November 14, 2000
The Working Group Report, submitted to the ERISA Advisory Council on
November 14, 2000, was approved by the full body and subsequently forwarded to
the Secretary of Labor. The Advisory Committee on Employee Welfare and Pension
Plans, as it is formally known, was established by Section 512(a)(1) of the
Employee Retirement Income Security Act of 1974 to advise the Secretary with
respect to carrying out his/her duties under ERISA.
Members of the 2000 Working Group
Chair: Rebecca J. Miller
McGladrey & Pullen, LLP
|
Vice Chair: Janie Greenwood
Harris
Firstar Corporation
|
Rose Mary Abelson
Council Vice-Chair
Northrup Grumman Corp.
|
Evelyn Adams
IBM
|
Eddie C. Brown
Brown Capital Management
|
Judith Ann Calder
Abacus Financial Group, Inc.
|
Michael Gulotta
Council Chair
Actuarial Sciences Associates, Inc.
|
Catherine L. Heron
Capital Group Companies (CGC) of Los Angeles
|
Timothy J. Mahota
Integral Development, Inc.
|
Judith F. Mazo
Segal Company
|
Patrick N. McTeague
McTeague, Higbee, MacAdam, Case,
Watson & Cohen
|
James S. Ray
The Law Offices of James S. Ray
|
Michael Stapley
Deseret Mutual Benefit Association
|
Richard T. Tani, Retired,
William M. Mercer
|
ISSUE
The last decade has been one of consolidation, outsourcing and
reorganization in the entire American economy. Nothing in todays economy
indicates a cessation in this activity. As a result of this activity, employers
are confronted with the task of managing different benefit packages. In some
situations, sponsors can continue separate benefit structures. In other
situations, by choice or by operation of law, one or both plans must change.
The Working Groups assignment was to identify the challenges to
benefit continuity confronting sponsoring organizations and their employees
undergoing restructuring. This would be accomplished through a study of the
ERISA and Code1 provisions that are specifically
aimed at such sponsor changes and those provisions, though not aimed at such
activity, that have been cited as obstacles or impediments in maintaining
continuity. Recommendations for change were solicited from the witnesses. The
Working Group then reviewed these recommendations in light of the need to
balance policy objectives.
Throughout this deliberation, continuity was considered with respect to both
the acquired or the acquiring organizations plans. The fundamental issue
is: Does the Act or related regulations inadvertently cause interruptions, and
possibly, reductions in participants benefits which was not the intent of
the particular ERISA or Code provisions? One of the working group members
expressed the objective of this study: ...to achieve greater flexibility,
but ... to do that without undermining the employee protections.2
CONTENTS
EXPERT WITNESSES
Alan Tawshunsky
Special Counsel to the Division Counsel/Associate Chief Counsel
Internal Revenue Service
Tax Exempt and Government Entities Division
(May 9, 2000)
|
John Hickey
Vice President, Human Resources and
Global Employee Benefits
Lucent Technologies
(August 14, 2000)
|
Paul T. Shultz
Director
Employee Plans Rulings and Agreements
Tax Exempt/Governmental Entities
(May 9, 2000)
|
Martha Hutzelman and Janine Bosley, Attorneys
Bosley & Hutzelman, P.C.
(August 14, 2000)
|
William Bortz
Associate Benefits Tax Counsel
Department of Treasury
(June 2, 2000)
|
Anthony Rucci
Executive Vice President
Cardinal Health
(August 14, 2000)
|
Louis Campagna
Chief Division of Fiduciary Interpretations
and
John Canary
Chief Division of Reporting and Disclosure
EBSA
(June 2, 2000)
|
Nelson Phelps, Executive Director and A.J.
Jim Norby, President
Association of U.S. West Retirees
(September 12, 2000)
|
Peter Tobiason
Assistant General Counsel for Employee Benefits and OSHA
ITT Industries, Inc.
(July 18, 2000)
|
Eli Gottesdiener, Attorney
Gottesdiener Law Office
(September 12, 2000)
|
Nell Hennessy
Senior Vice-President
Actuarial Sciences Associates, Inc.
(July 18, 2000)
|
Anonymous Employee
of acquired company
Source: Pension Rights Center
(September 12, 2000)
|
Benefit Continuity after Organizational Restructuring
We consciously avoided [trying] the best of both worlds.Pamela Kimmet
Director of Compensation and Benefits for Citigroup
commenting on the merger of Citicorp and
Travelers Insurance Group
reported in the BNA Pension & Benefits Daily 5/15/2000
Executive Summary:
Mergers, acquisitions, spin-offs, split-ups, joint ventures, outplacing,
outsourcing
.the terms available to describe the changes in corporate
structure are as diverse as the methods of change. This trend of splitting and
reforming has been going on since the 1960s. There are times when the
rate of change slows and times when it seems virtually manic. What seems
readily apparent is that this restructuring is unlikely to cease.
Within this context, the benefit plans of both the acquiring and the
acquired entity or the divesting and the divested entity become subject to
possible change. That change may be triggered by regulatory requirements,
industry standards or simply the benefit objectives of either party. From the
perspective of the plan sponsor and the participating employees, these changes
are not always desired or considered beneficial. The purpose of this working
group was to survey what has been happening in this context.
Over a six-month period 15 witnesses from the Departments of Treasury and
Labor, Internal Revenue Service, practitioners advising plan sponsors,
corporations and participant advocacy groups testified on issues related to the
benefit continuity and other consequences arising from the restructuring of the
plan sponsor. Their testimony and the accompanying evidence has been subjected
to the consideration by the members of this Working Group. Those members are
all experts within their respective areas of ERISA and their value in arriving
at this report must be recognized. It is the combination of these resources
that serve as the backbone for the Working Groups findings and
recommendations.
The testimony and data we collected support the premise that there is often
conflict between the policy goals of various aspects of the law. This conflict
contributes to the apparent difficulty for either party to any restructuring to
maintain absolute continuity in its benefit structure.
The Working Group unanimously makes the following recommendations regarding
these challenges:
-
The entities responsible for enforcing all of ERISA (Department of Labor,
Department of Treasury, Internal Revenue Service, Pension Benefit Guaranty
Corporation, etc.) should create two public service guides in this area. The
plan sponsor guide would advise sponsors of the issues that result from a
restructuring regarding participant notices, vesting periods, protected
benefits, etc. The employee guide would advise employees of their rights,
changes that they may expect to see, where they can obtain information or
assistance, etc.
-
Disclosure was a consistent theme of the hearings. In this context, the
Department of Labor is encouraged to look at the current disclosure provisions
of ERISA and consider whether it may be appropriate to revise these rules in
light of todays fast-paced, rapidly changing, electronic workplace.
-
The third category of recommendations deals with transition relief. The
Internal Revenue Code contains a transition rule for the participation and
coverage test in a retirement plan following an acquisition of divestiture. The
recommendation is that comparable transition relief under ERISA and the
Internal Revenue Code should be extended to a number of benefit areas and plan
types.
-
Finally, although during the hearings a number of technical issues were
raised, insufficient data was gathered to make specific recommendations in
these highly technical matters. Thus, our recommendations are limited to
drawing attention to these issues and encouraging a continued study of the
challenges posed.
The remainder of this report highlights pertinent testimony and sets forth
in greater detail the Working Groups findings and Advisory Council
recommendations on the challenges to benefit continuity after an organizational
restructuring.
Introduction - Laying the Groundwork
According to Thomson Financial Securities Data, mergers worth $1.6 trillion
were consummated in 1999. This is nearly triple the value of such activity in
1996. They are currently reporting $2.4 trillion of activity through the middle
of October 2000.3 This is global activity. As
such, it may overstate the activity in this country. However, this report
highlights only reported mergers or acquisitions. It does not include activity
in small, private companies, not-for-profit markets, outsourcing, etc.
The U.S. activity reflected in this report is further amplified by actions
of the Federal Trade Commission and the Justice Department. These agencies
frequently require that entities wishing to combine divest themselves of
segments prior to approving the combination. The following chart illustrates
the increase in this activity over the last 5 years.4
For example, when 2 large financial institutions desired to combine, they
had to agree to divest themselves of 306 branch offices in 4 states. When two
large waste collection enterprises combined earlier this year, they had to sell
off operations in 15 locations. This phenomena is also supported by a recent
study released by The Conference Board. That study highlighted significant
downsizing following business combinations.5
Buyers in successful combinations reported significant downsizing of their
workforce 51 percent of the time. Sellers observed downsizing in their
workforce in 71 percent of the successful combinations.
All of this activity involves shifting of workers from one employer to
another. Some employees may shift through more than one employer within a year.
The Conference Board study noted above involved 134 corporations who had
participated in at least one combination since 1990. Of these respondents, half
had participated in more than 5 mergers or acquisitions between 1990 and 1999.
The median number of such events was 3.6 The
importance of employment issues in such activity is demonstrated in the report
by the relative participation levels of key executives in the activity. Human
resources executives of the acquiring companies were involved 81 percent of the
time in the pre-merger negotiations. This rate of participation was exceeded
only by the role of the chief executive officer. After acquisition, the human
resource executives reported participation 90 percent of the time in the
post-merger discussions. This exceeded the participation level of every other
executive position in the post-merger integration. This activity highlights the
importance of these issues.
|
|
Buyer
|
Seller
|
|
Buyer
|
Seller
|
|
CEO
|
91
|
79
|
|
66
|
52
|
|
Human Resources
|
81
|
59
|
|
90
|
58
|
|
Communication
|
54
|
35
|
|
67
|
34
|
|
Operations
|
67
|
54
|
|
72
|
61
|
|
Legal/Financial
|
88
|
71
|
|
67
|
42
|
|
Employees
|
25
|
25
|
|
53
|
50
|
|
Consultants
|
46
|
32
|
|
28
|
14
|
|
|
Lest too much emphasis is placed on the place of ERISA plans in this
workload, consider that the HR executives duties included:
Benefits
|
Business Unit Management
|
Change Management
|
Communications
|
Compensation
|
Compliance
|
Contract Review
|
Cultural Integration
|
Downsizing
|
Due Diligence
|
Executive Orientation
|
Integration Team Leadership
|
Labor Relations
|
Merger Negotiations
|
Organizational Development
|
Organizational Structure
|
Outplacement
|
Payroll
|
Pensions
|
Personnel Assessment
|
Planning
|
Purchasing
|
Relocation
|
Resources Review
|
Retention
|
Reward and Recognition
|
Severance
|
Staffing
|
Succession Planning
|
Training
|
Transitioning
|
Work Force Integration
|
The Conference Board report highlighted some interesting aspects of what the
respondents considered to be either successful or unsuccessful merger
experiences. There were many troublesome issues presented in such combinations.
Apparently the most difficult to resolve were matters such as attitudes towards
balancing work and family issues. The following table summarizes the situations
encountered relative to ERISA plans.
Issue
|
Companies were
Dissimilar
|
Companies Resolved
Their Differences
|
Retirement Package
|
67 %
|
85 %
|
Health Benefits
|
57 %
|
87 %
|
Employee/Labor Relations
|
38 %
|
92 %
|
It is not surprising to note that the ability to resolve differences in
these areas was inversely related to the extent of the differences.
In this background of rapid, complex and increasing activity as plan
sponsors go through varying forms of reorganization, ERISA and the Code have to
provide a balance of flexibility to sustain this activity and enforcement to
protect the employees vested interests in their benefit plans during the course
of such changes. This report summarizes the insight the group has gathered from
the testimony of expert witnesses called to share their experience and opinions
on this important topic.
Chapter One of the report outlines the existing statutory and regulatory
framework in which this activity takes place. The Working Group listened to
testimony from representatives of the Department of Labor, Internal Revenue
Service and Department of Treasury. Each entity outlined the ERISA provisions
under its jurisdiction that impact restructuring of the plan sponsors. These
provisions included those with direct and indirect implications for continuity.
In Chapter Two the plan sponsors side is explored. Testimony was
received from senior human resource officers of corporations that had been
involved in both sides of a reorganization the acquirer and the
acquired. Testimony was also taken from legal and consulting professionals.
Chapter Three describes the employees perspective on this matter.
