Category Archives: 401(k) Plans

Layoffs, Reductions in Force, and the 401(k) Plan

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Many business owners, employment law counsel and benefit advisors are grappling with reductions in force/layoffs due to the unprecedented business and economic impact of COVID-19. I wanted to flag for you, briefly, a retirement plan compliance issue that these staff reductions can trigger. The rule applies to all qualified retirement plans not just 401(k) plans; special issues exist if your client has a defined benefit/pension plan, or if it has collectively bargained benefits.

The issue is this: the IRS established in Revenue Ruling 2007-43 that when employer action – including as a result of an economic downturn – results in 20% or more of the plan population being terminated from employment, then a presumption arises that everyone affected must be fully vested in their employer contributions under the plan. This is called a “partial plan termination.”

This is relevant only if the retirement plan has employer contributions, such as matching or profit sharing contributions, that are subject to a vesting schedule. Safe harbor contributions are always 100% vested as are employee salary deferrals.

The way the employer determines the 20% threshold is as follows:

  • Start with the number of participants on the first day of the plan year which will also be the number of participants on the last day of the prior plan year, on Form 5500. For 401(k) plans you look at who is “eligible” to make salary deferrals not just those who actually make salary deferrals or otherwise have a plan account.  (IRS Q&A with ABA from May 2004, Q&A 40).
  • Add new participants (eligibles) added during the plan year in progress.
  • Take that total number, and divide by the number of participants (eligibles) experiencing employer-initiated termination of employment.
  • In all cases, count both vested and nonvested participants (eligibles).

If you are at 20% or more you have a presumed partial termination. Certain facts can rebut this presumption such as very high normal turnover but this message is meant to address reductions in force related to COVID-19 which are employer-initiated due to outside forces and thus the presumption would likely not be rebuttable.

If you meet or exceed 20% then all persons directly terminated by the employer during the year must be fully vested in their employer contributions. The IRS also recommends you fully vest collaterally-affected employees such as those who leave voluntarily, as often those voluntary departures are triggered by concern over the company’s future in light of the involuntary terminations. Even if the reduction in plan population is under 20%, a potential partial plan termination may have occurred depending on all of the facts and circumstances.

The period of a partial termination may exceed a single plan/calendar year in some cases but in the instance of COVID-19, with any luck, we will only be looking at 2020.

Fully vesting folks does not cost the employer money because the money is already in the plan. However if this is not done correctly it is a complicated and expensive fix “after-the-fact.”

Generally there is not a requirement to notify participants of full vesting as a result of partial termination at the employer level but it might be mentioned in distribution paperwork according to the practices of the client’s plan recordkeeper.

Partial terminations raise a number of other ERISA compliance issues – as does the COVID-19 crisis as a whole – so let me know if questions arise.

Wishing all readers safe passage through the next weeks and months.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2020 Christine P. Roberts, all rights reserved.

Photo Credit: Markus Spiske, Unsplash.

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2020 Benefits Update

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This PowerPoint deck covers:

  • SECURE Act mandatory and optional changes for employers that currently sponsor 401(k) or other defined contribution plans,
  • Proposed Department of Labor Regulations creating a safe harbor for posting certain retirement plan disclosures online, and
  • A quick update on the statuses of ACA repeal and the CalSavers program, respectively.

It was originally presented on March 4, 2020 as part of my firm’s 24th annual Employment Law Conference, held at the Four Seasons Biltmore, Santa Barbara, California.  As with all information posted here, it is provided general informational purposes only and does not create an attorney-client relationship between the author and the reader.  Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  © 2020 Christine P. Roberts, all rights reserved.

Photo by Lora Ohanessian on Unsplash

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Filed under 401(k) Plans, 403(b) Plans, ADP and ACP Testing, Affordable Care Act, Benefit Plan Design, California Insurance Laws, California Secure Choice Retirement Savings Program, CalSavers Program, ERISA, Health Care Reform, Profit Sharing Plan, Qualified Birth or Adoption Distribution, SECURE Act, State Auto-IRA Programs

As Out-of-Pocket Childbirth Costs Soar, SECURE Act Offers Relief

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Effective January 1, 2020, the SECURE Act exempts new parents from the 10% penalty tax that ordinarily would apply to retirement plan or IRA withdrawals before age 59.5, for distributions of up to $5,000 on account of a “qualified” birth or adoption.  This new optional plan feature is called a “Qualified Birth or Adoption Distribution” or QBAD.

