Just a brief post to let you know that I will be presenting a webinar for the Western Pension and Benefits Council Governing Board titled Voluntary Closing Agreements–The Non-EPCRS Correction Program on August 21 at 10 am PST.  I will discuss fixing plan issues that do not qualify for correction under the Employee Plans Correction Resolution System (EPCRS) through the Employee Plans Voluntary Closing Agreement Program, including the advantages and disadvantages of closing agreements.  I will also present some case studies of issues that have been resolved through the program.

Attendees will learn:

  • What is a closing agreement?
  • What is the EP Voluntary Closing Agreement Program?
  • What can be corrected under the program?
  • What is the procedure for applying under the program?

Click here to Register:


The issue of whether CalSavers is preempted by ERISA is being tracked by the Justice Department as it decides whether to participate in the litigation challenging the program.

CalSavers, California’s mandated payroll deduction program for certain California employees who do not have access to retirement plans at work became effective July 1, 2019.  However, still pending is a lawsuit by the Howard Jarvis Taxpayers Association to invalidate the law as preempted by ERISA.  See CalSavers Moves to Dismiss Amended Complaint Challenging Program under ERISA.  A motion to dismiss the amended complaint is awaiting a hearing.  However, interestingly, on August 2, 2019, the United States Department of Justice filed a Notice Concerning Potential Participation requesting that the court defer ruling on the motion in order to permit the United States an opportunity to determine whether it will participate in the litigation.  The Justice Department states in the motion that the United States may have an interest in providing its views with respect to the ERISA preemption issue and is actively considering whether to participate.  Federal law permits the Attorney General of the United States to send any officer of the Justice Department to attend to the interests of the United States in a suit pending in court.  The process for deciding to participate takes several weeks, the motion states the United States will update the court on the status of its consideration by the end of August.

Of course, the motion does not indicate whether the United States has a position on whether the law is preempted by ERISA.


This post takes a deeper dive into the expansion of the self-correction program under EPCRS by reproducing my article from this month’s Compensation Planning Journal.  The article discusses the increase in user fees under the Voluntary Correction Program which caused the industry to push back on the cost and request expanded self-correction to ease the cost of correction.  It also discusses issues with the concept of self-correction and some proposed resolutions.  I hope you enjoy it.



Effective August 16, 2019, final regulations require all “top hat” notices to be filed electronically through the Department of Labor’s website.

In 1989’s film Back to the Future II, Marty McFly rides a hoverboard (flying skateboard) to escape Griff Tannen and his gang of teenage thugs in the year 2015.  Well it’s 2019, and we still don’t have hoverboards to ride, however, thanks to the Department of Labor we now have mandatory electronic top hats.

On June 17, 2019, the Department of Labor announced that effective August 16, 2019 final regulations require that all “top hat” notices be filed with the Department electronically through its website.  Top hat statements are what a nonqualified deferred compensation plan for a select group of management or highly compensated employees (i.e., the top hat group) must file in order to be exempt from ERISA’s reporting and disclosure rules.  Top hat plans escape ERISA’s participation, vesting, funding, and fiduciary rules by statute.  However, the Department requires the top hat statement setting forth the name, address, and EIN of the employer; number of participants in each plan and number of plans.  The statement is supposed to be filed within 120 days of the beginning of the plan.  Once filed, the top hat plan need not file a Form 5500 or meet other reporting and disclosure rules.

In 2014, the Department established the ability to file top hat statements electronically on its website.  Filing electronically was completely voluntary (so, technically, we had electronic top hats before the hoverboard). Now, the Department is making it mandatory, beginning next month.  This is an important development for employers instituting any kind of deferred compensation plan for a select group that may be considered a retirement plan under ERISA.

It should be noted that the final regulation also applies to apprenticeship and training welfare benefit plans to be exempt from reporting and disclosure.

On April 11, 2019, the Howard Jarvis Taxpayer’s Association (HJTA) filed its amended complaint challenging the propriety of California’s new CalSavers retirement program after a federal district court dismissed its first complaint on March 28, 2019 but granted leave to amend the complaint due to the Court’s awareness of the importance of the case.  See HJTA Files Amended Complaint Challenging CalSavers Program, See also, CalSavers Saved from ERISA Preemption By District Court.  On May 28, 2019, lawyers for CalSavers again filed a motion to dismiss the suit.

The new motion challenges the amended complaint as not presenting any new arguments.  It argues that CalSavers is not preempted by ERISA because it is not an employee benefit plan under ERISA nor does it require employers to maintain an ERISA plan.   CalSavers establishes IRAs for employees who participate and IRAs are not ERISA plans.  The CalSavers law does not require employers to do anything more than they could do on their own with respect to payroll deduction IRAs without maintaining an ERISA plan.  Employers are only required to perform ministerial acts under the law and program and have no discretion as to the administration of the program.

