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

29 C.F.R. §2560.503-1

The DOL’s revised ERISA disability claims procedures regulations will be taking effect early next month, and plan sponsors should take a hard look at plan processes over the next few weeks to ensure compliance. The new requirements apply to disability benefit claims filed after April 1, 2018, after a 90-day delay postponed the effective date from January 1, 2018. The revised regulations combine detailed participant notice requirements with a new strict compliance standard for disability benefit claims, increasing both expectations for plan procedures and litigation exposure for plans that don’t meet those expectations.

In the preamble to the final regulations, the DOL hints that the changes were not made to reduce litigation, but to acknowledge that litigation may be a part of the “full and fair review” process. The DOL cites a istudy of ERISA benefits litigation from 2006 through 2010, which concluded that cases involving long-term disability accounted for a whopping 64.5% of litigation, while health care plan litigation during the same period constituted only 14.4%. Later , the DOL states that “[b]ecause the claimant may have limited opportunities to supplement the [litigation] record…it is particularly important that the claimant be given a full opportunity to develop the record that will serve as the basis for the review…[.]” Plan sponsors, then, should ensure their plan’s disability benefits claim procedures will withstand judicial scrutiny.

In the preamble to the regulations, the DOL notes seven major provisions of the final rule:

  1. claims and appeals must be adjudicated in a manner designed to ensure independence and impartiality of the persons involved in making the benefit determination;
  2. benefit denial notices must contain a complete discussion of why the plan denied the claim and the standards applied in reaching the decision, including the basis for disagreeing with the views of health care professionals, vocational professionals, or with disability benefit determinations by the Social Security Administration;
  3. claimants must be given timely notice of their right to access their entire claim file and other relevant documents and be guaranteed the right to present evidence and testimony in support of their claim during the review process;
  4. claimants must be given notice and a fair opportunity to respond before denials at the appeals stage are based on new or additional evidence or rationales;
  5. plans cannot prohibit a claimant from seeking court review of a claim denial based on a failure to exhaust administrative remedies under the plan if the plan failed to comply with the claims procedure requirements unless the violation was the result of a minor error;
  6. certain rescissions of coverage are to be treated as adverse benefit determinations triggering the plan’s appeals procedures; and
  7. required notices and disclosures issued under the claims procedure regulation must be written in a culturally and linguistically appropriate manner.In keeping with this theme, the regulations introduce a strict compliance standard for disability benefits claims procedures. The regulations provide that if a plan fails to follow the claims procedure requirements (with a limited exception), the claimant will be deemed to have exhausted the plan’s administrative procedures, meaning that the claimant can bring a lawsuit and the plan’s determination regarding disability may not receive the special deference otherwise available. The preamble emphasizes that this standard “is stricter than a mere ‘substantial compliance’ standard.” While the regulations provide an exception for de minimis violations, that exception is only available if the de minimis violation (a) does not cause (and is not likely to cause) “prejudice or harm to the claimant,” (b) the violation was “for good cause or due to matters beyond the control of the plan,” and (c) “the violation occurred in the context of an ongoing, good faith exchange of information between the plan and the claimant.” The exception is unavailable “if the violation is part of a pattern or practice of violations by the plan.”

A number of these provisions change the adverse benefit determination notice requirements. The requirement to provide a “discussion of the decision” (see 29 C.F.R. §2560.503-1(g)(1)(vii)), is both a new requirement and a familiar one. In the preamble, the DOL notes that “[i]n the Department’s view, the existing claims procedure regulation for disability claims already imposes a requirement that denial notices include a reasoned explanation for the denial.” Noting that many disability claims notices currently provided by plans are “not consistent with the letter or spirit of the Section 503 Regulation,” the DOL has added additional regulatory specifics with a goal of reinforcing transparency and, in the DOL’s words, “appropriate dialogue” between plans and claimants. Another example of the changes is the new requirement that plans issuing a notice of denial on review must include not only a statement of the participant’s right to bring an action under ERISA §502(a), but also a description of any plan-specific limitations period for bringing a claim (including the calendar date on which the contractual limitations period expires for the participant’s claim).

