Has your company recently acquired another company or its assets? Did the purchase agreement require continuation of any particular level of benefit for acquired employees or retirees? If so, the Fifth Circuit appears to believe that the purchase agreement may have amended your company’s employee benefit plans to provide those benefits described in the purchase agreement. What does this mean? That acquired employees and retirees can potentially sue your company for benefits described in a contract to which the employees and retirees were neither a party nor a third party beneficiary.
Evans v. Sterling, 2011 WL 4837847 (5th Cir. 2011).
In December of 1996, Sterling Chemicals acquired American Cyanamid’s (“Cytec”) acrylic fibers business in an asset purchase transaction. In connection with the acquisition, Sterling offered employment to certain Cytec employees. The asset purchase agreement included a provision requiring Sterling to provide certain levels of retiree medical coverage for the acquired Cytec employees unless Cytec agreed to changes. Sterling provided these retiree benefits to Cytec employees under its own retiree plans following consummation of the acquisition.
A few years following its acquisition of the Cytec business, Sterling increased retiree medical premiums for the acquired Cytec employees. The acquired Cytec employees sued, and the Fifth Circuit held that Sterling could not increase retiree premiums for the acquired Cytec employees without Cytec’s consent.
The court reasoned that the asset purchase agreement between Sterling and Cytec amended Sterling’s existing retiree medical programs. Following earlier precedent in Halliburton Co. Benefits Committee v. Graves, 463 F.3d 360 (5th Cir. 2006), the Fifth Circuit held that in order for an ERISA plan to be amended all that is required is (i) a written instrument that contains a provision directed to an ERISA plan and (ii) satisfaction of any plan amendment formalities. Because the Sterling retiree medical plans could be amended through board action, the board’s approval of the asset purchase agreement, which contained provisions directed at retiree medical benefits for the acquired employees, effectively amended the Sterling benefits plans. That the purchase agreement did not expressly state an intent to amend Sterling’s retiree medical plans was, in the court’s estimation, immaterial. Moreover, that the acquired Cytec employees were not party to the purchase agreement was also immaterial.
What does this mean for plan sponsors? Followed to its logical conclusion, the Fifth Circuit’s reasoning in Evans is not limited to benefits provisions in purchase agreements – potentially any writing that discusses a plan and is approved by an individual, group, or entity with the authority to amend the plan is an amendment. This could mean, for example, that board resolutions, compensation committee rulings, or other documents not intended to amend a plan could, in fact, amend a plan.
What to do going forward? At a minimum, make sure that any purchase agreement to which your company is a party explicitly states that it does not amend any employee benefit plan. In addition, consider adopting plan amendment procedures that are not likely to be inadvertently invoked. For example, consider requiring that any amendment to a plan must be set forth in a document or board resolution noting that such document formally amends the plan.
The Department of Labor’s Employee Benefit Security Administration (EBSA) is making it easier for consumers to submit questions and complaints regarding their health and retirement plans. EBSA has created a new consumer assistance website which allows users to submit inquiries electronically. If you hablo Espanol, it’s also available in Spanish.
The DOL claims the new website provides easy access to useful information through links for resources/tools, hot topics, and publications. It also provides links to electronic forms where a user may “Ask a Question”, “Submit a Complaint”, or “Report a Problem.” EBSA seems to be serious about wanting to hear from consumers and give them assistance by promising to respond to all inquiries within three business days.
What does this mean for employers? The increased ease in which employees can submit complaints regarding their health and retirement plans to the DOL may lead in increased government scrutiny. Employers should now, more than ever, make it a point to respond to employee inquires quickly and adequately. If an employee is not satisfied with their employer’s response, they now have a quick means to complain to the government. Employers should also be sure to thoroughly document their responses to employee questions and complaints, including the rationale, just in case the DOL comes knocking.
The IRS recently released Revenue Ruling 2011-29 clarifying the deductibility of bonuses. The question posed in the Ruling was:
“Can I deduct a bonus in the current tax year if I know how much I will pay in bonuses by the end of the year, even if I don’t know who will get them until next year?”
The Facts: The more detailed facts are as follows:
A company (we’ll call it “X” to protect the innocent) uses an accrual method of accounting for federal tax purposes. X pays bonuses to a group of employees pursuant to a program that defines the terms and conditions under which the bonuses are paid for a taxable year. X communicates the general terms of the bonus program to employees when they become eligible and whenever the program is changed.
