Retirement plans are complicated creatures to administer so it perhaps is not surprising that the process of determining the beneficiary of a deceased participant can present its own set of challenges and, if things go awry, expose a plan to paying twice for the same benefit.
These risks were recently highlighted in an 11th Circuit Court of Appeals decision decided in the aftermath of the Supreme Court case of Kennedy v. Plan Administrator for DuPont Savings and Investment Plan. In that 2009 decision, the Supreme Court ruled that a beneficiary designation naming a spouse had to be given effect even though the spouse had subsequently waived her interest in any of her husband’s retirement benefits in a divorce agreement.
In the 11th Circuit case, Ruiz v. Publix Super Markets, the question was whether a deceased participant’s prior designation of her niece and nephew as beneficiaries would trump the participant’s considerable efforts to change that designation shortly before her death. In deciding the case upon Publix’s motion for summary judgment, the Court assumed as true statements from the deposition of Arlene Ruiz, the partner of the deceased participant, who was asserting a right to the benefits as the newly intended beneficiary of Ms. Ruiz. According to the deposition, Ms. Ruiz spoke with a Publix representative who advised her that the beneficiary designation could be changed if the participant wrote a letter and delivered it to Publix indicating the new person she wanted to be her beneficiary and that person’s Social Security number. She was advised that such a letter had to be signed and dated.
The instructions provided by the Publix representative were contrary to a card system maintained by Publix especially designed for changes in beneficiary designations. Ms. Ruiz alleged that the Publix representative advised her that including a beneficiary designation change card with her correspondence was not necessary. Following the instructions of the Publix representative, Ms. Ruiz signed a letter following the instructions provided to her and included one of the Publix beneficiary designation change cards that contained the same pertinent information as the letter with the exception that the participant, Ms. Rizo, did not sign the card. Instead, on that card, she simply referenced her accompanying correspondence.
Faced with these facts, the Court concluded that it was clear that Ms. Rizo intended to change her beneficiary but that she did not strictly comply with the directions contained in the plan’s summary plan description for how to change a beneficiary designation. The issue for decision, according to the Court, was whether the equitable doctrine of substantial compliance required a ruling in favor of Ms. Ruiz. The doctrine of substantial compliance would give effect to a beneficiary designation where a participant evidenced his or her intent to make a change and made discernible attempts to effectuate the change. The Court concluded that the doctrine of substantial compliance did not survive the Supreme Court decision in Kennedy given the Supreme Court’s emphasis on the duty of a plan administrator to act in accordance with the plan documents.
The 11th Circuit decision should be helpful to plan administrators, although it highlights (i) the necessity of having a clearly stated process for changing beneficiary designations, (ii) for requiring that participants follow those procedures, and (iii) for being consistent in the administration of those procedures.
On the other hand, consistently applied administrative procedures will not necessarily solve all of a plan administrator’s issues with beneficiary designations. Apart from failed or incomplete efforts to change designations, we have encountered a number of thorny situations raising the question of who is the rightful beneficiary, including divorces, simultaneous deaths, multiple spouses, and beneficiaries as murderers of their benefactors. With these situations in mind, plan sponsors may wish to consider some of the following practices and additions to plan language in anticipation of these situations:
- Giving frequent written reminders to participants about their beneficiary designations
- Resoliciting updated beneficiary designations from participants on a periodic basis
- Adopting a rule providing for the revocation of spousal designations upon divorce
- Adopting a rule specifying a presumption of survival in the event of the simultaneous death of a participant and beneficiary
- Adopting a rule that voids a beneficiary designation naming a person who is convicted of the murder of the participant
While state law may address some of these situations, ERISA preemption muddies those waters and adopting a plan rule should avoid any debate over the applicability of a state law. Another helpful procedural provision to consider is a freeze on the distribution of a participant’s account where there is a dispute over the rightful beneficiary.
Where a dispute among beneficiary claimants appears insoluble, filing an interpleader action in federal court may be the only definitive way to resolve the dispute without exposing the plan to the possibility of having to pay twice for the same benefit.
On February 3, 2017, President Trump directed the DOL to re-examine the final rule’s impact. As a result, on March 2, 2017, the DOL opened a 15-day comment period (which ended last Friday) on a proposed 60-day delay of the rule’s effective date, from April 10, 2017 to June 9, 2017.
Simultaneously, the DOL opened a 45-day comment period on the substance of the actual rule. This second comment period affords the DOL with an opportunity to review comments before June 9, 2017 (the proposed delayed effective date). At such point, the DOL could allow the final rule to take effect, propose an additional extension in order make amendments to the rule based on the comments received or withdraw the rule.
