Recently the IRS issued Notice 2014-49, offering guidance for situations in which the measurement period or method applicable to an employee changes.
Under the Affordable Care Act, as amended (“ACA”) an applicable large employer risks the imposition of a penalty tax under Code section 4980H in connection with a failure to offer full-time employees (and their dependents) minimum essential coverage under an eligible employer-sponsored plan that is both affordable and provides minimum value. This is sometimes called the “play or pay” penalty.
There are two methods an employer may use to identify full-time employees for purposes of Code section 4980H – the monthly method and the look-back method. Under the look-back method, employers average an employee’s hours of service during a predetermined period (i.e., the measurement period) to determine whether to treat the employee as a full-time employee for the period that follows (i.e., the stability period). Employers have the flexibility to set their own measurement and stability periods, subject to certain prescribed parameters. Each employer within a control group may use different measurement methods or may establish measurement periods that differ in duration or that start on different dates. Employers may also establish different periods for specified categories of employees (e.g., collectively and non-collectively bargained employees, employees covered by different collective bargaining agreements, salaried and hourly employees and employees with primary places of employment in different states).
In the Notice the IRS offers guidance on administering the applicable measurement method in the following situations:
- Employee who transfers to a position to which a different measurement period applies
- Employer changes the measurement method (look-back to monthly or vice versa) applicable to a category of employees, or changes the start or duration of the measurement period
Transfer to Position with a Different Measurement Period
In situations in which an employee transfer to another position for which the employer uses a different measurement period (i.e., duration of measurement period and/or different start dates), the look-back method would be applied as follows:
- Transfer Occurs While Employee is In a Stability or Administrative Period (or as of the date of transfer the employee has been assigned a status for the stability period). Employee’s status as a full-time or non-full-time employee remains in effect until the end of the stability period applicable to the employee’s initial position. At the end of the stability period during which the transfer occurred (or, if the employee was in an administrative period, the end of the immediately following stability period), the employee assumes the full-time or non-full-time status that would have applied to the employee under the look-back methodology relating to the employee’s new position. If the employee’s full-time employee status in his or her new position cannot be determined (e.g., the employee is a variable hour employee who has not yet been employee for a full initial measurement period for the new position) then the rule governing employees who are not in a stability period (as described below) would apply to the employee with respect to his or her new position.
- Employee Not In a Stability or Administrative Period. Determine the employee’s status as a full-time or non-full-time employee solely under the look-back measurement method applicable to his or her new position as of the date of the transfer, including all hours of service in the employee’s first position.
Example: For Position 1, the employer uses 12-month standard measurement and stability periods beginning January 1 and a 12-month initial measurement period beginning on each employee’s start date. For Position 2, the employer uses 6-month standard measurement and stability periods (beginning January 1 and July 1) and a 6-month initial measurement period beginning on an employee’s start date. Employee B is hired to fill Position 1 as a new variable-hour employee on January 1, 2015. Employee B averages 30 or more hours of service per week during the period from January 1 through June 30, 2015. On October 1, 2015, at which time Employee B is in the initial measurement period for Position 1, Employee B transfers from Position 1 to Position 2. Position 2 is a variable-hour position as well. At the date of the transfer, Employee B is not in a stability period for Position 1 because Employee B has not been employed for a full initial measurement period or a full standard measurement period. Accordingly, Employee B’s status is determined under the measurement method applicable to Position 2 as of the date of transfer, taking into account Employee B’s hours of service in Position 1. Employee B is a full-time employee from the date of transfer (October 1, 2015) through the end of the applicable stability period for Position 2 (December 31, 2015) because Employee B averaged 30 or more hours of service per week during the applicable measurement period for Position 2 ending June 30, 2015 (for Employee B, the initial measurement period and standard measurement period ran simultaneously from January 1, 2015 through June 30, 2015). After December 31, 2015, Employee B’s status continues to be determined using the applicable measurement period for Position 2.
Note, however, that all the same rules generally applicable to the look-back measurement method will continue to apply, including the change in employment status rules that affect new employees. Therefore, a new variable hour, part-time or seasonal employee who transfers to a position where he or she is reasonably expect to average at least 30 hours of service per week will no longer be subject to an initial measurement period. Rather, the full-time status of such an employee will be determined on the basis of hours of service in each month, until that employee has been employed for a full standard measurement period applicable to the second position. If the employee has been employed for a full standard measurement period applicable to the new position but not the first position as of the transfer date, the employee’s full-time status will continue to be determined on the basis of the employee’s average hours of service during the standard measurement period for the new position.
