Compliance May 19, 2015

Council Urges Repeal of ACA Excise Tax

The American Benefits Council says, until the ACA excise tax is repealed, the IRS should structure rulemaking to minimize the impact to employers.
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The American Benefits Council submitted a very extensive written comment to the Department of Treasury and the Internal Revenue Service (IRS) in response to regulators’ solicitation of input about possible approaches for implementing the 40% excise tax on “high cost” employer-sponsored health  coverage mandated by the Patient Protection and Affordable Care Act (ACA).

“The health care law was expressly designed to build upon the employer-sponsored benefits system, which provides great value to American workers and families. But this tax would wreak havoc on the employer coverage that over 150 million Americans have and want to keep,” said American Benefits Council President James A. Klein.

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“Research estimates that, in 2018, more than one-third of employer-sponsored plans will trigger the tax unless the value of those plans is significantly reduced.  But the greater long-term concern is that because of the way the cost thresholds that trigger the tax are indexed, eventually even plans that only meet the minimum value required by the law will cross the thresholds,” Klein added. 

According to the letter, even with changes, many employers remain concerned that they will incur the so-called “Cadillac tax” in 2018 or shortly thereafter. Of Council members surveyed, 49% agreed with the statement “[a]t least one of our plans will trigger the tax by 2018 or shortly thereafter, even though we are making changes to avoid the tax.”

Reasons they may trigger the tax included:

  • employees located in geographic areas with higher health care costs;
  • a workforce that is older than the average workforce and thus has relatively higher costs;
  • employees that are generally higher-cost individuals (for example, those with a high prevalence of chronic conditions or other factors resulting in relatively higher claims experience).

Only 45% of respondents who anticipate triggering the tax indicated that they will do so in part because their plans are “very generous in terms of covered services” and impose minimal employee cost-sharing.

The Council is recommending that certain coverage be excluded from the definition of “applicable employer-sponsored coverage” for purposes of determining whether an employer’s health plan is a “high-cost” plan.

The Council says it supports legislation that will repeal the tax, but in the meantime, employers will have to prepare for it. It asked regulators to issue safe harbor estimates for use by employers since employers will need timely information regarding the dollar limits that will trigger the tax that will apply in 2018.

The American Benefits Council’s letter is here.

Compliance May 19, 2015

Considerations for Retirement Plan Sponsors after Tibble Ruling

The U.S. Supreme Court has taken a modest step to ensure the fiduciary “duty to monitor” retirement plan investments is defined as a distinct duty from the initial requirement to prudently select investments under ERISA.
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Jesse Gelsomini, a partner in Haynes and Boone LLP specializing in employee benefits, feels the Supreme Court decision in Tibble v. Edison has strengthened the ongoing duty to monitor investments under the Employee Retirement Income Security Act (ERISA).

He explains that the top federal court in Tibble held there is an ongoing fiduciary duty to monitor investments in a 401(k) plan to ensure that the investments remain prudent, “which applies even if there is no intervening change in circumstances.” The Supreme Court actually vacated and remanded the specifics in the long-running fee case back to the 9th U.S. Circuit Court of Appeals, which is left with the task of more closely defining what the duty to monitor should look like in this particular case or others like it.

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Limited in size and scope—the text of the ruling covers just 10 pages—the decision from the Supreme Court still seems to solidify the ongoing duty to monitor investments as a distinct fiduciary duty, so it’s important for plan sponsors to consider what the ruling means for them.

“What this means is that an employer or other responsible fiduciary will not avoid potential liability if it selects an imprudent investment alternative for the 401(k) plan, but then successfully waits out the six-year ERISA limitations period,” Gelsomini suggests.

Generally, 401(k) plan investment fiduciaries carefully examine a potential investment when first deciding what options to offer under the 401(k) plan, Gelsomini tells PLANSPONSOR. This is especially true in the case of the plan’s qualified default investment alternative (QDIA), which will serve as a catch all investment vehicle for anyone automatically enrolled into the plan without actively choosing another investment from the menu. Prudent selection and documentation are key requirements underlying the QDIA safe harbor, which protects ERISA plan fiduciaries from liability in the case that the automatic investment loses money and participants seek damages.

“If the investment is deemed to be prudent and is selected as [the QDIA], the fiduciary generally will continue to offer the investment as an alternative unless a change in circumstances renders it imprudent,” Gelsomini says. “Following the Supreme Court’s decision in Tibble, an investment alternative must continue to be monitored for prudence under ERISA on an ongoing basis even if there is no material change in circumstances.”

Specific issues to monitor for in the QDIA and other investments include impermissible changes in investment style or risk taking, Gelsomini explains. Others include persistent underperformance over a series of quarters, excessive increases in fees, and any other factors outlined in the plan’s investment policy statement or plan documents.

While it’s clear the duty to monitor is an independent duty from the duty to prudently select, Gelsomini notes the Supreme Court did not actually opine regarding how often or comprehensively a responsible plan fiduciary must perform the review of an investment alternative if there has been no blatant intervening change in circumstances that might indicate the alternative is imprudent. Another ERISA litigation expert, Sidley Austin LLP’s Mark Blocker, also says it’s unclear whether this decision will have a substantial impact on retirement plan sponsors and their advisers, given that most plans have already taken steps to avoid Tibble-like liability.

“Virtually all large employers already conduct periodic reviews of the investment options in the 401(k) plans they sponsor, so the decision will not require any major new activities on their part,” Blocker explains. “What remains to be seen is how the duty to monitor will be interpreted, a question that was not answered by the court and was left to the lower courts to determine.”

“This is an open question that may need to be fleshed out by the courts in upcoming years,” Gelsomini agrees. “In the meantime, there are other steps that employers can take to protect their investment fiduciaries.”

He suggests each employer could review the 401(k) plan’s investment policy statement to ensure that it contains clear guidelines specifying how often the responsible plan fiduciary must perform a comprehensive review of investment alternatives, even absent an intervening change in circumstances. The policy may also specify the proper steps to remove an investment if it is deemed imprudent, Gelsomini says. One thing to note is that, once language about periodic investment reviews is placed into the policy statement, it's absolutely critical to ensure the plan operations match what is written down. 

“If there are no clear guidelines in place, or if the guidelines provide for infrequent review, the employer should amend the investment policy statement to provide for a comprehensive review of each investment alternative at least annually, and more frequently if the responsible plan fiduciary determines that doing so would be prudent under ERISA’s fiduciary standards,” Gelsomini says. “Finally, perform a comprehensive review of all investments, if such a review has not been performed recently, and otherwise comply with the compliant investment policy statement.”

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