Compliance April 8, 2020

Clients Must Treat Layoffs and Furloughs Carefully

The IRS may determine that a ‘partial termination’ of a plan has occurred if a company undergoes sizable layoffs—but not furloughs—potentially impacting vesting schedules and other aspects of plan operations.  

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The true economic fallout of the coronavirus pandemic is slowly coming into view, and one of the unfortunate consequences is that millions of Americans have already lost their jobs or been furloughed.

While neither those people who have been terminated outright nor those who have been furloughed are receiving a paycheck, from the employee benefits perspective, there are actually some very important differences between the two situations. First and foremost, attorneys say, retirement plan sponsors should keep in mind that the Internal Revenue Service (IRS) may determine that a partial termination of a plan has occurred if a company undergoes significant layoffs, but not furloughs.

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“Companies tend to use the terms interchangeably, which is why it can be confusing,” says Lorie Maring, a partner at Fisher Phillips. “A furlough is not intended to be a permanent separation of work. A company might ask employees to take a week off, or reduce the work week from five days to four, as a way of avoiding a layoff.”

With a layoff, employers may intend for it to be temporary, hoping that they will rehire the workers at some point in the future, Maring says. But, what actually happens will determine whether a partial plan termination is triggered.

The IRS, broadly speaking, views cases where there is a true separation from employment of 20% or more of the employees participating in the retirement plan in a plan year as a partial plan termination, Maring says.

“In a partial termination of a plan,” says Kevin Brown, a partner with McCarter & English’s Employee Benefits and Executive Compensation Practice, “the benefits to the participants being terminated become fully vested. If the company match and profit sharing contributions in the plan were not otherwise vested, in the case of a termination, they would be.”

Maring says that while there is “no bright line test” that the IRS applies to the number of retirement plan participants being terminated, she has generally found it to be 20% or more. However, Brown says, it can be as little as 10%, depending on the facts and circumstance.

Stephen Ferszt, practice group leader for employee benefits at Olshan Frome Wolosky, says, “In determining whether there could be a partial termination of a qualified retirement plan resulting from some form of an employee’s separation from service, the first thing that you need to examine is how the plan counts an employee’s service. Is it counting actual hours of service performance? Is it using an elapsed time method, or some other method? The IRS’s bottom-line decision is based on an analysis of all facts and circumstances.”

Compliance April 7, 2020

What to Expect in an SEC Regulation Best Interest Inspection

Two new risk alerts published by the SEC provide broker/dealers and advisers with advance information about the expected scope and content of the initial examinations for compliance with Regulation Best Interest and Form CRS.

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The Office of Compliance Inspections and Examinations (OCIE) of the U.S. Securities and Exchange Commission (SEC) has issued two new risk alerts aimed at helping advisers comply with the Regulation Best Interest (Reg BI) rulemaking package.

Reg BI is set to take full effect on June 30—a date that has been recently reconfirmed publicly by SEC Chairman Jay Clayton despite the ongoing coronavirus pandemic—and firms should already be well on their way toward establishing compliance processes and procedures. In these new risk alerts, the OCIE staff says, advisers and broker/dealers (B/Ds) subject to Reg BI can find important information about how their compliance will be assessed in the future.

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The first risk alert specifically considers future OCIE examinations that focus on “compliance with Regulation Best Interest.” The OCIE says its initial examinations of Regulation Best Interest will focus on assessing whether broker/dealers “have made a good faith effort to implement policies and procedures reasonably designed to comply with Regulation Best Interest, including the operational effectiveness of broker/dealers’ policies and procedures.” 

The first risk alert emphasizes the following facts: “After the compliance date, OCIE will begin examinations to assess implementation of Regulation Best Interest. These initial examinations, which will likely occur during the first year after the compliance date, are designed primarily to evaluate whether firms have established policies and procedures reasonably designed to achieve compliance with Regulation Best Interest.”

OCIE will also “evaluate whether firms have made reasonable progress in implementing those policies and procedures as necessary or appropriate, including making such modifications as may be necessary or appropriate, in light of information gained from the implementation process and other facts and circumstances.”

The text of the risk alert details some (but not all) of the areas OCIE staff will consider as they do this work. These include Reg BI’s new disclosure requirements, its new care obligations and the conflict of interest mitigation requirements.

The second risk alert is concerned with examinations related to the provision of newly required customer relationship summary forms for all brokerage and advisory clients, referred to by the SEC as “Form CRS.” Review in this area, the OCIE says, will focus on assessing “whether firms have made a good faith effort to implement Form CRS,” including reviewing the filing and posting of a firm’s relationship summary as well as its process for delivering the relationship summary to existing and new retail investors.

This alert explains that the OCIE staff will be reviewing firms’ methods of delivery and filing for the Form CRS—as well as the actual content and formatting of the deliverables.

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