IRS Voluntary Classification Settlement Program Update - More Tax Relief For Employers?

The Internal Revenue Service ("IRS") is revising and expanding eligibility for the Voluntary Classification Settlement Program ("VSCP") that offers tax relief for employers that agree to prospectively treat workers as employees. In addition to relaxing certain technical rules that, in the past, prevented taxpayers from participating in the VCSP as originally formulated, the IRS is offering an expanded program to permit employers that failed to file required Forms 1099 to elect to treat workers as employees going forward. The IRS stated in an annoucement this week that the new program will: (1) permit taxpayers under audit, other than employment tax audits, to participate; (2) eliminate the requirement that taxpayers agree to extend the assessment period of limitations for employment taxes as part of the VCSP closing agreement with IRS; (3) clarify eligibility for taxpayers that are members of an affiliated group under Section 1504(a) where another member of the group is under an employment tax audit; and (4) clarify that taxpayers contesting in court the classification of workers from previous audits are ineligible to participate. A taxpayer participating in the program agrees to prospectively treat a class or classes of workers as employees for future tax periods. In return, the taxpayer pays 10 percent of the employment tax liability that would have been due on compensation paid to the workers being reclassified for the most recent tax year, as though they had been classified as employees. Interest and penalties are waived, and the taxpayer is not subject to an employment tax audit for prior years. The announcements were published Dec. 17 in Internal Revenue Bulletin 2012-51.

When Does A 401(k) Contribution Become A Plan Asset? New 11th Circuit Decision Provides Insight

 

In Pantoja v. Edward Zengel & Son Express Inc., Case No. 12-10036 (11th Cir. Dec. 12, 2012), the United States Court of Appeals for the Eleventh Circuit ruled that a section 401(k) plan participant's claim that his employer committed a fiduciary breach under ERISA by failing to forward certain employer contributions to the plan failed because the contributions in question did not constitute "plan assets" under ERISA. The court held that employer contributions to Section 401(k) plans do not become "plan assets" prior to being remitted to the plan absent “specific and clear” plan language providing otherwise.

 

By way of background, the defendant, Edward Zengel & Son Express Inc. ("EZS"), contracted with the U.S. Postal Service to haul mail in its trucks. The contract required EZS to provide fringe benefits to its employees either by paying them as wages or depositing them into a Section 401(k) plan. To satisfy its fringe benefit obligation, EZS elected the latter method and established a Section 401(k) plan for its employees. The plaintiff, Manuel Pantoja, worked for EZS for about six months in 2009. During that time, EZS withheld fringe benefits totaling $3,472 and failed to remit most of the money due the Plan on Pantoja's behalf, instead using the money to pay its employer payroll taxes. After receiving a benefit statement indicating that his Section 401(k) account balance was less than $300, Pantoja filed suit against EZS and three of its corporate officers. EZS subsequently paid into the plan the funds attributable to Pantoja plus interest. At the district court level, the court granted partial summary judgment to EZS on the issue of liability under ERISA. The district court found that the fringe benefits withheld did not constitute “plan assets” and that EZS therefore did not breach a fiduciary duty as a matter of law. Pantoja appealed to the Eleventh Circuit.

 

On appeal, the Eleventh Circuit first noted that, while Department of Labor regulations make clear that an employee's elective contributions to an ERISA plan constitute plan assets, those regulations do not address the status of employer contributions to a plan. Thus, the Eleventh Circuit looked to its own precedent, finding it had “held that unpaid employer contributions are not ‘plan assets' unless specific and clear language in the plan documents or other evidence so indicates." The Eleventh Circuit continued on to say that this reliance on clear plan language was justified by the “unfairness in imposing strict fiduciary responsibilities—and personal liability—upon corporate officers who are not clearly aware of their status as fiduciaries.” Pantoja argued that his case was “distinguishable” because EZS's obligation to contribute to the plan stemmed from a written contract with the Postal Service and was therefore “mandatory.” The Eleventh Circuit rejecting this argumentstating that, in every case Pantoja cited in which the court found employer contributions to be plan assets, the plan documents “clearly indicated contributions became assets when ‘due' or ‘owing,' rather than when they were actually remitted to the plan.” In the instant case, the Eleventh Circuit found “no clear and specific language indicating the fringe benefits are ‘plan assets' before they are actually remitted to the Plan.” Accordingly, EZS did not breach a fiduciary duty “as a matter of law" and the Eleventh Circuit affirmed the decision of the district court.

 

 

FCRA Changes Impose New Rules For Employers Using "Consumer Reports"

New regulations that go into effect early next year will require employers who use "consumer reports" to hire, fire promote, demote and/or reassign current or prospective employees to inform their employees and applicants, in advance, of their intention to obtain a consumer report. Regulations promulgated under the Fair Credit Reporting Act ("FCRA"), which take effect on January 13, 2013, will also require employers to obtain the employee's or applicant's express written consent to obtain such reports. In addition to securing the employee's or applicant's consent, employers will be required to give a copy of the report to the affected individual, as well as, provide advance notice if the employer intends to take any adverse employment action on the basis of the information in the report. The FCRA recently issued a Summary of Consumer Rights which employers must furnish to individuals before taking any adverse employment action based on information in a consumer report. The FCRA also recently issued a revised "Notice of Furnisher Responsibilities," which sets out the obligations of those who furnish consumer reports, and a revised "Notice to Users of Consumer Reports of Their Obligations Under the Fair Credit Reporting Act," which summarizes the duties of employers using consumer reports. Employers may obtain a copy of the Summary of Rights by clicking on following this link. View PDF .