CalSavers also argues that the program is not an ERISA plan under the 1975 DOL Safe Harbor because an employee’s participation is “completely voluntary”.  Despite the fact that eligible employers must automatically enroll employees, such employees can easily opt out of participating in CalSavers online, via email, telephone, overnight and regular mail.  The minimal effort needed to opt out of the automatic enrollment into the program should not prevent an employee’s participation from being “completely voluntary”, CalSavers argued.

CalSavers also argued that neither the individual taxpayer plaintiffs nor HJTA have standing to bring the state law claims because they have no direct injury.

HJTA can file an opposition to the CalSavers motion to dismiss.  The court will determine whether oral arguments are necessary.

Employers taking advantage of any self-correction should prepare appropriate documentation.

By now you’ve probably read that the IRS has expanded the failures that can be self-corrected under the Employee Plans Compliance Resolution System (EPCRS) as set forth in Rev. Proc. 2019-19 issued April 19, 2019.  This development comes on the heels of the IRS changing how user fees are determined under the Voluntary Correction Program (VCP) from a participant-based fee to an asset-based fee.  See, Plan Mistakes are Now More Costly to Correct.  The expansion will help smaller employers with significant plan assets save money by permitting certain failures to be corrected without filing under VCP and paying a user fee.

Failures that can now be self-corrected include: certain plan document failures caught by the end of the second plan year after the plan year in which the failure occurred; retroactive plan amendments to correct an operational failure by conforming the plan document to its actual operation; and certain plan loan failures.

Plan document failures.  If a plan would no longer be considered a qualified plan or 403(b) plan because it failed to timely adopt a good faith amendment or interim amendment required by law, this failure can be self-corrected if discovered early enough.  The employer must adopt the necessary amendment by the end of the second plan year following the plan year in which the amendment was required to be adopted.  The plan must already have a letter indicating it is tax favored to be eligible for self-correction.  A failure to originally adopt a plan timely cannot be self-corrected.

Operational failures.  If a plan was operated with respect to benefits, rights, and features contrary to the provisions of its plan document, such an operational failure can be self-corrected by adopting a retroactive plan amendment to conform the document to the operation.  The amendment must increase the benefit, right or feature for all eligible employees and otherwise be permitted under the Internal Revenue Code and satisfy EPCRS correction principles.  An example, would be a plan that in operation has been permitting in-service distributions at age 59 ½ when the document does not provide for such.  This could be self-corrected by a retroactive amendment permitting such distributions for all employees.

Loans.  Loan issues have historically been the number one cause for correction under EPCRS.  Now certain loan failures can be self-corrected.  If a loan was made from a plan that requires spousal consent for such a distribution, but such consent was not obtained, it can be self-corrected by notifying the Participant and spouse and obtaining written consent of the spouse currently.  If one or more participants has exceeded the number of loans permitted for a Participant under the plan document, the plan can be retroactively amended to conform to the operation as self-correction.

Likewise, where a participant defaults on making timely payments on a plan loan can now be self-corrected.  The failure can be for any reason, including the employer’s failure to start payroll deduction timely.  The default can be corrected by: the Participant making a single sum payment of the missed payments to “catch up”; by re-amortizing the outstanding balance over the remaining term of the loan; or a combination of the two.  In all of these cases of self-correcting loans, there is no deemed distribution to the Participant and no Form 1099-R need be issued.

It is important to note, that participant loans are allowed as an exception to the prohibited transaction rules.  Therefore, if a loan fails to meet the requirements for the exception, a prohibited transaction has occurred.  However, the sponsoring employer and other plan fiduciaries cannot obtain the Department of Labor’s blessing on the correction through a no-action letter stating it will not pursue penalties or legal action for fiduciary breaches because currently it will only accept corrections made through VCP under its Voluntary Fiduciary Correction Program.  It remains to be seen whether this will change.

Documenting the self-correction.

Expanded self-correction is beneficial given how measuring user fees based on plan assets tends to increase the cost of correction for plans with a small amount of participants but significant assets.  Of course, these are not the only failures that can be self-corrected.  Significant operational failures can still be self-corrected  by the end of the second plan year in which the failure occurred.  Likewise, insignificant operational failures can still be self-corrected at any time.  However, the overarching issue with self-correction is that the employer sponsoring the plan is never completely certain that on audit of the plan, the auditing IRS agent will agree that the matter was eligible  for self-correction and properly self-corrected.  In such case, the agent may attempt to require the employer enter the Audit Closing Agreement Program to maintain the qualified status of the plan where the employer will have to pay a substantial penalty.  This is quite different than VCP where the plan sponsor receives a compliance statement from the IRS agreeing not to disqualify the plan, if the corrections are timely made pursuant to the VCP submission.

