Form 5500: Getting Easier for Some Employers

2023 04 Advisory Form 5500

Before filing in 2023 and 2024 Form 5500s for retirement plans, employers should know about some key changes. The changes summarized in this advisory apply to 2023 reports, unless otherwise noted.

One of the bigger changes is the revised method for determining the 100-participant threshold for when a plan is treated as being small enough to use simplified reporting alternatives (including waiver of the annual audit requirements and using the short form version of the Form 5500). This counting methodology for defined contribution plans will now be based on the number of participants with account balances. Previously, the number of individuals who were eligible to participate (even if they did not have an account) was used. This may increase the number of employers that are eligible to use the simplified reporting.

Also notable are several new schedules enabling consolidated returns for additional categories of retirement plans. The first new schedule (DCG) allows defined contribution groups (DCGs) to file a single Form 5500 if several requirements are met. DCGs are defined contribution pension plans that have all plan assets in a single trust; have the same named plan administrators, trustees and fiduciaries; offer the same investments to all participants; and do not hold employer securities. The new Schedule DCG should allow more simplified and more consolidated Form 5500s for plan sponsors. Form 5500 schedules were also changed to help simplify reporting for multiple employer plans (MEPs) and create Pooled Employer Plans (PEPs), by streamlining Schedule MEP with respect to questions on PEPs. PEPs are a type of multiple employer plan. Multiple employer plans exist when employers who are unrelated participate in a single plan. Normally each employer in a multiple employer plan is treated as having their own plan, especially for reporting purposes. Under the new PEP rules, for reporting purposes, the PEP is treated as a single plan.

Several other schedules have or will be changed, including Schedules H, MB, SB and R. Draft forms and instructions are already available or will be later this year. The DOL’s final rule will be applicable for plan years beginning on or after January 1, 2023. Based on this timing, use of the new forms will likely begin in 2024 or later. According to the DOL’s Fact Sheet, certain changes that were proposed in September 2021 are being deferred as part of a separate improvement project. Employers should watch for further updates to the Form 5500 requirements.

In addition to these new items, Varnum can help you avoid common Form 5500 errors and answer some of the more complex questions created by these changes (such as which schedules you can or should use) and the Form 5500 reporting process in general.

Varnum’s Employee Benefits team is monitoring these issues closely and available to provide counsel. Employers should also reach out to their tax advisors with questions. Please contact a member of the team if you have any questions.

Recent FTX Email Notices Raise Basic Questions for Customers

2023 04 Advisory Ftx

On November 11, 2022 FTX Trading Ltd. (“FTX”) and its affiliated debtors (together, the “FTX Debtors”) filed emergency Chapter 11 bankruptcy cases in Delaware. The filing came less than two weeks after documents were leaked showing that Alameda Research, a cryptocurrency hedge fund affiliated with FTX, secretly held a large amount of FTT (FTX’s own cryptocurrency token), sparking viral liquidity concerns about Alameda, and a Bahamian financial regulator froze the assets of FTX and appointed a provisional liquidator.

Four months later, on March 15, 2023 the FTX Debtors filed their schedules of assets and liabilities. In the weeks that followed, the FTX Debtors sent emails to potentially one million customers or more worldwide (one FTX Debtor, West Realm Shires Services Inc. (“WRSS”), listed over 400,000 customers as unsecured creditors who presumably all received an email) informing them that:

“You are receiving this email because you have been identified as a customer with a net positive account balance as of November 11, 2022 of one or more of the debtors in the Chapter 11 cases of FTX Trading Ltd. and certain of its affiliated debtors and debtors-in-possession pending in the United States Bankruptcy Court for the District of Delaware and jointly administered under the case number 22-11068. You have been listed in one or more of the debtors’ schedules and statements.”

Recipients of these notices undoubtedly have many questions, possibly including: what does having a “net positive account balance” mean? Does this mean that these customers are one step closer to getting their cryptocurrency back from FTX, as many may think when they receive these notices? What further action is required, e.g., will they have to file a proof of claim down the road?

