5/4/2018

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What’s New inWashington?

Ilene H. Ferenczy, Esq., APA

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The DOL Fiduciary Rule and the 5th Circuit Decision

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5th Circuit Kills Fiduciary Rule!3

• Chamber of Commerce, et al. v. U.S. Dept. of Labor– 2-1 majority:

• Directly contradicts statute and Congressional intent

• Unreasonable interpretation of the law

• The rule and PTEs are “vacated”

• DOL not enforcing rule at present– Anywhere

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Intervention Attempt

• AARP and the states of California, New York, and Oregon file suit to intervene in the case

• Ask the court to rehear the case “en banc” – i.e., in front of all the 5th Circuit judges (normally a 3-judge panel)

• 5th Circuit refuses

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What’s Next?

• DOL could:

• Ask for en banc hearing of 5th Circuit (that ain’t gonna happen)

• Appeal to Supreme Court

• Unlikely that the Administration would do this

• Do nothing and let it go

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What Else Could Happen …6

• SEC is looking at coming up with their own

– That would handle all securities advice, not just plan advice

• DOL can try to rewrite regulation to fit parameters of decision

– That would take years

– Don’t expect it to be the top priority of this administration

• Congress could act

– Who are we kidding?

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If Decision Stands …

• Go back in time … to old regulation

• Appears to be the case

• Old regulation:

• Narrows who is a fiduciary (old 5-part test)

• Recommending an advisor is not fiduciary advice

• Rollover advice is not fiduciary advice … unless you are already a plan fiduciary (BICE and BICE Lite disappear with the regulation)

• Gives “stranger advisors” to the plan an advantage in capturing rollover assets over plan’s advisor

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Effect on Practitioners

• Comply for now

• We just don’t know what will happen

• Be careful of rollover advice …

• There really needs to be a transition rule

• Realize that the market has shifted, regardless of validity of regulation

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2018 Limits

Section Limit 2017 Limit 2018 Limit

415(b) Max DB Benefit $215,000 $220,000

415(c) Annual Addition $54,000 $55,000

401(a)(17) Compensation $270,000 $275,000

402(g) Deferral $18,000 $18,500

414(v) Catch-up $6,000 $6,000

408(p) SIMPLE Deferral $12,500 $13,000

414(q) HCE $120,000 $120,000

416(i) Key EE Officer $175,000 $175,000

Social Security Taxable Wage Base

$127,200 $128,400

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Legislation – The President and Congress

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Tax Cut and Jobs Act

Actual name: An act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018

Threats but no action:

• Mandatory Roth

• Reduced limits

• Elimination of plan types

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What Could Have Been There

• $2,400 limit on pre-tax 401(k) contributions

• Remainder Roth

• Compensation limit on catch-up contributions

• Stricter rules for 409A and 457(f) arrangements

• Consolidation of 403(b) and 457 plans with 401k plans

• Elimination of special 403(b), 457(b) catch-ups

• Expand 10% §72(t) early distribution penalty to gov’t 457(b) plans

• Reduction or freezing of limits (e.g., §§415, 401(a)(17), 402(g) etc.)

• Changes to the nondiscrimination and coverage rules

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What Was in Earlier Versions (But Not in the Final Bill)• Allowed hardship distribution to be made from QNECs, QMACs, and earnings

on those amounts as well as earnings on deferrals.

• Lowered the age for in service distributions from a DB or governmental 457(b) plan to 59½ from 62.

• Provided nondiscrimination relief for frozen DB plans with respect to benefits, rights, and features and benefit accruals for a closed class, under a plan that meets certain requirements.

• Hardship necessity relief:

• Eliminate six-month suspension

• Eliminate requirement to tax loans first

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Tax Rates Cut

• Standard deduction increased

• Joint return rate comparison

2017 2018Tax

RateUpper bound Tax Rate

Upper bound

10% $18,650 10% $19,050 15% $75,900 12% $77,400 25% $153,100 22% $165,000 28% $233,350 24% $315,000 33% $416,700 32% $400,000 35% $470,700 35% $600,000

39.6% 37%

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Other Adjustments:Watch the Deductions Disappear

