The Departments of Labor, Health and Human Services and the Treasury (the Agencies) issued another set of frequently asked questions (FAQs) regarding the implementation of the Affordable Care Act (ACA). This recent guidance, the thirty-seventh in a series of FAQs that the Agencies have published, focuses in part on Health Reimbursement Arrangement (HRA) integration issues.

Background. In September 2013, the Departments of Labor and Treasury published guidance on the application of ACA market reform provisions to HRAs and employer payment plans. This prior guidance clarified that such arrangements are subject to group market reform provisions, including the prohibition on annual dollar limits. To avoid violating these market reform rules, account-based reimbursement plans are generally required to qualify as excepted benefits, or be “integrated” with a group health plan that complies with these rules. Importantly, this guidance stated that integration does not require that the HRA and the coverage with which it is integrated share the same plan sponsor. For example, an employee’s HRA may be integrated with a non-HRA group health plan sponsored by the employer of the employee’s spouse. In 2015, the Treasury Department and the IRS issued guidance clarifying that an HRA available to reimburse medical expenses of an employee’s spouse or dependent children (a Family HRA) may not be integrated with self-only coverage under the employer’s other group health plan.

New Guidance. This most recent guidance explains that a Family HRA will be considered integrated, and not in violation of the ACA market reform rules, in cases where all family members have non-HRA group health plan coverage through either the employee’s employer or spouse’s employer or a combination of the two. For example, a Family HRA would be considered integrated if an employee enrolled in self-only coverage under his employer’s non-HRA group health plan and reasonably represented that his spouse and children had coverage under his spouse’s employer’s non-HRA group health plan.

In light of this new guidance, employers are encouraged to review their health care arrangements, including any relevant attestations, to determine if they comply with ACA market reform provisions.

All the FAQs on the ACA may be found by clicking on the FAQs tab on the left side of the Department of Labor’s Employee Benefit Security Administration’s website. You may go directly to this recent release here.

DOL Provides Updated Guidance to Fiduciaries on Proxy Voting of Shares

The Department of Labor (DOL) has issued an updated Interpretative Bulletin providing guidance to investment managers of ERISA plan assets and other ERISA plan fiduciaries discussing the fiduciary responsibility they have with respect to voting of shares held by a plan in proxy matters and compliance with investment policy statements. The DOL was concerned that a previous Interpretative Bulletin (IB 2008-2) had been misunderstood and had caused fiduciaries to not vote shares held by a plan. The DOL’s concern was that the prior guidance may have been interpreted to require that ERISA plan fiduciaries prepare a cost benefit analysis and conclude that a vote on a proxy matter was more likely than not to increase the economic value of the plan asset. The new guidance indicates that, other than in certain situations (such as voting on foreign proxy matters), the ERISA fiduciary does not need to perform a cost-benefit analysis and that fiduciaries can make an informed decision without incurring great additional expense. Further, the Interpretative Bulletin indicates that an investment policy may include provisions regarding economically targeted investments and include environmental, social, and governance factors. Under the new guidance, if the ERISA fiduciary believes that considering these factors would likely enhance shareholder value, the fiduciary may take into account these factors in their proxy voting. As always, ERISA plan fiduciaries should review their current policies in light of the updated guidance and take appropriate actions with respect to proxy voting matters: DOL Interpretive Bulletin 2016-1

IRS Releases Proposed Regulations Regarding QMACs and QNECs

To be considered a qualified cash or deferred arrangement (CODA), a 401(k) plan that allows employees to defer a percentage of their compensation must satisfy certain distribution and nonforfeiture requirements, as well as the actual deferral percentage (ADP) nondiscrimination test. Similarly, a defined contribution plan that includes employer matching contributions or employee after-tax contributions must satisfy the actual contribution percentage (ACP) nondiscrimination test.

Employer matching contributions and nonelective contributions that meet the distribution and nonforfeitability CODA requirements at the time they are contributed to the plan may be taken into account in performing the ADP or ACP nondiscrimination tests (QMACs and QNECs, respectively).

Defined contribution plans that include employer matching or nonelective contributions frequently subject those contributions to a vesting schedule. If a participant terminates employment before being 100% vested in the matching or nonelective contributions, the participant would forfeit all or a portion of those contributions. Because the current IRS regulations require that a contribution may only be a QMAC or QNEC if the distribution and nonforfeitability requirements are met at the time the contribution is made to the plan, amounts held in a forfeiture account that are used to offset an employer contribution could not qualify to be a QMAC or QNEC because those amounts were subject to a forfeiture provision at the time they were initially contributed to the plan.

