© 2019 FIS 1

Advanced Pension ConferenceSeptember 4-6, 2019Chicago, IL

Wednesday, September 4, 2019

S. Derrin Watson, Esq., APMIlene H. Ferenczy, Esq., CPC, APA

KEEPING CURRENT:Washington UpdateS. Derrin Watson, Esq., APM

Ilene H. Ferenczy, Esq., CPC, APA

© 2019 FIS 2

2020 LimitsSection Limit 2019 Limit 2020 Estimate

415(b) Max DB Benefit $225,000 ▼$230,000

415(c) Annual Addition $56,000 $57,000

401(a)(17) Compensation $280,000 $285,000

402(g) Deferral $19,000 ▼$19,500

414(v) Catch-up $6,000 ▼$6,500

414(q) HCE $125,000 ▼$130,000

416(i) Key EE Officer $180,000 $185,000

Social Security Taxable Wage Base $132,300

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LEGISLATION –THE PRESIDENT AND CONGRESS

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© 2019 FIS 3

SEC Best Interest Regulation (and Associated Rules)

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• SEC issued regulations relating to investment advisor/broker conduct

• Officially rejected having a “one size fits all” standard of conduct for all investment people

– Distinguishes between BDs, who are transaction-oriented and who do not necessarily have ongoing responsibilities once the sale is complete or fiduciary responsibilities, and IAs, who do

– Provides that the BD’s compliance with the rules is judged based on an objective standard, looking at the facts and circumstances at the time of the sale (and not with hindsight)

• Craig will review in more detail in Washington Update

MEP Problem

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• DOL issued proposed regulations expanding MEPs

– Associations (based on Association Health Plan Regs)– PEOs– Working Owners (based on AHP Regs)

• District court struck down AHP Regs

– Action based on concern for interaction between AHPs and ACA

– DOL has appealed– Should this affect ARP regs? Will it?

• Craig will discuss more in Washington Update

• Craig and Derrin have a MEP breakout

© 2019 FIS 4

Will We See MEP Legislation?

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• House overwhelmingly passed the SECURE Act, which contains MEP language (along with many other favorable provisions)

• Senate appears to be in favor of also passing SECURE or something similar

• Problem: politics

– Senate may or may not bring it to a vote

– President may or may not sign it if it passes

• And, you guessed it … more detail in Washington Update and MEP breakout

IRS GUIDANCE

© 2019 FIS 5

Proposed Hardship Regulations

• Taxpayers can rely

• Can turn off hardship suspensions starting in 2018

• Must turn off suspensions for hardship distributions starting in calendar year 2020

• New deemed hardship event: Disaster

• Casualty loss not limited to disaster areas

• Amendment is interim, not discretionary

– Relius has amendment for terminating plans

Rev. Proc. 2018-42: DC Preapproved Plan Deadline

• Extended deadline to submit third cycle preapproved plans from October 1, 2018, to December 31, 2018

• We got them in!

• Informal IRS goal; review complete by 6/30/2020

– 2022 restatement deadline?

© 2019 FIS 6

Rev. Proc. 2019-4: 5310 User Fee

• User fee for determination letter on plan termination (Form 5310) has been $2,300

– Rev. Proc. 2018-19

• Increases to $3,000 if submission postmarked after June 30, 2019

Rev. Proc. 2019-20: Limited Extension of FDLs

• Typically no DL for amendments of Individually Designed Plans (IDPs)

• New options starting September 1, 2019

– IDP Cash balance/hybrid plans can apply for DL for plan amendments Consider 2017 required amendments list Deadline 8/31/2020

– Merged IDP plans (associated with corporate transaction) can apply for DL for plan amendments in connection with merger

– Extends open remedial amendment periods

• Reduced or no sanctions for plans that apply

© 2019 FIS 7

Google: Operational Compliance List

• Just Google it!

• 2019 list:

– Hardship proposed regulations

– IRS Hardship Relief Florence and Michael

– Extension of nondiscrimination relief for closed DB plans

– Benefit restrictions in eligible cooperative or eligible charity DB plans

2018 Required Amendments List

NOTHING

First Updated EPCRS - Rev. Proc. 2018-52

• Requires electronic VCP submission after March 31, 2019

– www.pay.gov

– Convert to single PDF

– 15 meg maximum submission Fax the rest!