The timing could not be more apt.  The out-of-pocket costs of childbirth for women with health insurance have been reported to have increased 50% between 2008 and 2015 (citing Health Affairs study; subscription required.)  The same sources report that, with employee health insurance, the average out-of-pocket cost for hospital-assisted childbirth is approaching $5,000.  The costs of a domestic, private adoption can be much higher, approaching $40,000, although parents who adopt may qualify for an adoption tax credit of up to $14,300 per child in 2020, or tax-qualified employer provided adoption benefits under Internal Revenue Code Section 137.

How will the new QBAD work?

  • As mentioned, the distribution cannot exceed $5,000 per child
  • Children must not have attained age 18 (or, if older, be physically or mentally incapable of self-support) and must not be the child of the taxpayer’s spouse
  • The dollar limit applies per parent, so a couple could each qualify for the dollar limit unless an employer plan provides otherwise
  • The distribution must be taken after the date of birth or date on which adoption is finalized and within one year of the birth or adoption event.
  • Distributions can be repaid back to the qualified plan or IRA notwithstanding normal contribution dollar limits; the repayment will be treated as the equivalent of a rollover contribution for these purposes
  • Future regulations may specify timing rules for the repayment process
  • The parent must include the name, age, and taxpayer ID (SSN) of the child on his or her tax return.

Plans and IRA custodian/trustees will likely allow the distributions to occur in 2020 but ultimately a plan amendment – or amendment to an IRA custodial account or trust agreement – is required for this option to be available.  For qualified plans, the amendment deadline will generally be the last day of the first plan year beginning on or after January 1, 2022 and the amendment must be effective retroactively to January 1, 2020, or a later date on which the date the QBAD is first implemented.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader.  Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  © 2020 Christine P. Roberts, all rights reserved.

Photo credit:  Randy Rooibaatjie (Unsplash)

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Filed under 401(k) Plans, 403(b) Plans, Benefit Plan Design, ERISA, Fringe Benefits, IRA Issues, QBAD, Qualified Birth or Adoption Distribution, SECURE Act

2020 COLA Adjustments Announced

rodney-the-architect-Fqn4hiQ-Rnk-unsplash.jpgOn November 5, 2019, the IRS announced 2020 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.  The maximum limit on salary deferral contributions to 401(k) and 403(b) plans increased $500 to $19,500 and a number of other dollar limits increased.  Citations below are to the Internal Revenue Code.

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In a separate announcement, the Social Security Taxable Wage Base for 2020 increased to $137,700 from $132,900 in 2019.

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Does Your Retirement Plan Incorporate State Law Into the Plan?  Check Your Spousal Benefit Obligations!

jordan-mcdonald-766295-unsplashRetirement plan documents are contracts and generally they contain a “choice of law” provision.  The choice of law provision dictates what laws will govern interpretation of the contract, for instance in the event of a dispute over the contract’s application.  A recent, unpublished Ninth Circuit court opinion held that the Plan’s choice of California law required the plan to provide spousal survivor rights to registered domestic partners, because California law affords registered domestic partners the same legal status as spouses, and because doing so did not conflict with any provision of the plan document, ERISA or the Internal Revenue Code.  In light of the opinion, plan sponsors should examine their plan documents to determine whether or not choice of law provisions carry state domestic partner rights into their plan document, and if this is the case, should consult with counsel as to how that might impact their plan distribution and plan loan approval procedures, and QDRO procedures as well.

In Reed v. KRON/IBEW Local 45 Pension Plan, No. 4:16-cv-04471-JSW (9th Cir. May 16, 2019), plaintiff David Reed entered into a long-term relationship with Donald Gardner in 1998.  Gardner was an employee at KRON-TV and a participant in the KRON/IBEW Local 45 Pension Plan, a union-management sponsored defined benefit pension plan.  In addition to a choice of law provision that invoked California law, to the extent consistent with ERISA and the Internal Revenue Code, the KRON plan document did not limit the term “spouse” or “married” to opposite-sex spouses.

In 2004, Reed and Gardner registered as domestic partners under California law.  Registered domestic partners have had the same status under California law as legally married spouses since the California Domestic Partnership Rights and Responsibilities Act of 2003 went into effect on January 1, 2005.[1]

Gardner retired in 2009 and began receiving pension benefits under the plan.  Prior to retiring he attended meetings with KRON-TV’s human resources department together with Reed.  Although HR knew that the couple were registered domestic partners (Reed, for example, received benefits under the group health plan), the HR personnel did not mention the availability of a joint-and-survivor form of benefit under the Plan.  Gardner accordingly elected a single life annuity form of benefit.  He also designated Reed as his beneficiary under the Plan.

