On December 23, 2014, the U.S. Court of Appeals for the Second Circuit upheld the District Court’s dismissal of plaintiffs’ claims alleging that the same-sex spouse exclusion in the employer’s self-insured medical plan violated Section 510 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and also dismissed plaintiffs’ breach of fiduciary duty claim under Section 404 of ERISA.
As you may recall, the underlying case, Roe v Empire Blue Cross Blue Shield, decided by the District Court of the Southern District of New York, involved an employee of St. Joseph’s Medical Center who tried to add her same-sex spouse as a covered dependent under the employer’s self-insured health plan administered by Empire Blue Cross Blue Shield. The plan at issue did not define “spouse” but it did expressly exclude same-sex spouses and domestic partners. The District Court granted defendants’ motion to dismiss the ERISA 510 claim because there was no allegation that an adverse employment action was taken in retaliation for asserting rights under ERISA or for the purpose of interfering with the attainment of those rights. The District Court reasoned that ERISA 510 only prohibits interference with the employment relationship and that Roe was still employed by St. Joseph’s Medical Center and had suffered no adverse employment action. Having held that the exclusion did not violate Section 510 of ERISA, the District Court dismissed the ERISA 404 claim because it was based on an argument that enforcing an unlawful plan term constituted a breach of fiduciary duty. To read more about the underlying case click here to see our prior blog post.
After conducting a de novo review, the Second Circuit concluded, in an unpublished opinion, that the District Court properly dismissed the ERISA 510 claim because plaintiffs failed to adequately allege any right to which they are entitled, or may become entitled under the plan with respect to which defendants discriminated against them or with which defendants otherwise interfered. The Second Circuit also concluded that the District Court properly dismissed the ERISA 404 claim because plaintiffs did not adequately allege that defendants were acting in a fiduciary capacity or that they breached any fiduciary duty under ERISA.
Employers considering such an exclusion for their self-insured plans should note that the decision is expressly limited to consideration of the ERISA claims and both the District Court and Second Circuit declined to address whether the exclusion is constitutional or valid under any other federal or state law. Same-sex spouse exclusions will likely be challenged on other grounds. In addition, the legal landscape surrounding same-sex marriages continues to change as the U.S. Supreme Court recently agreed to decide whether the Fourteenth Amendment requires states to allow same-sex couples to marry and whether it requires states to recognize same-sex marriages performed in other states.
Earlier this month, Illinois became the first State to enact legislation that requires private-sector employers who do not offer qualified retirement plans to enroll their employees in individual retirement accounts (i.e., “IRAs”). Now-former Governor Pat Quinn signed the Illinois Secure Choice Savings Program Act (“Act”) into law on January 4, 2015.
The Act, which will become effective with enrollment occurring sometime in the next 24 months, has a broad reach. The following provides a high-level summary of the applicability of (and requirements under) the Act:
What Employers are Subject to the Act?
For any given year, the Act applies to any employer that:
- Is a private for-profit or non-for-profit company engaged in business in Illinois;
- Has been in business for at least two years;
- Has employed at least 25 employees in Illinois at all times during the previous calendar year; and
- Has not offered a qualified retirement plan (for example, a 401(k) or 403(b) plan) in the preceding two years.
An employer with fewer than 25 employees and/or that has been in business for less than two years may, but is not required to, participate in the program.
What Does the Act Require?
A private-sector employer that meets the above criteria will be required to either (i) set up a retirement plan for its employees, or (ii) automatically enroll its employees who are age 18 and older in the savings program created by the Act and set up payroll deductions for them to make deposits into the program.
The program itself will be established and administered by a seven-member board (“Board”) established by the Act. Employee accounts under the program will be set as Roth IRAs under Internal Revenue Code (“Code”) section 408A (i.e., an after-tax IRA).
The payroll deduction amount is set at a default 3% of the employee’s “wages” (generally, the amount shown in box 10 of Form W-2 (wages, tips, other compensation), less amount properly shown in box 14 (nonqualified plans)).
Employees may select a payroll deduction amount higher or lower than 3% (subject to the deduction limits under Code section 219(b)(1)(A)) or, alternatively, opt-out of the program entirely. An employee who opts out may later enroll in the program during the applicable open enrollment period (to be set by the employer). An employee’s account will be portable from one employer to another.
When Will Compliance Be Required?
The legislation includes a 24-month implementation period following its adoption (i.e., an employer may not be required to comply until 2017). During this pre-implementation window, the Board is required to seek an opinion/ruling of the IRS and the Department of Labor regarding the applicability of the federal Employee Retirement Income Security Act (“ERISA”) to the program. The program may be derailed – and never implemented – if it is determined that the IRA arrangements offered under the program will fail to qualify for the favorable federal income tax treatment ordinarily accorded to IRAs under the Code or it is determined that the program is an employee benefit plan under ERISA.
Assuming these federal hurdles can be overcome, then once the Board opens the program for enrollment, an employer will have up to nine months to establish the required payroll deduction program.
What is the Penalty for Failing to Comply?
An employer that fails to enroll an employee in the program as required by the Act may be hit by a penalty of $250 per employee for each calendar year (or portion thereof) that the employee was not enrolled in (and did not opt-out of) the program. For any calendar year beginning after an initial penalty has been assessed, an increased $500 penalty may be assessed for any portion of that calendar year during which the employee remains unenrolled in (or has not otherwise opted out) of the program.
Happy New Year!
