Retirement Plans

IRS Modifies its Voluntary Retirement Plan Correction Procedures (EPCRS)

Under the IRS’s Employee Plans Compliance Resolution System (EPCRS), retirement plan sponsors may voluntarily request that the IRS approve certain corrections to a variety of plan administration errors before those errors are discovered in an IRS audit. The IRS issued the most recent version of EPCRS in 2013 which sets forth a number of specific corrections and principles that plan sponsors may use when correcting for errors in plan form or operation. Recently, the IRS issued two revenue procedures containing modifications to its EPCRS program that will change a number of the correction principles that exist in its current program. The first set of guidance, set out inIRS Revenue Procedure 2015-27, includes:

  • Offering additional flexibility to plan sponsors correcting overpayments to participants in defined contribution and defined benefit plans;
  • Extending the eligibility of plan sponsors to self-correct errors relating to plan contributions that are in excess of limits established in the Internal Revenue Code;
  • Limiting the requirement that plan sponsors submit a determination letter application in connection with a corrective plan amendment in certain situations involving pre-approved retirement plans and or where the plan has been terminated;
  • Revising the process for submitting model documents that may be used in connection with a voluntary correction submission; and
  • Reducing the compliance fee for VCP submissions that involve a plan’s failure to meet minimum distribution (age 70 ½) requirements as well as for corrections involving plan loan failures.

 These changes to EPCRS are effective as of July 1, 2015, but plan sponsors may rely on these changes for any time period on or after March 27, 2015.

The IRS further modified EPCRS in Revenue Procedure 2015-28 to relax the requirements for corrections involving failures to properly implement elective deferrals in automatic contribution arrangements in 401(k) plans and 403(b) plans. The new safe harbor corrections are aimed at encouraging retirement savings by reducing the burden on employers who adopt and maintain retirement arrangements that automatically enroll participants in a workplace retirement plan.

IRS Extends Temporary Coverage/Nondiscrimination Testing Relief for Closed Defined Benefit Plans

Under guidance issued in Notice 2015-28, the IRS extended relief from certain coverage/nondiscrimination testing requirements for defined benefit plans that have been closed to new participants but provide ongoing accruals for some or all employees who participated in the plan as of a specified date (often referred to as a “soft freeze”). When defined benefit plans are closed to new participants in this way, nondiscrimination testing issues typically do not show up for at least a few years after the freeze. As time passes and the plan becomes more concentrated with highly compensated employees (typically due to longer-service employees earning more than new employees on average), it becomes more difficult for these plans to satisfy their coverage/nondiscrimination testing requirements under the Internal Revenue Code.

The IRS had previously issued relief from certain testing requirements for closed plans in Notice 2014-5, and Notice 2015-28 simply extends this relief for an additional year. The relief now applies for all plan years that begin before 2017. The IRS is eventually expected to issue regulations under Code Section 401(a)(4) to permanently address this issue.

Affordable Care Act 

Departments Finalize Rules for a Pilot Program that will Allow Group Health Plan Sponsors to Supplement Individual Policies Purchased on an Exchange

The Departments of Treasury, Labor and HHS finalized rules that were originally released in December 2014 that will give employers the opportunity to participate in a pilot program that will allow them to offer certain wraparound coverage as an “excepted benefit” to part-time employees, retirees, and to employees eligible for coverage under a multi-state plan. As discussed in our December 2014 update, these rules will permit employers to supplement eligible individual insurance policies or coverage purchased under a multi-state plan for certain part-time employees and retirees.

The final rules require that the wraparound coverage offer meaningful benefits beyond reimbursement for cost sharing under an individual’s primary plan, which might include coverage for reimbursement for in-network providers not covered under an individual’s primary health plan, or for benefits that are not essential benefits under the participant’s primary health plan. The final rules also clarify that the benefit may not be an account based benefit, such as a health reimbursement arrangement. Indeed, the benefit must include a risk sharing element to qualify as an excepted benefit under the final rules.

The final rules are different in some key ways from the proposed rules from December 2014. The final rules change the effective dates of the pilot program. An employer can offer such wraparound benefits as of any plan year beginning on or after January 1, 2016, and no later than December 31, 2018. In addition, the final rule clarifies that the cost of these benefits must be limited to no more than the greater of the annual limit for health flexible spending arrangements (currently $2,550) or 15% of the cost of the participant’s underlying group health coverage.

Health and Welfare Plans 

EEOC Initiates Rulemaking Process for Employer-Sponsored Wellness Programs

Addressing the ongoing controversy over employer wellness programs, which we discussed in a prior alert, the EEOC recently submitted a notice of proposed rulemaking to the White House Office of Management and Budget (OMB). The EEOC has recently brought a handful of lawsuits against employers sponsoring wellness programs, alleging that the incentives and other aspects of those programs violate both the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA). It is anticipated that the EEOC’s proposed rules will clarify some of the uncertainties employers and plan sponsors face under the ADA and GINA when sponsoring a wellness program that otherwise meets all applicable requirements of the Affordable Care Act, HIPAA, and state law.

Supreme Court Update

Supreme Court to Hear Arguments Involving a Health Plan’s Right to Recover Plan Overpayments

While public attention is currently focused on the upcoming high profile Supreme Court decision in King v. Burwell (which involves subsidies for exchange-based coverage under the ACA), the Supreme Court recently decided to hear arguments in a separate employee benefits case that involves an ERISA plan’s ability to recover overpaid amounts that are no longer in the plan participant’s or beneficiary’s possession.

Montanile v. Bd. of Trs. of Nat’l Elevator Industry Health Benefit Plan involves a group health plan’s attempt to recover the monetary proceeds that a plan participant received as part of an out-of-court settlement for injuries stemming from a car accident, pursuant to the plan’s subrogation provisions. The plan sought to recover the settlement amounts attributable to the participant’s health costs even though the participant had already spent the settlement proceeds. Although similar subrogation-related issues have been litigated and resolved by the U.S. Supreme Court over the past several years, the specific issue that the Supreme Court will decide in Montanile is whether ERISA Section 502(a)(3)’s equitable remedies provision allows a plan to recover overpaid amounts that are no longer in the possession of the plan participant or beneficiary.

The Supreme Court likely accepted the case because the federal circuit courts are currently split on this issue. The majority of circuit courts that have considered the issue (including the Seventh Circuit in Illinois, Indiana, and Wisconsin) allow plans to recover in spite of the fact that the participant or beneficiary no longer possesses the amounts at issue, and a minority of circuit courts do not allow plans to recover where the amounts at issue are no longer in the participant’s or beneficiary’s possession. Arguments in Montanile will take place during the Court’s 2015-16 term.