On September 23, 2019, the Department of the Treasury and the Internal Revenue Service released final regulations amending the rules applicable to hardship distributions from 401(k) plans. The final regulations are substantially similar to the proposed regulations issued on November 14, 2018 (described in this previous blog post), such that plans that have been amended to comply with the proposed regulations will also satisfy the final regulations.
On September 3, 2019, the IRS issued Revenue Ruling 2019-19, which discusses participants’ and beneficiaries’ inclusion of income and qualified retirement plans’ withholding and reporting obligations for uncashed distribution checks. Although the Revenue Ruling describes only a qualified retirement plan under Code section 401(a), the same reasoning would most likely also apply to a Code section 403(b) plan. Under the facts of this Revenue Ruling, a qualified retirement plan must make a distribution of $900 to a participant in 2019. The participant receives the check from the plan but chooses not to cash it in 2019. The IRS ruled that the participant’s failure to cash the check did not relieve her of the obligation to include the amount of the distribution in her gross income in 2019. Similarly, the employer, as plan administrator, was obligated to withhold tax on the distribution that was required to be withheld under Code section 3405. Finally, the employer was required to report the distribution amount on Form 1099‑R, and the participant’s failure to cash the distribution check did not affect this obligation.
These rulings are unsurprising based on existing law, particularly the doctrine of constructive receipt that is codified at Code section 451. The IRS already ruled on a similar factual situation in Revenue Ruling 68-126, for example. In that Revenue Ruling, a taxpayer could have received a retirement benefit check in one taxable year by appearing in person and claiming it but instead waited for the check to arrive in the mail in the following taxable year. The IRS held that “the income is constructively received in the year preceding the year of actual receipt,” and that the retiree therefore had to include the amount of the check in income in the earlier year. A rule that a participant could choose to delay inclusion in income of a distribution until a later year by simply failing to cash a distribution check in the year the plan issued it would also undermine the requirements to take required minimum distributions under Code section 401(a)(9).
On September 30, 2019, the Internal Revenue Service issued Revenue Procedure 2019-39, which finalizes important changes to how sponsors and employers can ensure 403(b) plan compliance. The guidance is a welcome update from the Service, which initiated a regular system of remedial amendment periods for 403(b) plans in 2013, with the first period ending on March 31, 2020. Most significantly, Revenue Procedure 2019-39:
- Makes permanent the system of remedial amendment periods, during which an employer may retroactively amend its 403(b) plan or adopt a pre-approved 403(b) plan to correct a “form defect” (e., a defect in the terms of the plan that causes the plan to fail a § 403(b) requirement);
- Clarifies that a retroactive amendment to correct a form defect is only permitted where the plan has been operated in compliance with the § 403(b) requirement;
- Establishes deadlines to adopt amendments that correct form defects as well as deadlines to adopt discretionary amendments (e., amendments that do not remedy a form defect);
- Confirms that the Service will not review individually designed 403(b) plans through a determination letter process;
- Sets out a cyclical system in which pre-approved 403(b) plan sponsors may seek Service approval of plans; and
- Announces the Service’s intent to provide additional guidance related to 403(b) plans, including its intent to include changes to the § 403(b) requirements on its annual Required Amendments List and the Operational Compliance List.
The Service intends to issue additional guidance in the next several years to address the procedures announced in Revenue Procedure 2019-39.
On July 10, 2019, the Sixth Circuit considered vexing questions of statutory interpretation in an ERISA case. A dispute over whether a transaction bonus plan was an ERISA employee pension benefit plan hinged on the meaning of two terms common in federal statutes: “results in” and “extending to.” While the meaning of the statute was plain to the entire panel, Judges Stranch and Thapar quarreled over the evidence that a court might rightly consider when interpreting a statute—in this case, ERISA. Judge Thapar argues that “[c]ourts should consider adding [corpus linguistics] to their tool belts.”
On August 20, 2019, the Ninth Circuit held in Dorman v. Charles Schwab Corp. that a 401(k) plan’s mandatory arbitration clause was enforceable in relation to a breach of fiduciary duty claim brought under ERISA § 502(a)(2). No. 18-15281 (9th Cir. Aug. 20, 2019). This is the first case in which the Ninth Circuit concluded that such fiduciary breach claims could be arbitrated.
Our own Richard Shea and Jack Lund recently contributed a post to the RetireSecure Blog maintained by the Pension Research Council of the Wharton School at the University of Pennsylvania. The post discusses the competing rhetoric surrounding the impact of proposed financial transaction taxes on the American retirement system.
Recently enacted California Assembly Bill 5 (“AB-5”) is a game changer for businesses that use independent contractors in California — and a warning shot for employers nationwide. Subject to exemptions for certain occupations and professions, AB-5 imposes a strict “ABC” test that appears to put a thumb on the scale of classifying workers as employees rather than independent contractors.