While the clock ticks down to the effective date of the new requirements, plan fiduciaries should consider consulting with benefit counsel to determine what changes are necessary to ensure plan compliance.

On November 27, 2017, the Social Security Administration (SSA) announced that it is adjusting the maximum earnings subject to the Social Security tax for 2018 to $128,400.  As we have previously posted, the SSA had announced that it would increase the maximum earnings to $128,700.  The SSA made the adjustment after receiving a large number of corrected W-2s received in October 2017 by a national payroll provider.

Our previous post has been updated to reflect the change to the cost-of-living adjustment and is reproduced below.

2017 2018
Elective Deferral Limit 401(k), 403(b), 457(b) $18,000 $18,500
Catch-up Limit (age 50+) $6,000 $6,000
Defined Benefit Limit $215,000 $220,000
Defined Contribution Limit $54,000 $55,000
Dollar Limit – Highly Compensated Employees $120,000 $120,000
Officer – Key Employee $175,000 $175,000
Annual Compensation Limit $270,000 $275,000
SEP Eligibility Compensation Limit $600 $600
SIMPLE Deferral Limit $12,500 $12,500
SIMPLE Catch-up Limit (age 50+) $3,000 $3,000
Social Security Taxable Wage Base $127,200 $128,400
ESOP 5 Year Distribution Extension Account Minimum $1,080,000 $1,105,000
Additional Amount for 1-Year Extension $215,000 $220,000
HSA (Self/Family) Maximum Annual Contribution $3,400/$6,750 $3,450/$6,900
HDHP Minimum Deductible Limits $1,300/$2,600 $1,350/$2,700
Out-of-pocket Expense Annual Maximum $6,550/$13,100 $6,650/$13,300
Medical FSA $2,600 $2,650

 

Recently, the Internal Revenue Service (IRS) indicated that it would begin enforcing the Affordable Care Act (ACA) Employer Shared Responsibility provisions (commonly known as the “Employer Mandate”). Last week, the IRS followed through on its promise and began mailing notices informing employers of potential liability for the 2015 reporting year.

The ACA’s Employer Mandate requires that certain “applicable large employers” offer minimum essential health coverage that is affordable and provides minimum value to full-time employees (and their dependents). Generally, “applicable large employers” are employers with 50 or more full-time or full-time equivalent employees, although a 100-employee standard, rather than a 50-employee standard, was applied for 2015. Applicable large employers must also report certain health coverage information to the IRS and plan participants annually on Forms 1094 and 1095. Employers who do not offer compliant coverage may be faced with costly penalties.

Employers who may be subject to Employer Mandate penalties for 2015 will receive a notice in the coming weeks. Employers will have the option to appeal the determination before the IRS issues a demand for payment, including the option to seek a pre-assessment conference with the Office of Appeals. Employers will have the opportunity to request an extension so long as they do so within 30 days of receiving a notice. Because of the short response time provided and the potential for significant penalties, employers should be on the lookout for penalty notices.

 

On October 19, 2017, the Internal Revenue Service released the 2018 cost-of-living adjustments affecting dollar limits on benefits and contributions for qualified retirement plans. The Notice providing the cost-of-living adjustments is available here.  The Service also announced various other inflation adjustments in a new revenue procedure (including an adjustment to the dollar limitation for flexible spending accounts).  The Service previously announced the adjustments for Health Savings Accounts earlier this year.  Last week, the Social Security Administration also announced its cost-of-living adjustments for the upcoming year.

The following chart summarizes the 2018 limits for benefit plans. The 2017 limits are provided for reference.

UPDATE: The Social Security Administration changed its cost-of-living adjustments for 2018 on November 27, 2017. The chart has been updated to reflect this change.