Employer Change to Measurement Method
For purposes of applying this rule, a change in the measurement method includes a change from the look-back measurement method to the monthly measurement method (or vice versa) as well as a change in the duration or start date of any applicable measurement period under the look-back measurement method.
The Notice provides that an employer who changes from the look-back to the monthly method or vice versa should apply the same transition rules contained in the final regulations that govern when an employee transfers from a position that uses the look-back method (or the monthly method) to a position that uses the other method. Those rules are contained in Treas. Reg. § 54.4980(H)-3(f).
Upon a change in the measurement period applicable to a category of employees, each employee’s full-time or non-full-time status for a transition period following the effective date of the change is determined as if the employee had transferred from a position to which the original measurement method applies to a position to which the revised measurement method applies.
Example: Starting January 1, 2015, the full-time employee status of employees covered by a particular collective bargaining agreement (“CBA”) is determined using 6-month measurement and stability periods (each starting April 1 and October 1). In contrast, the employer utilizes 12-month measurement and stability periods (each starting January 1) for employees who are not covered by the CBA . On April 1, 2017, the employer changes the look-back measurement method for employees not covered by the CBA to be the same as that used for employees covered by the CBA. For a transition period following the date of such change, each employee who is subject to the measurement method applicable to employees not covered by the CBA is treated as if on April 1, 2017, that employee had transferred from a position subject to the original measurement method to a position subject to the revised measurement method. Consequently each employee subject to the measurement method applicable to employees not covered by the CBA who is in a stability period as of April 1, 2017 retains his or her status as a full-time employee or non-full-time employee, as determined under the original measurement method for the remainder of the 12-month stability period applicable to that employee. Each such employee who is not in a stability period as of April 1, 2017 has his or her status determined as of April 1, 2017 in accordance with the 6-month measurement method.
Although the IRS is inviting comments to the proposed approaches, the Notice can be relied upon until further guidance is issued and at least through December 31, 2016.
 The IRS has informally confirmed that the reference in the Notice to Treas. Reg. § 54.4980H-3(f)(2), which contains a special rule for certain employees who have been continuously offered coverage, should actually refer to Treas. Reg. § 54,4980(H)-3(f)(1), which contains the generally applicable rules regarding changes in employment status from a position to which the look-back method applies to a position to which the monthly method applies, or vice versa. It is anticipated that this citation will be corrected when published in the Internal Revenue Bulletin next week.
If you keep an eye on the investment world at all, you’ve certainly heard the news – Bill Gross, co-founder and chief investment officer of Pacific Investment Management (PIMCO), is leaving the very company he started more than 40 years ago. In technical terms, Gross is what you call a “big deal” in the investment world. He has been at the helm of PIMCO for more than four decades leading the company to a whopping $2 trillion in assets under management. Gross has received countless awards and accolades in the industry for his thought leadership and successes, and is also a well-known writer on investment matters.
Until Friday, Gross managed the PIMCO Total Return fund (PTTCX). This bond fund ranks as one of the largest mutual funds with a reported $221.6 billion in total fund assets. And, perhaps more importantly for our readership, this bond fund is a pillar in many 401(k) investment platforms. Speculation and rumors swirl about the circumstances surrounding Gross’ departure from PIMCO (as well as his decision to join Denver-based Janus); however, one thing is certain – Gross’ departure from PIMCO means that many 401(k) plan fiduciaries are (or soon will be) discerning how to react.
Many investment fiduciaries may choose to put the fund on the plan’s “watch list” in the wake of this manager change. Departure of such an important part of the PIMCO investment team certainly could be grounds for closer scrutiny of the Total Return fund.
We thought these events presented a good opportunity to revisit the procedural prudence concept and provide an ERISA attorney’s perspective on how to handle this type of change. It goes without saying, but we’ll say it anyway, that best practice dictates establishment of a written Investment Policy Statement (IPS) that is kept current to ensure investments are made in rational manner and further the purpose of plan and its funding policy. If the plan’s IPS contains a procedure for monitoring managers or placing them on a “watch list” (as most do), then the plan fiduciaries should follow such policy and document those actions. Reminder – what is worse than not having an IPS in place? Not complying with the IPS!