• Increase in child care credit to $2,000 per qualifying child• Limit on home mortgage interest to $750,000 of acquisition

indebtedness, with no deduction home equity loans• Limit on deductions for state and local taxes• Casualty loss limited to federally declared disasters• Increase in charitable contribution limit, but repeal of deduction

for payments made in exchange for college athletic event seats• Repeal of miscellaneous itemized deductions, alimony, moving expenses,

and limit on certain itemized deductions• Repeal of “individual mandate” that applied a tax to individuals not

covered by health insurance

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Corporate Rate Cuts

• Highest tax rate for C corporations cut from 35% to 21%

• If you “zero out” income annually, you don’t care about rate

• Modifies deductions for many business expenses (and permits expensing for some things that were previously capitalized)

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New Deduction for QBIQualified Business Income: Code §199A

Can deduct up to 20% of QBI

Applies to:

• Sole proprietorships

• Partnerships

• S corporation shareholders

• Estates and trusts

Two Limits on QBI Deduction

• If fully phased in:

– No QBI deduction for specified service trades or businesses

– QBI deduction limited based on wages/depreciable assets

Single Married Filing Jointly

Limits don’t apply if taxable income less than $157,500 $315,000

Limits fully phased in at $207,500 $415,000

Taxable income computed before 199A deduction

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Specified services• Health,

• Law,

• Accounting,

• Actuarial science,

• Consulting,

• Financial services

• Brokerage services,

• Performing,

• Athletics,

• “Any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees”

Deliberately left

off the list:

• Architecture

• Engineering

Specified Service Trades or Businesses

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Have I Got a Plan for You!

• Prospective client

• Single emergency room doctor, sole proprietor

• QBI = $250,000 (20% = $50,000)

• Taxable income = $210,000

• No QBI deduction

• Add 401(k) plan

• Taxable income before QBI = $156,000

• Full QBI deduction

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Does Retirement Plan Deduction Affect QBI?

• Doctor: Sole proprietor, married

• Bottom line schedule C: $350,000

• Taxable income before 199A & 404: $300,000 – 22% bracket

QBI ignores §404 QBI considers §404

QBI $350,000 $300,000

199A deduction $70,000 $60,000

Retirement plan deduction $50,000 $50,000

Final taxable income $180,000 $190,000

Tax savings of retirement plan $11,000 $8,800

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What if Tax on Distribution Is HigherThan Deduction at Contribution?

You aren’t just deferring tax on $50,000. You are also deferring tax on earnings on $50,000.

If that’s a real concern, go with Roth

• But that won’t reduce your taxable income (which you may need for QBI)

And remember: until we get guidance, we aren’t sure there is an issue here

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S Corporation Dilemma

• S corporation W-2 to shareholder doesn’t count as QBI

• In fact, law allows IRS to count “reasonable compensation”

• But retirement plan compensation/deduction forS corporation shareholder is based on W-2

• Pass-through dividends aren’t compensation

• Guaranteed payments to partners aren’t QBI

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S Corporation Dilemma …Consider Ditching the Corporation

Low Compensation

• Higher QBI deduction

• Lower FICA taxes

Higher Compensation

• Higher retirement contribution

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Other Retirement Plan Provisions of the Tax Act• Extension of time to roll over plan loan offsets

• Setup: P has participant loan outstanding. P leaves the company (or the plan terminates). Plan offsets participant loan, causing it to be taxed through to P

• Old rules: If P wants to avoid taxation on loan, must cobble together equal amount of money and roll it to an IRA or other employer plan within 60 days

• New rules: P has until tax return due date (including extensions) to deposit the offset funds to a rollover account

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Other Retirement Plan Provisions of the Tax Act• Denial of recharacterization of Roth contributions and

rollovers• Setup: P makes a contribution or rollover to a normal IRA, but then

decides it should be a Roth rollover (or vice versa)

• Old Rule: P can ask trustee of IRA to transfer the funds to the other kind of IRA before tax return due date and it’s treated like it was always that kind of IRA

• New rule: cannot recharacterize once deposited

• Note: this does NOT apply to deposits made in 2017 that were intended to be recharacterized by 10/15/18

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Other Retirement Plan Provisions of the Tax Act• Codified relief for those who were affected by 2016 disasters

if distribution made by 12/31/17• No mandatory withholding or 10% premature distribution tax

• Permitted if plan amended by end of 2018, even if money not normally eligible for distribution (e.g., pre-age 59½ 401(k) funds

• Three-year averaging of distribution

• Can redeposit distribution within three years and treated as rollover (with no tax due on distribution)

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Other Retirement Plan Provisions of Tax Act• No SH hardship for many casualty losses

