Benefitting You

Health & Welfare Plans

Health Flexible Spending Account Participants May Carry Over $500 of Unused Balance

Traditionally, a health flexible spending account (“FSA”) would operate under the use-or-lose rule – that is, a participant would forfeit any unused amounts remaining at the end of the plan year. In 2005, the use-or-lose rule was modified to allow employers to amend their health FSA plans to permit participants to use their health FSA balance remaining from the previous plan year to pay expenses incurred during the two-month-and-15-day period immediately following the end of the plan year (which period is often referred to as a “grace period”). In Notice 2013-71, the IRS further modified the use-or-lose rule to allow employers to amend their health FSA plans to permit up to $500 of a participant’s unused health FSA balance remaining at the end of a plan year to be “carried over” into the following plan year. Unused amounts are any funds remaining after the end of the plan’s “run-out period,” a period of time directly after the plan year during which an employee may submit reimbursements for expenses incurred in that previous plan year. Carryover funds may be used to pay or reimburse medical expenses incurred at any point during the entire plan year to which they are carried over and do not count toward the $2,500 annual salary reduction contribution limit applicable to a health FSA. A plan may not use the carryover exception in combination with a grace period. Employers must weigh the needs of its employees in determining which optional feature to use.

Should an employer choose to take advantage of the carryover feature, the employer must adopt an amendment to its health FSA plan on or before the last day of the plan year from which amounts will be carried over. The amendment may be effective retroactive to the first day of that plan year provided that the health FSA plan is operated accordingly and the employer informs participants of the carryover feature. However, there is an exception for the 2013 plan year that allows employers until the end of the 2014 plan year to adopt the carryover feature beginning with the 2013 plan year.

Final Regulations Issued for ACA 90-Day Health Plan Eligibility Waiting Period Limitation

The Affordable Care Act (“ACA”) amended ERISA and the Internal Revenue Code to prohibit an employer-sponsored group health plan from applying a waiting period that exceeds 90 days effective for plan years beginning on or after January 1, 2014. A waiting period is any period that must pass before coverage becomes effective for an employee or dependent who is otherwise eligible to enroll under the terms of the plan. The Departments of Labor, Treasury and Health and Human Services (the “Departments”) recently issued final regulations regarding the 90-day waiting period limitation. The final regulations are effective for plan years beginning on or after January 1, 2015. Until that time, employers may continue to rely on the proposed regulations issued by the Departments in 2013.

The final regulations generally are consistent with the 2013 proposed regulations. Like the proposed regulations, the final regulations provide that eligibility conditions based solely on the lapse of a time period are permissible for no more than 90 days. Other eligibility conditions (e.g., being in an eligible job classification, meeting job-related licensure requirements) are generally permissible under the final regulations unless the condition is designed to avoid compliance with the 90-day waiting period limitation. In response to comments on the proposed regulations, the final regulations provide that a requirement to complete a “reasonable and bona fide employment-based orientation period” may be imposed as a condition for eligibility for coverage. Proposed regulations issued concurrently with the final regulations propose one month as the maximum length of any such orientation period. For a plan with a 90-day waiting period, the orientation period may be used to accommodate the common practice of commencing coverage on the first day of a calendar month.

In addition, the final regulations provide guidance with respect to the following time-based eligibility conditions:

  • Variable-Hour Employees: If a health plan conditions eligibility on an employee regularly having a specified number of hours of service per period, and it cannot be determined that a newly-hired employee is reasonably expected to work that number of hours, the plan may take a reasonable period of time to determine whether the employee meets the plan’s eligibility condition, which may include a measurement period of no more than 12 months that begins on any date between the employee’s start date and the first day of the first calendar month following the employee’s start date (plus a short administrative period).
  • Cumulative Service Requirements: If a health plan conditions eligibility on an employee’s having completed a number of cumulative hours of service, this condition will not violate the 90-day waiting period limitation if the cumulative hours-of-service requirement does not exceed 1,200 hours.