Being a plan fiduciary, especially one with investment oversight, is hard work. Investment fiduciaries need to establish a thoughtful fiduciary decision-making process pursuant to which they may identify relevant information; gather that information from competent, independent sources; give it due consideration; make a decision consistent with the information; and document the decision. Often times investment experts are engaged to assist plan fiduciaries in making investment decisions. Remember, use of these types of experts may be appropriate, particularly when plan fiduciaries don’t have substantial investment expertise. However, the input of investment fiduciaries should be evaluated pursuant to fiduciary process (not simply rubber stamped without consideration!).
All in all, plan fiduciaries with plan investments in the PIMCO Total Return fund are now faced with making a thoughtful decision on retention and monitoring of the fund. This decision is not a simple one and requires careful consideration of the IPS, governing plan documentation and, ultimately, what is perceived to be in the best interest of plan participants and beneficiaries.
So, what do you think, is Gross’ departure alone grounds to putting the PIMCO Total Return fund on the “watch list”?
If your 401(k) plan maintains a participant loan program, you may discover that you have compliance concerns thanks to a relatively obscure Florida tax statue.
Under its revenue laws, Florida imposes a document tax on loan transactions that are made, signed, executed, issued, or otherwise transacted in the State. The Florida Department of Revenue has specifically ruled that 401(k) plan loans are subject to the tax. The law further provides that no state court may enforce the provisions of a promissory note if the document tax is not paid.
We believe it would be a challenge to sustain a position that the Florida statute is preempted by ERISA. A failure to pay the tax, therefore, could mean that a 401(k) plan is extending loans that are not adequately secured, creating the potential for both prohibited transaction issues and plan operational failure issues.
The Florida statute arguably reaches not only plan loans extended to participants who are Florida residents but to plans with sponsors resident in Florida or third party administrators resident in Florida.
The Florida law does contemplate a process for paying past due taxes. The only other good news here is that no other state appears to have a similar transactional tax that would apply to plan loans.
Last Thursday, the IRS issued Notice 2014-55 (“Notice”), which expands the scope of permissible mid-year election changes under the cafeteria plan rules to allow an employee to revoke an election of employer-sponsored health coverage in the event of the employee’s reduction in hours of service (even if there is no loss of eligibility for coverage) or to avoid duplicative coverage (or a gap in coverage) under a non-calendar year group health plan due to the purchase of coverage through a Marketplace.
The guidance under the Notice is effective as of September 18, 2014 and may be relied on immediately even though the IRS has yet to amend the cafeteria plan regulations to reflect the new guidance.
Elections under a cafeteria plan have generally been irrevocable during a period of coverage except in certain limited situations. For example, a cafeteria plan may allow an employee to revoke an election for health plan coverage mid-plan year if a covered individual experiences a change in employment status affecting his or her eligibility for coverage under a group health plan. Under the consistency requirement, the employee’s requested revocation must be limited to only those individuals who either become or cease to be eligible for coverage under the group health plan as a result of the change in employment status. A cafeteria plan may also allow an employee to make a new election mid-plan year to correspond with a special enrollment right (e.g., loss of other coverage or acquisition of a new dependent) under Code section 9801(f); however, such special enrollment right does not include the ability to enroll in a qualified health plan (“QHP”) through a Marketplace. Yet, the open enrollment period rules for Marketplaces do not permit the purchase of coverage commencing upon the end of a group health plan’s non-calendar plan year.
The IRS recognized that an employee for whom it may be more advantageous to enroll in a QHP or other health plan providing minimum essential coverage (“MEC”) rather than to continue coverage under an employer-sponsored group health plan may be deterred from doing so due to the existing restrictions on mid-plan year election changes under cafeteria plan rules.
Reduction in Employee’s Hours of Service
In order to minimize the potential for being hit with a penalty under Code section 4980H, many employers are structuring their group health plans to offer coverage to employees who are determined to be full-time employees for the entire stability period that follows the look-back period. Consequently, an employee who actually changes from full-time to part-time employment status during the stability period may not have a change in employment status permitting a mid-year election change since there is no loss in eligibility for group health plan coverage. To remedy the situation, the IRS provides that a cafeteria plan may be amended to permit such a participant-employee to prospectively revoke an election for group health plan coverage (other than under a health flexible spending account) that provides minimum essential coverage (“MEC”) as long as:
- The employee has been in an employment status under which the employee was reasonably expected to average at least 30 hours of service per week and there is a change in that employee’s status so that the employee will reasonably be expected to average less than that after the change (even if that reduction does not result in the employee ceasing to be eligible under the group health plan); and
- The revocation of the election of coverage under the group health plan corresponds to the intended enrollment of the employee (and any related individuals who cease coverage due to the revocation) in another plan that provides MEC with the new coverage effective no later than the first day of the second month following the month that includes the date the original coverage is revoked.