IBM To Overhaul 401(k) Retirement Program

The Wall Street Journal reports that IBM is overhauling its retirement program to contribute once a year to employee 401(k) accounts in a lump-sum payment. IBM's switch is the latest in a series of moves big companies have been making to lower retirement-plan expenses, and the financial implications for employees could be significant.  According to the article, starting next year, IBM's contributions, which generally range from 6% to 10% of pay, will take place Dec. 31. Workers who leave the company before Dec. 15 won't qualify for the match, unless they retire. The article also note that, for IBM, the latest move could help save millions of dollars a year in compensation expenses, and keep valued workers who want to ensure they receive the match more tethered to their jobs—at least until the end of a given year. The change "reflects our continuing commitment to invest in our employee 401(k) plans while maintaining business competitiveness in a challenging economic environment," IBM spokesman Douglas Shelton said in a statement. Financial planners say the lump-sum contributions undermine one big advantage of 401(k) plans: "dollar-cost averaging," in which investors are buying stock and bonds at multiple prices over time, leveling out risk and return.

http://online.wsj.com/article/SB10001424127887323316804578163722900112526.html

Supreme Court Declines Consideration of "Moench" Presumption Case

The U.S. Supreme Court announced yesterday that it will not review a decision of the U.S. Court of Appeals for the Sixth Circuit on the extent to which Section 404(c) of the Employee Retirement Income Security Act shields plan fiduciaries from claims of imprudent investment in employer stock See State Street Bank and Trust Co. v. Pfeil, U.S., No. 12-256, cert. denied 12/3/12. Earlier this year, the Sixth Circuit held that, while the Section 401(k) plan participants pleaded sufficient facts to overcome the “presumption of prudence” (frequently called the "Moench" presumption) that attaches to plans that invest in employer stock, the lower court erred in applying the presumption at the motion-to-dismiss stage. According to the Sixth Circuit, plan fiduciaries cannot escape their duty of prudent investing by asserting at the pleadings stage that any losses plan participants suffered were caused by the participants' decisions to continue investing in employer stock, asserting that “[s]uch a rule would improperly shift the duty of prudence to monitor the menu of plan investments to plan participants” and would place an “unreasonable burden” on “unsophisticated” participants.

By way of background, in 2009, two General Motors Corp. employees filed a proposed class action alleging that State Street Bank and Trust Co. breached its fiduciaries duties by waiting too long to divest GM's Section 401(k) plans of their holdings in GM stock. The U.S. District Court for the Eastern District of Michigan dismissed the employees' complaint and found that, although they were likely to overcome the “presumption of prudence” that attaches to plans that invest in employer stock, they would be unable to show that State Street caused their investment losses, because the employees retained ultimate control over their investment selections. On appeal, the Sixth Circuit reversed, finding that the district court erred in applying the presumption of prudence at the motion to dismiss stage. The presumption, the appellate court said, was an evidentiary presumption, rather than an additional pleading requirement. The Sixth Circuit also found that the employees plausibly pleaded a causal connection between State Street's alleged breach and the plan losses. In so finding, the appeals court said the district court erroneously relied on the fact that the plaintiffs could divest their plan accounts of the GM stock to find that State Street's alleged breach did not cause plan losses.

In its petition for review, State Street framed the issue to the Supreme Court as whether ERISA Section 404(c) provides fiduciaries of otherwise-qualified plans a defense to liability against an imprudent investment claim when the participant's control over the investment is the proximate cause for the loss. It also asked the Court to consider a second question—whether liability under ERISA Section 409(a) for a breach of fiduciary duty claim requires that the breach constitute the proximate cause of the loss. In response to State Street's petition, the employees challenged whether a circuit split existed with respect to ERISA Section 404(c), saying that “[a]ny such circuit split, however, has no bearing on the Sixth Circuit's holding in the case because the Sixth Circuit held that 404(c) is a fact-intensive affirmative defense that the district court improperly applied on a motion to dismiss, an issue on which the courts of appeals unanimously agree.” The employees argued that State Street, as an ERISA fiduciary, “cannot breach its duty and then escape liability as a matter of law on 404(c) or causation grounds when the exact risk State Street was supposed to protect against materializes to harm the plans.” The employees also asserted that State Street's petition did not seek review of the case's “key holding,” which they contended was the holding that “GM plan participants had alleged sufficient facts to overcome the presumption of prudence,” and instead sought review of only two “narrow issues.”

Must Employers Appoint Employees With Disabilities to Vacant Positions? New Guidance From The Courts

Employers may violate the Americans with Disabilities Act (“ADA”) if they fail to appoint disabled employees to vacant positions for which they are qualified, even if they are not the most qualified candidate for the job, according to a recent decision by the Seventh Circuit.  In EEOC v. United Airlines, No. 11-1774 (7th Cir. Sept. 7, 2012),  the Seventh Circuit overruled its own precedents and adopted the Supreme Court rule first announced in U.S. Airways, Inc. v. Barnett, 535 U.S. 391 (2002) – that an employer has a duty to appoint a qualified disabled employee to a vacant position, absent “undue hardship”.  Under Barnett, for example, if the reassignment violates a seniority system, that ordinarily will constitute undue hardship, but the Plaintiff can still argue that special circumstances support the finding of an ADA violation.  This decision brings the Seventh Circuit in line with the Tenth and D.C. Circuits, though the Eighth Circuit continues to adhere to precedent imposing no such duty on employers.