Multiple large, class action lawsuits have been filed against prominent higher education institutions claiming fiduciary breaches under their Code Section 403(b) plans as a result of insufficient oversight of plan investments, which allegedly caused excessive fees to be paid by participants. Last week, district courts in Georgia and North Carolina, respectively, ruled on defendants’ motions under Henderson v. Emory University and Clark v. Duke University. Although the defendants in these cases has some success in eliminating certain causes of action, other causes of actions involving the payment of excessive fees and use of multiple record-keepers will continue through litigation.
Mary K. Samsa provides counsel on executive compensation matters and tax-qualified retirement programs to a wide range of organizations, including Fortune 500 public companies, privately held companies, multinational organizations and nonprofit entities, including health systems and educational institutions. She works directly with boards of directors, compensation and retirement/investment committees, plan administrators and plan fiduciaries regarding their duties and responsibilities under federal law. With a prior background as a Certified Public Accountant, Mary brings a multi-faceted approach to advising employers with respect to their legal, financial and administrative challenges as pertains to the implementation and maintenance of their employee benefit programs. Read Mary Samsa's full bio.
Join members of the McDermott Employee Benefits team in May at one of these programs covering a variety of employee benefits topics.
The John Marshall Law School The Center for Tax Law & Employee Benefits 14th Annual Employee Benefits Symposium | May 1, 2017 | Chicago, Illinois | Speaker, Joseph S. Adams
Proposed 457(f) Regulations: Opportunities and Challenges | May 3, 2017 | Webinar presented by Mary K. Samsa, Joseph K. Urwitz, Ruth Wimer
M&A Workshop: New Developments and Key Legal and Tax Issues Throughout the Life Cycle of a Deal | May 4, 2017 | Chicago, Illinois | Speaker, Joseph S. Adams
Amy Gordon, Jeffrey Holdvogt, Susan Nash and Mary Samsa wrote this bylined article on health system employee benefit opportunities and challenges in 2017. The authors urged health systems to review internal controls for 403(b) plan compliance and new design opportunities for 457(f) plans, to review their short- and long-term health plan operation in light of any Affordable Care Act replacement.
Health system employers should make sure they are familiar with three key employee benefit issues: (1) the new Department of Labor (DOL) fiduciary rule that currently becomes effective April 10, 2017 (but may be delayed in the near future under the new administration); (2) recent excessive fee litigation filed against universities (and now health care systems such as Essentia Health) maintaining Code Section 403(b) fee plans; and (3) new Code Section 457(f) regulations. Each of these issues present risks and opportunities for health systems in 2017.
On December 2, 2016, the Supreme Court of the United States granted the petitions for writs of certiorari to Advocate Health Care, et al. v. Stapleton, Maria, et al., St. Peter’s Healthcare, et al. v. Kaplan, Laurence and Dignity Health, et al. v. Rollins, Starla, all of which previously requested the Court review their arguments on whether the church plan exemption available under the Employee Retirement Income Security Act of 1974, as amended (ERISA), applies so long as a tax-qualified retirement plan is maintained by an otherwise qualifying church-affiliated organization, or whether the exemption applies only if, in addition, a church initially established the tax-qualified retirement plan. The three cases are being consolidated and will receive one hour total for oral argument.
The very long awaited release of the new proposed regulations for Internal Revenue Code (the ‘‘Code’’) Section 457(f) plans arrived at the end of June and presents welcome and surprising new opportunities with respect to tax-exempt and governmental entities’ ‘‘ineligible nonqualified deferred compensation’’ arrangements.
The Proposed Regulations present some unexpected and surprising opportunities with respect to the ability to electively defer compensation and to have deferred compensation paid out, contingent on a valid covenant not to compete and upon a rolling risk of forfeiture.
Read the full article here to learn more.
On June 21, the IRS issued long awaited proposed regulations under Section 457 of the Internal Revenue Code that affect a broad range of compensation arrangements at tax exempt organizations. If a compensation arrangement is subject to Section 457(f), the employee is immediately taxed upon earning a vested right to receive “deferred compensation” that might not be paid until years later. These regulations address important issues under Section 457(f) that were identified by the IRS back in 2007, including whether severance pay is subject to Section 457(f), if changes to a vesting schedule could delay when deferred compensation is taxable and if covenants not to compete would be respected as bona fide vesting conditions
A severance pay arrangement will be treated as deferred compensation under Section 457(f) under the proposed regulations unless (1) the total amount of severance pay is limited to two times total annual compensation; (2) payments are completed within two full calendar years following termination of employment; and (3) the events triggering the right to severance pay are limited to a bona fide involuntary termination, which may include certain types of “good reason” terminations of employment by an employee and failure to renew an employment agreement.
