March 19, 2015
- IRS Extends Nondiscrimination Relief for Frozen Defined Benefit Plans through 2016
- House Committee Discusses Upcoming Fiduciary Rule, DOL Budget Request
- Third Circuit Affirms Lower Court Decision in Favor of Plan Participants, Disregarding ‘Legal Deference’ Principle
IRS Extends Nondiscrimination Relief for Frozen Defined Benefit Plans through 2016
In Notice 2015-28, released on March 19, the Internal Revenue Service (IRS) extended through 2016 relief from the imposition of certain nondiscrimination rules on defined benefit pension plans that have been closed to new hires. The Council had requested an extension in a January 12 letter to the IRS.
The new notice effectively adds one additional year to the relief provided under IRS Notice 2014-5, issued in December 2013. Under the extended guidance, plans may be tested together (or “aggregated”) on a benefits basis for plan years beginning before January 1, 2017, if (1) the plans qualify for testing in 2013, based on meeting the “primarily defined benefit in character” rule or “broadly available” in the plan year beginning in 2013, or (2) the defined benefit (DB) plan passes nondiscrimination on its own in 2013. This allows plans that did not already have a problem to aggregate the defined benefit and defined contribution plans for testing purposes in their 2014 and 2015 (and now 2016) plan years, even if they would not have met the test in those plan years. To qualify for the temporary relief, the “soft freeze” amendment had to be in place by December 13, 2013.
The Council filed written comments with the IRS in response to the prior issuance of relief, urging the agency to address the inadvertent effects of ERISA’s nondiscrimination rules on plans that attempt to grandfather participants from changes in a defined benefit plan. The Council has also offered a proposal, outlined in a May 2013 letter to the U.S. Treasury Department, that would permanently address the problem.
The Council is pleased that IRS has extended this relief, but we will continue to work with administration officials to address this issue on a permanent basis through formal guidance while also pursuing a legislative fix to the problem. In the previous session of Congress, Senators Benjamin Cardin (D-MD) and Rob Portman (R-OH) of the U.S. Senate Finance Committee, and Representatives Pat Tiberi (R-OH) and Richard Neal (D-MA) of the U.S. House of Representatives Ways and Means Subcommittee on Select Revenue Measures, introduced legislation (the Retirement Security Preservation Act (S. 2855)/H.R. 5381) that would have affirmed that a defined benefit plan does not fail the nondiscrimination rules, or the minimum participation requirement, provided the composition of the closed class of participants in the plan meets certain requirements (See the October 7, 2014, Benefits Byte story). The Council has prepared a set of talking points on the issue, and wrote letters to Portman and Cardin and Tiberi and Neal expressing strong support for the legislation. Similar legislation has not yet been introduced in the current Congress.
House Committee Discusses Upcoming Fiduciary Rule, DOL Budget Request
In a March 18 hearing, the U.S. House of Representatives Education and the Workforce Committee examined the Fiscal Year 2016 federal budget proposal for the U.S. Department of Labor (DOL). During the hearing, the committee heard testimony from DOL Secretary Thomas E. Perez and discussed the forthcoming proposed rule expanding the definition of the term “fiduciary.”
The DOL recently submitted to the Office of Management and Budget (OMB) a revised version of the “conflict of interest” rule expanding the definition of the term “fiduciary.” The re-proposed rule is expected to expand significantly the definition of the term “fiduciary” with respect to investment advice provided in conjunction with defined benefit pension plans, defined contribution retirement savings plans and individual retirement accounts (IRAs). Generally, the proposal is intended to protect participants from conflicts of interest and self-dealing. (See the February 23 Benefits Byte for additional details.
In his opening statement, Chairman John Kline (R-MN) said that even with the gains made in the economy since the recession, Americans still face high health care costs and stagnant wages, causing them to struggle to send kids to college and save for retirement. He expressed concern about the DOL “putting more rules on more Americans” including on the men and women who need help saving for retirement, in reference to the fiduciary definition proposal.
Ranking Democratic member Bobby Scott (D-VA) also referenced the fiduciary rule in his opening statement, noting that they need to protect retirees and ensure the regulations to do so are in place.
Perez’s testimony covered a range of issues that fall under DOL jurisdiction, including “ensuring that workers receive the retirement, health and other workplace benefits that allow them to rely on their health care benefits and retire with dignity.” With regard to the fiduciary proposal, he emphasized that, like doctors and lawyers, financial advisors should be providing advice that is in their clients’ best interests. He said that while most financial advisors adhere to this, others “receive back-door payments for steering their clients to bad investments with high fees and low returns” that eat away at retirement savings.