“Net Positive Account Balance”

The amount of the “Net Positive Account Balance” that customers might get back depends heavily on whether the cryptocurrency in the accounts belongs to the customer or FTX. If it belongs to the customer, FTX would be holding their property as a custodian and the customer would be entitled to its full return (assuming it is still there) before any creditors of the estate are paid. If it belongs to FTX, the customer would be reduced to a general unsecured creditor, and would only be entitled to a pro rata payment from whatever pool of net assets are available after payment to higher priority creditors. While FTX customers may have thought of their cryptocurrency deposits at FTX as “their cryptocurrency,” the actual nature of the deposits is an open question at this point. In their schedules, the FTX Debtors take the position that some cryptocurrency they are holding is their property, and some remains the customers’ property:

“The Debtors take the position that, consistent with the applicable terms of use between the Debtors and their account holders, certain cryptocurrency held on the Debtors’ platform is property of the Debtors’ estate pursuant to section 541 of the Bankruptcy Code. Conversely, the Debtors take the position that, consistent with the applicable terms of use, certain other cryptocurrency held on the Debtors’ platform is not property of the Debtors’ estate pursuant to section 541 of the Bankruptcy Code.”

In the case of WRSS, that FTX Debtor takes the position in its schedules that the cryptocurrency it is holding is property of WRSS, not the customer. This position is consistent with a recent ruling in another cryptocurrency-related case, that of cryptocurrency lender Celsius Network, LLC, applying the terms and conditions of the contracts used by Celsius (“Account Holders granted Celsius ‘all right and title to such Eligible Digital Assets, including ownership rights’”). However, at least one challenge has been filed in the FTX case on behalf of a class of customers seeking, among other things, a declaration that the cryptocurrency held by WRSS belongs to the customers, not WRSS. So, for the many customers of WRSS as well as other FTX Debtors, whether they own the cryptocurrency in their accounts is very much an open question at this point.

If the cryptocurrency in the FTX accounts is deemed to be property of FTX and not the customer, customers that withdrew cryptocurrency or other funds from FTX on or after August 13, 2022 (i.e. within the 90 day period prior to the bankruptcy filing date of November 11) could have yet another wrinkle to deal with regarding their claims. That is because they could be the target of a “preference action” down the road, with their claims subject to “disallowance” to the extent of any “preference liability.” Preference actions are a bankruptcy tool that allows the bankruptcy estate to take back payments shortly before the bankruptcy filing, subject to a variety of affirmative defenses that any preference target will surely raise in their defense. While the FTX Debtors are starting with the low-hanging fruit, i.e a more limited subset of parties that received large contributions or other payments, in the future the preference net could expand to include all “90 day transferees” of assets of the FTX Debtors, including customer cryptocurrency withdrawals, to the extent the cryptocurrency is deemed to be property of FTX.

Requirement to File Proof of Claim

In a Chapter 11 bankruptcy case, if a creditor disagrees with the debtor’s scheduling of its claim, or the claim is designated as contested, unliquidated or disputed, it must file its own proof of claim by a court-established deadline. If the creditor agrees with how its claim is listed,  it does not have to file a proof of claim. The court in FTX has not established a claim filing deadline yet. When a deadline is set, scheduled creditors will receive a notice about it. However, if the question of ownership is still an open issue as of the bar date for filing claims, customers may face a dilemma as to whether to file a proof of claim in the first place, out of concern for making an inadvertent admission that their interest in the cryptocurrency is that of a creditor, not an owner. Ultimately, a customer may want to file a proof of claim in an abundance of caution, attaching a reservation of rights in the event that they are deemed to be owners, not creditors. 