Testimony was taken from active and retired employees and their advisors. In
general, the reported employee attitude towards the impact of restructuring on
their benefit programs was negative. The Conference Board Report may give some
insight as to why this is true. In reporting what constituencies were involved
in the process, it is enlightening to note that employees were only involved 25
percent of the time during the planning and negotiation stage and about half
the time during the implementation phase. (See the chart on page 4.) The
Conference Board had also studied employee communications in business
combinations in 1999. In that report, employees below middle management
reported being less committed to any impending merger, receiving less
communication or training than any other internal stakeholder group. For
example, only 1 percent of the reporting firms gave any training to rank and
file employees in contrast to over 50 percent offering such training to upper
management.7
Chapter Four of the Report provides the Work Group's findings and
recommendations arising from this discussion and analysis.
Chapter 1 Statutory Framework
Testimony was solicited from the Internal Revenue Service, Department of
Treasury and Department of Labor to establish a general understanding of the
attributes of employee benefit plans that are involved when the sponsor
undergoes an organizational restructuring. The following table summarizes these
provisions and the related policy effect.
Provision
|
Effect
|
Jurisdiction
|
Written Plan
|
Participant rights and employer duties fixed
and cannot be modified by informal written or oral communications.
|
DOL and Treasury/IRS
|
Settlor Functions
|
Employer privilege to design plan terms as it
sees fit to meet its operational objectives.
|
DOL and Treasury/IRS
|
Fiduciary Conduct
|
The plan is to be operated for the exclusive
benefit of plan participants and their beneficiaries.
|
DOL
|
Participation/Coverage
|
Tax benefit is conditioned upon covering a
fair cross section of the workforce, based on income. Generally such cross
section is determined by percentages, but in some cases (such as self- insured
health plans), it can be based upon a subjective fair cross section.
|
Treasury/IRS
|
Nondiscrimination
|
Tax benefit is conditioned upon the
plans providing substantially similar benefits to highly compensated
employees and rank-and-file employees.
|
Treasury/IRS
|
Anti-cutback rules
|
When included in the written plan, many
benefits may not be eliminated or reduced. Included in the list of protected
benefits is a participants right to already-earned early retirement
benefits and subsidies.
|
DOL and Treasury/IRS
|
Vesting
|
Participant must have a nonforfeitable right
to a benefit, once they have satisfied a specific minimum number of years of service
with the plan sponsor.
There is a Code section governing the measurement of service in the case of
a successor maintaining a plan of a predecessor employer. This has been in the
tax code for 25 years with no regulation explaining how and when it applies.
|
DOL and Treasury/IRS
|
Aggregation/Affiliation
|
Special definitions of employer, so
that the rules for nondiscrimination, coverage, vesting, etc. cannot be avoided
by using multiple entities for a unified enterprise.
|
Treasury/IRS
|
Combined plan limits
|
The amount of benefits that may accrue with
full tax protected status is limited.
|
Treasury/IRS
|
Funding
|
Assets must be set aside to fund retirement
benefits, and held solely for that purpose. The laws specify details on the
schedule for funding defined benefit plans.
|
DOL and Treasury/IRS
|
Distribution Restrictions
|
Retirement plans are granted tax benefits for
providing retirement income. Thus, the participants right to access funds
prior to retirement is limited.
|
Treasury/IRS
|
Tax-Free Rollovers
|
To encourage retention of savings for
retirement, participants may transfer funds from one tax- sheltered retirement
vehicle to another without current taxation.
|
IRS/Treasury
|
Health Coverage Continuation (COBRA)
|
Except for those employing very few
employees, employees can to continue their employer- provided health coverage
at group rates in the event of certain loss of coverage events, including
termination of employment.
|
DOL and IRS/Treasury
|
Pre-existing Medical Conditions
|
A person who had health coverage from a prior
employer cannot be excluded from coverage at a new employer due to a
pre-existing health problem.
|
DOL and IRS/Treasury
|
When a plan sponsor goes through a restructuring - merger, acquisition,
spin-off, etc. - these statutory provisions frequently create challenges for
the entities involved and often have the unintended effect of creating conflict
between ERISAs statutory goals. For example, the anti-cutback provisions
require that certain types of benefits be continued if the plan is maintained
by a successor employer. One such protected benefit that must be preserved is
an early retirement benefit. If the acquired company's plan provides for early
retirement distributions upon the attainment on one set of age and service
criteria and the successor employer's plan includes no early retirement
provision or applies other age and service criteria, the successors plan
must preserve both options for the benefits that the acquired group had earned
by the date of the change. If the successor company does not wish to include
this provision for all employees from that point forward, it must account for
the two groups separately and test each for nondiscrimination. If it is
unwilling to provide for this separate accounting of the participants'
interest, then the likely result would be elimination of this option for future
benefits earned by the acquired companys employees or possibly
termination of the acquired companys plan. Thus, this statutory goal
of protecting benefits would come into conflict with the fundamental goal of
preserving benefits for retirement.
Not all of these provisions create such challenges. The Treasury and IRS
have taken great care in drafting the regulations surrounding COBRA (health
coverage continuation) to address specific issues and concepts involved in the
restructuring of the plan sponsor. The proposed regulations issued in 1999
include detailed guidance in the restructuring of a corporate plan sponsor. In
addition, Health Insurance Portability and Accountability Act or HIPAA limited
a consequence that could have resulted in loss of coverage during sponsor
restructuring. This is the provision that restricts the ability of a successor
employer to apply a pre-existing condition clause to the employees coming into
its plan.
The regulations for cafeteria plans do not include specific details
regarding the implication of the rules in the event of the restructuring of the
plan sponsor. Rather, the cafeteria plan rules must be examined from the
perspective of the impact of any change upon the participant. Thus, a
participant can change its election to make pre-tax contributions towards
health coverage under a cafeteria plan, if the successor employer does not
maintain a health plan or if it offers different coverage. However, the
employee can only replace, not eliminate, the prior coverage with similar
coverage. Some cafeteria plans include medical spending accounts, funds that
employees set aside from their pay to cover a variety of medical costs with
pre-tax dollars. The treatment of such amounts in the context of mergers or
divestitures is not discussed in the regulations and it is unclear whether
these balances can transfer when the plan sponsor transfers the employees in
something other than an equity sale.
The concepts of settlor and fiduciary functions address the balance between
the employers versus employees rights under a benefit plan. Settlor
function describes the employers right to adopt plan terms that are
consistent with its business objectives and are within the limits of the law.
The fiduciary function is the obligation of the persons responsible for the
plan (Plan Administrator, Trustee, etc.) to operate it, consistent with its
written terms, but with consideration of the best interests of the plan
participants. Thus within these two basic concept, an employer is permitted to
take an action that is within the law, though it could be considered
disadvantageous to plan participants.
This can be illustrated by the issues presented to a successor employer with
respect to the pre- existing plan of the predecessor.
-
The plan may be terminated and the balances distributed to the
participants.
-
The plan can be frozen and the balances held in a separate plan until each
participant becomes eligible for distribution under the normal plan terms.
-
The plan can be continued for the existing workforce, subject to the
various nondiscrimination and coverage rules.
-
The plan can be amended to increase or reduce future benefit accruals, to
add features or to remove unprotected features.
-
The plan can be expanded to cover the employees of the buyers
workforce, if any.
-
The plan can be merged into the plan of the successor.
All of these choices would be executed under the sponsors settlor
rights. Once the decision is made, however, the oversight of the operation of
the plan including the investment of plan assets, timing of liquidation of
assets, efforts to identify the appropriate participants and beneficiaries,
etc. would fall within fiduciary conduct.
ERISA does include a requirement that employees be notified of significant
plan changes. For a pension plan, notification of any change that reduces the
rate of future benefit accruals must be given before such amendment is in
effect. For most other changes, such notice is not required until after the end
of the year in which such change is effective.
It must be recognized that the statutory framework is constantly being
modified. During the seven months that the working group studied this issue,
the government issued guidance that provided relief in several areas within the
scope of this project. For example, the Pension Benefit Guaranty Corporation
issued guidelines to clarify when, under its early warning system, the agency
might raise concerns in the event of a spin-off of a segment of the workforce.
The IRS provided some relief on the anti-cutback rules and the same
desk rule. This relief allows a profit sharing or stock bonus plan to
eliminate all payment options other than a lump sum and allows for
distributions from 401(k) plans within specific fact patterns common in many,
but not all restructurings.
See Appendix III for more information on the
specific statutory provisions involved in each policy area.
Chapter 2 - Employer Perspective
....Even if we are giving them more benefits in total, they take the
pluses for granted and look at and magnify what they lose.
But even minor benefits lost to seller are perceived by [employees] as
big takeaways. Employees who experience the most change are preoccupied by what
is being taken away.
Anonymous respondents to
The Conference Board Study8
While retirement plan concerns were the most frequently raised by testimony
from employers, health plans and cafeteria plans were also mentioned as
presenting problems. At least one speaker strongly believed that the laws and
regulations could have the perverse effect of subverting objectives that
Congress sought to achieve when it enacted ERISA.9 In contrast, another speaker challenged the working
group on the implication that benefit continuity was a suitable goal10. This witness noted that in an efficient market, an
employer will seek to provide to employees what benefits they value. The
working group does not dispute this position. The focus of this report is not
on the employers choice of providing or discontinuing benefits but rather
on where the provisions of the law or regulations restrict or eliminate the
employers choice in what benefit package or features to offer following a
restructuring.
Retirement Plan Matters
Fiduciary Conduct: Investment issues are increasingly being raised as
participants are transferred from the sellers 401(k) plan to the buyers 401(k)
plan. The buyers plan and the sellers plan rarely have exactly the same
investment options. It is often difficult to obtain new elections in advance of
the closing date of the transaction because of the timing of the transaction.
Yet it is important to the participants that their salary reductions continue
uninterrupted to obtain the tax advantage of the 401(k) plan. Even if the
continuing investment options cannot be preserved, continuing participants
existing deferral elections is the least disruptive alternative and the most
likely to enhance long-term savings. That money then must be invested.
Inevitably, some participants do not make timely elections as to how their
salary deferrals and matching contributions should be invested.
Employers have two choices: invest the money in comparable funds in the
buyers plan or put those amounts in a safe investment such a money market
fund which protects the principal until the participant makes and investment
choice. Either alternative could result in a loss to the participant, either in
the form of an actual loss of principal in a higher yielding investment or in a
lower return in the safe investment. Yet the alternative, which is to
discontinue the salary deferrals for a period, is clearly not the right policy
answer.
Automatic Enrollment: The IRS has issued guidance indicating that
automatic enrollment (so- called negative elections) for and Internal Revenue
Code Section 401(k) plan and Section 403(b) deferrals is permissible under the
Code. Fiduciary issues concerning the investment of the funds continue to
concern employers, both in on-going plans and in restructuring transactions.
Guidance from the Department providing guidance on safe harbor investment
options that would not cause the plan to lose its ERISA Section 404(c)
protections or that would provide some other sort of comfort for fiduciaries
would go a long way toward insuring uninterrupted 401(k) savings. The witnesses
suggested that appropriate safeguards could be built in to ensure that funds
are indeed comparable and that participants are informed of their right to
change investment options.
Employer Stock: Employer stock poses its own problems in
restructuring situations. Often employees would like to retain their current
investment in the sellers stock. In the buyers plan, however, that stock
generally loses its status as employer stock and therefore poses
diversification and fiduciary issues. (Certain defined contribution plans are
permitted to hold qualifying employer securities without regard to the
normal fiduciary conduct consideration of diversification.) Again where the
transferred participants have the option to transfer their investment from the
sellers stock to other investments in the buyers plan, one witness proposed
that the buyers plan should be permitted to treat the seller stock fund as employer securities. The participants would have made the investment
choice already in the sellers plan; the transfer to the buyers plan should not
cause that investment option to lose its 404(c) protections or subject the new
plans fiduciaries to responsibility for offering the other employer stock
option to participants. The same issue can arise in a spin-off or a joint
venture, where employees want to keep some investment in the former parent
company stock.
