Department of Labor Clarifies Stance on Still-Pending Overtime Rule

By James Pieper

In 2016, a dramatic overhaul of the rules for eligibility and payment of overtime under the Fair Labor Standards Act (FLSA) was on the verge of taking effect before being halted by an injunction issued by a federal judge.

With a new administration taking over the Department of Labor, the status of the overtime revisions has been uncertain.  Nor was it known whether the Department would defend its authority to revise the rules in the subject litigation.

In a brief filed on June 30, the Department’s new leadership finally provided some clarity.  The Department defended its legal authority to adopt a new rule (as had been challenged by the plaintiffs), but did not defend the actual changes proposed by the prior administration.

Accordingly, although the rule remains in legal and administrative limbo, it is clear that it will not take effect in the form proposed in 2016.  Should the courts conclude that the Department does have authority to set the earning threshold (under which overtime must be paid to non-exempt employees) by administrative rule, then the new Department leadership will adopt a threshold lower than the amount of $47,476 that was set prior to the injunction.

© 2017 Vandenack Weaver LLC
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Legacy ERISA Regulation Triggers Fiduciary Acknowledgement and Disclosures from Plan Advisers

By Monte Schatz

The Department of Labor’s fiduciary rule became effective June 9, 2017.  A whole new set of client disclosures will be required for advisers who previously were not operating under the fiduciary standard.  Interestingly, many of these disclosure requirements are not mandated by the fiduciary rule itself, but under a regulation that was part of the Employment Retirement Income Security Act of 1974 commonly referred to as ERISA.

29 C.F.R. § 408(b)(2) requires certain pension plan service providers to disclose information about the service providers’ compensation and potential conflict of interests.   Ironically, this regulation was introduced originally as an interim rule in 2010.  It was published as a final rule on February 3, 2012.  The intent and purpose of the regulation was to assist plan fiduciaries in assessing the reasonableness of compensation paid for services.  Also, the disclosure requirements are designed to assist plan fiduciaries to act prudently and solely in the interest of the plan’s participants by defraying reasonable expenses of administering the plan and avoiding conflicts of interest.

From 2012 to the present day, brokers and other non-fiduciary providers to ERISA retirement plans largely didn’t disclose they were fiduciaries.   However, with the institution of the fiduciary rule the status of those types of advisers have been elevated to the fiduciary standard which triggers the new disclosure requirements.  This subjects those groups to covered provider status.  The three major categories of covered service providers include:

(1) fiduciary investment managers and advisors,

(2) record keeping platforms and broker/dealers, and

(3) providers of other types of services that also receive revenue sharing payments                   or other “indirect” compensation other than from the plan or plan sponsor

The groups that fall under the provisions of 408(b)(2) must provide updated disclosures to plan fiduciaries within 60 days from the date of which the covered service provider is informed of such a change in status.   The 60 day standard is vague as it doesn’t define whether it is June 9th, 2017 or if the 60 days begins to run from the first day an adviser makes an investment recommendation post-June 9th.   The general consensus is to take the conservative approach and commence providing updated disclosure immediately and assume the 60 day clock runs from June 9th, 2017.

For advisers who previously have operated under the fiduciary standard the 408(b)(2) requirements will be “business as usual”.  For those advisers that are new to the fiduciary standard it is imperative that they provide the required disclosures in a concise and understandable one page format.   Previous plan adviser agreements that placed disclosures in multiple documents will no longer satisfy the disclosure requirements that are a critical part of the fiduciary rule.

© 2017 Vandenack Weaver LLC
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SOURCES:

http://www.investmentnews.com/article/20170608/FREE/170609941/the-disclosure-401-k-advisers-may-be-missing-under-the-dol-fiduciary?utm_source=Morning-20170609&utm_campaign=investmentnews&utm_medium=email&utm_visit=655100

http://www.investmentnews.com/article/20120202/FREE/120209978/labor-department-unveils-kinder-gentler-fee-disclosure-regs

http://webapps.dol.gov/federalregister/PdfDisplay.aspx?DocId=25781

IRS Denies Tax-Favored Status to Certain “Self-Funding” Health Plans

By James Pieper

The Internal Revenue Service (“IRS”) has issued a memorandum (“Memorandum”) indicating that it will deny tax-favored status to payments received under certain health plans marketed by their promoters as “self-funding.”

The Memorandum indicates that payments made under such plans will be considered “income” on the part of the employee (and thus not excluded from “gross income” for purposes of the income tax), and will be considered “wages” for purposes of the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes paid by the employer.

The Memorandum cites plans being offered by promoters as “fixed indemnity health plans” with associated “wellness plans.”  The benefit promoted is that the plans are “self-funding” because the purported tax benefits will offset the expense, and employees can gain apparently tax-favored payments as a result of the plan while reducing the FICA purportedly owed by the employer.

The key to the plans is that the employee receives a monthly payment, not as income, but as a “health benefit” in return for a simple but voluntary act such as calling a toll-free number to obtain health advice or participating in biometric screening.  So long as the employee undertakes one act per month, then the benefit is paid.  Promoters of such plans contend that the employee receives comparable take-home pay and the employer receives tax benefits, all on a self-funded basis.

The IRS, however, concludes in the Memorandum that the plans do not constitute “insurance” because the “health benefit” is almost certain to be paid, and, on an actuarial basis, the amount of “benefits” is almost certain to exceed the amount paid as “premium.”

Accordingly, the IRS concluded that payments related to the so-called “self-funding” plans will be considered “income” and “wages” – and, therefore, the apparent “self-funding” mechanism obtained via tax-favored treatment is illusory.

Any employers considering any sort of “self-funding” plan should consider the Memorandum as strong evidence that such a plan is not likely to produce the tax benefits promised.

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