Understanding Employee Benefits and key developments in the employee benefits field and items of interest to our clients. MORE

Employers who participate in multiemployer pension funds know that if they withdraw from those funds they may be required to pay withdrawal liability if the plan is underfunded. Employers who sell their assets to an unrelated buyer can avoid that withdrawal liability if the buyer agrees to assume an obligation to contribute to the pension fund for substantially the same number of contribution base units as the seller was contributing and meets certain other requirements. If the buyer does not meet these requirements, then the selling employer will be considered to have withdrawn from the fund and can be assessed withdrawal liability even if the buyer continues to participate in the fund after the sale.

In a recent case from the U.S. District Court for the Northern District of California, the court refused to dismiss the claim of the multiemployer fund that a buyer was a successor employer to a seller who failed to pay its withdrawal liability. The buyer had not met the requirements for assuming the seller’s obligation to contribute to the fund but had in fact entered into a collective bargaining agreement to contribute to the fund after the sale. The seller had withdrawn from the multiemployer fund after selling its assets to the buyer. The fund waited about five years to assess withdrawal liability against the seller, which then challenged the assessment on the grounds that the fund had waited too long to make the assessment. The fund rejected that timeliness claim and then sued the seller to collect the withdrawal liability. The fund later amended its complaint to add the buyer as a defendant claiming that the buyer was responsible for the seller’s withdrawal liability on the theory that the buyer was a successor employer to the seller.

The buyer asserted that it was not the withdrawing employer and therefore could not be held liable for the seller’s withdrawal liability. The court refused to dismiss the claim on a motion to dismiss, stating that the buyer could be responsible for the seller’s withdrawal liability if the buyer was the alter ego of or successor to the seller. The court noted that buyers have been found liable for delinquent contributions to a multiemployer fund where the buyer was a successor employer to the seller who owed the contributions. Of course, delinquent contributions would have been owed at the time of the purchase transaction. Withdrawal liability, on the other hand, typically arises as a result of the purchase transaction itself and so would not be owed until after the purchase transaction. Nevertheless, the court concluded that a buyer could be responsible for the seller’s withdrawal liability if the buyer is a successor employer to the seller and if the buyer had knowledge of the fact that the seller was liable for the pension fund’s unfunded liabilities. The court noted that the buyer substantially continued the seller’s automotive dealership operations, including using the same business name, providing the same services, using the same facilities, machinery and equipment, employing the same employees, completing work in process and serving the same customers. Thus, under the facts as alleged, the buyer could be considered the successor to the seller and therefore liable for the seller’s withdrawal liability.

Because this case was decided on a motion to dismiss, the facts alleged in the complaint were treated as true. Therefore, we do not know whether the buyer will actually have to pay the withdrawal liability imposed on the seller. However, the fact that the court found that the buyer could be liable for the withdrawal liability raises the stakes for buyers of assets of employers who will be withdrawing from multiemployer pension funds. Many of those pension funds have substantial withdrawal liability at present. Buyers and sellers who are well advised negotiate carefully the extent to which the buyer will or will not assume that liability. This case suggests that buyers who take steps not to assume the liability may nevertheless find themselves having to pay the liability under a successor employer theory. Unless the case is overturned on appeal, this may make it more difficult for employers who participate in underfunded multiemployer pension funds to sell their businesses.

BenefitsNotes.com is not the only blog maintained by attorneys at Leonard, Street and Deinard. Dodd-Frank.com, developed and maintained by attorneys at Leonard, Street and Deinard, is dedicated to making sense of the complex Dodd-Frank legislation and helping businesses understand how it will affect them specifically. A recent Dodd-Frank.com post highlights how the employee benefits and securities law practice areas often overlap. Check out this post relating to a new bulletin from the Consumer Financial Protection Bureau providing interim guidance on applicability of Regulations adopted pursuant to Dodd-Frank to retirement plans: http://dodd-frank.com/cfpb-permits-contributions-to-qualified-plans-under-loan-originator-compensation-rules/.

On Monday March 26th, almost exactly two years after its enactment on March 23, 2010, the United States Supreme Court will begin the first of three days of oral arguments relating to the health care reform law, the Patient Protection and Affordable Care Act of 2010 (“PPACA”). The Supreme Court agreed to hear six hours of arguments on four issues raised in connection with three cases. The outcome of these arguments could drastically alter the health care reform law, minimally alter it, or delay any decision for the time being.

 The first 90 minutes of argument are scheduled for Dept. H&HS v. Florida relating to the so‑called anti-injunction provision of the Internal Revenue Code, which prevents lawsuits that ask a court to restrain the collection of a tax until the tax is actually being collected. A special attorney was appointed by the Supreme Court to argue that the anti-injunction provision applies since neither the federal government nor the opponents are arguing that it does apply.  A “shared responsibility payment” is scheduled to be imposed in 2015 upon individuals who do not obtain health insurance in 2014. The question then becomes, is this shared responsibility payment a tax? If so, it would not be appropriate for the Court to issue a decision on the requirement that individuals obtain health insurance coverage (the so‑called individual mandate) until the tax is actually being collected (i.e., 2015).