With the final rule’s current effective date quickly approaching and no indication on whether a delay would occur, there was growing uncertainty among members of the retirement services industry about how to proceed. For example, if the DOL doesn’t announce its decision to delay implementation of the rule until after April 10, 2017, a “gap” would exist between April 10, 2017 and the date the DOL actually issues the final rule delaying the implementation. The other issue is that with entities ceasing their compliance efforts in anticipation of a delay it is highly unlikely such entities will be able to comply with the rule by April 10, 2017, if the delay does not occur.
The DOL issued Field Assistance Bulletin 2017-01 to assuage the above concerns. Pursuant to the Bulletin, the DOL will not take enforcement action against an adviser or financial institution during the “gap” period. In addition, in the absence of a delay in the final rule’s effective date, the DOL will refrain from initiating enforcement actions provided the adviser or financial institution complies with the final rule, including sending out required disclosures to retirement investors, within “a reasonable period” after the publication of a decision not to delay the effective date.
So breathe easy for the moment, but recognize this development relates to a delay, and not repeal, of the final rule.
For additional insight and perspective, read this client alert from our broker-dealer practice.
In today’s virtual world, we suspect most plan sponsors rely upon the self-certification process to document and process 401(k) distributions made on account of financial hardship. The IRS has recently issued examination guidelines for its field agents for their use in determining whether a self-certification process has an adequate documentation procedure. While these examination guidelines do not establish a rule that plan sponsors must follow, we believe most plan sponsors will want to ensure that their self-certification processes are consistent with these guidelines to minimize the potential for any dispute over the acceptability of its practices in the event of an IRS audit.
The examination guidelines describe three required components for the self-certification process:
(1) the plan sponsor or TPA must provide a notice to participants containing certain required information;
(2) the participant must provide a certification statement containing certain general information and more specific information tailored to the nature of the particular financial hardship; and
(3) the TPA must provide the plan sponsor with a summary report or other access to data regarding all hardship distributions made during each plan year.
The notice provided to participants by the plan sponsor or TPA must include the following:
(i) a warning that the hardship distribution is taxable and additional taxes could apply;
(ii) a statement that the amount of the distribution cannot exceed the immediate and heavy financial need;
(iii) a statement that the hardship distributions cannot be made from earnings; and
(iv) an acknowledgement by the participant that he or she will preserve source documents and make them available upon request to the plan sponsor or plan administrator at any time.
The participant certification statement for financial hardship distributions must contain the following information:
(i) the participant’s name;
(ii) the total cost of the hardship event;
(iii) the amount of the distribution requested;
(iv) a certification provided by the participant that the information provided is true and accurate; and
(v) more specific information with regard to the applicable category of financial hardship, as outlined in the examination guidelines that can be found at the following website link: https://www.irs.gov/pub/foia/ig/spder/tege-04-0217-0008.pdf.
In cases where any participant has received more than two financial hardship distributions in a single plan year, the guidelines advise agents to request source documents supporting those distributions if a credible explanation for the multiple distributions cannot be provided. Given the instructions being given to agents in this regard, plan sponsors may wish to consider limitations on the number of financial hardship distributions that a participant may take or to apply a more stringent process for approving requests for financial hardship distributions where more than two requests are made in any plan year.
Plan sponsors should be aware that this IRS memorandum only addresses substantiation of “safe-harbor” distributions and that if a plan permits hardship distributions for reasons other than the “safe-harbor” reasons listed in the regulations, the IRS may take the position that self-certification regarding the nature of those hardships is not sufficient.
The good news with these guidelines is that if a self-certification process with respect to “safe-harbor” hardship distributions adheres to these guidelines, plan sponsors should have less concern over using the self-certification process and there should be fewer, if any, disputes with IRS field agents over the need for plan sponsors to maintain or provide access to source documents.
In a prior post, we covered President Trump’s order directing the Department of Labor to review the new regulation and, as it deems appropriate, to take steps to revise or rescind it. The Employee Benefits Security Administration (“EBSA”) has taken the first step in response to that order by proposing a 60 day delay in the applicability date. The final rule had an applicability date of April 10, 2017. Likewise, the prohibited transaction exemptions (“PTEs”) included in the final rule, such as the Best Interest Contract Exemption, had an applicability date of April 10, 2017.
In light of the President’s prior order, EBSA has released the text of a proposed rule, to be published on March 2, 2017, delaying the applicability date of the final rule and the PTEs by 60 days. EBSA noted that there were only 45 days until the rule and the PTEs became effective and said that it felt it needed more time to perform the analysis required by the President’s order.