• Setup: IRS regulatory safe harbor hardship includes deductible casualty losses

• Old law: Personal casualty affecting taxpayer’s property is deductible if not covered by insurance

• New law: Casualty is deductible only if in federally declared disaster area

• Notes: This looks like an unintended consequence of deduction change

• Effective 1/1/2018

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But Wait: Congress Gives Us Some Sugar!• Bipartisan Budget Act of 2018

• Adopts some of the proposed Retirement PlanSimplification rules that were in original Tax Law proposals

• Changes:

• 401(k) Hardship Simplification

• Disaster Relief to California Wildfire Victims

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Hardship Simplification

• Effective January 1, 2019:

• Congress directs IRS to change regulations to get rid of six-month deferral suspension requirement

• Permits hardship distributions from QNECs, QMACs, safe harbor contributions, and earnings in those and deferral accounts

• Eliminates requirement that maximum loans precede hardship withdrawal

• Will likely need to amend plans by end of 2019 year to use

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California Wildfire Relief

• Similar to now “standard” disaster relief

• Wildfire victims: principal residence in federally declared disaster area and suffered economic loss due to fires between 10/8/17 and 12/31/18

• Home losses

• Business losses

• Must take advantage of relief byJanuary 1, 2019

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California Wildfire Relief

• Loans for victims

• Increased limit to $100,000 or 100% of vested interest

• Repayments delayed one year (including five-year repayment period)

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California Wildfire Relief

• Distributions for victims

• Can take distribution even if plan does not or cannot otherwise allow (up to $100,000 total)

• No 10% penalty

• No 20% withholding

• Can spread taxation over three years

• Can repay within three years and treated like a rollover (no tax)

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California Wildfire Relief

• If took distribution between 4/1/17 and 1/15/18 with intent to build or buy a home in wildfire district, and did not do so

• Can repay money by 6/30/18 and treated like rollover (i.e., not taxed)

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Retirement Reform Is Still on the Table

• Richard Neal introduced Retirement Plan Simplification and Enhancement Act in late 2017• Elimination of 10% cap on automatic increases

• Three-year, 500-hour eligibility for deferrals (but not coverage, top-heavy, nondiscrimination)

• Also exclusion of early entrants from TH rules

• “Secure Deferral Arrangements” – another 401(k) SH

• Auto enrollment starting at 6% and going up to 10%

• Match: 100% up to 1%, 50% up to 6%, 25% up to 10%

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Retirement Reform Is Still on the Table• Retirement Plan Simplification and Enhancement

Act in late 2017 (cont’d)

– Encouragement of annuities and qualified longevity annuity contract rules

– No RMD if account is less than $250,000

– Easier corrections for some errors under EPCRS

– Consolidation of employee notices

– Elimination of safe harbor notice for 3% NEC plans

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Congress Finds the Brake Pedal for State Run Plans

• Congress passed joint resolution disapproving of

• The change allowing municipalities to sponsor automatic enrollment plans free of ERISA protections

• State rule for ERISA exemption

• Oregon going forward anyway

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Treasury Kills MyRA

• Treasury announced July 28, 2017, that it will wind down the MyRA program• Not cost effective: $70 million in costs since 2014

• Low demand and high cost

• Will communicate withaccount holders re transitionto regular Roth IRAs

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Orrin Hatch Not Seeking Reelection

• Most senior Republican in the Senate and Finance Committee Chairman

• Has proposed legislation for several years aimed at pension simplification and MEP encouragement

• Historically worked with people “across the aisle”• Who will lead Finance Committee after 2018?

• Senator Grassley is next in line to replace Hatch as Finance Committee Chairman (but may prefer to stay on as head of Judiciary)

• Republicans could lose the Senate, in which case it is a Democrat who will lead the Committee in 2019

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IRS GUIDANCE

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New VCP Fees … Higher for Small Plans

• New fees based on assets

Participants User fee

Less than 21 $500

21-50 $750

51-100 $1,500

101-1,000 $5,000

1001-10,000 $10,000

Over 10,000 $15,000

Assets User fee

Less than $500,001 $1,500

$500,001 - $10,000,000 $3,000

Over $10,000,000 $3,500

No special fees for participant loans, late amender, RMDs, etc.