Possible Outcome For Customers

Unfortunately, like many bankruptcy cases at an early stage, the honest answer to this is, “who knows?” The FTX Debtors have not put forth any plan or timeframe about providing customers with access to their accounts, or any projections about what, if anything, owners or creditors might receive in the form of digital assets or a money equivalent. One good resource for customers who want to stay generally up to date is the Unsecured Creditor Committee’s Twitter account.

Varnum’s Bankruptcy, Restructuring and Creditors’ Rights Group is monitoring the FTX and other cryptocurrency-related cases and available to provide counsel to customers, creditors and other parties in interest. Please contact one of Varnum’s Restructuring Group attorneys if you have any questions.

Planning a Giveaway: Legal Considerations for Contests and Sweepstakes

2023 03 Advisory Giveaway

Giveaways are an effective avenue for promoting a product or business—from the early days of mail-in contests to today’s online entries, sweepstakes have been a powerful marketing tool for decades. What started as small incentives such as free products or discounts has now evolved into sizable prizes like cars and vacations, and as giveaways have grown in popularity, so have the legal stakes associated with this promotional strategy.

When planning a giveaway, companies should exercise caution and thoughtfulness regarding what the giveaway will entail, how customers will be expected to participate, the value of the prize and where the giveaway will be applicable. If done carelessly, an innocent giveaway can subject a company to a wide range of civil and criminal liability, all in the name of a product or service promotion.

Contests, Sweepstakes and Official Rule Content*

First, a company should know whether it intends to run the giveaway as a sweepstake or a contest.[1] This distinction is important, as each requires its own considerations to avoid liability related to lotteries and gambling. Generally speaking, the difference between sweepstakes and contests are how the winner is selected. Sweepstakes involve prizes that are awarded based on chance, while contests award prizes based on skill.  

While every state is different regarding the exact information that should be included in the official giveaway rules,[2] the consensus is that the official rules should include the following:

  • a statement that no purchase is necessary and that a purchase will not enhance the chances of winning;
  • information on how a party will enter the giveaway and how many entries will be permitted;
  • a clear statement regarding the number of prizes available and the number of entries permitted;
  • information regarding entry eligibility (i.e., age and states of residence);
  • information regarding the verified retail value of the prize (i.e., if the prize is a grill, the rules should identify the verified valued of the same in dollars);
  • a statement regarding the odds of winning the prize based on the number of estimated and completed entries received;
  • information concerning the free method of entry if there is a method of entry which requires a purchase (i.e., alternative forms of entry that do not require the entrant to make a purchase or incur a cost for entry);
  • information regarding the name of the giveaway sponsor, including the name and address; and
  • information about where the official rules can be accessed.

Most importantly, free options must give entrants an equal opportunity to submit an entry and win. In some situations, even a call and/or text message requirement may act as an entry for purchase, as the cost to call and/or text may be viewed as a fee to enter.[3] To avoid potential liability, a company should disclose a free method that does not result in a standard-carrier fee.[4]

Age and Location Considerations for Giveaways

In addition to rules considerations, companies should consider the age and location of the potential entrants. Issues of enforceability arise with those below the age of majority; therefore, it is recommended that eligibility be limited to those that are 18 years or older.[5] Similarly, enforceability issues arise when considering the locations of the applicant where some states impose stricter requirements than others and require additional filings. For example, if the states of giveaway eligibility include Florida, New York and/or Rhode Island, a company should be aware of the bond filing, registration requirements, and prize level thresholds imposed by these states. Ultimately, while giveaways covering the 50 states are often drafted more generally, if a company plans to limit the number of states in which it will conduct the giveaways (2-5 states), it is important to consult a lawyer about the specific requirements of said states to ensure strict compliance.

Giveaways are an excellent vehicle to promote brand awareness and to engage with a company’s audience. If you have any questions or would like to review your giveaway rules to ensure compliance with state and federal laws, please contact your Varnum attorney.

