All individuals involved in a proposed sale transaction have a personal stake in full federal, state and local legal compliance because of expanding doctrines of personal liability and successorship liability, notwithstanding transaction documents that purport to disclaim assumption of seller’s liabilities.
A law has been passed in France to encourage French employee buy-outs of small and medium-sized companies (SMEs). In companies with fewer than 250 employees, an owner will be required to inform French employees of an intent to sell the business or a majority share of the business no later than two months before the sale. Failure to comply with this new obligation may result in the sale being nullified.
In connection with a merger or acquisition, an acquiring company may end up assuming sponsorship of a tax-qualified retirement plan that covers employees of the acquired company. This article provides a brief summary of some key issues that a company should focus on to ensure that the numerous administrative and fiduciary requirements involved in maintaining a qualified retirement plan will continue to be met on an ongoing basis if the plan will continue to be maintained following the acquisition.
On October 2, 2014, the Supreme Court of the United States granted the plaintiffs’ petition for a writ of certiorari in Tibble v. Edison International to answer “Whether a claim that [Employee Retirement Income Security Act] ERISA plan fiduciaries breached their fiduciary obligation by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institutional-class mutual funds were available, is barred by 29 U.S.C. § 1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed.” The underlying claim asserts that the investment committee of the Edison 401(k) Savings Plan (the Plan), a defined contribution plan sponsored by Edison International, breached its fiduciary duty, although the issue presented to the Supreme Court focuses on the statute of limitations applicable to that claim.
The Plan’s investment committee selected a variety of funds for the investment of Plan assets. The funds selected by the investment committee were retail-class funds, which charged higher fees than the comparable institutional-class funds available in the retail market. Plan participants sued, alleging that lower-cost mutual funds were available and should have been selected for the Plan’s investment portfolio. The district court dismissed the case and the U.S. Court for the Ninth Circuit affirmed the dismissal on the basis that the funds were selected more than six years earlier and were therefore barred by ERISA statute of limitations.
ERISA provides a six-year period within which a participant or beneficiary may sue based on allegations of a breach of ERISA fiduciary duties. In general, the ERISA statute of limitation period begins to run on the date of the last act that constitutes a fiduciary breach owed to the beneficiaries. The U.S. District Court for the Central District of California dismissed several claims in the plaintiffs’ lawsuit, concluding that these claims were statutorily barred because the plaintiffs’ filed them after expiration of the six-year statute of limitations period. In addition, the district court ruled that it must defer to the investment committee’s selection of the higher-cost mutual fund by application of the deferential Firestone standard previously set by the Supreme Court.
In its petition for certiorari, the plaintiffs asked that the Supreme Court determine whether ERISA’s six-year limitations period begins on the date that the investment committee initially selected the higher-cost mutual fund options for the Plan’s investment portfolio or whether the on-going offering of such funds constituted a “continuing” fiduciary breach, thereby extending the period. The Supreme Court elected not to address whether the Firestone deference applies to fiduciary breach actions with respect to whether a fiduciary failed to follow plan terms in the selection of investment options.
This case follows the Supreme Court’s 2013 decision in Heimeshoff v. Hartford Life & Accident Insurance Co. Heimeshoff concluded that an ERISA plan’s contractual three-year limitations period for benefit claims was enforceable, despite the fact that the statute of limitations began to run before the participant’s benefit claim had been decided by the plan administrator. Conversely, in Tribble v. Edison, Int’l., the Supreme Court is asked when ERISA’s statutory limitations period accrues for fiduciary breach claims. The case holds important ramifications for plan sponsors. If the Supreme Court agrees with the plaintiffs and finds that a fiduciary violation is ongoing, fiduciaries may be open to larger classes in class action cases and potentially increased liability for successful fiduciary breach claims. On the other hand, if the Supreme Court upholds the Ninth Circuit’s decision with respect to the limitations period’s accrual, plan participants will be limited when challenging investment decisions that occurred before the limitations period.
In Notice 2014-55, the Internal Revenue Service (IRS) announced two new situations in which employees may change their health plan elections midyear under their employer’s cafeteria plan. In the first, an employee’s hours are reduced below 30 per week (without a corresponding loss of eligibility for the employer’s group health plan). In the second, an employee decides to enroll in coverage through a Marketplace Exchange (Exchange). Both of these are optional changes in status; neither is mandatory.
Reduction in Hours
If an employee who was expected to work on average at least 30 hours per week is then expected midyear to work on average less than 30 hours per week, the employee may drop his or her employer-provided group health plan coverage, even if the reduction in hours does not result in the employee’s loss of eligibility under the group health plan. The change in election must correspond to the employee’s intended enrollment (and the intended enrollment of any family members whose coverage is being dropped) in other minimum essential coverage (group health plan or Exchange). The new coverage must be effective no later than the first day of the second month following the month in which the employer-sponsored coverage is dropped. The administrator of the employer’s cafeteria plan may rely on an employee’s reasonable representation about the intended enrollment.
