Pension Benefits – Page 2 – ERISA Benefits Law

IRS Announces 2017 COLA Adjusted Limits for Retirement Plans

The IRS has released Notice 2016-62 announcing cost‑of‑living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2017.

Highlights Affecting Plan Sponsors of Qualified Plans for 2017

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $18,000.
The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $6,000.
The limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $210,000 to $215,000.
The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2017 from $53,000 to $54,000.
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $265,000 to $270,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $170,000 to $175,000.
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $120,000.
The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5‑year distribution period is increased from $1,070,000 to $1,080,000, while the dollar amount used to determine the lengthening of the 5‑year distribution period is increased from $210,000 to $215,000.
The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $600.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $12,500.

The IRS previously Updated Health Savings Account limits for 2017. See our post here.

The following chart summarizes various significant benefit Plan limits for 2015 through 2017:

Type of Limitation	2017	2016	2015
415 Defined Benefit Plans	$215,000	$210,000	$210,000
415 Defined Contribution Plans	$54,000	$53,000	$53,000
401(k) Elective Deferrals, 457(b) and 457(c)(1)	$18,000	$18,000	$18,000
401(k) Catch-Up Deferrals	$6,000	$6,000	$6,000
SIMPLE Employee Deferrals	$12,500	$12,500	$12,500
SIMPLE Catch-Up Deferrals	$3,000	$3,000	$3,000
Annual Compensation Limit	$270,000	$265,000	$265,000
SEP Minimum Compensation	$600	$600	$600
SEP Annual Compensation Limit	$270,000	$265,000	$265,000
Highly Compensated	$120,000	$120,000	$120,000
Key Employee (Officer)	$175,000	$170,000	$170,000
Income Subject To Social Security Tax (FICA)	$127,200	$118,500	$118,500
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%	2.9%	2.90%
IRA Contribution	$5,500	$5,500	$5,500
IRA catch-up Contribution	$1,000	$1,000	$1,000
HSA Max Single/Family	$3,400/6,750	$3,350/6,750	$3,350/6,650
HSA Catchup	$1,000	$1,000	$1,000
HSA Min. Annual Deductible Single/Family	$1,300/2,600	$1,300/2,600	$1,300/2,600

PBGC Expands Missing Participant Program to Defined Contribution Plans

The Pension Benefit Guaranty Corporation (PBGC) has issued a Proposed Rule that would redesign its existing missing participants program for single employer Defined Benefit (DB) plans and to adopt three new missing participants programs that will cover most Defined Contribution (DC) plans, as well as multiemployer DB plans and professional service employer DB plans. All four programs would follow the same basic design. Among the most prominent changes to the existing program would be:

• Provision for fees to be charged for plans to participate in the missing participants program.

• A requirement to treat as ‘‘missing’’ non-responsive distributees with de minimis benefits subject to mandatory cash-out under the plan’s terms.

• More robust requirements for diligent searches, using sponsor and related plan records, free web-search methods, and (subject to waiver) commercial locator services (which would be clearly defined).

• Fewer benefit categories and fewer sets of actuarial assumptions for determining the amount to transfer to PBGC.

• Changes in the rules for paying benefits to missing participants and their beneficiaries.

An important part of all of the missing participants programs will be a new unified pension search database. This database would include information about missing participants and their benefits and a directory through which members of the public could easily query the database (using a choice of fields) to determine whether it contained information about benefits being held for them. PBGC anticipates that its new pension search database will provide a comprehensive, nationwide, authoritative, reliable, easy to use source of information about missing participants and the benefits being held for them.

‘‘Missing’’ would be defined more specifically than in the current regulation. As explained below, a distributee would be missing if—

(1) For a DB plan, the plan did not know where the distributee was (e.g., a notice from the plan was returned as undeliverable), unless the distributee’s benefit was subject to mandatory ‘‘cashout’’ under the terms of the plan, or

(2) For a DC plan, or a distributee whose benefit was subject to a mandatory cash-out under the terms of a DB plan, the distributee failed to elect a form or manner of distribution.

