 F.3d 517, 523–27 (7th Cir. 2016).

Background

29 U.S.C. § 1003(b)(2) provides that a church plan is exempt from ERISA.
29 U.S.C. § 1002(33)(A) provides that in order to qualify for the church-plan exemption, a plan must be both established and maintained by a church.
29 U.S.C. § 1002(33)(C)(i) provides that a plan established and maintained by a church “includes” a plan maintained by a principal-purpose organization.

The 9th Circuit reasoned that “there are two possible readings of subparagraph (C)(i). First, the subparagraph can be read to mean that a plan need only be maintained by a principal-purpose organization to qualify for the church-plan exemption. Under this reading, a plan maintained by a principal-purpose organization qualifies for the church-plan exemption even if it was established by an organization other than a church. Second, the subparagraph can be read to mean merely that maintenance by a principal purpose organization is the equivalent, for purposes of the exemption, of maintenance by a church. Under this reading, the exemption continues to require that the plan be established by a church.”

The 9th Circuit then held that “the more natural reading of subparagraph (C)(i) is that the phrase preceded by the word “includes” serves only to broaden the definition of organizations that may maintain a church plan. The phrase does not eliminate the requirement that a church plan must be established by a church.”

More

Rollins v. Dignity Health, 2016 WL 3997259 (9th Cir. 2016)

Kaplan v. Saint Peter’s Healthcare Sys., 810 F.3d 175, 180–81 (3d Cir. 2015)

Stapleton v. Advocate Health Care Network, 817 F.3d 517, 523–27 (7th Cir. 2016)

IRS Releases 2016-2017 Priority Guidance Plan

The IRS has published its 2016–2017 Priority Guidance Plan containing 281 projects that are priorities for allocation of its resources during the twelve-month period from July 2016 to June 2017.

Significant employee benefits issues prioritized for guidance in the next year include:

Additional guidance on the determination letter program, including changes to the pre-approved plan program.
Updates to the Employee Plans Compliance Resolution System (EPCRS) to reflect changes in the determination letter program and to provide additional guidance with regard to corrections.
Final regulations on income inclusion under §409A.
Guidance to update prior §409A guidance on self-correction procedures.
Final regulations under §457(f) on ineligible plans.
Guidance on issues under §4980H (the Employer Mandate).
Regulations under §4980I regarding the excise tax on high cost employer-provided coverage (the Cadillac Tax)
Regulations updating the rules applicable to ESOPs.
Regulations under §401(a)(9) on the use of lump sum payments to replace lifetime income being received by retirees under defined benefit pension plans.
Guidance regarding substantiation of hardship distributions.
Guidance on the §403(b) remedial amendment period.

Notably absent is any mention of guidance on the nondiscrimination rules applicable to fully-insured medical plans, which were included in the Affordable Care Act. The Treasury Department and the IRS, as well as the Departments of Labor and Health and Human Services (collectively, the Departments), previously determined in Notice 2011-1 that compliance with the nondiscrimination provisions will not be required (and thus, any
sanctions for failure to comply do not apply) until after regulations or other administrative guidance of general applicability has been issued. Therefore, for the foreseeable future fully insured plans can continue to discriminate in favor of highly compensated individuals in ways the self-insured plans cannot under Code Section 105(h).

IRS 2016–2017 Priority Guidance Plan

Significant Changes Proposed for Form 5500

On July 21, 2016 the Department of Labor (DOL), the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) published proposed rules that would make significant revisions to the Form 5500 Annual Return/Report as of the 2019 filing year.

DOL explains in a Fact Sheet that the proposed form revisions and the DOL’s related implementing regulations are intended to address changes in applicable law and in the employee benefit plan and financial markets, and to accommodate shifts in the data the DOL, IRS and PBGC need for their enforcement priorities, policy analysis, rulemaking, compliance assistance, and educational activities.

The major proposed changes are summarized below:

Retirement Plan Changes– The new Form 5500 will request more information about participant accounts, contributions, and distributions. It will also ask about plan design features, including whether the plan uses a safe harbor or SIMPLE design and whether it includes a Roth feature. The form will also ask about investment education and investment advice features, default investments, rollovers used for business start-ups (ROBS), leased employees, and pre-approved plan designs. Schedule R will include new questions about participation rates, matching contributions, and nondiscrimination.

