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.
The U.S. Securities and Exchange Commission recently amended the rules governing money market funds in an effort to increase the stability and liquidity of these funds in times of economic stress. Sponsors of retirement plans should consider how their use of money market funds should be changed in light of these revised rules.
On July 1, 2014, Puerto Rico adopted new legislation (Tax Act 77), which provides a window from July 1, 2014 – October 31, 2014, for participants in Puerto Rico retirement plans to prepay at reduced rates Puerto Rico income tax on the value of accrued benefits. On August 6, the Puerto Rico Treasury Department issued guidance on the prepayment option via Administrative Determination No. 14-16. The guidance clarified how participants in Puerto Rico-qualified retirement plans may prepay to the Puerto Rico Treasury Department by October 31, 2014, income tax at the rate of eight percent on all or a portion of the participants’ vested balance or accrued benefit. Retirement plan sponsors with Puerto Rico employees, both dual-qualified and Puerto Rico-only plans, should make sure their administrators are aware of and can comply with the tax prepayment rules in the event a participant submits a request.
The income tax prepayment may be made by an individual participant or by the plan trustee on behalf of a participant. If a participant is making the tax prepayment, he or she must complete and file three copies of Form SC 2911 with the Puerto Rico Treasury Department, along with a recent copy of a plan statement (no older than 30 days) reflecting the vested account balance or accrued benefit. Plan sponsors and administrators should expect that they may be asked by plan participants for updated account statements or accrued benefit estimates in order to satisfy this requirement.
Plan participants may make the tax prepayment from their own funds or from plan assets, if they are eligible to take a distribution. Plan administrators may need to provide assistance in completing Form SC 2911 because it requires information about the plan that participants normally would not have access to, such as when the plan filed for a determination letter with the Puerto Rico Treasury Department and when the plan received a favorable determination. After the Treasury Department stamps and returns two original copies of the prepayment form to the participant, the participant must provide the plan administrator with one of two originals within 30 days, as evidence of the tax prepayment.
Plan sponsors who maintain retirement plans qualified in Puerto Rico should consider how they may wish to communicate this option to participants, keeping in mind that time is short, as the window ends on October 31, 2014. Plan sponsors should also make sure that administrators are able to separately track the accounts of participants who have prepaid the tax so that, upon a subsequent distribution, only amounts for which the tax was prepaid are subject to Puerto Rico income tax and withholding. Note that a similar prepayment window occurred in 2006, so plan administrators may have systems already set up to track for similar accounts or benefits that had income tax prepaid.
The Regional Labour Court of Cologne (Regional Court) stated in a decision in late November 2013 that a German employer has the obligation to allocate break times of employees in an orderly manner, and presented the possible consequences of non-compliance with such obligation.
In the case under review, the German employer (a nursing home) had set up a work schedule for the night shift which, in total, included a one-hour break from work per shift per employee. However, the German employer did not allocate a certain timeframe (e.g., from 4 to 5 am) for the break times. Instead, the employees were supposed to arrange among themselves who, when and in what time intervals to take the one-hour break per shift.
The Regional Court stated in its decision that such practice does not fulfil the legal requirements of “breaks” that do not have to be compensated by the employer. Under German law, only breaks from work within the meaning of § 4 German Working Hours Act (Arbeitszeitgesetz) do not need to be compensated. Importantly, to be covered by such statute, the breaks must be determined in advance. The German employer does not meet his statutory obligation to determine the breaks if it is up to the employees to freely arrange their breaks among themselves. The reasoning behind this ruling is the risk that the employees actually might not take a break at all because they lack the employer’s consent.
In summary, even though the German employer in this case took into account a one-hour break per employee and shift, it did not determine the organization or timing of such breaks. Therefore, the breaks did not fulfill the requirements of § 4 German Working Hours Act. As a consequence, the German employer had to pay remuneration for the whole night shift (not taking into account any kind of break).
German employers should keep this decision in mind when scheduling breaks. The best option is to determine the conditions and the timing of breaks in the employment contract, or, if a works council exists, in a collective works council agreement binding upon all employees of the operation. Additionally, the German employers should control and monitor compliance with such determined break times in order to avoid unnecessary claims for remuneration.
On September 16, 2014, the United States Senate unanimously approved Senate Bill 2511, which would amend Section 4062(e) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), to clarify the definition of substantial cessation of operations. ERISA Section 4062(e) enables the Pension Benefit Guaranty Corporation to require that employers financially guarantee pension obligations based on a plan’s underfunded termination liability when an employer that maintains a pension plan shuts down operations at a facility, and as a result, more than 20 percent of the employer’s employees who are plan participants incur a separation from employment.
The bill revises ERISA Section 4062(e) to clarify that a “substantial cessation of operations” occurs when an employer permanently ceases operations at a facility and, as a result, there is a “workforce reduction” of more than 15 percent of all eligible employees at all facilities in the contributing employer’s controlled group. Under the amendment, a “workforce reduction” would mean the number of eligible employees at a facility who are separated from employment by reason of the permanent cessation of operations of the employer at the facility. Certain eligible employees would be excluded from the reduction analysis, including employees who, within a reasonable period of time, are replaced by the employer, at the same or another facility in the United States, by an employee who is a citizen or resident of the United States. In addition, employees would not be not taken into consideration for these purposes following the sale or other disposition of the assets or stock of the employer if the acquiring entity maintains the single-employer plan of the predecessor employer that includes assets and liabilities attributable to the accrued benefit of the employee and either (1) the employee is separated from employment at the facility, but within a reasonable period of time, is replaced by the acquiring entity by an employee who is a citizen or resident of the United States, or (2) the eligible employees continues to be employed at the facility of the acquiring entity.
The Congressional Budget Office estimates that Senate Bill 2511 would reduce the contributions that plan sponsors are required to make to their plans as a result of terminating operations at a facility, leading to increases in employer revenues and decreases in direct spending. The House of Representatives concluded its fall session on September 19, 2014 without acting on the bill. It remains to be seen whether the House will take up the Senate bill when it returns for a “lame-duck” session after the mid-term elections.
Departing employees can represent a significant threat to UK business. This is particularly so in the case of senior managers and employees who have access to confidential information or who exert influence over key relationships with actual or prospective customers, suppliers or key members of staff.
Many employers seek to manage this threat by obtaining an employee’s agreement to a broad range of contractual post-termination restrictions (PTRs), often referred to as restrictive covenants. PTRs are generally designed to protect a business against a range of threats: former employees working for competitors, soliciting clients and poaching employees, etc. When they work, PTRs can be a very effective weapon in an employer’s arsenal, but there are potentially significant hurdles that must be overcome before they will be enforced by the UK courts.