Employee Benefits Update – December 2014
Recent Law & Regulation Updates
2015 PLAN LIMITATIONS
The IRS released on October 23rd the updated qualified retirement plan limits for 2015. Please see our full chart showing all the relevant limits for 2015 and the prior 5 years at the bottom of this newsletter.
INHERITED IRAS LOSE BANKRUPTCY PROTECTION
The U.S. Supreme Court dealt a major setback to owners of inherited IRAs this summer. In Clark v. Rameker, the Court unanimously ruled that inherited IRAs are not “retirement funds” that remain exempt from the inherited IRA owner’s creditors in bankruptcy, leaving owners of these IRAs exposed to serious losses if they find themselves in bankruptcy court. Inherited IRAs can accumulate significant assets if the IRA originated from a rollover of a qualified retirement plan—such as a 401(k)—given the much higher annual contribution limits of qualified plans.
In eliminating the bankruptcy exemption, the Supreme Court reasoned that—even though the money remained in a tax-favored IRA account—inherited IRAs are not “retirement funds” in the common sense because owners cannot contribute further money, but can withdraw the entire balance without penalty for any reason. Even though the inherited IRA owner might, in fact, use the inherited IRA toward their own retirement, the Supreme Court found that insufficient to shield inherited IRAs from the owners’ creditors.
Employees should account for this new rule when considering rolling into an IRA retirement plan balances that are expected to exceed the owner’s lifetime needs, as leaving an inherited IRA to a financially vulnerable beneficiary could result in the entire account winding up in someone else’s hands.
SAME-SEX MARRIAGE RECOGNIZED IN VIRGINIA
Months of court decisions—and a rejected appeal by the U.S. Supreme Court in early October—have culminated in Virginia recognizing same-sex marriages. Earlier this year, a Norfolk federal trial court ruled that Virginia’s ban on same-sex marriage violated the U.S. Constitution; the Richmond-based federal Fourth Circuit Court of Appeals agreed, upholding the decision, but delaying its effect until the U.S. Supreme Court could consider the case. In early October, the U.S. Supreme Court announced it would not hear any appeals of same-sex marriage cases from around the country, all of which ruled that state prohibitions on same-sex marriage were unconstitutional. The practical effect of the Supreme Court’s refusal to hear the appeals resulted in the lower court decisions becoming immediately effective, and requiring Virginia—and many other states—to recognize same-sex marriages for all purposes.
Virginia’s recognition of same-sex marriage has broad employee benefits applications. For example, all spousal protections and rights required by law in qualified retirement plans now apply to same-sex spouses in the same way they have previously applied to opposite-sex spouses, including rules covering spousal consent to name a different beneficiary, joint and survivor annuity requirements for pension plans, eligibility for QDROs, withdrawals for a spouse’s hardship, and other provisions granting rights to plan participants’ spouses. More broadly, same-sex spouses who marry in Virginia may file joint federal and state tax returns beginning this year.
Plan sponsors should review their plans’ definitions of “spouse” and any terms relating to spousal protections to ensure they are inclusive enough to cover same-sex spouses, and should also ensure they operate their plans to allow same-sex spouses the same rights as opposite-sex spouses effective immediately.
FIFTH THIRD BANCORP V. DUDENHOEFFER AND THE EFFECT ON ESOPS
In this summer’s decision, Fifth Third Bancorp v. Dudenhoeffer 573 U.S. ____ (2014), the Supreme Court unanimously ruled that there is no “presumption of prudence” to protect ERISA fiduciaries of employee stock ownership plans (“ESOPs”) which are designed to invest primarily in company stock. Dudenhoeffer overturns the “Moench presumption of prudence rule” that provided a presumption of prudence to plan fiduciaries to continue to invest in company stock unless they knew or should have known the company was in dire financial circumstances.
While the Dudenhoeffer decision eliminated the presumption of prudence rule, the decision created a pleading requirement that plaintiffs must demonstrate that the fiduciary acted imprudently. Accordingly, in order to show imprudence, plaintiffs will now be required to allege that (1) there were “special circumstances” requiring fiduciaries to recognize on the basis of public information that the market was over or undervaluing the stock or (2) based on nonpublic information, the fiduciaries should have taken an alternative action that would not violate securities laws and would not do more harm than good.
