Severance plans are designed to provide income to employees who are terminated, laid off or voluntarily quit. In contrast, a supplemental unemployment benefits (SUB) plan is designed to supplement a former employee’s state unemployment benefits after an involuntary termination.

SUB plans have tax advantages compared to severance plans but also present unique issues any employer should consider before choosing or designing a SUB plan. These include:

1. Payroll tax advantages: Unlike severance plans, a SUB plan is not subject to certain payroll taxes, in particular Federal Insurance Contributions Act (FICA) taxes and Federal Unemployment Tax Act (FUTA) taxes, pursuant to Revenue Ruling 90-72. These savings can be passed on to the former employee or to the employer.
2. Non-uniform eligibility: Only former employees qualifying for state unemployment benefits can qualify for SUB plan benefits. As a result, if employees live in different states with different laws, then similarly situated employees in different states (e.g., those affected by a lay-off) may not all qualify for benefits under a SUB plan.
3. Voluntary terminations? Many severance plans include benefits for employees who voluntarily terminate their employment for “good reason.” In contrast, it is not clear whether voluntary terminations are permitted at all under SUB plans. As a result, it is prudent to continue to pay payroll taxes for such individuals, unless voluntary terminations are a “de minimis” benefit under a plan (i.e., less than 1 percent of total annual benefit payments).
4. Benefits: SUB benefits cannot be paid in a lump sum. Instead, they must be paid periodically only as a person continues to qualify for state unemployment compensation. SUB plans also typically offset the amount of unemployment benefits paid by the state, so that a plan only pays the remainder necessary to restore the participant to his or her pre-termination pay (or a certain percentage thereof).
5. Duration: When a person no longer qualifies for state benefits, he or she no longer qualifies for SUB plan benefits as well. However, SUB plans are permitted (but not required) to continue to pay benefits to individuals who exceed the maximum duration of benefits under state law, so long as such individuals remain otherwise eligible for state benefits.
6. Federal law: Most SUB plans will qualify as welfare plans under the Employee Retirement Income Security Act of 1974 (ERISA), as opposed to pension plans. In contrast, a careful analysis will be needed to determine how to design a SUB plan to either comply with, or to meet an exception to, the requirements for nonqualified deferred compensation plans under Sections 409A and 457(f) of the Tax Code. These provisions may have significant tax consequences that affect the appeal of a SUB plan.
7. Funding: A SUB plan does not have to be funded. Benefits can be paid out of an employer’s general assets. However, employer and/or employee contributions could be made into a SUB trust under Code § 501(c)(17). If a SUB trust is used, additional requirements will have to be met, such as prohibiting discrimination in favor of officers, supervisors or highly compensated employees with respect to eligibility and benefits.
8. Administration: A SUB plan will likely require significantly greater administration than a severance plan. Participants will have to prove they are entitled to state unemployment compensation, both initially and periodically thereafter to remain eligible for benefits under a SUB plan and, potentially, to determine the proper amount of benefits.

The U.S. Court of Appeals for the Seventh Circuit joined the Sixth Circuit in holding that forum selection clauses in plan documents are valid and enforceable under the Employee Retirement Income Security Act of 1974 (ERISA).

In recent years, the question of whether forum selection clauses are enforceable under ERISA has been litigated in many district courts. The vast majority have found that forum selection clauses are consistent with ERISA’s permissive venue provision and its underlying policies, and the first appellate court to address the issue agreed. See Smith v. Aegon Cos. Pension Plan, 769 F.3d 922 (6th Cir. 2014). The Seventh Circuit’s decision in In re Mathias, No. 16-3808, 2017 WL 3431723 (7th Cir. Aug. 10, 2017), further supports plan sponsors who want to include forum selection clauses in their documents to increase litigation efficiency.