EBSA is inviting comments on the proposal to extend the applicability date of the final rule and PTEs. Comments must be submitted quickly; the comment period will end 15 days after publication.
On January 20, 2017, President Trump signed an executive order entitled “Regulatory Freeze Pending Review” (the “Freeze Memo“). The Freeze Memo was anticipated, and mirrors similar memos issued by Presidents Barack Obama and George W. Bush during their first few days in office. In light of the Freeze Memo, we have reviewed some of our recent posts discussing new regulations to determine the extent to which the Freeze Memo might affect such regulations.
The Regulatory Freeze
The two-page Freeze Memo requires that:
- Agencies not send for publication in the Federal Regulation any regulations that had not yet been so sent as of January 20, 2017, pending review by a department or agency head appointed by the President.
- Regulations that have been sent for publication in the Federal Register but not yet published be withdrawn, pending review by a department or agency head appointed by the President.
- Regulations that have been published but have not reached their effective date are to be delayed for 60 days from the date of the Freeze Memo (until March 21, 2017), pending review by a department or agency head appointed by the President. Agencies are further encouraged to consider postponing the effective date beyond the minimum 60 days.
Putting a Pin in It: Impacted Regulations
We have previously discussed a number of proposed IRS regulations which have not yet been finalized. These include the proposed regulations to allow the use of forfeitures to fund QNECs, regulations regarding deferred compensation plans under Code Section 457, and regulations regarding deferred compensation arrangements under Code Section 409A (covered in five separate posts, one, two, three, four and five).
Since these regulations were only proposed as of January 20, 2017, the Freeze Memo requires that no further action be taken on them until they are reviewed by a department or agency head appointed by the President. This review could conceivably result in a determination that one or more of the proposed regulations are inconsistent with the new administration’s objectives, which might lead Treasury to either withdraw, reissue, or simply take no further action with respect to such proposed regulations.
A Freeze on Reliance?
The proposed regulations cited above generally provide that taxpayers may rely on them for periods prior to any proposed applicability date. Continued reliance should be permissible until and unless Treasury takes action to withdraw or modify the proposed regulations.
The DOL Fiduciary Rule
The Freeze Memo does not impact the DOL’s fiduciary rule, which was the subject of its own presidential memorandum, discussed in detail elsewhere on our blog.
On Friday, President Trump issued an order directing the Department of Labor to review the new regulation to determine whether it is inconsistent with the current administration’s policies and, as it deems appropriate, to take steps to revise or rescind it.
The long awaited Fiduciary Rule expanded protection for retirement investors and included a requirement that brokers offering investment advice in the retirement space put clients’ interests first. Financial institutions that either implemented, or were rapidly completing, their compliance efforts to comply with the Fiduciary Rule will need to assess the impact of this order on these efforts. Notwithstanding many earlier reports that the rule would be delayed 180 days, the date on which the rule was to take effect (April 10, 2017) has not been delayed. However, it is anticipated that a delay will be forthcoming, making the decision whether or not to proceed with further compliance efforts a difficult one. Many of those institutions may choose to implement only certain aspects of the Fiduciary Rule, while delaying complying with other aspects of that rule, pending the results of the DOL review.
Some have speculated that regardless of whether the Fiduciary Rule is finally made effective, compliance with the Fiduciary Rule could become the new “best practice” model; however, it is unlikely that financial institutions will voluntarily assume most of the obligations and resulting exposure of serving retirees in a fiduciary capacity.
Last week, the Department of Labor (DOL) released adjusted penalty amounts which are effective for penalties assessed on or after January 13, 2017, whose associated violations occurred after November 2, 2015. You might remember that these penalties were just adjusted effective August 1, 2016 (also for violations which occurred after November 2, 2015); however, the DOL is required by law to release adjusted penalties every year by January 15th, so you shouldn’t be surprised to see these amounts rise again next year.
All of the adjusted penalties are published in the Federal Register, but we’ve listed a few of the updated penalty amounts under the Employee Retirement Income Security Act of 1974 (ERISA) for you below:
- For a failure to file a 5500, the penalty will be $2,097 per day (up from $2,063).
- If you don’t provide documents and information requested by the DOL, the penalty will be $149 per day (up from $147), up to a maximum penalty of $1,496 per request (up from $1,472).
- A failure to provide reports to certain former participants or failure to maintain records to determine their benefits remained stable at $28 per employee.
Pension and Retirement
- A failure to provide a blackout notice will be subject to a $133 per day per participant penalty (up from $131).
