The Pension Benefit Guaranty Corporation (PBGC) introduced its Early Warning Program (EWP) in the early 1990s, but didn’t publish any guidelines or standards for the EWP until mid-2000, in Technical Update 00-3. While the guidelines and standards have evolved since that time, the PBGC has not provided any publicly available update to Technical Update 00-3.

The purpose of the EWP is to identify corporate transactions that, in the PBGC’s view, may increase its insurance program’s exposure by weakening employer financial support for underfunded pension plans. When the PBGC identifies such a transaction, it contacts the pension plan sponsor to try to negotiate additional measures to secure plan funding. These transactions typically have involved controlled group breakups (e.g., sale of a subsidiary or the assets of a financially strong business unit), with or without the transfer of an underfunded pension plan outside the controlled group; leveraged buyouts; payments of extraordinary dividends; or substitutions of secured debt for significant amounts of previously unsecured debt.

The PBGC generally uses publicly available information, such as press reports or SEC filings, to identify these transactions. The PBGC may also rely on information from Form 10 or Form 10-Advance, which plan sponsors are required to file at the occurrence of a statutory reportable event (such as a change in membership of a plan sponsor’s controlled group, a transfer of pension liabilities outside the controlled group, or payment of an extraordinary dividend).

In recent years, the PBGC has focused on transactions affecting pension plans with aggregate underfunding of $50 million or more (determined on the basis of conservative plan termination assumptions) or 5,000 or more participants. This has produced a universe of about 1,500 companies that the PBGC actively monitors. In 2014, however, a brief interest rate increase improved pension plan funding overall. This prompted the PBGC to lower its monitoring standard to $25 million in aggregate underfunding, thus maintaining its active monitoring universe at about 1,500 companies. The current interest rate environment may cause the PBGC again to adjust its monitoring criteria to maintain a stable universe of about 1,500 companies.

As 2016 begins, group health plans and their sponsors will want consider the action items and reminders reviewed in today’s LawFlash, Group Health Plan Action Items and Reminders for the New Year.

As the Department of Labor (the DOL) considers comments on its proposed changes to the definition of an “investment advice” fiduciary under ERISA, an open question has been whether Congress would take action to delay or block the rule. Although several possible approaches were actively discussed, Congress ultimately did not pass any legislation in 2015. But these approaches remain open for 2016.

Although the criticism of the DOL proposal has come largely from Republicans, many Democrats have also expressed concerns. For example, in September, 96 House Democrats joined in a letter outlining recommended changes to the rule, and in October, 47 House Democrats urged the DOL to reopen the comment period before issuing a final rule. For this reason, it was thought that there might be sufficient support to pass a bill that would at least delay the DOL’s ability to issue a final rule.

On December 18, President Barack Obama signed the Consolidated Appropriations Act (the Act), which includes a variety of tax extenders that we will address in a series of posts.

The Act delays the onset of the Affordable Care Act’s (ACA’s) “Cadillac Tax” by two years—now, it will not start until 2020. Along with this delay, the Cadillac Tax (if imposed) will be deductible, its thresholds will be indexed starting in 2018, and the controller general must study the underlying age and gender adjustments to the tax.

This post continues our two-part series discussing the Department of Labor’s (DOL’s) recent guidance on state retirement initiatives. The first part of this series, “The Proposed Rule—State-Sponsored IRAs,” discusses the DOL’s proposed rule that would create an ERISA “safe harbor” for state-sponsored IRAs. In Part II, we discuss the DOL’s Interpretive Bulletin (Interpretive Bulletin), which addresses other types of state retirement initiatives for workers in the private sector.

The Interpretive Bulletin sets out, in a summary format, the DOL’s views on state-offered 401(k) plans for private sector employees and other state initiatives. Beginning with the DOL’s strong support for ERISA-covered plans (for reasons including the availability of employer contributions, higher contribution limits, and the protection of ERISA accounts from creditors), the Interpretive Bulletin surveys a range of current and potential state-sponsored programs and offers the DOL’s views on how ERISA coverage may apply to each of these initiatives.

The Interpretive Bulletin reviews programs in

  • Washington State, where the state’s proposed retirement program is not considered to be an ERISA-covered plan, but instead by design establishes a marketplace for the offering of ERISA plans and IRAs;
  • the Commonwealth of Massachusetts, where a state law allowing nonprofit organizations to adopt a contributory retirement plan developed and administered by the state is shown as an example of how states may set up their own 401(k) prototype plans for private employers to adopt; and
  • the State of Maryland, where a Governor’s Task Force report considered the possibility of the state establishing and obtaining IRS tax qualification for a state multiple-employer plan (MEP).