*Please note, the information in this advisory should not be construed as an exhaustive list of everything that should be included in the official rules of a giveaway nor a list of all laws that should be reviewed and factors considered when drafting and promoting a giveaway.

[1] States use various terms for sweepstakes, giveaways, contests, raffles, and lotteries, but remain consistent when distinguishing games of skill from games of chance.

[2] See, e.g., MCL § 750.372a; N.Y. Gen. Bus. Law § 369-e (McKinney); Fla. Stat. Ann. § 849.094 (West); 11 R.I. Gen. Laws Ann. § 11-50-1 (West); 16 C.F.R. § 310.3(a)(1)(iv).

[3] See, e.g., 16 C.F.R. § 308.3.

[4] Id.

[5] See, e.g., ¶ 60,632 Digital Demographics Inc.—recommend-it Online Service., Advert. L. Guide P. 

Last Call: H-1B Cap Registration

The electronic registration process for H-1B cap-subject petitions closes March 17 at noon. Applicants selected in the registration process will be notified by March 31 and will have until June 30 to submit H-1B petition. Employers with employees on F-1 Optional Practical Training (OPT) or candidates requiring cap-subject H-1Bs should contact Varnum immigration attorneys as soon as possible to allow for filing prior to Friday deadline.

Clarity on Professional Guardian Compensation

After the confusion spurred by Section 950 of the Michigan Budget Act of 2022 (“Section 950”), the Michigan Attorney General’s Office and the Oakland County Probate Court have recently provided more clarity on compensation for professional guardians. Section 950 appeared to cap professional guardian compensation at $83/month, stating: “a court-appointed public guardian shall not be compensated more than $83.00 per month for any CMHSP-eligible recipient regardless of funding source.” Michigan Public Act No. 166, of 2022, Section 950.  This apparent cap had led many across the state to believe that a public guardian’s compensation was now limited to $83/month in total, crippling the financial feasibility of a career as a professional guardian. 

Recently, the Michigan Attorney General’s Office weighed in (while not providing an official Attorney General Opinion, which may only be provided subject to a specific process and request made by certain officials) through a written response to a Petition before the Oakland County Probate Court. The Attorney General’s response clarified that it will not intervene in any cases to enforce a cap of $83/month on guardianship compensation. The response also referenced the Michigan Department of Health and Human Service’s (“MDHHS”) opinion that MDHHS has no jurisdiction to monitor third-party payments to guardians and that it also has no intention to enforce the $83 monthly cap on guardianship compensation. 

Helping to resolve the issue, the Oakland County Probate Court later issued an Order clarifying that Section 950 of the Michigan Budget Act does not in any way limit the compensation of professional guardians and that the Michigan Estates and Protected Individuals Code (“EPIC”) controls. EPIC provides that a professional guardian may be compensated, without limitation, from “a source other than the estate of the ward, developmentally disabled individual, incapacitated individual, or protected individual.”  MCL 700.5106(4). 

With the clarification from the Oakland County Probate Court and the Attorney General’s Office, professional guardians may be safely compensated above and beyond the apparent $83 cap outlined by Section 950. However, it’s important to note that EPIC mandates additional reporting for third-party payments to professional guardians, which involves its own set of requirements.  

As a note of caution, the expressed view of the Attorney General’s Office and MDHHS are not binding and may be subject to change. The final language related to guardianship compensation in the 2023 Michigan legislative budget could be an important marker of whether Section 950 was a drafting error not meant to limit compensation for professional guardians, or whether the legislature does intend to place a cap professional guardian compensation moving forward. 

Each Guardianship situation is unique, and Varnum attorneys are prepared to answer your questions related to professional guardian compensation, how this advisory relates to your specific situation and questions more generally related to guardianships and conservatorships. 

The NCAA Blows the Whistle on NIL Violations in First-Ever Charges Against a Higher Ed Institution

The NCAA’s first-ever sanctions against a university highlight the importance of NIL compliance across all levels of college athletic programs. Varnum is uniquely situated in the NIL arena with experience advising collectives, universities and others navigating this new era and its ever-changing rules and regulations.