• IRS may approve submission without contacting ER

– So if you have new issues, contact them ASAP

• Latest update Rev. Proc. 2019-19 (will discuss later …)

© 2019 FIS 8

Tax Relief in Disaster SituationsState Event Start Extension

Wisconsin Storms 17 Aug 2018 17 Dec 2018

NC, SC, VA Hurricane Florence 7 Sep 2018 31 Jan 2019

Florida, Georgia Hurricane Michael 7-9 Oct 2018 28 Feb 2019

Northern Mariana Islands Typhoon Yutu 24 Oct 2018 28 Feb 2019

California Wildfires 8 Nov 2018 30 Apr 2019

Alaska Earthquake 30 Nov 2018 30 Apr 2019

Alabama (Lee Co.) Tornados, storms 3 Mar 2019 31 July 2019

Nebraska Winter storm, winds, flooding 9 Mar 2019 31 Jul 2019

Iowa Storms and Flooding 12 Mar 2019 31 Jul 2019

South Dakota Winter storm, snowstorm, flooding 13 Mar 2019 15 Jul 2019

Missouri Storms, tornados, flooding 9 Apr 2019 30 Aug 2019

Oklahoma Storms, winds, tornados, flooding 7 May 2019 16 Sep 2019

Arkansas Storms and flooding 21 May 2019 30 Sep 2019

Ohio Storms, winds, tornados, flooding, landslides 27 May 2019 30 Sep 2019

Texas Storms, flooding 24 Jun 2019 31 Oct 2019

Specific Retirement Deadlines Postponed• Participant Loan due date

• Required minimum distributions

• ADP/ACP/402(g) correction distributions

– But not deadline to contribute QNEC• Remedial amendment period – But not interim and discretionary amendment deadlines

• Plan contribution deadline

– But not deadline to make safe harbor 401(k) contributions or giveSH notices

• Distribution of nondeductible contributions

• Self-correct significant operational failures

© 2019 FIS 9

Excise Taxes; Returns

• Normal deadline to return nondeductible contributions to avoid 10% penalty is deduction deadline

• Disaster relief extends both

• Extending tax return deadline extends §4975 filing deadline

Excise Taxes; Returns

• Form 5500 extended as indicated in Announcement

– Presumably includes 8955-SSA

– In the case of “affected taxpayers,” . . . the IRS may permit a postponement of the filing of the Form 5500 or Form 5500-EZ “Affected Taxpayers: unable to obtain on a timely basis information necessary

for completing the forms from a bank, insurance company, or any other service provider because such service providers' operations are located in a covered disaster area”

IRS postponement of the Form 5500 series filing due date under section 7508A also will be permitted by the Department of Labor and PBGC for similarly situated plan administrators and direct filing entities

© 2019 FIS 10

IRS Hardship DistributionRelief for Harvey, Irma Maria, Florence, Michael, 2017 California Wildfires

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• Qualified plan or 403(b) plan can make hardship distribution to affected employee–Only plans that can make hardship distributions - not pension

plans

• Governmental 457(b) plan can make unforeseeable emergency distribution to affected employee

• Applies whether or not:

–Plan has hardship language

–Plan recognizes this hardship

• Can rely on employee’s reasonable representations of hardship need and amount

• No need for six-month deferral suspension

• Applies if participant, spouse, ancestor, or descendant lived or worked in disaster area

Compare: New Hardship Deemed Distribution

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• Expenses and losses (including loss of income) incurred by the employee on account of a disaster declared by [FEMA] . . ., provided that the employee’s principal residence or principal place of employment at the time of the disaster was located in an area designated by FEMA for individual assistance with respect to the disaster

• Can be effective as early as January 1, 2018

© 2019 FIS 11

Notice 2018-74: Revised Safe Harbor 402(f) Notices

• IRS revised “safe harbor” notices for eligible rollover distributions

– Last revision 2014

• Includes:

– Extended period for rollover of loan offsets afteremployment or plan termination

– Self-certified waivers of 60-day rollover period

– Disaster relief waivers of 60-day rollover period

– Issues for governmental employees

– Roth 457(b) plans

Temporary Relief for Closed DB Plans

• Notice 2014-5 – Provided gateway relief for plans closed to new members that become subject to gateways

– Had to pass coverage and nondiscrimination for 2013 either on a standalone basis or, if aggregated, had to have not been subject to the minimum allocation gateway Primarily DB or broadly available separate plans

– If so, exempt from min allocation gateway for years beginning before 2016

– Extended by Notices 2015-28, 2016-57, 2017-45, 2018-69, and2019-49…now runs through years beginning before 2021

© 2019 FIS 12

Notice 2019-18: Lump Sum Option

• In 2015, IRS restricted ability of DB plans to offer annuity retirees a window to convert to a lump sum

– Plan to modify regulations

• In 2019 IRS withdrew proposal

• Can now offer lump sum windows

– No private letter rulings

Proposed Regs for MEPs “Bad Apple Rule”

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• MEP is single plan for IRS purposes

– It’s all qualified or all disqualified

– No special EPCRS fees for MEP

• Proposed regs (taxpayers CANNOT rely)

– “Bad Apple Rule” renamed the “Unified Plan Rule”

– Allow MEP administrator to salvage plan qualification if threatened by unresponsive or uncooperative employer

– Series of three increasingly threatening 90-day notices to bad employer demanding that it fix problem or take spinoff (3rd notice includes DOL and participants as recipients)

© 2019 FIS 13

Proposed Regs for MEPs “Bad Apple Rule”

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• Proposed regs (taxpayers CANNOT rely) (cont’d)

– If bad employer doesn’t act, its part of the plan is spun off to new, separate plan Run by MEP administrator Purpose: termination and distribution

– Tax qualification of benefits of innocent participants is retained in spun-off plan, so that they can roll over to IRAs or other plans

– Tax qualification of benefits of complicit participants subject to action by IRS, including disqualification and denial of rollover rights

• More details in MEP breakout

Rev. Rul. 2019-19 States the ObviousUncashed Checks

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• Plan sends distribution check to participant in 2019

• Participant doesn’t cash check

• Nonetheless:

– Participant includes distribution in 2019 income

– Plan withholds normally from the check

– Plan issues 2019 1099-R

© 2019 FIS 14

LABOR GUIDANCE

Fiduciary Rules … The Continuing Saga

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• SEC issued final Regulation Best Interest for broker-dealers

– Corresponding rules for investment advisors

– New mandatory disclosures

– Covers transactions with retail investors, including plan participants

– Covers rollover advice

• The DOL Secretary has said that the DOL is looking to rewrite fiduciary regulation to fit parameters of 5th Circuit decision and to dovetail with SEC Rule

© 2019 FIS 15

FAB 2019-01: Reporting Relief for Closed MEPs

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• In 2014, Congress enacted Cooperative and Small Employer Charity Pension Flexibility Act (CSEC), which required special Form 5500 reporting for MEPs

– Implicates only those plans that are MEPs for DOL purposes, so not Open MEPs

– Requires that Form 5500 filing include a list showing: Name and EIN of each participating employer A good-faith estimate of the percentage of the MEP’s contributions

made by that participating employer (including both employer and employee contributions) (n/a for certain health plans)

– Obligation began for 2014 Form 5500

FAB 2019-01: Reporting Relief for Closed MEPs

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• Provides transitional relief for plans that did not meet this filing obligation:

– If timely file complete Form 5500 for 2018, all is forgiven Automatic extension to 10/15/19 for calendar year plans (and maybe

2½-month extension for other plan years) – use Part 1, Line D and insert “FAB 2019-01” on related line

If Form 5500 was filed before FAB issued, can amend by 10/15 to repair

– If do not take advantage of transitional relief, could be subject to nonfiling penalties for 2014-2018 (up to $2,194 per day per form)

© 2019 FIS 16

403(b)

