In the wake of investment losses from the 2008 market downturn, many fiduciaries of employee benefit plans faced lawsuits brought by plan participants. Most cases involved defined contribution plans, in which participants sought to recover investment losses that had directly reduced their individual benefits. In contrast, fewer cases were brought against fiduciaries of defined benefit plans, largely because plan sponsors bear the investment risk in the defined benefit context–which means investment losses do not directly affect participants’ individual benefits. Courts have generally held that participants lack standing to sue defined benefit plan fiduciaries for investment losses–until now.
We are writing with another update on French labor law that could impact international corporate transactions. French President Francois Hollande has proposed a change to French legislation that could remove the threat of imprisonment for directors and senior employees who are found to have breached obligations to consult with works councils and other employee representatives. The implications of this change would be important for businesses in France, and also for international companies involved in mergers, acquisitions and divestitures in France.
The Pension Benefit Guaranty Corporation (“PBGC”) recently finalized its rule on insurance for amounts rolled over from a defined contribution plan to a defined benefit plan. Although amounts rolled over will be subject to greater protections than apply for most other benefits (i.e., benefits derived from employer contributions), the full rollover benefit will not necessarily be protected if the plan terminates with insufficient assets. Employers should assess the impact of the limitations on PBGC protection for their plans and consider updating participant communications to better explain the potential risks from a rollover to a defined benefit plan.
The IRS has updated its model Special Tax Notice (sometimes called a “402(f) Notice”) for certain changes in the law since 2009. Employers should review their Special Tax Notices to incorporate required updates.
By: Chris Bracebridge, Luciana Griebel, Helena Milner-Smith, and Jenna Wallace
A French law that comes into force on November 1, 2014 will give employees new rights to be informed prior to the sale of a small or medium-sized company, thereby allowing them the opportunity to make an offer to purchase the company. Companies that meet certain threshold requirements (details below) will be required to inform staff of the owner’s intent to sell either the business or shares or securities giving access to the majority of the company’s capital. Failure to comply with the new law may lead to a substantial fine and could even result in the sale being nullified by a court order. The implications of this law are important for business owners in France and also for international companies considering acquisitions in France. Continue Reading
The Equal Employment Opportunity Commission (“EEOC”) has requested that the United States District Court of Minnesota stop Honeywell from implementing a wellness program that would provide financial incentives for undergoing biometric screenings. The EEOC is challenging Honeywell’s program on grounds that it would violate the Americans with Disabilities Act (“ADA”) and the Genetic Information Nondiscrimination Act (“GINA”). The EEOC’s request is a surprising development because, as recently as last year, the EEOC stated that it has not taken a position on whether and to what extent providing a financial reward to participate in a wellness program violates the ADA. In addition, EEOC staff have not previously given any public indication that providing incentives to spouses for participating in a wellness program violates GINA. Consequently, many employers provide financial rewards to encourage participation in wellness programs up to the limits permitted by the Health Insurance Portability and Accountability Act (“HIPAA”), as amended by the Affordable Care Act (“ACA”). Employers that offer financial rewards (or impose financial penalties) for participation in wellness programs that request medical information or involve medical examinations should take note of this development.
Update: On November 3, 2014, the District Court judge denied the EEOC’s request.
The Chairs of the two Senate committees that govern pensions sent a letter last week to the heads of government agencies overseeing pensions requesting additional guidance on pension de-risking. The letter was written by Senator Wyden (D-Or), as Chair of the Committee on Finance, and Senator Harkin (D-IA), as Chair of the Committee on Health, Education, Labor and Pensions, and the letter was directed to the heads of the Department of Treasury, Department of Labor, Pension Benefit Guaranty Corporation (PBGC), and the Consumer Financial Protection Bureau. Continue Reading
Treasury and the IRS recently issued long-awaited regulations governing cash balance and other hybrid pension plans. Final regulations implement the intent of Congress in the Pension Protection Act of 2006 (the “PPA”) to eliminate the so-called “whipsaw calculation” and permit more generous rates of return for employees and retirees. Proposed regulations issued at the same time set forth a path for non-compliant plans to become compliant. Private sector plans must adopt these changes before the first day of first plan year beginning in 2016. Most significantly, however, is that the regulations − for the first time − specify the way in which employers can marry the efficiency of delivering benefits under through a defined benefit plan with the reduced financial volatility of a defined contribution plan. In short, the regulations make possible a new design for retirement benefits that may prove attractive for employers and employees alike: the shared-risk pension plan.