Gardner and Reed married in May 2014, five days before Gardner passed away.  Reed submitted a claim for survivor’s benefits under the plan.  Although the Pension Committee of the Plan never formally responded to Reed’s claim, Reed was deemed to have exhausted his administrative remedies and filed suit in federal court against the Plan, the Pension Committee, and the parent company of KRON-TV.  The federal trial court granted the Plan Committee’s motion for judgment on the pleadings, finding that it did not abuse its discretion in denying Reed’s benefit claim.

On appeal, a three-judge panel of the Ninth Circuit reversed the trial court and remanded the case with instructions to determine the payments owed to Reed.  The panel stated:

“The Committee abused its discretion by denying benefits to Reed. During either time the Committee evaluated the Plan’s benefits in this case—in 2009 or in 2016—California law afforded domestic partners the same rights, protections, and benefits as those granted to spouses. See Cal. Fam. Code § 297.5(a); see also Koebke v. Bernardo Heights Country Club, 36 Cal. 4th 824, 837-89 (2005). Neither ERISA nor the Code provided binding guidance inconsistent with applying this interpretation of spouse to the Plan. See United States v. Windsor, 570 U.S. 744 (2013) (striking down the Defense of Marriage Act’s definitions of “spouse” and “marriage” as unconstitutional); cf.26 C.F.R. § 301.7701-18(c) (as of September 2, 2016, the Code excludes registered domestic partners from the definition of “spouse, husband, and wife”). Therefore, because Reed and Gardner were domestic partners at the time of Gardner’s retirement, the Committee should have awarded Reed spousal benefits in accordance with California law, as was required by the Plan’s choice-of-law provision.”

Despite the fact that the Internal Revenue Code does not recognize domestic partners as equivalent to spouses, this did not limit the terms of the plan document; in this regard Reed successfully argued that federal law established a floor, but not a ceiling, for drafting the terms of the plan.  This case is of particular relevance to plan sponsors in California and Hawaii, as both states fall within the Ninth Circuit, and both states grant domestic partners the same rights as married couples.[2]  As mentioned, if domestic partner rights are imported into the plan document, they may be implicated even in the absence of joint and survivor annuity provisions.  For instance, if the plan document expressly requires spousal consent for a loan or hardship withdrawal, domestic partner approval in such instances may be required, and QDRO procedures may have to be expanded.

For this to be the case, the plan’s choice of law provision must invoke the law of a state which grants to domestic partners rights equal to those of spouses, and the plan must also not define “spouse” in a more limiting way, for instance by limiting the term to legally married couples. These factors are more likely to be present in individually drafted retirement plans, whether in a “Taft-Hartley” plan such as the KRON plan, or in a document drafted specifically for a unique single employer.

The situation posed in the Reed case is not as likely to occur under a pre-approved plan document.  Fidelity’s Volume Submitter Defined Contribution Plan (Basic Plan Document No. 17), for instance, defines “spouse” as “the person to whom an individual is married for purposes of Federal income taxes.”  This, then, would include same-sex and opposite-sex spouses, but would exclude domestic partners, irrespective of the Fidelity plan document’s choice of law provision (which invokes the laws of the Commonwealth of Massachusetts).

By contrast, the Empower basic plan document (formally, the Great-West Trust Company Defined Contribution Prototype Plan and Trust (Basic Plan Document #11)) allows the plan sponsor to define “spouse” in Appendix B to the Adoption Agreement.  If the plan sponsor fails to specify a definition, the basic plan document choice of law clause (Section 7.10(H)) defaults to the law of the state of the principal place of business of the employer, to that of the corporate trustee, if any, or to that of the insurer (for a fully insured plan).  Plan sponsors using an Empower prototype document may want to consult benefits counsel as to the consequences of the default language as applied to their specific factual circumstances.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader.  Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  © 2019 Christine P. Roberts, all rights reserved.

 

 

 

 

 

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Filed under 401(k) Plans, Benefit Plan Design, Defense of Marriage Act, ERISA, GINA/Genetic Privacy, Profit Sharing Plan, Qualified Domestic Relations Orders, Registered Domestic Partner Benefits, Same-Sex Marriage, Uncategorized

California Employers: Get Ready for the CalSavers Program

Beginning on July 1, 2019, California private employers with 5 or more employees, who do not already sponsor a retirement plan, may enroll in the CalSavers Retirement Savings Program (CalSavers).   Mandated employers must enroll in CalSavers according to the following schedule:

  • Over 100 employees – June 30, 2020
  • 50-99 employees – June 30, 2021
  • 5-49 more employees – June 30, 2022

Below, we describe the key features of the CalSavers program.