 

2017 2018
Elective Deferral Limit 401(k), 403(b), 457(b) $18,000 $18,500
Catch-up Limit (age 50+) $6,000 $6,000
Defined Benefit Limit $215,000 $220,000
Defined Contribution Limit $54,000 $55,000
Dollar Limit – Highly Compensated Employees $120,000 $120,000
Officer – Key Employee $175,000 $175,000
Annual Compensation Limit $270,000 $275,000
SEP Eligibility Compensation Limit $600 $600
SIMPLE Deferral Limit $12,500 $12,500
SIMPLE Catch-up Limit (age 50+) $3,000 $3,000
Social Security Taxable Wage Base $127,200 $128,400
ESOP 5 Year Distribution Extension Account Minimum $1,080,000 $1,105,000
Additional Amount for 1-Year Extension $215,000 $220,000
HSA (Self/Family) Maximum Annual Contribution $3,400/$6,750 $3,450/$6,900
HDHP Minimum Deductible Limits $1,300/$2,600 $1,350/$2,700
Out-of-pocket Expense Annual Maximum $6,550/$13,100 $6,650/$13,300
Medical FSA $2,600 $2,650

 

The stories of an employer and a long-term disability insurer and claims fiduciary for an ERISA plan, defendants in two recent cases, ring so true. In the first case, the insurer was designated as claims fiduciary for an employer’s long-term disability plan, and ended up in litigation with the least friendly standard of review – de novo review – of the disability benefit determination.  This happened because the claims administrator failed to timely respond to the employee’s challenge of the amount of disability benefits awarded. In the second case, the employer had to pay a $750,000 death benefit due to its failure to notify a disabled, and then terminated, employee of his right and the process to convert his group life insurance policy to an individual policy. This failure was coupled with assurances from human resources to the former employee’s spouse that nothing more was required to ensure that all benefits would continue, and was found to be a breach of the employer’s fiduciary duty.

Neither case involved difficult ERISA concepts, and neither set new precedent. They drew our attention because both involved seemingly small and avoidable mistakes with costly implications for well-meaning employers or administrators.

In Coats, the claims administrator could have avoided the court’s de novo review of the disability benefit determination (as opposed to the deferential “abuse of discretion” standard), and maybe even litigation, by timely responding to the participant’s claim, even if only to say that it required more time (assuming there were legitimate reasons requiring a more lengthy review time). We have no doubt that the claims administrator was aware of the timeframe for responding; anyone even tangentially involved with ERISA plans is familiar with the claims procedure that is included in every summary plan description (and laid out in great detail in the applicable Department of Labor regulations). Likely there was a process for making sure that claims were timely addressed, but it seems that process failed.

In Erwood, the employer could have avoided liability by sending the notice of the life insurance policy conversion right when the employee terminated employment. Here, too, there was some level of awareness of the requirement to notify the participant of his conversion rights: the insurance company had provided a process for the employer to follow, but the process had been ignored as unworkable.

In neither case was it likely that problems arose due to a lack of knowledge of the specific rules that should have been followed; what may have been lacking is a good understanding of why it’s important to follow those rules. Easier said than done, of course, but the cases serve as a good reminder that establishing, following, and monitoring a compliant process matters. And if the rules seem unworkable, see if you can re-work them and find a way to comply. The cost of noncompliance can be steep.

I have written a number of posts (here, here, and here) on employers and business owners who have been held responsible for the multiemployer plan withdrawal liability of a different employer. In some cases, the liability comes from common ownership. In other cases, the liability comes because a new business is held to be a successor of the prior business. Board of Trustees of the Automobile Mechanics’ Local No. 701 Union and Industry Pension Fund v. Full Circle Group, Inc. is one such case.

The decision is from the Seventh Circuit and involves a company that contributed to a multiemployer pension plan, withdrew, became insolvent, and failed to pay the withdrawal liability. At the time of the withdrawal, the son of the president of the company had formed a new company and had purchased some of the assets and hired some of the employees. That new company participated in the plan for a short period of time while it tried to negotiate a new collective bargaining agreement with the union. Ultimately, a new agreement was not negotiated and the workers voted to decertify. In the meantime, the multiemployer pension plan sought to hold the son’s company liable for the withdrawal liability of the company from which the assets were purchased on the theory that it was a successor employer. The district court granted summary judgment to the son’s company, finding that the new employer could not be a successor because the new company did not hire all of the employees of the old company and there was no evidence that the new company knew of the withdrawal liability that the old company had.