For a non-traded company, employer stock in a plan can pose an additional
problem. If the plan retains the shares of the original sponsor following a
restructuring, those shares may lose their status as qualifying employer
securities relative to the plan. That means that the plan may be restricted
in its ability to divest itself of the shares. The law provides a procedure for
the sale of qualifying employer securities to a related party. Such
procedure would not apply to a sale of nonqualifying employer securities. But the only market for those non-traded securities may be limited to an
entity that is related to the plan or plan sponsor. This leaves the plan in the
situation of having to request an individual prohibited transaction exemption.
This process is costly and time consuming. Furthermore, during this period, the
plan is required to hold such asset, which may be inconsistent with the overall
objectives of the plan fiduciary.
Defects in the operation of the sellers plan: Buyers are
sometimes reluctant to take transfers from the sellers qualified plans for fear
that the receiving plan would be tainted by qualification defects or ERISA
violations of those plans. Earlier this year, regulations were issued that
protected a receiving plan that accepted a rollover from a defective plan,
holding that such a rollover will not jeopardize the receiving plans
qualification. The witnesses testified that similar guidance with respect to
direct transfers would encourage plan-to-plan transfers allowing the
transferred employees entire benefit to be provided from the same plan without
the administrative complexity of rollover and the inherent risk of leakage for
those employees who do not roll over. Guidance from Treasury extending the same
protection to transfers would encourage benefit continuity. The preamble to the
regulation indicated that Treasury received a comment urging this result and
was considering issuing guidance.
Typically a buyer is unable to identify problems with a plan, particularly
operational problems, until after the transaction when the buyer has been
administering the plan for some period of time. Currently the IRS and DOL
voluntary compliance programs provide no relief for a buyer who finds and
corrects defects inherited from a seller, either when an entire plan is
transferred or when a portion is transferred. The witnesses offered that both
voluntary compliance programs should make it clear that a buyer who corrected
defects inherited from the sellers plan should face reduced penalties if
the defects were identified and corrected within a specified period of time
after the transaction. Since these defects are often operational in nature,
they are often detected only on audit, which takes place after year-end. The
speakers encouraged that the transition period chosen should be long enough to
complete the first full audit (e.g., until the end of the second year after the
transaction). The witnesses offered that if buyers are encouraged to identify
and correct these defects without fear of penalties, they might be more likely
to continue the sellers plan.
In addition, the witnesses noted that the current relief programs are
limited to retirement plans. They suggested that the DOL and IRS voluntary
compliance programs should be expanded to include COBRA, HIPAA, and other
health and cafeteria plan issues.
Anti-Cutback and other benefit protection issues: Often concern about
preserving benefit distribution forms or other ancillary benefits protected by
section 411(d)(6) prevents buyers from accepting a transfer of assets and
liabilities from the sellers plan. The Treasury has granted relief to defined
contribution plans for changes in distribution options, but the witnesses
observed that obstacles remain for defined benefit plans. From the employers
perspective, circumstances exist where eliminating options should be permitted,
easing the administrative burdens (and attendant cost) on plans without
jeopardizing participants. For example, where a frozen option applies to only a
small part of the benefit or where an option of equal actuarial value is rarely
if ever chosen by participants, the plan should be free to eliminate that
option. This would encourage buyers to accept transfers, knowing that over time
they could eliminate these vestigial options. The speakers suggested that this
change would reduce the number of plan terminations otherwise occurring during
restructuring transactions.
One speaker suggested that the right to eliminate the joint and survivor
option in profit sharing and stock bonus plans should be extended to money
purchase pension plans.
Vesting: Similarly, problems were cited with grandfathering vesting
formulas in transfers. Allegedly, companies have refused to accept transfers of
assets from the sellers plan because they do not want to be required to
administer different vesting schedule for future contributions. However, they
are willing to fully vest as to old money. This alternative puts the
participant in as good or better situation than they would be if their account
were left with the seller, who might or might not have the obligation to vest
the transferred participants, depending on whether the transaction resulted in
a partial termination.
Nondiscrimination rules: Often the provisions that create the most
difficulty for plan sponsors are those aimed at nondiscrimination under the
Internal Revenue Code. Designed for a single employers workforce, the rules do
not work well for large employers with diverse businesses that are often
engaging in mergers, acquisitions and divestitures. These provisions can
prevent the employer from continuing the benefits that employees had under the
sellers plan because the mathematical tests cannot be met. The successor can
encounter the following problems when trying to meet the transferred employees
expectations that their benefits will continue unchanged and the problems that
can arise under the nondiscrimination rules:
-
Grandfathering the sellers pension design for transferred employees,
which is the option that protects the transferred employees expectations
without increasing the buyers costs for its other employees. This can
create discrimination testing problems as the group of transferred employees
shrinks over time and becomes more senior (and therefore more highly
compensated).
-
If the buyer is willing to continue the existing pension design for the
entire acquired business unit on a permanent basis, continuing the benefits
often result in expensive discrimination testing. Further, the separate benefit
formula may not satisfy the discrimination testing rules if the mix between
highly-compensated in the acquired group is significantly different than in the
acquiring group.
-
Results of non-discrimination tests are rarely known at the time of the
transaction, making buyers reluctant to commit to continuation of the existing
benefit structure beyond the transition periods, even though as a business
matter they may be willing to make such a commitment. Worse yet, employers who
do make extended commitments to their new employees may find themselves
flunking the tests as time goes by, particularly as they acquire and sell other
businesses.
Same desk rule for 401(k) plans: Based upon the number of comments,
the same desk rule that prevents distribution of participants accounts from IRC
section 401(k) plans is a frequent source of frustration in transactions. While
IRC section 401(k)(10) solves the problem by permitting distributions in
certain cases and the IRS has recently issued guidance indicating a narrowing
of the same desk rule, certain transactions are still covered by the rule (such
as joint ventures and sales of partnership and LLC interests). This rule is
cited as being particularly difficult to explain to plan administrators and
participants because employees may be permitted to receive distribution of
their benefits under the defined benefit plan, to which the Service has said
the same desk rule does not apply. On the other hand, these employees may be
unable to receive a distribution of their own deferrals under the 401(k) plan
due to the same desk rule.
Health Plan Matters
Temporary Sharing of Employees: One of the items raised in the
context of health plans is the frequent use of transition employment
agreements, where the seller continues to provide health coverage for some
brief period for the employees taken over by the successor. A
transaction may close when financing is obtained or the Hart-Scott-Rodino
antitrust period ends or when regulatory approvals are obtained or simply when
the business people iron out all the details. This may not coordinate neatly
with the year-end of a benefit plan.
Continued participation in the sellers health plan, which would create
the least disruption, is often precluded by fear that covering these former
employees would create an unintended multiple employer welfare plan
(MEWA) which would be subject to state insurance laws. Earlier this year, the
Department responded to this concern in the context of a new MEWA filing
requirement created by HIPAA. The Department issued guidance that relieved
employers of the obligation to file the Form M-1, at least for this year, if
the plan might be a MEWA solely because it provides temporary coverage of
former employees in change in control transactions (such as mergers and
divestitures). Under the Departments guidance, the arrangement is
considered temporary (and a filing will not be required) if it does not extend
beyond the end of the plan year following the year in which the change in
control occurs.
Although this guidance deals only with the plans reporting obligation
on the Form M-1, it does indicate that the DOL is aware of the issues posed in
these circumstances. Several witnesses proposed that uninterrupted health
benefit coverage would be facilitated if the Department issued permanent
guidance that a health plan is not a MEWA where the multiple-employer feature
exists solely to facilitate a restructuring.
Cafeteria Plan Matters
Discrimination: Earlier the Code provisions relating to
nondiscrimination were discussed for retirement plans. These important
protections do contribute to the complexity of managing retirement plans during
restructuring, but the Code has relieved this complexity somewhat by providing
a transition period. The situation is even worse for cafeteria plans,
flexible benefits, and self-funded health plans, where discrimination rules
apply, but there is no transition period. While testimony indicated that most
IRS offices seem to allow a reasonable transition period, this is by grace of
the individual examiner. It would contribute to predictability to have official
guidance making it clear that continuation of the sellers benefits for some
period of time will not violate the various nondiscrimination rules.
Transfer of Flexible Spending Accounts: Several witnesses testified
about the absence of guidance on the right of a successor employer to assume
the obligation for pre-existing employee contributions to medical flexible
spending accounts. Though the Treasurys perspective on this matter was that
these deferrals have the character of insurance, it is not clear that
permitting the continuation of these benefits would violate any policy
objective and such permission would contribute to continuity. The absence of
guidance creates unnecessary confusion and should be corrected.
Chapter 3 The Employee Perspective
"We need legislation to amend ERISA to return it to its original
intent, protect the retirees."
A. J. Jim Norby
Northwestern Bell retiree
The organizational restructuring of an employer commonly causes uncertainty
and anxiety among employees, pensioners, and their families. Among their many
concerns are the effects of the restructuring on their health care coverage,
expected pension benefits, and other employee benefits, as well as the effects
on their jobs, salary and wages, and other terms and conditions of employment.
The employer controls the business and the benefit plans (except in the case of
multi employer, Taft-Hartley Act plans). Rarely do employees, much less
pensioners, have influence over restructuring decisions or the effects of those
decisions on terms and conditions of employment, except, perhaps, where the
employees are represented by a labor union with collective bargaining and labor
law rights. This lack of control and influence exacerbates the concerns of
employees and pensioners.
These concerns can often be mitigated through timely, comprehensive, honest
communication from the employer to the employees, pensioners and, in a
unionized setting, their representatives. In any event, employees and
pensioners have a right to know how a restructuring affects their employee
benefits and to know as quickly and accurately as possible. Full disclosure was
clearly important to the drafters of ERISA; in fact Title I, Part I of ERISA
deals with reporting and disclosure. If employees receive full and clear
disclosure of what is happening, then they can make informed decisions.
Most benefit plan changes are made by the employer in the exercise of its
"plan sponsor" authority to design and amend the plans. In 1974, the
authors of ERISA strove to strike a policy balance between protection for plan
participants and the voluntary maintenance of pension and health plans by
employers -- now Congress should revisit that essential balance. A
fiduciarys duty under ERISA to provide timely, honest, and comprehensive
disclosure to plan participants is being expanded by the courts. But, according
to employee representatives that gave testimony to this working group that
expansion is not moving fast enough, and it is not broad enough to include
employers acting in their non-fiduciary roles as plan sponsor. While employers
complain that provisions of the law inhibit continuity of benefits in a
restructuring, employees and pensioners are concerned that these laws are not
sufficiently protective of their vital interests.
Some of this inconsistency is inherent in the law, which is written to grant
employers some freedom to make changes as seen necessary to meet business
conditions. Some of the inconsistency may, however, be attributed to a simple
failure to communicate. This perspective was acknowledged to some extent in the
Conference Boards report:
"Awareness that employees are not fully engaged in the bulk of
mergers should act as strong preventive medicine. This means not only
ratcheting up customized communications to the rank and file but also
developing means for actively involving their input to the merger process and
developing the ability to surface and listen to concernsin decisions from
crafting of new values and behaviors in the joint company to downsizing and
talent retention. The data on employee distance from merger policy and process
are sufficiently clear as to justify a cultural shift by top management as well
as by senior HP people. Senior executives often have the right words about
employee value, but may lack a supporting body of practices. Many companies
report that the disconnect between words and actions in this area has come home
to hurt them in retention and ability to fully integrate new teams."
Retirement Plans
Employers often make oral or written representations regarding the
maintenance of a certain level of benefits employees may take these
comments as promises. When the successor employer does not maintain such
levels, the employees understandably take it as a breach of trust. Employers
also make oral representations relative to their relationship with the
employees. These may go beyond the literal language of the plan document
and witnesses represented that employees may make employment decisions to take
a job or to stay with a job based upon these oral or written representations.
Witnesses did not suggest that the employees believe that the successor
employers had violated the law rather witnesses on this point merely
wished to point out that they did not believe that the law went far enough to
protect employee expectations.
While the employers expressed concerns over the restrictions imposed upon
their decision- making under the anti-cutback rules, the employees expressed
concerns over the employers right to reduce future benefit accruals.
Witnesses noted that the marketplace currently provides many opportunities for
employees in aggregate but this fails to take into account the circumstances
employees face as individuals.