In In re Mathias, a plan participant sought review of a denial of a retransfer motion. The participant initially filed suit in the U.S. District Court for the Eastern District of Pennsylvania. Caterpillar moved to transfer to the Central District of Illinois pursuant to a forum selection clause in the plan document. Mathias argued that ERISA’s venue provision invalidated the forum selection clause. The Eastern District of Pennsylvania disagreed, relying primarily on Smith. In the Central District of Illinois, the participant moved to retransfer, which the court denied based primarily on Smith.

The Seventh Circuit started its analysis by discussing that mandamus was the appropriate vehicle to seek review of a retransfer order. However, the court noted that the Central District of Illinois was bound by law-of-the-case principles, making the motion unlikely to succeed. Furthermore, the party seeking mandamus review of the order “has an uphill fight,” and the Seventh Circuit concluded the high standard was not met here.

Like the two district courts, the Seventh Circuit found the Sixth Circuit’s reasoning in Smith to be convincing. The court was not persuaded by Mathias’ citation to “an obscure decision of the Supreme Court” — Boyd v. Grand Trunk Western Railroad Co., 338 U.S. 263 (1949) — that is often relied upon by plaintiffs in forum selection clause cases.

In 2016, the same issue was raised in a petition for writ of mandamus to the Eighth Circuit under facts similar to Mathias. The Eighth Circuit denied the petition without explanation. In re Clause, No. 16-2607 (8th Cir. Sept. 27, 2016). The secretary of labor filed an amicus brief in support of the participants in each of the three appellate cases, but none of the circuit courts were persuaded.

Despite the strong weight of authority in support of plan sponsors, litigation in this area is likely to continue. Mathias intends to seek en banc review of the Seventh Circuit. Both Smith and Clause filed petitions for writ of certiorari with the Supreme Court, but the court denied the petitions. The Third Circuit will be the next appellate court to weigh in on the matter in Shah v. Wellmark Blue Cross Blue Shield, No. 17-1982. Unlike Mathias and Clause, who sought mandamus review of a retransfer denial, Shah’s case was dismissed pursuant to the forum selection clause. Therefore, like Smith, Shah will not have as much of an uphill battle but will have to contend with two contrary circuit court opinions (and an Eighth Circuit mandamus denial).

The U.S. Court of Appeals for the Fifth Circuit has ordered a Mississippi district court judge to reconsider approval of a $150 million settlement deal regarding an underfunded pension plan.

In Jones v. Singing River Health Servs. Found., No. 16-60550, 2017 WL 3178624 (5th Cir. July 27, 2017), Singing River Health Services Foundation (SRHS), a community-owned not-for-profit health system in Jackson County, Mississippi, failed to make contributions to its pension plan between 2009 and 2014, when the hospital board officially froze the plan. The missed contributions exceeded $55 million. When the financially imperiled health system sought to terminate and liquidate the plan, participants initiated a flurry of state and federal lawsuits. The settlement covered three consolidated federal court cases.

As part of the settlement agreement, SRHS must deposit a total of $149,950,000 into the retirement trust under a 35-year schedule. Jackson County, the sole member of SRHS, will pay $13.6 million over eight years to help support the hospital. SHRS will pay attorneys’ fees of $6.45 million by September 2018 and expenses up to $125,000 of all plaintiffs’ counsel.

Over 200 objectors appealed to the Fifth Circuit, bringing up a variety of arguments regarding class certification and the fairness of the settlement. The Fifth Circuit agreed with one point about the fairness of the settlement and sent the case back to the district court for further consideration. The Fifth Circuit took issue with the fact that the “unsecured contractual obligations” to make contributions to the plan would extend over 35 years while class counsel would receive their fees by the end of 2018. “That counsel assured themselves a multimillion-dollar bird in hand, while leaving the class members two in the bush, is disturbing. If they were confident about SRHS’s ability to comply with the settlement, they could have accepted payments over its prescribed duration.” Jones, 2017 WL 3178624, at *9.

