McKenzie, Rothwell, Barlow, and Coughran, P.S.
1325 Fourth Avenue, Suite 910, Seattle, WA 98101 US
Phone: (206) 224-9900
Fax: (206) 224-9820

Employee Benefits Law Updates

Lost Participants and Unpaid Benefits

Posted Friday, August 12, 2016 by Linda M. Josephson

There has been a small flurry of concern about a change in the instructions for 2015 filings on Schedule H, of the Form 5500, the annual report file by all ERISA pension plans. Specifically, one question, Line Line 4l:

“Has the plan failed to provide any benefit when due under the plan?”

Formerly, the instructions for answering this question read:

You must check “Yes” if any benefits due under the plan were not timely paid or not paid in full. Include in this amount the total of any outstanding amounts that were not paid when due in previous years that have continued to remain unpaid.It has generally been answered by plans taking into account terms that require the plan’s normal administrative procedures for commencing a benefit be followed in order to initiate benefit payments.

The IRS acknowledges in its Internal Revenue Manual that a plan may contain such a provision, provided it also provides for the actuarial adjustments whenever the annuity starting date occurs after the participants’ normal retirement date (unless suspended by return-to-work rules). The 7th Circuit Court of Appeals came to the same conclusion in Contilli v Teamsters Local 705 Pension(559 F.3d 720 (7th Cir. 2009)).

New Instructions for Completing Line 4l

In an unannounced change for the 2015 plan year filings, the IRS’s instructions for Line 4l now read as follows:

Line 4l. You must check “Yes” if any benefits due under the plan were not timely paid or not paid in full. This would include minimum required distributions to 5% owners who have attained 70½ whether or not retired and/or non-5% owners who have attained 70½ and have retired or separated from service, see section 401(a)(9) of the Code. Include in this amount the total of any outstanding amounts that were not paid when due in previous years that have continued to remain unpaid.

While it may be contrary to the terms of a plan to fail to begin payment of a participant’s benefit at normal retirement age, the failure to begin a participant’s payment as of the required beginning date is of more consequence. It is a violation of Code §401(a)(9) minimum required distribution (“MRD”) rules, and so violating that rule technically risks the qualified status of the plan and trust. Additionally, there is a 50 percent excise tax that applies to payments that should have—but were not—paid in accordance with the MRD rules.

On July 29, 2016, the IRS offered a clarification of its instructions. Plans are not required to report participants past their required beginning date if either:

▪ They cannot be located after “reasonable efforts;” or

▪ Where the plan is in the process of engaging in such reasonable efforts at the end of the plan year reporting period.

It states that plans should use “one or more” of the search methods described in the DOL guidance to demonstrate reasonable efforts have been made to locate RMD-eligible missing participants.

Enforcement Initiatives

There are two initiatives, one at IRS and a second at Department of Labor (“DOL”), which it appears will be using the information gleaned through this and other channels.

First, the Employee Plans Compliance Unit (“EPCU”) has an open project on “failure to provide a benefit.” It appears that plans that indicate on Line 4l that they have participants with unpaid benefits will receive and information request from EPCU.

Second, there have also been reports in the media that the DOL has begun audits targeted on this issue. DOL views the failure to pay benefits when due as potentially a violation of the plan fiduciary’s duty to operate the plan in accordance with its terms and in the best interests of participants (which in this case would be the timely payment of the benefits they have earned).

So what steps should plans put in place as a matter of good compliance and, if necessary, to address operational noncompliance? Glad you asked.

“Reasonable Efforts” to Locate Lost Participants

As with all such claims, the fiduciary’s best defense is procedural: That the plan has administrative procedures in place that are intended and designed to locate and pay these participants their benefits.

IRS’s correction procedures (“EPCRS”) require that “reasonable actions” must be taken to find participants to whom benefits are due if a mailing to the last address of record is unsuccessful. If a participant is missing after a thorough search (and as suggested in DOL guidance, missing includes unresponsive participants as well as those that cannot be located) then “a plan will not be considered to have failed to correct a failure due to the inability to locate an individual…provided that, if the individual is later located, the additional benefits are provided to the individual at that time.” (IRS Revenue Procedure 2016-17, §4.04)

Locating Missing Participants: The DOL has addressed the steps for locating missing participants in the context of terminating defined contribution plans. This standard is looked to as a benchmark for plans generally. It has suggested the following strategies should be taken before a treating a participant is “missing”:

○ Certified mail

○ Check related plan and employer records (such as those of a related health & welfare trust or union local)