Specifically, these factors were cited as working to disadvantage the
employees:
-
The failure to recognize prior service with the predecessor employer when
an employee stayed in the same job, but with a new employer.
-
The decision by a successor employer to curtail the prior pattern of
providing cost of living adjustments to retirees.
-
One witness, legal counsel to several employee groups, noted that one of
the difficulties for employees under ERISA is the access to relief. Too often
they must file suit to obtain relief.
-
Notices of change in benefits, other than reductions in future accrual
rates, are not required to be communicated until after the end of the plan
year.
-
Finally, employees must pay copying fees to obtain something as basic as a
copy of the plan document.
The witnesses recognize that these matters may have been permissible under
the law, but they still changed the expectations of the affected employees.
Some of the issues raised by employees may go beyond policy conflicts within
the law and deal with violations of current law. This working group has studied
the existence of conflicting provision or the absence of guidance. To the
extent that a fact pattern highlights matters that arose during a restructuring
but may have been a violation of the law, they are beyond the scope of this
report.
Welfare Plan Concerns
Similar to retirement plans, the primary employee issue with welfare plans
is the reduction in expected benefits. The witnesses testified to cases of the
reduction or elimination of post- retirement health benefits or the increase in
the retirees required contribution to such plans. These highlight the
lack of clarity for professional advisors in the field of employee benefits,
employees and retirees on the rights of the employer to change expected
post-retirement welfare benefits.
Protections
The witnesses recognized the improvements that ERISA has made. Financial
solvency of benefit plans has been substantially improved. The disclosures to
employees are more frequent and complete. Employees right to obtain
access to plan documents has been improved and their ability to seek relief has
been enhanced. However, communication problems remain. Notices are frequently
too brief and the employees right to obtain information is frequently
after the fact and, maybe, as much as 19 months after the fact.
Chapter 4 - Findings and Recommendations
Findings
Over a period of six months, the Working Group heard testimony from the
Department of Labor, Department of Treasury, Internal Revenue Service,
corporations, employee organizations and advocacy groups and their counsel on
issues related to the issues encountered upon the reorganization of a plan
sponsor. Based on the testimony heard and the information that was submitted,
the Working Group has made the following observations:
-
The level of plan sponsors restructuring is increasing without any
indication of slowing.
-
Required notice to plan participants of the benefit plan changes following
a restructuring often are made after any changes to the plan have been
adopted.
-
The nondiscrimination rules of the Tax Code are indeed a challenge to
benefit continuity. While compliance with these rules often requires sponsors
to change plans, we are not convinced that the policy goal of nondiscrimination
should be overridden by the continuity objective.
-
The notice of the reduction in benefit accruals required by ERISA Section
204(h) is to be issued after the amendment for such reduction has been passed,
but at least 15 days before it is effective. As a pension plan may be amended
concurrent with the effective date of the merger or other restructuring, this
timing is complicated in the event of the confidential negotiation on the
restructuring of a sponsor. We cannot see a clear resolution to this matter, as
the details involved in such notice cannot easily be reduced to a safe harbor
statement.
-
Several speakers noted the problems of complying with ERISA Section 404(c)
while changing fund choices due a change in the plan sponsor. One speaker
recommended that the Department provide a safe harbor notice or other relief
for compliance with ERISA Section 404(c). The working group did not go so far
as recommending that such a safe harbor notice be issued, as it was difficult
to anticipate what it would entail. However, the difficulty in complying with
Section 404(c) where the acquired plans portfolio must be conformed to
the investment options of the new sponsoring organization should be addressed
in the recommended transition relief.
-
The witnesses reported that obtaining relief as a separate line of
business under IRC Section 414(r) was difficult. The working group recognizes
that this is an extremely complicated area and does represent a compromise
between flexibility and the general policy goal of nondiscrimination.
-
The absence of a statute of limitations under ERISA for participant
benefit claims and the subsequent default to the various State laws setting
limitations was cited as a complexity in reorganizations. The successor
employer may continue to be at risk for an uncertain period for unknown defects
of its predecessor. The witnesses from the government acknowledged this issue,
but advised that any change could have ramifications that go well beyond the
scope of this working group. As such, this matter is left as the possible topic
for a future working group study.
Recommendations
We unanimously make the following specific recommendations:
o The employers guide should be readily available in print
and on each agencys web page. It should include (but not be limited to)
reminders of the following technical rules frequently overlooked in such
transactions:
-
The double counting of service credit in the event of a change in year-end,
-
Partial terminations
-
Form 5500 reporting periods,
-
Record retention requirements,
-
Statute of Limitations, and
-
Timely employee disclosures, etc.
o The employees guide should also be made available in
print and added to each agency web page. It should include, but not be
limited to:
-
Education/communication of employee rights to information.
-
Common benefit effects in the event of the restructuring
-
Employee rights to information, documents, etc.
-
How to access such information; reach the DOL hotline, etc.
-
Other sources of information and assistance.
o The Department should consider developing a legislative
package that re-examines the timing of the disclosure requirements, such as the
90-day requirement for the SPD, 210 days for the Statement of Material
Modifications, particularly in the context of sponsor restructuring.
o In the current debate regarding disclosure of fundamental plan
changes, specific consideration should be given to disclosure of changes
resulting from a restructuring.
o Each agency responsible for enforcing ERISA has issued
policies, rules or regulations that relate to sponsor restructuring. These
should be reviewed for the following:
-
In general, these provisions address the purchase or sale of assets or
stock. In todays marketplace, restructuring takes many forms. These
include non- corporate successor employers, partnership joint ventures, the
outplacement of a segment of the workforce, etc. Each agency should assess
their regulations to determine if they need to be clarified or refined to
respond to this change in the marketplace. In this context it is important
to note that the IRS had hoped for insight in this area when they solicited
comments on the recent changes to the COBRA regulations. Such input was not
forthcoming from the professional community. It remains both prudent and
necessary to obtain the guidance, cooperation and assistance of the
professional advisors to these sponsors for comprehensive relief to be
developed11.
-
The Internal Revenue Code minimum coverage rules include a specific
transition provision for retirement plans undergoing a change in sponsors. This
is found in Internal Revenue Code Section 410(b)(6)(C). Each of the agencies
should be encouraged to review such provision to determine whether such a
transition period could be applied to its operations. Such reconsideration
should expand to include welfare benefit plans.
o The current program for reduced penalty rates in the event of
the voluntary filing of late Forms 5500 should be revised to provide for some
reduced fees or waivers where a successor employer files the late reports of
the predecessor employer.
o Both the Department of Labor and the Internal Revenue Service have
developed programs that allow plan sponsors to correct plan defects. Specific,
discounted relief for corrections made by successor employers should be given.
o The Department of Labor should look at the current claims regulation
project in the context of what provisions are in place where there has been a
change in the plan sponsor from the sponsor who administered the plan at the
time the claim arose.
o The Department of Labor should consider granting prohibited transaction
relief where a plan holds a non-traded security that loses its status as a qualifying employer security due to the restructuring of the plan
sponsor. Such relief might involve a prohibited transaction class exemption or
a transition period from the date of acquisition in the existing provision for
buying, selling or holding qualifying employer securities.
o The Department should grant an exemption from MEWA status for
situations where 2 or more unrelated employers sponsor a common welfare plan
that covers employees who are transitioning from one employer to another
consistent with the relief already included from the filing of the Form M-1.
o Investigate the policy considerations associated with revising
the cafeteria plan regulations to specifically authorize the transfer of
flexible spending accounts as part of a restructuring.
o Expand the current relief on the same desk rule to include other entities
such as partnerships, limited liability companies, etc.
o Reconsider the anti-cutback regulations under IRC Section 411(d)(6) in the
context of allowing a defined benefit plan sponsor to eliminate certain
redundant or de minimis distribution options.
o Revise the PBGC premium policies in the event of a spin-off of plan
balances. A double payment can arise where a transaction involves a change in
plan years -- a premium was due on these participants at the beginning of the
predecessors plan year and, again, for the successor plan.
o Review the procedures for qualifying as a separate line of business (SLOB)
when an existing plan sponsor acquires an entity that was a separate business
prior to acquisition.
APPENDIX
Summaries of Testimony of Expert Witnesses
By Date
Summary of Testimony of Alan Tawshunsky, Special Counsel to the Division
Counsel/Associate Chief Counsel, Internal Revenue Service, Tax Exempt and
Government Entities Division - May 9, 2000
Mr. Tawshunsky focused his remarks on two major statutes that deal with
provisions that overlap both the Internal Revenue Code and Title I of ERISA --
the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA")
and the Health and Insurance Portability and Accountability Act of 1996
("HIPAA"). It is his opinion that these statutes tend to promote
continuity in the event of mergers and acquisitions.
COBRA
He began his remarks by stating that the set of proposed regulations issued
in 1987 provided very little guidance to plan sponsors on how COBRA applied in
mergers and acquisitions. This lack of guidance caused uncertainty for the
employer because it was not clear as to who had the responsibility to provide
COBRA coverage. These uncertainties also caused a number of employees to
"fall through the cracks". New proposed regulations were issued in
1999 to address the merger and acquisition situation. The finalization of these
regulations is a part of the Treasury Department's business plan for 2000. The
new regulations will provide greater certainty for employers as to who is
responsible for providing coverage and certainty for employees as to whether a
transaction entitles them to coverage.
According to Tawshunsky, there are three groups of potential "qualified
beneficiaries", including dependents that must be considered when dealing
with COBRA in merger and acquisition situations. First, the participants in a
group health plan who have a "qualifying event", i.e. termination of
employment before the acquisition; second, participants whose employment is
terminated in connection with the transaction; and third, participants who are
employed by the buyer after the transaction. He indicated that the new proposed
rules address COBRA liabilities in two types of situations: 1) sale of stock
and 2) sale of substantial assets. In both stock sales and asset sales, the
employees in the first and second groups are entitled to COBRA coverage and the
seller has responsibility for providing the coverage if it maintains a group
health plan. However, if the seller does not maintain a group health plan after
the sale, there is no requirement of the seller to establish a group health
plan solely to accommodate the terminated employee. In addressing the third
group of employees, he stated that they are entitled to COBRA coverage only if
the common law employer has changed, i.e. if a termination of employment has
occurred. If the employee remains employed by the same corporation following a
stock sale, even if that corporation leaves the seller's controlled group,
there has been no "qualifying event". Mr. Tawshunsky pointed out that
under the new regulations, the seller can contract with the buyer for the buyer
to provide the COBRA coverage. If the buyer fails to perform, the liability
comes back to the seller.
He informed the Study Group that the new regulations do not address the sale
of ownership interests in non-corporate entities. This area needs to be
addressed and will be looked at by the Service in later years.
HIPAA
Mr. Tawshunsky expressed the opinion that some people believe HIPAA does a
lot more than it really does. It does not enable employees to take their
current plan with them if they change jobs. It mitigates some problems but
certainly not all problems connected with a job change. The basic purpose of
the statute is to deal with "job lock", i.e. the problem of a
preexisting medical condition that will not be covered in a new job.
Specifically HIPAA:
-
Limits the permissible types of preexisting condition exclusions
-
Limits the length of preexisting condition exclusions
-
Requires group plans to give credit for the time an employee has been in
another group health plan towards satisfying the preexisting condition
exclusion
-
Requires insurers and employers to give employees certificates of
creditable coverage
-
Provides for special enrollment, in certain situations, e.g. birth,
adoption, loss of coverage
In response to the question has HIPAA caused some employers to abandon the
preexisting limitations requirements because 90% of the employees get
certificates of credible coverage, Mr. Tawshunsky stated that it was his
understanding that a fair number of employers feel that preexisting condition
exclusions are now more trouble than they are worth.
Prepared by Janie Greenwood Harris
Summary of Testimony of Paul T. Shultz, Director, Employee Plans Rulings
and Agreements, Tax Exempt/Governmental Entities - May 9, 2000
Mr. Shultz's remarks addressed issues that arise under the mirror provisions
of the Internal Revenue Code and Title I of ERISA by corporate transactions
where retirement plans are involved. He identified five different areas, which
overlap and addressed each.
