Retroactive inclusion in a defined benefit plan

[Carol V. Calhoun]

I think I know the answer to these questions, but I'm having a hard time finding specific citations.

Facts: Employer has a defined benefit plan. It has a number of people whom it has classified as independent contractors, and thus has not included in the plan. A judgment is entered against it saying that these people are employees, and thus need to be retroactively included in the plan. (The plan specifically states that individuals who are employees but have been characterized as independent contractors by the employer are not to be included, but the judgment just blew by that argument.)

Question 1: In calculating the 415(b) limit, should an individual's years of participation in the plan include the years the individual should have been included under the court's theory, or only those years in which the individual participated after the court's judgment? For example, suppose that the individual worked for 10 years before the judgment, but terminates employment a year after the judgment. Is the 415(b) limit $210,000 (reflecting the years worked for which s/he receives credit), or $21,000 (reflecting only the year following the time the individual began participation in the plan)?

Common sense would appear to say that all years should be counted. This would reflect the rule for annual additions, which are counted for the year for which they are made rather than the year in which they are made. Treas. Reg. § 1.415©-1(b)(6)(ii)(A). It would also reflect the rule for back pay, that:

Back pay is treated as compensation for the limitation year to which the back pay relates to the extent the back pay represents wages and other compensation that would be includible in compensation for purposes of § 415.

Publication 7001, page 3. And it would be consistent with the rule of ERISA Reg. § 2530.200b-2, which treats back pay as giving rise to hours of service for the year to which it relates, not the year in which it is paid.

However, I have been unable to find any direct authority dealing with the calculation of the 415(b) limit in our situation, which does not involve back pay.

Question 2: Is there any obligation to go in under VCP in this situation? I can think of two arguments that VCP might be necessary: either that the plan is now being operated in a way inconsistent with its terms (because the plan terms say that the plan is not to include people characterized by the employer as independent contractors, even if they are later found to be employees) or that these individuals were erroneously excluded from the plan in prior years. However, this seems unnecessarily harsh if the failure to abide by the plan terms comes due to a judgment, and if the employer corrects the exclusion for prior years promptly after issuance of the judgment.

[Andy the Actuary]

Even if classified as employees, did plan satisfy 410(b) if they were excluded?

[Carol V. Calhoun]

Even if classified as employees, did plan satisfy 410(b) if they were excluded?

They are a governmental plan, so 410(b) was not an issue.

[jpod]

Probably pointless, but what was the court's theory for ignoring what appear to be the clear terms of the contract (albeit a unilateral contract)? Is it a weak opinion susceptible to being overturned on appeal?

[Andy the Actuary]

Is employer required to reimburse employees for the emloyer's share of the Social Security/Medicare contributions made while considered an independent contractor?

[QDROphile]

Are you entertaining questions about the premise, such as whether the plan is an ERISA plan and whether or not the employer is going to concede the validity of the judgment to the extent it requires retroactive installation? I can understand that compliance with the judgment may be the lesser of evils.

[Carol V. Calhoun]

Probably pointless, but what was the court's theory for ignoring what appear to be the clear terms of the contract (albeit a unilateral contract)? Is it a weak opinion susceptible to being overturned on appeal?

The judgment didn't discuss this at all. However, the client is not in a position to appeal the judgment.

Is employer required to reimburse employees for the employer's share of the Social Security/Medicare contributions made while considered an independent contractor?

I don't know whether that question was dealt with. The client handles a lot of things internally, and just asks me questions when they get too complicated for in-house counsel.

Are you entertaining questions about the premise, such as whether the plan is an ERISA plan and whether or not the employer is going to concede the validity of the judgment to the extent it requires retroactive installation? I can understand that compliance with the judgment may be the lesser of evils.

The plan is clearly governmental, so not ERISA. (I looked at ERISA regulations only because anything those regulations required would presumably not be in violation of Code qualification requirements, but it is clear that ERISA would not apply directly.) And the client is not in a position to appeal the judgment.

[david rigby]

Nothing in the Gray Book on point, but is this close enough to help?

Gray Book 2014-21
Section 415: Applicability of §415 Accrual Issue to Governmental and Church Plans
Regulation §1.415(a)-1(d) provides that a DB plan subject to §411 must preclude the possibility of any benefit accrual in excess of the §415 limit. Does this apply to governmental and non-electing church plans?

RESPONSE
Regulation §1.415(b)-1(a)(7)(iii) contains a special rule that provides that a DB plan that is not subject to §411 is not required to limit the accrued benefit until the benefit is payable. Therefore, assuming the requirements for asserting government or non-electing church plan status are met, the §411 restriction described above would not apply and accrued benefits could be reduced to satisfy the §415 maximum benefit limits.

Copyright © 2014, Enrolled Actuaries Meeting
All rights reserved by Enrolled Actuaries Meeting. Permission is granted to print or otherwise reproduce a limited number of copies of the material on the CD-ROM for personal, internal, classroom, or other instructional use, on the condition that the foregoing copyright notice is used so as to give reasonable notice of the copyright of the Enrolled Actuaries Meeting. This consent for free limited copying without prior consent of the Enrolled Actuaries Meeting does not extend to making copies for general distribution, for advertising or promotional purposes, for inclusion in new collective works, or for sale or resale.

BTW, I vote for common sense.

[Carol V. Calhoun]

Nothing in the Gray Book on point, but is this close enough to help?

Gray Book 2014-21

Section 415: Applicability of §415 Accrual Issue to Governmental and Church Plans

Regulation §1.415(a)-1(d) provides that a DB plan subject to §411 must preclude the possibility of any benefit accrual in excess of the §415 limit. Does this apply to governmental and non-electing church plans?

RESPONSE

Regulation §1.415(b)-1(a)(7)(iii) contains a special rule that provides that a DB plan that is not subject to §411 is not required to limit the accrued benefit until the benefit is payable. Therefore, assuming the requirements for asserting government or non-electing church plan status are met, the §411 restriction described above would not apply and accrued benefits could be reduced to satisfy the §415 maximum benefit limits.

Copyright © 2014, Enrolled Actuaries Meeting

All rights reserved by Enrolled Actuaries Meeting. Permission is granted to print or otherwise reproduce a limited number of copies of the material on the CD-ROM for personal, internal, classroom, or other instructional use, on the condition that the foregoing copyright notice is used so as to give reasonable notice of the copyright of the Enrolled Actuaries Meeting. This consent for free limited copying without prior consent of the Enrolled Actuaries Meeting does not extend to making copies for general distribution, for advertising or promotional purposes, for inclusion in new collective works, or for sale or resale.

BTW, I vote for common sense.

There are actually a couple of issues with that statement. The first is that although governmental plans are not required to comply with section 411, they are often required to comply with interpretations of the state or federal Constitution's impairment of contracts clause that may limit not only reduction of past benefits, but reduction of future benefit accruals with respect to existing employees. Thus, reduction of benefits to comply with 415 limits may not be possible even though 411 does not apply.

The other issue is that the judgment in this case required the retroactive benefits. If an individual's annual benefit would have been $210,000, if such individual had been a participant from the beginning, I doubt the court would consider the judgment complied with if the individual ended up with a $21,000 benefit due to reductions to comply with 415(b).

However, I would agree with your common sense approach. Certainly, if ECPRS applied, the overriding principle is to put the person back into the position that s/he would have been in had the employer done the right thing from the beginning. I would argue that a VCP submission is not required (because the employer complied with the plan's terms to begin with, and simply made a retroactive amendment to the plan to comply with the judgment). But I still think the spirit of the ECPRS rules is that fixing an error should not get you into trouble.