The ABC test was adopted last year by the California Supreme Court in its Dynamex decision to determine classification of workers for purposes of the state’s Industrial Welfare Commission Wage Orders. For 20 years before Dynamex, worker classification was governed by the more relaxed “Borello” multi-factor test, which focuses on the hirer’s right to control an individual’s work and other secondary factors. AB-5 now makes the ABC test the default standard for determining worker classification — not just under the Wage Orders, but also for all California Labor Code, unemployment insurance, and workers’ compensation claims.
As a result of the passage of AB-5, companies that hire consultants or contractors based in California should take a hard look at those relationships and determine whether they need to reclassify any such individuals as employees. For other companies, this legislation should be monitored as the potential tip of an iceberg of a trend in many states, and potentially nationwide, toward imposing additional hurdles in classifying workers as independent contractors.
The U.S. Department of Labor (DOL) has announced a final rule that will increase access to overtime pay under the Fair Labor Standards Act (FLSA) for approximately 1.3 million workers. The final rule, which comes six months after DOL published a proposed rule in March, is the latest development in a years-long process by DOL, spanning the Obama Administration and the Trump Administration, to modify FLSA overtime regulations. The new rule takes effect on January 1, 2020, giving employers just a narrow window to assess the rule’s impact on their operations. The final rule is available here. DOL has also published a fact sheet that provides an overview of the final rule, available here.
In May, the IRS issued a private letter ruling to an individual taxpayer regarding the deductibility of 23andMe’s at-home DNA test kits under section 213(d) of the Code, which permits the deduction of medical expenses. In the ruling, the IRS determined that an allocable portion of the purchase price may be treated as a deductible medical expense and the taxpayer may use a medical flexible spending account to purchase the kit.
23andMe provides a DNA collection kit that is used to collect a DNA sample from an individual and to send the sample to 23andMe for genetic testing. The sample is then tested by a third-party laboratory. The genetic information from the test is then analyzed by 23andMe and a report is provided to the individual with results from the laboratory and general information regarding genetic health risks, carrier status, wellness, and traits. The individual may then provide the information to a healthcare provider for additional testing, diagnosis, or treatment.
The IRS determined that the health services provided by 23andMe may be deductible medical expenses based on three revenue rulings, Revenue Ruling 54-457, Revenue Ruling 71-282, and Revenue Ruling 2007-72. Revenue Ruling 54-457 determined that an allocable share of a lump-sum fee charged by a university for medical care and other expenses is eligible for deduction under section 213(d). Revenue Ruling 71-282 holds that the fee paid for storage of medical information in a computer data bank is deductible under section 213(d). Revenue Ruling 2007-72 determined that full-body scans performed without a doctor’s recommendation and for an individual experiencing no symptoms falls within the broad definition of “diagnosis,” which encompasses determinations that a disease may or may not be present, and includes testing of changes to the function of the body that are unrelated to disease.
Bolstering the state’s reputation for progressive employment legislation, California has become the first state to ban discrimination based on natural hair and protective hairstyles. On July 3, 2019, California Governor Gavin Newsom signed into law SB 188, which amends the California Fair Employment and Housing Act (FEHA), specifying that “hair discrimination targeting hairstyles associated with race is racial discrimination.” The Creating a Respectful and Open Workplace for Natural Hair (CROWN) Act, takes effect on January 1, 2020, and applies to California employers with five or more employees.
The new law amends the FEHA definition of “race” to include “traits historically associated with race, including, but not limited to, hair texture and protective hairstyles.” Protective hairstyles include, for example, “braids, locks, and twists.” As a result, California employers will be barred from maintaining dress code or grooming policies that prohibit natural hair or protective hairstyles, as these policies are more likely to deter Black applicants, and to burden or punish Black employees, than any other group. The bill explains that “[p]rofessionalism was, and still is, closely linked to European features and mannerisms, which entails that those who do not naturally fall into Eurocentric norms must alter their appearances, sometimes drastically and permanently, in order to be deemed professional.” The legislation also updates the California Education Code to prohibit similar discrimination in public education.
Although California is the first state to prohibit natural hairstyle discrimination, it trails New York City, which issued guidance in February 2019 explaining that policies banning natural hairstyles or hairstyles most closely associated with black people generally violate the New York City Human Rights Law. The New York City guidance also explicitly prohibits grooming policies that require employees to change their hairstyle to conform to the company’s appearance standards, including having to straighten or relax hair.
Similar legislation, sponsored by the CROWN Coalition (Creating a Respectful and Open World for Natural Hair), is pending in New Jersey and was recently passed in New York state and is now awaiting the governor’s signature.
In light of these developments, employers should proactively review their grooming and appearance policies, even those that appear facially neutral, to ensure that they comply with the new prohibitions, are inclusive of all cultures and legally protected categories, and backed by legitimate, objective business needs. Employers should also take measures to ensure that such policies are applied in a nondiscriminatory manner, including providing training to managers and others involved in the hiring process regarding the new law.