Attorney Erwin Kratz Named to the Best Lawyers in America© 2019

ERISA Benefits Law attorney Erwin Kratz was recently selected by his peers for inclusion in The Best Lawyers in America© 2019 in the practice area of Employee Benefits (ERISA) Law. Mr. Kratz has been continuously listed on The Best Lawyers in America list since 2010.

Since it was first published in 1983, Best Lawyers® has become universally regarded as the definitive guide to legal excellence. Best Lawyers lists are compiled based on an exhaustive peer-review evaluation. Lawyers are not required or allowed to pay a fee to be listed; therefore inclusion in Best Lawyers is considered a singular honor. Corporate Counsel magazine has called Best Lawyers “the most respected referral list of attorneys in practice.”

Treasury and IRS Issue Final Regulations Amending the Definition of Qualified Matching Contributions and Qualified Nonelective Contributions

The Treasury and IRS have issued final regulations amending the definitions of qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) under regulations regarding certain qualified retirement plans that contain cash or deferred arrangements under section 401(k) or that provide for matching contributions or employee contributions under section 401(m).

Under these new regulations, an employer contribution to a plan may be a QMAC or QNEC if it satisfies applicable nonforfeitability requirements and distribution limitations at the time it is allocated to a participant’s account, but need not meet these requirements or limitations when it is contributed to the plan.

History

On January 18, 2017, the Treasury Department and the IRS issued a notice of proposed rulemaking. Several comments on the proposed rules were submitted, and, after consideration of all the comments, the final rules adopt the proposed rules without substantive modification. However, the Treasury Department and the IRS determined that the distribution requirements referred to in the existing definitions of QMACs and QNECs in §§ 1.401(k)-6 and 1.401(m)-5 are more appropriately characterized as distribution limitations (consistent with the heading of § 1.401(k)-1(d)), and, accordingly, these definitions have been amended to refer to distribution limitations.

Implications of the New Rules

The new rule raises some questions relating to the application of Code section 411(d)(6) (protected benefits) in cases in which a plan sponsor seeks to amend its plan to apply the new rules. The application of section 411(d)(6) is generally outside the scope of these regulations. However, the IRS indicates in the discussion of the new rules that if a plan sponsor adopts a plan amendment to define QMACs and QNECs in a manner consistent with the final regulations and applies that amendment prospectively to future plan years, section 411(d)(6) would not be implicated.

In addition, in the common case of a plan that provides that forfeitures will be used to pay plan expenses incurred during a plan year and that any remaining forfeitures in the plan at the end of the plan year will be allocated pursuant to a specified formula among active participants who have completed a specified number of hours of service during the plan year, section 411(d)(6) would not prohibit a plan amendment adopted before the end of the plan year that permits the use of forfeitures to fund QMACs and QNECs (even if, at the time of the amendment, one or more participants had already completed the specified number of hours of service). This is because all conditions for receiving an allocation will not have been satisfied at the time of the amendment, since one of the conditions for receiving an allocation is that plan expenses at the end of the plan year are less than the amount of forfeitures. See § 1.411(d)-4, Q&A-1(d)(8) (features that are not section 411(d)(6) protected benefits include “[t]he allocation dates for contributions, forfeitures, and earnings, the time for making contributions (but not the conditions for receiving an allocation of contributions or forfeitures for a plan year after such conditions have been satisfied), and the valuation dates for account balances”).

Statutory Background

Section 401(k)(1) provides that a profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan will not be considered as failing to satisfy the requirements of section 401(a) merely because the plan includes a qualified cash or deferred arrangement (CODA). To be considered a qualified CODA, a plan must satisfy several requirements, including: (i) Under section 401(k)(2)(B), amounts held by the plan’s trust that are attributable to employer contributions made pursuant to an employee’s election must satisfy certain distribution limitations; (ii) under section 401(k)(2)(C), an employee’s right to such employer contributions must be nonforfeitable; and (iii) under section 401(k)(3), such employer contributions must satisfy certain nondiscrimination requirements.

Under section 401(k)(3)(D)(ii), the employer contributions taken into account for purposes of applying the nondiscrimination requirements may, under such rules as the Secretary may provide and at the election of the employer, include matching contributions within the meaning of section 401(m)(4)(A) that meet the distribution limitations and nonforfeitability requirements of section 401(k)(2)(B) and (C) (also referred to as qualified matching contributions or QMACs) and qualified nonelective contributions within the meaning of section 401(m)(4)(C) (QNECs). Under section 401(m)(4)(C), a QNEC is an employer contribution, other than a matching contribution, with respect to which the distribution limitations and nonforfeitability requirements of section 401(k)(2)(B) and (C) are met.