For DC plans, PBGC proposes to specify simply that a diligent search is one conducted in accordance with DOL guidance, the most recent of which was issued on August 14, 2014 by the Employee Benefits Security Administration (EBSA) in Field Assistance Bulletin No. 2014–01 regarding Fiduciary Duties And Missing Participants In Terminated Defined Contribution Plans (the FAB). The FAB provides guidance about required search steps and options for dealing with the benefits of missing participants in terminated DC plans.

PBGC is proposing to charge a one-time $35 fee per missing distributee, payable when benefit transfer amounts are paid to PBGC, without any obligation to pay PBGC continuing ‘‘maintenance’’ fees or a distribution fee. There would be no charge for amounts transferred to PBGC of $250 or less. There would be no charge for plans that only send information about missing participant benefits to PBGC.

More…

Overview of Proposed Expanded Missing Participants Program

Proposed Expanded Missing Participants Program FAQs

Read the Proposed Rule

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 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.

DOL Adjusts ERISA Penalties

The Department of Labor, Employee Benefits Security Administration has issued interim final rules increasing certain DOL compliance penalties effective as of August 1, 2016. The highlights are:

The maximum penalty for failure or refusal to file the Form 5500 annual report is increasing from $1,100 per day to $2,063 per day
Failure to furnish information to the DOL under ERISA Section 104(a)(6 will now carry penalties equal to $147 per day (up from $110 per day)
The maximum penalty for failing to provide a summary of benefits and coverage for a group health plan is increasing from $1,000 to $1,087 per failure
Numerous miscellaneous penalties are increasing from $100 per day to $110 per day, including
- Certain violations of the Genetic Information Nondiscrimination Act (GINA), such as establishing eligibility rules based on genetic information or requesting genetic information for underwriting purposes, and
- An employer’s failure to inform employees of CHIP coverage opportunities
The penalty for failure to provide benefit statements to certain former participants and beneficiaries in a retirement plan are increasing from $11 per employee to $28 per employee
The penalties for failure to furnish a blackout notice (when participants are precluded from changing investment instructions, taking a loan or a distribution) are increasing from $100 per day to $131 per day

Why are the Penalties Being Increased Now? In 2015, Congress passed the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (2015 Inflation Adjustment Act) as part of the Bipartisan Budget Act of 2015. The new law directs agencies to adjust their civil monetary penalties for inflation.

Will the Penalties be Adjusted again in the Future? The law requires federal agencies to adjust their civil monetary penalties for inflation by July 1, 2016. After this initial “catch-up” adjustment, the agencies must adjust their civil monetary penalties annually for inflation.

When are the New Penalty Amounts Effective? The new civil penalty amounts are applicable only to civil penalties assessed after August 1, 2016, whose associated violations occurred after November 2, 2015, the date of enactment of the 2015 Inflation Adjustment Act.

More…

The interim final rule

EBSA Fact Sheet, including full chart showing all the new penalty amounts

IRS Issues Proposed Regulations Clarifying and Modifying the Final 409A Regulations

IRS has issued proposed regulations that would clarify or modify certain specific provisions of the final regulations under section 409A, including revisions to the rules regarding the calculation of amounts includible in income under section 409A. The proposed regulations:

(1) Clarify that the rules under section 409A apply to nonqualified deferred compensation plans separately and in addition to the rules under section 457A.

(2) Modify the short-term deferral rule to permit a delay in payments to avoid violating Federal securities laws or other applicable law.

(3) Clarify that a stock right that does not otherwise provide for a deferral of compensation will not be treated as providing for a deferral of compensation solely because the amount payable under the stock right upon an involuntary separation from service for cause, or the occurrence of a condition within the service provider’s control, is based on a measure that is less than fair market value.

(4) Modify the definition of the term “eligible issuer of service recipient stock” to provide that it includes a corporation (or other entity) for which a person is reasonably expected to begin, and actually begins, providing services within 12 months after the grant date of a stock right.

