Employee Benefits & Executive Compensation Blog

The View from Proskauer on Developments in the World of Employee Benefits, Executive Compensation & ERISA Litigation

Annual IRS Revenue Procedure Includes Surprising Change to User Fees

On January 2, 2018, the IRS published its annual bulletin that updates procedures for requesting rulings, determinations, and other guidance from the IRS. As in past years, the bulletin includes new user fees for determination requests and submissions under the Voluntary Correction Program (“VCP”). But this year’s update includes a significant surprise for the VCP program; and while changes in past years typically went into effect about a month after they were announced, this year’s changes are effective immediately.

For many VCP filings, the new fees are significantly lower than in the past. Instead of fees based on the number of participants and capped at $15,000, the new fee schedule is based on plan assets and caps out at $3,500 (for a plan with over $10 million in assets). While this is certainly a welcome change, the IRS has eliminated the availability of reduced fees for streamlined filings. For example, in 2017 plan sponsors could correct minor plan loan and minimum required distribution errors for as little as $300; these streamlined options are no longer available.

Under the new fee schedule, the user fee for a VCP filing is the same for any type of error and there is no limit on the number of errors that can be included in a submission. Plan sponsors considering the pros and cons of self-correction vs. VCP should consider the new fee schedule.

In addition to the VCP change, the user fee for a Form 5310 filing (a determination letter application for a terminating plan) has increased from $2,300 to $3,000.

IRS Once Again Extends Distribution (Not Filing) Deadline for ACA Reporting and Continues Good Faith Standard

Following the old “better late than never” axiom, the IRS recently announced (see Notice 2018-06) that once again it would be extending the distribution (but not filing) deadline for the Affordable Care Act (ACA) reporting requirements set forth in Sections 6055 and 6056 of the Internal Revenue Code (the “Code”). Under Code Section 6055, health coverage providers are required to file with the IRS, and distribute to covered individuals, forms showing the months in which the individuals were covered by “minimum essential coverage.” Under Code Section 6056, applicable large employers (generally, those with 50 or more full-time employees and equivalents) are required to file with the IRS, and distribute to employees, forms containing detailed information regarding offers of, and enrollment in, health coverage. In most cases, employers and coverage providers will use Forms 1094-B and 1095-B and/or Forms 1094-C and 1095-C. The chart below shows the new deadline for distributing the forms.

  Old Deadline New Deadline
Deadline to Distribute Forms to Employees and Covered Individuals Jan. 31, 2018 March 2, 2018
Deadline to File with the IRS Feb. 28, 2018 (paper)

April 2, 2018 (electronic)

NO CHANGE

The regulations issued under Code Section 6055 and 6056 allow for an automatic 30-day extension to distribute and file the forms if good cause exists. An additional 30-day is extension is available upon application to the IRS. Notice 2018-06 provides that, as was the case last year, these extensions do not apply to the extended due date for the distribution of the forms, but they do apply to the unchanged deadline to file the forms with the IRS.

Perhaps more significantly to many, the IRS carried over from last year a second valuable measure of relief. Specifically, the IRS continued the interim good faith compliance standard under which the IRS will not assess a penalty for incomplete or incorrect information on the reporting forms if a filer can show that it completed the forms in good faith. As was the case last year, this relief only applies if the forms were filed on time. Thus, filers would be wise to distribute and file forms, even imperfect ones, timely and should document their good faith efforts.

Those that do not file by the new deadlines have a more uphill battle to avoid penalties under Code Sections 6721 and 6722. The IRS stated in Notice 2018-06 that it would apply a reasonable cause analysis when determining the penalty amount for a late filer. According to the IRS, this analysis will take into account such things as whether reasonable efforts were made to prepare for filing (e.g., gathering and transmitting data to an agent or testing its own ability to transmit information to the IRS) and the extent to which the filer is taking steps to ensure that it can comply with the reporting requirements for 2017.

