The Employee Benefits practice group is pleased to present the Benefits Developments Newsletter for the month of April, 2017.

Deadline to Provide QSEHRA Notice Suspended

IRS Notice 2017-20 -

Citing the lack of published guidance, the Internal Revenue Service (IRS) suspended the employer advance notice requirement for qualified small employer health reimbursement arrangements (QSEHRAs). By way of background, in December 2016, the 21^st Century Cures Act permitted certain employers with fewer than 50 full-time employees to provide QSEHRAs to their eligible employees. Under a QSEHRA, if certain requirements are satisfied an employer may reimburse an employee for the cost of an individual health insurance policy. QSEHRAs represent a limited exception to the general rule (under the Affordable Care Act and related guidance) prohibiting employers from reimbursing individual health insurance policies. One of the requirements for small employers offering a QSEHRA was an advance notice obligation. Specifically, employers were required to furnish written notice to eligible employees at least 90 days before the beginning of a year for which the QSEHRA is provided. Failure to provide the advance written notice would expose the employer to potential penalties. Recognizing the need for additional guidance regarding the contents of the notice, the IRS and Treasury have suspended the 90 day advance notice deadline. An eligible employer that provides a QSEHRA to its eligible employees for a year beginning in 2017 is not required to furnish the initial written notice until after further guidance has been issued by the IRS and the Treasury. IRS Notice 2017-20 https://www.irs.gov/pub/irs-drop/n-17-20.pdf

DOL Delays Fiduciary Rule Applicability Date

The Department of Labor’s final rule defining fiduciary investment advice will now become applicable on June 9, 2017. The rule was originally set to become applicable on April 10^th of this year, but just days before, DOL published a rule extending its applicability date by 60 days while it re-examines the rule in response to a February 3^rd memorandum issued by President Trump. Our recent client alert discussing the rule, related prohibited transaction exemptions, and President Trump’s memorandum, is available here http://www.hodgsonruss.com/newsroom-publications-9695.html

The following timelines will now apply for the rule and related prohibited transaction exemptions:

1. The final rule defining fiduciary investment advice will be fully applicable as of June 9, 2017.
2. The newly created Best Interests Contract (“BIC”) Exemption and Class Exemption for Principal Transactions will become applicable on June 9, 2017, but their conditions will be phased in. Specifically, investment advisers utilizing the exemptions will only need to comply with their impartial conduct standards (including the best interest standard) during a transition period through January 1, 2018. All other conditions of the exemptions must be complied with as of January 1, 2018.
3. Amendments to certain related prohibited transaction exemptions will become applicable on June 9, 2017. For amendments to Prohibited Transaction Exemption 84-24 (relating to annuities), impartial conduct standards will become applicable on June 9, 2017, and the remaining amendments to the exemption will become applicable on January 1, 2018.

Between now and January 1, 2018, DOL plans to complete its re-examination of the rule and decide on whether or not to propose any changes to it or the related prohibited transaction exemptions. DOL has noted that it does not believe a longer delay of the fiduciary definition or impartial conduct standards can be justified in light of its previous findings of harm to retirement investors. However, DOL also noted that its approach in allowing the fiduciary definition and impartial conduct standards to become applicable on June 9, 2017 does not prevent it from re-considering or making changes to the definition or related prohibited transaction exemptions based on new evidence or analyses that arise as a result of its re-examination in response to President Trump’s memorandum.

New Hardship Withdrawal Substantiation Guidance

The Internal Revenue Service (IRS) recently published two memos for its employees who audit employee plans that provides substantiation guidelines when they are examining whether a 401(k) or 403(b) plan hardship distribution is “deemed to be on account of an immediate and heavy financial need” (medical care expenses, purchase of principal residence, post-secondary education expenses, funeral expenses, etc.) under the safe-harbor hardship withdrawal standards – one memo pertains to 401(k) plans and the other one pertains to 403(b) plans. A 401(k) or 403(b) plan may, but is not required to, allow participants to receive a distribution of elective contributions from the plan on account of hardship. Those 401(k) and 403(b) plans that do allow for hardship withdrawals are not required to make use of the safe harbor hardship withdrawal ruled described in the 401(k) regulations, but many if not most do. And the 403(b) rules make it clear that a 403(b) plan may rely on the safe harbor hardship withdrawal that appear in the 401(k) regulations.

