What Employers Need to Know About Employee Benefits in Today's Economy
This episode of Point By Point was produced prior to the combination of Waller and Holland & Knight.
Given the current environment, employers that sponsor benefit plans are under a unique set of pressures and opportunities. On this episode, we look at the impact of COVID-19, economic uncertainty and other factors on employee benefits. Shannon Goff Kukulka from Waller’s tax practice shares her insight on how companies of all sizes are impacted by compliance obligations, tax implications of new stimulus funds, technical notice requirements and more.
Morgan Ribeiro: On today's episode, we are talking about the impact of the current economy on employee benefits. The Employee Retirement Income Security Act of 1974, also known as ERISA, is a federal law that sets minimum standards for most voluntarily established retirement and health plan and private industry to provide protection for individuals and these plans. And of course, given the current environment, employers that sponsor benefit plans are under a unique set of pressures but also have unique opportunities. I am joined today by Shannon Goff Kukulka, a partner in the firm's Tax practice group, who focuses her time on representing client and employee benefit matters. Shannon, thank you for joining me today.
Shannon Goff Kukulka: Thank you for having me, Morgan.
Morgan: So first to set the stage, can you tell me a little bit more about your practice?
Shannon: Sure, my practice really encompasses everything under the very large umbrella of employee benefits, ERISA and executive compensation. So in a typical day, I may work on various issues related to health and welfare plans, qualified and nonqualified retirement plans, equity incentive arrangements, stock options, those types of things, executive compensation and benefits issues related to corporate transactions, which are still very busy right now. I recently returned to practice at Waller from several years as in-house ERISA counsel at Bridgestone Americas, and I also have a background in human resources and a degree in business. And so I try to bring this experience to bear in providing really practical advice and counsel to clients.
Morgan: Can you give me a few examples of the types of clients that you currently work with, either the industry that they're in, or the size of the clients that you're working with?
Shannon: Sure, it really spans all industries. Pretty much any organization that has employees and offers benefits. Maybe a decade ago, the answer might have been a little different, because it would have been large employers with large compliance issues and large plans and that sort of thing. And the Affordable Care Act really changed that a good bit because it confronted employers with plans who didn't consider themselves as large employers. They might have 51 employees, and now all of a sudden they're subject to these regulatory requirements under the Affordable Care Act. And so really, it's almost any size employer who has those types of compliance questions with benefit plans and runs the gamut of industries as well.
Morgan: That's interesting to hear the shift that has occurred over the last decade. And then of course, what's going on right now in the world with the pandemic and the current state of the economy, I imagine that you're getting some pretty unique questions. Any organization that has employees right now is, particularly large number of employees, just have a number of questions, and so one of the hot topics right now in your practice area, what are clients asking the most about, particularly as it relates to COVID-19 and the state of the economy?
Shannon: Well, these clients really have a heightened interest, as you said, in the impacts of recent legislation on both their employees and their benefit plans. For example, and I know we've had several podcasts about this before, sweeping legislation under the Families First Coronavirus Response Act and the CARES Act which were both signed into law in March. They also provide various types of relief to plan participants that employers are now working to understand and implement. Of course, the Affordable Care Act continues to present this tricky regulatory and compliance issues for employers, and the law continues to develop with some recent case law, and against a bit of a protracted political backdrop, clients have shown a renewed interest in some tools that have actually been around for a while.
For example, qualified disaster payments are popping up again, and that was related to law that was passed post-9/11. Payments that may be made to employees for reasonable and necessary expenses that are incurred as a result of a federally declared disaster. Like, perhaps, a global pandemic. Employers have had to make some difficult employment decisions as of late. Furloughs and layoffs, maybe maintaining the workforces they have but reducing hours, and they're grappling with the impacts of those decisions on the operations that they have and the remaining workforce that they have and what compliance obligations they now have because of those. Some employers are navigating the landmines of very technical legislation like section 409A of the tax code, when they're dealing with nonqualified deferred compensation arrangements that, for example, are triggered when executives are terminated. And so they're dealing with a lot.
There's been a recent flurry of class action litigation alleging that employers have violated technical notice requirements when employees experience an event such as a termination or reduction in hours, as I mentioned, that would make them eligible for COBRA continuation coverage. And these employers are forced to sort of, regardless of the merits of those types of claims, either settle or defend against them. And so it can be expensive. It can be administratively burdensome, and so really, they're just kind of grappling with a lot right now. There's really no rest for the weary.
