LEGAL DEVELOPMENTS IMPACTING RETIREMENT PLANS – 2019 YEAR-END UPDATE

1. In December 2019, Congress passed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) as part of the Appropriations Act. See our article for additional information.

2. Pursuant to an Executive Order, the IRS proposed updates to the actuarial tables for required minimum distributions (RMDs) to reflect longer life expectancies, resulting in lower RMD payments.

3. The IRS finalized regulations on hardship distributions from 401(k) plans that implement changes in the 2018 Bipartisan Budget Act. The final regulations ease participant access to hardship distributions, such as by eliminating the 6-month waiting period to make elective deferrals after a hardship distribution and allowing a hardship distribution even if a plan loan is available. The regulations also include a new safe harbor permitting these distributions for expenses arising from certain natural disasters.

4. In the Dorman v. Schwab case,¹ the Ninth Circuit Court of Appeals held an ERISA plan’s terms can require arbitration of claims on an individual basis, essentially foreclosing class actions and claims brought on behalf of a plan. See our article for additional information.

5. In 2018, a federal court struck the DOL’s “Fiduciary Rule,” which would have broadened the definition of “investment advice” that made someone an ERISA fiduciary. The SEC’s recent, related rule—“Regulation Best Interest”—will indirectly affect some employers and retirement plan fiduciaries by targeting broker-dealers and retail customers and covering advice on whether to transfer assets in a retirement plan or to take a plan distribution to a securities account. The rule generally increases the standards applicable to broker-dealers but does not fully impose fiduciary standards. Several states have sued, arguing Regulation Best Interest provides inadequate consumer protection.

6. A federal district court ruled ERISA does not preempt California’s automatic-enrollment IRA program.² That program enrolls certain employees not eligible for a tax-qualified retirement plan in a state-administered IRA (unless they opt out) and requires their employers to make and forward deductions from employees’ wages to that program. In 2017, Congress invalidated DOL regulations approving such auto-IRA programs. The court still found ERISA inapplicable because the law only applies to employers without ERISA plans and merely requires them to take “ministerial” actions. The case is ongoing and an eventual appeal to the Ninth Circuit Court of Appeals is likely.

7. Two cases show how a plan administrator’s failure to comply with regulatory benefit claim procedures can forfeit the court’s deference to the plan decision. The Seventh Circuit Court of Appeals ruled one plan lost its right to deference because it was not enough to “substantially comply” with the final determination deadline.³  Likewise, a federal district court in Ohio gave no deference to a claim denial when the named plan administrator delegated final claim determination to another party without authorization to do so in the plan document.⁴

8. In a win for multiemployer pension plans, the Ninth Circuit Court of Appeals expanded the situations in which a successor employer takes on the withdrawal liability of a predecessor in an asset sale.⁵  The court held withdrawal liability extends to any successor who reasonably should know the predecessor was subject to withdrawal liability.

9. The IRS made several changes to its program for correcting plan errors, such as expanding the self-correction program for certain plan document and loan failures; adding new rules for self-correction of operational failures by a plan amendment; and requiring electronic filing of voluntary correction program submissions.

10. For the past few years, the IRS has permitted determination letters for individually designed plans only at initial qualification or termination. In September 2019, the IRS expanded this program for individually designed statutory hybrid plans through August 31, 2020, and for certain individually designed merged plans on an ongoing basis.

11. Plaintiffs continue to bring class actions alleging excessive fees charged by investment options in retirement plans. For example, the Supreme Court was recently asked to review the threshold for determining whether a plaintiff’s complaint alleged sufficient facts to state a fiduciary breach claim.

12. As we reported last year, the Second Circuit permitted an ERISA case against IBM to proceed based on a failure to disclose financial information impacting IBM stock.⁶  The facts of the Second Circuit case are unusual—plaintiffs cited economic evidence that by withholding disclosure of an IBM business unit’s losses, the plan fiduciaries exacerbated a stock price drop and ignored the fact that the business unit’s losses would inevitably be disclosed during IBM’s impending sale of the business unit. The Supreme Court agreed to review the case and, in January 2020, vacated and remanded the decision to the Second Circuit to consider (1) the plan’s argument that ERISA imposes no duty to act on inside information and (2) the SEC’s argument that an ERISA obligation to disclose inside information conflicts with securities law on insider trading and corporate disclosures.⁷

13. In August 2019, the IRS issued guidance on what happens when an individual fails to cash a distribution check from a qualified plan. The IRS explained that leaving a distribution check uncashed through the year’s end does not excuse an individual from including the amount in his or her gross income, nor does it excuse the employer from tax withholding and reporting obligations. The IRS noted it is still considering other contexts involving uncashed checks, including missing participants—an area where uncertainty remains.

14. The IRS issued its annual list of required amendments which generally identifies plan amendments required for plan qualification which must be adopted by affected plans by the end of the second calendar year following the year the list is published. The 2019 list recognized amendments may be required for newly finalized hardship regulations and for final regulations impacting certain cash balance/hybrid defined benefit plants maintained per a collective bargaining agreement.

15. The IRS announced the retirement plan compensation and benefits limits for 2019, including:
16. • The maximum elective deferral to a § 401(k) or § 403(b) plan increased to $19,500. Catch-up contributions for participants age 50 or older are now capped at $6,500.
    • The contribution limit for § 457(b) plans also increased to $19,500. Catch-up contributions are now capped at $6,500 and subject to coordination with the special catch-up contribution for the last 3 years before retirement age.
    • The highly compensated employee threshold used for nondiscrimination testing increased from $125,000 to $130,000.
    • The maximum compensation taken into account under a qualified retirement plan increased from $280,000 to $285,000.
    • The Code § 415 limit on annual benefits for defined benefit plans increased to $230,000 and the annual addition limit for defined contribution plans increased to $57,000.

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

Not intended as legal advice.