Plaintiffs Lack Standing to Bring ERISA Fee Litigation Case

A federal district court in Georgia dismissed claims by participants in Delta Air Lines, Inc.’s 401(k) plan who alleged that Delta breached its ERISA fiduciary duties by allowing the plan to invest in funds that allegedly charged excessive fees and unperformed against comparable funds. Consistent with rulings in other jurisdictions, the court held that plaintiffs lacked Article III standing because they failed to allege that they were invested in the challenged funds or that they paid excessive fees. In so holding, the court explained that personal injury is a prerequisite to standing even when plaintiffs purport to bring their claims on behalf of a 401(k) plan. The court also rejected plaintiffs’ argument that the mere fact that defendants allegedly violated ERISA rights creates an injury to them. The case is Johnson v. Delta Air Lines, Inc., No. 1:17-cv-02608, ECF No. 53 (N.D. Ga. Dec. 12, 2017).

Tax Reform Act Denies Deductions for Some Sexual Harassment Settlements

In a little-noticed provision buried deep inside the new Tax Cuts and Jobs Act (signed into law on Dec. 22) is the following “denial of deduction”:

Payments related to sexual harassment and sexual abuse – No deduction shall be allowed under this chapter for –

  • any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement; or
  • attorney’s fees related to such a settlement or payment.”

The statute adds a new Section 162(q) to the Internal Revenue Code, effective for amounts paid or incurred after December 22, 2017.  Where applicable, it may require taxpayers to choose between non-deductibility of the payment and non-disclosure of the settlement.

For a summary of the statue, please see our California Employment Law Update blog post.

Fifth Circuit Borrows One-Year Statute of Limitations for Section 502(c)(1) Claim

The Fifth Circuit held that the statute of limitations for an ERISA § 502(c)(1) claim—a claim for penalties for failure to provide certain documents within thirty days of a written request—was subject to a one-year statute of limitations.  In so holding, the Court borrowed the statute of limitations from the Louisiana Civil Code for claims alleging a violation of a general duty owed, and rejected plaintiff’s argument in favor of the ten-year breach of contract statute of limitations. Accordingly, the Court ruled that the claim expired one year and thirty days from the date of the request for documents. The case is Babin v. Quality Energy Servs., Inc., No. 17-civ-30059, 2017 WL 6374738 (5th Cir. Dec. 14, 2017).

IRS Issues Limited Section 409A Relief to Pay Income Taxes on Pre-2009 Section 457A Deferrals

The Internal Revenue Service (the “IRS”) has issued Notice 2017-75 (the “Notice”), which provides certain limited relief from the strict requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), in order to pay income taxes on deferrals attributable to services performed before 2009 that are required to be included in gross income under Section 457A.

For a summary of the Notice, please see our Tax Talks blog post.

Department of Labor Finalizes 90 Day Delay on New Disability Claims Procedures

On November 24, 2017, the Department of Labor (“DOL”) released regulations finalizing a 90-day delay on the application of new claims procedures for disability claims. The Obama-era regulations providing for the new claims procedures were set to become effective for disability claims filed on or after January 1, 2018. In the absence of additional regulatory changes, the new claims procedures will apply to disability claims filed on or after April 1, 2018.

The 60-day public comment period for the final disability claims procedures regulations remains open (ending on December 11, 2017), although the DOL did not extend that period. Because the DOL is still accepting comments on the final regulations relating to their possible rescission, modification or retention, the ultimate fate of the final regulations remains uncertain.

Despite the uncertain climate, because of the time needed to adopt and implement new procedures, plans may still wish to continue working toward being in compliance with the final regulations on April 1, 2018 until more information and guidance is available. We will continue monitoring for developments. For more information on the new disability claims procedures and the 90-day delay, see our August 1, 2017 and October 12, 2017 blog entries.