Group Health Plan Changes– The most significant change for health plans is that all ERISA group health plans, including small plans that are currently exempt from filing, will be required to file a Form 5500. The new filing requirement includes a new Schedule J (Group Health Plan Information), which will list the types of health benefits provided, the plan’s funding method (self insured or fully insured), information about participant and employer contributions, information about COBRA coverage, whether the plan is grandfathered under health care reform, and whether it includes a high deductible health plan, HRA, or health FSA. In addition, most filings (except those for small fully insured plans) would have to provide financial and claims information, disclose stop-loss carriers, third party administrators and other plan service providers, and provide details regarding compliance with HIPAA, GINA, health care reform and other compliance issues.

Other Changes– The proposed changes affect many of the existing Form 5500 schedules, including:
- Schedule C would be revised to coordinate with the service provider fee disclosure rules.
- Schedule C would be required from some small plans currently exempt from filing it.
- Schedule H would be expanded to include questions on fee disclosures, annual fair market valuations, designated investment alternatives, investment managers, plan terminations, asset transfers, administrative expenses and uncashed participant checks.
- Schedule I would be eliminated.
- Small plans that currently file Schedule I would generally need to file Schedule H.

Effective Date– The new Form 5500 is expected to be required as of the 2019 plan year filings.

Proposed Rule Making Form 5500 Changes

IRS Announces More Changes to its Determination Letter Program

On June 29, 2016, the IRS updated its determination letter program for individually designed tax qualified retirement plans, making a number of significant changes, mostly having to do with (1) when individually designed plans must be amended to comply with changes in the law and other guidance, and (2) when those plans may request a favorable determination letter.

The bottom line for sponsors of individually designed plans is that they will need to amend their plans as frequently as annually to incorporate changes in the law, starting with required changes the IRS identifies in 2016, which will need to be made before December 31, 2018.

Background

Rev. Proc. 2007-44 provided a 5-year remedial amendment cycle (RAC) system for individually designed plans to request a determination letter generally every 5 years. Under that system, plans had to adopt interim amendments by the end of the year in which the amendments became effective. Plans would then have to make final conforming amendments at the end of their 5-year RAC cycle.

In Announcement 2015-19 the IRS stated that the RAC system would end, and a replacement system for the IRC Section 401(b) period would be created. Revenue Procedure 2016-37 ends the RAC system and replaces it with a new approach to the remedial amendment period.

When must individually designed plans be amended?

Interim amendments will no longer be required for individually designed plans. Instead, an individually designed plan’s Code Section 401(b) remedial amendment period for required amendments will be tied to a Required Amendment List (RA List) issued by the IRS, unless legislation or other guidance states otherwise. The RA List is the annual list of all the amendments for which an individually designed plan must be amended to retain its qualified plan status.

IRS will publish the RA List after October 1 of each year. Generally, plan sponsors must adopt any item placed on RA List by the end of the second calendar year following the year the RA List is published. For example, plan amendments for items on the 2016 RA List generally must be adopted by December 31, 2018.

Discretionary amendments will still be required by the end of the plan year in which the plan amendment is operationally put into effect.

What About Operational Compliance?

Revenue Procedure 2016-37 doesn’t change a plan’s operational compliance standards. Employers need to operate their plans in compliance with any change in qualification requirements from the effective date of the change, regardless of the plan’s 401(b) period for adopting amendments. To assist employers, IRS intends to provide annually an Operational Compliance List to identify changes in qualification requirements that are effective during a calendar year.

When may a plan apply for a Determination Letter?
Under Revenue Procedure 2016-37, a plan sponsor can request a determination letter only if any of these apply:

The plan has never received a letter before
The plan is terminating
The IRS makes a special exception

Other Implications

The new determination letter program makes the consequences of failing to timely amend a Plan potentially more dangerous, because the failure could continue for many years before being identified. Therefore, sponsors of individually designed plans that still have the option of converting to a volume submitter or prototype document should revisit that question now.

In addition, if your plan remains individually designed, you ought to incorporate into your annual compliance schedule a check of the RA List in the fall of each year.

Finally, all tax qualified retirement plan sponsors (whether their plan is individually designed or volume submitter or prototype) should incorporate into their annual compliance schedule a check of the IRS Operational Compliance List, to ensure they are operating their plan in compliance with law changes.

Plan Administrator Bears Burden to Produce Key Information Regarding Claimant’s Service and Benefits Eligibility

The 9th Circuit Court of Appeals ruled on April 21, 2016 that where a claimant has made a prima facie case that he is entitled to a pension benefit, but lacks access to the key information about corporate structure, or hours worked, needed to substantiate his claim, and the defendant controls this information, the burden shifts to the defendant to produce this information. Estate of Bruce H. Barton v. ADT Security Services Pension Plan (9th Cir., 2016).

