401 Chaos
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401 Chaos last won the day on January 23 2020
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Thanks. I'm wondering if anyone out there has direct, recent experience or further thoughts with this issue? I have a new client facing a similar situation. They just filed both 2022 and 2023 on October 15th. Apparently received advice from recordkeeper to just go ahead and file both. Then, a couple of days ago, they received IRS Notice CP-406 with respect to 2022. (They say they were unaware of prior notices or missing filing; responsible employee no longer there, company moved, etc.) The CP-406 notes in one part: "If you are required to file a Form 5500 and have not filed, you may be eligible to participate in the DOL Delinquent Filer Voluntary Compliance Program (DFVCP) . . . ." I'm not sure the phrasing there is meant to be strictly interpreted so as to suggest a plan that has already filed is disqualified from the DFVCP but it seems possible. In looking through the DOL fact sheets on DFVCP, I don't see this directly addressed. It is clear that once the DOL notifies the plan of intent to assess that DFVCP is no longer possible but the fact sheets do not say having filed the Form 5500 disqualifies the plan. To my mind, the late 5500 that gets filed is still a "delinquently filed" 5500, it's just that it was initially filed before going through the DFVCP. If the plan files under the DFVCP before any DOL notice, it would seem to me that should be OK. Of course, the fact that they went ahead and filed the 5500 may make it more likely that the DOL will notice and initiate a penalty assessment so time may be more of the essence as Sabrina1 notes.
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Thanks very much for these additional responses. There is no trust here. Also, for what it's worth, the accident occurred in 2023 with all expenses incurred and paid in 2023 so the benefits promised for the 2023 Plan Year were all provided and covered. The participants (including the injured participant) paid in the insurance contribution amounts requested for 2023 and the employer ensured the plan covered all covered expenses. Also, no stop loss coverage was triggered for the injured participant at issue here. Apart from reimbursing the employer for expenses the employer would not have incurred had the accident not occurred, collecting on the subrogation amount (or not) would not appear to have any economic impact on the plan or benefits provided under the plan so agree with Bryan that this all seems like an employer business / budgetary decision at this stage. Even if the plan document issue was not in the mix the plan administrator might still be free to decide not to pursue subrogation here. That may arguably result in a bit of a "windfall" for the participant but it does not seem that causes any harm to the plan or other participants. The fact that waiving subrogation here may have the result of saving the plan administrator and ultimately the employer from additional expenses doesn't really trouble me under these circumstances. (Obviously, the plan needs to do a better job responding to document requests and the plaintiff's lawyer is being fairly zealous in his representation here but I'm not sure that changes the result.) Given the facts here, it also does not seem to me that the employer / plan sponsor needs "permission" from the third party administrator or the subrogation recovery group pursuing the subrogation claims. Obviously, they need to reach out to the TPA and the subrogation recovery group to let them know of the decision (and may share why since the TPA apparently told them not to respond in any way to the initial lawyer correspondence requesting copies of the plan documents as well as a request to waive subrogation) but I don't see them needing the TPA or subrogation recovery group's permission. Does that make sense? I also think in-house counsel should let the attorney know they will not pursue subrogation of the currently identified amounts provided the injured employee agrees not to disclose the failure to provide the plan documents and signs a short general release around that. And suggest that they also go ahead and provide the requested documents. Thoughts?
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Thanks, Peter. This is very helpful. I'm particularly drawn to your comments at the end: Yet, consider too whether the employer’s obligation to fund the self-funded health plan washes the plan’s loss that otherwise might be a subject of the plan’s claim against a breaching fiduciary. . . . It’s much better to have a written analysis showing the plan suffers no loss or harm because the employer is obligated (and has financial capacity) to meet everything that could have been recovered from the participant. The particular rub here is that the total amount at stake is relatively low. So low in fact the subrogation amount is far less than the potential penalties for failing to produce the plan documents at this point. Add to that the fact that just trying to think through the hiring of outside counsel to advise the plan or consider prohibited transactions and/or to "establish" some independent fiduciary would, I'm afraid, be beyond the financial appetite (not to mention the attention spans) of the primary players even though I agree those are all very wise and appropriate suggestions. In this situation, the employer is very large and financially strong and stable. While significant amounts go into the plan from employee contributions, the vast majority of the funds are employer funds and I cannot imagine the company ever having any issue or concern making the plan whole for the amount at issue. I know that's the practical end result but not sure how to easily get to an appropriate written analysis showing the plan suffers no harm and making clear the employer's obligation to make the plan whole.