That said, Employers taking advantage of any self-correction should prepare appropriate documentation regarding the correction so that they can defend it if the plan were audited.  Employers should prepare and keep detailed records reflecting the Employer’s action relating to the self-correction including resolutions or meeting minutes recording: the issue; its eligibility for self-correction;  the employer decision to self-correct; the number of participants affected;  the dollars involved; and the employer action taken.  These documents should be kept with the employer records of business action such as a corporate book as well as with the plan documents.    Detailed documents showing the actual correction should also be created and kept.  For example, if an amendment was adopted, a signed copy of the amendment should be included.   If a loan agreement’s payment schedule is changed, this should be documented with an amendment to the loan agreement and both included. If payments were made and accounts adjusted, documents demonstrating this should be included.  I also recommend that all the correction documents be kept in their own separate “self-correction” file that can be easily found and reviewed without sifting through several other documents. A memorandum summarizing the entire correction is also a good idea so when years have passed it can easily be determined how the issue was corrected.

These steps will help defend the self-correction should it ever be challenged by the IRS.


On April 11, 2019, the Howard Jarvis Taxpayer’s Association (HJTA) filed its amended complaint challenging the propriety of California’s new CalSavers retirement program after a federal district court dismissed its first complaint on March 29, 2019.  See CalSavers Saved from ERISA Preemption By District Court.  Like the first complaint, the amended complaint attacks the statutory program in two ways.  First, it argues that the program is preempted by ERISA and therefore should be declared void.  Second, under California state law, the complaint asks the court to enjoin the implementation of CalSavers as a waste of taxpayer funds.

The amended complaint emphasizes that since the 2016 Department of Labor safe harbor for savings  arrangements established by states for nongovernmental employees was repealed by Congress that there is no exception from ERISA preemption.  Additionally, since under the CalSavers statute, the state is not liable for any loss of the payroll deduction contributions, the purposes of ERISA are thwarted by the program.

The complaint further alleges that since the CalSavers program has already spent over $1.5 million and has requested to borrow $20,000,000 more to further implement the program, the state is wasting taxpayer money when all California employees already have access and opportunity to save for retirement through private IRAs.  CalSavers has until May 25, 2019 to file its answer to the amended complaint.

To learn more about the CalSavers program and lawsuit, attend the Capitol Forum on Pensions on June 5, 2019, at Arden Hills resort in Sacramento which will have a session called “CalSavers is Here…Are You Ready?” featuring a panel of myself, Aaron Karr, from Ameriprise Financial, and a representative from CalSavers.  Details of the conference can be found at this link CFOP.

On March 29, 2019, the United States District Court for the Eastern District of California dismissed the lawsuit filed by the Howard Jarvis Taxpayers Association (HJTA) maintaining that CalSavers, California’s mandated auto-enrollment payroll deduction IRA retirement savings program, is preempted by ERISA.   The court found that HJTA had standing to bring the suit and that the case was ripe for decision and would not dismiss on those grounds.

It also found that CalSavers could not rely on a 1975 Department of Labor Safe Harbor to argue ERISA did not preempt CalSavers.  The Safe Harbor rules that programs whereby employers remit payroll deduction contributions to employee IRAs for employees whose participation is completely voluntary did not establish plans subject to ERISA.  However, CalSavers could not use the Safe Harbor to argue that employee participation was completely voluntary for its program, requiring automatic enrollment with an employee’s ability to opt out, because “completely voluntary” was not defined in the safe harbor.   Still, the court found that ERISA did not preempt CalSavers on general preemption principles.

Under general principles of preemption the court found that because CalSavers only applies to employers who don’t have existing retirement plans, no ERISA plans are governed or interfered with by it. Therefore, ERISA’s primary purposes of ensuring employees receive promised benefits and protecting employers from the burden of meeting multiple regulatory requirements in managing plans are not implicated.  CalSavers does not require employers to promise any benefits to employees and remitting payroll deduction contributions to CalSavers is simply a ministerial act.  The court cited the Golden Gate Resturant Association, 546 F.3d 639 (9th Cir. 2008), case that upheld San Francisco’s ordinance requiring employers within the city to make minimum healthcare expenditures on behalf of their employees as not being preempted by ERISA because the ordinance did not require employers without ERISA plans to establish one, just to contribute to the city administered plan. The court concluded that finding that ERISA preempted CalSavers would be “out-of-step” with ERISA’s underlying purposes because CalSavers does not govern an ERISA plan’s administration nor interfere with uniform plan administration.