○ Check with the participant’s designated beneficiary

○ Use free electronic search tools, including Internet search engines, public record databases (such as those for licenses, mortgages and real estate taxes), obituaries and social media

IRS’ correction procedures contain a similar series of steps they recommend be taken:

○ Commercial locator services

○ Credit reporting agencies

○ Internet search tools

Document Procedures. Trust offices should review and document policies and procedures related to commencement of benefits and location of missing participants. The trust office should be prepared to disclose how many participants are on the rolls who have reached their:

○ Normal Retirement Date, are terminated and not in pay status (potentially contrary to the terms of the plan) or

○ Required Beginning Date, generally April 1 following the year in which they attained 70.5 – though some plans do employ a rule allowing commencement the later of the year following age 70.5 or termination.

Ideally, in each case in which benefit payments have not begun timely, and particularly by the participant’s required beginning date, the plan should be able to demonstrate its attempts to locate and communicate with the participant and to put the participant into pay status.


Under EPCRS there is a standardized filing for correcting RBD failures. Relative to other correction filings, the user fee may be relatively small, depending upon the number of participants affected: $500 if 150 or fewer participants are affected and $1,500 if 151 to 300 participants are affected. Standard user fees apply if more than 300 participants are affected.


With the IRS’s July 29 clarification of the Form 5500 instructions, the IRS and DOL in theory recognize that there will be delayed payments to participants due to no fault of the administrator. The clarification may still leave plans in a reporting quandary if “reasonable efforts” were not underway at the end of 2015 or have not been concluded prior to the Form 5500 due date. In anticipation of any informal inquiry and in particular because an IRS or DOL inquiry may foreclose self- or voluntary correction options, it would be advisable to audit plan records to ensure that:

● The proper procedures are in place and have been followed;

● Attempts to put missing participants into pay status can be documented if an inquiry is made; and

● Where necessary, corrective action has been taken.

Please contact us if you have questions or to discuss particular situations where commencement of benefits has been delayed.

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First Circuit Court to Apply U.S. Supreme Court’s Gobeille Decision Makes Important Distinction

Posted Tuesday, August 2, 2016 by Linda M. Josephson

In a 6-2 decision (with two separate concurrences) this past March, the U.S. Supreme Court decided the case Gobeille v. Liberty Mutual Insurance Company, holding that ERISA preempts state statutes that impose certain reporting requirements on health plans and third party administrators. Already, at least one circuit court of appeals has distinguished Gobeille and found a Michigan law taxing benefit claim payments is not preempted.

Vermont Law Preempted Because It Implicates Fundamental ERISA Reporting Requirements

The Gobeille case centered around a Vermont statute requiring health insurers, including self-funded ERISA plans and third party administrators, to disclose claims data on members. Reporting was required on a monthly, quarterly, or annual basis depending on the number of individuals served. Coding, formatting and other specifications had to be followed. The information was compiled by the State into a database reflecting health care utilization, costs and resources in Vermont, and health care utilization and costs for services provided to Vermont residents in other states.

Liberty Mutual sponsored a self-funded ERISA plan, covering 80,000 individuals in 50 states. This included 137 in Vermont, where Liberty Mutual advised its third-party administrator not to file the disclosure reports with the state. In response, the State threatened to impose a fine for noncompliance of $2,000 per day. Liberty Mutual then brought an action seeking to enjoin Vermont from enforcing the statute on grounds it was preempted by ERISA.

ERISA preempts state laws that relate to employee benefit plans. In considering the case, the Supreme Court noted that ERISA has extensive reporting, disclosure, and recordkeeping requirements that applied to welfare benefit plans. Based upon that, the Court concluded that the Vermont law was preempted because it was a law that attempted to govern or interfere with the uniformity of plan administration, and therefore, had an impermissible connection with ERISA plans. The majority opinion focused on the potential of conflicting state and federal regulations, noting that 17 states have some type of reporting law that applies to health plans.

Michigan Law Survives Preemption Because It Does Not Interfere with “Uniform Plan Administration”

A week after the Gobeille decision, the Supreme Court directed the Sixth Circuit Court of Appeals to reevaluate its decision in Self-Insurance Institute Of America v. Snyder et al., in light of Gobeille. The Sixth Circuit had found that self-funded ERISA plans must comply with a Michigan statute that imposes 1% tax on claims paid for Michigan residents who received services from Michigan providers (Case No. 12-2264, Sixth Circuit Court of Appeals).