The second day will have a two hour argument on the individual mandate. The issue boils down to whether the federal government is permitted to enact an individual health care mandate under the Constitution. Opponents will argue that the federal government lacks the power to force individuals to purchase health insurance. Proponents will argue that it is within the federal government’s power under the commerce clause of the Constitution to pass laws relating to interstate commercial activity. Proponents also argue that the federal government has the power under the necessary and proper and taxing power provisions of the Constitution.

On the third and final day, the Supreme Court will hear arguments on two issues. First, Nat. Fed. Indep. Business v. Sebelius, Sec. of H&HS will be heard for 90 minutes regarding the ability to sever the individual mandate from the remainder of the law if the individual mandate were to be found unconstitutional. The federal government will argue that if the individual mandate is unconstitutional only that provision and the guaranteed-issue provision requiring insurers to issue policies to customers no matter the individuals health status should be struck down. Opponents will argue that without the individual mandate, Congress would never have passed any health reform and therefore the entire law should be struck down if the individual mandate is unconstitutional.

The second argument of the final day will address an issue from Florida v. Dept. of H&HS regarding the ability of the federal government to require states to expand Medicaid eligibility. The opponents will argue that the required expansion violates the Tenth Amendment by impinging upon the individual states’ right to sovereignty.

After the oral arguments in March, it may be some time before the Supreme Court issues any opinions. We will continue to post on these legal challenges to health care reform as new developments occur.

 

The Department of Labor recently posted the report of the ERISA Advisory Council on Current Challenges and Best Practices for ERISA Compliance for 403(b) Plan Sponsors. The report contains a good side by side comparison of 403(b) and 401(k) plans that may be of interest to plan sponsors eligible for both types of plans and trying to decide which to adopt. Unfortunately, the report is more “Challenges” than “Best Practices.” Most of the best practices would require additional guidance from either the Internal Revenue Service or Department of Labor before plan sponsors could adopt them. Perhaps the report will spur the agencies to act.

The Department of Labor recently posted the report of the ERISA Advisory Council on Privacy and Security Issues Affecting Employee Benefit Plans. The report contains some good due diligence questions for plan sponsors to ask their service providers about privacy and security of personal identifiable information (PII), especially for retirement plans. While banks and other financial institutions are bound by certain federal laws to protect PII (e.g., under the Gramm Leach Bliley Act), TPAs not associated with financial institutions may not be subject to comprehensive regulations in this area.

 Plan sponsors looking for general information and some resources on this topic may find the report of interest.

Mary worked for IT, Inc. at its headquarters in Maryland. Her husband moved to New Jersey for his work and Mary moved with him. Mary continued to work for IT, Inc., writing computer code from her home in New Jersey and uploading her work to her co-workers in Maryland via the Internet. IT, Inc. withheld New Jersey income taxes from her pay and filed appropriate employment tax returns in New Jersey.

The problem? By employing one telecommuter in New Jersey, IT, Inc. is now doing business in New Jersey and is liable for New Jersey franchise (income) taxes. That was the decision of the New Jersey Superior Court in Telebright Corporation, Inc. v. Director, New Jersey Division of Taxation.

Most employers with a single telecommuting employee in a state do not expect to have to pay corporate income taxes to that state – but they might be required to do so. They might also be required to pay unemployment compensation and workers compensation in the state where the employee is located and to follow the employment laws of that state with respect to that employee. The compensation and benefits twist: In addition to following the correct payroll and wage and hour requirements of the state where the employee lives, the employer should also check that the insurers of any insured benefit plans (e.g., life, health, dental, long term disability, etc.) know that there is an employee in another state and that state insurance laws allow the insurer to cover that employee.

Employers contemplating telecommuting arrangements with employees in other states should think through all the ramifications before agreeing to the relationship. They should think even harder if the employee is in another country. In some cases, the benefits of a single employee’s services may not outweigh the compliance and tax headaches that those services carry with them.

Most employers are aware that the federal Defense of Marriage Act (DOMA) defines marriage as the union of one man and one woman for federal law purposes, including federal tax and benefits law. For benefits governed by ERISA, this means that state laws that recognize same sex marriages are preempted. Although for some benefits (e.g., health plan benefits) an employer could choose to recognize same sex partners, for other federal benefits (e.g., qualified domestic relations orders (QDROs) dividing pension or 401(k) benefits), an employer is not permitted to treat a same sex spouse under state law as a spouse under the pension plan.

 The Obama administration has determined that it can no longer defend DOMA against constitutional challenges in lawsuits that have been filed raising that issue. However, the administration intends to continue to enforce the law until it is either repealed or held unconstitutional in a final court decision. Congress has chosen to defend the law in some of the suits that have been filed.

