Home > News & Seminars > Articles & Alerts > 2010 Articles & Alerts > Employee Benefits Developments November 2010
November 29, 2010
The Internal Revenue Service and Social Security Administration have announced the cost-of-living adjusted dollar limits applicable to benefit plans for 2011. Because of the reduced rise in cost of living, all limits remain unadjusted from 2010. A listing of key limits is set out below:
As part of its Employee Contributions Initiative, the U.S. Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) recently filed 24 civil lawsuits nationwide in an effort to protect benefits for employees participating in contributory health or retirement benefit plans. EBSA announced its enforcement efforts in a press release on November 16, explaining that the lawsuits involve scenarios where employees’ contributions were withheld from their paychecks but employers retained and used the contributions instead of depositing the funds into benefit plans. In the news release, Secretary of Labor Hilda Solis acknowledged that employees sacrifice their wages to contribute to retirement and health benefits, and stated that EBSA’s enforcements actions aim “to ensure that these workers’ contributions are protected and available to pay future benefits.” In addition to its civil enforcement initiative, EBSA’s nationwide Contributory Plans Criminal Project targets employer and third-party fraud and abuse related to contributory benefit plans. EBSA has also created publications intended to educate participants and beneficiaries about their rights and to assist them in determining whether their contributions are being misused. EBSA’s enforcement and education efforts underscore the emphasis employers should place on properly handling and promptly depositing plan contributions. DOL Regulation § 2510.3-102 sets out the proper timing for depositing contributions into benefit plans. Employers who fail to deposit contributions in a timely manner may be able to self-correct their violations and prevent investigation through the DOL’s Voluntary Fiduciary Correction Program. Information related to EBSA’s Employee Contributions Initiative, including descriptions of the 24 recently filed lawsuits, can be found at www.dol.gov/ebsa/newsroom/ECI/main.html
The Department of Labor has finalized its regulation that will expand the requirements for disclosures to participants in 401(k) plans and other individual account plans where the participant directs the investment of the account. The principal aim of the new rules is to establish a uniform, basic disclosure routine that will provide participants with information about how fees and expenses are charged to a plan and to their individual accounts. This new regulation is a corollary to a separate set of regulations issued in July 2010 that impose obligations on record-keepers, investment providers, and other plan service providers to disclose to the plan sponsor the elements and amounts of fees charged to a plan and its participants under the service arrangements the provider has with the plan and its investment funds. In most 401(k) plans, participants have the ability to direct the investment of their accounts, and in most of these plans a significant portion of the costs in providing record-keeping, investment choices, access to information through the internet, voice-response, or other support systems is paid for through asset-based fees or other charges to participant accounts. These fees might be “12b-1” fees, sub-advisory fees and other charges that are imposed by mutual funds or under group investment contracts used by insurance companies and other providers to bring investment options and plan record-keeping services to plans. The aim of the regulations is to increase the awareness of both plan sponsors and plan participants in how services are paid for. The regulations requiring the disclosures to plan sponsors are effective in July 2011. The newly issued regulations that impose new disclosure rules for information to be given to participants are effective for plan years beginning on or after November 1, 2011. This will be the 2012 plan year for calendar year plans. The new disclosure rules apply regardless of whether a plan intends to use the fiduciary protection afforded by ERISA Section 404(c) which allows a plan fiduciary to avoid responsibility for the investment results produced by a participant’s investment directions. To obtain the ERISA Section 404(c), protection, a plan fiduciary must provide sufficient investment choices and information to participants. The 404(c) rules are optional; the new fee disclosure regulations are mandatory. For the most part, it is anticipated that service providers will develop the means to meet the new disclosure requirements. Furthermore, a plan administrator will not be liable for the completeness and accuracy of the information given to participants under the rules when the plan administrator “reasonably and in good faith” relies on information received from and provided to participants by a service provider or issuer of investment choices. Look for reports and information from your 401(k) service providers over the coming months on these new disclosure requirements. Reasonable and good faith reliance will require a plan administrator to understand a plan’s fee structure, how plan costs are being paid for as well as a judgment that the fees are reasonable. (Department of Labor Regulations Section 2550.404a-5 and 2550.404a-1, issued October 7, 2010.)
