Buyer (Of Assets) Beware?

A recent Third Circuit Court of Appeals opinion emphasizes how important it is to have an employee benefits ­attorney involved in the acquisition of a business. If a buyer purchases the stock of a business, the buyer obtains all of the assets and inherits all of the liabilities of that business, including any hidden liabilities. Therefore, many buyers choose to purchase assets and, sometimes, only liabilities that are specifically enumerated in the deal. In Einhorn v. M.L. Ruberton Construction Company (WL 182131), the Third Circuit Court of Appeals decided in a procedural case that a buyer of assets may be considered a successor in interest and, therefore, liable for the seller's delinquent contributions to a multiemployer defined benefit pension plan and a multiemployer health and welfare plan.

The seller was a construction company with a unionized workforce. The seller was delinquent in making its contributions to the pension and health and welfare plans. As a result of financial difficulties, the company decided to sell its assets and at the same time entered into an agreement with the union to pay all of its delinquent contributions to the pension and health and welfare plans. During the sale process, the buyer was put on notice of the seller's liability for delinquent contributions to these plans. The buyer purchased the assets, entered into a separate agreement with the union and began contributing to the two plans. The buyer hired more than half of the employees of the seller, including its Vice President and 33% shareholder, and took over some of the seller's projects.

Shortly after the asset sale, the seller went out of business and stopped paying its delinquent contributions. The plans sued the buyer for the seller's delinquent contributions. The District Court dismissed the case and found in favor of the buyer.

On appeal, the Third Circuit decided that under these facts and circumstances the buyer may be liable for the delinquent contributions based upon certain successorship concepts that have developed in the labor and employment law context. Under the labor and employment successor in interest line of cases, a successor company could be responsible for the ­liabilities of a predecessor company if there is a sufficient ­continuity of operations between the entities.

The Third Circuit decided that these successor liability concepts should also be applicable to cases involving liabilities to ERISA pension and welfare plans. The Court held that the buyer in this case may be liable for the seller's delinquent contributions, based upon the continuity of operations and the fact that buyer had specific notice of the delinquent contributions. The Third Circuit of Appeals reversed the decision of the District Court and remanded the case to the District Court to determine whether the buyer was a successor in interest to the seller.

Comment: The Third Circuit decision emphasizes how important it is to discuss what approach to take in the context of planning and executing an acquisition of a company.

IRS Reverses Position Regarding Lactation Supplies as Medical Expenses

In Announcement 2011-14, the Internal Revenue Service reversed its position with respect to whether the cost of breast pumps and supplies that assist with lactation may be reimbursed from a flexible spending account. In Information Letter 2010-0173, the IRS had held that the costs associated with breast pumps and supplies did not qualify as medical expenses under section 213(d) of the Internal Revenue Code and were therefore not eligible for reimbursement from a flexible spending account. The IRS explained that medical care expenses are limited to expenses relating to the diag­nosis, cure, mitigation, or treatment of a disease. Medical care expenses do not include expenses relating to goods or services obtained for general health.

In reversing its position, the IRS reasoned that, similar to obstetric care, breast pumps and related supplies are for the purpose of "affecting a structure or function of the body of a lactating woman." Consequently, these costs are medical expenses that are deductible medical expenses and can be reimbursed from flexible spending arrangements, Archer medical savings accounts, health reimbursement arrangements, or health savings accounts.

Comment: Employers should review and update, if appli­cable, participant communication related to qualified medical care expenses to make sure the information accurately reflects the ability to seek reimbursement for lactation related expenses.

Determination Letter Five-Year Cycle Begins Again

February 1, 2011 marked the opening of Cycle A of the five-year IRS determination letter cycle for individually designed qualified retirement plans. The period, or Cycle, during which an individually designed plan must be filed is determined based on the last digit of the plan sponsor's employer identification number (EIN). If a plan sponsor's EIN ends in a 1 or 6, an application for a determination letter must be filed no later than January 31, 2012.

In addition, Cycle A provides a unique opportunity for members of a controlled group to apply at the same time even if the members have EINs that would place them in different determination letter Cycles. Members of a controlled group may jointly elect to apply for a determination letter ­during the same Cycle. If this election is made, all plans must be submitted during Cycle A. Alternatively, if a controlled group is a parent-subsidiary controlled group, the parent may elect to apply for a determination letter during the period ­corresponding to the last digit of the parent's EIN. The parent-subsidiary controlled group election must be made by the parent and must be made prior to the end of the earliest determination letter Cycle during which any member of the parent-subsidiary controlled group could be filed.

Comment: For those plan sponsors that applied for a determination letter during the Cycle A ending on January 1, 2007, this is the first opportunity to seek approval of changes to plan designs that reflect the Pension Protection Act of 2006 and subsequent legislation, including the qualified automatic contribution arrangement safe-harbor design under section 401(k)(13) of the Code.