The final regulations also provide guidance on how the 90-day waiting period limitation applies to rehired employees, transferred employees, and multiemployer plans and with respect to the liability of health insurance issuers related to the limitation. Employers that sponsor a health plan with an eligibility waiting period or time-based eligibility criteria are encouraged to review the final regulations.

Certificates of Creditable Coverage No Longer Required Effective December 31, 2014

Employer-sponsored group health plans historically have been required to provide individuals who lose coverage (or would lose coverage absent an election to continue coverage under COBRA) with a certificate of creditable coverage to provide proof of coverage that may reduce the length of a preexisting condition exclusion under another health plan. The Affordable Care Act prohibits employer-sponsored group health plans from imposing preexisting condition exclusions effective for plan years beginning on or after January 1, 2014. This prohibition has rendered certificates of creditable coverage unnecessary. Accordingly, the Departments of Labor, Treasury and Health and Human Services recently issued final regulations that eliminate the requirement to provide certificates of creditable coverage effective December 31, 2014.

Final Regulations Issued for ACA Employer Reporting Requirements

The Department of Treasury has issued final regulations regarding Affordable Care Act (“ACA”) information reporting of minimum essential coverage and ACA information reporting by large employers on health insurance coverage offered under employer-sponsored plans. Information reporting under the ACA is optional for 2014 and required for 2015 and later years (i.e., information reporting must be filed and furnished in 2016 with respect to coverage and offers of coverage made in 2015).

Information Reporting of Minimum Essential Coverage. Under the ACA, covered entities – including plan sponsors of self-insured group health plans and health insurance issuers – that provide minimum essential coverage must annually report to the Internal Revenue Service (“IRS”) certain information about individuals covered by minimum essential coverage and furnish annual statements to responsible individuals (i.e., individuals who enroll one or more persons in the coverage). Each covered entity generally will be required to report its (i) name, address, and EIN; (ii) the name, address, and TIN (e.g., Social Security number) of each responsible individual; (iii) the name and TIN of each covered individual (such as a dependent or spouse); (iv) and the months for which each covered individual was enrolled in coverage. Birth dates may be reported in lieu of TINs where the TINs are unavailable after reasonable efforts. Annual individual statements of minimum essential coverage must include the same information with respect to the responsible individual and covered individuals, along with a contact telephone number and policy number, if any.

Information Reporting by Large Employers on Health Insurance. Under the ACA, applicable large employers (i.e., employers that employ an average of at least 50 full-time employees on business days during the preceding calendar year) must annually report to the IRS information regarding the health insurance they offer their full-time employees and furnish annual statements to full-time employees. Similar to Form W-2 statements and Form W-3 submittals, a separate return is required for each full-time employee, accompanied by a single transmittal form for all of the returns filed for a given calendar year. Each applicable large employer will be required to report (i) its name, address, and EIN; (ii) the name and telephone number of a contact person; (iii) the calendar year for which information is being reported; (iv) a certification as to whether the employer offered minimum essential coverage under an eligible employer-sponsored plan, by calendar month; (v) the months for which minimum essential coverage under the plan was available; (vi) each full-time employee’s share of the lowest cost monthly premium for self-only coverage providing minimum value under the plan, by month; (vii) the number of full-time employees for each month; (viii) and the name, address and TIN of each full-time employee and the months, if any, during which the employee was covered under the plan. The final regulations provide for two alternative, streamlined reporting methods, including one for employers that can certify that they offered minimum essential coverage providing minimum value that was affordable under the ACA to at least 98% of their full-time employees (and dependents). Also, a special transition rule may apply for 2015 reporting. Annual employee statements on health insurance must include the information described above with respect to the full-time employee.

The final regulations allow applicable large employers who sponsor self-insured group health plans to report both types of information reporting on a single form. The final regulations indicate that drafts of the reporting forms will be available in the near future. Information reporting is due to the IRS on or before February 28 of the year following the calendar year for which the filing relates (March 31, if filed electronically), and electronic filing may be required. Annual statements are due to responsible individuals and employees on or before January 31 of the year following the calendar year for which the statement relates and may be provided electronically if certain requirements are met. Special rules with respect to the ACA reporting requirements may apply to certain entities, such as employers contributing to multiemployer plans and governmental employers and/or minimum essential coverage providers.

