Compliance News
Art by Mary Kate McDevitt
Trump Executive Order Targets Retirement Plans
President Donald Trump signed an executive order that states, “It shall be the policy of the federal government to expand access to workplace retirement plans for American workers.”
Focusing especially on small and midsize employers, the order called on the secretary of the Department of Labor (DOL) to clarify and expand the circumstances under which these companies may sponsor or adopt an open multiple employer plan (MEP)—subject to appropriate safeguards—as a workplace retirement option for their employees. The order also asked the DOL to increase retirement security for part-time staff, sole proprietors, working owners and other entrepreneurial workers in nontraditional employer–employee relationships by expanding their access to workplace retirement plans, including MEPs.
Further, the president ordered the Treasury secretary to look into updating the life expectancy and distribution period tables found in the regulations dictating retirement plan required minimum distributions (RMDs). To be considered is whether the tables should be changed to reflect current mortality data and whether such updates should be made annually or on another periodic basis.
While Trump noted that expanding access to MEPs can reduce administrative costs—especially for small businesses—when establishing a retirement plan, he also pointed out that reducing the number and complexity of currently required employee benefit plan notices and disclosures would ease regulatory burdens.
Republicans Flesh Out Tax Reform 2.0
Republican members of the House Ways and Means Committee have introduced three bills aimed at advancing their Tax Reform 2.0 agenda ahead of the November mid-term elections: the Protecting Family and Small Business Tax Cuts Act (H.R. 6760), the Family Savings Act (H.R. 6757) and the American Innovation Act (H.R. 6756), all of 2018.
House Ways and Means Committee Chairman Kevin Brady, R-Texas, suggests that the three bills “collectively build on the growing economic successes of the Tax Cuts and Jobs Act [of 2017].”
The most wide-ranging of the proposals is the Small Business Tax Cuts Act, which seeks to solidify many of the temporary tax cuts implemented as part of last year’s tax legislation.
The Family Savings Act is probably of the most relevant for retirement industry stakeholders, as it includes many of the provisions written into the popular Retirement Enhancement and Savings Act of 2018. It would allow for wider adoption of multiple employer plans (MEPs), referred to here as “pooled employer plans.”
The American Innovation Act, the most narrowly focused of the three, runs just 15 pages and calls for various simplifications and expansions of tax deductions for start-up organization expenditures.
Frontier Faces Stock Drop Litigation
Lead plaintiff Mary Reidt is seeking class certification for similarly situated Frontier Communications 401(k) Savings Plan participants in a new Employee Retirement Income Security Act (ERISA) stock drop lawsuit filed on September 11 in the U.S. District Court for the District of Connecticut. This action “concerns the plan’s excessive concentration in Verizon common stock.”
Starting in July 2010, Frontier began acquiring significant capital assets of Verizon, starting with wireline operations that provide services to residential, commercial and wholesale communications customers.
According to the complaint, between July 2010 and end of year 2011, the Frontier Communications 401(k) plan received and retained approximately $150 million in Verizon stock, then representing over 15% of the plan’s total assets. In April 2016, Frontier acquired additional Verizon assets, and the plan fiduciary defendants allegedly invested over $200 million of additional plan assets in Verizon stock.
The lead plaintiff suggests that the failure of the plan’s fiduciaries to liquidate the significant holdings in Verizon common stock in a timely manner, and the decision to concentrate plan investments in Verizon common stock, breached their “fiduciary duty under ERISA to diversify the investments of the plan so as to minimize the risk of large losses.”
5th Circuit Sides With Whole Foods
The 5th U.S. Circuit Court of Appeals has firmly sided with Whole Foods by rejecting a stock drop lawsuit filed by participants in the company’s defined contribution (DC) retirement plan.
The case ascended on appeal from the U.S. District Court for the Western District of Texas, where it also flatly failed to meet the high hurdles for proving standing established in U.S Supreme Court (SCOTUS) decision Fifth-Third Bank v. Dudenhoeffer.
Siding with the District Court’s interpretation of SCOTUS’ precedent, the Appeals Court ruled that the plaintiff failed to plausibly allege an alternative action the fiduciaries could have taken that would have been consistent with securities laws and that a prudent fiduciary would have viewed as less likely to harm the fund than help it.