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Hardship Distribution SubstantiationGuidelines for Audit• Historically, Plan Administrator needed to obtain proof from

participant that s/he sustained an immediate and heavy financial need

• Precluded use of electronic process of hardships

• IRS issued memorandum to its auditors, advising them that there are now two ways to demonstrate the existence of the need• Retain source documentation• Use information summary

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Hardship Distribution SubstantiationGuidelines for Audit• To use document summary method:

• Plan provides mandatory disclosures to participant• Plan obtains information (can be done by phone/electronically) per

questions listed by IRS• Participant agrees to keep documentation and provide it on request• If TPA gets the summary, it provides employer with report or other

access to the data at least annually, describing the hardship distributions made during the year• If any participant gets more than two hardship distributions per year,

auditor can ask for original documents (but only with his/her manager’s approval)

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IRS Auditors Also Address:Statutory Definition of Loan Limit

• Loan limit is lesser of

• $50,000 reduced by

• The highest outstanding balance of loans during the last year

• Minus the loan balance on the date of the loan

• Or, 50% of vested accrued benefit

• Loan limit is reduced by outstanding balance on date of loan

$ Limit Adjustment

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Question: What Is Highest Outstanding Balance When More Than One Loan Is Outstanding During the Year?• Two approaches:

– Generous – Look for the highest outstanding balance on any day in the prior year

– Conservative – $ Limit Adjustment = Amount outstanding at loan date plus principal repaid during year

• IRS Audit memo: either approach is acceptable

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Example

• Jack’s vested account balance is $150,000

• No loans outstanding on 1/1/2017

• Jack borrows $30,000 on 2/1/2017

– Repays it on 4/1/2017

• Jack borrows $20,000 on 5/1/2017

– Repays it on 7/1/2017

• Jack wants to borrow maximum on 8/1/2017

• Liberal Approach

– Highest balance on any day during the year was $30,000

– Current balance is $0

– $ Limit Adjustment = $30,000

– Maximum loan limit now is $50,000 - $30,000 = $20,000

• Conservative Approach

– Current balance is $0

– Total repaid is $50,000

– $ Limit Adjustment = $50,000

– Jack can’t borrow anything now

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October 19, 2017, Audit Memo on RMDs and Lost Participants• Instructs auditors not to challenge qualified plan for failure to

make RMD when due if:• Searched plan and related plan, sponsor, and publicly available records or

directories for alternative contact information• Used any of the following:

• A commercial locator service • A credit reporting agency • A proprietary Internet search tool for locating individuals

• “Attempted contact via United States Postal Service (USPS) certified mail to the last known mailing address and through appropriate means for any address or contact information (including email addresses and telephone numbers)”

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Preapproved Plan Program Revamped (Rev. Proc. 2017-41)• Prototype and Volume Submitter combined into a single

program• “Preapproved”

• Choice: Standardized or nonstandardized

• Nonstandardized can make minor modifications

• Choice: Basic plan/adoption agreement or specimen document

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Preapproved Plan Program Revamped

• Additional clauses allowed

• ESOP can include 401(k) feature

• Cash balance can base interest rate on actual asset return

• But not participant selected

• Hardship distributions don’t have to follow 401(k) safe harbors

• Can combine 401(k) and money purchase in one document

• Can submit opinion letter request for nonelecting church plans

• Submission period changed to 10/2/2017 - 10/1/2018

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• Updated list: Notice 2017-37

• To be used for DC preapproved plans

• Discretionary Obergefell amendments

• Proposed regs allowing forfeitures to fund QNECs/QMACs/ safe harbor

• Mid-year changes to safe harbor plans

• Normal retirement age for governmental pension plans

• Rollovers from plan to SIMPLE IRA

Cumulative List of Changes1

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• Deadlines for updates for IDP plans = List date + 2 years

• Published Lists:

• 2016: Notice 2016-80 (nothing but collective bargaining DB plan issue)

• 2017: Notice 2017-72; Deadline December 31, 2019

• Final regulation re cash balance/hybrid plans to comply with current rules on market rate of return

• Benefit restrictions for DB plans that are eligible cooperative plans or eligible charity plans

• Partial annuity distribution options for DB plans

Required Amendments List2

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• Find Current List on Google:• Forfeitures used for QNECs and QMACs• Extension of nondiscrimination relief for closed DB plans• Final regs for cash balance/hybrid plans re market return• Partial annuity distribution options for DB plans• Benefit restrictions in eligible cooperative or eligible charity DB plans• Rules for 2016 storms• Mid-year changes to safe harbor plans• Proposed regulations re normal retirement age for governmental plans• Restrictions on distributions in bankruptcy for collectively bargained DB

plans

Operational Compliance list3

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Rev. Proc. 2018-4: Changed Fees for FDLon Plan Termination