  • CalSavers is the byproduct of California Senate Bill 1234, which Governor Brown signed into law in 2016. It is codified in Title 21 of the Government Code and in applicable regulations. It creates a state board tasked with developing a workplace retirement savings program for employers with at least 5 employees that do not sponsor their own retirement plans (“Eligible Employers”). This may mean a 401(k) plan, a 403(b) plan, a SEP or SIMPLE plan, or a multiple employer (union) plan.
  • CalSavers applies to private for-profit and non-profit employers, but not to federal or state governmental entities.
  • CalSavers calls for employees aged at least 18, and receiving a Form W-2 from an eligible employer, to be automatically enrolled in the CalSavers program after a 30 day period, during which they may either opt out, or customize their contribution level and investment choices.
  • The default is an employee contribution of 5% of their wages subject to income tax withholding, automatically increasing each year by 1% to a maximum contribution level of 8%. Employer contributions currently are prohibited, but may be allowed at a later date.
  • Prior to their mandatory participation date, Eligible Employers will receive a notice from the CalSavers program containing an access code, and a written notice that may be forwarded to employees. Eligible Employers must log on to the CalSavers site to either register online, or certify their exemption from Calsavers by stating that their business already maintains a retirement plan. The link to do so is here. To do either, you will need your federal tax ID number and your California payroll tax number, as well as the access code provided in the CalSavers Notice.
  • Eligible Employers who enroll in CalSavers will provide some basic employee roster information to CalSavers. CalSavers will then contact employees directly to notify them of the program and to instruct them about how to enroll or opt-out online. Those who enroll will have an online account which they can access in order to change their contribution levels or investment selections.
  • Once an Eligible Employer has enrolled in CalSavers, their subsequent obligations are limited to deducting and remitting each enrolled employee’s contributions each pay period, and to adding new eligible employees within 30 days of hire (or of attaining eligibility by turning age 18, if later).
  • Eligible employers may delegate their third party payroll provider to fulfill these functions, if the payroll provider agrees and is equipped to do so.
  • Eligible Employers are shielded from fiduciary liability to employees that might otherwise arise regarding investment performance or other aspects of participation in the CalSavers program.
  • There are employer penalties for noncompliance. The penalty is $250 per eligible employee for failure to comply after 90 days of receiving the CalSavers notification, and $500 per eligible employee if noncompliance extends to 180 days or more after the notice.
  • Eligible Employers must remain neutral about the CalSavers program and may not encourage employees to participate, or discourage them from doing so. They should refer employees with questions about CalSavers to the CalSavers website or to Client Services at 855-650-6918 or clientservices@calsavers.com.

The CalSavers program was challenged in court by a California taxpayer association, on the grounds that it was preempted by ERISA as a consequence of the automatic enrollment feature.[1] On March 29, 2019, a federal court judge concluded that ERISA did not prevent operation of the CalSavers program, because the program only applies to employers who do not have retirement plans governed by ERISA.  The taxpayer association is deciding whether to amend their complaint by May 25, 2019, or appeal the decision to the Ninth Circuit.  Therefore, further litigation may ensue, but after this important early victory the timely rollout of CalSavers seems likely, and employers should act accordingly.  (Programs similar to CalSavers are up and running in Oregon and Illinois, and have been proposed in a handful of other states.)

Employers reviewing this information should pause to re-examine their earlier decisions against maintaining a retirement plan for employees. The benefit of sponsoring your own plan is that it will bear the “brand” of your business and will serve to attract and retain quality employees.  Further, the administrative functions you must fulfill in order to participate in CalSavers are comparable to those required by a SEP or SIMPLE plan, both of which offer larger contribution limits and an employer deduction to boot.  If mandatory participation in CalSavers is bearing down on your business, now is a good time to talk to a retirement plan consultant, or your CPA or attorney, to determine whether you can leverage the time investment CalSavers will require, into a retirement arrangement that offers considerably more to your business and your employees.

In the meantime, here are some online resources for Eligible Employers:

  • Employer checklist – a punchlist to help you prepare for enrollment.
  • CalSavers Program Disclosure Booklet – this goes into significant detail about the way CalSavers contributions will be invested; notably the cost of these investments (consisting of an underlying fund fee, a state fee, and a program administration fee), will range at launch between $0.83 to $0.95 for every $100 invested, which is approximately twice the cost load for typical 401(k) investments.  It is expected that the fees will drop as the assets in the program grow, according to a breakpoint schedule approved by the CalSavers board and program administrator.
  • Online FAQ

 

[1] A Department of Labor “safe harbor” dating back to 1975 excludes “completely voluntary” programs with limited employer involvement from the definition of an ERISA plan.  29 C.F.R. § 2510.3-2(d).  The Obama administration finalized regulations in 2016 that would have expressly permitted state programs like CalSavers as exempt from ERISA coverage. However, Congress passed legislation in 2017 that repealed those regulations.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader.  Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  © 2019 Christine P. Roberts, all rights reserved.