The court did grant HJTA 20 days to amend its complaint.  Unless HJTA files an amended complaint or otherwise appeals the case to the Ninth Circuit, CalSavers is here to stay.  Employers with 100 or more employees who don’t otherwise provide a retirement plan must register and automatically enroll employees by July 1, 2020 or face penalties.  The number of employees then drops to 50 in 2021, and 5 in 2022.

I don’t believe much in coincidence when it comes to politics.  It is clear that the President and current administration believe that the Mueller Report exonerates the President from any wrongdoing with respect to the Russian interference in the 2016 election or the subsequent investigation.  Others disagree with respect to the obstruction of justice issue and congressional investigations continue.

It is interesting though that just a day after the Attorney General issued his summary of the Mueller report, the Justice Department changed its position regarding the federal case involving the constitutionality of the Affordable Care Act (ACA) on appeal before the United States Court of Appeals for the Fifth Circuit, Texas v. United States, No. 19-10011.  In December of last year, a federal judge of a U.S. District Court in Texas found the entire Affordable Care Act to be unconstitutional because Congress virtually repealed the individual mandate by decreasing the tax on individuals for not having health insurance, to zero.  Texas v. United States, 352 F.Supp.3d 665 (N.D. TX 2018).  The case was appealed to the Fifth Circuit and originally the U.S. Justice Department argued that if the individual mandate was no longer constitutional than the protections against pre-existing conditions of the Act were also unconstitutional.  On Monday, March 25, the Justice Department lawyers informed the Fifth Circuit that it now agrees entirely with the lower court decision that the entire Act is unconstitutional and will file a brief arguing the lower decision should be upheld in its entirety.

Coincidence? Or is the Administration emboldened by its perceived victory?  Senator Brian Schatz (D-Hawaii) seems to believe it’s the latter as he tweeted, “The Barr summary clearly demonstrates Republicans are trying to take your healthcare away.”

In any case, the new Justice Department position means the fight over the ACA and healthcare in general, rages on.  Regardless of the Fifth Circuit’s decision, it is likely to be appealed to the U.S. Supreme Court.  Of course, we know that President Trump was successful in getting his last nominee for Supreme Court Justice approved.  Therefore, the administration may like their chances to end the ACA at the high court.

In the meantime, on March 26, House Democrats introduced the Protecting Preexisting Conditions and Making Health Care More Affordable Care Act of 2019, a bill to preserve and strengthen the ACA by, among other things, protecting coverage for pre-existing conditions, expanding the availability of subsidies and increasing premium tax credits.  Other Democrats, and Independent Senator Bernie Sanders, are pushing for “Medicare for all” legislation but that is not included in the bill introduced on March 26. Democrats see protecting the ACA as a big part of the mid-term elections that gave them control of the House.  It is also likely to be a big part of the 2020 election.

As a result of the 2017 Tax Act, the costs of providing qualified parking to employees as a tax-free fringe benefit is not deductible by for-profit employers and is subject to a 21% tax for tax exempt organization employers.  Interim guidance provided by the Internal Revenue Service in Notice 2018-99 in December sets forth a four step process in determining how much of the cost of providing parking is nondeductible or taxable, respectively.  Where the parking is owned or leased by the employer, step 1 provides that the percentage of the total cost of parking that represents spaces that are reserved exclusively for employees are nondeductible by for-profit employers or taxable to exempt organization employers up to the $260 per month per employee excluded from their income.  Parking may be exclusively reserved for employees by a variety of methods, including signage or limiting access.

However, the Notice also contains an important election until March 31 of this year for an employer to change the characterization of some or all employee parking spots from reserved exclusively for employees to not so reserved and to treat those spots as not reserved retroactively to January 1, 2018.  This could save significant taxes for the 2018 tax year, but time is running out.

To change the characterization, the employer would have to change the method that made the parking reserved exclusively for employees such as signage or limited access.  Once the parking spaces are re-characterized, the remaining steps must be made to determine how much of the parking costs are nondeductible or taxable, respectively.  This includes determining how many spaces are reserved or primarily used (more than 50% of the time) for the general public, which are deductible by for-profit employers and not taxable to exempt employers.  If no spaces are reserved for employees or the general public, an allocation based on the typical use of the parking on a normal day between employee use and general public use must be determined.  Re-characterization could save taxes but like most things the numbers must be run.  This should be done before the meter expires at the end of this month.