Whipsaw Is Dead. The PPA eliminated the practice, known as “whipsaw,” of requiring hybrid plans to pay out lump sums in excess of the hypothetical account balance (or accumulated percentage of final pay) by projecting interest credits to normal retirement age and then discounting the resulting benefit to present value using statutory rates. Whipsaw was objectionable on a number of grounds, which is why Congress eliminated it. Perhaps its most objectionable feature is that it required affected hybrid plans to pay out larger lump sums to younger employees than to similarly situated older employees. The proposed regulations imposed numerous restrictions on Congress’s elimination of whipsaw that did not appear in the statute, and appeared to require affected hybrid plans to continue using the whipsaw calculation, for example, if they provided subsidized survivor or early retirement benefits. The final regulations remove these restrictions and eliminate any requirement for any hybrid plan to continue using the whipsaw calculation.
More Generous Fixed and Minimum Interest Credits. The PPA made clear that hybrid plans could periodically adjust a participant’s hypothetical account balance (or accumulated percentage of final average pay) for the time value of money—for example, by crediting interest—as long as the rate of adjustment does not exceed a market rate of return. A hybrid plan that credits interest has a number of options for doing so, including crediting only a single fixed rate of interest (e.g., 5%) or offering a variable rate of interest that is underpinned by a floor or minimum fixed rate of interest (e.g., the current yield on 30-year Treasury securities, but never less than 4%). The final regulations increase the fixed and minimum rates that may be used as follows:
Type of Rate Highest Rate Permitted
single fixed rate 6%
minimum annual rate
if using rates in Notice 96-8
(such as 30-year Treasuries) 5%
minimum annual rate
if using 1st, 2nd, or 3rd segments 4%
minimum cumulative rate 3%
Treasury and the IRS established these ceilings on minimum rates to ensure that the combination of the variable interest crediting rate and the fixed minimum rate would not, together, create an above-market rate.
More Flexible Investment Rates of Return. Another way for a hybrid plan to adjust a participant’s hypothetical account balance for the time value of money is to credit the account with the rate of return on an investment, be it a single security or a diversified investment portfolio. Prior regulations permitted a plan to credit an investment rate of return, but limited the choices to the return on (1) all the assets held by the plan, (2) a diversified regulated investment company (such as an S&P 500 mutual fund), or (3) an annuity contract issued by an insurance company. One drawback to this approach is that it appeared to limit plans to crediting the same investment rate of return to all participants in the plan, even though individual participants might have vastly different investment horizons and appetites for risk (for example, the new hire just out of college vs. a long-term employee on the verge of retirement). The recently released regulations address this shortcoming by permitting a plan to (1) subdivide the plan’s assets into separate pools with different asset mixes, (2) calculate the rate of return on each pool separately, and (3) credit participants with different rates of return by crediting them with the rate of return on one of the pools. To be eligible to do this, the each subset of plan assets must meet the following requirements: the subset of assets is diversified, no more than 10% of such assets are employer securities, and the assets approximate the liabilities for which the return is being credited.
However, certain limitations remain regarding investment rates of return:
Limit on age or service grading. Plans that credit an investment rate of return may apply the anti-backloading rules by projecting negative returns using a 0% interest rate. This projection might preclude a plan from providing pay credits (or similar principal-like credits) that increase with increased age or service.
Difficult to Replace a RIC. A plan that credits a rate of return on a regulated investment company (“RIC”) may replace the RIC with another RIC without violating the anti-cutback rule if the initial RIC ceases to exist and the replacement is the successor to the RIC (where a successor exists) or a RIC with similar characteristics. A rate of return based on a RIC may not be replaced with a different RIC merely because the first RIC begins to perform poorly or otherwise changes without ceasing to exist.