Under § 1.401(k)-1(b)(1)(ii), a CODA satisfies the applicable nondiscrimination requirements if it satisfies the actual deferral percentage (ADP) test of section 401(k)(3), described in § 1.401(k)-2. The ADP test limits the disparity permitted between the percentage of compensation made as employer contributions to the plan for a plan year on behalf of eligible highly compensated employees and the percentage of compensation made as employer contributions on behalf of eligible nonhighly compensated employees. If the ADP test limits are exceeded, the employer must take corrective action to ensure that the limits are met. In determining the amount of employer contributions made on behalf of an eligible employee, employers are allowed to take into account certain QMACs and QNECs made on behalf of the employee by the employer.

In lieu of applying the ADP test, an employer may choose to design its plan to satisfy an ADP safe harbor, including the ADP safe harbor provisions of section 401(k)(12), described in § 1.401(k)-3. Under § 1.401(k)-3, a plan satisfies the ADP safe harbor provisions of section 401(k)(12) if, among other things, it satisfies certain contribution requirements. With respect to the safe harbor under section 401(k)(12), an employer may choose to satisfy the contribution requirement by providing a certain level of QMACs or QNECs to eligible nonhighly compensated employees under the plan.

A defined contribution plan that provides for matching or employee after-tax contributions must satisfy the nondiscrimination requirements under section 401(m) with respect to those contributions for each plan year. Under § 1.401(m)-1(b)(1), the matching contributions and employee contributions under a plan satisfy the nondiscrimination requirements for a plan year if the plan satisfies the actual contribution percentage (ACP) test of section 401(m)(2) described in § 1.401(m)-2.

The ACP test limits the disparity permitted between the percentage of compensation made as matching contributions and after-tax employee contributions for or by eligible highly compensated employees under the plan and the percentage of compensation made as matching contributions and after-tax employee contributions for or by eligible nonhighly compensated employees under the plan. If the ACP test limits are exceeded, the employer must take corrective action to ensure that the limits are met. In determining the amount of employer contributions made on behalf of an eligible employee, employers are allowed to take into account certain QNECs made on behalf of the employee by the employer. Employers must also take into account QMACs made on behalf of the employee by the employer unless an exclusion applies (including an exclusion for Start Printed Page 34470QMACs that are taken into account under the ADP test).

If an employer designs its plan to satisfy the ADP safe harbor of section 401(k)(12), it may avoid performing the ACP test with respect to matching contributions under the plan, as long as the additional requirements of the ACP safe harbor of section 401(m)(11) are met.

As previously defined in § 1.401(k)-6, QMACs and QNECs must satisfy the nonforfeitability requirements of § 1.401(k)-1(c) and the distribution limitations of § 1.401(k)-1(d) “when they are contributed to the plan.” Similarly, under the independent definitions in § 1.401(m)-5, QMACs and QNECs must satisfy the nonforfeitability requirements of § 1.401(k)-1(c) and the distribution limitations of § 1.401(k)-1(d) “at the time the contribution is made.” In general, contributions satisfy the nonforfeitability requirements of § 1.401(k)-1(c) if they are immediately nonforfeitable within the meaning of section 411, and contributions satisfy the distribution limitations of § 1.401(k)-1(d) if they may not be distributed before the employee’s death, disability, severance from employment, attainment of age 59.5, or hardship, or upon the termination of the plan.

Background to the Rule Change

Before 2017, the Treasury Department and the IRS received comments with respect to the definitions of QMACs and QNECs in §§ 1.401(k)-6 and 1.401(m)-5. In particular, commenters asserted that employer contributions should qualify as QMACs and QNECs as long as they satisfy applicable nonforfeitability requirements at the time they are allocated to participants’ accounts, rather than when they are first contributed to the plan. Commenters pointed out that interpreting sections 401(k)(3)(D)(ii) and 401(m)(4)(C) to require satisfaction of applicable nonforfeitability requirements at the time amounts are first contributed to the plan would preclude plan sponsors with plans that permit the use of amounts in plan forfeiture accounts to offset future employer contributions under the plan from applying such amounts to fund QMACs and QNECs. This is because the amounts would have been allocated to the forfeiture accounts only after a participant incurred a forfeiture of benefits and, thus, generally would have been subject to a vesting schedule when they were first contributed to the plan. Commenters requested that QMAC and QNEC requirements not be interpreted to prevent the use of plan forfeitures to fund QMACs and QNECs. The commenters urged that the nonforfeitability requirements under § 1.401(k)-6 should apply when QMACs and QNECs are allocated to participants’ accounts and not when the contributions are first made to the plan.

