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

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.

Many employers self-administer welfare benefit plans such as life insurance or disability insurance plans. This self administration requires the employer to determine eligibility for coverage, remit proper premiums and notify the insurance carrier about changes in coverage. The insurance carrier often does not even know the names of the covered individuals and the coverage amounts. However, if the employer makes a mistake, the employer can be left holding the bag.

Consider the case of Van Loo v. Cajun Operating Company, a recent U.S. District Court decision. That case involved group term life insurance coverage. Employees were eligible for a base amount of coverage and could buy supplemental coverage. In some cases, evidence of insurability (EOI) was required for the additional coverage. The plan was administered by the employer, and the open enrollment materials where an employee could elect the additional coverage simply told the employee that evidence of insurability “may be required” and that the employee would be sent the necessary forms if it was required.

The employee in question increased supplemental coverage over the years beyond the level at which coverage was available without evidence of insurability. However, the employee was never sent the EOI form and the EOI form was never completed. When the employee died of an aggressive form of cancer, her parents, the beneficiaries, made a claim for the benefit, but the insurance company paid only the amount allowed without EOI despite the fact that the employee had been paying premiums on the increased amount for at least five years without knowing that coverage was not in force.

The employer made a number of arguments about why the coverage should be limited to the guaranteed issue amounts, but the court rejected them all. The court found that the employer breached its fiduciary duty by administering the plan in a way that allowed the employee to believe incorrectly that coverage was in place, particularly when the employee had paid premiums for the coverage for a number of years. The court reached this result even though the insurance company reported that given the employee’s health history, the carrier would not have approved the additional coverage in any case.

The insurance company is not responsible for more than guaranteed issue amount. The employer will have to pay the excess amount, in this case, $314,000. It is also likely that the employer will have to pay for the attorney’s fees of the employee’s parents, as well as interest on the unpaid amount.

The lesson for employers: If you self-administer your group term life insurance policy, make sure you follow and enforce all policy limits that you are administering – and follow up on evidence of insurability requirements when employees elect to increase their coverage amounts.

The US Department of Labor (DOL) has proposed changes to the Form 5500 and schedules that will affect ERISA Title I group health plans of all sizes, but small group health plans should be especially aware of the changes. Certain small group health plans (fewer than 100 participants) are currently exempt from filing the Form 5500 Annual Return if they are fully insured, unfunded, or a combination of these. Under the proposed Form 5500 changes, these plans would no longer be exempt and all group health plans covered by Title I would be required to file a Form 5500 including a new Schedule J, Group Health Plan Information. This new schedule would drastically expand the group health plans information gathered.

But the increase in public data comes at a cost to the private sector, according to estimates provided by the DOL . Approximately 6,200 small group health plans currently file a Form 5500, at an aggregate cost of $4.1 million, but under the proposed changes that number would increase to an estimated 2,158,000 small group health plans at an estimated aggregate cost of $227.9 million. See “Estimated Burden Change by Type of Filer”, here at page 47502, for data regarding the impact of the proposed Form 5500 changes on large plans and pension plans. Schedule J alone is estimated to affect an estimated 2,205,900 group health plans of all sizes and will increase Form 5500 filing costs by $202.6 million, while the total increased burden from all proposed Form 5500 changes for group health plans is estimated to be a 2.2 million hours and $241.6 million.

So what would be reported on the proposed Schedule J? Fully insured group health plans with fewer than 100 participants would complete a limited portion of Schedule J covering information on participation, coverage, insurance company, and basic benefits. The complete schedule would also require reporting of:

  • How many individuals are receiving COBRA coverage through the plan
  • Who may be covered under the plan (employees, spouses, dependents, and/or retirees)
  • Whether the plan has a high deductible
  • Whether the plan is an FSA or HRA (or has either as a component)
  • Whether the plan is claiming grandfathered status under the ACA
  • Information about any rebates or reimbursements from a service provider, such as a medical loss ratio rebate under the ACA
  • Total premium payment and other details regarding stop loss coverage
  • Information about employer and participant contributions (for plans not completing Schedule H), and whether any contribution forwarding was untimely
  • Claims payment information, including:
    • Counts of claims approved and denied, with a dollar amount of claims paid
    • Counts of benefit claim appeals (and results of appeals)
    • Counts of benefit claims adjudicated late
    • Counts of pre-service claims appealed (and results of appeals)
    • Whether the plan was unable to pay claims at any time during the year
  • For plans with insurance policies, whether premiums were paid timely and whether any delinquent payments resulted in coverage lapse
  • Self-reporting of compliance with various federal laws (including HIPAA, GINA, MHPAEA, and ACA)
  • Whether the plan is subject to, and if so, has complied with the Form M-1 filing requirements, a question that would be moved from the current Form 5500

The deadline for submitting comments on the proposed changes is October 4, 2016. Changes to the form would generally be effective for plan years beginning on or after January 1, 2019.

Employers who self fund their medical plans often have contracts with their third party administrators about claims processing. Some of those contracts provide that the claims processor has discretion to decide claims; others provide that the claims processor is simply acting in a ministerial fashion so that the employer ultimately retains discretion to decide contested claims. Under ERISA, if a claims processor has discretion to decide claims, then a court will overturn the decision only if it is arbitrary and capricious. This standard of review is quite favorable to the plan, and employers often take steps to ensure that they have the benefit of that standard of review.

A recent federal circuit court decision emphasizes the importance of properly providing for that discretion. The case involved an employee whose son incurred claims for a stay at a residential/educational mental health care facility. Blue Cross Blue Shield of Massachusetts denied payment of the claims for treatment in the facility based on a failure to show medical necessity. The parent employee challenged the denial which the plan upheld. The district court noted that the administrative services contract between the employer and Blue Cross Blue Shield had a clear designation of discretionary authority to Blue Cross to decide claims. The plan certificate, which was the only document delivered to the employee participant, was less clear. It simply said that Blue Cross Blue Shield “decides which health care services and supplies you receive (or you are planning to receive) are medically necessary and appropriate for coverage.” While the district court found that this language was sufficient to grant discretion to Blue Cross, the appeals court disagreed. According to the appeals court, the grant of discretion must be explicit. The certificate and the contract could not be read together to give Blue Cross the discretion to decide claims. The contract was not part of the plan document and the employee did not receive a copy of it.

The appeals court found that Blue Cross had complied with the claims procedure and had provided a full and fair review of the claim. However, because the district court reviewed that claim denial under an arbitrary and capricious standard and because that standard was inappropriate, the case was remanded back to the district court. The district court will need to review the claim denial under a “de novo” standard which will not give deference to the decisions that Blue Cross made.

Employers often rely on their third party administrators to decide claims and to generate documents that are delivered to participants describing the plan and the claims procedure. Employers may wish to check their documents to make sure that they understand whether their third party administrator is given discretion to decide claims or whether the employer itself has that obligation. If the employer does not want to decide claims and expects its third party administrator to assume that obligation, the employer should make sure that the contract with the third party administrator so provides. The employer should also check to make sure that both the summary plan description and the formal plan documents give an explicit grant of discretionary authority to the third party administrator to decide claims. Only in that way can the employer be confident that the courts will review denied claims using the favorable (to the plan) arbitrary and capricious standard.