The Seventh Circuit overturned the decision and sent the case back to the district court, finding that summary judgment was premature. Summary judgment is available only if the facts alleged by the party who loses summary judgment, even if true, are not sufficient to allow that party to win the lawsuit. The Seventh Circuit found that it was common knowledge that many multiemployer pension funds are underfunded and therefore have withdrawal liability. Because the son had been active in the father’s business, the son would know about the collective bargaining agreement and the obligation to contribute to the pension fund. Therefore, the son would have had at least constructive knowledge of the underfunding. Consequently, the court of appeals refused to uphold a decision of the district court that the son necessarily had no knowledge of the withdrawal liability. According to the Seventh Circuit, knowledge of that liability is important to holding a successor responsible for the liability.

The case now goes back to the district court, presumably for a trial on what the son knew and did not know at the time that he purchased the assets.

From the perspective of the purchaser of a business, it is troublesome that the Seventh Circuit was willing to base successor liability on the fact that there was some continuation of the business and that the purchaser was aware or should have been aware of the withdrawal liability. A purchaser may be more reluctant to purchase assets from a company that has contributed to a multiemployer plan because of concerns about becoming a successor employer for withdrawal liability purposes. That also makes it more difficult for companies that contribute to underfunded multiemployer pension plans to sell the business buyers who wish not to join the multiemployer plan will be concerned about successor liability.

Even asset purchasers not assuming collective bargaining agreements must be cognizant of withdrawal liability risks.

I noticed an interesting case from the Tenth Circuit which found that a two to three percent working interest in an oil and gas venture could generate self-employment income for the owner of that interest. The individual in question entered into both a purchase agreement and an operating agreement with the operator of the oil and gas venture. The operator designated the income as non-employee compensation and did not send a Schedule K-1. The individual paid federal income taxes on the income but did not pay self-employment taxes. The tax court determined that the individual’s arrangements with the operator constituted a partnership under the Internal Revenue Code and concluded that the individual should have paid self-employment taxes on that income. The Tenth Circuit upheld the decision of the tax court, rejecting the individual’s argument that he was a passive investor and therefore not responsible for self-employment income. The court determined that the existence of a partnership is a question of fact and looked at the rights that the individual had in the oil and gas venture, including rights to

•  Inspect receipts, vouchers, insurance policies, legal opinions, logs, reports, tests, and other records,

•  Audit the books and records,

•  Enter the property to inspect operations,

•  Obtain information reasonably requested regarding development and operation, and

•  Inspect the operator’s records.

The individual shared rights and costs in proportion to the share of the working interest.

I am not an oil and gas attorney but I would not be surprised if the rights that this individual held are typical of the industry and not often exercised by those who hold a two to three percent working interest. Nevertheless, they were sufficient for the tax court and the Tenth Circuit to find a partnership existed that generated self-employment income.

So what is the connection to multiemployer pension plan withdrawal liability about which I have written frequently? Withdrawal liability is imposed on employers who withdraw from multiemployer plans that are underfunded. If one of these oil and gas entities participates in a multiemployer pension plan and withdraws, all partners in the partnership would be responsible to pay the withdrawal liability if the employer does not itself make the payment. In other words, if the oil and gas venture becomes insolvent and does not pay, the plan is likely to look to the partners for payment. Unless such individuals can show that they are limited partners for federal tax purposes and not general partners, they are likely to be held personally responsible for the withdrawal liability. The conclusion that the individual is subject to self-employment income suggests that the individual is not a limited partner, but is more akin to an active investor.

I may be reading too much into this case; however, as multiemployer plans look more aggressively for solvent payers of unpaid withdrawal liability, individuals in the position of this oil and gas venturers may find themselves swept into the group of parties responsible for withdrawal liability.