Proposed regulations recently published by the IRS modify the current regulations to provide that an employer contribution may qualify as a QMAC or QNEC if the contribution satisfies the distribution and nonforfeitability requirements at the time the contribution is allocated to participants’ accounts. As a result, amounts held in a forfeiture account could qualify as a QMAC or QNEC.

The proposed regulations would apply to taxable years beginning on or after the final regulations are published in the Federal Register. However, taxpayers may rely on the proposed regulations.

Employee’s Liability for Improper Use of Employee Health Plan Contributions is Not Dischargeable in Bankruptcy: DOL v. Harris (In re. Harris) (B.A.P. 8th Cir. 2017)

In a recent case, the United States Bankruptcy Appellate Panel for the Eighth Circuit held that the CEO of a defunct company who used employee health care contributions to pay personal expenses and other corporate debts could not avoid his fiduciary liability by filing for bankruptcy.

In this case, the company was the ERISA Administrator of the company-sponsored health plan. Employees paid 100% of the premiums via payroll deduction. The company withheld the premiums from the employees’ paychecks and held them in the company’s general operating account from which other corporate expenses were paid. The CEO had signatory authority on the general operating account, payroll account, and other company accounts and, in his capacity as CEO, had the authority to determine which company debts to pay. The court found that employee contributions earmarked for the payment of premiums were used to pay other corporate debts and certain personal expenses of the CEO. The Secretary of the Department of Labor filed a lawsuit against the CEO on the grounds that the premiums that were withheld from employees’ paychecks were “plan assets.” Because the CEO had exercised authority and control with respect to the disposition of the plan’s assets, he was a fiduciary and had breached his fiduciary duties by using plan assets to pay corporate creditors and personal expenses. The United States Department of Labor obtained a judgment against him in the amount of $67,840.

The CEO (Debtor) then filed a Chapter 7 bankruptcy case with the expectation that the judgment obtained by the Department of Labor would be discharged. The Department of Labor objected, citing an exception under bankruptcy law that would prevent a bankruptcy debtor from discharging a debt resulting from “fraud or defalcation while acting in a fiduciary capacity.” The court ruled that “defalcation” includes either (a) an intentional misappropriation of trust funds, or (b) a misappropriation of trust funds undertaken with conscious disregard to the substantial and justifiable risk that doing so would result in a breach of fiduciary duty. In the court’s view, the Debtor committed “defalcation” when he knowingly failed to remit employee contributions to the health insurer and instead knowingly used those funds to pay for other expenses, including personal expenses.

Corporate owners, officers and directors, and their business advisors need to take careful note of the court’s decision in this case. When companies in severe financial distress cannot meet their obligations, company employees establish payment priorities that, more often than one would think, do not include the prompt deposit of employee contributions into the company retirement or health plan accounts. As this case demonstrates, owners, officers and directors of a company who are plan fiduciaries would be quite wrong in assuming that they have no personal liability for putting personal and corporate debts ahead of employee contributions to company benefit plans, and that their personal liability can be discharged in bankruptcy. DOL v. Harris (In re. Harris) (B.A.P. 8^th Cir. 2017)

Circuit Court Upholds Stock Drop Decision: Coburn v. Evercore Trust Company (D.C. Cir. 2016)

While an employee worked for J.C. Penney, she participated in the J.C. Penney Savings Profit-Sharing and Stock Ownership Plan (the Plan) and she was able to allocate contributions among a variety of investment options, including the Penney Stock Fund. That Fund was an ESOP that consisted largely of J.C. Penney common stock. Evercore was the designated fiduciary and investment manager of the Penney Stock Fund. Between 2012 and 2013, there was a dramatic drop in the value of J.C. Penney common stock. In 2015, the employee, on behalf of herself and all others similarly situated, sued Evercore alleging that Evercore was liable for substantial Plan losses because it breached its ERISA fiduciary duty by deciding to neither eliminate the Penney Stock Fund as an investment option in the Plan nor sell shares held by the Fund.

In response to a motion filed by Evercore, a federal district court dismissed the complaint for failure to state a claim. Because the employee failed to plead the “special circumstances” needed to sustain a claim under the standards of the Supreme Court’s decision in in Fifth Third Bancorp v. Dudenhoeffer, the district court held that the employee’s complaint must be dismissed. The district court also rejected the employee’s alternative argument that, pursuant to Tibble v. Edison International, Evercore violated its fiduciary “duty to monitor” investments and remove imprudent ones.

On appeal, the D.C. Circuit Court of Appeals affirmed the district court’s decision. The D.C. Circuit held that the employee’s complaint disregarded “the Supreme Court’s instruction that claims of imprudence based on publicly available information must be accompanied by allegations of ‘special circumstances’.” Indeed, the employee acknowledged that she “did not allege the market on which J.C. Penney stock traded was inefficient . . .”