Qualified Retirement Plans

IRS Sets Deadline for Qualified Retirement Plan Amendments to Apply Supreme Court Decision in United States v. Windsor

As we have discussed in previous alerts, in United States v. Windsor, the Supreme Court of the United States struck down Section 3 of the Defense of Marriage Act (“DOMA”), which limited federal recognition of marriage to legal unions between one man and one woman. The Internal Revenue Service (“IRS”) subsequently issued Revenue Ruling 2013-17 to provide that, effective September 16, 2013, for purposes of enforcing the Internal Revenue Code (the “Code”) the IRS will recognize a same-sex marriage that is valid in the state where it was celebrated, regardless of where either spouse is later domiciled. The IRS recently issued Notice 2014-19 (the “Notice”) to provide the following guidance on the application of Windsor to the operations and plan documents of qualified retirement plans:

  • Plan Operations: Qualified retirement plan operations must reflect the outcome of Windsor as of the date of the Supreme Court’s decision, i.e., June 26, 2013. Qualified retirement plans will not lose their tax-qualified status under the Code for failing to recognize same-sex marriages prior to this date. In addition, qualified retirement plans will not lose their tax-qualified status under the Code merely because the plan, prior to September 16, 2013, recognized the same-sex spouse of a participant only if the participant was domiciled in a state that recognized same-sex marriages.
  • Plan Document: If the terms of a qualified retirement plan define a marital relationship by reference to DOMA or are otherwise inconsistent with the outcome of Windsor or Revenue Ruling 2013-17, then the plan must be amended to reflect the outcome of Windsor effective no later than June 26, 2013 and to reflect the guidance in Revenue Ruling 2013-17 effective no later than September 16, 2013. The amendment must be adopted by the latest of: (i) the end of the plan year in which the change is effective, (ii) the due date of the employer’s tax return for the tax year that includes the date the change is effective, and (iii) December 31, 2014. For example, the amendment deadline will be December 31, 2014 for a qualified retirement plan that has a calendar plan year and is sponsored by an employer with a calendar tax year. Governmental plans may have additional time to adopt the amendment.

The Eighth Circuit Rules in Retirement Plan Fee Case

On March 19, 2014, the Eighth Circuit Court of Appeals (“Eighth Circuit”) released its decision in Tussey v. ABB, Inc. (“Tussey”). In Tussey, the Eighth Circuit affirmed in part, remanded in part, and reversed in part a district court decision that granted substantial damages to plaintiffs representing participants in two ABB, Inc. (“ABB”) 401(k) plans.  The case involved a claim that ABB violated its fiduciary duty under ERISA by using plan assets to pay unreasonable fees to Fidelity Management Trust Company (“Fidelity Trust”) as recordkeeper for the 401(k) plans and Fidelity Management and Research Company (“Fidelity Research”) as investment fund advisor (collectively, “Fidelity”) for services to the 401(k) plans.

The Eighth Circuit agreed with the district court’s decision that ABB violated its fiduciary duty to ensure that fees paid with plan assets are reasonable. The Eighth Circuit explained that fiduciary duties are in large part fulfilled through a prudent decision-making process.  As such, Eighth Circuit focused on the process that ABB used with respect to the engagement of Fidelity and payment of fees to Fidelity as opposed to actual amount of fees paid to Fidelity. The court found that ABB failed to monitor and control fees and allowed Fidelity to collect excessive revenue sharing fees from the plans’ assets.  Moreover, the fees paid with plan assets effectively subsidized services that Fidelity provided to ABB completely unrelated to the 401(k) plans (including payroll services and recordkeeping services for ABB’s defined benefit plan and health and welfare plans).  In addition, the court explained that ABB failed to leverage the plans’ size to negotiate for better fees and benchmark Fidelity Trust’s fees against its competitors.

As litigation involving fee reasonableness is becoming more and more prevalent, employers should take care to monitor the fees being paid from plan assets (including revenue sharing fees) and ensure that such fees are not being used to subsidize unrelated services.