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Employer has self-insured health plan administered by large national insurer providing administrative services only. Plan document contains very broad, expansive "latest and greatest" subrogation provisions provided by ASO provider. Employee / participant was injured in auto accident more than a year ago. About a year ago, participant's lawyer wrote employer inquiring about plan sponsor / employer's willingness to waive subrogation rights under the plan or possibly agree to reduced subrogation amounts. Lawyer also requested usual host of plan documents per ERISA. Employer / Plan Sponsor did not respond or provide any plan documents. Participant's lawyer has surfaced again noting they have negotiated settlement and are ready to disburse proceeds. Lawyer reminded employer of its failure to provide documents per ERISA and the potential penalties that have now accrued. Lawyer is pushing for immediate answer from employer on follow-up request to waive all subrogation rights (or settling for about 1/15th of value) in exchange for agreeing not to report plan's failures to provide plan documents. The overall subrogation amounts at issue here are not that great. Employer freely admits it ignored all requests to provide documents. Can the employer (as plan sponsor and ultimate ERISA plan administrator) agree to simply waive pursuing subrogation here without giving rise to a possible fiduciary breach or other potential exposure? Any suggestions on how to negotiate and limit possible exposure to employer?
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Employer has history of reimbursing some COBRA for terminated employees being provided severance. Company is concerned about number of individuals on COBRA for general health insurance renewal purposes as well as with possible switch to a PEO with benefits. Former employees generally have no contractual right to COBRA reimbursement and there is no severance plan or program--the Company has just offered to reimburse some limited COBRA on a discretionary basis with past terminations. Company would prefer to avoid more COBRA beneficiaries if possible. Any concern in stopping the old COBRA reimbursement practice (maybe forever, maybe just temporarily) and implementing a new severance arrangement where the amounts provided for COBRA reimbursement are instead provided as special "transition health insurance benefits" (or whatever you want to call them) for use in covering the cost of transition health coverage either through an exchange or COBRA and requiring proof of coverage? If that is a problem, any issue in simply providing that amount generally earmarked for transition health coverage but paid no matter what--i.e., they get the cash and can spend however they want without being limited to reimbursement. Employer would not limit ability to elect COBRA and would provide all required COBRA election packages but may highlight the potential benefits of exchange coverage as part of the exit process. Thanks.
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Spouse received longer COBRA coverage period at employee's termination than the employee's 18-month coverage period because of employee's Medicare coverage prior to termination. Is there any restriction on the covered spouse adding the former employee back to coverage (here just the dental plan) during the next open enrollment. It seems the spouse (as a qualified beneficiary) must be provided the same election / enrollment rights as an active employee which would permit election of employee + spouse coverage. Thanks.
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Thanks, Peter. All very good and helpful recommendations. In this situation, I believe the authority of the current plan administrator is clear and certain (at least for the foreseeable future until the next stage of the bankruptcy process) and we are very attuned to the potential risk of nonpayment (and corresponding need to try and sort and assist with these issues as quickly and efficiently as possible). I also have on good authority that the plan's ERISA lawyer was, unfortunately, absent from law school the day they taught how to deal with this particular fact pattern and has not seen this situation before. I am not sure they will be able to quickly engage a more experienced counsel under these facts. Maybe I can shortcut an overarching question I have here which is to ask if others have seen leading recordkeepers serve up these sorts of sloppy draft Letters of Direction in bankruptcy situations? Part of me wonders if it may be worth seeking (demanding) a more knowledgeable / experienced rep at the record keeper to help with this situation and the Letter, etc. I feel like they haven't gotten the proper attention / assistance here. Many thanks.