The D.C. Circuit also rejected the employee’s argument that the additional pleading requirements under Dudenhoeffer are inapplicable to her allegations. The employee argued that her claim was not that Evercore over- or undervalued J.C. Penney stock. Instead, she argued that Evercore exposed her to unnecessary and excessive investment risk by failing to act as J.C. Penney stock value continued to drop. The D.C. Circuit disagreed with the employee’s assertion, noting that similar arguments had been made and rejected by the Supreme Court in the Dudenhoeffer case. The Second and Sixth Circuits reached similar conclusions when confronted with similar risk-exposure arguments. Coburn v. Evercore Trust Company (D.C. Cir. 2016)

Severance Arrangement Not Subject to ERISA Where No Need for an Ongoing Administrative Program: Hall v. LSREF4 Lighthouse Corp. Acquisitions, LLC (W.D.N.Y. 2016)

In a recent case decided in the Western District of New York, a former executive sued his employer for not providing severance after he terminated his employment in connection with a change in control. The company had a severance arrangement in place specifically for the purpose of providing severance payments to certain employees terminated within two years of the company’s change in control. As pertinent to this case, the arrangement provided for severance payments in the event an eligible employee terminated his employment for “Good Reason” within two years of the change in control. The former executive claimed he had “Good Reason” but the company disagreed, and litigation followed. At issue before the court was whether it had jurisdiction on the basis of the arrangement being a plan governed by the Employee Retirement Income Security Act of 1974 (“ERISA”).

The court’s analysis was guided by three non-exclusive factors used by courts in the Second Circuit and an extensive review of related case law. The first factor was whether administration of the arrangement required managerial discretion. On this factor, the court found that no discretion was required with respect to the amount, timing, or form of severance payments. While the arrangement required some analysis of the reasons for the employee’s termination, the arrangement outlined specific criteria and required only a one-time determination, not an ongoing discretionary exercise. The second factor was whether a reasonable employee would view the arrangement as involving an ongoing commitment by the employer to provide benefits. On this factor, the court noted that the arrangement did not impose any ongoing responsibilities between a terminated employee and employer after termination other than severance payments.   Additionally, the arrangement was available for only two years after a change in control, rather than an indefinite severance arrangement that would require regular severance determinations. The third factor was whether each employee’s termination would have to be analyzed separately in light of specific criteria. The court found that this factor raised the closest question because some separate analysis was required, but found that the specific criteria delineated in the arrangement made any separate analysis minimal. Finally, the court also examined the arrangement for other “usual earmarks” of ERISA plans. While the arrangement was reduced to a plan document, it did not provide for a plan administrator, fiduciaries, an administrative review or claims procedure, employee contributions, or use of a trust. Moreover, the arrangement was made subject to Maryland law, with no mention of ERISA or other federal law. The court also noted that the arrangement was not a pension plan, as it did not relate in any way to retirement.

While this particular severance arrangement was found not to be an ERISA plan, the court stressed that analyzing whether such an arrangement is an ERISA plan requires a mostly fact-dependent analysis with no set checklist of factors to follow.   The case highlights the fact that care should be taken in drafting a severance arrangement if the goal is to prevent it from being subject to ERISA plan requirements (e.g., ERISA fiduciary obligations, reporting requirements, etc.). Hall v. LSREF4 Lighthouse Corp. Acquisitions, LLC (W.D.N.Y. 2016).

Disabled Taxpayer Entitled to Relief from 60-Day Rollover Rule for One, But Not Two, Rollovers in One Year: Priv. Ltr. Rul. 201647014

In March of 2015, a taxpayer received two distributions from his IRA on March 10 and March 30, respectively. Both distributions were deposited into the taxpayer’s non-IRA savings account. The taxpayer requested that the IRS waive the 60-day period within which the taxpayer would have been required to roll both distributions into another IRA. The taxpayer suffered from cognitive impairment that rendered him incapable of understanding the implications of withdrawing the amounts from the IRA and depositing them into a non-IRA account.

Under a hardship exception made available in the Internal Revenue Code, the IRS agreed to waive the 60-day rollover requirement for the first IRA distribution, and ruled that the first distribution could be rolled by the taxpayer into another IRA as long as the other relevant rollover requirements were satisfied. However, the IRS ruled that the second distribution was not eligible for a tax-deferred rollover to another IRA. The ruling with respect to the second IRA distribution had nothing to do with the taxpayer’s impaired status. Instead, the IRS ruled that the second IRA distribution could not be rolled over because the Internal Revenue Code imposes a one rollover per year limitation on IRA-to-IRA rollovers, and no relief from that limitation is available. Priv. Ltr. Rul. 201647014