Under the program, bonuses are paid to X’s employees for services performed during the taxable year. The minimum aggregate amount of bonuses payable under the program to X’s employees as a group is determinable either (a) through a formula that is fixed prior to the end of the year, taking into account financial results as of the end of that year, or (b) through other corporate action, such as a resolution of X’s Board or Compensation Committee, made before the end of the taxable year, that fixes the total bonuses payable to the employees as a group. To be eligible for a bonus, an employee must perform services during the taxable year and be employed on the date that X pays bonuses. Under the program, bonuses are paid after the end of the year in which the services are performed, but before the 15th day of the 3rd month after the end of the year.
Under the program, if an employee is not employed on the date bonuses are paid, then any bonus amount that would have been paid to an employee is reallocated among other eligible employees. This is a key fact. Thus, the aggregate minimum amount of bonuses X pays to its group of eligible employees is not reduced by the departure of an employee after the end of the taxable year but before bonuses are paid.
The Question (again): Can X deduct the bonus in the year it’s earned as opposed to the year it is paid?
The Answer: Logically, it would seem that since the amount is fixed by the end of the year, it should be deductible in that year. In this case, the law agrees with logic and the IRS said that the bonus was deductible in the year the aggregate amount of bonuses was determined.
The Caveats: First, this only applies to companies who are accrual basis taxpayers. Second, the Ruling says that if you have been deducting bonuses like this in the year they are paid, then changing is considered a change in accounting method which can only be accomplished in accordance with IRS procedures. Third, if forfeited bonuses are not re-allocated to remaining eligible employees, the result is different because the aggregate minimum amount of bonuses X will pay is not fixed by the end of the taxable year.
We’ve all heard the old adage, advising us to record our thoughts and actions, lest they become lost to obscurity. In EP Quality Assurance Bulletin 2012-1, released November 2, the IRS reminds us of the importance of documentation with regard to the qualified plans in our lives. The Bulletin, entitled “Verification of Prior Plan Documents in the Absence of a Determination Letter,” provides IRS determination letter specialists with updated guidance on verification that retirement plans have been timely amended for prior legislation.
If you are filing your plan during the second remedial amendment cycle and you already have a d-letter covering the first cycle, you need to include all good-faith and interim amendments adopted after your first cycle submission. In addition, you should include any discretionary amendments adopted since the issue date of the d-letter. However, if you are filing for a plan that does not yet have a d-letter, all amendments going back to the beginning of the EGTRRA amendment cycle should be included in your submission.
If a specialist determines that verification of compliance with additional laws beyond the cycles described above is warranted, he or she may expand the inquiry with managerial approval. This is where it could get tricky for plan sponsors. What if plan documentation cannot be produced? In the Bulletin, the IRS provides that if pre-GUST documentation is necessary (but the plan documents are missing), specialists should secure other evidence from the employer, including a prior d-letter, board of directors’ resolutions, corporate minutes, summary plan descriptions, annual reports and internal plan-related memos, among other documentation. The specialist evaluates the sufficiency of that evidence based on the particular facts and circumstances.
Before you file your d-letter submission, be sure to determine if any documentation is missing. You may be able to file a VCP application and avoid Audit CAP sanctions once your application has been submitted. Hopefully, your diligence will be rewarded with a clean letter from the IRS.
The Securities and Exchange Commission (“SEC”) issued a “no action letter” on October 26, 2011 indicating that issuing disclosures compliant with the Department of Labor (“DOL”) participant fee disclosure rules will not be considered inconsistent with the SEC Rule 482 advertising requirements that apply to mutual funds.
Participant Fee Disclosure Rule – DOL Regulation Section 2550.404a-5 requires plan administrators of participant-directed individual account plans to disclose, among other things, plan and investment-related information. Initial disclosures are not required until 2012. The performance data required to be disclosed in the regulation must be presented in a chart or other comparative format. Generally, the chart must include the average annual total return of the fund for the one-, five, and ten-calendar year periods ending on the date of the most recently completed calendar year. The DOL regulation also requires certain other disclosures, but, with respect to a money market fund, does not require inclusion of the fund’s most recent yield.
SEC Rule 482 – This SEC rule requires advertisements and other sales materials for certain mutual funds to include, among other disclosures, uniformly calculated performance information. In general, the rule requires performance data to be current as of the most recent calendar quarter ending prior to the publication of the advertisement (or sooner if the advertisement is provided telephonically or through an Internet site). An advertisement for a money market fund must also include a quotation of the fund’s current yield.
Problem – Comments submitted in response to the DOL regulation were concerned that additional information would have to be included in the participant fee disclosures so that the disclosures could also comply with SEC Rule 482.
Resolution – The SEC’s no action letter provides comfort that issuing disclosures which comply with the DOL participant fee disclosure rules will not violate the SEC Rule 482 requirements. The disclosures will contain plenty of information for participants to wade through and digest. The good news is that more information will not have to be added to the disclosures, which would only make them more complicated for participants to understand and undermine the intended purpose of the disclosures.