Notice 2018-95

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• Once In Always In (OIAI) applies to 20-hour exclusion

• Example:

– Dave works for 403(b) sponsor with plan that excludes people who don’t normally work 20 hours/week

– Dave generally works 800 hours/year but in 2017 (only) worked 1,100 hours

– Must be allowed to defer in 2018

– Must he be allowed to defer in 2019 and thereafter? OIAI says yes, although fresh start rule applies for 2019

• Doesn’t require amendment for preapproved plans

© 2019 FIS 17

PBGC

New Coverage Application Procedure

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• Historically, if you were asking the PBGC to make a ruling as to coverage, the application process was pretty casual (an email could do)

• New forms are now on their website for such an application, which at least attempts to collect the relevant information: https://www.pbgc.gov/prac/other-guidance/insurance-coverage

• Provides separate sections or the reasons for the application: substantial owner plan, small professional employer plan, church plan, Puerto Rico-based plan, other exemption

• Identifies what information they need to make ruling

© 2019 FIS 18

New Coverage Application Procedure

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• Requested information includes things like:

– For owner-only plan: organizational documents, list of participants, descriptions of family relationships between owners and other participants

– For professional service employers: website for the company, description of business, breakdown of services performed and percentage of revenue for each service, education levels of owners/managers, education and licensing requirements for the profession

– Also provides space for narrative

• Application is sent via email or US mail

New Coverage Application Procedure

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• Historically, could not get determination unless there was a plan

• PBGC has set up a pilot program where such a request can be made using the new forms “in limited circumstances,” i.e.:

– Is the employer a professional service employer?; or

– Are all participants substantial owners?

• Pilot program expires on 6/30/20

© 2019 FIS 19

ERISA LITIGATION

Key Fiduciary Breach Issue: Shifting Burden of Proof?

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• Courts are examining who has the burden of proving that there are losses due to a fiduciary breach:

– Some courts say: once breach proven, the burden shifts to the fiduciary to show that losses were not the result of the breach (1st, 4th, 5th, and 8th Circuits)

– Other courts say: plaintiff must prove breach and losses as a result of the breach (2nd, 6th, 7th, 9th, 10th, and 11th Circuits)

© 2019 FIS 20

Brotherston v. Putnam (1st Cir. 2018)

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• Putnam offered participants in its plan a selection of proprietary funds, as well as an SDBA

• Participants sued, claiming prohibited transaction, and breach of prudence and loyalty

• District court found that participants did not demonstrate that the loss was due to any breach by the defendants

Brotherston v. Putnam (1st Cir. 2018)

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• On appeal, the 1st Circuit joined the 4th, 5th, and 8th Circuits in deciding that, once a breach and a loss have been demonstrated by the plaintiffs, the burden of proof shifts to the fiduciary to show that its actions did not cause the loss

• Putnam is appealing to the Supreme Court

• The Supreme Court has not yet accepted the appeal (the Solicitor General of the US is filing a brief with his thoughts as to whether the Supreme Court should accept)

© 2019 FIS 21

A Fiduciary Is Not a Fiduciary ….

• Santomenno v. Transamerica

– Company entered into contracts and service agreements with Transamerica for administration and recordkeeping for its plan

– Contract set Transamerica compensation as a fixed percentage of plan assets

– Participants sued, saying that Transamericabreached its duty by, among other things,receiving too much in fees

A Fiduciary Is Not a Fiduciary ….

• The court held that Transamerica was not a fiduciary when it negotiated its own fees and the Company, not the service provider, is responsible for determining whether fees are reasonable

• After Transamerica became a fiduciary, its ability to withdraw fees to pay itself was governed by a contract that did not permit it discretion

© 2019 FIS 22

Arbitration of ERISA Claims: Dorman v. Schwab

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• Dorman files class action suit against his employer (Schwab) for fiduciary breach in relation to 401(k) plan investments

• Schwab moves to compel arbitration based on an arbitration clause in the plan document. District court denies. Defendants appeal

• 9th Circuit had a longstanding history of courts not permitting mandatory arbitration in relation to ERISA claims, because it deemed arbitrators to “lack the competence of courts to interpret and apply” ERISA