What is the effect on Private Company ESOPs?
The Supreme Court reviewed this ESOP “stock-drop” issue in connection with a public company, Fifth Third Bancorp, which had a 401(k) plan in which it matched employee contributions by contributing company stock to the ESOP—which was a component of the 401(k) plan. The guidance Dudenhoeffer provides cannot be easily applied to private ESOPs. In addition, all of the prior cases decided in the lower courts on the presumption of prudence have involved public companies. The ruling in Dudenhoeffer does not mean that company stock can no longer be held in ESOPs and its long-term effects, especially for privately held companies, will depend on decisions by lower courts if any should arise.
In private ESOPs, fiduciaries have limited options that might potentially give rise to a course of action. First, ESOPs by law are required to be primarily invested in company stock. Second, the only liquidity options for a private ESOP are the company redeeming the shares or a “fire sale” of the company which would likely result in a lower sale price for plan participants and which may be limited by the company’s charter documents.
As a result, the prudence presumption has so far not been an issue for private ESOP companies, and this is unlikely to change as plaintiffs will have difficulties indicating what fiduciaries should have done. Instead, cases will likely continue to focus, as they have been, on the initial sale price of the shares purchased by the ESOP, which is determined by the trustee with reliance on the opinion of an outside valuation advisor.
On the other hand, public companies with employer stock in their retirement plans might begin to think more carefully about whether and how to continue to offer company shares as investment options in light of the Dudenhoeffer decision
As we have previously advised, all 401(k) and profit-sharing plan sponsors using pre-approved prototype and volume submitter plan documents must restate their plans for the required Pension Protection Act (“PPA”) amendments. While the PPA restatement is a mandatory legal requirement, we want to alert you to the opportunity the restatement process affords your firm to review and improve upon your current plan design, by making thoughtful selections on the K&C Plan Document. The attorneys and paralegals in the K&C Employee Benefits Practice Group (“EB Group”) are knowledgeable in all options available under the tax and pension law and the K&C Plan Document, and we look forward to working with you to maximize the value of your company’s retirement plan design while assisting you with the PPA restatement.
Undergoing the restatement process requires a complete reworking of your plan document, meaning you must review and re-adopt your plan. The PPA restatement period, during which restatements must be adopted, started May 1, 2014, and ends on April 30, 2016.
Our employee benefits specialists are happy to help you along the way.
Consultation. We provide full-scope, individualized review of existing and proposed plan designs, or consultation with your existing plan providers, on the entire PPA restatement and plan design process.
Complete Plan Document Services. We provide Kaufman & Canoles’ prototype and volume submitter 401(k) plan documents in addition to consultation and plan design services. If the pre-approved plans do not meet your specific needs, we also offer individually designed plan documents.
Ongoing Plan Services. We offer extensive plan-related services, including corrections, amendments, plan design advice, operational guidance, and counsel on any other issues that arise along the way.
Capped Costs. We are pleased to quote “not-to-exceed” fees on an individualized basis for plan provision or consultation.
Please contact a member of the K&C EB Group at your earliest convenience to initiate a review of your current plan document and to begin the PPA restatement. While the deadline for PPA compliance is April 30, 2016, the earlier we begin the process, the smoother it is likely to go.
NO MORE EMPLOYER PAYMENT OR REIMBURSEMENT OF EMPLOYEE INDIVIDUAL HEALTH INSURANCE PREMIUMS
For many years some small employers have chosen not to offer a group health insurance plan but instead simply pay or reimburse employees for the cost of their individual policies, often on a tax-free basis. Nothing in the Affordable Care Act directly addressed or changed the tax treatment of such programs.
In September 2013 the IRS and DOL issued parallel notices taking the position that such a program constitutes an employer-sponsored health plan that does not meet at least two of the ACA’s health plan reforms. The penalty for failing to comply with the reforms is potentially $100 a day per employee. The initial notices have been supplemented and clarified by FAQs issued by both agencies.
What is now clear is that employers should immediately stop paying or reimbursing employee premiums on individual policies and either offer a group health plan (that automatically complies with all ACA reforms) or stop offering any health insurance benefit and have employees purchase whatever coverage they desire without employer involvement (fortunately 2015 open enrollment for individual policies runs through February 15, 2015).
Please contact any member of the K&C EB Group if you have any questions.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.