Where a 401(k) or 403(b) plan does allow for hardship distributions and does make use the safe harbor standards, the recent IRS memos prescribe a multi-step inquiry that the IRS examiner is expected to undertake to determine whether a hardship distribution is being made on account of a deemed immediate and heavy financial need. Those guidelines suggest that plans granting hardship distribution withdrawals under the safe harbor hardship withdrawal standards will have two different options for substantiating an immediate and heavy financial need.

Option 1 - Source Documents. A plan, prior to making the hardship distribution may obtain from the participant certain “source documents” (such as estimates, contracts, bills and statements from third parties) relating to the hardship distribution. If the plan relies on those source documents to substantiate the hardship request, an IRS examiner would expect to be able to review those documents to determine if they substantiate the hardship distribution – so proper retention of those source documents in the event of a future plan audit would be needed.

Option 2 - Summary of Information. Alternatively, the plan, instead of obtaining the source documents discussed above, may rely on a summary (in paper, electronic format, or telephone records) of the information contained in source documents. If a plan intends to make use of the “summary of information” approach to substantiate a hardship distribution, the IRS examiner will look for the following procedural steps to have been followed:

• The plan sponsor or the third party administrator will be expected to have provided certain notifications to the plan participant before making the hardship distribution, including the fact that the hardship distribution is taxable and potentially subject to additional taxes, the amount distributed cannot exceed the amount of the immediate and heavy financial need, and the recipient agrees to preserve the source documents and to make those documents available at a later time if the plan sponsor or the third party administrator so requests. More detail on the contents of the notifications can be found in an attachment to the IRS memo.
• The summary of information must contain certain information that also is spelled out in an attachment to the memo sent to IRS examiners.
  • There is general information applicable to all categories of hardship requests (participant name, a description of the hardship event, the total cost of the event causing the hardship, the amount of the distribution requested, and a certification from the participant that the information provided is true and accurate) that must be included in the summary of information maintained for each hardship distribution.
  • The summary of information also must contain certain other information specific to the type of hardship for which the distribution is being requested. If, for example, a hardship is requested for the purchase of a principal residence, the summary must identify whether the home that is purchased will be the participant’s principal residence, the address of the residence, the purchase price of the residence, the types of costs and expenses covered (down-payment, closing costs, title/fees, etc.), the name/address of lender, the date of purchase sale agreement, and the expected date of closing. A complete listing of the hardship-specific information that is required to be maintained for each type of hardship when using the summary of information approach is outlined in the attachment to the IRS memos.
• If a plan is using a third-party administrator to obtain a summary of information contained in source documents, the plan sponsor should receive from the third-party administrator a report or other access to data to the employer, at least annually, describing the hardship distributions made during the plan year.

The good news is that the recent IRS memos offers some flexibility as to what works in terms of substantiating a hardship distribution. The bad news is that the so-called “self-certification” approach to processing hardship distributions may no longer work from a substantiation perspective. The guidance contained in these recent IRS memos, while they are not binding legal pronouncements, should nevertheless prompt sponsors (together with their third-party administrators) that have plans with a hardship distribution feature to evaluate and potentially modify their hardship distribution procedures. Sponsors (together with their third-party administrators) will want to strongly consider having plan procedures and participant communications (summary plan descriptions, administrative forms, websites, etc.), going forward, that are designed so that information sufficient to satisfy a request for substantiation is obtained by the plan in the event of an IRS examination. And while the summary of information approach, on its face, may be seen as a procedurally friendlier approach, it is important to recognize that the summary of information approach ultimately requires the participants to have and retain the underlying source documents – those source document still could be requested in the event of an IRS examination.

The complete IRS memorandum relating to 401(k) plans can be found here: https://www.irs.gov/pub/foia/ig/spder/tege-04-0217-0008.pdf.   The complete IRS memorandum relating to 403(b) plans can be found here: https://www.irs.gov/pub/foia/ig/spder/tege-04-0317-0010.pdf.

