Compliance August 31, 2020

IRS Issues Guidance About the Payroll Tax Deferral

The guidance defined the ‘applicable wages’ per pay period that qualify for the deferral, as well as how the Social Security tax must be paid back.

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In guidance about the payroll tax deferral, the IRS says unpaid amounts must be withheld and paid between January 1 and April 30, 2021.

Payroll taxes are shared by the employer and employee, each paying 6.2% of wages along with a 1.45% tax for Medicare. On August 8, President Donald Trump signed a presidential memorandum directing the Secretary of the Treasury to use his authority to defer the withholding, deposit and payment of taxes to Social Security from September 1 through December 31 for employees making less than $104,000 a year. Employers are still required to pay their portion.

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According to IRS Notice 2020-65, “the Secretary has determined that employers that are required to withhold and pay the employee share of Social Security tax under Section 3102(a) or the railroad retirement tax equivalent under Section 3202(a) are affected by the COVID-19 emergency for purposes of the relief described in the presidential memorandum.” Treasury Secretary Steven Mnuchin said previously that while he encourages employers to withhold the taxes, he cannot mandate that they do so.

The tax may be deferred for any employee whose “wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000.” The deferred taxes must be withheld and paid ratably per pay period for affected employees between January 1 and April 30 of next year or interest on the amounts will accrue starting May 1.

Trump’s order also directs the Treasury Department to look into how the government can forgive the deferred payments, a power only Congress has. Sources worry that if Congress does so, it would add a significant strain on the solvency of Social Security.
Compliance August 31, 2020

Technical Ruling Clears UPS in ERISA Actuarial Equivalence Lawsuit

The pro-defense ruling highlights the importance of exhausting potential administrative remedies before filing a lawsuit under ERISA.

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The latest decision in an Employee Retirement Income Security Act (ERISA) lawsuit comes out of the U.S. District Court for the Northern District of Georgia’s Atlanta Division.

Plaintiffs in the case suggest the United Parcel Service of America (UPS) committed multiple fiduciary breaches while calculating the value of joint and survivor annuity (JSA) benefits to be paid out of the delivery company’s pension plan relative to the value of the plan’s standard single life annuity (SLA) option. The new ruling, however, sides with the defense’s arguments that the plaintiffs have not fully exhausted all the potential administrative remedies available under the plan, and so the suit has been dismissed.

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Because of the technical nature of the ruling, the decision does not offer much guidance about how much discretion a plan sponsor has in this situation. By way of background, the plaintiffs’ suit sought to remedy “failures to pay joint and survivor annuity benefits in amounts that are actuarially equivalent to a single life annuity benefit to pension plan participants and their beneficiaries.” Such actuarial equivalence is required by ERISA, but the term itself is not defined in detail in the statue.

This fact has resulted in a rash of closely related lawsuits that have been filed in the past few years, naming such well-known defendants as UPS, MetLife, Pepsi and American Airlines. Though the exact details differ, at the core of each case is the argument that plans are failing to offer JSAs that are actuarially equivalent to the SLAs that participants earn. The plaintiffs in such cases say this means the defendants are causing retirees to lose part of their vested retirement benefits, in violation of ERISA.

The lawsuits further claim the companies are using outdated interest rate assumptions that additionally dampen the present value of the JSA benefit. So far, different district courts have reacted contrarily to such claims, based on local precedents and the varying facts of the cases.

Despite the complexity of the issues at hand, the new UPS decision stretches to just 20 pages, given its focus on the fact that the plaintiffs did not exhaust all the potential administrative remedies which the court says they must first explore before litigation is appropriate. The ruling is also written in uncharacteristically large font for a legal decision, making it an easier read than the typical ERISA ruling.

“In the [11th U.S. Circuit Court of Appeals], a plaintiff in an ERISA action must exhaust any available administrative remedies before filing suit,” the decision states. “The 11th Circuit strictly enforces the exhaustion requirement in order to reduce the number of frivolous lawsuits under ERISA; minimize the cost of dispute resolution; enhance the plan’s trustees’ ability to carry out their fiduciary duties expertly and efficiently by preventing premature judicial intervention in the decisionmaking process; and allow prior fully considered actions by pension plan trustees to assist courts if the dispute is eventually litigated. … As a preliminary matter, plaintiffs have failed to plead either exhaustion or an exception to the exhaustion requirement on the face of their complaint. Their claims are due to be dismissed on this basis alone.”

Even so, for the sake of “clarity and scrupulousness,” the ruling still addresses the plaintiffs’ arguments that the exhaustion requirement does not apply to their claims and that, even if exhaustion was required, it is excused as futile under the circumstances. While there is a decent amount of technical discussion on both points, the court ultimately sides firmly with the defense.

The full text of the ruling is available here.

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