The Plan Administrator could not place the burden of producing records establishing which entities participated in the pension plan between 1967 and 1986, and the claimant’s service record, on the claimant where the Plan Administrator had no records of its own.

The Plan Administrator originally denied the claim on the basis of an absence of records establishing eligibility for plan participation, actual participation, or accrual of plan benefits. This was wrong where the Committee rather than the claimant would likely be in possession of such records.

The lesson for Plan Administrators: keep plan documents,service records and contemporary records establishing benefit accruals forever -there is no practical document retention period for these documents.

The lesson for claimants: don’t be deterred from asserting a claim if you have enough evidence to state a prima facie case and the definitive documents or information ought to be in the Plan Administrator’s possession.

Estate of Bruce H. Barton v. ADT Security Services Pension Plan (9th Cir., 2016)

Fiduciaries Ultimately Prevail in Tibble v. Edison

On remand from the United States Supreme Court, which held in May 2015 that ERISA imposes on retirement plan fiduciaries an ongoing duty to monitor investments, even absent a change in circumstances, the 9th Circuit Court of Appeals recently affirmed the district court’s original judgment in favor of the employer and its benefits plan administrator on claims of breach of fiduciary duty in the selection and retention of certain mutual funds for a benefit plan governed by ERISA.

The court of appeals had previously affirmed the district court’s holding that the plan beneficiaries’ claims regarding the selection of mutual funds in 1999 were time-barred. The Supreme Court vacated the court of appeals’ decision, observing that federal law imposes on fiduciaries an ongoing duty to monitor investments even absent a change in circumstances.

On remand, the panel held that the beneficiaries forfeited such ongoing-duty-to-monitor argument by failing to raise it either before the district court or in their initial appeal. While the fiduciaries ultimately prevailed in this case, the lesson for fiduciaries remains clear: You have an ongoing duty to monitor the investment options in your retirement plans.

Tibble v. Edison International (9th Cir., 2016)

Full Text of the Supreme Court Decision in Tibble v. Edison International (2015)

IRS Updated Plan Limits for 2016

IRS has announced the retirement plan and employee benefits limits for 2016. Most of the limits are unchanged. The exception is the HSA Maximum Contribution for Family increased $100 to $6,750. Here is a chart showing the limits for 2014 through 2016:

Type of Limitation	2016	2015	2014
415 Defined Benefit Plans	$210,000	$210,000	$210,000
415 Defined Contribution Plans	$53,000	$53,000	$52,000
401(k) Elective Deferrals, 457(b) and 457(c)(1)	$18,000	$18,000	$17,500
401(k) Catch-Up Deferrals	$6,000	$6,000	$5,500
SIMPLE Employee Deferrals	$12,500	$12,500	$12,000
SIMPLE Catch-Up Deferrals	$3,000	$3,000	$2,500
Annual Compensation Limit	$265,000	$265,000	$260,000
SEP Minimum Compensation	$600	$600	$550
SEP Annual Compensation Limit	$265,000	$265,000	$260,000
Highly Compensated	$120,000	$120,000	$115,000
Key Employee (Officer)	$170,000	$170,000	$170,000
Income Subject To Social Security Tax (FICA)	$118,500	$118,500	$117,000
Social Security (FICA) Tax For ER & EE (each pays)	6.20%	6.20%	6.20%
Social Security (Med. HI) Tax For ERs & EEs (each pays)	1.45%	1.45%	1.45%
SECA (FICA Portion) for Self-Employed	12.40%	12.40%	12.40%
SECA (Med. HI Portion) For Self-Employed	2.9%	2.90%	2.90%
IRA Contribution	$5,500	$5,500	$5,500
IRA catch-up Contribution	$1,000	$1,000	$1,000
HSA Max Single/Family	$3,350/6,750	$3,350/6,650	$3,300/6,550
HSA Catchup	$1,000	$1,000	$1,000
HSA Min. Annual Deductible Single/Family	$1,300/2,600	$1,300/2,600	$1,250/2,500

IRS Announces Significant Reduction in Determination Letter Program

On July 21, 2015, the IRS announced changes to the favorable determination letter program for qualified retirement plans. Employers that sponsor individually designed plans should take a close look at whether they can state their plans on a pre-approved plan document, particularly a volume submitter document, for the reasons explained in this post.