Old Rules

• Form 5300: $2,500

• Form 5307: $800

• Form 5310: $2,300

• MEP Form 5300: $4,000

• MEP Form 5310: $4,000

New Rules

• Form 5300: $2,500

• Form 5307: $800

• Form 5310: $3,000

• MEP Form 5300: $4,000

• MEP Form 5310: $4,000

• Rev Proc. provides overall annual guidance for Employee Plans rulings

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Tax Relief in Disaster Situations• https://www.irs.gov/newsroom/tax-relief-in-disaster-situations

State Event Start Extension

Georgia Storms, Tornadoes, Winds 2 Jan 2017 31 May 2017

Mississippi Storms, Tornadoes, Winds 20 Jan 2017 31 May 2017

Georgia Storms, Tornadoes, Winds 21 Jan 2017 31 May 2017

Louisiana Storms, Tornadoes, Winds 7 Feb 2017 30 Jun 2017

Arkansas Storms, Tornadoes, Winds 26 Apr 2017 31 Aug 2017

Missouri Storms, Tornadoes, Winds, Flooding 28 Apr 2017 31 Aug 2017

Michigan Storms, Flooding 22 Jun 2017 31 Oct 2017

West Virginia Storms, Flooding 28 July 2017 30 Nov 2017

Texas Hurricane Harvey 23 Aug 2017 31 Jan 2018

FL, GA, PR, VI Hurricane Irma 4 Sep 2017 31 Jan 2018

Puerto Rico, Virgin Islands Hurricane Maria 19 Sep 2017 31 Jan 2018

California Wildfires 8 Oct 2017 31 Jan 2018

California Wildfires, Flooding, Mudflows 4 Dec 2017 30 Apr 2018

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Specific Deadlines Postponed• Participant Loan Due Date• Required minimum distributions• ADP/ACP/402(g) correction distributions

• But not deadline to contribute QNEC

• Remedial amendment period • But not interim and discretionary amendment deadlines

• Plan contribution deadline• But not deadline to make safe harbor 401(k) contributions or give SH

notices

• Distribution of nondeductible contributions• Self-correct significant operational failures

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Excise Taxes; Returns• Normal deadline to return nondeductible contributions to

avoid 10% penalty is deduction deadline

• Disaster relief extends both

• Extending tax return deadline extends §4975 filing deadline

• Form 5500 extended as indicated in Announcement

• Presumably includes Form 8955-SSA

• In the case of “affected taxpayers,” . . . the IRS may permit a postponement of the filing of the Form 5500 or Form 5500-EZ.

• “Affected Taxpayers: unable to obtain on a timely basis information necessary for completing the forms from a bank, insurance company, or any other service provider because such service providers' operations are located in a covered disaster area”

• IRS postponement of the Form 5500 series filing due date under section 7508A will also be permitted by the Department of Labor and PBGC for similarly situated plan administrators and direct filing entities

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IRS Hardship Distribution

Relief for Harvey, Irma

Maria, California Wildfires

• Qualified plan or 403(b) plan can makehardship distribution to affected employee

– Only plans that can make hardship distributions –not pension plans

• Governmental 457(b) plan can make unforeseeable emergency distribution to affected employee

• Whether or not:

– Plan has hardship language

– Plan recognizes this hardship

• No hardships from QMACs or QNECs or deferral earnings

• Can rely on employee’s reasonable representations of hardship need and amount

• No need for six-month deferral suspension

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Qualified Hurricane Distribution

• Distribution from eligible plan

• Between disaster date and 12/31/18

• Qualified recipients include beneficiaries

• Limit: $100,000

• No:

• 10% penalty

• Normal distributable event

• Can spread taxes over three years

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Hurricane Loan Limits• Double §72(p) loan limits: Lesser of:

– $100,000

– 100% vested account balance

– Subtract other loans

• DOL– Not PT because of:

• Reasonably equivalent basis rule

• Adequate security

– So 100% loan secured solely by vested account?