Morgan: That is for sure true. And you mentioned earlier legislation that has rolled out in response to the COVID-19 outbreak, and Congress and the Department of Labor have offered temporary relief from certain legal requirements applicable to employee benefit plans. Some of this is temporary relief that impacts participants right under ERISA covered employee benefit plans. Can you speak more to that specifically?
Shannon: Our clients are deeply concerned about the overall well-being of their employees from a health perspective, both physical and mental health, and a financial wellness perspective, particularly currently, and recent events have really magnified those concerns in some cases. You mentioned recent legislation impacts, you know, really all of these things that we've spoken about: health and welfare and fringe benefit plans, retirement plans, and in many cases, this legislation provides some much needed relief that employers can really avail themselves of and take it in by category, under group health plans. Those group health plans and insurers are now required to provide coverage for COVID-19 diagnostic testing at no cost to covered individuals without prior authorization. We in Tennessee are well aware of being kind of a leader as a state in those testing initiatives. And so it's good that those tests are basically covered at no cost for covered individuals.
Group health plans and insurers must also cover what are called qualifying coronavirus preventive services without any deductibles, copayments or other cost sharing, and you can sort of see the social benefit to that, encouraging people to go and get preventive services as needed to reduce spread of coronavirus. Employers with their group health plans were implementing telehealth already before this pandemic, it was really becoming more popular. It's more convenient. It's a way, particularly with rural populations and that sort of thing, to access care. So it was already becoming popular but now it's really become all the rage with social distancing protocols in place. And now, under legislation, telehealth can be covered under a high deductible health plan before the deductible is met without actually disqualifying participants from contributing to health savings accounts. This sort of relates to some pretty technical and draconian rules of high deductible health plans and health savings accounts. So relaxing those rules has offered some relief there. You don't worry these days as much about foot faults with providing that telehealth at no cost sharing before a deductible is met.
Employers also recognize these days that on top of everything else, student loan debt has become a huge burden for many of their employees and that may be exacerbating their financial health, particularly in the current environment. And with recent legislation, employers can now contribute over $5,000 per year toward an employee's repayment of student loan debt tax-free. Previously that would have been taxable income, which definitely takes a bite out of what that benefit would otherwise be. So that's certainly beneficial.
In the retirement plan space, the CARES Act has provided relief to qualified individuals through numerous retirement plan changes that plan sponsors can choose to implement. I'll just touch on a few of those. Delayed loan repayment for one year. For example, if plan participants already had an outstanding loan at the time of the CARES Act passage, that loan repayment could be postponed for one year. Increased loan amounts that are available under the plan, those can now be up to 100% of vested accounts, account balances, or $100,000. A relaxing of the rules for emergency withdrawals and how those are certified, which is basically an attestation that you've incurred this need for an emergency withdrawal and paid out that can now be paid out over several years. Most importantly, in the context of those emergency withdrawals from qualified plans, would be the waiver of the 10% early withdrawal penalty.
And then for those participants who are eligible for required minimum distributions, they can actually waive those distributions for 2020. That's an interesting analysis. Oftentimes, participants are weighing the need to get those funds versus the impacts of the market on the investments in their plans. And so it may not actually be most advantageous, from a participant's perspective, to take those distributions now. And, with recent legislation, they can actually waive those required minimum distributions and not take them and just basically postpone taking them until next year. So there's a lot to digest and navigate, but there are some real opportunities for employers to respond to the significant impacts of the pandemic on their on their workforce and in meaningful ways.
Morgan: I imagine with that, of course, there's compliance. So what advice do you have for companies that are finding it more difficult to prioritize compliance projects if resources are spread thin during the pandemic?
Shannon: It is an interesting tension, isn't it, where day-to-day they're faced with these compliance responsibilities, and now they have this interesting overlay and significant overlay of the pandemic. It's important to step back and look at the backdrop for compliance obligations in this context. You know, ERISA imposes responsibilities on plan fiduciaries, and those are individuals who exercise discretionary authority or control over benefit plans, plan assets or plan administration. Plan fiduciaries are really that by virtue of the role, the function that they play, not so much the title that they have. And so many employers and stakeholders are acting as fiduciaries day to day when they're administering benefit plans. So understanding those significant obligations of loyalty, prudence, acting solely in the interests of participants, acting for the exclusive purpose of providing benefits, all those things are absolutely required. So they need to navigate carefully. Those obligations don't go away, even in the midst of a pandemic. In fact, they're probably intensified. That said, companies can look at how they're actually paying plan administration expenses, because they may be permitted to pay reasonable expenses for plan administration from a retirement plan trust as opposed to out of essentially working capital.