Department of Labor Proposes Section 408(b)(2) Fee Disclosure Guide

On March 12, 2014, the Department of Labor (the “DOL”) issued a proposed amendment to the final regulations under Section 408(b)(2) of ERISA which is the section of ERISA that requires covered service providers (“CSPs”) to disclose certain fee information to retirement plan fiduciaries. The final Section 408(b)(2) regulations, issued by the DOL in 2012, generally require CSPs to furnish disclosures sufficient to enable plan fiduciaries to meet their ERISA fiduciary obligations regarding the selection and monitoring of CSPs. The proposal would require CSPs that make Section 408(b)(2) disclosures in multiple or lengthy documents to furnish a guide intended to assist plan fiduciaries in reviewing such disclosures.

The DOL proposal would require CSPs to furnish plan fiduciaries with a guide sufficiently specific to enable the plan fiduciary “to quickly and easily find” certain information required by the final Section 408(b)(2) regulations. The guide would direct the plan fiduciaries to the following information:

  • The description of services to be provided to the plan;
  • The statement concerning any services to be provided as a fiduciary or registered investment advisor;
  • The description of any and all direct compensation, indirect compensation, compensation paid among related parties, and compensation that would be paid for the termination of the arrangement; and
  • The special required investment disclosures for fiduciary, recordkeeping and brokerage services.

The DOL indicated that the intent of the proposed amendment is to balance the need of plan fiduciaries to comply with their ERISA fiduciary responsibilities and the cost and burdens imposed on CSPs. The proposal would become effective 12 months following the issuance of the final version of the regulation.

We will continue to monitor this proposal as it moves through the DOL regulatory process. In this regard, Bass attorney Fritz Richter is the co-leader of an American Bar Association, Tax Section, comment seeking to advise the DOL on improvements and refinements to the proposal.

Compensation Arrangements

Recent IRS Guidance Under Section 83 of the Internal Revenue Code Clarifies the Definition of a “Substantial Risk of Forfeiture”

Under Section 83, of the Internal Revenue Code (the “Code”) restricted stock and other property that is transferred to a service provider (e.g., an employee or director) for services is taxable when the service provider’s rights in the property are no longer subject to a substantial risk of forfeiture.  The Department of Treasury recently issued final regulations under Section 83 that clarify what events constitute a “substantial risk of forfeiture.” The final regulations provide that a substantial risk of forfeiture may be established only if a service provider’s rights in transferred property are either (i) conditioned on the performance, or refraining from performance (e.g., as a result of a non-competition agreement), of substantial services, or (ii) subject to a condition related to the purpose of the transfer (e.g., performance-based awards). In addition, to determine if a substantial risk of forfeiture exists, both the likelihood that a forfeiture event will occur and the likelihood that it actually will be enforced must be established by the underlying facts and circumstances.

The final regulations provide several examples of risks of forfeiture that, subject to certain exceptions, are not substantial, including transfer restrictions on securities (e.g., lock-up arrangements, blackout periods, buy-back provisions and insider-trading restrictions).  Such restrictions alone do not create a substantial risk of forfeiture.  However, a key exception to this rule is available if an insider is subject to sale restrictions (and possible suit) due to potential liability under Section 16(b) of the Securities Exchange Act.

Additionally, the preamble to the final regulations makes it clear that a right to receive property or cash in the future following an involuntary separation from service is not property for purposes of Section 83, and thus is not taxable until the property or cash is actually received (assuming compliance with Section 409A of the Code).  However, the final regulations continue to allow the possibility that a non-competition clause may constitute a substantial risk of forfeiture under Section 83.  This is in stark contrast to Section 409A of the Code, which does not treat a non‑competition clause as a substantial risk of forfeiture.

While this is useful guidance, there are still many uncertainties regarding the various definitions of a substantial risk of forfeiture under the Code, including the long-awaited guidance under Section 457(f) of the Code dealing with deferred compensation plans for certain nonprofit and governmental entities.  Given these uncertainties, many traps remain for the unwary when drafting compensation arrangements.