Protected Benefits under Section 411(d)(6)
The rule affects business transactions because it requires
optional forms of benefits and protected benefits to be preserved after a
transaction, if the plan is continued. It is Mr. Shultz's opinion that this
anti-cutback rule may encourage employers to terminate plans instead of
retaining them. He informed the study group that the proposed regulations would
1) allow some optional forms of benefits to be eliminated; 2) liberalize the
existing elective transfer rules; 3) apply the elective transfer rules to
amounts that are not eligible rollover distributions and 4) revise the rules
for in-kind distributions.
Continuation of benefits on a termination basis, Section
401(e)(12) and 414(l)
These provisions provide that in the case of a merger or
consolidation, or a transfer of assets or liabilities from one plan to another,
each participant must receive benefits equal to or greater than the benefits
the participant would have received before the merger, consolidation, or
transfer on a termination basis. In Mr. Shultz's opinion, a buyer may be
discouraged from continuing the seller's plan because it could be responsible
for any operational deficiencies in the seller's plan.
Common Control Rules under Section 414(b), 414(c) and 414(m)
The rules governing common control effect the business transactions because
after the transaction has occurred, the group of employees and the newly formed
group of companies will change also. Mr. Shultz noted that the rules are
complex and business people are looking for more guidance on how they apply in
specific scenarios.
Vesting and eligibility under Section 414(a)(1) and
414(a)(2)
Section 414(a)(1) provides that service for a predecessor employer must be
counted in any case in which the employer maintains a plan of a predecessor
employer. Section 414(a)(2) provides that where an employer maintains a plan of
a predecessor employer, service for the predecessor is treated as service for
the successor employer "to the extent provided in regulations". Mr.
Shultz stated many people have not counted such service since there were no
regulations. He is not sure that that is the right position to take. He
indicated that this is an issue that the service needs to look at.
Joint and Survivor Rules under Section 401(a)(11) and Section
417
These provisions require the qualified joint and survivor annuity and the
qualified pre-retirement survivor annuity be provided to participants and
spouses. Mr. Shultz stated that a buyer may not wish to continue a seller's
plan subject to these provisions and may elect to terminate the plan. The final
regulation may ease these provisions, although they will not be completely
eliminated.
When asked how the partial termination rules might apply in the case of a
spin-off, it was his opinion that the rules don't apply very often because a
substantial decrease in employment, at least 20%, is needed and generally that
level is not reached.
In response to a comment concerning the continuity of benefits in
outsourcing business functions, Mr. Shultz stated that outsourcing situations
generally raise a lot of questions that need to be thought about and addressed.
Prepared by Janie Greenwood Harris
Summary of the Testimony of Bill Bortz, Associate Benefits Tax Counsel,
Department of Treasury
June 2, 2000
Mr. Bortz appeared at the recommendation of Mr. Paul Schultz and Alan
Tawshunsky to address questions that the working group had in the area of
cafeteria plans. He emphasized that cafeteria plans must be analyzed in the
context of their origin. Their specific purpose was to lessen the cost to
employees where the employer required an increase in the employees
contribution to their health care coverage. The program involves salary
reduction elections where the employee agrees to give up cash wages in exchange
for health coverage or some other tax-advantaged benefit. The key to these
arrangements is that when the rules are satisfied, the general tax principal of
constructive receipt does not apply and the employee does not pay
tax on the benefit, even though he or she had the unrestricted right to the
cash.
Mr. Bortzs comments then shifted to the specific issues of
medical
flexible spending accounts. He emphasized that such arrangements must be
viewed as insurance. The decision to enter into the arrangement must be made
before any expenses are incurred and will be fixed for a year. Changes in
coverage can be made during the year in the event of changes in circumstances
that are of independent significance. He emphasized that the typical FSA
involves a benefit that is equal to one times cost the employee sets aside $500
and can receive up to $500 of benefit. Such plans, however, cannot have design
features that insure that benefits equal cost. Coverage must be fairly uniform
throughout the year. For example, an employee may defer $50 per month, but
incur a cost early in the year and request a reimbursement of up to their total
annual payment, even though their cumulative deposits to date do not cover the
amount of the benefit. If the employee incurs no medical costs during the year
and thus, submits no claims, the benefit is not refunded.
The discussion then shifted to whether or not the requirements for operating
a cafeteria plan provide sufficient flexibility in the event of a
reorganization of the plan sponsor. The concept of a reorganization of the plan
sponsor is not an event that is listed as a basis for an employee making a
change in their election. A change in election can be made if there is a change
in coverage. Thus, a change in sponsor that involves a simultaneous change in
coverage would trigger the right to change certain elections. Such changes,
however, must be consistent with the change in coverage.
A specific question was what would happen to the amounts that the employee
has deferred from wages for future medical or dependent care costs, but were
not used as of the date of the transfer to the successor employer. Mr. Bortz
noted that there was no specific provision in the law covering this matter and
that it is a matter of plan design. Mr. Bortz emphasized that if such employees
lost these deferrals during the course of such transaction; they should not be
looked upon as forfeitures. This is the point of emphasizing the insurance
nature of these deferrals. Mr. Bortz stated that these periodic deferrals are
similar to periodic premium payments for insurance. If the policy period ends
for any reason, the right to coverage ceases with no right to refund for
previously paid premiums.
Prepared by Rebecca J. Miller
Testimony of Louis Campagna, Chief of the Division of Fiduciary
Interpretations, Office of Regulations and Interpretations, Pension and Welfare
Benefits Administration accompanied by John Canary, Division of Disclosure
June 2, 2000
Mr. Campagna emphasized that the bulk of the specific guidance covering the
reorganization of the plan sponsor lies within the Internal Revenue Code
provisions of ERISA. Mr. Campagna covered the fiduciary conduct provisions that
each employer must demonstrate with respect to the plan.
Fiduciary Conduct Matters
In general, the decisions of a plan sponsor to merge, terminate or amend a
plan following a merger, acquisition, outsourcing or other restructuring event
would not be considered a fiduciary action. These are settlor functions.
However, the actions taken to implement these decisions can involve fiduciary
standards.
Mr. Campagna emphasized that there is very little guidance on this matter in
ERISA. The general rules of fiduciary conduct apply. Fiduciaries must act
solely in the interest of the plan participants and beneficiaries and for the
exclusive purpose of providing benefits to participants.
The following items are subject to scrutiny for fiduciary conduct:
-
Merger of defined contribution plans must protect the participants
accrued benefit, as they existed prior to the merger. This ties into the
anti-cutback provisions of the Code. A plan is merged, not when assets are
commingled, but when the assets of one plan can be used to pay benefits of the
other plan.
-
Participant rights to direct their investments. The right itself is not
protected. The plan sponsor can eliminate this right. But, once granted, how
such right operates does trigger fiduciary conduct concerns.
-
The change in investment funds offered to participants as a result of a
merger including the costs associated with the wholesale liquidation of one
portfolio and investment into a new portfolio, if any. (There was significant
discussion on this point by members of the working group.)
-
Offering proprietary funds of the plan sponsor, subject to the class
exemption from prohibited transaction.
-
Black out periods during the investment transfer.
-
The fees associated with different investment choices.
-
Payment of expenses by the plan.
-
Notices and disclosures to participants. There was significant discussion
on this point also highlighting the timing and limited number of notices
required to participants in the event of a reorganization of a sponsor of a
defined contribution plan.
-
Actions with respect to employer securities held in a plan including
tender offers.
During the question and answer session of Mr. Campagnas presentation
there was significant discussion about the transition of early retirement
subsidies, etc. in the case of a restructuring. The consensus was that the
accrued benefits to the date of transfer must remain, but there is no fiduciary
conduct matter regarding the continuation of future accruals following the
change. That becomes a settlor function of the successor employer.
At that point the discussion switched to the matter of welfare plans. Much
of the focus was on retiree benefits. There is no vesting concept in ERISA for
welfare plans, but frequently the participants in these plans have received
written and oral representations that the benefits would be available for life.
Mr. Campagna agreed that this was an area of uncertainty under the law.
Mr. Campagna then discussed the statute of limitations concept under ERISA.
Section 413 of ERISA contains the sole reference to a statute of limitations
and it applies to fiduciary breaches and prohibited transactions. This period
goes for the later of 6 years from the date of the last action which
constituted a breach or violation or the last date on which the fiduciary could
have cured the breach or violation or three years after the earliest date on
which the fiduciary actually had knowledge of the breach or violation, except
in the cases of fraud or concealment, which is then extended to six years.
There is no reference to a statute of limitations for reporting or
disclosure matters or participant claims. Participant claims are subject to
state law where they may be treated as a contract claim or a claim for lost
wages. ERISA does, however, have specific claims procedures for employees who
believe they have been denied benefits to which they are entitled. The
regulations are in the process of being revised.
This triggered a discussion among the group members of the diversity of
caseloads between state and federal courts.
On the question of participant deferrals through a cafeteria plan, Mr.
Campagna and Mr. Canary noted that they were not aware of any enforcement
actions in this regard but that this was not their specific field of influence.
Mr. Canary discussed the penalties associated with late filings of Form
5500. He mentioned that many persons had discussed the issue of the absence of
a statute of limitations and the size of the penalty in the context of an
innocent successor sponsor. The DOL is looking at these penalties as part of
the revised Form 5500 reporting system, but no specific statement was made
relative to relief in this area.
Prepared by Rebecca J. Miller
Summary of Testimony of Peter J. Tobiason, Assistant General Counsel for
Employee Benefits and OSHA on behalf of the ERISA Industry Committee - July 18,
2000
The ERISA Industry Committee (*ERIC*) represents major employers with over
25 million ERISA plan participants to whom its members directly provide
retirement, health and other benefits.
Although technology, increased global and domestic competition, and new
markets are driving an increase in mergers and acquisitions, employees are
still recognized as the most important asset to a business. Employers want to
retain employees during and after M&A transactions.
Five problems exist in connection with benefit continuity in organizational
restructuring:
-
PBGC intervention in M&A transactions with no regulatory guidance or
limits. The result is that sellers, in order to avoid PBGC intervention, are
not transferring plans to buyers. As a result, many employees end up without a
plan or have their benefits split between two plans, which may mean less in the
way of overall benefits. Also, many employers are simply staying away from DB
plans in M&A transactions. [NOTE: the PBGC, subsequent to this testimony
and in response to ERICs concerns, addressed this issue in Technical
Update 00-3.]
-
Anti-Cutback Rule: Having to maintain all forms of distribution options
under the old plan effectively discourages combining the sellers plan
with the buyers plan in order to provide employees with seamless
coverage.
-
Nondiscrimination rules can prevent the buyer from providing the
sellers employees with the same benefits previously provided by the
seller or from tailoring benefits to address employee needs and competitive
conditions in a new line of business. The grace period to continue the
sellers plan is ineffective. QSLOB provisions in the Code are so narrowly
interpreted as to be ineffective.
-
IRS Audit CAP program is unpredictable and exposes a buyer to substantial
penalties if it maintains the sellers plan.
-
Cafeteria Plans: Unknown whether a seller can transfer the plan to a
buyer.
Substantial uncertainty as to a MEWA (multiple employer welfare arrangement)
is created when the buyer temporarily continues the sellers welfare
arrangement or when an employee works for a joint venture (with less than
80% ownership of employer) and continues to maintain that employee on its
welfare arrangement.
Portability inhibitors: The same desk rule is a major inhibition to
portability for which the only meaningful solution is repeal of the rule. Also,
the anti-cutback rule inhibits portability due to the administrative burden
discussed above. The current IRS proposal would provide relief in some
situations.
Current cash-balance plan legislative proposals would also substantially
inhibit continuity of benefits, for example:
-
Pension Reduction Disclosure Act: Requires four kinds of disclosure: 1)
basic written notice, 2) hypothetical examples protecting benefits under the
new and old plans, 3) at participants requests, information sufficient to
confirm calculations in the hypotheticals, and 4) at the participants
request, individual benefit projections. This amount of disclosure is overkill
and impossible to comply with in the context of business transactions.
-
Older Workers Pension Protection Act of 1999, which requires "sum
of" approach whenever the plans benefit formula is amended (i.e.
benefit=accrued benefit under plans old benefit formula at date of
amendment + benefit accrued after amendment under plans new benefit
formula). This imposes a substantial burden because it requires every
participants benefit formula to be bifurcated every time plan is amended.