District Court Rules USC Cannot Enforce Arbitration Agreements in Breach of Fiduciary Duty Suit

Munro v. University of Southern California, Cent. Dist. Cal. 2017 -

Participants in two retirement plans maintained by the University of Southern California (“USC”) brought an action for breach of fiduciary duty with respect to those plans. As a condition of employment, the participants were required to execute arbitration agreements, under which the participants agreed that all claims the participants may have against USC would be resolved by arbitration. In response to the participants’ action for breach of fiduciary duty, USC sought an order from the district court to compel arbitration in accordance with the terms of the arbitration agreements.

The court first held that ERISA claims are subject to arbitration when the parties have entered into a valid arbitration agreement. However, in the present case, where the participants’ action was for breach of fiduciary duty, the participants are treated as suing USC on behalf of the retirement plans, and the retirement plans were not a party to any arbitration agreement with USC. As a result, the court denied USC’s motion to compel arbitration.

The court’s decision is in line with prior decisions holding that a former employee may bring an action for breach of fiduciary duty with respect to an ERISA plan, even after having entered into a separation agreement and release, in which the employee released any claims he or she may have against the former employer. Munro v. University of Southern California, Cent. Dist. Cal. 2017.

Honeywell Cannot Unilaterally Terminate Retiree Health Benefits

Fletcher v. Honeywell Int'l, Inc. (S.D. Ohio, 2017) -

In a recent case involving the vesting of retiree health benefits - Fletcher v. Honeywell Int'l, Inc.- an Ohio federal district court ruled that Honeywell International Inc. could not unilaterally terminate lifetime health-care benefits for retirees of a Greenville, Ohio, plant. In so ruling, the court agreed with the retirees’ contention that a series of collective bargaining agreements (CBAs) promised them lifetime retiree healthcare benefits even though there was no language in the CBAs specifically imposing on Honeywell an obligation to provide lifetime benefits. The court rejected Honeywell’s argument that the absence of specific language providing for lifetime healthcare benefits for retirees is crucial to a claim of vesting. According to the court, a "clear statement" in a CBA that the company agrees to provide lifetime retiree healthcare benefits is not necessarily required; courts may draw "implications and inferences" from other language in a CBA. Moreover, because the court found that the CBA language was ambiguous, it had the right to look to extrinsic evidence to determine what the parties intended when they drafted the language in question. Significantly, the court found that Honeywell's course of conduct in continuing to provide coverage after the expiration of the CBA provided strong support for the court's finding that Honeywell had agreed to provide lifetime retiree healthcare benefits. In so doing, the court rejected Honeywell’s argument, based on the 6^th Circuit federal court of appeals decision in Gallo v. Moen (addressed here: http://www.hodgsonruss.com/newsroom-publications-employee-benefits-developments-february-2016.html), that a company does not act inconsistently when it continues paying healthcare benefits to retirees and reserves the right to alter or eliminate those benefits in the future. According to the court, the principal announced in Gallo v. Moen– that the continuation of retiree coverage following the expiration of the CBAs did not dictate a finding that benefits were vested – did not apply for several reasons: (1) the governing documents in Gallo v. Moen, unlike the documents in the case at bar, contained a “reservation-of-rights” clause; and (2) the language in Gallo v. Moen, unlike the language in the case at bar, unambiguously indicated that retiree benefits were not vested.

The ruling in Honeywell was based on a factual pattern that is common in retiree health benefit litigation: The CBA does not expressly address whether retiree benefits are (or are not) vested, does not contain a clear reservation of rights clause pursuant to which the company may claim the right to alter or terminate the benefits in the future, and retiree benefits are provided beyond the expiration of the relevant CBA. Given these facts, the court’s analysis in Honeywell, if it holds, is not good news for employers seeking to unilaterally alter or terminate existing programs. In designing future programs, or extending current programs, the CBA should expressly address vesting. If a program is not intended to vest for the life of a retiree, employers should also be careful to ensure that summary plan descriptions, enrollment forms and other employee and retiree communications include “reservation of rights” clauses. Benefits counselors who communicate with retirees and their spouses should receive proper guidance and training to ensure that their statements are accurate and complete with respect to the vesting of retiree benefits. Finally, to reduce the risk of a dispute about the intentions of the parties, employers should carefully document the circumstances surrounding contract negotiations. Fletcher v. Honeywell Int'l, Inc. (S.D. Ohio, 2017)