In considering the comments, the Treasury Department and the IRS took into account that the nonforfeitability requirements applicable to QMACs and QNECs are intended to ensure that QMACs and QNECS provide nonforfeitable benefits for the participants who receive them. In accordance with that purpose, the Treasury Department and the IRS concluded that it is sufficient to require that amounts allocated to participants’ accounts as QMACs and QNECs be nonforfeitable at the time they are allocated to participants’ accounts, rather than when such contributions are made to the plan.

The Final Rules

DOL Issues Final Rules Expanding Association Health Plans: New Opportunities for Small Employers to Reduce Costs?

The Department of Labor’s Employee Benefits Security Administration (EBSA) has issued a final rule under Title I of the Employee Retirement Income Security Act (ERISA) that creates new opportunities for groups of employers to band together and be treated as a single “employer” sponsor of a group health plan. The final rule adopts a new regulation at 29 CFR 2510.3-5. This post summarizes the major provisions of the rule.

The general purpose of the rule is to clarify which persons may act as an “employer” within the meaning of ERISA section 3(5) in sponsoring a multiple employer “employee welfare benefit plan” and “group health plan,” as those terms are defined in Title I of ERISA. The essence of the final rule is to set forth the criteria for a “bona fide group or association” of employers that may establish a group health plan that is an employee welfare benefit plan under ERISA. The rule sets forth 8 broad criteria that must be satisfied.

 1) The final rule establishes a general legal standard that requires that a group or association of employers have at least one substantial business purpose unrelated to offering and providing health coverage or other employee benefits to its employer members and their employees, even if the primary purpose of the group or association is to offer such coverage to its members.

Although the final rule does not define the term “substantial business purpose,” the rule contains an explicit safe harbor under which a substantial business purpose is considered to exist in cases where the group or association would be a viable entity even in the absence of sponsoring an employee benefit plan. The final rule also states that a business purposes is not required to be a for-profit purpose. For example, a bona fide group or association could offer other services to its members, such as convening conferences or offering classes or educational materials on business issues of interest to the association members.

2) Each employer member of the group or association participating in the group health plan (the “Association Health Plan” or “AHP”) must be a person acting directly as an employer of at least one employee who is a participant covered under the plan.

3) A group must have “a formal organizational structure with a governing body” as well as “by-laws or other similar indications of formality” appropriate for the legal form in which the group operates in order to qualify as bona fide.

4) The functions and activities of the group must be controlled by its employer members, and the group’s employer members that participate in the AHP must control the plan. Basically – act like an employer sponsored group health plan, not like an insurance company.

5) The group must have a commonality of interest. Employer members of a group will be treated as having a commonality of interest if they satisfy one of the following:

  • the employers are in the same trade, industry, line of business or profession; or
  • each employer has a principal place of business in the same region that does not exceed the boundaries of a single State or a metropolitan area (even if the metropolitan area includes more than one State)

6) The group cannot offer coverage under the AHP to anyone other than employees, former employees and beneficiaries of the members of the group. Again, act like an employer sponsored group health plan, not like an insurance company.

 7) The health coverage must satisfy certain nondiscrimination requirements under ERISA. For example, an AHP:

  • cannot condition employer membership in the group or association on any health factor of any individual who is or may become eligible to participate in plan;
  • must comply with the HIPAA nondiscrimination rules prohibiting discrimination in eligibility for benefits based on an individual health factor;
  • must comply with the HIPAA nondiscrimination rules prohibiting discrimination in premiums or contributions required by any participant or beneficiary for coverage under the plan based on an individual health factor; and
  • may not treat the employees of different employer members of the group or association as distinct groups of similarly-situated individuals based on a health factor of one or more individuals.

8) The group cannot be a health insurer.

 The final rule also describes the types of working owners without common law employees (i.e. partners in a partnership) who can qualify as employer members and also be treated as employees for purposes of being covered by the bona fide employer group or association’s health plan.

Implications of the final rule will take some time to play out. The administration has stated that its intention behind the final rule is to allow “small employers – many of whom are facing much higher premiums and fewer coverage options as a result of Obamacare – a greater ability to join together and gain many of the regulatory advantages enjoyed by large employers.” The Congressional Budget Office estimated that 400,000 previously uninsured people will gain coverage under AHPs and that millions of people will switch their coverage to more affordable and more flexible AHP plans and save thousands of dollars in premiums.

For our part, we are evaluating the potential to assist smaller employers to save costs and improve the benefits in their health plans by establishing groups and associations to provide AHPs, and we will update our clients as those opportunities mature.

