Benefits Counselor Fall 2018 Update


General Employee Benefits

IRS and OCR Publish Cybersecurity Tips Applicable to Plan Sponsors

The Internal Revenue Service ("IRS") and the Department of Health and Human Services' ("HHS") Office for Civil Rights ("OCR") have issued newsletters highlighting various items for plan sponsors to consider when securing confidential electronic information. The IRS newsletter focuses on steps plan sponsors can take to limit access to information, such as granting access only to select employees, requiring strong passwords, locking computer screens during periods of inactivity, securing portable devices, and terminating access for employees who no longer need access. The IRS newsletter also emphasizes training employees on basic security principles, reminding employees of written policies, and disciplining employees for violations. The OCR newsletter reiterates many of the points raised in the IRS newsletter, but also cites security standards established under the Health Insurance Portability and Accountability Act ("HIPAA"), suggesting covered entities consider whether they have adequate records to track the location, movement, modifications, repairs and disposition of electronic devices and media throughout their lifecycles. The OCR newsletter also notes that organizations should implement risk analysis and risk management processes to identify and implement appropriate controls under the HIPAA standards, based on the size of the organization. The OCR newsletter also identifies several factors to consider when determining appropriate security measures, such as the organization's size, complexity, technical capabilities, costs of the security measures, and the probability and criticality of risks to unprotected information.

IRS Approves Procedures for Awarding Employer-Related Scholarships

The IRS has approved procedures established by a private foundation to award scholarships to an employer's employees and their children, despite the foundation's inability to guarantee that certain threshold percentage tests will be met. Generally, the Internal Revenue Code (the "Code") treats scholarship programs that favor employees or their family members as taxable expenditures unless it can be shown that such programs satisfy seven conditions, including separate percentage tests for employees and their children established by the IRS, or, if no applicable percentage test can be met, based on a facts and circumstances test. In this case, the foundation represented that its program would meet all seven conditions, but could not guarantee the percentage tests would be satisfied. Furthermore, given the small number of scholarships granted and each scholarship's small value, the foundation argued that annual testing would be unreasonably expensive. The IRS agreed with the foundation, and, as an alternative to the percentage tests, found that the following representations would be sufficient to prove tax exempt status: scholarship recipients would be selected by an independent committee; scholarships would not be used for recruiting or be terminated upon termination of employment; recipients would be selected based on objective selection standards unrelated to employment; and the scholarships would not limit recipients to a field of study beneficial to the employer.

Third Circuit Adopts "Material Involvement" Standard in Voluntary Plan Ruling

The Third Circuit Court of Appeals has held that an employer's "material involvement" with respect to a supplemental long term disability policy resulted in the policy's removal from ERISA's voluntary plan safe harbor. McCann v. Unum Provident, No. 16 2014 (3d Cir. Oct. 5, 2018). Under the safe harbor, certain "voluntary plans" do not become employee benefit plans subject to ERISA if certain conditions are met. One such condition is the absence of the employer's endorsement of the plan. The Third Circuit concluded that an employer crosses the line of neutrality and endorses a plan when the employer exercises some level of "material involvement" in the creation or administration of the plan. In this case, which the court conceded was "close" on the question of endorsement, the court highlighted evidence of the employer's material involvement, which included selecting Provident as the sole provider of the policies rather than offering employees a menu of insurers from which to select, encouraging employees to enroll in coverage, expressing judgment about the policy, determining who was eligible for the policy, and suggesting the policy was part of the employer's standard benefits package. Thus, the Third Circuit held that a dispute regarding coverage under the policy was governed by ERISA.

Retirement Plan Development

IRS Revises Employee Plans Compliance Resolution System

On September 28, the IRS issued Revenue Procedure 2018-52, superseding Revenue Procedure 2016-51 as the most recent consolidated statement of the correction programs under the Employee Plans Compliance Resolution System ("EPCRS"). Notable changes include:

From January 1, 2019, through March 31, 2019, plan sponsors may file submissions under the voluntary correction program ("VCP") with the IRS by either paper submissions in accordance with Revenue Procedure 2016-51 or online at However, beginning April 1, 2019, the IRS will no longer accept paper submissions and plan sponsors must file VCP submissions online using Beginning April 1, 2019, applicants must generally convert documents relating to a VCP submission, including descriptions of failures, Form 14568, Schedules 1 through 9 of Form 14568, and any other applicable items into a single PDF document to be uploaded to, subject to a 15-megabyte size limitation. Submissions exceeding 15 megabytes should be faxed separately to the IRS. The IRS will no longer send the applicant a letter via the U.S. Mail to acknowledge a VCP submission made via Rather, receipt of a VCP submission will be acknowledged through the generation of a unique tracking ID included with the e mailed payment confirmation after a VCP submission is filed and the user fee paid. IRS Updates Model Eligible Rollover Distribution Notice to Address Plan Loan Offsets and Other Legal Changes

The IRS has updated safe harbor explanations for eligible rollover distributions to reflect recent legal changes and IRS guidance. Internal Revenue Code (the "Code") section 402(f) requires plans to provide recipients of eligible rollover distributions with a written explanation of their rollover...

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