Employee Benefits General

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The August 31st Executive Order may make open MEPs more feasible.

On August 31, 2018, President Trump signed an Executive Order directing the Labor Department to consider issuing regulations and guidance that would make it easier for businesses to join together in Association Retirement Plans also known as open multiple employer plans (MEPs).  It is believed that the Labor Department will act to remove the commonality requirement of existing regulations which requires that all employers participating in the MEP must share some commonality such as being members in the same industry trade group.  So called “open” MEPs don’t meet the commonality rule and each employer is currently treated as adopting its own individual plan rather than one single MEP.  This means each employer’s plan has its own administration and must file its own Form 5500.  In addition, the current regulations contain a “one bad apple rule” that says under a MEP, if a single employer fails to meet qualification requirements, the entire MEP is subject to disqualification affecting all employers.

Of course, we will have to see what the Labor Department does in its new guidance, however, a relaxation of these restrictions would encourage more MEPs to be created and adopted, allowing smaller employers to pool together to enjoy economies of scale in the administration of plans like plans of larger employers enjoy.  This should encourage small businesses to provide retirement plans for their employees and help with the low rate of retirement savings.  In my opinion, this would be a better way to encourage small employers to offer retirement plans than state mandated payroll deduction IRAs which may be preempted by ERISA (see Suit Claims CalSavers is Preempted by ERISA).

For the past year or so, I have been speaking and writing about the California Secure Choice Law authorizing the State’s mandatory payroll deduction IRA program named CalSavers (“Program”).  When implemented, the Program will require private employers who don’t otherwise offer employees a retirement plan to automatically enroll their employees and withhold and contribute to the Program a percentage of the employees’ pay to be invested in an individual retirement account for the employee.  Employees can elect to opt out but must be automatically enrolled first.  In particular, I have stressed that there is still an open issue as to whether the statute creating the Program is preempted by ERISA due to the way the statute was enacted and amended.  And, I have pointed out that it is likely going to require litigation to settle the matter.

On May 31, my prediction came true when the Howard Jarvis Taxpayer’s Association (“HJTA”) and two of its employees sued the Program and the Chair of its Board, State Treasurer, John Chiang, in Federal District Court.  As predicted, the suit maintains that the statute creating the Program is void as preempted by ERISA.  The suit also seeks to enjoin the State from spending any further money on the Program.

State Sailed Legislation Through Rough Water Without Safe Harbor

The issue of ERISA preemption exists because of the history of the Secure Choice Law as well as Federal regulatory developments between the Obama and Trump administrations.  The statute creating the Secure Choice Board was enacted in 2016 and the Program’s implementation was contingent upon the Board reporting to the Governor and State legislature that the U.S. Department of Labor (“DOL”) had issued a safe harbor regulation stating that state run mandated employer payroll deduction IRA plans were not subject to ERISA and that the Program met such safe harbor’s requirements.  In August of 2016, the DOL issued the safe harbor.  In November, Trump won the election and took office in 2017.  In May of 2017, Congress repealed the safe harbor regulation under the Congressional Review Act, providing it shall have no force or effect and Trump signed it.

Also in May of 2017, the Secure Choice Board received a legal opinion from a private law firm stating that even without the Obama administration’s 2016 safe harbor, the Program would not create one or more ERISA plans (see www.treasurer.ca.gov/scib/background.asp).  The legal opinion relied on interpretive guidance by the DOL from 1975 (“1975 Safe Harbor”), finding that a payroll deduction IRA plan is not an ERISA plan where:  1) there are no employer contributions to the plan; 2) the only employer involvement is publicizing the program without endorsing it; collecting employee contributions through payroll deductions and remitting them to the IRA sponsor; 3) employee participation is “completely voluntary”; and 4) the employer receives no compensation from the IRA sponsor.

The opinion summarizes how when the 2016 safe harbor was issued, the DOL stated it was necessary because the 1975 Safe Harbor would not cover a program using auto enrollment.  The DOL analyzed that if an employer voluntarily adopted auto enrollment, it may exercise undue influence over an employee’s decision to participate.  This would prevent the employee’s participation from being completely voluntary because it is not “employee initiated”.  Therefore, the employer has established an ERISA plan.  The opinion then states that where an employer is offering the Program because it is required by State law, the employer is not voluntarily acting to establish a plan, or coercing employees to participate.  Therefore, the employee’s participation through auto enrollment with an opt out should be considered “completely voluntary”.

The Program requires covered employers of a certain size to automatically enroll employees into CalSavers and contribute a percentage of the employees’ pay.  However, the employee may opt out of participation in the Program.  In the first year of implementation, covered employers are those with 100 or more employees.  In the second year, the number drops to 50 or more employees and in the third year it drops to 5 or more employees.  The Board will decide when the Program is ready to be implemented and is aiming for 2019.

If the HJTA lawsuit is successful it would be the end of the Program.  Of course, the Program could appeal the initial decision.  And given that other states, such as Oregon, have similar laws, the issue could eventually wind up before the U.S. Supreme Court to decide.  Of course, this will take time.

Currently, the anticipation of CalSavers becoming effective serves as a great opportunity for the California retirement plan industry to market the value of employers adopting other types of retirement plans that would exempt them from the mandate (such as 401k or SEP-IRA plans), and the flexibility of design they offer to meet an employer’s needs.

Most employee benefits require a written plan document setting forth the terms of the plan.  ERISA requires that every employee benefit plan be established and maintained pursuant to a written instrument.  In addition, the Internal Revenue Code also requires many employee benefits be pursuant to a written plan.  For example, cafeteria plans must be in writing under Code Section 125; self-insured health plans must be written under Code Section 105(h); dependent care assistance plans are required to be in writing under Code Section 129; and Code Section 409A requires nonqualified deferred compensation plans to be operated and maintained pursuant to a compliant written document.