There have been questions as to whether vesting conditions imposed after a compensation arrangement has been established will be respected for tax purposes. In that event, the time for income taxation under Section 457(f) is delayed until the new vesting requirement is met. If certain requirements are met, the proposed regulations provide that additional vesting conditions will be taken into account when determining the time of taxation under Section 457. These conditions include that the deferred amount subject to a new vesting date has to be more than 25 percent greater than the old amount with the former vesting date, the delay in vesting has to be at least two years (except in the case of death, disability or a qualifying involuntary termination), and the change in vesting is entered into sufficiently in advance of the original vesting date under special timing rules.
The proposed regulations also allow for noncompetes to be used as vesting conditions under Section 457(f), but only if:
- The right to payment is expressly conditioned on satisfying the noncompete;
- The noncompete has to be evidenced by an enforceable written agreement between the employer and employee;
- The employer has to make reasonable ongoing efforts to verify compliance with the noncompete;
- When the noncompete agreement becomes binding, the facts and circumstances have to show that both the ability to compete and the harm of competition are genuine and substantial;
- The noncompete must be enforceable under applicable law; and
- The employer must show that the likelihood of enforcement of the noncompete is substantial.
There had been concern that the IRS might not allow any form of noncompete to be a substantial risk of forfeiture under Section 457(f).
These regulations are generally scheduled to go into effect as of January 1 of the calendar year after being finalized. These rule changes under Section 457(f) will affect amounts deferred amounts in earlier years that were not taxed before the Section 457(f) effective date. The IRS has stated that no implication is intended regarding the proper interpretation of Section 457(f) for prior periods. The IRS will be accepting comments on the proposed regulations until early this fall. Taxpayers may rely on these proposed regulations until the applicability date—doing so is likely to be an appropriate compliance approach in many situations.
Click here for a copy of the Section 457 proposed regulation. We will be issuing a detailed review of these regulations. In the meantime, please contact one of the authors or your regular McDermott Will & Emery lawyer if you have questions about the Section 457 regulations.
Since 2014, large church-controlled health systems that offer defined benefit pension plans have seen lawsuits filed as to whether such plans are eligible to qualify for the ERISA church-plan exemption, which governs those arrangements. When a retirement plan meets the ERISA church-plan exemption, it is exempt from the typical funding and vesting requirements of ERISA and the Internal Revenue Code as well as from the ERISA reporting and disclosure requirements. As the church-plan litigation moves to the appellate level, two adverse decisions are reached denying ERISA church-plan exemption to two health systems.
Ten short years ago, revenue sharing seemingly presented a “win win” opportunity for third-party administrators (TPAs) and defined contribution plan sponsors. TPAs generally retained all revenue sharing payments received from plans’ investment fund companies in exchange for administrative services provided to the investment funds. In recognition of the revenue sharing received from the investment fund companies, TPAs often provided “free” plan administrative services to plan sponsors. Starting in the mid-2000s, however, more plan sponsors began to question the amount of money received by the TPAs under this arrangement, and plaintiffs’ lawyers and the DOL began to monitor and scrutinize revenue sharing.
This article summarizes the evolution of revenue sharing over the past ten years and examines its future through the lens of the recent U.S. Supreme Court decision in Tibble v. Edison and the subsequent uptick in 401(k) fee litigation.
Generally, any type of organization can offer a defined benefit pension plan under Section 4019a) in the Internal Revenue Code of 1986, as amended (the “Code) or a Code Section 401(k) Plan. However, only employers described in Code Section 501(a) and educational organizations described in Code Section 170(b)(A)(iii) are permitted to sponsor Code Section 403(b) plans. Equally, Code Section 457 plans can only be sponsored by governmental and other organizations exempt from tax under the Code. Until roughly 2009, both Code Sections 403(b) plans and Code Section 457 plans had been basically ignored or overlooked by the Internal Revenue Service (“IRS”) and the Department of Labor (“DOL”). However, as these two plans have accumulated significant assets over the course of time (many occurring due to the consolidation of large plans in the healthcare sector through business combinations), the IRS and DOL have deemed it necessary to start taking a closer look. The audits of Code Section 403(b) plans and Code Section 457 plans has increased dramatically in the last few years to the point where the IRS has now issued its “top ten list” of issues which tax-exempt entities need to focus on when sponsoring these types of plans.
(c)2015 ThomsonReuters, reprinted with permission.