More from EBSA on Association Health Plans:

Final Rule

Fact Sheet

Frequently Asked Questions

News Release

IRS Posts Explanation and Forms of Letters Used to Close Employer Mandate Inquiries

The IRS has posted an explanation of the various Letters 227, which the IRS will use to acknowledge the closure of an Employer Shared Responsibility Payment (ESRP) inquiry, or to provide the next steps to the Applicable Large Employer (ALE) regarding the proposed ESRP. There are five different 227 letters:

  • Letter 227-J acknowledges receipt of the signed agreement Form 14764, ESRP Response, and that the ESRP will be assessed. After issuance of this letter, the case will be closed. No response is required.
  • Letter 227-K acknowledges receipt of the information provided and shows the ESRP has been reduced to zero. After issuance of this letter, the case will be closed. No response is required.
  • Letter 227-L acknowledges receipt of the information provided and shows the ESRP has been revised. The letter includes an updated Form 14765 (PTC Listing) and revised calculation table. The ALE can agree or request a meeting with the manager and/or appeals.
  • Letter 227-M acknowledges receipt of information provided and shows that the ESRP did not change. The letter provides an updated Form 14765 (PTC Listing) and revised calculation table. The ALE can agree or request a meeting with the manager and/or appeals.
  • Letter 227-N acknowledges the decision reached in Appeals and shows the ESRP based on the Appeals review. After issuance of this letter, the case will be closed. No response is required.

PBGC’s Expanded Missing Participant Program Final Rule Covers DC Plans and non-PBGC Insured DB Plans

As authorized by the Pension Protection Act of 2006 (PPA), the Pension and  Benefit Guarantee Corporation (PBGC) has issued a final regulation that expands PBGC’s missing participants program, effective as of plan terminations that occur on or after January 1, 2018. PBGC’s missing participant program was previously limited to terminated single-employer DB plans covered by title IV’s insurance program. It is now available to other terminated retirement plans.

Summary of How the PBGC MIssing Participant Program Applies to Defined Contribution (DC) Plans and non-PBGC Defined Benefit Plans

The revised program now provides that PBGC’s missing participants program is voluntary for terminated non-PBGC-insured plans, e.g.,DC plans.

In addition, a non-PBGC-insured plan that chooses to use the program may elect to be a “transferring plan” or a “notifying plan.” A transferring plan sends the benefit amounts of missing distributees to PBGC’s missing participants program. A notifying plan informs PBGC of the disposition of the benefits of one or more of its missing distributees. Section 4050(d)(1) of ERISA permits but does not require non-PBGC-insured plans covered by the program to turn missing participants’ benefits over to PBGC.

A DC plan that chooses to participate in the missing participants program and elects to be a transferring plan must transfer the benefits of all its missing participants into the missing participants program. PBGC explains that this is to prevent the possibility of “cherry-picking”—that is, selective use of the missing participants program—by transferring plans.

PBGC will charge a one-time $35 fee per missing distributee, payable when benefit transfer amounts are paid to PBGC. There will be no charge for amounts transferred to PBGC of $250 or less. There will be no charge for plans that only send to PBGC information about where benefits are held (such as in an IRA or under an annuity contract). Fees will be set forth in the program’s forms and instructions.

The program definition of “missing” for DC plans follows Department of Labor regulations, which treat DC plan distributees who cannot be found following a diligent search similar to distributees whose whereabouts are known but who do not elect a form of distribution.

A distributee is treated as missing if, upon close-out, the distributee does not accept a lump sum distribution made in accordance with the terms of the plan and, if applicable, any election made by the distributee. For example, if a check issued pursuant to a distributee’s election of a lump sum remains uncashed after the last date prescribed on the check or an accompanying notice (e.g., by the bank or the plan) for cashing it (the “cash-by” date), the distributee is considered not to have accepted the lump sum.

A DC plan must search for each missing distributee whose location the plan does not know with reasonable certainty. The plan must search in accordance with regulations and other applicable guidance issued by the Secretary of Labor under section 404 of ERISA. See the DOL’s FAB 2014-01 for guidance on search steps. Compliance with that guidance satisfies PBGC’s “diligent search” standard for DC plans.

Some other major features of the new program include:

  • A unified unclaimed pension database of information about missing participants and their benefits from terminated DB and DC plans.
  •  A centralized, reliable, easy-to-use directory through which persons who may be owed retirement benefits from DB or DC plans could find out whether benefits are being held for them.
  • Periodic active searches by PBGC for missing participants.
  • Fewer benefit categories and fewer sets of actuarial assumptions for DB plans determining the amount to transfer to PBGC and a free on-line calculator to do certain actuarial calculations.

