DOL guidance on worker misclassification may have benefit program implications

August 28th, 2015 No comments

By Employee Benefit Research Group

The Department of Labor’s (DOL) Wage and Hour Division recently issued guidance on the classification of workers as employees or independent contractors under the Fair Labor Standards Act (FLSA) that may have implications for employer-sponsored benefit programs (in addition to an employer’s compensation and related policies and practices). Administrator’s Interpretation No. 2015-1 focuses on the FLSA’s pertinent definitions and considers the “economic realities” factors that various courts (including the U.S. Supreme Court) have applied to determine whether a worker is economically dependent on the employer (and thus an employee) or in business for himself or herself (and thus an independent contractor).

In general, the DOL concludes that “most workers” are employees under the broad definitions of the FLSA.

Employers should review the DOL’s new guidance for the effects it could have on their retirement, health, and other benefit programs (separate from but in addition to the worker classification issue), particularly in light of the DOL’s heightened enforcement and investigation activities, or as individuals file suits to claim rights to pay and benefits as employees. Misclassification of workers could raise numerous concerns, such as retirement or health plan coverage, contributions to those programs, or nondiscrimination testing issues, along with employer liability for retroactive pay and taxes as well as other penalties.

For additional information about the DOL’s guidance, please contact your Milliman consultant.

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DOL proposes overtime pay rule

August 28th, 2015 No comments

By Employee Benefit Research Group

The Department of Labor’s (DOL) Wage and Hour Division has issued a proposed rule that calls for more than a doubling of the annual salary threshold – from the current $23,660 to $50,440 (to be adjusted annually) – for “white-collar” employees to remain exempt from receiving overtime compensation when working more than 40 hours per week. The proposed rule under the Fair Labor Standards Act (FLSA) makes no changes to the “duties” test for employees falling into this category (primarily executive, administrative, professional, computer, and outside sales employees), but seeks comments on this issue.

The proposed rule, which the DOL estimates could entitle more than 4.5 million currently exempt white-collar workers to overtime pay in the first year that the rule is implemented, also would:

• Increase the total annual compensation requirement needed to qualify for the FLSA’s highly compensated employee exemption, from the current $100,000 to $122,148 (with yearly adjustments);
• Establish a mechanism for automatically updating the salary threshold levels using either a fixed percentage of earnings of full-time salaried workers or changes based on the Consumer Price Index; and
• Permit nondiscretionary bonuses and incentive payments to count toward the salary threshold requirement (but not discretionary bonuses, board or lodging, medical or life insurance payments, retirement plan contributions, or other fringe benefits).

The proposed rule will not take effect until it is issued in final form, which the DOL is expected to do in 2016.

Employers should begin considering how the proposed changes to the salary threshold will affect their compensation practices and the benefits offered to employees. Some retirement plans, for example, take into account only base pay, possibly raising the specter of nondiscrimination testing failures if “includable compensation” excludes overtime and bonus payments when non-highly compensated participants become newly eligible for overtime (for example, see this blog post). Similarly, employers that offer different health benefits plans based on workers being classified as “salaried” or “hourly” could experience employees (and their dependents) potentially being covered under a plan that had been limited to staff according to their FLSA exempt/nonexempt status.

For additional information about the DOL’s proposed rule on overtime pay, please contact your Milliman consultant.

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Regulatory roundup

August 17th, 2015 No comments

By Employee Benefit Research Group

More retirement-related regulatory news for plan sponsors, including links to detailed information.

2015 PBGC premium filings for small plans
The Pension Benefit Guaranty Corporation (PBGC) recently sent out a news release regarding 2015 premium filings for small plans. This is a reminder of regulatory changes that affect small plans for plan years beginning in 2015.

For plan years starting in 2015, small plans are subject to the same normal due date rules as all other plans. For example, a small plan with a plan year commencing date of January 1, 2015 now has a due date of October 15, 2015. Further details are in the “When to file” section of the premium instructions.

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New developments affecting defined benefit pension plans

August 14th, 2015 No comments

By Employee Benefit Research Group

Several key developments – in the form of IRS guidance, PBGC proposed regulations, and a new law – have occurred recently for employers that sponsor defined benefit pension plans. This Client Action Bulletin provides an overview of these items, which affect: the mortality tables used for a variety of pension plan requirements; the elimination of lump-sum payouts to current annuitants as part of a “de-risking” strategy; the reporting of financial and actuarial information by “underfunded” plans; and transfers of excess plan assets to retiree health and group-term life accounts.