Morgan: What type of expenses can be paid from plan assets and what types of limitations are there?
Shannon: I think a useful starting point is understanding the difference between what are called settlor activities and administrative activities, and then picturing them on a sort of glide path. Settlor activities relate to the formation, design and termination of plans, generally. Some examples would be planned design studies, calculating cost projections to determine financial impact of plan changes. Oftentimes, consultants are hired to do those corrections that are necessary under voluntary correction programs for qualified plans, etc. Settlor activities cannot be paid from plan assets. I think it's helpful to sometimes think about them as strategy, sort of in the strategic arena.
On the other hand, plan administration expenses that are reasonable and prudent may be paid from plan assets. And some examples of those expenses are amending a plan to comply with law changes, calculating participant benefits, communicating with participants and beneficiaries, nondiscrimination testing, peer and annual reports, processing claims, recordkeeping and legal services relating to these plan administration activities. So that's sort of the implementation phase, oftentimes. If you think of settlor activities sort of on the strategic side and plan administration activities on the implementation side, it can be helpful to think about in that way. For instance, considering whether to amend a plan would fall under settlor activities on the glide path, and implementing that amendment would fall under the administrative expenses on the glide path.
Morgan: So how can companies pay administrative expenses from the plan assets; are there best practices along with the legislative framework?
Shannon: There are, and the process in this context I think is very important, and companies should really establish internal processes for reviewing costs to determine if they are settlor activities or if they are administrative activities. Often they already have and should have ad hoc processes in place for kind of checking the reasonableness and prudence of plan-related expenses. They already have individuals assigned to these tasks or they have committees who are undertaking these tasks. And so they can fold in these processes into that.
I've worked with clients in the past where it's a really helpful exercise to really assess the processes you have and then identify what are the points of entry that maybe we need to solidify a bit and then go from there. You identify the points of contact for review, coordinate with the various stakeholders to make sure the review happens and are consistent in applying that review. Training is really important here. We provide a lot of training in the tax and ERISA group. And oftentimes we'll go and fold into periodic fiduciary training that companies are already or should be providing. Typically on an annual basis we'll go in and do a fiduciary training refresh. And this can be a part of that, assistance with understanding and implementing a process for identifying plan administration expenses that can be paid from a trust. So training committees that are reviewing the plans and the HR professionals that are managing the plans and the assets to sort of understand the difference between settlor and administrative activities and categorizing those expenses accordingly is important.
And then lastly, we're really implementing a lot of these checkpoints in light of potential audits. When you're dealing with benefit plans and a pretty stringent compliance environment, you always have to keep an eye on a future audit. And so setting up and following record keeping protocols when you're talking about analyzing expenses in this way and implementing your fiduciary duties is really also gearing toward having a viable narrative in the case of a future audit.
Morgan: I imagine this is an area where, outside of the pandemic and the current economic situation that we're in, there are always legal developments that are happening in this space that impact employers and plan sponsors. Anything that you would share with our listeners that they should be aware of as it relates to ongoing legal developments?
Shannon: There are some recent cases of notes that impact employers and benefit plans, and the Supreme Court recently actually showed some love for ERISA cases and heard several of them in their recent session. That's not always the case. But it was a kind of busy time for ERISA cases on the docket. Some of the high points, albeit a bit technical, they offer some important guidance for plan sponsors. In one case, they ruled that a plan participant does not necessarily have actual knowledge of information contained in plan disclosures that they receive, which would start ERISA's three year statute of limitation limitations in the Sulyma case. It's sort of worth employers taking another look at their statements to participants, the disclosures that they send to participants, and look at the level of detail. That's sort of a practical takeaway here. I think it's worth thinking about ways to maintain records that might support a finding that plan participants actually did receive electronic disclosures. And so it's kind of a good housekeeping point and record keeping point.
