Proposed Changes to Hardship Distribution Rules Affect 401(k) Plans

On November 14, 2018, the Department of the Treasury and the Internal Revenue Service issued proposed regulations updating the 401(k) plan regulations for hardship distributions from section 401(k) plans.  In particular, these proposed amendments reflect statutory changes including recent changes made by the Bipartisan Budget Act of 2018.  Plan sponsors of 401(k) plans have been awaiting guidance as they make plan design choices for 2019.  While the proposed regulations do not explicitly say that plan sponsors can rely on the proposed regulations, we would not be surprised if the final regulations closely track the proposed regulations.  Comments are due January 14, 2019.  These proposed rules also affect 403(b) plans, but the rules are somewhat different – consult with legal counsel.

Key Takeaways

The proposed changes affecting 401(k) plans are summarized below, but the key takeaways from the proposed regulations include:

  • 401(k) plans must eliminate the 6-month suspension on participant contributions following a hardship withdrawal no later than January 1, 2020; plans will not be permitted to impose a suspension after that date.
  • 401(k) plans can lift the suspension on participant contributions beginning January 1, 2019, even for hardship withdrawals taken before January 1, 2019. For example, if a participant in a calendar year plan took a hardship distribution in the latter half of 2018, the plan could be amended to lift the suspension beginning January 1, 2019.
  • The proposed regulations replace the “facts and circumstances” test for determining whether a distribution is necessary to satisfy a financial need with a “general standard” that requires a representation by the participant that he or she has insufficient cash or other liquid assets to satisfy the financial need. 401(k) plans may apply the new “general standard” for distributions on and after January 1, 2019, or may continue to apply the “facts and circumstances” test through December 31, 2019.  Notably, if a plan elects to apply the new “general standard” beginning in 2019, plans are not obligated to require the participant representation until January 1, 2020.
  • Beginning January 1, 2019, safe harbor contributions may also be distributed on account of an employee’s hardship. The preamble explains this is because safe harbor contributions are subject to the same distribution limitations applicable to QNECs and QMACs, which are available for hardship distributions beginning January 1, 2019.

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New Rules for Noncompetition Agreements in Massachusetts

On October 1, 2018, the Massachusetts Noncompetition Agreement Act (the “Act”) came into effect, creating several new requirements for noncompetition agreements between employers and service providers based in Massachusetts. The new law does not impact agreements entered into before October 1; however, going forward, employers should evaluate when to seek a noncompetition agreement from a service provider and should update any form agreements to comply with the Act’s requirements. In this post, we highlight five considerations to help guide employers as they revisit their practices for Massachusetts workers.

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Beware Laws Intersecting Benefit Concierge Services

(This article was originally published in Law360 and has been modified for this blog.)

Employers commonly offer a wide array of employee benefit plans and programs.  In addition to traditional staples, many employers today offer an employee assistance program, dependent care, accident insurance and even pet insurance.  In an increasingly competitive labor market, offering a full spectrum of employee benefits is an important way to maintain a competitive advantage.  While the type of programs offered have increased, employees may not always have sufficient knowledge to make use of them.  In a 2017 survey, only 60 percent of employees thought their employers effectively educated them to select the benefits options that meet their needs.  Underutilization means employers are not receiving the full benefit of their offerings.

That is why some employers are starting to use a navigator, or concierge service, to help employers realize a greater return on their investment in these programs by raising employees’ awareness of available benefits and promoting employees’ access and utilization of them.  Benefit concierge services raise several unique legal issues in the areas of data privacy, Health Insurance Portability and Accountability Act privacy, the Employee Retirement Income Security Act, and technology, to name a few.  With appropriate legal counsel and planning, many of these issues can be addressed.  This article highlights some of the legal issues that may arise when providing a concierge service.

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New § 4960 of the Internal Revenue Code Imposes an Excise Tax on Compensation Paid to the Top Five Employees of Tax-Exempt Organizations

As part of the Tax Cuts and Jobs Act of 2017, Congress enacted new § 4960 of the Internal Revenue Code.  Section 4960 imposes an excise tax on certain executive compensation paid by tax-exempt organizations – similar to the $1 million limit on deductions for compensation paid to highly paid executives in for-profit companies under § 162(m) of the Code and to the golden parachute rules of § 280G of the Code.  The new provision could have a significant impact on some tax-exempt organizations, but it lacks important detail and leaves many questions unanswered.  The excise tax provision is in addition to other rules applicable to reasonable compensation paid to employees of tax-exempt organizations.

The statute directs the Secretary of the Treasury to prescribe regulations under § 4960 “as may be necessary to prevent avoidance of the tax under this section, including regulations to prevent avoidance of such tax through the performance of services other than as an employee or by providing compensation through a pass-through or other entity to avoid such tax.”   No regulations or other IRS guidance have been issued under § 4960 thus far. Continue Reading

Executive Order on Strengthening Retirement Security in America: Impact on Required Minimum Distributions from Defined Contribution Accounts

On the last day of August, the Trump administration signed an executive order proposing a number of changes which the administration says is intended to strengthen retirement security in America, specifically, by expanding access to multiple employer plans and reducing the costs and burdens associated with employee plan notices.  However, tucked away at the end of this executive order is a proposal that, when implemented, could have a significant impact on plan participants — the revision of the required minimum distribution mortality and life expectancy tables.  This post summarizes how this change could impact defined contribution plan participants.

