The 2015 Cromnibus and the Tax Increase Prevention Act of 2014 solve some problems and raise others.
On December 16, 2014, U.S. President Barack Obama signed the Consolidated and Further Continuing Appropriations Act of 2015 (the Cromnibus). Three days later, he signed the Tax Increase Prevention Act of 2014 (the Extender Act). This LawFlash highlights several key employee benefit–related provisions included in this lengthy legislation.
Ceasing Operations Under Threat of 4062(e) Liability
Tucked into the final few pages of the Cromnibus is Congress’s amended section 4062(e) of the Employee Retirement Income Security Act (ERISA). Section 4062(e) imposes liability on employers for a “substantial cessation of operations,” which generally occurs when an employer downsizes operations with underfunded defined benefit pension plans. Notably, as explained in greater detail below, this amendment redefines a “substantial cessation of operations” by (1) requiring that the cessation of operations be permanent, (2) raising the threshold at which a cessation becomes substantial enough to report, and (3) carving out certain workforce relocations and sales or dispositions of the contributing sponsor's assets or stock. Further, if an employer does trip the substantial cessation of operations threshold, resulting in a 4062(e) event, the amendment excludes certain small or well-funded plans from liability and offers other plans an optional seven-year payment plan. In sum, this amendment gives employers some much needed breathing room.
Prior to the amendment, section 4062(e) of ERISA had become a flashpoint between companies and the Pension Benefit Guaranty Corporation (PBGC), a federal agency tasked with protecting and insuring private-sector defined benefit plans. Often, when a company with a defined benefit pension plan temporarily shut down a plant, permanently moved operations from one plant to another, or sold a portion of its business, the company did so under the shadow of section 4062(e) liability. This liability, although often renegotiated with the PBGC, could in some situations be equivalent to the entire amount of the plan’s underfunding (or at least the equivalent proportion of that amount to the reduced workforce). Companies have argued that this liability, which often included large legacy liabilities, had little to no correlation with the financial risk that the plan actually posed to the PBGC. This was particularly true when a large company still stood behind the plan in question. In response to this concern, the PBGC both announced a new enforcement policy in late 2012 (see our LawFlash on this subject), and then, in July 2014, placed a (now lifted) moratorium on all new section 4062(e) enforcement actions through the end of the year. Despite this, by the end of 2014, the situation was dire enough that even the PBGC's Participant and Plan Sponsor Advocate, in her annual report, took issue with the PBGC's continuing policy and referred to it as “expansive and inappropriate.” Congress’s amendment in the Cromnibus responds to these concerns.
In particular, the new definition of substantial cessation of operations, now meaning “a permanent cessation of operations at a facility which results in a workforce reduction of a number of eligible employees at the facility equivalent to more than 15% of the number of all eligible employees of the employer,” solves this large employer/small plan problem. It does this by sweeping into the calculation all eligible employees, meaning any employee eligible to participate in any employee pension benefit plan (including defined contribution plans) of the employer and its control group, not just the employer (or plan) involved in the transaction.
Outside of this large employer/small plan scenario, it is also notable that under the new law, an eligible employee separated from employment at a facility is not taken into account in computing a workforce reduction if (1) the employee is replaced by the employer at another facility located in the United States or (2) in a sale or other disposition of the business, the new employer maintains a defined benefit plan that “includes the assets and liabilities attributable to the accrued benefit of the eligible employee at the time of separation.”
Finally, although it has been reported that the Cromnibus restricts the PBGC from enforcing any section 4062(e) actions with the funds allocated to it in 2015, it is unclear whether this restriction continues to apply. That is, the restriction is effective until the enactment of a bill that amends section 4062(e). Given that another section of the Cromnibus does just that, there is an apparent inconsistency. However, the PBGC's January 5, 2015 announcement lifting the 4062(e) moratorium suggests that the PBGC believes that the restriction on enforcing section 4062(e) actions no longer applies.
Change in Normal Retirement Age
A second important provision tucked into the final few pages of the Cromnibus under the title “Clarification of the Normal Retirement Age” essentially provides a retroactive safe harbor for plan sponsors. The amendment changes both ERISA and the Internal Revenue Code (Code) to allow an “applicable plan” to define normal retirement age by reference to a target number of years of benefit accrual service. For these purposes, an “applicable plan” is a plan that was in existence on or before December 8, 2014 and defined normal retirement age as the earlier of (i) an age otherwise permitted under ERISA or (ii) the age at which a participant completes the number of years (not less than 30 years) of benefit accrual service specified by the plan.
Expatriate Health Plans Under the Affordable Care Act
A third important provision introduced under the Cromnibus provides expatriate health plans, sponsors, and health insurance issuers with relief from certain Affordable Care Act provisions. Significantly, this relief includes, so long as all other requirements are met, an assumption that these plans meet the definition of minimum essential coverage under Code section 5000A(f). Although the rules remain complicated, generally, an expatriate health plan is a group health plan, either insured or self-insured, that offers coverage, substantially all of which is provided to qualified expatriates. And, qualified expatriates are, generally, individuals who (1) are transferred temporarily to the United States for work, (2) work outside the United States for 180 days a year, or (3) are members of a group formed for a 501(c)(3) or 501(c)(4) purpose and must relocate in service of that purpose. Notably, although some of the rules are now relaxed for expatriate health plans, others, such as employer reporting requirements, are still in play.