Department of Labor Finalizes 18-Month Delay of Fiduciary Rule Exemptions

On November 27, 2017, the Department of Labor (“DOL”) finalized the delay of the applicability date for certain conditions for exemptions to the fiduciary rule until July 1, 2019. This delay was initially proposed in late August as described here.

Although certain requirements have been delayed, the fiduciary rule’s broad definition of “fiduciary” and the “impartial conduct standards” continue in effect, subject to a good faith compliance standard. (Those requirements have been in effect since June 9, 2017.)  Consequently, financial institutions and advisers continue to be subject to requirements to give prudent advice that is in the retirement investor’s best interest, charge no more than reasonable compensation, and avoid misleading statements. But other requirements, including the written contract required by BIC Exemption and certain disclosure requirements, have been delayed pending DOL’s review of the rule.

DOL’s stated reason for the delay is that it has not yet completed its reexamination of the fiduciary rule and exemptions, as directed by the President in his February 3, 2017 memorandum, including its review of hundreds of comments that it received from stakeholders. In addition, DOL stated that it intends to use the additional time to consult further with other regulators, including the National Association of Insurance Commissioners and the SEC.

By continuing the status quo during the review period, DOL appears to be allowing the rule’s core principles to grow roots. At the same time, however, DOL has suggested that it intends to make significant changes to the compliance details. First, DOL has stated that it anticipates proposing a new streamlined class exemption in the near future. Second, DOL has made clear that it does not want stakeholders to incur additional costs to comply with conditions that DOL might revise, repeal, or replace.

ACA Employer Mandate Assessments Coming

Within the past few weeks, IRS officials have informally indicated that the IRS would begin assessing tax penalties under the Affordable Care Act’s (ACA) employer shared responsibility. The IRS has now updated its Questions and Answers on Employer Shared Responsibility Provisions under the Affordable Care Act (see Q&As 55-58) and has issued a form preliminary tax notification letter (Letter 226J).  The first round of letters is expected before the end of the year and will relate to the 2015 tax year.  Background information and steps employers should take if they receive Letter 226J are provided below.

Background

A key component of the ACA is the employer shared responsibility mandate, which requires applicable large employers (generally those with 50 or more full-time employees and equivalents, determined on a controlled group basis) (“ALEs”) to offer minimum essential coverage (MEC) to 95% of their full-time employees.  This coverage must also be affordable, based on various affordability safe harbors, and have minimum value.  For plan years beginning in 2015, ALEs with 50-99 full-time employees were exempt from the requirement to offer MEC to 95% of their full-time employees, but the MEC offered to full-time employees still had to be affordable and have minimum value.  ALEs with 100 or more full-time employees would be deemed to satisfy the employer shared responsibility mandate in 2015 if MEC was offered to 70% of their full-time employees, and that coverage was affordable and had minimum value.  All ALEs became subject to the full 95% threshold in plan years beginning in 2016.

Over the past few years, ALEs and other coverage providers have been required to submit information reporting forms to give the IRS the information necessary to determine compliance with the individual and employer shared responsibility mandates.  ALEs generally file Forms 1094-C and 1095-C containing information regarding offers of MEC, including whether that MEC was affordable and had minimum value.

Penalties for failure to satisfy the employer shared responsibility mandate can be severe.  Under Internal Revenue Code Section 4980H(a), an ALE that fails to offer coverage to 95% of its full-time employees could be assessed a penalty equal to $166.67 (for 2014 and later indexed for inflation, as described below) per full-time employee (less 30 full-time employees) per month if any full-time employee obtains coverage on the Marketplace and receives a premium credit.  Under Internal Revenue Code (“Code”) Section 4980H(b), an ALE that fails to offer affordable coverage or coverage that has minimum value to any full-time employee could be assessed a penalty equal to $250 (for 2014 and later indexed for inflation, as described below) per month for any full-time employee that obtains coverage on the Marketplace and receives a premium credit.  The penalty amounts under the employer shared responsibility mandates are indexed for inflation:

