We are frequently asked by clients whether a severance policy or program is an “ERISA plan” and, thus, subject to ERISA’s documentary, administrative, reporting, and disclosure requirements. A recent decision from the United States District Court for the District of Puerto Rico provides a helpful analysis of this re-occurring question in a concise, six-page opinion, and provides an opportunity for us to review the issues.
Late last week the IRS released Notice 2013-71, modifying the health flexible spending account (“health FSA”) use-it-or-lose-it rule to allow participants to carry over up to $500 in unused health FSA funds. Although not unexpected (the Service has hinted at such a change a number of times over the past year), this new feature is welcome relief to participants and plan sponsors. Plan sponsors may adopt this optional amendment effective as early as the 2013 plan year.
Notice 2013-71 provides that a plan sponsor may, at its option, allow a participant to carry over up to $500 of unused health FSA funds to the immediately following plan year. Unused health FSA funds are those remaining at the end of the plan’s run-out period (if any), and do not count against the limit on participant salary reduction contributions. Accordingly, a participant could elect to contribute the full $2,500 (as indexed in future years) permitted by law and also carryover as much as $500.
An employer wishing to adopt this new carryover feature must...
An article in the business section of the New York Times last week reported some surprising conclusions reached by a recent study of the performance of pension plan investments. (“Doubts Raised on Value of Investment Consultants to Pensions,” September 30, 2013.) The study, performed by two Oxford professors, revealed that the performance of some of the highest paid consultants in the business over a 12 year period was below benchmarks for comparable investments. But more interesting, from the standpoint of those of us who advise pension plan fiduciaries, the study found that these high powered consulting firms do not even make available the kind of information that would allow prospective clients to evaluate and compare their track records. Ultimately, the study concluded, investment consultants should be required “to provide the same high level of disclosure as that which is provided by fund managers on their performance, or the same level of disclosure provided by research analysts on their stock recommendations.” This got our attention. Without the kind of disclosure proposed by the Oxford study, how can a pension plan investment fiduciary select an investment consultant and feel it has complied with its duties under ERISA?
The “place of celebration” rule adopted by the IRS in Revenue Ruling 2013-17 means that legally married same-sex couples are now recognized as married for federal tax purposes regardless of the state in which they reside. This ruling clearly affects the design and operation of employer-sponsored benefit plans in all states, whether the state recognizes same-sex marriage or some other form of legal relationship between same-sex couples or continues to define marriage as a union between one man and one woman. Somewhat less clear is how the place of celebration rule will affect the legal obligations of religious organizations in states that recognize same-sex marriage.
Most states that recognize same-sex marriage exempt religious organizations from the application of statutes that prohibit discrimination based on sexual orientation. As a result, religious organizations in these states may generally continue to treat an employee in a same-sex union differently than an employee who is married to someone of the opposite sex. Thus, these state exemptions appear to give religious organizations the right to refuse equal employment benefits to employees in same-sex marriages despite the Service’s guidance. Questions remain, however, regarding the scope of these exemptions and whether they would survive constitutional scrutiny.
First, many of the state exemptions do not define with specificity what constitutes a “religious” organization.
Yesterday Treasury and the IRS released much needed guidance regarding the U.S. Supreme Court’s decision on the Defense of Marriage Act. Specifically, Treasury and the IRS ruled that they will adopt a “place of celebration rule” under which legally married same-sex couples will be recognized for federal tax purposes regardless of the state in which they reside. Importantly, the ruling does not extend this treatment to domestic partnerships (whether registered or not), civil unions, or similar relationships. Treasury and the IRS will begin to apply this rule on September 16, 2013.
Treasury and the IRS intend to issue additional guidance pertaining to cafeteria plans, qualified retirement plans, and other employee benefit plans and arrangements, and to provide a streamlined process by which employers may obtain refunds on payroll taxes paid on imputed income. For now, however, we offer the following observations based on the new guidance:
- Employers should stop imputing the value of welfare benefits provided for the spouse of a same-sex married employee as income for federal tax purposes if the employee and his or her spouse were legally married in any state. This means that differences between state and federal tax treatment will continue in many states. Specifically, employers operating in states that do not recognize same-sex marriage may need to continue to impute income at the state level, but not at the federal level. Similarly, employers operating in states that treat civil unions as marriages for tax purposes may not need to impute income at the state level for benefits provided to the civil union partner of an employee, but would need to impute income at the federal level.
- Since the ruling expressly allows employees to file refund claims for benefits-related imputed income, employers may want to prepare to answer questions from employees about the amount that was included in their gross income in past years. (Refund claims will only be allowed for open years, which for most employees would include 2012, 2011, and 2010.)
- While the guidance may provide some flexibility with respect to the cessation of imputed income for federal income tax purposes, FAQs issued with the ruling make clear that qualified retirement plans must comply with the ruling as of September 16, 2013. As of that date, for example, a plan that provides for the payment of a spousal death benefit must pay that benefit to the same-sex surviving spouse of a deceased participant.
We will have more to say about these issues soon. Suffice it to say, this guidance will significantly impact the design and operation of employer-sponsored benefit plans and should be carefully reviewed by plan sponsors.