This will force more buyers to reject any seller DB plan.
Prepared by Tim Mahota
Summary of Testimony of Nell Hennessy, President ASA Fiduciary
Councilors, Inc. - July 18, 2000.
Ms. Hennessy indicated that the subject matter was important because laws
intended to protect participants should not impede seamless continuation of
benefits where both buyer and seller have an interest in maintaining the status
quo. She then summarized issues in the following areas:
Health Plans
Ms. Hennessy emphasized that continuity in health plan coverage is very
important and that continued participation in the sellers plan would
create the least disruption, but there is concern that such an arrangement
would create an unintended multi-employer welfare plan (MEWA) which
would be subject to state insurance laws. She further stated that the
department in July responded to this concern by issuing guidance in the form of
Q&A-20, which relieves the employer of the obligation to file the form M1
in three circumstances. Ms. Hennessy suggested that it would greatly facilitate
uninterrupted health benefit coverage if the Department would issue permanent
guidance that a health plan is not an MEWA in circumstances outlined in the
Q&A-20, both for the M1 reporting obligation and for the underlying MEWA
status.
Joint Ventures
Ms. Hennessy indicated that a rule that would allow employees to participate
in the plan of any company that owned 25 percent or more of the venture would
be helpful in providing benefit continuity, particularly for participants
transferred to the joint venture.
Fiduciary Issues
Ms. Hennessy discussed fiduciary issues related to investment related
concerns that are raised when participants are transferred from the
sellers 401(k) plan to the buyers 401(k) plan. These issues relate
to investment options, new elections, salary reduction agreements, and what the
employer can and cannot do. She indicated that guidance from the Department of
Labor providing direction on Safe Harbor investment options that would not
cause the plan to lose its 404(c) protections would go a long way towards
insuring uninterrupted 401(k) savings. Ms. Hennessy further discussed the
problems related to employer stock in an organizational change. She indicated
that the buyers plan should be permitted to treat the sellers stock
as employer securities. This is because the participants have already made the
investment choice in the sellers plan and the transfer to the
buyers plan shouldnt cause that investment option to lose its
404(c) protection.
Defects in the Operation of the Sellers Plan
Ms. Hennessy then discussed several issues related to defects in the
sellers plan that may or may not be inherited by the buyer and the impact
that this situation may have on benefit continuity. She recommended that the
accepting plan be protected from defects in the sending plan in the case of
transfers which are simpler than rollovers and do not have the risk of leakage
inherent in rollovers. Ms. Hennessy then recommended that the IRS and DOL
Voluntary Compliance Program provide relief for buyers who find and correct
defects inherited from a seller when such defects are corrected within a
reasonable period of time. This will encourage them to continue the
sellers plan and provide better benefit continuity.
Other Transfer Issues
Ms. Hennessy discussed concerns relating to benefit distribution forms
protected by Section 411(d)(6) that make buyers unwilling to accept transfers
of assets and liabilities in the sellers plan. She suggested that whereas
the Treasury has indicated a willingness to grant release to defined
contribution plans this has not been the case with defined benefit plans and
that there are clearly circumstances where eliminating options could be
permitted easing administrative burdens and attended costs in plans without
jeopardizing participants. She also raised concerns with respect to
grandfathering investing formulas in transfers. Such grandfathering have caused
companies to refuse to accept transfer of assets from sellers plan
because they do not want to have to administer vesting schedules separately.
Nondiscrimination Rules
Ms. Hennessy indicated that some of the most difficult problems in benefit
continuity in business restructuring are related to the nondiscrimination rules
under the Internal Revenue Code. She indicated these were designed for a single
work force and do not work well for large employers with diverse businesses.
She indicated that grandfathering the sellers pension design for
transferred employees can create discrimination testing problems over time.
That even when the buyers want to continue the existing pension design,
to continue the sellers benefits often will create expensive
discrimination testing. Also, the rigidity of the coverage rules and separate
lines of business rules make it so that the former facts and circumstances test
no longer apply which in turn makes it so that buyers are reluctant to commit
to continuation of the existing benefit structure. This situation is even worse
in cafeteria plans, flexible benefits, and self funded health plans where the
rules provide no transition period.
PBGC Issues
Ms. Hennessy raised concerns about duplicative PBGC premiums where even a
portion of the plan is transferred from the sellers plan and the need for
written guidance regarding circumstances in which PBGC wont intervene in
corporate transactions.
Same Desk Rule for 401(k) Plans
Ms. Hennessy indicated that the same desk rule that prevents distribution of
participant accounts in 401(k) plans is an endless source of frustration in
transactions and should be eliminated. She suggested that a good solution would
be a rule that would allow employees to receive a distribution from their
401(k) plan if they transfer from the controlled group, which maintains the
plan to another controlled group that does not participate in the plans.
Prepared by Michael Stapley
Summary of Testimony of John Hickey, Vice President, Global Benefits,
Lucent Technologies Inc.
August 14, 2000
Mr. Hickey testified regarding his experience with respect to over 100
different deals involving Lucent. These deals typically involved the
acquisition by Lucent of start-up companies with defined contribution plans.
He identified three areas of the law where relief is needed to smooth the
transition of employees involved in an organizational restructuring: the
anti-cut back rule, the tainting of a plan by a predecessor plan and the same
desk rule.
With respect to the anti-cut back rule, Mr. Hickey described the problem
created by existing law, which requires that the plan of the acquiring
organization maintain all of the optional benefit forms offered under the
acquired plan. He noted that the recently-proposed IRS regulations would be a
step in the right direction, but would not entirely solve this problem. He
suggested that the regulations be expanded to cover survivors as well as
participants. In addition, he suggested that a defined benefit plan should be
permitted to eliminate all other optional benefit forms, provided that the plan
offers a 50% joint and survivor annuity.
With respect to the potential for the tainting of one plan by another plan
when the plans are merged, Mr. Hickey suggested that any IRS penalties arising
from an operational defect in one of the plans being merged be limited to the
closed group merged into the plan rather than the entire post-merger plan. This
solution would prevent a windfall to the IRS when a small plan with a potential
operational defect is merged into a larger plan. Currently, the need for an
audit of the acquired plan typically costs between $10,000 and $50,000 and
results in an average delay of six months for assets to be transferred. Prior
to the transfer, both plans must be separately administered.
Mr. Hickey urged the need for further relief from the application of the
same desk rule to a 401(k) plan. Although Rev. Ruling 2000-27 provided some
relief, that relief is limited to situations where the seller sells less than
85% of the assets of a trade or business. It does not appear to apply to
spin-offs or the sale of a business by a partnership. He urged the complete
repeal of the same desk rule for defined contribution plans.
In additional testimony, Mr. Hickey noted the need for clear guidance
regarding the use of Transition Service Agreements when a sale of part of a
business results in certain employees changing employers. In the absence of
clear IRS guidance, such agreements, which provide a smooth benefits transition
for employees, can result in the unintentional creation of a MEWA. He further
noted need for relaxation of the non-discrimination rules to provide more
flexibility to employers and the need for guidance under the PBGCs Early
Warning Program. Although this Program has been disruptive in the past,
Technical Update 00-3 appears to grant the necessary relief.
When asked to identify his top two recommendations, Mr. Hickey cited the
need for relief from tainting of a plan when two plans are merged and relief
from the anti-cut back rule.
Prepared by Catherine Heron
Summary of Testimony of Martha Hutzelman and Janine Bosley, attorneys,
Bosley & Hutzelman, P.C.
August 14, 2000
Attorneys Bosley and Hutzelman made the following significant points in
their written statement and oral testimony:
-
They are attorneys who represent businesses that engage in mergers and
acquisitions. Their joint testimony focused on the obstacles to maintaining
benefit continuity after corporate restructurings, especially mergers and
acquisitions.
-
The general problem with the current regulatory scheme is that the
statutory and regulatory rules applicable to mergers and acquisitions were
developed piecemeal in response to particular issues or situations. Piecemeal
solutions sometimes create new problems and leave other questions unanswered.
-
Particular obstacles relating to defined contribution plans include the
following:
a.
|
Protected plan benefits. Internal Revenue Code (IRC) Section
411(d)(6), the so-called "anti-cutback rule," protects all optional
forms of benefit payments under both plans when plans are consolidated. For a
large employer involved in multiple acquisitions, the employers surviving
plan may have a proliferation of benefit options. Small and mid-sized employers
may have prototype and master plans that cannot be easily amended to include
non-standard benefit options included in the acquired companies plans.
These employers may have to incur the cost of designing a custom plan or
finding a plan administrator who is willing to administer additional benefit
options.
Recently proposed IRS regulations would provide some relief by allowing some
defined contribution plans (e.g. 401(k) plans) to be amended to
eliminate nearly all existing benefit options so long as the participants
distribution choices include payment in the form of a single lump sum and an
extended distribution form (e.g. life annuity) that is otherwise
identical to the replaced optional form of benefit. However, this relief is not
available for consolidation of a money purchase pension plan with another
defined contribution plan. Under the regulations, employers will never be able
to eliminate the costs and burdens associated with the joint and survivor
annuity option that must be offered under any plan that contains money purchase
pension plan assets.
|
b.
|
.Same Desk Rule. This rule prevents a buyer from making
distributions from the sellers plan to participants who are employed by
the buyer in essentially the same occupation as they previously held with the
seller. The employee is treated as though his employment was not severed. The
IRS provided narrow relief in Revenue Ruling 2000-27, but it is of limited use.
Accordingly, if the sellers plan is not terminated before the
acquisition, the buyer must either continue the sellers plan or
consolidate the two plans; in either event, the buyer assumes responsibility
for the protected benefits of the sellers plan and any defects in the
plan.
|
c.
|
Plan Defect-Short Year Vesting. If the plan year is changed
as part of an organizational restructuring, there may be a short year (less
than 12 months). Participants who have 1,000 hours of service in the short year
and 1,000 hours in the new plan year are entitled to two years of vesting
credit under Labor Department regulations. But, this rule is commonly
overlooked. The employer would have to resort to the IRS voluntary
correction programs to correct the defect and avoid possible disqualification.
|
-
Issues for defined benefit plans include a situation where the
sellers plan was terminated before the acquisition, but the final
distribution has not been made until after the acquisition and there is an
unfunded benefit liability to the PBGC. The buyer could be held responsible for
the liability to the PBGC.
-
Following an acquisition, the Code Section 125 cafeteria plans of the buyer
and the seller must be consolidated for purposes of complying with the
nondiscrimination rules. If there is a nondiscrimination problem, the employer
must correct it prospectively. But, there is no IRS voluntary correction
program under which Section 125 plan problems can be corrected retroactively to
avoid adverse consequences.
-
.Issues for health plans affected by mergers and acquisitions include the
following
a.
|
COBRA: Following an acquisition there may be an issue as to
whether the buyer or the seller is responsible for providing COBRA notices to
former employees of the seller. IRS proposed regulations adequately address
this issue in the context of asset sales, stock sales, and other transactions.
But, the regulations do not address limited liability partnerships and limited
liability companies.
|
b.
|
HIPAA: Extensive regulations issued by the Labor Department and the IRS
address the applicability of the HIPAA portability and notice requirements in
business reorganizations. However, the regulations do not address whether there
is a break in creditable coverage at the time a participant leaves a health
plan of the seller and enters a health plan of the buyer.
|
-
.Recommendations include the following:
a.
|
There should be a comprehensive, long-range regulatory structure for
benefits issues in mergers and acquisitions that is based on general principles
rather than piecemeal solutions to specific situations.
|
b.
|
There should be a nationwide network of IRS and Labor
Department personnel dedicated to dealing with issues raised by mergers and
acquisitions to foster consistency and clarity of interpretation and
application of the law and regulations.
|
c.
|
The Labor Department and the IRS should publish an informational booklet on
benefits issues in mergers and acquisitions. The agencies should also conduct
education programs. With this information, employers involved in mergers and
acquisitions could better identify and assess the risks of regulatory problems
and adjust the price of the acquisition to account for the risk.
|
Prepared by James Ray
Summary of Testimony of Anthony J. Rucci, Executive Vice President and
Chief Administrative Officer, Cardinal Health, Inc.