- A failure to provide participants a notice of benefit restrictions under an underfunded pension plan under 436 of the tax code will cost $1,659 per day (up from $1,632).
- Failure of fiduciary to make a properly restricted distribution from a defined benefit plan will be $16,169 per distribution (up from $15,909).
- A failure of a multiemployer plan to provide plan documents and other information or to provide an estimate of withdrawal liability will be $1,659 per day (up from $1,632).
- A failure to provide notice of an automatic contribution arrangement required under Section 514(e)(3) of ERISA will also be $1,659 per day per participant (also up from $1,632).
Health and Welfare
- For a multiple employer welfare arrangement’s failure to file a M-1, the penalty will be $1,527 per day (up from $1,502).
- Employers who fail to give employees their required CHIP notices will be subject to a $112 per day per employee penalty (up from $110).
- Failing to give State Medicaid & CHIP agencies information on an employee’s health coverage will also cost $112 per day per participant/beneficiary (again, up from $110).
- Health plan violations of the Genetic Information Nondiscrimination Act will also go up to $112 per day per participant/beneficiary from $110. Additionally, the following minimums and maximums for GINA violations also go up:
- minimum penalty for de minimis failures not corrected prior to receiving a notice from DOL: $2,790 (formerly $2,745)
- minimum penalty for GINA failures that are not de minimis and are not corrected prior to receiving a notice from the DOL: $16,742 (up from $16,473)
- cap on unintentional GINA failures: $558,078 (up from $549,095)
- Failure to provide the Affordable Care Act’s Summary of Benefits and Coverage is now $1,105 per failure (up from $1,087).
The penalty amounts listed above are generally maximums, but there is no guarantee the DOL will negotiate reduced penalties. If you’re already wavering on some of your new year’s resolutions, we recommend you stick with making sure your plans remain compliant!
On January 18, 2017, the IRS issued proposed regulations allowing amounts held as forfeitures in a 401(k) plan to be used to fund qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs). This sounds really technical (and it is), but it’s also really helpful. Some plan sponsors of 401(k) plans use additional contributions QNECs and/or QMACs to satisfy nondiscrimination testing. Before these proposed rules, they could not use forfeitures to fund these contributions because the rules required that QNECs and QMACs be nonforfeitable when made (and also subject to the same distribution restrictions as 401(k) contributions). If you have money sitting in a forfeiture account, then by definition it was forfeitable when made, so that money couldn’t possibly have been used to fund a QNEC or QMAC.
The proposed regulations provide that amounts used to make these contributions must satisfy the vesting requirements and distribution requirements applicable to 401(k) contributions when they are allocated to participants’ accounts rather than when they are contributed to the plan. The regulations are only proposed, but the IRS has said taxpayers may rely on them. If the final regulations turn out to be more restrictive, then those restrictions will only apply after the regulations are finalized.
Going forward, plan sponsors wishing to apply amounts held in forfeiture accounts to fund QNECs and QMACs under the 401(k) plan should review their plan document provisions. The plan should at a minimum allow forfeitures to be used to make employer contributions and not prohibit their use to fund QNECs and QMACs. Plan sponsors may wish to amend the document to clarify that “employer contributions” will include allocations made as QNECs and QMACs.
Rise of Minimum Wage as of January 1st 2017:
As of January 1st 2017 the statutory Minimum Wage in Germany rises from € 8.50 to € 8.84 gross per hour. It is the first increase, since the Minimum Wage Act (Mindestlohngesetz – MiLoG) has put into effect a statutory minimum wage for Germany in 2015. This statutory minimum wage applies – with some exceptions – to all employees working on German territory. Most interim arrangements that allowed for lower wages for certain groups of workers expired on 31st of December 2016. As the Minimum Wage Act only states a base amount to be paid for any employee in Germany, binding collective bargaining agreements (Allgemeinverbindliche Tarifverträge) stipulate higher hourly wages in many work areas.
Clients employing blue collar workers in Germany with low salaries as well as clients who have marginal employed employees (geringfügig Beschäftigte) are advised to check whether they comply with the new Minimum Wage.