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Incentive Plans and Shareholder Approval After Tax Reform

This article originally appeared in Law360.

Companies have had a lot to digest since the passage of the Tax Cuts and Jobs Act (the “TJCA”) late last year.  But for executive compensation attorneys and professionals who work with or advise public companies, the elimination of the tax deduction for performance-based compensation under section 162(m) of the Internal Revenue Code was perhaps the most significant change brought about by tax reform.  Since then, the changes to section 162(m) have been top of mind for everyone involved with structuring executive compensation arrangements and strategies at public companies.

Among the many questions companies face following the changes to section 162(m) is whether to continue seeking periodic shareholder approval for the performance criteria under their incentive plans.  Before tax reform, companies were generally able to deduct performance-based compensation if, among other things, the performance criteria used in the arrangement were approved by shareholder vote at least once every five years.  The repeal of the performance-based compensation exception eliminated this requirement.  However, there may be other reasons why companies might opt to continue seeking shareholder approval, even if it will no longer allow the compensation to be deductible.

We researched what large public companies decided to do this year with regard to shareholder approval of their performance criteria by reviewing the most recent proxy statements filed by S&P 100 companies.  We discovered that most companies that under pre-TJCA law would have been scheduled to seek shareholder approval for their performance criteria (because they had previously done so five years ago) elected not to do so this year.  Although a limited data set, these findings may be instructive for other public companies who are considering how to approach this matter in future years.

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ERISA Litigation Surging – Focus on Fees

After a few years of decline, litigation involving 401(k) plans “has surged again recently,” according to a study published by the Center for Retirement Research at Boston College.  This is likely not news to 401(k) sponsors and service providers, who are confronted with this reality on a near daily basis.  However, the study is a fascinating read, in part because it chronicles many cases brought since 2006, but also because it discusses the consequences of all this litigation—both the good and the not-so-good.

Complaints filed by participants of 401(k) plans against their plan fiduciaries over the past ten years follow a pattern.  Section 401(k) plan litigation exploded during the recession in 2008, with many allegations targeting funds holding employer stock whose value plummeted.  The number of lawsuits peaked at 107 in 2008, and 2009 remains second on the list for number of 401(k) lawsuits filed over the past 12 years.

Section 401(k) litigation tapered off during the first few years of this decade, with the Supreme Court’s 2014 Dudenhoeffer v. Fifth Third Bancorp decision delivering a devastating blow to the so-called “stock drop” cases.[1]

Although the Court agreed with the Sixth Circuit that employer stock ownership plan (ESOP) fiduciaries are not entitled to a special “presumption of prudence,” its discussion of the difficulty such allegations faced in meeting the pleading standard led to many dismissals.

But starting around 2015, the study finds, 401(k) litigation began to surge again.  The more recent cases focus on “excessive fees” paid either for actively managed investment funds or for record-keeping and other administrative services.  There has been a corresponding shift in who is sued: record-keepers, third-party administrators, and other plan service providers are increasingly named as defendants, in addition to or instead of the employees or fiduciary committees of plan sponsors.  The plaintiffs in many of these “excessive fees” cases probe the complicated—and sometimes opaque—fee structures between plan service providers such as record-keepers and investment advisors for what plaintiffs believe to be hidden kickbacks.

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DOL Finalizes Highly Anticipated Rule Aimed at Expanding Access to Association Health Plans

In January, we posted about the Department of Labor’s (DOL or the “Department”) proposed rule to allow more Association Health Plans (AHPs) to be regulated as large group health plans.  The proposed rule garnered national attention and the Department received over 900 stakeholder comments from consumer groups, individual employers, employer associations, health insurance issuers, business groups, and state regulators.  Supporters of the rule emphasized the need for more affordable health care options while detractors raised concerns about the rule’s potential effects on the existing health care markets and the scope of coverage that will be available to individuals who enroll in AHPs.

On June 19, 2018, the Department finalized the rule, 83 Fed. Reg. 28912 (June 19, 2018) (codified at 29 C.F.R. 2510), with relatively few changes to the proposed rule.

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Reducing Required Minimum Distributions from a Defined Contribution Plan: The Spousal Rollover IRA

During a participant’s lifetime, required minimum distributions (“RMDs”) from a defined contribution plan are relatively small in size.  Less favorable treatment may apply after the participant’s death, depending on the distribution options offered by the plan, the form of distribution elected by the participant, the age of the beneficiary and the relationship between the participant and the beneficiary.

Surviving spouses can take advantage of a special rule that permits them to create spousal rollover IRAs, which effectively allow the surviving spouse to treat the benefit as if he or she was a participant in the plan.  This treatment allows the surviving spouse to elect a longer payout and to designate a beneficiary who may also be eligible for an extended distribution period.

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