The suit also raised the issue of who will be held responsible for struggling governmental pension plans. Governmental plans are exempt from the Employee Retirement Income Security Act of 1974 (ERISA) and insurance through the Pension Benefit Guarantee Corporation. The objectors argued that Jackson County, a non-party released as part of the settlement, should have been held liable because its taxing powers allowed the county to guarantee payment to the pension plan. The objectors further argued that the government’s ability to guarantee pensions through its taxing power was the policy behind the ERISA exemption. The Fifth Circuit disagreed, however, finding the statute allowed taxation to fund the hospital, not its pension, and that the plaintiffs had limited ability to recover from Jackson County based on state tort law.

The plaintiffs also brought claims against the pension plan’s advisors — KPMG, LLP and Transamerica Retirement Solutions Corporations. They were not part of the settlement, and KPMG successfully moved to compel arbitration.

The U.S. Tax Court ruled on June 26, 2017, that the Boston Bruins of the National Hockey League could deduct the full cost of meals before the team’s 41-plus away games in the regular season and playoffs. The decision provides a clear path for professional sports teams — and potentially other employers in similar situations — to realize additional tax savings.

In 2009 and 2010, the Bruins spent $255,754 and $284,446, respectively, on meals for players and certain staff members before away games. That is a lot of food, but these are big guys, like 6-foot-9-inch team captain Zdeno Chára.

The owners of the franchise sought to fully deduct these amounts from taxes. Code § 274, however, places limits on certain types of deductions, and the Internal Revenue Service limited the deductions to 50 percent of meal expenses pursuant to § 274(n)(1). The Bruins were notified of a tax deficiency.

The owners, however, threw down their gloves and claimed they were entitled to a full deduction under § 274(n)(2)(B), an exception to the 50 percent limitation when meals are excludible from a recipient’s gross income as a de minimis fringe benefit under § 132(e).

In order to qualify as a de minimis fringe benefit, the Bruins had to show, in part, that:

1. The Bruins “leased” the hotel dining rooms players and staff ate in;
2. The Bruins “operated” the dining rooms;
3. The dining rooms were located on or near the Bruins’ “business premises”; and
4. The annual revenue derived from the dining rooms normally equaled or exceeded the operating costs.

The Tax Court found each requirement met.

First, the Bruins “leased” the hotel dining rooms because they were part of the team’s contract with each hotel, even though the contract was not called a “lease,” and even though the hotels agreed to provide the dining rooms free of charge.

Second, the Bruins “operated” the hotel dining rooms because they contracted with the hotels for the meals, and the hotels operated the dining rooms in accordance with the team’s requirements. In other words, by paying the hotels to operate the hotels’ own dining rooms, the Bruins were treated as “operating” the rooms for their players and staff during meal times.

Third, the hotels were the team’s “business premises,” because the Bruins had to travel and stay in hotels in order to play away games, and the hotels were also used for pre-game preparation, such as medical treatment, physical therapy, and massages.

Finally, revenue equal to the operating costs was deemed generated. Under Code § 132(e), an employee is treated as having paid an amount equal to the operating costs for a meal if the employee can exclude the meal from gross income under § 119. Under § 119, an employee can exclude a meal that is furnished on an employer’s “business premises” for the employer’s convenience. The Tax Court naturally found that providing pre-game meals was convenient to the Bruins.  

Accordingly, the Bruins were allowed to take a full deduction for their pre-game meals when away from Boston. Other professional sports teams in hockey, baseball, football, basketball, soccer, and other sports will likely be able to claim a similar deduction.

In 1975, a mere 42 years ago, Congress enacted Section 301 of the Tax Reduction Act of 1975 authorizing a tax-credit driven employee stock ownership plan known as a TRASOP – Tax Reduction Act Stock Ownership Plan. An employer that adopted a TRASOP could claim an extended investment tax credit against its federal income taxes equal to an amount it contributed to an employee stock ownership plan in stock, or cash that was used to purchase its stock. The plan had to abide by special, strict vesting and distribution rules. Thus, the TRASOP credit was designed to encourage the purchase of qualified property — mainly equipment and machinery — while at the same time providing a benefit to employees.