The terms of the benefits plan don’t necessarily have to be contained in a single document, more than one document taken together can make up the plan.  A common example of this is a pre-approved qualified prototype plan which usually consists of at least two documents, a basic plan document (BPD) and an Adoption Agreement.  The BPD contains all the qualification requirements and boilerplate language to be a qualified plan under the Internal Revenue Code.  The Adoption Agreement contains various options for the employer to choose regarding the design of the plan and is completed and signed by the employer indicating it has adopted the BPD as part of its plan.  The National Office of the Internal Revenue Service (IRS) approves the BPD and blank Adoption Agreement and issues an opinion letter to the pre-approved plan sponsor upon which adopting employers can rely.  Both these documents make up the “written plan document.”

It is important for an employer to keep its plan documents in a safe place where they can be easily retrieved for a number of reasons.  First, for a plan governed by ERISA, plan participants may request the plan document from the plan administrator and if it is not provided within 30 days, the plan administrator can be liable for a penalty of up to $110/day that it is late.  Second, the language of the actual plan document may need to be consulted to properly administer the plan, decide claims or settle disputes.  Finally, if your retirement plan is audited by the IRS, the agent is likely going to ask for every plan document since the plan was originally adopted.  That is, the IRS will want the employer to prove that the plan was always a qualified plan in form and was timely amended and restated for changes in the law.  It is also very important to be able to demonstrate that the plan documents or amendments were actually adopted by the employer.  To do so the employer should have signed copies of the plan documents and minutes, resolutions or consents evidencing the action of the appropriate body approving the documents on behalf of the employer.

I write this article because throughout my years of practice, I have had occasion to have to remind employers of the importance of maintaining plan documents.  Many times I have asked for retirement plan documents and was provided only an unsigned Adoption Agreement and have to ask for the BPD.  On occasion a client may then have to obtain the document from a third-party administrator (TPA) or other service provider.  Also, at times, clients simply cannot find a signed version of the plan document.  Once, I had a client inform me they had to retrieve their current document from storage.

Often employers mistakenly rely on their TPA or other service provider to maintain signed copies of their plan documents.  Many TPAs have a policy not to maintain signed copies of plan documents but inform clients that it is the responsibility of the adopting employer to safeguard documents.  Additionally, if the employer changes TPAs, the former TPA has no real incentive to help its former client find old documents.  Ultimately, legally, the responsibility falls on the employer even if it has contracted with a service provider to be responsible for maintaining the plan document.

The act of adopting plan documents or amendments should be well documented like any important employer action.  If the employer is a corporation, minutes or consents reflecting the action should be kept in the corporate book or filed where records of shareholder and directors meetings are kept.  Other types of entities such as limited liability companies and sole proprietorships should also keep them with their important records.  This is important because in an audit or investigation, if the employer cannot find a signed plan document, if it has a blank document and a signed resolution showing that it was approved, this might suffice.

I recommend that one or more persons be assigned the duty of maintaining the complete plan document for each written benefit plan of the employer.  This could be the Secretary of the corporate employer or a similar officer.  It could be the plan administrative committee that acts as plan administrator.  It could be an administrative fiduciary.  The point is that the employer should take action to ensure that someone is monitoring the plan documents.  Many service providers are now offering to store electronic versions of plan documents.  The agreements for such services should be reviewed to determine what responsibilities the provider has with respect to the plan documents.  For example, who is responsible for ensuring that the provider has the most current plan documents?  That they are signed?  Are they stored on multiple servers in the cloud to reduce the chance of them being lost or destroyed upon a server failure?  What happens if the provider loses documents?  Even in such an arrangement, someone from the employer should be designated to ensure that the most up to date documents are provided to the service provider for storage.

Ultimately, it is the employer’s responsibility to establish and maintain the written employee benefit plan document.  Therefore, employers should ensure that all of their employee benefit plans have up to date plan documents that have been properly adopted and are easily retrieved.

The U.S. Department of Labor’s final disability claims procedures become effective for disability claims filed after April 1, 2018. The purpose of the new procedures is to ensure full and fair claims review procedures for any determination of disability in line with protections for certain group health plans under the Affordable Care Act. This means any employee benefit plan governed by ERISA that conditions a benefit upon a determination that a person is disabled must be amended to adopt these new procedures. The procedures do not only apply to long and short-term disability plans but any qualified or nonqualified retirement or deferred compensation plan governed by ERISA that conditions a benefit on a determination of disability. Likewise, group health plans often extend coverage beyond age 26 for disabled children of insureds.

If a plan conditions a benefit on disability as determined by another plan administrator or program, then the plan need not be amended provided the plan making the determination is amended. For example, nonqualified deferred compensation plans often provide that if the claimant has been determined to be disabled by the Social Security Administration, they will be considered disabled for purposes of the plan. However, if the plan provides that the plan administrator can otherwise determine that the claimant is disabled and entitled to benefits, the plan must adopt the claims procedure. Likewise, if a plan provides for a disability benefit if the employee is determined to be disabled but incorporates by reference the procedures of another plan, such as a long term disability plan, then only the incorporated procedures need to be amended.

Plan documents generally must be amended by the end of the plan year that includes April 1, 2018. However, the procedures must be followed for any claims on or after April 1, 2018.

Employers should take steps to review all plans that might condition a benefit on a determination of disability ASAP, and implement a strategy for compliance. Health plans, qualified retirement plans, nonqualified supplemental retirement or deferred compensation plans, severance plans or any other plan that provides for a benefit upon disability should be reviewed.