As part of our annual tradition in helping retirement plan fiduciaries get started down the right path in the new year, we’re pleased to present our Top Ten New Year’s Countdown. But, wait, what’s better than a Top Ten Countdown list to kickoff 2015? How about a Top Ten list set to Pop Culture themes that dominated 2014? Well, here goes nothing…. Because we’re happy (clap along if you feel like a fiduciary without a roof):
1. It’s all About The Fees, about the Fees, No trouble. Another year, another reminder (thank you, Meghan Trainor) that fees should be closely scrutinized by plan fiduciaries. Participant fee disclosures are not the new kid on the block anymore; however, fiduciaries should still ensure that all required fee disclosures are complete, accurate and made timely. Plan fiduciaries should also periodically monitor all fees charged against the plan’s assets to ensure reasonableness.
2. The DOL Ice Bucket Challenge – I challenge you, within 24 hours – to get your payroll remittances in…. The DOL has not receded from its firm position that employee deferrals segregated from corporate assets should be paid into the plan “as soon as reasonably practicable”. So, now is as good a time as any to visit with payroll and/or HR to make sure an air-tight process is in place for timely transmitting employee contributions and loan repayments to the plan. Sure, 24 hours may not be a feasible deadline, but remember that the 15th business day of the following month is not a safe harbor for transmissions.
3. “Game of Thrones” is our new “Sopranos”, “Orange Is the New Black” and “IPS is the new Plan Document”. With heightened scrutiny of plan fiduciaries flowing in part from the so-called 401(k) fee litigation, retirement plan fiduciaries should pay particular attention to the contents of the plan’s investment policy statement (IPS) – or adopt one if it is missing. The review should be focused on ensuring that the IPS is consistent with the fiduciaries’ intent, the other governing plan documents and actual practice (e.g., do we actually use a watch list for 1-year before removing an underperforming manager?).
4. ‘Cause the players gonna play, play, play, play, play; And the haters gonna hate, hate, hate, hate, hate; Baby, I’m just gonna delegate, gate, gate gate. Delegate it all…. It all?? Being an ERISA fiduciary is hard and delegating certain responsibilities may seem attractive. Retirement plan fiduciaries are well-served to consider retaining professionals and service providers to help perform certain fiduciary tasks. Keep in mind, however, that the act of delegating is a fiduciary act – and even after delegating responsibilities, fiduciaries still have a duty to monitor plan service providers. Also, delegation needs to be permitted by the governing plan documents.
5. Justin Bieber went to jail again, but this doesn’t have to happen to you. Get fiduciary liability insurance. Okay, so ERISA fiduciary jail is unlikely, but personal liability for restoring to the plan amounts lost due to a breach of ERISA’s complex rules is a real possibility. Remember, that ERISA fiduciary liability insurance serves as a first line of defense for potential breach of fiduciary duties. These policies often come as riders to D&O coverage; consider getting your company’s risk manager or counsel engaged to review the scope and amount of the coverage to assess its appropriateness. Remember that a fiduciary liability insurance is not the same as a fidelity bond. As discussed here, a fidelity bond is separate and distinct from fiduciary liability insurance – and bond coverage is specifically required by law.
6. It’s not just for Actors at the Oscars, Take a “Group Selfie” when your committee next meets (Yes, that’s a thing now – and a real word according to the Oxford Dictionary). Sure, it may not be as exciting as the red carpet or post-Academy Awards parties, but holding regular plan fiduciary/committee meetings can be a grand ole’ time. Plan fiduciaries should meet periodically (we generally recommend at least quarterly) to consider information regarding performance, selection, and oversight of plan investments, investment managers, service providers, and other plan administrative matters. Minutes of the meetings should be kept to help demonstrate that the fiduciaries have engaged in a prudent process of analyzing and assessing relevant issues.
7. Avoid “Scandals” and Having to Call Olivia Pope’s Crisis Management Firm…. Provide fiduciary education and training to plan fiduciaries. It is another one of our favorite taglines – the simple act of providing fiduciary training to your organization’s ERISA fiduciaries is a major step in minimizing fiduciary liability. Training will educate fiduciaries as to their responsibilities and help establish a record of procedural prudence. There are some really nifty fiduciary training programs which can be easily customized for any group of plan fiduciaries.
8. I’m so fancy, You already know… I’ve reviewed my plan docs, and I’m good to go. Since fiduciaries should make decisions by following the applicable plan documents (e.g., plan, summary plan description, IPS, trust, committee charters, delegations, etc.), fiduciaries should make sure plan documents are consistent with intended plan design, with one another and with actual practice. This can be an arduous undertaking, but can pay huge dividends down the road in the event of litigation or an in-depth plan audit by the IRS or DOL.
9. “How I Met Your Mother” ends, but fee litigation continues. The list of 401(k) fee cases left on the docket is dwindling, but the Supreme Court has agreed to weigh in on a standard of review issue in the Tibble case. Moral of the story??? Stay tuned, pay close attention to items 1-7 above, pay really close attention to item 10 below and, when in doubt, get the help of retirement plan experts.
10. Let it Go, Let it Go, Can’t Let ERISA Concerns Hold you Back anymore…. If we’ve said it once, we’ve said it a thousand times – being a good fiduciary is all about having a procedurally prudent process. For each fiduciary decision you should: inquire; analyze; consider alternatives; get help and advice if needed; and document the process, actions and basis for the decision. Completing these tasks will help establish and demonstrate procedural prudence, and ERISA stress will melt away. Pop the bubbly once more!