If a controlled group intends to make an election to apply together during Cycle A, that election must be made by each member of the controlled group and submitted with the determination letter application. Such an election concentrates the required work to one Cycle, thereby permitting members of a controlled group together to review their retirement plan designs and how they fit into the overall compensation and benefit structure of the control group while at the same time updating the retirement plans for legal requirements.

Groups of tax-exempt organizations that form a "control group" may apply together as discussed above. A group of tax-exempt organizations that do not form a "control group" may also elect to apply together for determination letters based on the EIN of the centralized organization responsible for the administration of all qualified plans sponsored by the members of a group of tax- exempt organizations that are "related" if: (1) the tax-exempt organizations are not a controlled group or affiliated service group, (2) the terms of the plans sponsored by the tax-exempt organizations are ­substantially similar and (3) all or substantially all of the ­discretionary authority concerning plan administration and operation is handled by a centralized organization. The election is also available for a taxable entity that is related to the tax-exempt organizations so long as the terms of the plans sponsored by the taxable entity are substantially the same as the plans sponsored by the tax-exempt entity.

Comment: Applying for a determination letter and/or making an election to file as a group requires advanced planning. A plan sponsor should determine whether it must file during the current Cycle so that it may begin the process of updating and restating its plan document. In addition, controlled group and tax-exempt organization elections must be made during the earliest Cycle during which any of the plans may be filed. For many, the earliest Cycle may be Cycle A.

IRS Issues Guidance Regarding Termination of 403(b) Plans

On February 22, 2011, the Internal Revenue Service issued Revenue Ruling 2011-7 providing guidance regarding the mechanics of terminating non-ERISA section 403(b) plans. The Revenue Ruling provides guidance by presenting four sets of circumstances, each of which would constitute a termination of the applicable 403(b) plan.

At the time the final section 403(b) regulations were issued, the regulations included authority to terminate a 403(b) plan, but offered little guidance on how to do it. Unlike 401(k) plans, Section 403(b) plans frequently feature several record keepers and individual investment and annuity contracts. It was unclear what actions would constitute termination, especially when a plan sponsor may not have sufficient control to effect a distribution of custodial accounts or a participant has invested in an individual annuity contract. Under the final regulations, a 403(b) plan will be considered terminated if:

  1. the written plan includes authorization to terminate the plan;
  2. the employer (and all employers in the same control group) does not make a contribution to any 403(b) plan for a period of 12 months following the termination and distribution of all assets under the plan; and
  3. the plan distributes all accumulated benefits under the plan as soon as administratively practicable after termination.

For purposes of the third requirement above, Revenue Ruling 2011-7 defines a distribution to include the delivery of a fully paid individual insurance annuity contract or an individual certificate evidencing fully paid benefits under an insured group annuity contract, or a lump payment of a custodial account interest. This means that although plan benefits will continue to be subject to the annuity contract for purposes of termination, the plan sponsor may treat plans as terminated if annuity contracts have been delivered to participants.

Comment: Revenue Ruling 2011-7 sets forth the Internal Revenue Service's view of Section 403(b)(10) of the Internal Revenue Code. It does not address the Department of Labor's views as what actions are necessary to terminate an ERISA-covered plan.

Illinois Civil Union Law Impacts Employee Benefit Plans

Effective June 1, 2011, civil unions for same-sex and opposite-sex partners will be legalized in Illinois. The new Illinois Civil Union law entitles civil union partners to all the legal rights and obligations afforded to opposite-sex married individuals under existing Illinois law. The law also recognizes as a civil union any same-sex marriage, civil union, domestic partnership or substantially similar legal relationship entered into in other states. This law will impact employee benefit plans with respect to Illinois employers and employees.

As a result of the Illinois Civil Union law, employers should anticipate a rise in requests for civil union partner benefits, particularly with respect to the employer's health plans. Employers with insured health plans with insurance contracts issued in Illinois will be required to extend coverage to an employee's civil union partner if the plan provides coverage for other employees' spouses. However, employer health plans that do not provide spousal coverage, are self-insured, or operate under contracts issued in a state without a civil union law are not required to extend such coverage. Employers are not required to provide federal COBRA continuation coverage to civil union partners under their health plans, regardless of the type of plan or place of issuance.

Under the Illinois Civil Union law, health benefits provided to civil union partners must be provided on a tax-favored basis similar to the tax treatment of those benefits for dependents or spouses. This tax treatment differs from Federal income tax law, which generally requires employees to pay their portion of civil union coverage premium on an after-tax basis and employers to impute income to the employee for the employer's cost for the civil union partner health benefits.

The Illinois civil union law does not require non-government employers to extend qualified retirement plan benefits to civil unions since these plans are regulated by Federal law.

Comment: Prior to June 1, employers should review their current benefit plans and determine what actions, if any, need to be taken to comply with the Illinois Civil Union law. Employers may need to amend their existing benefit plans, summary plan descriptions and enrollment materials. Employers may also need to update their payroll systems to accommodate the state tax consequences of the new law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.