An employee who is eligible to enroll in Exchange coverage (during an Exchange open enrollment or special enrollment period) may drop employer-provided group health plan coverage midyear. The change must correspond to the employee’s intended enrollment (and the intended enrollment of any family members whose coverage is being dropped) in Exchange coverage that is effective no later than the day after the last day of the employer-sponsored coverage. The administrator of the employer’s cafeteria plan may rely on an employee’s reasonable representation about the intended enrollment.
If an employer chooses to adopt one or more of these midyear election changes for its cafeteria plan, a plan amendment is necessary. The amendment generally must be adopted on or before the last day of the plan year in which the additional changes are allowed and can be effective retroactively to the first day of that plan year, provided that the plan operates in accordance with the guidance, including notification to participants of the amendment.
Special Rule for the 2014 Plan Year
Under a special rule, an employer that adopts these new midyear election changes for its 2014 cafeteria plan year has until the last day of the 2015 plan year to adopt the amendment. Although plan amendments may be adopted retroactively, election changes to revoke coverage retroactively are not permitted.
The Internal Revenue Service (IRS) recently announced the cost-of-living adjustments to the applicable dollar limits on various employer-sponsored retirement and welfare plans for 2015. Although many dollar limits currently in effect for 2014 will change, some limits will remain unchanged for 2015.
As the economy continues to rebound and the United States again starts to see more movement in the employment market, employers are once again revisiting their severance pay and retention policies and developing an underlying rational of whether or not to provide these benefits and if so, how broadly among their workforce. However, it has become apparent that not everyone really understands the difference between severance arrangements and retention agreements and when one should be used instead of the other. Each accomplishes a different purpose and understanding the fundamental differences between the two will allow professionals to make an educated decision regarding which option is best for a given organization depending on its existing circumstances.
Reprinted with the permission of ThomsonReuters, © 2014, all rights reserved.
Employers that sponsor defined benefit qualified retirement plans benefiting only Puerto Rico employees should be aware that Pension Benefit Guaranty Corporation (PBGC) coverage may no longer apply. Last year, the PBGC withdrew old prior opinion letters (Opinion Letters 77-172 and 85-19) regarding PBGC coverage in Puerto Rico and Guam. Those opinion letters articulated the PBGC’s position at that time, that Title IV of the Employee Retirement Income Security Act (ERISA) (providing for PBGC coverage), may apply to defined benefit plans covering only Puerto Rico participants if the Puerto Rico plan is either qualified under Section 401(a) of the U.S. Internal Revenue Code or has been operated in practice in accordance with the requirements of Section 401(a) for at least the five preceding years. Earlier this year, in remarks made at an enrolled actuaries meeting, PBGC officials stated that, going forward, PBGC will determine that a plan is not covered under Title IV of ERISA if (1) the plan’s trust is created or organized outside of the United States (e.g., Puerto Rico) and (2) no election under ERISA section 1022(i)(2) has been made. As a result, it appears the new PBGC position is that Puerto Rico-only qualified plans generally are not covered under Title IV of ERISA (although dual-qualified plans with Puerto Rico participants are covered). Since few Puerto Rico plans have made an election under ERISA section 1022(i)(2) due to the strict U.S. laws applicable to such arrangements, this new PBGC position will affect a number of Puerto Rico-only defined benefit plans. PBGC officials also stated that if the PBGC determines that a plan is not covered under Title IV of ERISA, it may refund up to six years of premiums.
Employers with Puerto Rico-only defined benefit plans should consider whether PBGC coverage of their plan is still possible or desired. If not, a refund of PBGC premiums should be sought.
From today, 1 October 2014, employees and agency workers who have a “qualifying relationship” with a pregnant woman or her expected child are entitled to take unpaid time off during working hours to accompany the woman to two antenatal appointments.
This new right supplements the existing right of pregnant women to paid time off for such appointments.
The Pension Benefit Guaranty Corporation (PBGC) stated in a filing published in the Federal Register on September 23, 2014, that it intends to require that plan sponsors report to the PBGC “certain undertakings” to cashout or annuitize benefits for specified groups of employees under defined benefit pension plans. PBGC intends to make this reporting part of the 2015 PBGC premium filing procedures.
Recently, many defined benefit pension plan sponsors have been implementing lump-sum distribution windows, primarily to former employees who are not receiving benefits, as part of a de-risking strategy. If participants elect to take lump-sum distributions in lieu of annuity payments, the plan sponsor can minimize the risk of interest rate fluctuations negatively affecting plan assets.
In addition, lump-sum distribution windows under defined benefit pension plans typically have the effect of reducing the number of defined benefit pension plan participants because eligible participants are paid their full benefit under the plan at the time of the lump-sum distribution. The reduction in defined benefit pension plan participants has the effect of reducing premium payments due from such plans to the PBGC.
Some pension rights advocates have recently raised public policy concerns about the increasing use of lump-sum cashouts, claiming that cashouts jeopardize the retirement security of plan participants by providing them with unrestricted access to their retirement funds. However, it is the reduction in premium payments that is likely most concerning to the PBGC. PBGC relies on annual premium payments from a dwindling number of ongoing defined benefit pension plans to fund guaranteed benefits under plans that have been taken over by the PBGC.
At this time, the PBGC is only proposing to require disclosure of certain lump-sum distributions and annuitizations, and has not proposed any other type of PBGC review or oversight.