The statute at issue in the SIIA case imposes a 1% tax on “paid claims” by carriers or third party administrators for paid claims on healthcare provided in Michigan to Michigan residents. The revenue generated by the tax is used to fund Michigan’s Medicaid program. Carriers and TPAs must maintain accurate and complete records and make quarterly filings with the state. “Paid claims” is defined as “actual payments…made to a health and medical services provider or reimbursed to an individual by a carrier, third party administrator, or excess loss or stop loss carrier.” Residency of individuals for whom claims are paid may be determined by the carrier or plan’s own administrative records.

The case had made its way through the district court and Sixth Circuit prior to the Supreme Court’s decision in Gobeille, with both courts determining that ERISA did not preempt the Michigan law’s application to ERISA self-funded plans. The Supreme Court remanded SIIA to the Sixth Circuit for the Court to reconsider its holding in light of Gobeille. In a July 1, 2016 decision, the Sixth Circuit reaffirmed its holding that ERISA does not preempt Michigan’s law.

The Sixth Circuit drew a distinction between “the Gobeille category of state laws,” which it claimed directly regulate ERISA’s essential reporting and recordkeeping functions, and laws like Michigan’s, which necessitate “incidental reporting and recordkeeping.” The Court stated that Congress did not set out to preempt state laws in areas of traditional state concern and Court quoted a reservation included in the Gobeille decision itself, that “[t]he analysis may be different when applied to a state law, such as a tax on hospitals, see De Buono v. NYSA-ILA Med & Clinical Servs. Fund [], the enforcement of which necessitates incidental reporting by ERISA plans.”

In De Buono(520 US 806 (1997)) the Supreme Court upheld a New York State law that imposed a gross receipts tax on all hospitals—including a facility operated by an ERISA plan—to fund the state’s Medicaid program. The Supreme Court argued that the tax was one of general application and would have been passed through to an ERISA plan even if the hospital had not been affiliated with the plan.

The main thrust of the Sixth Circuit’s argument is that ERISA preempts laws that directly regulate internal aspects of ERISA preemption and does not preempt state laws that only peripherally impact plans. It found that the Michigan Act’s purpose was to raise revenue and not collect data. Other than suggesting a state law intended to tax self-funded plans to raise revenue is peripheral, there is little guidance about how to approach ERISA preemption decisions. *The Cases Illustrate the Murkiness of ERISA Preemption Doctrine*

The two cases illustrate the continued lack of certainty about ERISA’s preemption doctrine. The Supreme Court’s Gobeille decision contained three separate opinions with no opinion receiving a majority of votes. The Sixth Circuit’s decision makes a semantic distinction between laws that directly regulate plan administration and those that have only peripheral effect, but offers little help concerning how that distinction is made.

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9th Circuit Court of Appeals Finds for Plan, Explains Limits of ERISA “Surcharge”

Posted Friday, June 6, 2014 by Linda M. Josephson

The Ninth Circuit Court of Appeals handed down a decision today in a case handled by Bruce McKenzie and Frank Morales of our office. In Gabriel v Alaska Electrical Pension Fund, the Court declined to apply the equitable remedy of “surcharge” where the plan erroneously paid benefits for a period of time to a nonvested participant.

“We were pleased by the decision and particularly pleased by the Court’s application of the Supreme Court’s decision in Cigna Corp. v. Amara, which some practitioners have seen as a “sea change” in the courts’ approach to cases of this kind,” said Bruce McKenzie. “We believe the majority appropriately concluded that the equitable remedies discussed in Amara (estoppel, reformation and surcharge) can only be applied in the limited circumstances described in its opinion and not in situations involving a mere administrative error that did not result in any improper benefit to the plan or its fiduciaries.”

The opinion can be found at

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SSA Letter Forwarding Program to End May 19, 2014

Posted Monday, May 19, 2014 by Linda M. Josephson

Effective May 19, 2014, the Social Security Administration (“SSA”) is discontinuing its letter forwarding program, following the lead of the Internal Revenue Service (“IRS”), which discontinued its letter forwarding program in 2012. These services had long been considered the “gold standard” for qualified plans seeking to locate lost participants and beneficiaries. Their termination leaves plan sponsors with only commercial locator services going forward.

ERISA requires plan sponsors to take steps “reasonably calculated to ensure actual receipt” of certain notices and communications. Additionally, as noted in the IRS’s correction procedures (“EPCRS”), full correction of an operational misstep requires qualified retirement plan sponsors to undertake a diligent search for affected participants. This begins with mailing to the individuals’ last known mailing address and culminates in use of a commercial locator service.

Plan sponsors that have incorporated SSA’s letter forwarding program into their administrative procedures or policies to meet their ERISA obligations should review and update those procedures accordingly.

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