• Then, Supreme Court decided American Express v. Italian Colors, in which it ruled that arbitration is an adequate forum so long as the plaintiff can vindicate its statutory cause of action there

Arbitration of ERISA Claims: Dorman v. Schwab

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• 9th Circuit found that, in light of Amex Decision, it must overrule its prior precedent against arbitration of ERISA cases

• Note: In another case heard by the 9th Circuit last year (USC v. Munro), the court denied arbitration, but not on the grounds that it was inappropriate for an ERISA case. The reason in that case is that the court found that the arbitration agreement between the parties did not apply to the ERISA plan. So, the Dorman decision is not contradictory to the USC case

© 2019 FIS 23

Misrepresentation of Agents of the Plan

• Participant in union plan gets cancer

• Nonfiduciary plan representatives give theparticipant misinformation about the effect ofcertain elections on both the health benefits whilehe is alive (and ailing) and the death benefits to hisspouse after he dies

– Based on those misrepresentations, he elects not to retire during his lifetime, so as to preserve his health coverage (to the detriment of the level of post-death benefits to his wife)

Misrepresentation of Agents of the Plan

• SPD was unclear

• Under the plan’s terms, however, he would have preserved his health benefits AND gotten the higher benefit for his wife had he retired while alive

• Supreme Court said in Varity v. Howe that plan administrators act as fiduciaries when they answer beneficiaries’ questions about the plan

• But the plan administrator did not talk to the participant and his wife here: agents of the plan administrator did

© 2019 FIS 24

Misrepresentation of Agents of the Plan

• This court said that, when the plan administrator cloaks agents with authority to speak about benefits in its stead:

– The agents are NOT fiduciaries, but

– The communications constitute fiduciary conduct; and

– The plan administrator is nonetheless responsible as a fiduciary for what the agents do

• Case remanded to the district court for remedy

QDRO Payment Is Not Retirement Money forBankruptcy Purposes

• In Re Lerbakken

– Supreme Court found in Clark v. Rameker that an inherited IRA is not “retirement funds” exempt from the bankruptcy estate

– The 8th Circuit found similarly here with QDRO-awarded funds

– Key: to be exempt from bankruptcy estate, funds must be: Retirement funds; Exempt from taxation under the IRC

© 2019 FIS 25

QDRO Payment Is Not Retirement Money forBankruptcy Purposes

• In Re Lerbakken

– Court said: QDRO funds are a property settlement, not retirement funds

– Therefore, attachable in bankruptcy

And the Award for Litigant With the Most ChutzpahGoes To ….

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• Lehr v. Perri Electric (E.D. of CA, 2019)

– 30-year employee and trustee of retirement plan stole $1+ million from company and $326,846 from plan

– Pled guilty to ERISA charges and agreed to pay the company $326,846 in relation to those claims (allowed offset of her $75,000 account)

– Declared bankruptcy; bankruptcy court awarded the company $1,257,395 (not dischargeable)

© 2019 FIS 26

And the Award for Litigant With the Most ChutzpahGoes To ….

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• Court said:

– Check was made out to the company not the plan, so the company could decide how to allocate the money When company does so, it acts as a company, not as a fiduciary

– Since what she owes the plan is > her account, she’s not a participant and has no standing to sue for fiduciary breach

QUESTIONS?

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© 2019 FIS 27

CONTACT INFORMATION

Ilene H. Ferenczy

Ferenczy BenefitsLaw Center

2635 Century Pkwy. NE, Suite 200

Atlanta, Georgia 30345

(678) 399-6602 (V)

(866) 515-5140 (toll free)

(404) 320-1105 (F)

ilene@ferenczylaw.com

Follow us on Twitter: @ferenczylaw

S. Derrin Watson

Attorney at Law

Of Counsel to FBLC5631 Kent Place

Goleta, CA 93117

(805) 451-8713 (V)

(805) 683-0369 (F)

sderrin@gmail.comFind Who’s the Employer, 403(b) Plan

eSource and 457 Plan eSource at

www.ERISApedia.com

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