The important point: An employer adopting a TRASOP was entitled to a credit, not a deduction, and the plans had widespread acceptance principally among larger capital intensive publicly held companies. The allowed credit was improved in the Tax Reform Act of 1976, and in 1983, the capital investment tax credit was abandoned and the basis for the credit was switched to an employer’s payroll, under which the employer was entitled to a tax credit of the lesser of the value of the stock contributed to the plan or 0.5 percent of the employer’s payroll. Hence the name PAYSOP.

Congress later enacted the Tax Reform Act of 1986, which repealed the PAYSOP tax credit. Here are reasons why Congress should now consider reinstituting these plans:

• A TRASOP/PAYSOP was designed to stimulate economic growth by increasing employment and enhancing capital acquisitions. For an administration set on a yearly 3 percent increase in GDP, the TRASOP/PAYSOP design fits like a glove.
• Moreover, these plans, like ESOPs in general, provide a valuable employee benefit aligning an employee’s interest with his or her employer through stock ownership.

No doubt the general consensus today is that any tax bill coming out of Washington must be revenue-neutral. Clearly TRASOPs and PAYSOPs are not revenue-neutral. But given the administration’s policy considerations, these plans deserve a fresh look.

Although the Trump administration has floated a general tax reform proposal, little detail has been provided. However, it is clear that additional revenue will be needed to fund the tax cuts the president proposed. Retirement plans are a likely target, as they were responsible for a reduction in federal revenues by $83 billion in 2016, according to the nonprofit Tax Policy Center.

The most likely target is 401(k) savings plans. One area of discussion is the so-called Rothification of retirement accounts such as 401(k), 403(b) and 457 plans. Such an approach would call for all or a portion of the contributions to these accounts to be made on a post-tax basis and eliminate the current deduction for such contributions. Under this proposal, the distributions from these accounts at retirement would not be subject to tax. However, for a taxpayer in a 25 percent bracket, it would take $24,000 of earnings to make the $18,000 maximum contribution to a 401(k) plan.

A second proposal is a freeze on retirement plan limitations for 10 years. Currently the individual limits are $18,000 for 401(k) contributions, $6,000 for catch-up contributions, and $54,000 for total contributions to a defined contribution retirement plan and are indexed annually. Other ideas from the past that could be resurrected include an acceleration of required minimum distributions for retirement plan participants and beneficiaries.

The proposed 15 percent maximum tax on pass-through income poses a different risk to small business retirement plans. Business owners will be faced with the dilemma of paying a 15 percent tax on this income currently or taking a deduction for a retirement plan contribution, only to pay tax at a 35 percent rate when the funds are withdrawn. If there is no advantage to deferring income in a retirement plan, it is doubtful that business owners will continue to sponsor retirement plans.

We have a long way to go before we see tax reform, and some pundits believe there is only a 50-50 chance that real tax reform will pass. If there is reform, there will be winners and losers. Hopefully retirement savings will not be among the losers.

Recent Supreme Court decisions permitting class action waivers in arbitration agreements opened the door to the question of whether such an agreement would be enforceable under the Employee Retirement Income Security Act of 1974 (ERISA). (See American Express Co. v. Italian Colors Restaurant and AT&T Mobility LLC v. Concepcion.) The wave of class action litigation over 401(k) and 403(b) fees has created a forum for addressing this question, and courts are beginning to provide an answer.

The U.S. Court of Appeals for the Fifth Circuit is the only appellate court to address class action waivers in ERISA documents. Hendricks v. UBS Fin. Servs., Inc., 546 F. App’x 514 (5th Cir. 2013). Although the circuit court enforced the arbitration agreement, it determined that the arbitration panel should decide “whether the class waiver requires the Plaintiffs to arbitrate on an individual basis.”