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Client in process of Chapter 11 bankruptcy and near appointment of Liquidating Trustee. In process on terminating the 401(k) Plan and the record keeper / trustee (very large mutual fund company) has prepared draft Letter of Direction with some unusual (at least to me) provisions. Curious for any thoughts / experience from similar situations. First, just to note the draft Letter served up is really "sloppy." As the client said, it's like they asked ChatGPT to prepare rather than starting with some customization of a standard template document. Among other things, draft letter provides as follows: 1. Repeatedly says company "is" terminating plan and phrasing all the provisions throughout as if this will be of a future date when they know plan was already "terminated' and even reference prior date. Not a big deal really as we can revise (assuming they will accept any edits) but the whole thing is very sloppy and confusing to read on some timing points. 2. Provides plan sponsor will not restore the forfeiture account funds to participants and if participants reach out "the Plan Sponsor will handle outside the Plan." Huh? Not sure what participants are going to be seeking forfeiture restorals in the future but how can the plan sponsor (which is bankrupt and about to be completely gone) handle outside the plan? I guess not doing anything might be "handling outside the plan?" Also, do record keepers typically suggest that potentially legit claims can be handled "outside the plan?" 3. Expressly indicates this is a Chapter 11 bankruptcy and that a Bankruptcy Trustee has been appointed and will act as a fiduciary of the plan going forward. I don't know much about bankruptcy but understand Bankuptcy Trustees in Chapter 7 cases may have duty to step into the role of a plan administrator and take over some fiduciary duties. Here, however, there is no Bankruptcy Trustee nor will there ever be. There will be a Liquidating Trustee to liquidate and pay out to creditors but bankruptcy lawyer says they won't step into the role of plan admininstrator or take on other duties of for the company (debtor) / plan administrator. Understand they may just be confused on roles here but who does step in normally in these cases? 4. There are also provisions noting that no FDIC or DOL Trustee will be appointed. I'm unfamiliar with an FDIC Trustee or DOL Trustee. Is that a real thing? Is that possibly some reference to abandoned plan situations or something? 5. Following appointment of the Liquidating Trustee, the company / debtor (and officers) will cease to exist as a matter of law so there technically is nobody around with any real authority to act for the company / plan administrator or take action for the plan. I understand the DOL may consider the existing officers functioning as fiduciaries to continue in that role after the company is gone and employment has ended but is that what typically happens in these situations? Is there any other way to approach? 6. There are a few participants in a capital preservation fund that cannot be liquidated / removed by the plan without at least 12 months' notice. If the participants in that fund affirmatively elect to move their funds out of the account and roll over their balances, is the 12-month notice period still applicable or is that only an issue if they must be forced out? The letter suggest it may apply whether or not they request to roll over. If so, they're into 2025 before all amounts get paid. 7. Letter notes the company will continue to be responsible for recordkeeping fees through end of quarter following the plan termination date. Well, the company adopted resolutions "terminating" the plan in September so that suggests fees through December 31, 2023 but there is a lot left to be done by the record keeper (which has been moving like the bureaucratic behemoth it is) and so presumably lots more fees to come. I should know this but don't--how do fees typically work in bankruptcy terminations? There are some funds in the forfeiture and suspense accounts that, per the plan, can be used to pay plan expenses. Will they hold making any allocations / distributions from those accounts until all work is done then follow any force out distributions with some later distribution? If so, how long does that take--they have to do final 5500 which is a long time in the future. Apologies for the long post / questions (and embedded rant) but welcome any feedback or suggestions with any or all of these if anybody has the appetite to address. Thanks.