(5) Clarify that certain separation pay plans that do not provide for a deferral of compensation may apply to a service provider who had no compensation from the service recipient during the year preceding the year in which a separation from service occurs.

(6) Provide that a plan under which a service provider has a right to payment or reimbursement of reasonable attorneys’ fees and other expenses incurred to pursue a bona fide legal claim against the service recipient with respect to the service relationship does not provide for a deferral of compensation.

(7) Modify the rules regarding recurring part-year compensation.

(8) Clarify that a stock purchase treated as a deemed asset sale under section 338 is not a sale or other disposition of assets for purposes of determining whether a service provider has a separation from service.

(9) Clarify that a service provider who ceases providing services as an employee and begins providing services as an independent contractor is treated as having a separation from service if, at the time of the change in employment status, the level of services reasonably anticipated to be provided after the change would result in a separation from service under the rules applicable to employees.

(10) Provide a rule that is generally applicable to determine when a “payment” has been made for purposes of section 409A.

(11) Modify the rules applicable to amounts payable following death.

(12) Clarify that the rules for transaction-based compensation apply to stock rights that do not provide for a deferral of compensation and statutory stock options.

(13) Provide that the addition of the death, disability, or unforeseeable emergency of a beneficiary who has become entitled to a payment due to a service provider’s death as a potentially earlier or intervening payment event will not violate the prohibition on the acceleration of payments.

(14) Modify the conflict of interest exception to the prohibition on the acceleration of payments to permit the payment of all types of deferred compensation (and not only certain types of foreign earned income) to comply with bona fide foreign ethics or conflicts of interest laws.

(15) Clarify the provision permitting payments upon the termination and liquidation of a plan in connection with bankruptcy.

(16) Clarify other rules permitting payments in connection with the termination and liquidation of a plan.

(17) Provide that a plan may accelerate the time of payment to comply with Federal debt collection laws.

(18) Clarify and modify the proposed rules regarding the treatment of deferred amounts subject to a substantial risk of forfeiture for purposes of calculating the amount includible in income under section 409A.

(19) Clarify various provisions of the final regulations to recognize that a service provider can be an entity as well as an individual.

Proposed 409A Regulations

IRS Issues Long-Awaited Proposed 457 Regulations

IRS has issued proposed regulations prescribing rules under section 457 of the Internal Revenue Code for the taxation of compensation deferred under plans established and maintained by State or local governments or other tax exempt organizations.

The proposed regulations include rules for determining when amounts deferred under these plans are includible in income, the amounts that are includible in income, and the types of plans that are not subject to these rules. Significant provisions in the proposed regulations include:

Guidance on what constitutes a bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, and death benefit plan, which are treated as not providing for a deferral of compensation for purposes of section 457
Guidance regarding plans paying solely length of service awards to bona fide volunteers (or their beneficiaries) that also are treated as not providing for a deferral of compensation for purposes of section 457.
Amendments to existing regulations to reflect statutory changes that allow an eligible governmental plan to include a qualified Roth contribution program, and requiring eligible governmental plans to include provisions that where a participant dies while performing qualified military service, the survivors of the participant generally are entitled to any additional benefits that would have been provided under the plan if the participant had resumed and then terminated employment on account of death

Bona Fide Severance Pay Plans

The rules for a bonafide severance pay plan are very similar to the rules for separation pay plans in the final section 409A regulations.

First, the benefits provided under the plan must be payable only upon a participant’s involuntary severance from employment or pursuant to a window program or voluntary early retirement incentive plan.
Second, the amount payable under the plan with respect to a participant must not exceed two times the participant’s annualized compensation based upon the annual rate of pay for services provided to the eligible employer for the calendar year preceding the calendar year in which the participant has a severance from employment (unlike the 409A regulations, there is no cap on how high this amount can go).
Third, pursuant to the written terms of the plan, the severance benefits must be paid no later than the last day of the second calendar year following the calendar year in which the severance from employment occurs.