A cafeteria plan is permitted to rely on an employee’s reasonable representation that the employee and related individuals have enrolled or intend to enroll in another plan that provides MEC effective as for the above referenced period.
Participation in Non-Calendar Year Plan
The IRS noted that the lack of a change in status event where an employee purchases coverage through a Marketplace could create a synchronization issue. In particular, if an employee enrolls in coverage through a non-calendar year group health plan and then decides to purchase coverage through the Marketplace, the potential exists that the coverage periods would not line up. This would result in either overlapping coverage or a gap in coverage. To address this issue, the Notice permits a cafeteria plan to allow a participant-employee to revoke an election for group health plan coverage so long as:
- The employee is eligible for a Special Enrollment Period to enroll in a QHP through a Marketplace pursuant to guidance issued by the U.S. Department of Health and Human Services (and any other applicable guidance), or the employee seeks to enroll in a QHP during the Marketplace’s annual open enrollment period; and
- The revocation of the election of coverage under the group health plan corresponds to the intended enrollment of the employee (and any related individuals who cease coverage due to the revocation) in a QHP for new coverage that is effective beginning no later than the day immediately following the last day of the original coverage that is revoked.
Again, the cafeteria plan may rely on an employee’s reasonable representations as to the employee and other related individual’s enrollment (or intention to enroll) in a QHP for the above referenced period.
To take advantage of the Notice’s election change provisions, an amendment to the cafeteria plan generally must be adopted on or before the last day of the plan year in which the elections are allowed and may be effective retroactively to the first day of such plan year as long as: (1) the cafeteria plan operates in accordance with the guidance, and (2) the employer informs participants of the amendment. For a plan year that begins in 2014 the amendment may be made at any time on or before the last day of the plan year that begins in 2015. However, no election to revoke coverage on a retroactive basis is permitted.
When is a signature more than just a signature?
In Perez v. Geopharma, decided on July 25, 2014, Geopharma’s CEO, Mihir Taneja, brought a motion to dismiss an ERISA breach of fiduciary duty claim under the company’s health and welfare plan brought against him by the DOL. In its suit, the DOL alleged that because Taneja had signature authority on Geopharma’s bank accounts – which included the plan’s participant contributions – he was a plan fiduciary. The claim arose from findings that the company: (1) withheld employee premium contributions over a two-month and ten-month period in 2009 and 2010 respectively; (2) failed to segregate the contributions from company assets as soon reasonably possible; and (3) failed to use the funds to pay claims. The DOL alleged that the company also failed to segregate COBRA contributions from general assets and to use the funds to pay claims.
The DOL sought to hold Taneja, the company and two other company officers jointly liable for fiduciary breaches under ERISA including:(1) participating knowingly in an act of another fiduciary, knowing the act was a breach, in violation of 29 U.S.C. § 1105(a)(1); (2) failing to monitor or supervise another fiduciary and thereby enabling a breach in violation of 29 U.S.C. § 1105(a)(2); or (3) having knowledge of a breach by another fiduciary and failing to make reasonable efforts under the circumstances to remedy the breach in violation of 29 U.S.C. § 1105(a)(3). The DOL argued that, as CEO, Director, Secretary, and signatory to the company’s bank accounts, Taneja had a fiduciary duty to monitor the plan’s other fiduciaries, as well as the company’s management and administration of the plan.
Taneja countered that he was not a plan fiduciary because there was no proof that he performed any function or exercised any authority related to the “particular activity” of the payment of employee premium contributions. Further, the fact that he had general signature authority over the company’s bank accounts was not enough to trigger ERISA’s fiduciary responsibilities, as this would make every company officer an ERISA fiduciary. Finally, Taneja argued that he could only become a plan fiduciary if he were named a fiduciary under the plan or exercised discretionary control or authority over the plan or the management of its assets.