The underlying case was filed by Thomas Martone, a former Whole Foods employee. He brought the proposed class action against certain Whole Foods executives who are named fiduciaries for the company’s 401(k) plan.
In the mold of a classic stock drop suit, Martone alleged that these executives breached their fiduciary duties by allowing employees to continue investing in Whole Foods stock “while its value was artificially inflated due to a widespread overpricing scheme.”
PBGC May Sue for Successor Liability
Reversing a federal district court’s decision, the 6th U.S. Circuit Court of Appeals has found that the Pension Benefit Guaranty Corporation (PBGC) may be able to recoup termination liabilities for a single-employer defined benefit (DB) plan from a personal trust of the owner or the asset purchasers of the sponsoring company.
Writing for the panel, Circuit Judge Martha Craig Daughtrey explained in the opinion that the PBGC sued to collect more than $30 million in underfunded pension liabilities from Findlay Industries following the shutdown of its operation in 2009. When Findlay could not meet its obligations, PBGC looked to hold liable a trust started by Findlay’s founder, Philip D. Gardner (the Gardner Trust), treating it as a “trade or business” under common control by Findlay. PBGC also asked the court to apply the federal common-law doctrine of successor liability to hold Michael J. Gardner, Philip’s son, liable for some of Findlay’s debt.
Gardner, a 45% shareholder of Findlay and its former CEO, had purchased the company’s assets and started his own companies, using the same land, hiring many of the same employees and selling to Findlay’s largest customer.
In determining whether the Gardner Trust was a “trade or business” under Findlay’s common control, Daughtrey noted that the district court rejected the approach of sister circuits that apply a “categorical test” to determine liability. The categorical test treats any entity leasing to a commonly controlled entity as a trade or business under the Employee Retirement Income Security Act (ERISA). Instead of the categorical test, the district court applied a fact-intensive test cribbed from Commissioner v. Groetzinger, a case interpreting the term “trade or business” as used in the tax code. The district court held, under the Groetzinger test, that the trust was not liable.
6th Circuit Rules for Chrysler Pension Plan Participants
The U.S. 6th Circuit Court of Appeals has ruled once again on pension plan litigation filed by a former employee of Chrysler Group.
As with previous decisions in the case, the opinion filed by the 6th Circuit is something of a mixed bag. In short, this second appellate decision reverses the district court’s latest grant of summary judgment to the plan on the lead plaintiff’s request for reformation. On the other hand, the decision affirms summary judgment on the plaintiff’s request for equitable estoppel and remands the matter again to the district court for further proceedings consistent with the latest appellate opinion.
The case had reached the 6th Circuit for a second time on appeal from the U.S. District Court for the Eastern District of Michigan. In the first appellate decision, the Circuit Court sided with Chrysler on some matters, but it determined, in favor of the plaintiff/appellee, that the pension plan’s summary plan description (SPD) in fact failed to provide all of the information required by the Employee Retirement Income Security Act (ERISA) about eligibility for supplemental benefits. At that juncture, the Appellate Court concluded that a participant who relied on the SPD and expected those benefits may be due relief.
BGC Rules to Facilitate Multiemployer Plan Mergers
The Pension Benefit Guaranty Corporation (PBGC) has finalized guidance on mergers and transfers between multiemployer plans. Mergers of multiemployer plans, PBGC says, will help protect the benefits earned by workers and retirees and extend the solvency of troubled plans.
“Although we have limited resources to address the anticipated insolvencies of multiemployer plans, facilitated mergers under this final rule could help preserve retirement benefits for workers and retirees in some struggling multiemployer plans,” says PBGC Director Tom Reeder. “Merged plans may save money from lower administration and investment expenses and provide greater stability by expanding the base of employers that contribute to the plan.”
ERIC Asks the IRS to Expand on Private Letter Ruling
The ERISA [Employee Retirement Income Security Act] Industry Committee (ERIC) sent a letter to the IRS commending it for a private letter ruling (PLR) it recently issued. The ruling permits a plan sponsor to contribute to its company’s 401(k) on behalf of participants who were paying down student loan debt but not necessarily contributing to the 401(k) plan.
ERIC is asking the IRS to issue a revenue ruling that would broaden the reach of the guidance to enable all sponsors of 401(k) plans to make similar contributions, as a private letter ruling is directed only to the individual taxpayer requesting it.