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Administration preparation for lump-sum cashout windows

August 12th, 2015 No comments

By Lynn Yu

Yu-LynnMany plan sponsors have offered lump-sum cashout options to vested terminated participants (VTs) for a specified period of time, or window. While this strategy provides pension risk management opportunities, it is important to note that a large number of administrative tasks are necessary before offering such a window. Some of the key steps include:

• Create a timeline that lists target mailing dates, intermediate due dates, and responsibilities of each party involved in the window project. Set up biweekly or monthly calls to update status of each task.
• Estimate the total lump-sum value for all VTs and select a threshold for the lump-sum cap, if any.
• Identify which VTs are eligible for the window. The plan sponsor may want to exclude VTs with a qualified domestic relations order (QDRO) and alternate payees under a QDRO.
• Amend the plan. The amendment should include definitions for the window period, eligible VTs for the window, lump sum and corresponding annuity calculation basis. The treatment of early retirement subsidies, if any should also be addressed.
• Perform death and address searches.
• Find copies of benefit calculations for eligible VTs. This task will take a lot of effort if the eligible VT population is large. Some calculations may need to be revised or newly prepared and will require the rapid availability of data from the plan administrator.
• Prepare communication package including announcement letter, election packages, reminder postcard, etc.

The plan sponsor should coordinate all tasks with the human resources department, the actuary of the plan, and legal counsel before offering the lump-sum cashout window. Advanced planning along with a flexible timeline will allow for a successful window campaign.

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Milliman Hangout: Pension Funding Index, August 2015

August 11th, 2015 No comments

By Javier Sanabria

The funded status of the 100 largest corporate defined benefit pension plans worsened by $16 billion during July as measured by the Milliman 100 Pension Funding Index (PFI). The deficit rose to $261 billion primarily due to a decrease in the benchmark corporate bond interest rates used to value pension liabilities. Pension asset gains during July helped to dampen the funded status decrease. The funded ratio declined from 85.5% to 84.8%. This breaks the upward momentum from the second quarter of 2015 where the funded ratio had increased for three consecutive months.

PFI co-author Zorast Wadia discusses the index’s latest results on this Milliman Hangout.

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Regulatory roundup

August 10th, 2015 No comments

By Employee Benefit Research Group

More retirement-related regulatory news for plan sponsors, including links to detailed information.

DOL posts agenda for public hearing on proposed conflict-of-interest rule
The Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) will hold a public hearing from August 10-13, if necessary, to consider issues attendant to adopting a regulation concerning its proposed conflict of interest rule and related proposed prohibited transaction exemptions.

For more information, click here.

IRS issues corrections to suspension of benefits under the Multiemployer Pension Reform Act
The Internal Revenue Service (IRS) has issued two corrections to the temporary regulations and a correction to the proposed regulation that were published in the Federal Register on Friday, June 19, 2015. The temporary regulations relate to multiemployer pension plans that are projected to have insufficient funds, at some point in the future, to pay the full benefits to which individuals will be entitled under the plans (referred to as plans in “critical and declining status”).

The first correction affects Section 1.432(e)(9)-1T. To view the correction to the temporary regulation, click here.

The second correction affects the pages 35207, 35210, and 35215 of the temporary regulations. To view the correction to the temporary regulation, click here.

The third document corrects the notice of proposed rulemaking, notice of proposed rulemaking by cross-reference to temporary regulations. Numerous pages are corrected. To view the correction to proposed rule, click here.


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Corporate pension funded status drops by $16 billion in July

August 6th, 2015 No comments

By John Ehrhardt

Milliman today released the results of its latest Pension Funding Index, which analyzes the 100 largest U.S. corporate pension plans. In July, these pension plans experienced a $16 billion decrease in funded status based on a $10 billion increase in asset values and a $26 billion increase in pension liabilities. The funded status for these pensions decreased from 85.5% to 84.8.