Most significantly, the IRS will eliminate the staggered 5-year determination letter remedial amendment cycles for individually designed plans as of January 2017. This means that, effective as of January 1, 2017, sponsors of individually designed plans will only be permitted to submit a determination letter application for qualification in two circumstances:

upon initial plan adoption; and
upon plan termination.

In addition, effective immediately, the IRS will no longer accept determination letter applications for individually designed plans that are submitted off-cycle, except for new plans and for terminating plans.

Implications for Plan Sponsors

These changes to the determination letter program increase the risk that document failures may get into, and remain for a long period of time in, plan sponsor’s qualified retirement plans. For example, a failure to adopt a required amendment to the plan document, which ordinarily would have been discovered and corrected in connection with the staggered 5-year determination letter remedial amendment cycle, could now persist for years or even decades before being discovered. Plan terminations will likely become more difficult, time consuming and costly if such errors are not discovered until the Plan submits for a favorable determination upon termination.

Plans that are stated on a pre-approved document (such as a volume submitter or prototype plan document) will continue to receive IRS opinion letters on the language in those plans. In addition, plan sponsors who adopt a volume submitter plan and make limited modifications to the approved specimen plan, which does not create an individually designed plan, will still be able to get a favorable determination on their plans every six years. These plans will thereby avoid the above risks.

For this reason, employers that sponsor individually designed plans should closely evaluate whether they can convert their plans to a pre-approved plan document, with a goal of completing the transition by January 1, 2017. Many individually designed plans may be able to fit onto a volume submitter plan with minor modifications, which will allow those sponsors to continue receiving a favorable determination lettre on their plan every six years.

Additional Guidance Expected from the IRS

The IRS has asked for comments, and expects to issue further guidance, regarding how it can assist plan sponsors that wish to convert individually designed plans to pre-approved plans.

We should also expect some changes to the IRS’s EPCRS correction program, to help correct errors that inevitably will increase as a result of this curtailment in the favorable determination letter program.

In addition, the IRS is considering ways to make it easier for plan sponsors that continue to sponsor individually designed plans to comply with the qualified plan document requirements, including:

providing model amendments,
not requiring certain plan provisions or amendments to be adopted if and for so long as they are not relevant to a particular plan (for example, because of the type of plan, employer, or benefits offered),
or expanding plan sponsors’ options to document qualification requirements through incorporation by reference.

IRS Announcement 2015-19

IRS Ends Lump Sum Risk Transferring Programs in Defined Benefit Plans

Treasury Department and the IRS announced today in Notice 2015-49 that they intend to amend the required minimum distribution regulations under Code Section 401(a)(9) to address the use of lump sum payments to replace annuity payments being paid by a qualified defined benefit pension plan.

The revised regulations will provide that qualified defined benefit plans generally are not permitted to replace any joint and survivor, single life, or other annuity currently being paid with a lump sum payment or other accelerated form of distribution. These amendments to the regulations will apply as of July 9, 2015.

Background

Section 401(a)(9) prescribes required minimum distribution rules for a qualified plan under Code Section 401(a). Under the regulations, a defined benefit pension plan cannot permit a current annuitant to convert their annuity payments to a lump sum or otherwise accelerate those payments, except in a narrow set of circumstances specified in the regulations, such as in the case of retirement, death, or plan termination. In addition, the regulations permit annuity payments to increase “[t]o pay increased benefits that result from a plan amendment.”

A number of defined benefit plan sponsors have amended their plans pursuant to this “plan amendment” exception to provide a limited period during which certain retirees who are currently receiving joint and survivor, single life, or other life annuity payments from those plans may elect to convert that annuity into a lump sum that is payable immediately. These arrangements are sometimes referred to as lump sum risk-transferring programs because longevity risk and investment risk are transferred from the plan to the retirees.

In 2012, the IRS issued Private Letter Rulings to General Motors and Ford specifically approving such programs for those companies. See PLR 201228045 and PLR 201228051. While Private Letter Rulings do not apply to anyone other than the person to whom they are issued, many employers found support in those PLRs for their risk transfer programs. With the change in the regulations announced today, those PLRs no longer provide any support.

Conclusion

The Treasury Department and the IRS have concluded that a broad exception for increased benefits that would permit lump sum payments to replace rights to ongoing annuity payments (of the kind approved in the two 2012 PLRs) would undermine the intent of the required minimum distribution regulations. Therefore, the exception for changes to the annuity payment period provided in the regulations (as intended to be amended) will not permit acceleration of annuity payments to which an individual receiving annuity payments was entitled before the amendment, even if the plan amendment also increases annuity payments.

Notice 2015-49