During the question-and-answer session, many members of the committee asked Perez for more details about the fiduciary rule. Representative David Roe (R-TN) questioned whether Perez believed that financial advisors don’t act within their clients’ best interests and Perez responded that financial planners can and should do what lawyers and doctors do, which is to look out for clients’ best interests, and agreed that many are already doing this, but that many have told him that the playing field isn’t level for them. Roe also suggested that the Securities and Exchange Commission (SEC) ought to be writing this rule, to which Perez responded that the DOL is working very closely with the SEC. SEC Chair Mary Jo White recently announced that the agency is developing its own rules for financial advisors.
Rep. Luke Messer (R-IN) said that with the burden of retirement planning shifting increasingly onto employees, they will need more advice, not less, and noted concern that expanding the fiduciary definition could have the unintended consequence of making less advice available. Perez emphasized that they want more to have access to good advice, and right now there’s a lack of certainty on whether clients are receiving good advice.
Rep. Frederica Wilson (D-FL) also voiced concerns that the fiduciary rule should not impact the availability of affordable financial advice, noting that Americans have a better chance at retirement security when good advice is available.
Rep. Brett Guthrie (R-KY) brought up the application of the proposed rule to valuations of non-publicly traded employer securities within employee stock ownership plans (ESOPs). Perez noted the benefits of ESOPs and stated that after the concerns expressed about ESOPs in the previous year’s budget hearing, they would not be included in the upcoming fiduciary rule.
Other issues discussed included:
- Wellness programs: Rep. Tim Walberg voiced his concerns over the recent litigation brought by the Equal Employment Opportunity Commission (EEOC) against employer wellness programs despite the support for wellness programs in the Patient Protection and Affordable Care Act (PPACA). The DOL does not have direct oversight of EEOC, though they share jurisdiction over certain policy matters.
- Age discrimination: Rep. Suzanne Bonamici (D-OR) asked what the DOL is doing to ensure there isn’t age discrimination against older workers. Perez said that this year the White House will be holding a summit on older Americans and a wide range of issues affecting them, including retirement security.
- Stop-loss insurance: Messer asked about stop-loss insurance and voiced concerns that the administration has been signaling attempts to regulate it. Stop-loss insurance is an insurance contract or provision in a contract between a self-funded benefit plan and an insurance carrier that provides financial protection and insures the employer against losses if claims to the plan exceed a specified dollar amount over a set period of time.
- Multiemployer pensions: In his opening statement, Kline thanked Perez for his support of the current multiemployer defined benefit plan provisions enacted as part of the Consolidated and Further Continuing Appropriations Act (see the December 10, 2014, Benefits Byte), but said there was still a lot of work to be done on the issue.
Other topics of discussion included raising the minimum wage, the effects of sequestration and overtime pay reforms.
Third Circuit Affirms Lower Court Decision in Favor of Plan Participants, Disregarding ‘Legal Deference’ Principle
In a blow to benefit plan sponsors, the U.S. Court of Appeals for the Third Circuit has ruled for a class of plaintiffs in the case of Cottillion v. United Refining Company. The court’s three-judge panel sidestepped the issue of whether the plan sponsor was entitled to “legal deference” as established under prior case law.
The Council (along with the ERISA Industry Committee and the U.S. Chamber of Commerce), in an amicus (“friend of the court”) brief, filed in June 2014, had asserted that such deference was warranted in light of the U.S. Supreme Court in an April 2010 ruling in the case of Conkright v. Frommert. In that decision, the Supreme Court held that the district court had an obligation to defer to an ERISA plan administrator's reasonable interpretation of the terms of the plan if the plan administrator arrived at the interpretation outside the context of an administrative claim for benefits (see the April 21, 2010, Benefits Byte for more details). The Third Circuit, in Cottillion, also indicated that an exhaustion of administrative remedies argument (the named plaintiffs failed to file claims with the plan before filing the lawsuit) was left to the discretion of the district court which had not abused its discretion.
Cottillion v. United Refining Company, on appeal from the U.S. District Court for the Western District of Pennsylvania, involves the attempted recovery of pension plan distributions that had been erroneously paid through a misinterpretation of plan documents that was subsequently corrected. When the plan attempted to recover the overpayments to maintain qualified status after a Voluntary Correction Program (VCP) filing with the IRS, the plaintiffs sued, alleging that the defendant violated ERISA's anti-cutback provisions by attempting to retroactively reduce the amount of accrued early retirement benefits. The district court found in favor of the plaintiffs, including remedy awards.
Ultimately, the Third Circuit declined to weigh in on the matter of legal deference, concluding that “no amount of deference” could overcome the facts of the case and that the reinterpretation of the plan document was actually a plan amendment that violated the anti-cutback rules. United Refining is considering whether to file a petition either for a rehearing or a rehearing en banc (of the entire court) and the Council will consider whether to file an amicus brief in connection with the request for review.
For more information on this issue or the Council's amicus brief program, contact Jan Jacobson, senior counsel, retirement policy, or Lynn Dudley, senior vice president, global retirement and compensation policy. Both can be reached at (202) 289-6700.