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Many thanks to all. Definitely not wild about the potential for making the employer the claims administrator on this particular exception and the potential for that to arguably be extended to other areas in the future as Chaz notes. I don't believe that the intent of the Benefit Exception form provision that was served up was to possibly pull in the employer for everything going forward just because the employer is forced to serve as claims administrator for the exception. That said, we've tried to revise the language there to narrow the interpretation. The employer here doesn't really have any choice--the drug in question is needed to keep the employee alive--so the employer is going to permit the exception. It's just a matter of trying to limit the scope / reach of the precedent and potential damage to other areas in the process. I very much appreciate everyone's input and assistance on this. A related question that has come up this afternoon is with respect to the reach of the precedent. Curious for thoughts on this but my view is that the precedent sort of always remains from the general perspective of something a similarly-situated participant could point to in demanding similar treatment in the future. But is there any argument that the precedential / legal effect ceases after the plan is amended and restated for the next plan year? Or at some other point in the future? I think that's a bit of a specious argument, at least in many cases where plans just continue on with essentially the same plan design, plan documents, administrators, year-to-year with minor updates each year but essentially functioning as the same program. Thanks again for the assistance.
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Thanks, Brian. This is super helpful. Roger that on the stop-loss. They are already in motion on getting written confirmation (following prior informal approval) from the stop-loss provider. (Stop loss is provided by the same insurance company / network administrator of the plan.) Perhaps somewhat helpfully, the plan builds out a process for requesting exceptions in order to gain access to non-formulary or restricted-access drugs or devices when medically necessary and to request or gain access to clinically appropriate drugs not otherwise provided under the health plan. The Administrator has suggested this exception process applies in the current case; however, upon a close reading of the plan's exception request procedures, it seems the exception protocol is more in cases where a member has tried a formulary-preferred or alternate drug and found that ineffective and so is seeking an exception to that coverage. I'm not sure that is really the same thing as the current situation (which, arguably, seems less like an "exception" to me than agreeing to cover an otherwise excluded drug). In any event, I think you are correct that best approach they can follow here is to work hard to make this as narrow of a precedent as possible but realize they are creating a precedent. Of course, the exception form served up also makes clear that for purposes of the particular exception the employer assumes the rule as claims administrator (while the administrator remains the administrator under the plan's general exception request protocol. The employer is, of course, not really set up to serve in that role but I think is comfortable doing so on the specific facts of this situation.
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Looked around and did not see a similar thread on this issue but apologies if addressed elsewhere and I missed. Looking for some qucik help on this one. Employer has self-insured health plan. One participant depends on prescription drug to stay alive. The drug is covered under the formulary and normally no issue; however, the drug is in short supply currently and the one network pharmacy for the plan cannot provide on a reliable basis. The drug can, with some effort, be found elsewhere, including at retail, but is out of network. Network provider (ASO insurance company) has suggested coverage be extended at member's current benefit level to cover purchases at any pharmacy that has drug available for temporary period while supply is so restricted. Provider wants employer / plan sponsor to sign an exception form agreeing to cover all costs and also to hold provider harmless, etc. Employer is eager to help and ok with exception generally and picking up the additional drug costs. (The added costs have not been great thus far. They will also clear with their stop loss provider.) Part of the hold harmless agreement, however, has Plan acknowledge that making benefit exceptions for the group health plan could violate provisions of state and federal law, including ERISA, the Code, HIPAA, COBRA, etc. and result in significant penalties and adverse tax consequences, etc. Here the member at issue is not a highly compensated individual and the exception being made is tied just to the lack of consistent supply for the drug with the plan's pharmacy network. The drug is covered under the plan and so not an exception in and of itself. The Plan / Employer is just trying to find a way to provide a critical drug that it has otherwise promised to provide. Plan wants to know if there really are material discrimination concerns or other significant penalties or adverse tax consequences here that could arise. That seems unlikely but welcome others' thoughts and experiences.