More recently, the Central District of California denied the University of Southern California’s motion to compel arbitration of a lawsuit challenging the fees charged in its 403(b) and retirement savings plans. Munro v. University of Southern California, No. 16-6191, 2017 WL 1654075 (C.D. Ca. March 23, 2017). The plaintiffs signed arbitration agreements at the start of their employment, but they argued that their ERISA claims were not subject to arbitration because it is contrary to ERISA’s policies. The court first found that ERISA claims were subject to arbitration. However, the court then found that there was not a valid arbitration agreement because the ERISA plans had not consented to the agreement. Although the participants could waive their individual right to file ERISA lawsuits, they could not waive the right to sue on behalf of the plans.

Charles Schwab Corporation filed a similar motion to compel individual arbitration of a purported ERISA class action lawsuit. Severson v. Charles Schwab Corp., No. 4:17-cv-00285 (N.D. Cal. motion filed April 7, 2017). However, Charles Schwab’s plan contains an arbitration provision, suggesting Charles Schwab may have a more favorable outcome. DST Systems, Inc. also has a similar motion pending. Ducharme v. DST Systems, Inc., No 4:17-cv-00022, Dkt. 27 (W.D. Mo. motion filed Feb. 22, 2017). These cases will lay the groundwork for future decisions on the issue.

The Supreme Court recently agreed to address a similar issue of whether arbitration agreements with class action waivers are permissible under the National Labor Relations Act. NLRB v. Murphy Oil USA, Inc., No. 16-307. The court will hear arguments in the case next term. If the court follows its recent trend of endorsing class action waivers, it could inspire more district courts to compel individual arbitration of ERISA class actions when the participant and plan have consented to arbitration.

The Republican leadership in the House of Representatives has introduced legislation titled the American Health Care Act to repeal and replace the Affordable Care Act. The proposal actually would leave in place a significant portion of the ACA, including those parts affecting Medicare and many insurance reforms.

Among the ACA provisions that have been preserved are the prohibitions against health status underwriting and lifetime coverage limitations. Also preserved are coverage for pre-existing conditions, a cap on out-of-pocket expenditures, coverage for adult children to age 26, and guaranteed availability of coverage.

Penalties related to the individual responsibility and employer responsibility provisions of the ACA would be repealed retroactively to 2016. The most significant change is the repeal of the individual mandate. This would be replaced with a continuous coverage requirement. Under this requirement, an individual would be subject to a 30 percent premium surcharge if there was a gap in creditable coverage of more than 63 days.

Changes to the current system of premium tax credits are also included. An age-adjusted refundable tax credit will be available for individuals purchasing insurance in the individual market beginning in 2020. Annual credits will range from $2,000 to $4,000 per person depending on age and will begin to phase out for individuals with income in excess of $75,000.

Revenue provisions in the ACA would also be repealed. Most significantly, this would include the 3.9 percent tax on net investment income for high earners and the 0.9 percent tax surcharge on earned income exceeding $200,000. Restrictions on flexible spending accounts, including the $2,500 contribution limitation and the use of funds for over-the-counter medications would also be eliminated. Several other taxes including the health insurance tax, the “Cadillac plan” tax and the medical device excise tax would be repealed.

There are a number of changes to the Medicaid program proposed, including a transition from the current funding to Medicaid funding utilizing a per capita cap by 2020. The legislation will create a Patient and State Stability Fund. This will provide money to individual states to be used in connection with health care coverage. Among the permissible uses would be financial assistance to high-risk individual, promotion of preventative care, paying for mental health and substance abuse disorders, and providing incentives to stabilize individual market premiums.

House committees began markups of the bills March 8. The legislation has a long way to go before being adopted. It will require near unanimous support for Senate Republicans, as Senate Democrats are likely to oppose any meaningful changes to the ACA.