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Health & Welfare Plans

Health Flexible Spending Account Participants May Carry Over $500 of Unused Balance

Traditionally, a health flexible spending account (“FSA”) would operate under the use-or-lose rule – that is, a participant would forfeit any unused amounts remaining at the end of the plan year. In 2005, the use-or-lose rule was modified to allow employers to amend their health FSA plans to permit participants to use their health FSA balance remaining from the previous plan year to pay expenses incurred during the two-month-and-15-day period immediately following the end of the plan year (which period is often referred to as a “grace period”). In Notice 2013-71, the IRS further modified the use-or-lose rule to allow employers to amend their health FSA plans to permit up to $500 of a participant’s unused health FSA balance remaining at the end of a plan year to be “carried over” into the following plan year. Unused amounts are any funds remaining after the end of the plan’s “run-out period,” a period of time directly after the plan year during which an employee may submit reimbursements for expenses incurred in that previous plan year. Carryover funds may be used to pay or reimburse medical expenses incurred at any point during the entire plan year to which they are carried over and do not count toward the $2,500 annual salary reduction contribution limit applicable to a health FSA. A plan may not use the carryover exception in combination with a grace period. Employers must weigh the needs of its employees in determining which optional feature to use.

Should an employer choose to take advantage of the carryover feature, the employer must adopt an amendment to its health FSA plan on or before the last day of the plan year from which amounts will be carried over. The amendment may be effective retroactive to the first day of that plan year provided that the health FSA plan is operated accordingly and the employer informs participants of the carryover feature. However, there is an exception for the 2013 plan year that allows employers until the end of the 2014 plan year to adopt the carryover feature beginning with the 2013 plan year.

Final Regulations Issued for ACA 90-Day Health Plan Eligibility Waiting Period Limitation

The Affordable Care Act (“ACA”) amended ERISA and the Internal Revenue Code to prohibit an employer-sponsored group health plan from applying a waiting period that exceeds 90 days effective for plan years beginning on or after January 1, 2014. A waiting period is any period that must pass before coverage becomes effective for an employee or dependent who is otherwise eligible to enroll under the terms of the plan. The Departments of Labor, Treasury and Health and Human Services (the “Departments”) recently issued final regulations regarding the 90-day waiting period limitation. The final regulations are effective for plan years beginning on or after January 1, 2015. Until that time, employers may continue to rely on the proposed regulations issued by the Departments in 2013.

The final regulations generally are consistent with the 2013 proposed regulations. Like the proposed regulations, the final regulations provide that eligibility conditions based solely on the lapse of a time period are permissible for no more than 90 days. Other eligibility conditions (e.g., being in an eligible job classification, meeting job-related licensure requirements) are generally permissible under the final regulations unless the condition is designed to avoid compliance with the 90-day waiting period limitation. In response to comments on the proposed regulations, the final regulations provide that a requirement to complete a “reasonable and bona fide employment-based orientation period” may be imposed as a condition for eligibility for coverage. Proposed regulations issued concurrently with the final regulations propose one month as the maximum length of any such orientation period. For a plan with a 90-day waiting period, the orientation period may be used to accommodate the common practice of commencing coverage on the first day of a calendar month.

In addition, the final regulations provide guidance with respect to the following time-based eligibility conditions:

  • Variable-Hour Employees: If a health plan conditions eligibility on an employee regularly having a specified number of hours of service per period, and it cannot be determined that a newly-hired employee is reasonably expected to work that number of hours, the plan may take a reasonable period of time to determine whether the employee meets the plan’s eligibility condition, which may include a measurement period of no more than 12 months that begins on any date between the employee’s start date and the first day of the first calendar month following the employee’s start date (plus a short administrative period).
  • Cumulative Service Requirements: If a health plan conditions eligibility on an employee’s having completed a number of cumulative hours of service, this condition will not violate the 90-day waiting period limitation if the cumulative hours-of-service requirement does not exceed 1,200 hours.