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Filed under 401(k) Plans, 403(b) Plans, CalSavers Program, ERISA, IRA Issues, Profit Sharing Plan, State Auto-IRA Programs

Bankruptcy Case Highlights Importance of Promptly Transferring Retirement Assets in Divorce

When a couple divorce, it is not uncommon for one partner to have accumulated significantly larger retirement accounts (e.g., in 401(k) plans or IRAs) than the other.  In such cases the parties generally divide IRA accounts pursuant to Internal Revenue Code 408(d)(6) and/or enter into a qualified domestic relations order (QDRO) to divide a 401(k) or other qualified retirement plan.

The importance of moving promptly to divide and transfer title to retirement accounts in divorce was highlighted in a Bankruptcy Court case from 2018, In re Lerbakken, 590 B.R. 895 (8th Cir. 2018).  In the case, the husband’s failure to take formal legal custody of half of his ex-wife’s 401(k) account (through obtaining a QDRO), and the entirety of one of her IRAs, resulted in those amounts becoming available to creditors in the husband’s bankruptcy case.

In Lerbakken, the court’s dissolution order/property settlement directed Lerbakken’s attorney to submit a QDRO with respect to the 401(k) account, and presumably contained language relevant to transferring title to the IRA, for which a QDRO is not necessary.  However no steps towards obtaining a QDRO or transferring title of the IRA were taken.  When Lerbakken filed a voluntary Chapter 7 bankruptcy petition, he claimed his share of the 401(k) account, and the IRA, as exempt retirement accounts.  The bankruptcy court disallowed the exemption on the basis of the Supreme Court’s opinion in Clark v. Rameker, 134 S.Ct. 2242 (2014), which held that a non-spousal inherited IRA (in that case, from a mother to a daughter) was not entitled to the same protection from bankruptcy creditors as are retirement funds that are individually set aside by the person claiming bankruptcy protection; e.g. inherited accounts are more in the nature of a financial windfall than an intended source of retirement living expenses.

On appeal, the Bankruptcy panel of the 8th Circuit court agreed, noting that Clark v. Rameker limits the bankruptcy exemption to “individuals who create and contribute funds into the retirement account,” and disregarding Lerbakken’s claim that he would use the funds for retirement income.  The court’s final summing up suggests that a different result would have obtained,  had Lerbakken obtained a QDRO and moved the IRA funds into his own name, rather than simply having relied on the wording of the property settlement:

            “We recognize that Lerbakken’s interest in the 401(k) and IRA did not arise in the identical manner as the IRA account addressed in Clark.  This distinction is not material to our de novo review.  Any interest he holds in the Accounts resulted from nothing more than a property settlement.  Applying the reasoning of Clark the 401(k) and IRA accounts are not retirement funds which qualify as exempt under federal law.”  (Emphasis added.)

In essence, the result is that without having taken actual ownership to the retirement funds, Lerbakken could not “borrow” the exemption status for the 401(k) and IRA that his wife would have been able to claim, had she been the bankruptcy debtor.  The fact that Lerbakken himself may have been saving money during the marriage to allow for his ex-wife’s 401(k) and IRA contributions simply does not come into play.   The Lerbakken opinion did not address the question of how one of Lerbakken’s creditors (who included his family law counsel) would actually obtain the assets still held in the ex wife’s 401(k) account and IRA, but presumably they would intervene in any attempt to later transfer these amounts over to Lerbakken or to accounts established on his behalf.

As legal precedent, the Lerbakken ruling is limited to states in the 8th Circuit, namely Arkansas, Iowa, Minnesota, Missouri, Nebraska, and North and South Dakota, but it’s invocation of the Supreme Court’s Clark v. Rameker decision could be invoked in other districts.  It is also possible that this concept could influence state courts deciding the rights of non-bankruptcy creditors.  It therefore provides a timely reminder of the importance of moving promptly to obtain a QDRO and to move IRA assets pursuant to Internal Revenue Code 408(d)(6) pursuant to divorce.  Sitting on your rights in such instances could result in loss of the protected status of retirement savings in a bankruptcy or possibly other creditor situation.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader.  Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  © 2019 Christine P. Roberts, all rights reserved.

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Filed under 401(k) Plans, IRA Issues, Qualified Domestic Relations Orders