LEGAL DEVELOPMENTS IMPACTING RETIREMENT PLANS 2018 YEAR-END UPDATE

1. In October 2018, the DOL issued proposed regulations that would permit the establishment of association retirement plans.  The proposed regulations are similar to the DOL’s regulations permitting the establishment of association health plans that were finalized in June 2018.  As proposed, the regulations would be limited to defined contribution plans. 

2. In 2014, the Supreme Court eliminated the presumption that employer stock is a prudent investment.  However, to sue retirement plan fiduciaries for employer stock losses, plaintiffs must allege what the fiduciary should have done differently and that a prudent fiduciary in that situation would not have viewed the alternative “as more likely to harm the fund than to help it.”¹ The Court emphasized these claims must be supported by sufficiently detailed factual allegations, which has been a high bar blocking most recent stock drop cases.  However, in December 2018, the Second Circuit permitted a stock drop claim against IBM to go forward, and unless it settles, a rehearing or appeal is likely. ²

3. In February 2018, Congress passed the Bipartisan Budget Act, which relaxed the rules for taking hardship distributions from 401(k) plans. In November 2018, the IRS issued proposed regulations implementing these changes. As part of the changes, the IRS also proposed adding an additional permanent safe harbor for distributions related to expenses and losses caused by federally declared disasters.

4. In April 2018, the Employee Benefits Security Administration (EBSA) released guidance on investment decisions that derive from environmental, social and governance (ESG) factors.  EBSA reiterated that plan fiduciaries cannot invest plan assets to promote ESG goals in a way that sacrifices investment returns or increases investment risk.  However, EBSA also acknowledged that collateral ESG factors can sometimes create material business risks and opportunities that constitute appropriate economic considerations which a prudent fiduciary should take into account along with other relevant economic factors when evaluating the risk and return profiles of alternative investments.

5. EBSA’s April guidance also addressed proxy voting and shareholder engagement.  EBSA acknowledged that an investment policy contemplating shareholder activities designed to influence corporate management could coincide with fiduciary obligations if the activities are expected to enhance the economic value of the investment after reducing for costs. EBSA cautioned that costs related to shareholder activities should not be routinely significant, and that a fiduciary considering spending a large amount of plan assets to engage with management on ESG factors might need a documented analysis comparing the cost of the shareholder activity to the expected economic gain over an appropriate investment horizon.    

6. The Fifth Circuit Court of Appeals vacated the DOL’s “fiduciary rule” on June 21, 2018.³ The DOL chose not to appeal to the Supreme Court, and third-party attempts to intervene and appeal the decision were unsuccessful.  The rule would have made it more likely that a person providing investment advice would be held to the standards of an ERISA fiduciary.  In April 2018, the SEC proposed an investment advice rule, and both the SEC and DOL have a final rule on their timeline for September 2019.

7. The DOL released guidance on the fiduciary implications of an automatic rollover program which automatically rolls an employee’s defined contribution account into an IRA after termination of employment, and then into a subsequent employer’s plan if the subsequent employer also participates in the program. The DOL advised that the decision to roll funds into the IRA is subject to ERISA’s fiduciary standards, but the decision to transfer assets from the IRA to a new employer’s plan is not. The DOL reasoned that once the funds are transferred to the IRA, they are no longer ERISA plan assets.

8. The IRS updated its guidance on correcting plan errors.  For Voluntary Correction Program (VCP) applications, the IRS introduced an electronic filing system, which becomes mandatory on April 1, 2019. The IRS also simplified how VCP user fees are determined and revised the fee structure to be based on the amount of assets in a plan instead of the number of participants.

9. The IRS blessed a plan in which the employer conditioned its contribution to an employee’s 401(k) plan account on the employee making a student loan repayment.  The employer would make a contribution equal to 5% of pay to an employee’s plan account if the employee used at least 2% of wages to repay student loans or deferred at least 2% of wages to the plan.  While an employee could both defer wages and repay student loans, the employer’s contribution was limited to 5%.     

10. In dueling decisions less than four months apart, two federal district courts disagreed as to whether the “Segal Blend” is reasonable and appropriate for determining an employer’s withdrawal liability for leaving a multiemployer pension plan.  The district court in the Southern District of New York disapproved of the “Segal Blend” whereas the district court in the District of New Jersey agreed with decades of prior decisions approving the method.  This method blends the plan’s assumed investment earnings rate with PBGC interest rates to determine withdrawal liability and often produces a higher employer obligation than using the plan’s assumed investment earnings rate alone.  Both decisions have been appealed.⁴

11. On another question of withdrawal liability, the Fourth Circuit Court of Appeals ruled that when a multiemployer pension plan determines an employer is liable for a transaction intended to evade or avoid withdrawal liability, the burden shifts to the employer to prove in arbitration and any later litigation that the plan’s determination was incorrect.⁵

12. In July 2018, the IRS issued final regulations specifying that plan forfeitures can be used to fund Qualified Nonelective Contributions (QNECs) and Qualified Matching Contributions (QMACs).

13. The IRS issued its annual list of required amendments which generally identifies plan amendments required for plan qualification that must be adopted by the end of the second calendar year following the year the list is published. No amendments were included on the 2018 list.

14. The IRS updated its Code § 402(f) safe harbor notices for recipients of eligible rollover distributions.

15. The IRS announced the retirement plan compensation and benefits limits for 2019, including:

• The maximum elective deferral to a Code § 401(k) or 403(b) plan increased to $19,000. Catch-up contributions for participants age 50 or older remain capped at $6,000.
• The contribution limit for Code § 457(b) plans also increased to $19,000. Catch-up contributions remain capped at $6,000 and subject to coordination with the special acatch-up contribution for the last 3 years before retirement age.
• The highly compensated employee threshold used for nondiscrimination testing increased from $120,000 to $125,000.
• The maximum compensation taken into account under a qualified retirement plan increased from $275,000 to $280,000.
• The Code § 415 limit on annual benefits for defined benefit plans increased to $225,000 and the annual addition limit for defined contribution plans increased to $56,000.

From all of us here at MMPL, your employee benefits law firm.

Not intended as legal advice.