In denying the motion, the court held that Taneja’s signature authority made him a plan fiduciary because, among other things, ERISA provides that a person can become a plan fiduciary by exercising any authority or control over the management or disposition of plan assets, even without discretion. The Court declined to decide whether discretion was an ERISA fiduciary requirement at this stage, but noted that at least one Circuit (the Eleventh) has suggested that discretion is a necessary prerequisite for ERISA fiduciary status.
Lesson Learned: Although the ERISA discretion requirement is still in limbo, CEOs and other company officers responsible for ERISA-governed plans who do not want to be plan fiduciaries should consider segregating plan assets and having only plan fiduciaries serve as signatories on the plan’s bank accounts to avoid potential fiduciary liability under ERISA.
Our sister blog, Start-Up Bryan Cave, recently posted about when and why to use the an 83(b) election. The post has a good discussion of the advantages and disadvantages.
One item it does not mention is the company’s deduction, which is taken if and when the 83(b) election is made. In the absence of an election, the deduction occurs when the property vests.
Of course, for the company to take the deduction, it has to know that the election has been made. Even though the IRS rules require the recipient to give a copy to the company, another valuable planning point is to make sure that the agreement itself also requires the recipient to provide a copy of the election to the company.
Forty years ago yesterday, September 2, 1974, Congress passed the Employees Retirement Income Security Act of 1974. Most, maybe all, of the people reading this blog owe their careers to a single piece of legislation that has spawned growth industries and cottage industries. The acronym “ERISA” has special meaning to all who work in the employee benefits industry.
ERISA exists in no small measure due to three factors: (1) the ineptitude and greed of those running the automobile manufacturer, Studebaker–Packard Corporation back in the early 1960s; (2) the mismanagement and abuse (likely theft with no federal recourse to protect participants) of the world’s then largest pension fund by the executives of the Teamsters Union; and (3) the legislative tenacity of Senators Jacob Javits and Harrison Williams. These factors forged together over a decade to get ERISA passed. The legislative debate was one of the most significant management versus labor debates in Congressional history, and the result is a compromise, or series of compromises, that demonstrate the ability of members of Congress, lobbyists and those holding on to “sacred cows” to come to a resolution in the best interest of the country.
ERISA has created jobs for numerous government employees in the agencies that write and enforce its broad and complex rules and their exceptions. Attorneys, accountants, and actuaries who daily address these complex rules on behalf of clients have developed specialty practices in employee benefits. RIAs, broker-dealers, investment advisors, third-party administrators, insurance salesmen, and many others who spend their time working with pension and welfare benefit plans owe their professional existence to a single piece of legislation, ERISA.
ERISA is oft-criticized in no small measure due to its uncompromising complexity in labor law, tax law, and pension insurance law. ERISA has struggled at times to keep up with societal changes and certainly with the change from traditional defined benefit plans to 401(k) plans. ERISA’s coverage of welfare benefit plans was somewhat of an after-thought in 1974, and the law itself and particularly the courts have struggled to apply ERISA’s complexity to traditional health plans, HMOs and other types of welfare benefit arrangements.
Year after year, it is fascinating to see the Supreme Court issue a number of opinions analyzing ERISA. Not only does this speak to ERISA’s complexity, but it also demonstrates how important ERISA is to the nation and certainly to the economic well-being of Americans.
Most of us would agree that the policies ERISA attempts to address necessarily give rise to its complexity. The web of ERISA coverage is vast and sometimes contradictory since the policy issues themselves are so complex. But overall, the construct of ERISA presents one of the most exceptional pieces of federal legislation ever enacted. Looking at it over forty years, it has withstood the test of time, but most would agree that it needs refinement in order to improve the employer-based retirement system and assist in providing working Americans with a dignified retirement.
Happy birthday, ERISA. May you continue to provide employers with the ability to attract, incentivize and retain quality employees and provide employees with retirement security and economic benefits needed to promote the ideals of hard-working Americans and a productive society for generations to come.
ERISA has been modified by many pieces of legislation since it was signed into law on this day in 1974. In honor of ERISA’s “Big 4-0” we invite you to (1) find all of the abbreviations below for different acts that have amended ERISA and (2) come up with the full name for each abbreviated act. We will share the solution along with each act’s full name on Thursday. Good luck! *Note: letters are shared and acronyms go every direction.