We finally saw an interruption to the streak of improving pension funded status in July. Interest rates drove up pension liabilities last month, but fortunately the discount rate remained above four percent. Interest rates remain the big story this year, contributing to a $66 billion decrease in the pension benefit obligation.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.39% by the end of 2015 and 4.99% by the end of 2016) and asset gains (11.3% annual returns), the funded ratio would climb to 90% by the end of 2015 and 103% by the end of 2016. Under a pessimistic forecast (3.89% discount rate at the end of 2015 and 3.29% by the end of 2016 and 3.3% annual returns), the funded ratio would decline to 82% by the end of 2015 and 74% by the end of 2016.

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IRS’s employee plans unit announces program changes

August 6th, 2015 No comments

By Employee Benefit Research Group

The IRS has announced two changes to services under the agency’s Employee Plans Compliance Unit that oversees tax-qualified retirement plan issues:

Determination Letters for Individually Designed Plans
Beginning in 2017, the IRS will accept determination letter applications only for new plans, plan terminations, or other limited circumstances yet to be determined. Announcement 2015-19 states that the current, staggered five-year cycles under which sponsors of individually designed retirement plans may request an approval of the plans’ qualified status will be eliminated. Furthermore, effective as of July 21, 2015, the IRS stopped accepting off-cycle determination letter applications other than for new or terminating plans.

A transition period applies for sponsors that are or will be in the midst of determination letter filings, until January 31, 2017. Plan sponsors in Cycle E (those with employer identification numbers ending in 5 or 0) or Cycle A (EIN ending in 1 or 6) will be able to obtain rulings from the Employee Plans unit before the IRS eliminates the program because they fall in the February 1-January 31 application deadline period of 2016 and 2017, respectively.

The changed policy is due “to more efficiently direct limited resources” of the IRS. It will place a significant responsibility on plan sponsors to consider an annual review of plan documents for necessary amendments with their professional advisers or to consider shifting to a preapproved plan document.

Technical Questions through Email or via Customer Account Services
Beginning October 1, 2015, the Employee Plans unit no longer will accept technical questions, including questions forwarded from the unit’s Customer Account Services, through email, according to a July 31, 2015, Employee Plans News newsletter and web posting. The agency suggests that plan sponsors apply for a private letter ruling for answers to legal questions.

Customer Account Services employees will continue to respond to questions about a plan sponsor’s account, basic information about forms used in Employee Plans, and the status of pending applications.

The announcement states that change is due to a realignment of legal work and personnel resulting from fewer resources.

For additional information about the IRS’s announcements about the changes to the determination letter program or the closing of the avenues to obtain answers to technical questions, please contact your Milliman consultant.

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New IRS form requests supplemental information from plan sponsors

August 5th, 2015 No comments

By Suzanne Smith

Smith-SuzanneIf you sponsor a calendar year retirement plan, you are likely in the process of completing your Form 5500 for the 2014 plan year. Thus, it seems like a good time to let you know that, unfortunately, new information may be required next year on your Form 5500.

The Internal Revenue Service (IRS) has proposed a new Form 5500-SUP for the 2015 plan year. SUP stands for Supplemental Information. Essentially, the IRS is adding some new questions to the annual filing to gather certain plan compliance information.

Each year, the Department of Labor (DOL) uses the information on Form 5500 to identify plans for further questioning and auditing. With the addition of these new questions proposed by the IRS, the IRS will have a similar ability to use the Form 5500 responses to target plans for IRS examination or perhaps a compliance questionnaire. As a result, it’s crucial to answer all Form 5500 questions, including these new questions, with care.

Some of the new information that may be required is pretty basic, such as the name of the trust, the trust identification number, and the name and telephone number of the trustee or custodian.

But other items will require more effort to answer. These items include:

• How does the plan satisfy nondiscrimination testing and coverage testing?
• Which testing method is used for the ADP/ACP test?
• Has the plan been amended in time for all tax law changes?
• What is the date of the last amendment/restatement?
• What is the date of the IRS opinion or advisory letter (for pre-approved plans) or favorable determination letter (for individually designed plans)?
• Is the plan maintained in a U.S. territory?
• Did the plan trust incur unrelated business taxable income?
• Were in-service distributions made during the plan year and, if so, what was the amount?

Most employers will be able to answer these new IRS questions electronically on Form 5500 and 5500-SF. Plan sponsors who do not file electronically will need to use the paper Form 5500-SUP.

Although these questions are still in proposed form, as you administer your retirement plan through the 2015 plan year, you will want to keep in mind that you may need to be prepared to answer these new questions next year.

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