The final regulations also provide guidance on how the 90-day waiting period limitation applies to rehired employees, transferred employees, and multiemployer plans and with respect to the liability of health insurance issuers related to the limitation. Employers that sponsor a health plan with an eligibility waiting period or time-based eligibility criteria are encouraged to review the final regulations.

Certificates of Creditable Coverage No Longer Required Effective December 31, 2014

Employer-sponsored group health plans historically have been required to provide individuals who lose coverage (or would lose coverage absent an election to continue coverage under COBRA) with a certificate of creditable coverage to provide proof of coverage that may reduce the length of a preexisting condition exclusion under another health plan. The Affordable Care Act prohibits employer-sponsored group health plans from imposing preexisting condition exclusions effective for plan years beginning on or after January 1, 2014. This prohibition has rendered certificates of creditable coverage unnecessary. Accordingly, the Departments of Labor, Treasury and Health and Human Services recently issued final regulations that eliminate the requirement to provide certificates of creditable coverage effective December 31, 2014.

Final Regulations Issued for ACA Employer Reporting Requirements

The Department of Treasury has issued final regulations regarding Affordable Care Act (“ACA”) information reporting of minimum essential coverage and ACA information reporting by large employers on health insurance coverage offered under employer-sponsored plans. Information reporting under the ACA is optional for 2014 and required for 2015 and later years (i.e., information reporting must be filed and furnished in 2016 with respect to coverage and offers of coverage made in 2015).

Information Reporting of Minimum Essential Coverage. Under the ACA, covered entities – including plan sponsors of self-insured group health plans and health insurance issuers – that provide minimum essential coverage must annually report to the Internal Revenue Service (“IRS”) certain information about individuals covered by minimum essential coverage and furnish annual statements to responsible individuals (i.e., individuals who enroll one or more persons in the coverage). Each covered entity generally will be required to report its (i) name, address, and EIN; (ii) the name, address, and TIN (e.g., Social Security number) of each responsible individual; (iii) the name and TIN of each covered individual (such as a dependent or spouse); (iv) and the months for which each covered individual was enrolled in coverage. Birth dates may be reported in lieu of TINs where the TINs are unavailable after reasonable efforts. Annual individual statements of minimum essential coverage must include the same information with respect to the responsible individual and covered individuals, along with a contact telephone number and policy number, if any.

Information Reporting by Large Employers on Health Insurance. Under the ACA, applicable large employers (i.e., employers that employ an average of at least 50 full-time employees on business days during the preceding calendar year) must annually report to the IRS information regarding the health insurance they offer their full-time employees and furnish annual statements to full-time employees. Similar to Form W-2 statements and Form W-3 submittals, a separate return is required for each full-time employee, accompanied by a single transmittal form for all of the returns filed for a given calendar year. Each applicable large employer will be required to report (i) its name, address, and EIN; (ii) the name and telephone number of a contact person; (iii) the calendar year for which information is being reported; (iv) a certification as to whether the employer offered minimum essential coverage under an eligible employer-sponsored plan, by calendar month; (v) the months for which minimum essential coverage under the plan was available; (vi) each full-time employee’s share of the lowest cost monthly premium for self-only coverage providing minimum value under the plan, by month; (vii) the number of full-time employees for each month; (viii) and the name, address and TIN of each full-time employee and the months, if any, during which the employee was covered under the plan. The final regulations provide for two alternative, streamlined reporting methods, including one for employers that can certify that they offered minimum essential coverage providing minimum value that was affordable under the ACA to at least 98% of their full-time employees (and dependents). Also, a special transition rule may apply for 2015 reporting. Annual employee statements on health insurance must include the information described above with respect to the full-time employee.

The final regulations allow applicable large employers who sponsor self-insured group health plans to report both types of information reporting on a single form. The final regulations indicate that drafts of the reporting forms will be available in the near future. Information reporting is due to the IRS on or before February 28 of the year following the calendar year for which the filing relates (March 31, if filed electronically), and electronic filing may be required. Annual statements are due to responsible individuals and employees on or before January 31 of the year following the calendar year for which the statement relates and may be provided electronically if certain requirements are met. Special rules with respect to the ACA reporting requirements may apply to certain entities, such as employers contributing to multiemployer plans and governmental employers and/or minimum essential coverage providers.