- August 14, 2000
Mr. Rucci began his remarks by posing a hypothetical question - Should
benefits "continuity" be a goal in corporate restructurings? He asked
the Council to at least entertain the possibility that benefits continuity
during periods of organizational change may not be the most desirable outcome.
He addressed the issue of benefits continuity post-restructuring from three
perspectives:
-
The "health of the enterprise" perspective. Any decisions about
continuity and levels of employee benefits must consider the competitive
positioning of the organization.
-
The "fairness to employees" perspective. Fairness to prior,
current and future employees must be considered.
-
The "compliance" perspective. Laws and policy, which are
appropriately intended to protect individual rights, if too complex or
administratively burdensome, can slow down business and thus work against the
long-term best interests of the US and its workforce.
In discussing the "health of the enterprise" perspective, Mr.
Rucci concluded that the primary consideration in benefits continuity
situations should be the long-term competitive health of the organization.
Ultimately, that is the best decision for employees. To illustrate his
position, he cited four different strategies that had been employed by
companies with which he has been involved:
a)
|
"best of both worlds
strategy" - best benefits of both companies were retained.
(Baxter-Travenol acquisition of American Hospital Supply Corporation in 1985)
|
b)
|
"protect the level of
benefits strategy" - the more liberal benefits were retained (Casemark
spinoff from Baxter International in 1992)
|
c)
|
"what will it take to be
competitive" strategy - benefits for all employees were reduced to be
competitive (Allegiance spin-off from Baxter in 1996)
|
d)
|
"challenge the legacy"
strategy - benefits were changed (Sears transformation)
|
Which employees benefitted the most? It was Mr. Rucci's conclusion that the
Allegiance employees benefitted the most in the long run, even though there
were short-term give-ups in benefits.
In discussing the "fairness to employees" perspective, he
emphasized that the interests of all groups of employees - past, current and
future - must be balanced. As an example he cited the Sears decision to reduce
over a ten-year period the retiree life insurance benefit, an unpopular and
difficult decision, but a decision that benefitted current and future employees
and better-positioned Sears for the future.
As to the "compliance" perspective, Mr. Rucci stated that he
supports any efforts to protect funded and vested benefits. However, he
encourages greater regulatory flexibility. Compliance adjudication that
jeopardizes the future competitiveness and career and earnings opportunities
for employees is dysfunctional.
He summarized his three perspectives by recounting a personal anecdote
involving his family, who were employed by the steel industry. It was his
opinion that US steelworkers may have been better served if the unions and
steel companies had not "bargained" themselves out of competitiveness
versus global competition. In the long run, employees are not benefitted if, in
the interest of benefits continuity, we contribute to an organization's
competitive decline.
Prepared by Janie Greenwood Harris
Summary of Testimony of A. J. Jim Norby, President and Nelson
Phelps, Executive Director of U. S. WEST Retirees Association
September 12, 2000
Mr. Norby, who is a Northwestern Bell retiree, informed the Working Group
that the association, which was formed in 1992, has a membership of
approximately 19,000 members and represents 45,000 individuals. The membership
consists of retirees and active employees including employees who are union
represented. The pension plan is a combined plan, which covers both vocational
workers and management. The organization became very active at the time QWEST
announced its intention to acquire U. S. WEST.
He stated that the associations relationship with their former
employer is adversarial for the following reasons:
Inequities in the administration of the health benefit
plan. There has been a constant erosion of health benefits. The retirees
were promised the same level of benefits in retirement as they received as
active employees. This promise was made in written documents and was part of
the bargaining agreement. The retirees now must use HMOs and make
co-payments contrary to the promises made to them.
Misuse of the pension trust fund. The Company rewrote the
plan to provide that the substantial surplus approximately 6 billion
would revert to the company. In the last 11 years, there has been no
increase in benefits to the retirees except a 2.9 percent average raise given
in January 1996. Mr. Norby also indicated that there were some irregularities
in regards to expenses that were charged to the administrative costs of the
plan.
Mr. Phelps discussed the three lawsuits that the Association has been a
party to. The first case the Unger Case alleged that the plan
sponsor charged improper administrative expenses to the defined benefit plan.
The company agreed to restore 8 million dollars to the pension fund and the
case was settled out of court. In the second suit, the plaintiffs alleged that
the company was denying the health benefits promised to the retirees at the
time of their retirement. The Company agreed to retain the promised level of
benefits and the case was settled. The final case charged a violation of ERISA
when the plan sponsor amended the plan in 1994 to change the benefits. This
case was decided against the retirees on the basis of the Hughes case.
He further commented on the Associations efforts to oppose the merger
of QWEST and U. S. WEST because of the effect the merger would have on retiree
benefits. They were thwarted in this effort at the state regulatory level
because of the preemptive provisions of ERISA. Mr. Phelps stated that what was
being sought at the state level was the protection of what had been promised by
the employer and not a cost of living increase.
Mr. Norby and Mr. Phelps both think that the preemptive provisions of ERISA
do not protect the interests of plan participants. They also feel that case
law, particularly the Hughes case, does not adequately protect the normal
retirement benefits of employees. In their opinion, ERISA has become a
law for corporations. They urged the Council to recommend legislation
that will amend ERISA, enforce vesting and reverse the Hughes case.
Prepared by Janie Greenwood Harris
Summary of Testimony of Eli Gottesdiener, Esq., Gottesdiener Law Office,
Washington, D.C.
September 12, 2000
Mr. Gottesdiener discussed four class action suits that he has filed within
the past two years against First Union Corporation, SBC Communications, Inc.
and New York Life Insurance Company arising out of these companies
handling of their of in-house 401(k) and defined benefit plans. He said that
broadly stated, the common theme of the suits is that the companies, acting as
fiduciaries, engaged in self- dealing and breach of fiduciary duty with respect
to the investment of the plans assets.
The First Union Cases
Mr. Gottesdiener explained that there are two First Union cases. The first,
known as Franklin I or the Signet case, arises out of First Unions
takeover of Signet Bank in Richmond, Virginia in 1997. The suit challenges
First Unions unilateral liquidation of the non-proprietary investment options
in the Signet 401(k) plan and reinvestment of the proceeds in the exclusively
First Union proprietary options offered under the First Union 401(k). The First
Union options have under performed the Signet options by some $100 million. The
case was filed with nine plaintiffs on behalf of some 5,000 Signet 401(k) Plan
participants. The case was filed in May 1999 in the Eastern District of
Virginia in Richmond. It asserts a variety of claims under ERISA.
The second First Union case, closely related to the first, and known as
Franklin II or the First Union Case was filed in September 1999 by
eighteen plaintiffs on behalf of some 100,000 First Union 401(k) participants
and challenges, among other things, First Unions practice of offering only
First Union proprietary investment options to its employees. The suit contends
that had participants been offered non-proprietary options -- such as the ones
that First Union is required by market forces to offer third- party client
plans - participants accounts would be worth some $300 million more than they
are today. The suit also alleges that First Union improperly assesses the Plans
participant fees for record keeping and administrative services that First
Union waives for much smaller clients. It alleges claims under ERISA, RICO and
the Bank Holding Company Act.
New York Life Case
Mr. Gottesdiener explained that the New York Life case was filed on June 14,
2000 in the Eastern District of Pennsylvania (Philadelphia division) on behalf
of tens of thousands of New York Life employees and agents. It focuses on the
investment of the companys in-house large pension plans assets in
proprietary mutual funds. The suit accuses the company of using the assets of
the employees and agents defined benefit plans to seed, sustain and
subsidize a new line of institutional mutual funds. In the early 1990s,
New York Life took hundreds of millions of dollars of pension plan assets and
used them to create the new funds. Since then, the company has invested
hundreds of millions of dollars more in plan assets into the funds. For some
years, the pension plans investment in the funds constituted 70%, 80% and
even 90% or more of some individual funds, leaving little doubt as to the
funds dependence on the pension plans assets for their continued
survival and profitability. Indeed, since the funds inception, they have
consistently had, in the aggregate, half of all their assets come from the
plans.
Mr. Gottesdiener explained that ERISA obviously forbids the use of plan
assets for any purpose other than the exclusive interest of plan participants
and thus the suit accused New York Life of self-dealing and breach of the duty
of loyalty (as well as racketeering under RICO). But, he said, more simply, the
suit contends that the investment of the pension plans assets in the
MainStay funds was imprudent because it forced the pension plans to pay tens of
millions of dollars in unnecessary mutual fund fees and expenses. He said that
mutual funds may be appropriate investment vehicles for small or relatively
small investors but it is an entirely inappropriate form of investment for a
large pension plan, such as the multi-billion dollar New York Life Plans, which
can obtain expert, individualized investment management outside the mutual fund
form for a fraction of the cost of even the least expensive mutual fund.
Mr. Gottesdiener said the suit also contends that as part of New York
Lifes scheme to use its in-house employee benefit plans to jump start the
companys entry in the institutional mutual fund business, the company
similarly abused its stewardship over its 401(k) plans. The 401(k) plans had
been invested in New York Life separate accounts. In the mid-1990s, New
York Life converted those investments into its news proprietary mutual funds --
to grow the size of those funds, according to the suit. In addition to alleging
that this was a prohibited act of self-dealing and breach of the fiduciary duty
of loyalty, the suit questions whether it was prudent for New York Life to use
mutual funds for the 401(k) plans at all or at least without exploring the use
of less expensive individually managed or pooled accounts. Assuming the use of
mutual forms was not imprudent under the circumstances, the New York Life
plaintiffs still claim that New York Life violated ERISA (and RICO) by never
considering offering its employees anything other than New York Life mutual
funds, much the same as First Union does. Indeed, New York Life, like First
Union, is a bundled provider in the highly competitive 401(k) marketplace and,
like First Union, is forced to offer its third-party clients and prospective
clients better performing non- proprietary mutual funds, and not just its own,
in order to attract and retain business.
The SBC Case
Mr. Gottesdiener said the SBC case was filed in April 2000 in the Central
District of California (Los Angeles division) on behalf of approximately 40,000
401(k) plan participants. It challenges SBCs decision to liquidate
participants investment in the stock of a rival company, AirTouch (now
Vodafone AirTouch), which they held in the 401(k) plan of a company SBC
acquired (Pacific Telesis Group or PTG), and SBCs mapping of
the proceeds into SBC stock. The suit also challenges SBCs failure to
give clear and timely notice to the many thousands of participants who had the
right before the liquidation to withdraw or rollout their shares of AirTouch
that they had the right to do so. The suit contends that SBCs motive to
get their new employees (those acquired in the PTG) out of AirTouch, a key SBC
rival, drove the decision to provide participants with notice of the
liquidation that all but said participants had no means of avoiding the
liquidation of their shares. However, under the terms of the PTG 401(k) plan,
many thousands of participants had the right to withdraw or roll out their
AirTouch shares at any time. According to the suit, the notice SBC sent out to
participants concerning the liquidation of the AirTouch stock fund misled
participants into believing that there was nothing they could do to save their
AirTouch holdings. Mr. Gottesdiener said that a favorable ruling from the First
Union-Signet case on the notice issue should help establish that SBC breached
its fiduciary duties with respect to this subclass of participants.
Prepared by Janie Greenwood Harris
Summary of Testimony of Anonymous Employee Witness, arranged by the
Pension Rights Center
September 12, 2000
The witness began his testimony by stating that he thought his story
represented a good example of what employees go through with regard to their
retirement benefits in a corporate restructuring. He is a 50- year old senior
programmer analyst for an insurance company with 23 years of service, nine with
his present employer and the remainder with a company acquired by his present
employer.
He stated that many of his estimated retirement benefits have fluctuated
wildly, mostly downward. This fluctuation was due to three factors:
freezing of the benefit in the predecessor companys
defined benefit plan
no credit in the present pension plan for service with the predecessor
employer
conversion of the employers defined benefit pension plan to an age
weighted cash balance plan.
The witness informed the Working Group that he will suffer a loss of more
than a quarter of a million dollars in projected age 65 retirement benefits.
This amounts to more than a 45 percent reduction of his projected benefit.