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News on 403(b) Preapproved Plans

• IRS has issued opinion letters

• March 31, 2020, end of RAP (Rev Proc. 2017-18)

• IRS isn’t allowing

• QCCOs in preapproved retirementincome trust (403(b)(9) plans

• Non-QCCOS in retirement incometrust plans at all

• IRS is imposing pre-ERISA vesting rules on governmental plans

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LABOR GUIDANCE

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New EBSA Leader

• Preston Rutledge was affirmed asAssistant Secretary of Labor for EBSA

• Mr. Rutledge has been a Senior Tax &Benefits Counsel at the Senate FinanceCommittee

• Has historically been sympathetic toretirement plan practitioners

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MEPs and PEPs

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In Case You Forgot …• In 2012, the DOL declared that most retirement MEPs are really

individual plans of each adopting employer (i.e., “Open” MEPs)

• In addition, the IRS has scared people in relation to MEPs because of the “one bad apple” rule – i.e., a disqualifying action by one employer could disqualify the entire plan, including the part that relates to other, unrelated employers

• The Hutcheson Debacle, i.e., the misappropriation of funds from a MEP leading to a 17-year prison sentence, made everyone nervous about MEPs

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In Case You Forgot …• Since then, Congress (particularly Orrin Hatch, with the help of

Preston Rutledge) has entertained several proposals to make MEPs more available• Let Open MEPs be MEPs• Add some regulatory controls to protect participants and increase

reportability

• Many in the federal government think that MEPs are a good way to:• Encourage more plans for small employers (expanding access to

retirement plans)• Decrease costs for adopting employers

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In Case You Forgot …

• Obama Administration DOL regulation (overturned by Trump Administration and Congress) provided for the possibility that a state could offer a MEP to employers within the state without it being an Open MEP

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Proposal Elements

• Significantly modify or eliminate the DOL’s distinction between Open MEPs and Closed MEPs so that unrelated employers may participate in one plan

• One plan, one Form 5500, one audit

• Mitigate or eliminate the “One Bad Apple” rule to be able to jettison the worm without throwing out the apple

• “Pooled Employer Plan” or PEP option

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PEP Proposed Structure

• Someone must be in charge: Pooled Plan Provider

• Accepts responsibility for plan oversight (named fiduciaryof the plan)

• Perhaps must be a financial institution subject to federal or state regulation

• Adopting employers retain fiduciary responsibility for choosing the PEP and monitoring the PPP

• There are required disclosures to adopters and employees

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DOL May Be Lightening Up!

• DOL published proposed regulation re association health plans• Responding to executive order to find ways to reduce

cost of health plans

• The narrow rules for pension MEPs are based on the existing health plan rules

• Theory: proposed regs could signal that the DOL will broaden pension MEP applicability

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DOL May Be Lightening Up!• The Proposed Regulation:

• Expands “commonality” rules so that an association is an “employer” if the members are in the same trade, industry, line of business or profession or are in geographically limited areas (such as state or metropolitan area)

• Requires that the plan have formal organizational structure with a governing body and bylaws• Needs to be controlled by the employer members

• Allows unincorporated sole proprietor without common law employees to be treated as employer

• Limits availability of these rules to plans organized and run by service providers

• Does not appear to discuss PEO rules

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Will the Proposed Regulation Make a Difference?• Too early to tell

• Not specifically aimed at retirement plans

• But, EBSA head may favor MEPs and encourage the DOL to change its position

• The entire regulation is proposed and might not be finalized at all

• Congress might act ..

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Current MEP Status

• Nothing really pending at this time in Congress

• Can still maintain an Open MEP

• Separate Form 5500 for each adopting employer

• Separate audits for each adopting employer with>100 participants

• Several companies are out there marketing various MEP products (likely with various levels of quality)

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PBGC

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New Missing Participants Program

• Includes terminating DC plans and small professional service DB plans • One-time fee for benefits over $250. No ongoing maintenance or

distribution charges

• Provides database and directory for unclaimed pensions from terminated plans

• Periodic PBGC searches for missing participants

• Effective for plan terminations on or after 1/1/18

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ERISA LITIGATION

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Litigation Challenges to the Fiduciary Rule• Status:

• So far, the DOL is undefeated

• Plaintiff claims include:• DOL overstepped authority to area vested in SEC• BICE violates free speech (prohibits truthful commercial speech)• Encompasses “sales related” nonfiduciary activities• Creation of private right of action is unlawful• Unduly vague• Violates Due Process• BICE shouldn’t be needed for fixed income annuities (they aren’t securities) and

inadequate notice given to FIA companies• Inadequate rule-making process

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But, at the End of July…

• Oral arguments in anti-fiduciary rule case in 5th Cir. on 7/31/17• 5th Circuit is considered to be conservative court