Tax Increase Prevention Act of 2014
- a. Extension of Period to Amortize Funding Shortfalls in Multiemployer Plans. A multiemployer plan, with an accumulated funding deficiency, has its funding standard account charged with the normal cost for the plan year as well as amounts necessary to amortize a whole range of other liabilities (such as those that arise from past service, net losses, and waived funding deficiencies, among others). Code section 431(d) provides such a plan with an automatic extension of up to five years for the full funding amortization periods, so long as the plan sponsor properly submits an application to the Internal Revenue Service (IRS) that requests an extension for the period of years. Although this automatic extension was set to expire for applications submitted to the IRS after December 31, 2014, the Extender Act moves the deadline for submitting amortization extension applications to December 31, 2015.
- b. Extension of the Shortfall Funding Method and Endangered and Critical Rules Under the Pension Protection Act of 2006. Prior to the Extender Act, the additional funding rules and associated excise taxes for plans in endangered or critical status under the Pension Prevention Act of 2006 were set to expire for plan years beginning after December 31, 2014. The Extender Act extends these rules for one year. This means that the rules will apply to a plan that enters endangered or critical status during a plan year that began in 2015. For further discussion on these rules and others relating to the Multiemployer Pension Reform Act of 2014, see our previous LawFlash.
- c. Tax-Free Distributions from Individual Retirement Plans for Charitable Purposes. The Individual Retirement Arrangement (IRA) distribution rule that allows a taxpayer who is 70½ or older to make a “qualified charitable distribution” up to the limit of $100,000 directly from the IRA trustee to certain charitable organizations was retroactively extended for one year and now terminates as of December 31, 2014. The rule, therefore, can be applied to qualified charitable distributions made after December 31, 2013 and before January 1, 2015.
- d. Employer Wage Credit for Employees Who Are Active-Duty Members of the Uniformed Services. The Extender Act retroactively extended the employer wage credit for activated military reservists for 2014. The credit is only available to employers with 50 or fewer employees and is limited to an amount up to 20% of the sum of the eligible differential wage payments (not to exceed $20,000) for activated military reservists under Code section 45P.
- e. Parity for Exclusion from Income for Qualified Transportation Fringe Benefits. The Extender Act, retroactively for 2014, brought parity between the amount an employer could exclude from an employee's income for employer-provided parking, transit passes, and vanpool benefits. Prior to the Extender Act, the exclusion limit for qualified transportation fringe benefits for 2014 was $130 for employer-provided transit and vanpooling benefits and $250 for employer-provided parking. The Extender Act, by making the exclusion for all three categories $250 and expiring on January 1, 2015, provides welcome relief to some employers and employees who had relied on this outcome. Notably, it is anticipated that the IRS will provide administrative relief, similar to that outlined in Notice 2013-8, to help employers dealing with the implications of this change streamline their tax filings.
- f. Work Opportunity Tax Credit. The Extender Act retroactively extends the Work Opportunity Tax Credit (WOTC) for one year and makes it available for employers whose employees began work after December 31, 2013 and before January 1, 2015. This credit is available on an elective basis and is equal to 40% of the first $6,000 of wages paid to new hires from a targeted group. Targeted groups include families that receive benefits under the Temporary Assistance for Needy Families program, qualified veterans, qualified ex-felons, qualified Social Security Income recipients, and others. Among other forms, an employer that claims this credit must have certified its eligible employees with the appropriate State Employment Security Agency in 2014 using Form 8850. Therefore, employers that plan on claiming a similar benefit in 2015 will have to both continue this practice and hope that Congress continues its recent trend of retroactive reinstatements.
- g. Indian Employment Tax Credit. The Extender Act extends a tax credit through December 31, 2014 that had expired on December 31, 2013 for employers under Code section 45A equal to 20% of the first $20,000 of qualified wages and insurance costs paid to an employee who was a member of an Indian tribe and who, generally, worked and lived on or near the Indian reservation.
- h. Achieving a Better Life Experience Act of 2014 (the ABLE Act). The Extender Act includes the ABLE Act, which, among other things, (1) establishes a tax-free savings vehicle for certain disabled individuals and (2) allows certain professional employer organizations (PEOs) to be certified by the IRS to be solely responsible for their customers’ employment taxes. These are discussed in order below:
- The tax-free savings vehicle, deemed an ABLE program, is designed to “assist individuals and families in saving private funds to support individuals with disabilities.” Although complex, generally, an ABLE program can be used “to provide secure funding for disability-related expenses that will supplement, but not supplant, benefits provided through private insurance, Medicaid, SSI, the beneficiary's employment, and other sources.” For individuals to be eligible for this program, notably, their disability or blindness must have occurred before they reached the age of 26. Perhaps tempering this age limitation, the IRS has been directed to develop regulations that may include a list of conditions deemed to have occurred before age 26.
- Prior to the ABLE Act, employers that used PEOs to compute and pay varying employee taxes still remained generally liable for PEO failures of this duty. The ABLE Act changes this by allowing certain PEOs to be “certified” by the IRS. These certified PEOs will then, for employment tax purposes, be treated as the sole employers of their customers’ work-site employees. To be certified a PEO, among other things, employers must pay an annual fee of $1,000, post a bond, submit audited financial statements, and comply with IRS reporting obligations.
Notably, quite a few of the provisions listed above were only retroactively extended for 2014; therefore, although a continuing trend of retroactive reinstatements is becoming clear, employers should proceed cautiously in the coming year.