He stated that improving the notice requirements when an employees
benefits change would do little to help employees whose benefits have been
reduced. Something more substantial must be done to eliminate the
employers ability to break their promises of retirement benefits. The
employees should be informed of what the old benefits were, what the new
benefits are and given the opportunity to choose between the two.
In conclusion, the witness urged the Council to recommend changes to current
laws that will protect the benefits of plan participants from corporate actions
that reduce their anticipated pensions.
Prepared by Janie Greenwood Harris
Appendix II
Index of Sources
Index for Benefit Continuity After Organizational
Restructuring - 2000
May 9, 2000: Benefit Continuity After Organizational Restructuring
Chair: Rebecca Miller
Vice Chair: Janie Greenwood Harris
a)
|
Agenda
|
b)
|
Official Transcript
|
c)
|
Executive Summary of Transcript
|
d)
|
Overview of Study Scope
|
e)
|
Number of News Releases About the Topic including "SBC
Communications Sued by Workers on Stock Sale: Dispute Centers on Employee
401(k) Plan by David Cay Johnston, New York Times; "Employees Sue SBC Over
Stock in 401(k) by Albert B. Crenshaw, Washington Post; "Workers Sue SBC
over 401(k) by Christine Dugas, USA Today;"SBC Faces Suit Over Retirement
Plans: Pacific Telesis Employees Allege That Investments Were Improperly
Sold" by Jeff D. Opdyke and Ellen E. Schultz, Wall Street Journal, all on
April 19, 2000, and
"Sprenger & Lang, PLC Announces Employee Class Action Lawsuit Against
SBC Communications Inc., in Billion Dollar 401(k) Suit, Business Wire, April
18, 2000.
|
June 2, 2000:Benefit Continuity After Organizational Restructuring
a)
|
Agenda
|
b)
|
Official Transcript
|
c)
|
Executive Summary of Transcript
|
d)
|
ERISA Industry Committee submission to the Internal Revenue
Service and Department of Treasury on Application of the Plan Qualification
Requirements in Connection with Mergers, Acquisitions, Dispositions and Other
Transactions and on the Multiple Use Rules, March 22, 2000.
|
e)
|
"Advisory Council: Officials Discuss Benefit Issues
Under Mergers, Acquisitions, Spin-Offs," May 10, 2000 BNA Pension and
Benefits Daily.
|
f)
|
Harry Bellas, Appellee, v. CBS, Inc. Westinghouse Pension
Plan, Partial Settlement Granted June 29, 1999, Civil Action #98-1455, and
Appeal November 22, 1999. (Amicus Curiae of the Association of Private Pension
and Welfare Plans in support of appellants urging reversal.
|
g)
|
"Officials Discuss Benefit Issues under Mergers,
Acquisitions, Spinoffs" by Colleen T. Congel, May 10, 2000 BNA Pension and
Benefits Daily
|
July 18, 2000: Benefit Continuity After Organizational Restructuring
a)
|
Agenda
|
b)
|
Official Transcript
|
c)
|
Executive Summary of Transcript
|
d)
|
Written Testimony by Peter J. Tobiason, Assistant General Counsel for
Employee Benefits and OSHA, ITT Industries, Inc., on behalf of the ERISA
Industry Committee, as well as the news release issued by ERIC on his
appearance before the working group.
|
e)
|
Written Testimony by Nell Hennessy, President, ASA Fiduciary
Counselors, Inc.
|
f)
|
Several news stories including:
-
"US West Retirees Threaten to Block Merger" by Andrew Backover,
Knight Ridder Syndicate, June 28, 2000;
-
"No Constructive Discharge in Requiring Choice Between Pension and
Employment" in BNA Pensions and Benefits, June 5, 2000; "Employ
Caution With Company Stock," a column by Jane Bryant Quinn, Washington
Post, July 2, 2000; "Participants Waived Right to Escrow Following Merger
and Plan Termination," BNA, June 12, 2000.
|
g)
|
A comment letter from the Investment Company Institute to the Internal
Revenue Service, June 27, 2000, on proposed special rules regarding optional
forms of benefit under qualified retirement plans.
|
August 14, 2000: Benefit Continuity After Organizational
Restructuring
a)
|
Agenda
|
b)
|
Official Transcript
|
c)
|
Executive Summary of Transcript
|
d)
|
Written Testimony on Problematic Issues Commonly Found in
Mergers and Acquisitions by Janine H. Bosley and Martha L. Hutzelman, Bosley
& Hutzelman, P.C.
|
e)
|
Written Statement of John G. Hickey, Vice President of
Global Benefits, Lucent Technologies, Inc.
|
f)
|
Written Testimony of Anthony J. Rucci, Cardinal Health,
Inc.
|
g)
|
IRS Private Letter Rulings on Distributions, Exclusion of
Compensation for Sickness or Inquiry, Qualification, Minimum Funding Standard,
Deferred Compensation, GCMs, TAMs & PLRs, Section 401 PLR 200030031, BNA
Pensions & Benefits, August 8, 2000.
|
h)
|
ERIC Applauds PBGC Guidance on Operation of Early Warning
Program
|
i)
|
ALJ Reduces Labor Department Penalty Where Plan Merger Led
to Reporting Error, BNA Pensions & Benefits, July 13, 2000
|
j)
|
ERISA Does Not Authorize Recovery of Fees for
Administrative Appeal Work, Court Rules.
|
k)
|
TEI Supports Anti-Cutback Exceptions, Latitude in
Transferring Plan Benefits, BNA Pensions & Benefits, August 8, 2000.
|
l)
|
PLR 200027059, Same desk rule applies to prevent contract
for outsourcing of information services from causing separation from service.
|
m)
|
Court Says Participant May Sue Employer for Failing to
Provide Insurers Claim Form?
|
n)
|
Welsch v. Empire Plastics, Inc., May 19, 2000
|
o)
|
Section 401 PLR 200024056, Same desk rule does not apply to
distributions to terminated employees hired by new primary government
contractor.
|
p)
|
"Cleaning up ?same desk IRS Rule," August
1, 2000, Providence Journal.
|
q)
|
Merger Found Not ?Change in Control Under Terms of
Executives Agreement, And Trucking Company Did Not Violate ERISA During
Subsidiary Spin-Off, Court Rules, both in BNA Pension & Benefits, August 7,
2000.
|
r)
|
No Constructive Discharge in Requiring Choice Between
Pension or Employment, BNA, June 5, 2000.
|
s)
|
Your Portfolio: Is Your Boss Raiding the 401(k) Till?
Individual Investor Magazine, July 20, 2000.
|
t)
|
PBGC Technical Update 00-3 on Early Warning Program, June
24, 2000.
|
|
|
|
|
September 12, 2000: Benefit Continuity After Organizational
Restructuring
a)
|
Agenda
|
b)
|
Official Transcript
|
c)
|
Executive Summary of Transcript
|
d)
|
ABA Net story on Comments Regarding the Internal Revenue
Service and Treasury Department Proposal on the Application of Section
4119d)(6) to Defined Contribution Plans
|
e)
|
Copy of Larry F. Gottlieb, et al vs. SBC Communications and
Pacific Telesis and their related savings and pension plans, U.S. District
Court for the Central District of California - A class action lawsuit.
|
f)
|
The Retiree Guardian, newsletter of the U S West Retiree
Association, as well as Highlights of the Pay and Benefits Changes for Classic
U S West Employees with 20 or more years of service, series of letters from
association president James Norby to various personages (Witnesses also
provided copy September 2000 issue of the AARP Bulletin, featuring an article
"Pension revolt catches fire: Longtime employees say they want their ?just
due by Trish Nicholson.
|
g)
|
An Employees Testimony before the Working Group on
September 12. Provided by the Pension Rights Center after principals arranged
for anonymous caller to talk about his own situation regarding a corporate
acquisition.
|
October 13, 2000: Benefit Continuity After Organizational
Restructuring
a)
|
Agenda
|
b)
|
Executive Summary
|
c)
|
Official Transcript
|
d)
|
Conference Boards "Post-Merger Integration"
A Human Resources Perspective", a Research Report 1278-00-RR.
|
e)
|
Merge & Purge by Daniel Gross, CFO Magazine, October
2000.
|
f)
|
U.S. Court of Appeals for the Third Circuit, March 7, 1985
in Merle R. Edwards, James Bridgland, William Fisher, Edward J. Schrode, John
T. Tredinnick and Richard L. Zath, Appellants v. Wilkes-Barre Publishing Co.
Pension Trust and Wilkes-Barre Publishing Co., Appellees
|
Appendix III
Relevant ERISA Provisions
The following lists the statutory provisions that correspond to the policy
considerations in Chapter One.
Requirement
|
Citations
|
Written Plan
|
ERISA Section 402(a)(1)
Treasury Regulation Section 1.401-1(a)(2) for a retirement plan; IRC
Sections 125, 127, 129, 137 for assorted welfare benefit programs.
|
Settlor Functions
|
Various, see, e.g., Lockheed Corp. v.
Spink, 517 U.S. 882 (1996)
|
Fiduciary Conduct
|
IRC Section 401(a)(2) for retirement plans.
Treasury Regulation Section 1.501(c)(9)-4 for certain funded welfare plans.
ERISA Section 403 405 for all plans subject to ERISA.
ERISA Sections 406 through 408 on prohibited transactions. Similar standards
are found in IRC Section 4975; see also, IRC Section 503
Statute of limitations is found in ERISA Section 413, enforcement provisions
in ERISA Section 502.
|
Broad based Participation/
Coverage
|
IRC Sections 401(a)(26) and 410
|
Nondiscrimination in Benefits
|
IRC Sections 401(a)(4), 401(k), 401(m),
401(l), 403(b)(12), 414(q), 414(r) and 416, Treasury Regulation Section
1.401(a)(4) for retirement plans.
Sections 79, 105(h), 125, 127, 129, 137, 501(c)(17) and 505, e.g., for
various welfare plans (these include coverage nondiscrimination standards, as
well).
|
Anti-cutback
Rules
|
IRC Sections 411(d)(6) and 414(l) and ERISA
Sections 204(g), 208 and 4231(b)(2), 4232(b).
|
Vesting
|
IRC Sections 411 and 414(a), ERISA Section
203.
|
Aggregation/
Affiliation
|
IRC Sections 414(b), (c), (m), (n) and (o)
with an exception in IRC Section 414(r); ERISA sections 210(c), (d), 4001(b)(1)
IRC Section 414(t) extends these considerations to certain welfare plans.
|
Combined retirement plan benefit limits
|
IRC Sections 401(a)(17) and 415
|
Minimum Funding
|
IRC Sections 412, 418 418E and ERISA
Sections 302 307, 4062- 69, 4201-25 - minimum funding and employer
liability for pension plans.
|
Distribution
Restrictions
|
IRC Sections 401(a) various, 401(k),
411(a)(11) and 417.
|
Tax-Free
Rollovers
|
IRC Sections 401(a)(31), 402(c) and 408.
|
Health
Coverage
Continuation
(COBRA)
|
IRC Section 4980B
ERISA Sections 601 through 608
|
Pre-existing
Medical
Conditions
|
IRC Sections 4980D, 9801 and ERISA Section
701
|
1 For purposes of this report ERISA refers to
the Title I provisions of the Employee Retirement Income Security Act of 1974.
The term Code will be used when referring to the Tax Code
provisions of ERISA or other relevant Tax Code provisions.
2 Patrick McTeague Working Group meeting
October 13. Page 18, line 7 of transcript.
3 Year to date market totals, reported on
October 11, 2000 on the Thomson Financial Securities Data web page at
http://www.tfsd.com/
4 FTC Annual Reports
5The Conference Board, Post-Merger Integration:
A Human Resources Perspective, R-1278, September 2000. Page 14
6The Conference Board, ibid. 4
7 The Conference Board, ibid. page 15
8 The Conference Board ibid. page 18
9 Peter Tobiason, Assistant General Counsel for
Employee Benefits and OSHA, ITT Industries, Inc. testimony on July 18, 2000,
page 7 of transcript.
10Anthony Rucci, Executive Vice President and
Chief Administrative Office, Cardinal Health, testimony on August 14, 2000
11Testimony of Alan Tawshunsky, May 9, 2000,
page 40.
|