On November 16, the US Department of Labor (DOL) announced both a notice of proposed rulemaking and an interpretative bulletin aimed at providing more clarity to states attempting to solve (in the words of Secretary of Labor Thomas Perez) “a potential financial crisis [and] a critical economic issue for the nation.” The crisis, as reflected in a Government Accountability Office (GAO) report from September of this year, is that about half of private sector workers in the United States don’t have access to a retirement plan at work. As Perez noted in a DOL blog post in July, only a tiny fraction of this group will use an Individual Retirement Plan (IRA) when a workplace retirement plan is not available.

According to the Georgetown University Center for Retirement Initiatives, several years ago, states began to recognize and respond to this retirement planning crisis by considering (and in some cases implementing) proposals for state-sponsored retirement plans. These initiatives are designed to reach at least some portion of private sector workers who are not participating in a retirement plan. However, ERISA (the federal pension plan law) looms in the background, which could threaten to preempt (i.e., invalidate) many of the state solutions. And so, the DOL—at the urging of President Obama—was charged earlier this year with developing regulatory support for states to continue their experimentation with state-sponsored retirement plan initiatives.

In response, the DOL’s proposed rule creates a new ERISA “safe harbor” for state-sponsored IRAs. That is, the proposed rule sets forth certain parameters under which states may sponsor IRAs without the DOL considering the programs to be employee pension benefit plans under ERISA. While the DOL has not promised that its proposed rule will ward off all claims of ERISA preemption, the intent is to build a case for deference in favor of the DOL’s rules should the principles be tested in the courts.

As we approach the end of 2015, it’s a good time for companies to review their equity compensation plans to see if any action items will be required for 2016. The following two items are particularly important:

  1. Equity Compensation Plan—Term: All equity compensation plans, and some employee stock purchase plans, contain a term for which grants may be made under the plan. Once the term for the plan has expired, no future grants may be made under such plan, both for tax reasons and securities law reasons.

    As a result, each year, it is important to see whether the term of a corporation’s plan is set to expire in the coming year. This is particularly relevant for plans that have existed for a number of years without any shareholder action, as well as for plans for which shareholder action has occurred, but there has been no extension of the plan’s original term.
  2. Equity Compensation Plan—Authorized Shares: All equity compensation plans and employee stock purchase plans authorize a specified number of shares that can be granted under the plan. There are also usually per-person limits on the number of shares that each participant can be granted each year.

    Every year, it’s important to review the shares remaining available for issuance for future grants to ensure that there are a sufficient number of shares available for grant to cover the expected grants for the coming year. It is also important to review the per-person limit under the plan to ensure that grants are not made in any year that exceed the applicable limits. If there are not enough shares authorized for issuance under the plan and/or grants may be made that exceed the relevant limits in the plan, the plan will need to be amended and shareholder approval will be required.

    Failure to comply with the limits under the plan and/or make grants when there are not enough shares authorized for issuance (as well as issuing grants after a plan’s term has expired) raises a number of potential issues, including, securities, tax, and potential litigation claims.

Over the past year or so, the Department of Labor (DOL) has made a number of announcements expressing concerns about the quality of plan auditors and audits. In particular, in May 2015, the DOL released a report titled “Assessing the Quality of Employee Benefit Plan Audits” that found a very high (39%) deficiency rate for benefit plan audits. The report makes a number of recommendations, including increasing DOL outreach and enforcement related to audit standards. It appears that, as part of this continuing outreach, the DOL has started sending letters to plan administrators of “funded” ERISA employee benefit plans that provide tips for selecting plan auditors.

As we approach the end of the calendar year it is not too early (nor too late) to start discussions about actions that may need to be taken next year relating to Internal Revenue Code (IRC) Section 162(m) (Section 162(m)) performance grants. Fourth quarter Board and Compensation Committee meetings are an ideal time to start the discussions for next year’s proxy season and compensation planning (to the extent such discussions have not already begun).

By way of background, Section 162(m) limits to $1 million the amount of compensation that a publicly held corporation may deduct with respect to compensation paid to its Chief Executive Officer and certain other named executive officers. Compensation that meets the “qualified performance-based compensation” exception under Section 162(m) is not subject to this limit. To meet this exception, compensation must, among other requirements, be payable solely on the account of the achievement of one or more pre-established, objective performance goals. A performance goal is considered objective if an unrelated third party could calculate the amount that is payable. Another requirement is that the corporation’s shareholders approve the material terms of the performance goals to which the compensation is to be paid, which may include a laundry list of various objective performance criteria.