Visit the PBGC’s Missing Participant site for more information, including an  explanation of the plans covered by the program and the forms and instructions to use with the program.

Our prior post on the proposed regulations is here

Private Letter Ruling Applies Controlled Group Rules to 501(c)(3) Entities

On March 16, 2018 the IRS issued a private letter ruling (PLR 201811009) analyzing and applying the controlled group rules to two related 501(c)(3) entities. The first entity is a Medical Center, organized in part for the purpose of operating an academic medical center as part of a health system affiliated with the other entity, a University.

The PLR reiterates the general rule that one 501(c)(3) entity (the University) in this case) does not “Control” another 501(c)(3) entity (the Medical Center) for purposes of the IRS controlled group rules where:

  • The University holds the power to approve and remove without cause four of the Medical Center’s 11 directors.
  • With the exception of the University’s chancellor, no employee of the University may serve as a director of the Medical Center.
  • The University holds no right or power to require the use of the Medical Center’s funds or assets for the University’s purposes.
  • Rather, the Medical Center determines its budget, issues debt and expends funds without oversight from the University.
  • The Medical Center has sole control over collection of its receivables and sole responsibility for satisfaction of its liabilities.
  • The University does not control hiring, firing or salaries of the Medical Center’s Employees.

The PLR states that the above facts evidence the Medical Center’s operational independence from the University and support a conclusion that the University does not directly control the Medical Center.

The PLR goes on to conclude that the University does not directly control the Medical Center, even though the University has the right to prohibit the Medical Center from taking certain actions, including:

  • any major corporate transaction not within the ordinary course of business;
  • any action that would result in a change in the Medical Center’s exempt status under §§ 501(c)(3) and 509(a) of the Code;
  • any material change to the Medical Center’s purposes;
  • any change in the fundamental, nonprofit, charitable, tax-exempt mission of the Medical Center;
  • any action that would grant any third party the right to appoint directors of the Medical Center;
  • a joint operating agreement or similar arrangement under which the Medical Center’s governance is substantially subject to a board or similar body that the Medical Center does not control; and
  • the sale or transfer of all or substantially all of the Medical Center’s assets.

The IRS determined that, although the above rights certainly represent a form of control over the Medical Center, such control is qualitatively different from the operational control factors that were not present here.

The key to the ruling is that the University’s rights do not confer the power to cause the Medical Center to act. Rather they confer the power to bar the Medical Center from taking certain actions. The right merely limits the Medical Center’s capacity to deviate from the charitable mission it shares with the university and diminishes the chance that the Medical Center will stray from the quality standards and community focus that the University wants in an academic medical center.

Background on Tax Exempt Control Group Rules

In the case of an organization that is exempt from tax under Code section 501(a), the employer includes the exempt organization and any other organization that is under common control with that exempt organization under the special rules set forth in Treas. Reg. §1.414(c)-5(b).

For this purpose, common control exists between an exempt organization and another organization if at least 80 percent of the directors or trustees of one organization are either representatives of, or directly or indirectly controlled by, the other organization. Treas. Reg. §1.414(c)-5(b). A trustee or director is treated as a representative of another organization if he or she also is a trustee, director, agent, or employee of the other organization. A trustee or director is controlled by another organization if the other organization has the general power to remove such trustee or director and designate a new trustee or director. Whether a person has the power to remove or designate a trustee or director is based on all the facts and circumstances. Id.

In the case of PLR 201811009, the University controlled far less than 80% of the Medical Center’s board positions, so the analysis focuses on the “facts and circumstances” element of control. The key takeaway is that the power to prevent another entity from acting does not necessarily result in control. Keep in mind, however, that PLRs are fact specific and can only be relied on by the taxpayer to whom they are issued. We therefore cannot conclude that the power to preclude action by another 501(c)(3) entity will never result in control.

Attorney Erwin Kratz Named to the Best Lawyers in America© 2017

ERISA Benefits Law attorney Erwin Kratz was recently selected by his peers for inclusion in The Best Lawyers in America© 2017 in the practice area of Employee Benefits (ERISA) Law. Mr. Kratz has been continuously listed on The Best Lawyers in America list since 2010.

Since it was first published in 1983, Best Lawyers® has become universally regarded as the definitive guide to legal excellence. Best Lawyers lists are compiled based on an exhaustive peer-review evaluation. Lawyers are not required or allowed to pay a fee to be listed; therefore inclusion in Best Lawyers is considered a singular honor. Corporate Counsel magazine has called Best Lawyers “the most respected referral list of attorneys in practice.”