IRS Annual Limits on Qualified Plans for 2017

On October 27, 2016, the Internal Revenue Service released the 2017 cost of living adjustments affecting dollar limits on benefits and contributions under qualified retirement plans and health savings accounts. Changes from 2016 were minimal. Notice 2016-62 is available here.

The following chart summarizes the 2017 retirement plan limits and other benefit plan limits. The 2016 limits are provided for reference purposes.

2016 2017
Elective Deferral Limit 401(k), 403(b), 457(b) $18,000 $18,000
Catch-up Limit (age 50+) $6,000 $6,000
Defined Benefit Limit $210,000 $215,000
Defined Contribution Limit $53,000 $54,000
Dollar Limit – Highly Compensated Employees $120,000 $120,000
Officer – Key Employee $170,000 $175,000
Annual Compensation Limit $265,000 $270,000
SEP Eligibility Compensation Limit $600 $600
SIMPLE Deferral Limit $12,500 $12,500
SIMPLE Catch-up Limit (age 50+) $3,000 $3,000
Social Security Taxable Wage Base $118,500 $127,200
ESOP 5 Year Distribution Extension Account Minimum $1,070,000 $1,080,000
Additional Amount for 1-Year Extension $210,000 $215,000
HSA (Self/Family) Maximum Annual Contribution $3,350/$6,750 $3,400/$6,750
HDHP Minimum Deductible Limits $1,300/$2,600 $1,300/$2,600
Out-of-pocket Expense Annual Maximum $6,550/$13,100 $6,550/$13,100
Medical FSA $2,550 $2,600

 

Social Security Taxable Wage Base information is available here, and Revenue Procedure 2016-28, addressing other benefits limits, is available here.

On September 16, 2016, the IRS and the Department of the Treasury requested public comment on ways the IRS and Treasury “can improve compliance…by making it easier for plan sponsors to satisfy requirements for qualified plan documents” in the wake of the determination letter program changes (Announcement 2016-32). In June, the Internal Revenue Service announced significant reductions to the determination letter program including the end of the five-year remedial amendment cycle (Revenue Procedure 2016-37). Generally effective January 1, 2017, a plan sponsor may only request a determination letter if (1) the plan has never before received a letter, (2) the plan is terminating, or (3) the IRS makes a special exception. Though the IRS is still accepting Cycle A plan determination letter applications until the January 31, 2017 deadline for that cycle, as more time passes plan sponsors may begin feeling uneasy in the absence of IRS blessing of their plan document.

Recognizing the impact the determination letter program reduction and plan sponsors’ need for certainty, the Treasury and the IRS now specifically request comments on the following four topics:

(1)   Incorporation by reference. A limited set of Internal Revenue Code plan document requirements may be satisfied by incorporating the applicable Code requirement by reference. Should the list be expanded? If so, how and why?

(2)   Circumstances under which plan provisions may not be required. If a required provision isn’t currently applicable to the plan due to the type of benefits offered, etc., should the provision still be required? What if the provision becomes applicable at a later date?

(3)   Conversion to pre-approved plans. What prevents plan sponsors from using a pre-approved plan document (master or prototype plan or volume submitter plan)? How can the Treasury and IRS make conversion to a pre-approved plan a more attractive option?

(4)   Additional ways to facilitate compliance. What other guidance would assist with qualified plan document requirements?

Parties must submit comments in writing before the deadline of December 15, 2016.

Mail comments to the Internal Revenue Service, CC:PA:LPD:PR (Announcement 2016-32), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Alternatively, email comments to notice.comments@irscounsel.treas.gov (including “Announcement 2016-32” in the subject line). In preparing their comments, parties should keep in mind that submissions are available for public inspection.

The announcement also noted that Treasury and the IRS are working on an update for the IRS’s voluntary compliance program, the Employee Plans Compliance Resolution System contained in Revenue Procedure 2013-12, as the changes to the determination letter program also effect certain EPCRS corrections.