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Existing rules in Europe require, and proposed rules in the U.S. would require, companies and financial institutions to have in place effective clawback policies.  Under such policies, employers have the ability to recover compensation paid to employees when certain events occur or information comes to light that could have an adverse effect on the employer.  The aim, of course, is to create a direct link between reward and conduct so as to promote good corporate behavior and ensure effective risk management.

Clawback provisions have been around for a number of years and they are now a fairly well-known feature in a variety of different bonus and equity incentive programs. They often complement other measures that employers can deploy to address adverse events and circumstances, the most common of which is the ability to forfeit or downward adjust unvested compensation. With executive scrutiny and accountability on the rise, the significance of these policies and their effectiveness will undoubtedly be put to the test.  This article looks briefly at the legal and practical challenges companies face at each stage of a clawback policy – from design and implementation to operation and enforcement.

Continue Reading Learning to Live with Clawbacks: The New, Long String on Executive Compensation

Long considered to be at the forefront of providing benefits to employees who take family and medical leave, California recently enacted a new law aimed at increasing the benefits paid out to employees who take time off to care for an ill or injured family member or for new child bonding. Meanwhile, San Francisco’s Board

On July 21, the IRS announced that it is eliminating its current determination letter program for tax-qualified retirement plans. (IRS officials had been sending signals that this was coming for several months. It is now official.) Starting in 2017, the IRS will accept determination letter applications in only three circumstances:

  1. Initial qualification for a new plan. The IRS will still review any plan that has not previously received a determination letter.
  2. Plan termination. The IRS will still accept applications for a determination upon termination of a plan.
  3. Other limited circumstances to be determined by the Treasury Department and IRS. The Announcement says that Treasury and the IRS intend periodically to request public comments on what circumstances should be included in this category.

For plan sponsors, favorable IRS determination letters provide protection against disqualification for a “plan document failure”–for example, if the IRS later determines that a plan provision does not comply with the tax-qualification requirements or the IRS determines that a required provision is missing. Given the significant potential costs of a plan being disqualified, third parties often rely on determination letters to confirm that a plan is qualified. For example, buyers in corporate transactions, plans and IRAs accepting rollovers, and lenders often request to see copies of a plan’s favorable determination letter.

Continue Reading Changes to IRS Determination Letter Program Raise Practical Questions

by Seth Safra and Jonathan Goldberg

A recent appellate court decision, Cottillion v. United Refining Co. et al. (3d Cir. Mar. 18, 2015), is a good reminder of the high cost that a drafting error can have for a plan’s sponsor.  Although courts have recognized a “scrivener’s error” doctrine, the bar for establishing a scrivener’s error is high and the outcome can be unpredictable.  The Cottillion case illustrates that the sponsor’s intent will not always win the day–even where the outcome does not make sense economically.
Continue Reading Recent Case Illustrates Importance of Careful Plan Drafting

A recent post in the IRS’s Employee Plans News has two important tips for employers who sponsor 401(k) and similar plans:

  1. The plan sponsor is ultimately responsible for maintaining records that document compliance with tax-qualification requirements. Many employers rely on third-party administrators to maintain records of day-to-day transactions, such as loans, hardship withdrawals and distributions. It is important to confirm with the third-party administrators that the records are being kept and that the sponsor will have access to the records–in a usable format–including after the sponsor changes administrators.
  2. The IRS expects the administrator to collect documentation in support of any hardship withdrawal–saying “[i]t’s not sufficient for plan participants to keep their own records of hardship distributions.”

In an effort to streamline plan administration, some third-party administrators have promoted a simplified procedure that would allow employees to get hardship withdrawals without submitting documentation.
Continue Reading IRS Issues Warning on Documentation Requirements for 401(k) Plans

A recent Supreme Court decision, Perez v. Mortgage Bankers Ass’n, highlights two important points about the authority of the U.S. Department of Labor, IRS, and other administrative agencies to interpret rules:

  1. U.S. courts will generally follow administrative interpretations of statutes and an agency’s regulations, except in rare circumstances. This deference extends to “sub-regulatory” guidance, like opinion letters, rulings, notices, amicus briefs, and probably even FAQs posted on a website; and
  2. Agencies have wide latitude to change their minds on interpretive guidance, without any obligation to consult with the public.

The decision illustrates the practical importance of getting involved in the regulatory process, and advocating for important clarifications before regulations are finalized. Although agencies may change interpretive guidance unilaterally, unambiguous regulations generally cannot be changed without advance notice and an opportunity to comment.

Background.  This case involved whether mortgage-loan officers are eligible for overtime under the Fair Labor Standards Act.
Continue Reading Supreme Court Ruling on Agency Flip-Flopping Affects Rules for Benefit Plans

Two cases decided in January—one by the Sixth Circuit and another by the District Court for the District of Columbia—offer a cautionary tale to plan sponsors who rely on a statute or regulation that allows retroactive amendments to tax-qualified plans. Both cases involved a change to the interest and mortality assumptions that pension plans use to calculate the minimum amount of a lump sum distribution. The change was expressly authorized by a statute, but the Pension Benefit Guaranty Corporation said “not so fast”—leaving the plan sponsors responsible for several million dollars in additional liabilities.

The cases offer a cautionary tale for plan sponsors: practices that are permitted in one context will not necessarily be accepted in other contexts. For this reason, it is important to conduct a thorough analysis before relying on agency guidance or accepted practice.

Continue Reading Two Recent Cases Offer Cautionary Tale to Plan Sponsors Relying on IRS Guidance

A complaint filed this month against FedEx Corporation and its pension plan asks a court to apply the Supreme Court’s decision in Windsor v. United States retroactively.  The case is Schuett v. FedEx Corporation.  The plaintiff is the surviving same-sex spouse of a FedEx pension plan participant who died six days before the Court issued its opinion in Windsor.

Case background.  The participant and the plaintiff began living as a couple in 1983.  The participant worked as a FedEx delivery driver for 26 years while the plaintiff stayed home to care for the couple’s two children.  The participant was diagnosed with cancer and learned on June 3, 2013, that her condition was terminal.  Already registered as domestic partners in California, the couple held a bedside wedding ceremony June 19, 2013, and the participant died the following day.

Six days later, the Supreme Court held in Windsor that the U.S. Constitution requires federal law to recognize state-sanctioned same-sex marriages.  The Court overturned section 3 of the Defense of Marriage Act (“DOMA”), which defined marriage under federal law to exclude same-sex couples.  The same day, the Court decided Hollingsworth v. Perry, a procedural ruling that effectively reinstated same-sex marriage in California.  The plaintiff obtained a marriage certificate and a judicial order declaring the couple’s marriage legally valid as of June 19, 2013.
Continue Reading Lawsuit by Surviving Same-Sex Spouse Raises Windsor Retroactivity Question

An eight-year transition period for U.S. tax-qualified retirement plans covering Puerto Rico residents is set to end in 2015.  Employers that cover Puerto Rico residents under U.S. tax-qualified plans should consider spinning off the Puerto Rico portion of the plan in 2015, to avoid subjecting Puerto Rico residents to U.S. federal income tax.


Continue Reading Action Required for Retirement Plans Covering Puerto Rico Residents