Since the beginning of the Name, Image and Likeness (NIL) Era, the National Collegiate Athletic Association (NCAA) has largely positioned itself on the sidelines, providing clarifications on NIL rules yet refraining from issuing penalties against institutions and student-athletes. Their latest, and first-ever, sanctions against the University of Miami’s women’s basketball team have changed this narrative, a move that has opened the gates for harsher penalties moving forward.

The sanctions were issued by the Division I Committee on Infractions (COI) in relation to an impermissible meeting between prospective University of Miami women’s basketball players Haley and Hanna Cavinder and Miami athletic booster John Ruiz. The Cavinder sisters were spotted in a tweet from Ruiz after a dinner at his Florida home, raising red flags for the NCAA. It was discovered that Miami’s women’s basketball coach Katie Meier had introduced the Cavinder sisters to Ruiz and arranged the dinner at issue prior to the student-athletes’ official visit, resulting in a prohibited recruiting contact and inducement. 

Miami’s women’s basketball program was issued five sanctions spanning fines to recruitment restrictions, and Meier will serve a three-game suspension. While Ruiz and the Cavinders were left unscathed by the sanctions, the COI did send a warning on future booster disassociation penalties.

Key Takeaways for Institutions, Boosters and Student-Athletes

In the Negotiated Resolution between the NCAA and Miami, the COI stated that, “addressing impermissible booster conduct is critical, and the disassociation penalty presents an effective penalty available to the Committee on Infractions,” and as a result, the COI “will strongly consider disassociation penalties in future cases involving NIL-adjacent conduct.” The NCAA’s unwavering enforcement against the University of Miami points to its activity in policing NIL infractions. Moreover, the NCAA’s latest amendment to its infractions program, which allows the COI to use circumstantial evidence for NIL violations, has made it easier for the NCAA to place the burden of proof on institutions, clearing a path to more charges against schools.  

While the Negotiated Resolution does not set precedent for future infractions, it suggests that the NCAA could prioritize enforcement of its bylaws in the future. To avoid infractions and significant penalties, universities should review their current policies and educate their employees and boosters on relevant bylaws issued by the NCAA.

Download Varnum's State-by-State NIL Compliance Playbook

Cover of Varnum's State-by-State NIL Compliance Guide PlaybookTo aid individuals, schools and collectives with the often inconsistent and rapidly developing legislative and executive actions of the states, Varnum’s dedicated team of NIL attorneys created an all-inclusive, state-by-state compliance playbook. Learn more and download your free copy: varnumlaw.com/NILguide

Michigan House Moves Quickly to Repeal Michigan Right to Work Act

UPDATE: On March 24, 2023 Governor Whitmer signed multiple bills repealing Michigan’s Right to Work Act. Read more in our latest advisory.

The Michigan House of Representatives moved quickly yesterday to advance legislation repealing Michigan’s Right to Work law, which has been in effect for the last decade. Right to Work prohibits the inclusion of a clause in a union labor contract that conditions access to employment (and continued employment) on becoming and remaining a Union member in good standing. Before enactment of Michigan’s Right to Work law, Unions could legally negotiate a union security clause into a labor contract. In a nutshell, union security means that employees performing work covered by a labor contract must join the union and remain in good standing with the union or be terminated. On March 8, the House passed both House Bill 4005 (private sector unions) and House Bill 4004 (public sector unions). The bills will now be taken up by the Michigan State Senate.

What Does Repeal of Right to Work Mean for Michigan Companies?