Qualified Retirement Plans

IRS Sets Deadline for Qualified Retirement Plan Amendments to Apply Supreme Court Decision in United States v. Windsor

As we have discussed in previous alerts, in United States v. Windsor, the Supreme Court of the United States struck down Section 3 of the Defense of Marriage Act (“DOMA”), which limited federal recognition of marriage to legal unions between one man and one woman. The Internal Revenue Service (“IRS”) subsequently issued Revenue Ruling 2013-17 to provide that, effective September 16, 2013, for purposes of enforcing the Internal Revenue Code (the “Code”) the IRS will recognize a same-sex marriage that is valid in the state where it was celebrated, regardless of where either spouse is later domiciled. The IRS recently issued Notice 2014-19 (the “Notice”) to provide the following guidance on the application of Windsor to the operations and plan documents of qualified retirement plans:

  • Plan Operations: Qualified retirement plan operations must reflect the outcome of Windsor as of the date of the Supreme Court’s decision, i.e., June 26, 2013. Qualified retirement plans will not lose their tax-qualified status under the Code for failing to recognize same-sex marriages prior to this date. In addition, qualified retirement plans will not lose their tax-qualified status under the Code merely because the plan, prior to September 16, 2013, recognized the same-sex spouse of a participant only if the participant was domiciled in a state that recognized same-sex marriages.
  • Plan Document: If the terms of a qualified retirement plan define a marital relationship by reference to DOMA or are otherwise inconsistent with the outcome of Windsor or Revenue Ruling 2013-17, then the plan must be amended to reflect the outcome of Windsor effective no later than June 26, 2013 and to reflect the guidance in Revenue Ruling 2013-17 effective no later than September 16, 2013. The amendment must be adopted by the latest of: (i) the end of the plan year in which the change is effective, (ii) the due date of the employer’s tax return for the tax year that includes the date the change is effective, and (iii) December 31, 2014. For example, the amendment deadline will be December 31, 2014 for a qualified retirement plan that has a calendar plan year and is sponsored by an employer with a calendar tax year. Governmental plans may have additional time to adopt the amendment.

The Eighth Circuit Rules in Retirement Plan Fee Case

On March 19, 2014, the Eighth Circuit Court of Appeals (“Eighth Circuit”) released its decision in Tussey v. ABB, Inc. (“Tussey”). In Tussey, the Eighth Circuit affirmed in part, remanded in part, and reversed in part a district court decision that granted substantial damages to plaintiffs representing participants in two ABB, Inc. (“ABB”) 401(k) plans.  The case involved a claim that ABB violated its fiduciary duty under ERISA by using plan assets to pay unreasonable fees to Fidelity Management Trust Company (“Fidelity Trust”) as recordkeeper for the 401(k) plans and Fidelity Management and Research Company (“Fidelity Research”) as investment fund advisor (collectively, “Fidelity”) for services to the 401(k) plans.

The Eighth Circuit agreed with the district court’s decision that ABB violated its fiduciary duty to ensure that fees paid with plan assets are reasonable. The Eighth Circuit explained that fiduciary duties are in large part fulfilled through a prudent decision-making process.  As such, Eighth Circuit focused on the process that ABB used with respect to the engagement of Fidelity and payment of fees to Fidelity as opposed to actual amount of fees paid to Fidelity. The court found that ABB failed to monitor and control fees and allowed Fidelity to collect excessive revenue sharing fees from the plans’ assets.  Moreover, the fees paid with plan assets effectively subsidized services that Fidelity provided to ABB completely unrelated to the 401(k) plans (including payroll services and recordkeeping services for ABB’s defined benefit plan and health and welfare plans).  In addition, the court explained that ABB failed to leverage the plans’ size to negotiate for better fees and benchmark Fidelity Trust’s fees against its competitors.

As litigation involving fee reasonableness is becoming more and more prevalent, employers should take care to monitor the fees being paid from plan assets (including revenue sharing fees) and ensure that such fees are not being used to subsidize unrelated services.

