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.
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.
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.
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.
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.
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.
The Supreme Court put to rest years of uncertainty regarding the enforceability of class action waivers for employees when it decided Epic Systems Corp. v. Lewis, 582 U.S. ___ (2018) on May 21. In a 5-4 decision, the majority held that employers do not violate the National Labor Relations Act (NLRA) or the Federal Arbitration Act (FAA) by requiring employees to sign arbitration agreements that waive their rights to bring class action suits. While the Supreme Court’s decision focused on class action waivers in the context of arbitration agreements, its holding could be extrapolated to uphold employee class action waivers included in any agreement between an employer and employee.
[This article was originally published in Law360.]
As U.S. companies expand internationally, they often wish to compensate their non-U.S. employees with stock options, restricted stock, phantom stock and other forms of equity compensation. But offering equity compensation to non-U.S. employees is not as straightforward as it may sound, and is often more complicated than it is at home. U.S. companies venturing into the world of global equity compensation confront a complex, cross-border web of rules and regulations, which can vary markedly from country to country.
In this article, we highlight five critical questions that can help U.S. companies navigate common legal pitfalls in the global equity space. These questions focus on some of the most rapidly evolving areas of law, including securities, exchange controls, data privacy, tax and foreign account reporting, and labor and employment.
California’s highest court recently pronounced a new worker classification standard in Dynamex v. Lee, a case involving wage and hour requirements under the California Labor Code. Compared with the old rule, the new standard is simpler, arguably more predictable—and will make it more difficult for businesses to classify workers as independent contractors. Dynamex will have immediate consequences for businesses operating in California. Indeed, within days of the ruling, workers sued two prominent “gig economy” companies alleging unlawful worker classifications. For companies in every state, the decision is a reminder that the potential risks of worker misclassification could arise under myriad state and federal laws.
Taxpayers may treat the $6,900 original annual contribution limit for family coverage to health savings accounts (“HSAs”) as the limit for 2018, according to IRS guidance released on April 26, 2018 (press release; IRS Rev. Proc. 2018-27). Employers that took steps to comply with the reduced limit may need to take action.
As discussed in our earlier blog post, the contribution limit for family coverage to HSAs for 2018 was reduced by $50 from $6,900 to $6,850. Bowing to pressure from stakeholders who explained to the Treasury Department and IRS that implementing the reduction would impose administrative and financial burdens, the IRS announced that for 2018, taxpayers with family coverage under a high deductible health plan may treat $6,900 as the maximum deductible HSA contribution.
This is welcome relief for employers that had not yet taken steps to comply with the reduced limit. However, for employers that already informed participants of the change and took steps to modify salary reduction elections or return contributions in excess of the lower limit, this guidance likely triggers additional action.
The Advisory Council on Employee Welfare and Pension Benefit Plans (often called the “ERISA Advisory Council”) has released a report urging the Department of Labor (“DOL”) to streamline retirement plan disclosure requirements. The report reiterates concerns the Council expressed in 2005 and 2009, echoed by the U.S. Government and Accountability Office (the “GAO”) in 2013, that the number and complexity of mandatory disclosures confuses participants and burdens plan administrators. The Council’s latest report goes further than previous reports have done, outlining four recommendations for specific rule changes and proposing new model notices to simplify the current disclosure scheme.