New contribution assessment ceilings for statutory Social Security as of January 1st 2017:
In Germany, most social benefits such as health insurance, long-term care insurance, pension insurance as well as unemployment insurance are statutory and compulsory for the absolute majority of employees. These programs are generally financed by employers and employees jointly. The contributions employers and employees have to pay are determined by percentage rates applying to the gross salary of the employee. The contribution assessment ceilings (the maximum amount of monthly income to which the contribution rates apply) are subject to periodic changes. As of January 1st 2017, the monthly contribution assessment ceilings and percentage rates are as follows:
|Program||Contribution Limit/Month||Employer Portion||Employee Portion|
14.6% shared equally + additional contribution by employee (1.1% in average depending on individual insurance company)
|€ 4,350.00 (West & East)||Up to € 317.55||Up to € 317.55 + additional contribution|
|Long-term care insurance:
2.55% shared equally (except Saxony, where employees cover 1.775% and employers cover 0.775%)
|€ 4,350.00 (West & East)||Up to € 55.46||Up to € 55.46 + 0.25% if employee is older than 23 and has no children|
18.7% shared equally
|€ 6,350.00 (West)
€ 5,700.00 (East)
|Up to € 593.73 (West)
up to € 532.95 (East)
|Up to € 593.73 (West)
up to € 532.95 (East)
3% shared equally
|€ 6,350.00 (West)
€ 5,700.00 (East)
|Up to € 95.25 (West)
up to € 85.50 (East)
|Up to € 95.25 (West)
up to € 85.50 (East)
In the latest round of FAQs on ACA implementation (now up to 35 if you’re keeping track), the DOL, HHS and Treasury Department addressed questions regarding HIPAA special enrollment rights, ACA coverage for preventive services, and HRA-like arrangements under the 21st Century Cures Act.
Special Enrollment for Group Health Plans. Under HIPAA, group health plans generally must allow current employees and dependents to enroll in the group health plan if the employee or dependents lose eligibility for coverage in which they were previously enrolled. This FAQ clarifies that an individual is entitled to a special enrollment period if they lose individual market coverage. This could happen, for example, if an insurer covering the employee or dependent stops offering that individual market coverage. However, a loss of coverage due to a failure to timely pay premiums or for cause will not give the employee or dependent in a special enrollment right.
Women’s Care: Coverage for Preventive Services. The Public Health Service Act (PHS Act) requires non-grandfathered plans to provide recommended preventive services without imposing any cost-sharing. Recommended preventive services that must be covered include the women’s preventive services provided for in Health Resources and Services Administration’s (HRSA) guidelines.
HRSA updated its guidelines on December 20, 2016. The updated guidelines build on many of the existing preventive care for women and include screening for breast cancer, cervical cancer, gestational diabetes, HIV, and domestic violence, among other items. The services identified in the updated guidelines must be covered, without cost-sharing, for plan years beginning on or after December 20, 2017. For calendar year plans, that’s the plan year starting January 1, 2018. Until those guidelines become applicable, non-grandfathered plans are required to continue providing coverage without cost-sharing consistent with the previous HRSA guidelines and the PHS Act.
Qualified Small Employer Health Reimbursement Arrangements. Since 2013, the DOL, IRS and HHS published guidance (here, here and here) addressing the application of the ACA to HRAs. This guidance explained that HRAs and similar arrangements that are used to pay or reimburse for the cost of individual market policies will fail to comply with the ACA because the arrangements, by definition, reimburse or pay medical expenses only up to a specified dollar amount each year and would not meet other ACA requirements. Prior to this guidance, smaller employers would sometimes reimburse employees for individual policies instead of obtaining their own group policy. This guidance made such a practice impermissible and could subject employers to penalty taxes of $100 per day per individual for violations.
To address concerns raised by application of the ACA reforms to certain arrangements of small employers, the 21st Century Cures Act created a new type of tax-preferred arrangement, the “qualified small employer health reimbursement arrangement” (QSEHRA) to reimburse for medical expenses, including coverage on the individual market. This special arrangement is effective for plan years beginning after December 31, 2016. For calendar plan years, this means the QSEHRA exclusion is effective January 1, 2017. For plan years beginning on or prior to December 31, 2016, the relief under Notice 2015-17 applies (which we discussed in a previous post).
To be a QSEHRA under the Cures Act, the arrangement generally must:
- Be funded entirely by an eligible employer (generally, an employer that had fewer than 50 full-time equivalent employees in the prior year and does not offer a group health plan to any of its employees);
- Provide for payment to, or reimbursement of, an eligible employee for expenses for medical care as defined in Code section 213(d);
- Not reimburse more than $4,950 ($10,000 for families) of eligible expenses for any year; and
- Be provided on the same terms to all eligible employees of the employer.
While a QSEHRA is not a group health plan for ACA or COB RA purposes, the 21st Century Cares Act does not really address how (or whether) other ERISA rules apply to QSEHRAs. Additional guidance in these areas would be helpful.