 In the meantime, at least some courts have held that the law is unconstitutional. The most recent decision is Golinski v. US Office of Personnel Management, in which a US District Court judge ordered the federal government to honor an employee’s request to enroll her same sex spouse in the federal employees health benefits program. The two were married during the time that same sex marriages were permitted in California. An earlier decision in Massachusetts ordered the federal government to allow legally married same sex spouses access to social security benefits (e.g., death benefits) and benefits available to legally married opposite sex spouses of federal employees (e.g., spousal health coverage).

 So far the cases affect the federal government and the benefit programs that it maintains. However, if the law is ultimately declared to be unconstitutional, employers will be obligated to recognize same sex spouses as spouses for purposes of their benefit plans where spouses are given rights under federal law. These would include QDROs (as mentioned above), rights to death benefits, including qualified joint and survivor annuities in retirement plans, and COBRA and special enrollment rights under health plans, among others. These rights would not extend to unmarried domestic partners. Employers might also be obligated to recognize same sex marriages contracted in other states even if the state in which the employer does business does not recognize such unions.

 Whether or not operating in a state that recognizes same sex marriages employers should pay attention to this developing area of the law.

In many cases where the IRS claims that compensation is not “reasonable,” the focus is on whether the compensation is too high to be deductible by the employer. The arguments are often reversed in the S corporation context. Because there is only one level of tax in the S Corporation, some owners try to minimize the amounts paid to them as wages and maximize the non-wage distributions paid because the wages are subject to employment taxes and the distributions are not. So in its audits of S Corporations, the IRS sometimes finds itself in the position of arguing that the compensation paid to an owner was unreasonably low, particularly in situations where the S Corporation owner is a service professional (e.g., lawyer or accountant) and the revenue of the business is generated in large measure by the owner.

 That is the situation of Watson v.United States, a recent Eighth Circuit decision involving an accountant’s S Corporation. In that case, the court held that the IRS could recharacterize dividends paid to the S shareholder as wages and subject those dividends to FICA (Social Security) taxes. In doing so, the Eighth Circuit held for the first time that the concept of “reasonable compensation” applies for FICA tax purposes, as well as for income tax purposes, and that the employer’s intent not to pay wages or salary, but instead to make a non-wage distribution, is not dispositive of whether an amount paid is compensation for tax purposes.

 S Corporation owners should keep in mind the requirement that “reasonable compensation” be paid in structuring their compensation arrangements. They should also keep in mind that under qualified retirement plan rules, only the wage payments can be “compensation” for purposes of 401(k) deferrals or other qualified plan contributions. Unreasonably low compensation can also result in low retirement plan benefits.

I am of an age to be contemplating retirement (and I work in the field so that age may come sooner for me than for others).  My parents are both in their late 80s; I had a grandmother who died a few weeks shy of her 100th birthday.  So I have a personal interest in the risk of outliving one’s retirement assets.

The IRS recently issued two sets of proposed regulations and two notices that attempt to address these issues.  One set of proposed regulations, if finalized, will permit plan participants (and IRA holders) to use up to the lesser of 25% of their account balances or $100,000 to purchase what is being called a “Qualifying Longevity Annuity Contract” or QLAC, which is a type of annuity contract purchased before age 70 to begin paying benefits at between ages 80 and 85.  The goal would be to allow participants to use a portion of their retirement assets to ensure that they will have a stream of lifetime income if they outlive their life expectancy so that they can better manage the remaining assets between the time that they retire and the time that the QLAC begins.

The QLAC has a number of requirements and restrictions attached to it; I am assuming that once the IRS finalizes these regulations, the insurance industry will develop products that meet the requirements.  But will employers sponsoring 401(k) plans add them either as an investment option for active participants or as a distribution option for retired participants? Because plan sponsors may have access to institutional pricing of annuities and because plans must provide annuities on a unisex basis, policies available through a plan may provide a better value (particularly for women) than policies available through an IRA, where pricing is more likely to be retail pricing and where gender based rates could be used. 

The reason that plan sponsors may be reluctant to offer QLACs in their plans is fiduciary risk.  The Department of Labor (DOL) places strict standards on plan sponsors/fiduciaries that provide annuities under an individual account plan, such as a 401(k) plan.  The sponsor must engage in an objective, thorough and analytical search for the right provider; must obtain sufficient information to assess the ability of the annuity provider to make all future payments; must consider the costs (fees and commissions) in relation to the benefits and services provided under the contract; and must conclude that the provider is financially able to meet its obligation to make future payments and that the costs are reasonable.  If necessary, the fiduciary must hire an expert to assist it in evaluating the products.

To date, plan sponsors have been reluctant to take on the responsibility of providing annuities to plan participants.  In addition to this IRS guidance, the DOL may also need to provide guidance to plan sponsors that convinces them that the benefits of the QLACs will outweigh the fiduciary risks of QLAC selection. 

I can hope that the guidance comes before I retire.