Bona Fide Disability Pay Plan

The proposed regulations provide that a bona fide disability pay plan must meet three conditions, which mirror the 409A definition of Disability):

The participant is unable to engage in substantial gainful activity by reason of a medically determinable physical or mental impairment that can be expected to result in death or last for a continuous period of not less than 12 months
The participant is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or last for a continuous period of not less than 12 months, receiving income replacement benefits for a continuous period of not less than three months under an accident or health plan covering employees of the eligible employer; or
The participant is determined to be totally disabled by the Social Security Administration or the Railroad Retirement Board.Short Term DeferralsThe proposed regulations provide that a deferral of compensation does not occur with respect to any amount that would be a short-term deferral under the 409A regulations, substituting the definition of a substantial risk of forfeiture provided under the 457 proposed regulations for the definition under § 1.409A-1(d). There is considerable overlap between the definition of substantial risk of forfeiture for purposes of section 457(f) and the definition of substantial risk of forfeiture for purposes of section 409A.
As with the 409A regulations, under the proposed 457 regulations, if a plan provides that entitlement to an amount is conditioned on an involuntary severance from employment without cause, the right is subject to a substantial risk of forfeiture if the possibility of forfeiture is substantial.

Income Inclusion Under 457(f)

The proposed regulations provide that if a 457 plan of an eligible employer provides for a deferral of compensation for the benefit of a participant or beneficiary and the plan is not an eligible plan (i.e. is is an ineligible plan subject to Code Section 457(f)), the compensation deferred under the plan is includible in gross income as of the later of

the date the participant or beneficiary obtains a legally binding right to the compensation or,
if the compensation is subject to a substantial risk of forfeiture, the date the substantial risk of forfeiture lapses.

The proposed regulations also provide general rules for determining the present value of compensation deferred under an ineligible plan. These rules are similar to the rules for determining present value in the proposed section 409A regulations. One difference is that income inclusion under the proposed 457 regulations is determined as of the date the substantial risk of forfeiture lapses, whereas income inclusion under section 409A is determined as of the end of the service provider’s taxable year.

Proposed 457 Regulations

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)

7th Circuit Holds Only a Church Can Establish an ERISA-Exempt Church Plan

On March 17, 2016 the 7th Circuit Court of Appeals joined the 3rd Circuit in holding that a network of hospitals and health care locations that is affiliated with a church cannot establish an ERISA-exempt church plan. Stapleton v. Advocate Health Care Network (7th Cir. 2016).

In Stapleton, several current and former employees of the church-affiliated hospital claimed that the organization failed to comply with ERISA’s vesting, reporting and disclosure, funding, trust, and fiduciary rules. The 7th Circuit Curt of Appeals agreed.

This issue is bubbling up all over the country. District Court cases have decided the question both ways. There is a case pending before the Ninth Circuit that held at the District Curt level that an affiliate cannot establish a church plan. Rollins v. Dignity Health, 19 F. Supp. 3d 909, 917 (N.D. Cal. 2013), appeal filed, No. 15-15351 (9th Cir. Feb. 26, 2016). The employer in Rollins faces up to $1.2 billion in funding obligations if it loses the case.

District court cases in several other states have help the other way – that affiliated organizations can establish a church plan. The only two Court of Appeals cases to decide the question have ruled that the affiliated organization cannot establish a church plan. See Stapleton and Kaplan v. St. Peter’s Healthcare Sys., 810 F.3d 175 (3d Cir. 2015).

If you an organization affiliated with a church that is relying on the church plan exemption from ERISA’s vesting, reporting, disclosure, funding, trust, and fiduciary rules, you ought to review that decision with ERISA counsel.

Plan Imposed Limitations Period Must be in Benefit Denial Notice

The First Circuit recently ruled that it will not enforce a plan-imposed deadline for filing a lawsuit because the deadline was not set forth in the plan’s benefit denial notices. Santana-Diaz v. Metropolitan Life Ins. Co. (1st Cir. 2016). This case reiterates the importance of including any plan specific limitations period for filing suit in the Summary Plan Description and in all benefit denial notices and appeal determinations.