July 2014 HR Alert | ACA and the Potential for Litigation:
ERISA Section 510
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IRS Issues Final Regulations on Qualifying Longevity Annuity Contracts 

On July 1, 2014, the IRS issued final regulations for qualifying longevity annuity contracts (QLACs) (the "Final Regulations") under tax-qualified defined contributions plans (such as 401(k) plans), 403(b) plans, IRAs and eligible governmental 457 plans.

A longevity annuity is an income stream that is scheduled to commence at an age in the future and that continues as long as the individual lives, for example, an annuity under which payments begin at age 80 or 85. Generally, a QLAC is intended to provide protection against longevity risk that a participant will outlive his or her retirement plan assets. 

Prior to the Final Regulations, the required minimum distribution (RMD) rules required that the distribution of a participant's entire interest begin by the later of: (i) April 1 of the year following the calendar year in which the participant attains age 70 1/2, or (ii) the calendar year in which the participant retires. Under the Final Regulations, a participant will now be allowed to purchase a longevity annuity contract that can be excluded from the fair market value used to calculate his or her RMD and will only be required to receive RMDs during the period before the annuity begins. 

The following provides additional highlights from the Final Regulations:
  • Payments from a QLAC must begin no later than age 85.
  • Participants are limited as to how much of their retirement savings can be invested in a QLAC. The limit is the lesser of: (i) $125,000, or (ii) 25% of applicable retirement account assets. The $125,000 is a cumulative limit for all QLACs in all retirement accounts. However, the 25% limit applies on an individual plan basis (except for IRAs). For IRAs, the 25% limit applies to the prior year-end total of all IRAs (not including Roth IRAs).
  • The QLAC contribution limits apply separately to each spouse (provided each spouse has their own retirement account).
  • A longevity annuity can provide for a "return of premium" death benefit so that, if a participant dies prior to the age when the annuity begins, the premiums he or she paid but had not yet received as annuity payments, will be paid to the QLAC beneficiary.  
  • QLACs cannot offer a cash surrender value.
The Final Regulations are effective for QLACs purchased on or after July 2, 2014. In order to avoid surrender charges for contract reissuances, the Final Regulations provide a transition rule for any QLAC issued prior to January 1, 2016. Under the transition rule, a contract may qualify as a QLAC if it is amended (or a rider or endorsement is provided) for the requirements outlined above. Pursuant to the Final Regulations, the offering of a QLAC is optional for plan sponsors.

Thousands of 401(k) Plans Fail Non-Discrimination Test

Nearly 60,000 401(k) plans in the U.S. failed their most recent non-discrimination test (resulting in $800 million in returned contributions) for the 2012 plan year. Generally, 401(k) plan non-discrimination testing requires highly compensated and rank-and-file participants to contribute similar rates to their retirement plans. If there is a contribution imbalance in favor of highly compensated employees, plans are required to return contributions to employees (also known as a "corrective distribution").

Incidences of corrective distributions may indicate the need to restructure a plan's design and contribution rates. Employers should work with employee benefits counsel to address plan design issues and ensure maximum 401(k) plan participation and utilization.



HR Alert

July 2014

The following is an excerpt from the article, "Understanding the Safe Harbor Rules for Determining Full-Time Employee Status and the Litigation Risks Associated with Workforce Restructuring Under the Affordable Care Act," by Anne Tyler Hamby. It was published in the Journal of Pension Benefits, Spring 2014, volume 21, number 3. 

In an effort to avoid Applicable Large Employer status and mitigate exposure to the Pay or Play Penalty under the Affordable Care Act (ACA), many employers are considering workforce realignment, including a reduction in the number of employees who work 30 hours or more per week. However, provisions in ACA and ERISA may preclude employers from workforce restructuring that includes reduction in an employee’s hours so that he or she is no longer eligible for employer-sponsored health coverage. The May 2014 HR Alert evaluated the ACA Whistleblower Provision that may significantly limit an employer's flexibility with respect to workforce realignment. This HR Alert discusses the worker protections provided under ERISA Section 510 that may also be a concern for employers contemplating a reduction in employees' hours to avoid the Pay or Play penalty.

What Protections Are Provided Under ERISA Section 510?

Generally, ERISA Section 510 prevents employers from using adverse employment action (e.g., discharge or harassment) to interfere with the attainment of any right to which a participant may become entitled under the terms of a benefit plan. ERISA Section 510 protects a worker's present and future entitlement to benefits.

ERISA Section 510 provides, in relevant part, as follows:
It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan... or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan...[29 U.S.C. § 1140].
ERISA defines a participant as an employee or former employee who is or may become eligible for a benefit of any type from an employee benefit plan. Therefore, the most likely ERISA Section 510 claimant is an employee who is demoted to part-time status after previously averaging 30 or more hours per week. Similarly, a workforce realignment resulting in an employer remaining consistently below the 50 full-time employee threshold may be subject to an ERISA Section 510 claim.

What is the Burden of Proof for an ERISA Section 510 Claim?

Generally, in order for the plaintiff to prevail under ERISA Section 510, he or she must show that the employer made a conscious decision to interfere with the employee's attainment of benefits. However, the plaintiff is not required to prove that the sole reason for the adverse action was to interfere with his or her right to employee benefits. ERISA Section 510 requires no more than proof that the desire to defeat benefit eligibility was a determinative factor in the challenged conduct. Upon a prima facie showing by the plaintiff, a rebuttable presumption arises and the burden of production shifts to the employer. If the employer then makes a prima facie showing of a nondiscriminatory reason, the burden of proof shifts back to the plaintiff.

What Is a Defense to an ERISA Section 510 Claim?

Although ERISA Section 510 appears to provide broad protection to employees against any employer interference with entitlement to benefits, the Supreme Court has indicated that the cost of benefits may be a defense against ERISA Section 510 liability. In Inter-Modal Rail Employees Ass'n v. Atchison, Topeka and Santa Fe Railway Co., 117 S. Ct. 1513 (1997), the Supreme Court held that discriminatory conduct may be insulated from liability under ERISA Section 510 upon showing that the defendant acted in furtherance of a fundamental business decision to contain costs. For employers considering workforce realignment, the decision in Inter-Modal suggests that an employer's decision to reduce employees' hours as part of a necessary business objective to avoid the Pay or Play Penalty and remain profitable may be an absolute defense to an ERISA Section 510 claim.

What Remedies Are Available to Prevailing Plaintiffs?

Plaintiffs enforce the ERISA Section 510 protections under ERISA Section 502(a)(3). Therefore, remedies are limited to equitable relief, which includes reinstatement, restitution, and back pay. Because of the narrow scope of available remedies under ERISA Section 510, workers may try to argue that their claims arise under the ACA Whistleblower Provision (in addition to ERISA Section 510) so as to qualify for the enhanced remedies available under such provision.

Hamby Benefits Law, LLC recommends that you consult with employee benefits legal counsel to assist you with workforce realignment issues and questions regarding ERISA Section 510.   

This HR Alert was written by:
Anne Tyler Hamby
Employee Benefits Attorney
3525 Piedmont Rd NE
7 Piedmont Center, Suite 300
Atlanta, GA 30305
(470) 223-3095 (office)
(404) 861-7441 (cell)
Specializing in retirement plans, health and welfare benefits and executive compensation law

This HR Alert is intended to provide a summary of significant developments to clients and friends.  It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under rules of certain jurisdictions.

Copyright © 2014 Hall Benefits Law, All rights reserved.

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