Department of Labor Proposes Section 408(b)(2) Fee Disclosure Guide

On March 12, 2014, the Department of Labor (the “DOL”) issued a proposed amendment to the final regulations under Section 408(b)(2) of ERISA which is the section of ERISA that requires covered service providers (“CSPs”) to disclose certain fee information to retirement plan fiduciaries. The final Section 408(b)(2) regulations, issued by the DOL in 2012, generally require CSPs to furnish disclosures sufficient to enable plan fiduciaries to meet their ERISA fiduciary obligations regarding the selection and monitoring of CSPs. The proposal would require CSPs that make Section 408(b)(2) disclosures in multiple or lengthy documents to furnish a guide intended to assist plan fiduciaries in reviewing such disclosures.

The DOL proposal would require CSPs to furnish plan fiduciaries with a guide sufficiently specific to enable the plan fiduciary “to quickly and easily find” certain information required by the final Section 408(b)(2) regulations. The guide would direct the plan fiduciaries to the following information:

  • The description of services to be provided to the plan;
  • The statement concerning any services to be provided as a fiduciary or registered investment advisor;
  • The description of any and all direct compensation, indirect compensation, compensation paid among related parties, and compensation that would be paid for the termination of the arrangement; and
  • The special required investment disclosures for fiduciary, recordkeeping and brokerage services.

The DOL indicated that the intent of the proposed amendment is to balance the need of plan fiduciaries to comply with their ERISA fiduciary responsibilities and the cost and burdens imposed on CSPs. The proposal would become effective 12 months following the issuance of the final version of the regulation.

We will continue to monitor this proposal as it moves through the DOL regulatory process. In this regard, Bass attorney Fritz Richter is the co-leader of an American Bar Association, Tax Section, comment seeking to advise the DOL on improvements and refinements to the proposal.

Compensation Arrangements

Recent IRS Guidance Under Section 83 of the Internal Revenue Code Clarifies the Definition of a “Substantial Risk of Forfeiture”

Under Section 83, of the Internal Revenue Code (the “Code”) restricted stock and other property that is transferred to a service provider (e.g., an employee or director) for services is taxable when the service provider’s rights in the property are no longer subject to a substantial risk of forfeiture.  The Department of Treasury recently issued final regulations under Section 83 that clarify what events constitute a “substantial risk of forfeiture.” The final regulations provide that a substantial risk of forfeiture may be established only if a service provider’s rights in transferred property are either (i) conditioned on the performance, or refraining from performance (e.g., as a result of a non-competition agreement), of substantial services, or (ii) subject to a condition related to the purpose of the transfer (e.g., performance-based awards). In addition, to determine if a substantial risk of forfeiture exists, both the likelihood that a forfeiture event will occur and the likelihood that it actually will be enforced must be established by the underlying facts and circumstances.

The final regulations provide several examples of risks of forfeiture that, subject to certain exceptions, are not substantial, including transfer restrictions on securities (e.g., lock-up arrangements, blackout periods, buy-back provisions and insider-trading restrictions).  Such restrictions alone do not create a substantial risk of forfeiture.  However, a key exception to this rule is available if an insider is subject to sale restrictions (and possible suit) due to potential liability under Section 16(b) of the Securities Exchange Act.

Additionally, the preamble to the final regulations makes it clear that a right to receive property or cash in the future following an involuntary separation from service is not property for purposes of Section 83, and thus is not taxable until the property or cash is actually received (assuming compliance with Section 409A of the Code).  However, the final regulations continue to allow the possibility that a non-competition clause may constitute a substantial risk of forfeiture under Section 83.  This is in stark contrast to Section 409A of the Code, which does not treat a non‑competition clause as a substantial risk of forfeiture.

While this is useful guidance, there are still many uncertainties regarding the various definitions of a substantial risk of forfeiture under the Code, including the long-awaited guidance under Section 457(f) of the Code dealing with deferred compensation plans for certain nonprofit and governmental entities.  Given these uncertainties, many traps remain for the unwary when drafting compensation arrangements.

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