If Right to Work is repealed, employers with Union labor contracts can expect requests to meet and bargain regarding union security clauses. If repealed, existing labor contracts will not be presumed to include such clauses. Rather, union security clauses and the terms and scope of such provisions are a subject of negotiation. Existing labor contracts should be reviewed with labor counsel to determine the employer’s obligations to engage in mid-contract bargaining on this important topic. Labor contracts on this issue vary. For example, labor contracts may contain:

  • A union security clause that becomes effective upon a change in the law;
  • An obligation to meet and negotiate with the Company upon a change in the law; or,
  • The labor contract may be silent on the issue.

Varnum’s Labor and Employment team is monitoring this issue closely and available to provide counsel regarding bargaining obligations. Please contact a member of the team if you have any questions.

Can I Track My Spouse During My Divorce?

If you think that it’s a good idea to track your spouse, think again. Electronic spying and tracking implicate state and federal law protections, and there are both civil and criminal laws prohibiting certain forms of spying on spouses. Michigan is a two-party consent state, with an exception for recordings by conversation participants. In addition to Michigan’s eavesdropping statute, electronic spying may also involve Michigan laws regarding:

  1. invasion of privacy;
  2. infliction of emotional distress;
  3. stalking; and
  4. trespass.

Federal statutes limiting electronic spying include, but are not limited to the:

  1. Computer Fraud and Abuse Act;
  2. Electronic Communications Privacy Act;
  3. Stored Communications Act; and
  4. Federal Wiretap Act.  

The Legality of Electronic Spying and Tracking of Spouses During Divorce Cases

In Michigan, installing a tracking device on a motor vehicle could be a criminal offense that results in jail time, probation or fines. Michigan law defines a tracking device as “any electronic device that is designed or intended to be used to track the location of a motor vehicle regardless of whether that information is recorded.” As defined, tracking devices include, but are not limited to, (1) Radio Frequency Identification (“RFID”) tracking, (2) Global Position System (“GPS”) tracking, (3) internet tracking, (4) radio tracking, (5) satellite tracking, (6) cell phone triangulation tracking, etc. Under these rules, the use of the “Find My iPhone” iOS application could arguably violate this law. 

Certain conduct and individuals are exempt from this statute, and it does not prohibit the installations, uses or services of any device:

  • Providing vehicle tracking for purposes of providing mechanical, operational, directional, navigation, weather or traffic information to the operator of the vehicle such as OnStar, MCL 750.539l(2)(a); 
  • Providing emergency assistance to the operator or passengers of the vehicle under the terms and conditions of a subscription service, including any trial period of that subscription service, MCL 750.539l(2)(b);
  • Providing missing vehicle assistance for the benefit of the owner or operator of the vehicle, MCL 750.539l(2)(c);
  • Providing diagnostic services regarding the mechanical operation of a vehicle under the terms and conditions of a subscription service, including any trial period of the subscription service. MCL 750.539l(2)(d);
  • Providing the lessee of the vehicle with clear notice that the vehicle may be tracked, MCL 750.539l(2)(e);
  • Installed or used by the parent or guardian of a minor on any vehicle owned or leased by that parent or guardian or the minor, and operated by the minor, MCL 750.539l(2)(f);
  • By a police officer while lawfully performing his or her duties as a police officer, MCL 750.539l(2)(g);
  • By a court officer appointed to serve civil process upon a defendant, while lawfully performing his or her duties as a court officer, MCL 750.539l(2)(h);
  • By a person lawfully performing his or her duties as a bail agent or as an employee or contractor of that bail agent lawfully performing his or her duties as an employee or contractor of a bail agent, MCL 750.539l(2)(i); and
  • By a professional investigator licensed by the State of Michigan, MCL 750.539l(2)(j).

Even considering the conduct exempted by the statute, there are still certain consequences and/or limitations. For example, a professional investigator is limited to a tracking device to perform specific duties, and they lose immunity if certain conditions are met. 

Anyone with concerns about the legality of tracking technology or who may be a victim of improper spying should consult with a lawyer who has had the opportunity to consider all facts involved in their specific case.  If you have any questions, please contact a member of Varnum’s Family Law Practice Team.