Private Equity Groups and Retirement Plan Compliance

They buy companies. They sell companies. That means, among other things, that at any given point in time, they own lots of companies.

What are they? They're private equity firms. And, in their normal mode of operation, many of them constitute a controlled group of corporations within the meaning of Internal Revenue Code Section 1563(a)(1).

So? Bully for them, right. Actually, if we look more closely, it may be far more complicated than that when it comes to retirement plans. In the most typical situation, each portfolio company will maintain one or more qualified retirement plans. So, the controlled group maintains lots of qualified retirement plans. And, because private equity firms usually allow each portfolio company to operate autonomously, the proverbial left hand may not know what the proverbial right hand is doing.

Usually, in my experience, they are mostly or entirely defined contribution (DC) plans. That's good, but let's think about the compliance issues. Each DC plan needs to satisfy the coverage rules of Code Section 410(b) on a controlled group basis. Each plan needs to satisfy the benefits, rights, and features rules of Treasury Regulation 1.401(a)(4)-4 on a controlled group basis. Each plan that is not a 401(k)/(m) plan (or 403(b)) needs to satisfy amounts testing under Treasury Regulation 1.401(a)(4)-2 (or -3 for a DB plan) on a controlled group basis. Each plan that is subject to 401(k)/(m) may wind up needing to be aggregated with another like plan in the controlled group for testing purposes.

I'm going to simplify this a little bit, but here is the way that we might look at the compliance situation for a group of DC plans in a controlled group.

• Count up the number of nonexcludible (generally all that are at least age 21, have at least 1 year of service, are not covered by a collective bargaining agreement, and are not nonresident aliens) highly compensated employees (HCEs) in the controlled group. Let's call this number CGH.
• Do the same thing for the nonhighly compensated employees (NHCEs) in the controlled group. Let's call this number CGNH.
• For each plan, determine the number of HCEs and NHCEs, separately who are covered by that plan. For plan 1, we will call those numbers P1H and P1NH. For plan 2, let's call them, P2H and P2NH. You get the picture.
• Now, take the ratio (P1NH/CGNH)/(P1H/CGH). Is it at least 70%? Are the similar ratios for all of the other plans also at least 70%? In my experience, the answer is often no. If the answer is yes, you are in good shape. If it's no, you may have problems.
• At this point, you'll need to consider other issues such as plan aggregation, current year versus prior year testing methods, safe harbor designs, qualified separate lines of business (QSLOBs) and other equally wonderful concepts. You probably need an expert.

We could go on for pages and pages here. These situations often get ugly. The private equity company probably never thought about this stuff. Suddenly, the plans maintained by the companies that they own may have compliance problems.

In reality, when dealing with this type of organization, I've seen this issue more often than not. It's not part of the buying decision, it's not part of ongoing process, and frankly, the people completing (and signing) Forms 5500 for the various plans probably don't even realize the problem exists.

I've seen it. It's usually ugly. I can help.

Relief on Health Care Nondiscrimination -- A Visit from Santa Claus

IRS Notice 2011-1 brings us nothing but good news. The IRS has said that compliance with the nondiscrimination rules of PPACA Section 2716 should not be enforced until after the IRS has issued regulations or other administrative guidance on the topic. In the notice, the IRS specifically asks for public comments on these issues:

• The basis on which the determination of what constitutes non-discriminatory benefits under § 105(h)(4) should be made and what is included in the term “benefits.”
• The suggestion made in previous comments that the Departments have the authority to provide for an alternative method of compliance with § 2716 that would involve only an availability of coverage test.
• The application of § 2716 to insured group health plans beginning in 2014 when the health insurance exchanges become operational and the employer responsibility provisions (§ 4980H of the Code), the premium tax credit (§ 36B of the Code), and the individual responsibility provisions (§ 5000A of the Code) and related Affordable Care Act provisions are effective.
• The suggestion in previous comments that the nondiscriminatory classification provision in § 105(h)(3)(A)(iii) could be used as a basis to permit an insured health care plan to use a highly compensated employee definition in § 414(q) of the Code for purposes of determining the plan’s nondiscriminatory classification.
• The suggestion in previous comments that the nondiscrimination standards should be applied separately to employers sponsoring insured group health plans in distinct geographic locations and on whether application of the standards on a geographic basis should be permissive or mandatory.
• The suggestion in previous comments that the guidance should provide for “safe harbor” plan designs. Specifically, comments are requested on potential safe and unsafe harbor designs that are consistent with the substantive requirements of § 105(h).
• Whether employers should be permitted to aggregate different, but substantially similar, coverage options for purposes of § 2716 and, if so, the basis upon which a “substantially similar” determination could be made.
• The application of the nondiscrimination rules to “expatriate” and “inpatriate” coverage.
• The application of the nondiscrimination rules to multiple employer plans.
• The suggestion in previous comments that coverage provided to a "highly compensated individual" (as defined in § 105(h)(5)) on an after-tax basis should be disregarded in applying § 2716.
• The treatment of employees who voluntarily waive employer coverage in favor of other coverage.
• Potential transition rules following a merger, acquisition, or other corporate transaction.
• The application of the sanctions for noncompliance with § 2716.