The IRS issued Notice 2010-63 inviting public comments on the application of rules prohibiting insured group health plans from discriminating in favor of highly compensated individuals (HCIs). Under the Patient Protection and Affordable Care Act (PPACA), Internal Revenue Code (Code) Section 105(h) nondiscrimination rules (previously only applied to self-insured group health plans) are applied to non-grandfathered insured group health plans. This provision of PPACA is effective for non-grandfathered group health plans as of the first day of the plan year beginning on or after September 23, 2010. Although the application of the nondiscrimination requirements of Code Section 105(h) will be similar for self-insured and non-grandfathered insured plans, the consequences for noncompliance are different. Under a self-insured plan, the penalty for failing the nondiscrimination test falls mainly on the HCIs receiving the discriminatory benefit. Specifically, the HCIs receiving the discriminatory benefit must recognize the excess benefit as taxable income. In contrast, the penalty for failing the nondiscrimination test for a non-grandfathered insured plan is applied to the plan sponsor. As the IRS Notice highlights, the penalty for a discriminatory non-grandfathered insured plan is an excise tax or civil monetary penalty of $100 per day per individual discriminated against (all of the non-highly compensated individuals (NHCIs)). As an example, an employer with 200 NHCIs who sponsors a non-grandfathered insured plan that discriminated in favor of at least one HCI, would be subject to a penalty of $20,000 (200 x $100) a day for each day the plan was found to be discriminatory. For purposes of the 105(h) nondiscrimination rules, an HCI is generally defined as an individual who is (i) one of the five highest paid officers; (ii) a shareholder who owns more than 10 percent in value of the stock of the employer; or (iii) one of the highest 25 percent of all employees (some employees such as part-time employees and employees covered by a collective bargaining agreement can be excluded). Although this Notice describes the penalty for failing this nondiscrimination test, we continue to wait for clear guidance on exactly how this test should be applied to non-grandfathered insured plans. Generally, the non-discrimination provisions of Code Section 105(h) prohibit discrimination in favor of HCIs for purposes of either eligibility or benefits. This could implicate a variety of arrangements such as plans that cover only a select group of management employees (such as an executive health plan), or a health plan that provides reduced premiums for executives. Also, a severance agreement for a departing HCI that included post-employment health coverage may also violate this rule if the coverage is not generally available to all employees upon termination. In light of the severe penalty associated with this new PPACA provision, plan sponsors should review their group health plans and related arrangements to determine if they may be at risk.
A district court recently upheld the denial by a 401(k) plan administrator of a participant’s claim for restoration of funds impermissibly withdrawn from his account by the participant’s ex-wife. Following his divorce in 2004, the participant continued to list his prior marital residence as his permanent address for all purposes related to the plan, despite notification that he was required to notify the plan of any change to his mailing address. As a result of his failure to notify the plan of his address change, all plan documents and communications continued to be sent to the marital address. In early 2005, the plan administrator mailed documents to the participant that described changes in the way plan participants would access their accounts, including the procedure for creating a new User ID. The participant’s ex-wife received the document at the marital address and made an online request for a new User ID. In accordance with the plan’s security procedures, confirmation of the new User ID and a temporary password were sent to the listed permanent address. The ex-wife changed the password, established a User ID for her ex-husband’s account, changed the permanent address on the account, and made a withdrawal. The money was electronically deposited into a bank account established by the ex-wife. Over the next few months, the ex-wife emptied the account of all available funds, an amount in excess of $42,000. The participant remained unaware of the withdrawals until January of 2006, when he received a Form 1099-R showing the 2005 distributions from his account. His subsequent demand that the plan restore the withdrawn funds was denied by the plan administrator, which determined that the plan was not responsible for the lost funds because the plan had in place all necessary and proper security measures, the benefits were paid in accordance with all plan terms and requirements, and the participant’s loss of benefits was due to the fraudulent conduct of his ex-wife and to his own failure to notify the plan of his change of address. The participant subsequently filed a lawsuit requesting restoration of his benefit. The court ruled in favor of the plan, holding that the plan administrator did not act arbitrarily and capriciously in its denial of the participant’s claim for restoration of funds. Pointing to the clear procedures contained in various plan documents that obligate participants to provide updated mailing addresses and informing them that PIN numbers and confidential information related to electronic withdrawals would be sent to participants at the addresses on file with the plan, the court found that it was the participant’s failure to comply with the notification requirements that permitted his ex-wife to receive confidential documents relating to his account. The lesson here for plan sponsors is to, like the plan sponsor in this case, establish and follow reasonable procedures for administering your plans. (Foster v. PPG Industries Inc., N.D. Okla., 2010)
In the May 2009 edition of Employee Benefits Developments, we reported on a case from the U.S. Court of Appeals for the Seventh Circuit which held that a plan administrator violated ERISA by failing to provide a participant with the internal guidelines used by its claims administrator. These internal guidelines were expressly cited by the claims administrator in denying the participant’s claim for benefits. Following the decision of the Seventh Circuit, the case was remanded to the federal trial court to determine the appropriate statutory penalties for the plan administrator's failure to produce the requested documents. After hearing evidence, the federal trial court ruled that the participant was entitled to statutory penalties of $9,720 ($30 per day for a 309-day delay in producing the requested documents) — the participant had been seeking a $1 million dollar penalty. In reaching a decision on the statutory penalties, the court took into consideration, among other things, the length of the delay, the prejudice to the plaintiff, and the efforts made by the plan administrator to help the plaintiff gather information from the claims administrator. The court's opinion indicated its belief that a larger penalty was not needed for deterrence purposes.
On remand, the federal trial court was also asked to determine whether the plan administrator had breached its fiduciary duty in connection with its failure to help secure the documents requested by the participant. On this issue, the court concluded that the plan administrator did breach its fiduciary duties to the participant by not taking additional steps to help obtain copies of the claim administrator's internal guidelines. The court indicated its belief that the plan administrator could have done more to persuade the claims administrator to turn over the guidelines without interfering inappropriately with the disposition of the particular claim. The stipulated damage amount for the breach was $603.25. (Mondry v. American Family Mutual Insurance Co., W.D. Wis. 2010)
Peter K. Bradley
pbradley@hodgsonruss.com
Anita Costello Greer
anita_greer@hodgsonruss.com
Michael J. Flanagan
mflanagan@hodgsonruss.com
Richard W. Kaiser
rkaiser@hodgsonruss.com
Arthur A. Marrapese, III
Art_Marrapese@hodgsonruss.com
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