Year 4980H(a) 4980H(b)
2014 (non-enforcement year) $166.67/month $250/month
2015 (transition relief) $173.33/month $260/month
2016 $180/month $270/month
2017 $188.33/month $280/month
2018 $193.33/month $290/month

Preliminary Penalty Notice

Based on statements from the IRS, notices of preliminary penalty determinations will be sent before the end of 2017.  ALEs who could be assessed a penalty will receive a Letter 226J which will include general information regarding the employer shared responsibility mandate and assessable penalties, a tabular summary of the penalties being assessed (shown on a monthly basis), an employee list showing each full-time employee triggering a penalty and the Form 1095-C indicator codes attributable to that employee,  an employer response form (Form 14764, which as of the date of this blog entry, has not been released), and a description of steps to take if the employer disagrees with the IRS.

An employer will respond using Form 14764 to either agree or disagree with the proposed penalty amount. If an employer indicates its disagreement, the IRS will respond with a Letter 227 (not yet released) describing further actions the employer must take.  The Letter 227 will likely explain that an employer must follow the steps set forth in Publication 5 and may request a pre-assessment conference within 30 days of the employer’s receipt of the Letter 227.  If an employer fails to respond to either Letter 226J or Letter 227, the IRS will formally assess the penalty and issue a notice of demand for payment (Notice CP 220J).

Employer Steps if Penalty Notice Received

Given the severity of penalties that could be assessed under the employer shared responsibility mandate, employers take action immediately upon receiving a Letter 226J.  Below are recommended steps to take upon being assessed a penalty:

  1. Utilize counsel experienced with the ACA’s employer shared responsibility mandate.
  2. Compile the Form 1095-Cs for each assessable full-time employee listed by the IRS in Letter 226J.
  3. Closely compare the information contained in Letter 226J with the Form 1095-Cs for each assessable full-time employee.
  4. Review other relevant payroll and benefit enrollment as necessary to determine whether each assessable full-time employee listed by the IRS was, in fact, full-time and did not actually receive an offer or MEC or the MEC offered was not affordable or did not have minimum value.
  5. Work with counsel to determine how to respond to the IRS. If the employer disagrees with the assessment, Form 14764 should be submitted explaining the disagreement. Once Letter 227 is received by the employer, a pre-assessment conference should be scheduled to formally appeal the potential assessment.
  6. Prepare all relevant materials and supporting documentation in advance of the pre-assessment conference.
  7. Attend the pre-assessment conference with counsel and await the IRS’s determination.

Because transition relief during the 2015 plan year exempted employers with less than 100 full-time employees from the penalty in Code Section 4980H(a) and reduced the penalty threshold to 70% for larger employers, we anticipate that assessments this year will primarily be based on the smaller, individualized penalty set forth in Code Section 4980(b).

Ninth Circuit Considers Pre-Appeal Conduct in Plan’s Request for Appellate Attorney’s Fees

The Ninth Circuit ruled that a district court erred by failing to consider the entire course of the litigation when analyzing a request for attorney’s fees under ERISA and remanded the case for a calculation of fees. A plan participant filed suit against a plan and insurer seeking disability benefits. The plan, in turn, filed a cross-claim against the insurer seeking reimbursement of costs it would be required to expend in the lawsuit. The plan ultimately received an award for attorneys’ fees from the insurer in connection with the plan’s work in the case. The insurer appealed the award of attorney’s fees and lost. The plan then sought to recover its attorney’s fees associated with the appeal. The Ninth Circuit concluded that the insurer’s actions in the underlying benefits claim litigation were relevant to a determination of whether to award attorney’s fees to the plan in connection with the appeal, and held that the district court erred when it failed to consider them. The case is Micha v. Sun Life Assurance of Canada, Inc., No. 16-55053, 2017 WL 4896481 (9th Cir. Oct. 31, 2017).

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