• Press reports indicate that the judges were somewhat hostile to the DOL’s defense of the rule

• Court can: affirm rule, throw out the rule, or remand the case to the lower court

• Still no decision …

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Advocate Health

• Supremes look at whether a plan sponsored by “an organization … the principal purpose … of which is the administration or funding of such plan … for the employees of a church … if such organization is controlled by or associated with a church” is a church plan and exempt from ERISA

• In particular, church-related hospitals or medical groups

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Advocate Health

• Answer: yes, exemption applies

• Basically, the case is a good example of the way the Supreme Court (and other courts) interpret language

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Osberg v. Foot Locker

• Foot Locker converted its definedbenefit plan to a cash balance plan in 1995• Conversion subjected participants to “wear away,” i.e., their benefit

did not increase until the cash balance account exceeded the PVAB

• Used assumptions that further reduced the chances of the participant having a new accrual

• Foot Locker did not disclose – in fact, inhibited the disclosure – of the wear-away

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Osberg v. Foot Locker

• District court found failure to disclose and, in fact, obstruction of discovery of wear-away to create mistaken understanding by participants and ordered reformation of plan to A+B (with proper assumptions) formula to meet participants’ expectations

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Osberg v. Foot Locker

• Key elements leading to result

• Demonstrable actions by FL to obscure the effect of the wear-away (e.g., SPD, disclosures did not discuss and were “designed to conceal” it)

• Representations by FL that indicated thatthe changes were “good news” to the participants

• Showing of proof that even a divisional CFO couldn’t figure out that there was a problem

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Osberg v. Foot Locker

• Defendants said that the statute of limitations should have run because the participants should have recognized and sued when they got their benefits

• Court found that the FL actions intended to obscure the existence of the wear-away made this argument particularly inappropriate

84

Ruiz v. Publix Super Markets: Beneficiaries

• Former Publix employee, Irialeth Rizo, designated her nieces and nephew as beneficiaries of 401(k) and ESOP Plan funds in 2008.

• In 2011, diagnosed with cancer.

• In 2015, trying to get her affairs in order, she calls Publix to find out how to change beneficiaries. She is told:

• Write a letter, naming beneficiaries with their SS#s.

• Be sure to sign and date the letter.

• There are also Beneficiary Designation Cards, but they are not important, because she is no longer an employee.

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Ruiz v. Publix Super Markets: Beneficiaries

• Rizo dictates a letter to Publix to Irene Ruiz, who transcribes it. The letter names Ruiz as beneficiary and includes her SSN.

• Rizo reads the letter 2-3 times, signs and dates it, and tells Ruiz tosend it.

• Rizo dies soon thereafter.• Upon receipt of the letter, Publix sends Rizo the Beneficiary Designation

Cards, but she has already passed away.• SPD clearly said that, to change beneficiaries, must obtain a Beneficiary

Designation Card and complete it and send it to the Retirement Department. “Your beneficiary designation is not valid under the Plan until the Retirement Department receives and processes the properly completed Beneficiary Designation Card.”

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Ruiz v. Publix Super Markets: Beneficiaries• Publix denies Ruiz’s claim for benefits.

• Ruiz sues: Rizo substantially complied with the Plan’s requirements for beneficiary changes.

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Ruiz v. Publix Super Markets: Beneficiaries• What is needed: substantial compliance vs. strict compliance?

• Courts are divided on this, with no specific decision in the 11th Circuit, which controls this case.

• The court cited to the Kennedy case, where the Supreme Court emphasized the importance of the terms of the written document and the instruments related to the document. The Supreme Court emphasized the need for a straightforward rule of “hewing to the directives of the plan document” in order to have a uniform administrative scheme.

• The Ruiz court said: after Kennedy, substantial compliance likely does not remain viable. Last valid designation controls.

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Representations and Reliance

• Two cases deal with statements made by plan officials on which participants relied … with negative results. Fiduciary breach? Other action available?

• Deschamp v. Bridgestone (6th Cir.)

• O’Shea v. UPS (1st Cir.)