May Not Credit Based on an Index. A plan may not credit a rate of return based on an index, such as the S&P 500. Instead, the plan would need to credit the rate of return on a RIC that seeks to mirror an index, such as a specified S&P index mutual fund.
Opportunity for Shared-Risk Pension Plans. Traditional defined benefit plans require the employer to bear the risks associated with changes in interest rates, financial markets, and life expectancies: the benefits promised under traditional defined benefit plans do not vary based on these factors. In contrast, the benefits provided by defined contributions plans are based solely on the participant’s account balance, which the participant typically must manage to address changes in the market, interest rate fluctuations, and the participant’s life expectancy (which is not always easy to predict). A key feature of the final hybrid pension regulations permits a new type of plan design in which these risks are shared between the employer and the participant.
As noted above, the final regulations permit a hybrid plan to credit an investment rate of return. The benefits under a hybrid plan could therefore vary based on market experience. However, the plan would need to credit, at a minimum, a cumulative return of 0% interest (meaning that the participant receives, at a minimum, the sum of his or her pay credits without interest). In this manner, a participant would bear some investment risk, but would have some protection from the 0% cumulative floor. Furthermore, the plan would be required to offer an annuity form of benefit, providing a stream of payments for the life of the participant and, if married, his or her spouse. But, as described above, prior regulations required a one-size-fits all approach: the plan could credit a return based on an S&P 500 index fund, for example, but doing so for all participants, regardless of investment horizon, limited the attractiveness of this approach. The final regulations remedy this concern: different rates of return may be credited for different groups of participants based on separate subsets of plan assets. The regulations offer an example of how this might work: a subset of assets could be associated with participants based on years of service. For example, shorter service employees might be credited with a rate of return on a subset of plan assets that is invested less conservatively than a subset of assets associated with benefits for longer-service participants.
Most group health plans must apply to the Centers for Medicare & Medicaid Services by November 5 for a unique health plan identifying number (HPID). Although self-insured health plans must apply for HPIDs, the application process was not designed with these plans in mind.
In a post this summer, we identified several deficiencies in the HPID rules that will make the application process difficult for employers. CMS has recently fixed a few problems; but with the November 5 deadline fast approaching, the agency still has not addressed other fundamental shortcomings of the HPID rules. Continue Reading
Earlier today, Motorola Solutions announced that it is transferring $3 billion of pension liabilities to Prudential. The transfer covers approximately 30,000 plan participants who currently receive monthly pensions. In addition, former employees who have a vested benefit under the company’s pension plan but have not yet begun to receive benefits will be given a one-time offer to receive a lump sum. The company is limiting the total amount of lump sums to $1 billion.
The Motorola Solutions transaction is the third largest transfer of pension liabilities to an insurance company in the United States. In 2012, General Motors transferred approximately $25 billion of pension liabilities to Prudential and, in the same year, Verizon transferred approximately $7.5 billion of pension liabilities to Prudential. The magnitude of de-risking transactions decreased in 2013, but some large transactions continued to occur. For example, in 2013 SPX announced a transfer of $625 million to Massachusetts Mutual.
The Motorola Solutions transaction comes at a time when many companies that sponsor defined benefit plans are considering ways to reduce financial volatility associated with pension liabilities. As we previously noted, there has been some scrutiny of pension de-risking transactions in recent years. In 2013, the ERISA Advisory Council held hearings on pension de-risking, but, despite calls for a moratorium on pension settlements, the Council’s primary recommendation regarding pension transfers focused only on the standard for selecting an insurance company. In addition, Verizon’s pension transfer was challenged in court, but the district court dismissed those claims in their entirety. An appeal is pending.
Earlier this week, the PBGC issued a proposal to collect information from plan sponsors regarding certain pension de-risking activity. Under the proposal, plan sponsors would be required to report to the PBGC each year “undertakings to cash out or annuitize benefits for a specified group of former employees.”