Comments must be submitted by March 11. You can read the notice for yourself including the instructions on how to comment here: http://www.irs.gov/pub/irs-drop/n-11-01.pdf

Experienced readers may find an analogue here to the Tax Reform Act of 1986, the last time that Congress was good enough to give us new, sweeping nondiscrimination requirements. You may recall that the Section 89 regulations were so bad that Congress felt compelled to repeal that section which actually had some similarity to Section 2716 of PPACA. And, on the retirement side, it took 7 years to get final regulations under 401(a)(4) (after a false start for earlier regulations that made no sense).

So, don't panic. You could be retired before you need to understand this stuff.

Health Care Nondiscrimination Rules -- What to Do, We All Wish We Knew

PPACA, better known as health care reform, added Section 9815 to the Internal Revenue Code and Section 715 to ERISA, as well as Section 2716 of the Public Health Service Act. It's back to the future we go, or perhaps in the future, we go back to the past.

Confused yet? We all were when Section 89 was added to the Code by the Tax Reform Act of 1986 as well. It took a few years, but the IRS finally gave us Section 89 regulations. The fact that some of you are lost already is testament that Section 89 was repealed shortly thereafter.

But now we have these nondiscrimination rules that apply not just to self-insured health care plans, but also fully insured plans. What does that mean for an employer, or for that matter for an employee? We all wish we knew, but here is my take.

The new law applies the rules of Code Section 105(h) to fully insured plans. And, evidence suggests that Congress will provide the IRS with funds to enforce these provisions.

Problem: Section 105(h) has been around for a long time and nobody is entirely sure how the rules work. The rules are much like the old coverage and nondiscrimination rules for qualified retirement plans that applied pre-1986. Under those, there were generally three coverage tests that an employer could pass, and one of them was so vague as to be ludicrous.

Good news: When the rules under the Internal Revenue Code are so vague as to use words like "reasonable classification" and "fair cross-section", the courts have usually ruled against the IRS. However, we will likely, IMHO, be getting some more detailed rules with tighter wording.

Bad news: If the IRS does publish regulations that are less vague, the courts have shown a pattern of giving deference to IRS regulations and the methods contained therein.

So, what should employers do for 2011 (for calendar year plans, this all applies beginning in 2011)? My observation is that many companies will ignore these new rules until we have some formal guidance from the IRS. While this may turn out to be the winning approach, this would not be my recommendation. In my opinion, companies should establish that they are reasonably complying with these rules. Establish that plans are not more favorable either in coverage or in levels of benefits available for high-paid than for low-paid. Again, when there are no regulations, reasonable compliance with documentation tends to be a winner.

For companies that cannot pass, they need to develop a strategy to satisfy these rules. Once enforcement actually begins, penalties could be harsh. But, before you panic, two types of plans seem to be exempt: those that are considered "grandfathered plans" under PPACA and those of employers who on average employed 50 or fewer employees during the preceding plan year.

Failure appears to subject the plan to an excise tax under Code Section 4980D of $100 per day of failure ... per person. That could be enormous.

For retiree medical plans and perhaps for benefits earned while working for post-employment benefits, failure, by my read, could result in 409A violations.

All of this is bad. Hopefully, regulations will help, or these sections will be repealed ... once again.

GINA Strikes and She's Not a Hurricane ... Yet

Back in 2008, President Bush signed into law something called the Genetic Information Nondiscrimination Act, usually known as GINA. Does GINA apply to your company?

Generally, if you have 15 or more employees, GINA does. What it does is prohibit an employer or employer plan from discriminating against an employee based upon their genetics. That makes sense, doesn't it? Yes, it probably does, but so did the Americans with Disabilities Act (ADA), and we have seen what has happened under ADA.

Conditions are covered under ADA that this observer thinks were never intended as disabilities. Workplace accommodations have been required for some of the silliest things. Why is it that if you apply for Social Security, being disabled means one thing, but under ADA, disability means something completely unrelated. It's a simple word. Let's parse it: disability -- roughly akin to not being able. Disability and discomfort are not the same thing.

And, so I fear for poor GINA. What will wind up being considered genetic? Could the law wind up going so far as to suggest that the propensity to smoke cigarettes is genetic in nature? Is the propensity to overeat genetic in nature? Is the propensity to undereat genetic in nature?

Who knows, but as I say, I fear for the health of GINA.

You can read the final regulations here: http://www.federalregister.gov/articles/2010/11/09/2010-28011/regulations-under-the-genetic-information-nondiscrimination-act-of-2008