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Company recently established using a ROBS (not our client and we aren't directly involved) is doing well and has potential investor. The investor would like to invest in exchange for issuance of preferred stock. The ROBS company has apparently told investor that because the ROBS 401(k) holds shares in the company, the company cannot issue preferred stock. Instead, they have proposed a temporary workaround whereby they will issue a debt instrument (loan agreement with de minimis interest) that will convert to preferred stock within 180 days. Investor has asked us generally if that makes sense. We don't work with ROBS and have suggested they need to find experienced counsel if they want to proceed but just curious with all of this but, in interim, just curious if this is a common ROBS issue. And, if so, does the work-around really solve for it? Thanks
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Luke, thanks very much. Buyer is OK with concept so long as payments are spread out sufficiently so they aren't likely to have an immediate labor drain (e.g., so over 3 or 4 years). The employees that would receive the largest payments (most tenured) are nearing retirement age so not really expected to stick around too much longer but Buyer obviously would like to have a few more years from them (or at least be more in control of timing). Definitely understand this can be a gray area and facts intensive so not possible to fully sort here. But just to tease out a bit, if I am reading your response correctly, sounds like there may always be at least some risk around deductibility if there is no prior legal obligation to pay? If that's the case and the owner doesn't mind going the gift route, is that likely the easier and cheaper route? Seems the IRS cannot challenge them as both gifts and deductible expenses. If she gets the money, pays taxes, and then just makes straight gifts (while remaining cognizant of not gifting too much too soon or inducing anybody to leave) maybe the ease of that makes most sense. Certainly seems simpler and cheaper if any approach is going to still leave some meaningful risk.
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Apologies as I'm not sure this is the correct place to post this question but figured folks watching this board would have some good thoughts as you usually do. Apologies too for the long fact pattern but figure the set up is needed to capture the predicament. Client / Seller ( founder / owner) sold her private company to large company earlier this year in an asset deal. Deal has closed and seller received funds now held in her shell company. Business had 25 or so employees who all were hired by Buyer and are now employees of a sub in Buyer's group. Seller did not provide any transaction or sale bonuses to employees at closing--had no plan / contractual obligations to do so and failed to build bonuses into the transaction (whereby part of the purchase price might basically have been earmarked for employee bonuses to be paid out by Buyer as part of a post-closing bonus / retention plan, etc.). Seller regrets failing to arrange some sort of bonuses and feels strongly about getting something to former employees. Seller would like to do that in a tiered way so a few very long-term employees get significant amounts. Some of those individuals are old enough and the anticipated bonus amounts large enough they might result in individuals leaving buyer or retiring if paid all at once. Other, younger employees would still get meaningful bonuses but likely not career-altering. All former employees would get some amount. Seller is generous and willing to do this out of proceeds however works but does not want to have to pay tax on the deal proceeds and then pay them out without any deduction and with recipients also getting taxed on the payments. Seller has thought about just taking cash when distributed from company and making "gifts" to the former employees over some period of time. Seller would generally be ok doing that but understands the risk such "gifts" to former employees may get characterized as taxable compensation if ever audited. Buyer is not really interested in helping Seller with her issue or opening the terms of the deal back up. Seller wonders if there could be a deferred compensation plan of some sort set up by the Seller Company with the bonus amounts contributed to an irrevocable trust and the bonuses distributed over a period of years to the former employees on a schedule the Buyer would not object to as potentially impacting employee retention (e.g., plan would provide for $75,000 per year over 4 years provided employee remained with Buyer rather than giving $300,000 at once) with all amounts due accelerated upon death or disability. Seller would be fine in having the amounts contributed to trust so they never revert back to Seller and any forfeitures would get allocated among remaining employees and any ultimate remainder (in highly unlikely event there was no remaining employee at the end of 4 years) going to a charity. In short, Seller would be ok setting up as a completed transfer never to receive any portion back. While intriguing, it is unclear to me Seller's company would be entitled to an immediate tax deduction (this year) on the amount transferred to an irrevocable trust for distribution to former employees over multiple years. And, even if that did work somehow, it seems such an arrangement would clearly fail to qualify as a top hat plan since it would cover all former employees (few of whom are highly compensated or management employees). Seller is not really interested in setting up anything governed by ERISA (if that could even be done) for covering former employees. Sorry for the long fact patter but hoping somebody may have seen a similar situation and come up with an easy or simple solution that may work. Thanks for any thoughts.