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Deschamp

• Deschamp worked for Bridgestone in Canadian facility

• Offered transfer to US

• Concerned that he would lose service credit for time in Canada for benefits purposes

• Asked about it; told the people negotiating the transfer that he wouldn’t go if he lost service credit

• They assured him that he would be considered to have started work when he started with Canadian facility

• Nothing written at the time, but later statements and reports reaffirmed his date of hire to be the original date

90

Deschamp

• In fact, Bridgestone plan covered someone if:

• Classified as a US non-union employee; or

• Foreman, supervisor, plant protection employee, administrative or clerical employee, or confidential employee

• Deschamp was a maintenance manager

• Deschamp was twice offered a job with another employer that offered higher pay, but retirement benefit with 10 years of Canadian service was higher, so he declined and stayed with Bridgestone

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Deschamp

• After eight or nine years, Bridgestone did general investigation of dates of hire for plan participants and changed Deschamp’s date of hire to the date he started working in the US

• Deschamp discovered this on his own (was not informed by employer) and requested that the records be changed back to show his original date of hire. Bridgestone refused

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Deschamp• Court found for Deschamp on the basis of equitable estoppel

and fiduciary breach.• Said that the plan section was ambiguous if the true interpretation

was that a manager is not a “foreman” or “supervisor”• Due to ambiguity, reference by Deschamp to plan document would

not inform him that he was not eligible for the past service credit• In the case of a plan ambiguity, equitable estoppel applies if:

• Material misrepresentation of a fact;• The one making the representation knew what the truth was;• The one making the representation intended for the other to rely on it;• The one relying had no awareness that the representation was wrong;• The one relying did so to his or her detriment

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Deschamp• Court said:

• Reliance was reasonable – Deschamp asked initially and then several times thereafter, and was always reassured that he got the service credit (and the original date of hire appeared on materials he received over an extended period of time);

• The ambiguity in the document meant that Bridgestone was the only one in a position to clarify and did not do so;

• Bridgestone never advised Deschamp that the original representation was incorrect, even though it knew that he had consistently cared about this issue;

• He gave up possible jobs with other company that would have paid him more and possibly given him additional opportunities

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O’Shea• O’Shea worked for UPS for 37 years• In 2008, diagnosed with terminal cancer• Reached 65 as of 2009, so told UPS he would retire at end of

2008• UPS did not know he was terminally ill• Advised him to delay retirement to 2/28/09 to take advantage of

accrued vacation to maximize his service under the plan• He stopped work 1/7/09, considered to retire 2/28/09, annuity

starting date was 3/1/09

• Also, UPS provided an early retirement window that O’Shea took – which had a waiver of right to sue company

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O’Shea

• Elected life annuity with 10-year guaranty

• Election form said: “if you die before the guarantee period ends, your designated beneficiary will receive payments for the remainder of the guarantee period.”

• Plan had no preretirement death benefit other than QPSA and participant’s spouse predeceased him

• The Plan Document was clear that, in the event of death before annuity starting date, only amount due was QPSA

96

O’Shea

• O’Shea died 2/21/09 – seven days before his annuity starting date

• UPS declined benefit claim by beneficiary children because they were not entitled to QPSA

• Important: standard applied by the court was “abuse of discretion” – overturn PA only if arbitrary, capricious (i.e., could a reasonable PA make the same decision that UPS made?)

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O’Shea

• Court found for UPS:

• Company decision followed clear plan terms (not ambiguity, like Deschamps)

• Cannot sue for equitable estoppel because:

• The waiver O’Shea signed precludes the lawsuit (the cause of action arose after he signed the waiver, i.e., when he died)

• Court acknowledged that this is an unfortunate result

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How to Fully Reconcile?

• Deschamp:• Ambiguous plan terms put his discovery of the issue outside his

hands• Company repeated misrepresentation repeatedly and by various

people over the years• Deschamp took no action to harm his own ability to seek redress

• O’Shea• No plan document ambiguity• UPS didn’t know the impact of a recommendation that was

generally made to retiring employees (i.e., that O’Shea was ill)• Waiver signed by O’Shea made redress difficult

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Questions?

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Contact InformationIlene H. Ferenczy

Ferenczy Benefits Law Center2200 Century Parkway, Suite 560, Atlanta, Georgia 30345

(678) 399-6602 (V); (866) 515-5140 (toll free); (404) 320-1105 (F)

ilene@ferenczylaw.com

Follow us on Twitter: @ferenczylaw