The Supreme Court also provided some good news to plan fiduciaries and held in a different case that plaintiffs did not have standing to sue in the case of a defined benefit pension plan that engaged in some allegedly high risk equities. The plan here was a pension plan, so a bit different, and it was over funded, and the plaintiffs continued to receive their promised benefits. So the Supreme Court held they essentially had no concrete stake to a claim. So a mixed bag; some cases that fell a bit towards some leniency for plans and some that have created some additional risks, potentially, for plans. So a bit of a mixed bag, We're always watching developments with the Affordable Care Act and are watching closely the Texas case that declared the ACA unconstitutional. That's been in the news that many people have probably been following as well, which the Supreme Court will hear in its upcoming term. And this is really the most serious challenge to the 10 year old healthcare law that has been heard. It'll be the third time the Supreme Court has heard a challenge to the Affordable Care Act, and this time they're hearing it in the midst of a pandemic and presidential election season and with the court composition as it is, and so that one will be really, really important for plan sponsors to sort of follow and see, because even unwinding plans that are under the Affordable Care Act, in the case that the Affordable Care Act does no more, would present a huge challenge for plan sponsors and employers. So what is the phrase, may you live in interesting times. We live in interesting times.
Morgan: And when is that hearing expected?
Shannon: It will be in October. So the presidential season will be in high gear, and we will see where we are in terms of the coronavirus epidemic. It will be an important decision to say the least.
Morgan: In closing, are there practical tips, or any kind of advice that you would share with employers at the moment? If they were going to look into a couple of these things and dig deeper, what would you suggest? Where should they get started?
Shannon: I think it's really a good time to look at the service provider relationships that they have and take a look at the processes that they have in place. I know that that's sometimes a lot to ask because really, we're just kind of getting by day by day with all the compliance considerations and requirements that we have, but sometimes it can reveal some vulnerabilities that you really just don't need as an employer at this time or at any time, but particularly at this time. I mentioned looking at the communications that go out to participants. Employers in recent years have really endured a sort of push/pull with the litigation that's out there because there's even been litigation that says, you're sending me too much communication. So you sort of can't win for losing sometimes, but it's oftentimes very telling to sort of look at those communications. Let's say you have a third party provider who's actually sending out denial letters for claims requests. Oftentimes, they don't necessarily reflect the provisions in a plan. That's a very important difference to note if you are as planned sponsor ultimately on the hook for that. We talked a lot about fiduciary obligations, and one of those obligations is diversifying investments in your retirement plans. So you need to make sure that you're doing that because certainly attended is being paid on how those markets are behaving right now, how those investments are behaving and what's happening to the balances in 401k plans. Oftentimes we want to just not look at that statement in volatile market times like now, but it's important as plan sponsors that we monitor what those investments are, that they're diversified, that we get the consultation that we need with investment advisors, we get the training that we need, we understand their fiduciary obligations and our own, and to look at what are the terms of our plans? Are we actually following the terms of our plans? Because what I'll always tell, particularly in fiduciary trainings and that sort of thing with committees, you never want to de facto amend your plan. If you want to amend the plan, amend the plan, but don't defacto amend the plan by administering it in a way that's different from the written plan. So a little bit of that sort of plan hygiene is important and to the extent that there's an ability to do that to sort of really take a step back and look at the terms of the plan, whether we're following them and amending them as needed is important to mitigate the risk of a potential audit that we talked about, or potential challenge or litigation.
Morgan: In closing, are there any links in particular that you would encourage folks to go to if they're looking for more information on these topics?
Shannon: We certainly do try to curate some of the guidance. We know that there's a lot of noise out there particularly now with legislative developments. We do with the blog posts have hyperlinks out to certain primary sources. Department of Labor often has good guidance on their own website, and we can hyperlink to that as well. I did mention there is some litigation surrounding COBRA right now, where even if you used the DOL model, notice you may face litigation. But it's important to know that the government is providing both the traditional legislation as we understand it, as well as FAQs these days and oftentimes FAQs provide more guidance than the legislation themselves. Speaking of the Affordable Care Act, if you print it out, the law and all the guidance that's been published since then, including FAQs, it would stand over seven feet tall, so there's a lot out there to digest. And so there are resources on our website. As you mentioned, we will link to several of those even in sort of chart format, because sometimes I think being able to apply some of this information in a practical way can be a challenge with everything else everyone has going on. So those resources are available and will be hyperlinked.