It has been an eventful 10 days in the courts and in Congress for halting impending regulations and setting the stage to roll-back new rules implemented by the Obama Administration. Employers can expect a repeal of recently passed regulations is on the horizon in the area of benefits regulation.
ACA — 1557 Regulations: Discrimination Based on Gender Identity or Pregnancy Termination
A nationwide injunction prohibiting the Department of Health and Human Services (HHS) from enforcing nondiscrimination rules promulgated under ACA section 1557 as they relate to discrimination on the basis of gender identity or termination of pregnancy was imposed by a federal judge on December 31, 2016. (Franciscan Alliance, Inc. v. Burwell, N.D. Tex., No. 16-cv-108, 12/31/16) The plaintiffs argued that section 1557 regulations forced health care professionals and religious-based facilities to provide gender transition services against their medical judgment and religious beliefs.
Regulations under 1557 have been challenged in a number of suits across the country, the most recent being a case filed by a collection of Catholic organizations in North Dakota. (Catholic Benefits Ass’n v. Burwell, D.N.D., No. 3:16-cv-432, filed 12/28/2016) Plaintiffs are arguing that the rules improperly require religious health-care organizations and benefits providers to provide services and insurance coverage relating to certain procedures that are in violation of their religious beliefs.
Since the passage of these regulations, employer-sponsors of health plans have been scrambling to determine if the rules require that they cover gender reassignment, among other things. Generally speaking, most employer-sponsored health plans are not “covered entities” under Section 1557 because they do not receive direct subsidies from HHS.
The remaining antidiscrimination provisions of the 1557 regulations which prohibit discrimination on the basis of disability, race, color, age, national origin, or sex other than gender identity, were generally effective January 1, 2017.
The DOL Fiduciary Rule: Proposed 2-Year Delay for Effective Date (H. R. 355)
A bill was introduced by Rep. Joe Wilson (R-S.C.) on 1/6/2017 proposing a 2-year delay in the effective date of the DOL Fiduciary Rule. The Fiduciary Rule is scheduled to take effect April 10, 2017, with full compliance required by January 1, 2018.
Republicans have repeatedly challenged the DOL Fiduciary Rule, but presumably stand a better chance of success under President-elect Donald Trump.
En Bloc Reconsideration of Agency Regulations by Congress – Retroactive Consideration
Bills have been introduced in both the Senate (S.34) and the House (H.R 21) that would empower Congress to make a wholesale repeal at once of multiple regulations that were passed by the Obama Administration in the last half of 2016. The House passed the Midnight Rules Relief Act (H. R. 21) on 1/4/17, one day after it was introduced. The Senate bill was introduced 1/5/2017.
The measures amend the Congressional Review Act (“CRA”) to allow Congress to repeal multiple rules and regulations in one joint resolution. The CRA currently requires that regulations be considered individually.
Regulations promulgated in the last half of 2016 by the Department of Labor and the Department of Health and Human Services as well as other agencies could come under review under these bills.
New Requirements of the Process of Agency Adoption of Regulations
Two bills have been introduced in the House to add substantial Congressional review of regulations promulgated by governmental agencies, such as the National Labor Relations Board, The Equal Employment Opportunity Commission, and the Department of Labor. The “Executive in Need of Scrutiny Act” (H. R. 26) and the “Regulatory Accountability Act of 2017” (H.R. 5) substantially limit agencies by requiring multiple additional steps in the rulemaking process.
The “Executive in Need of Scrutiny Act” (H. R. 26) requires Congress to act before any major rules take effect. Under the bill, an agency promulgating rules would have to publish certain information in the Federal Register and include in its report to Congress and to the Government Accountability Offices 1) a classification of the rule as major or non-major, and 2) a copy of the cost-benefit analysis of the rule that includes an analysis of any jobs added or lost. The bill includes standards for determining if a rule is major or non-major and sets forth the congressional approval procedure for major rules and the congressional disapproval procedure for non-major rules.
The “Regulatory Accountability Act of 2017” (H.R. 5) likewise imposes a number of steps on the formulation of new regulations and guidance documents, clarifies the nature of judicial review of agency interpretations, and requires a rigorous analysis of potential impacts of proposed rules on small entities.
It was bound to happen. For several years, the plaintiffs’ bar has sued fiduciaries of large 401(k) plans asserting breach of their duties under ERISA by failing to exercise requisite prudence in permitting excessive administrative and investment fees. It may be that the plaintiffs’ bar has come close to exhausting the low-hanging lineup of potential large plan defendants, and, if a recent case is any indication, the small and medium-sized plan fiduciaries are the next target. See, Damberg v. LaMettry’s Collision Inc., et al. The allegations in this class action case parallel those that have been successful in the large plan fee dispute cases. Now that the lid is off, small and medium sized plan fiduciaries should be forewarned of the need to employ solid plan governance to avoid, or at least well defend, a suit aimed at them.
Exceptional plan governance means that, at a minimum, plan sponsors (and designated fiduciaries) should consider the following items to help demonstrate that they are primarily operating their plans to the benefit of participants and their beneficiaries and then to reduce liability exposure for themselves:
- Understand and exercise procedural prudence – process, process, process
- Identify plan fiduciaries and know their roles and duties
- Seek and obtain fiduciary training for all plan fiduciaries
- Adopt a proper plan committee charter or similar document
- Appoint fiduciaries and retain service providers prudently and monitor them
- Know the difference between a 3(16), 3(21) and a 3(38) fiduciary and make prudent decisions with respect to retaining them
- Utilize a qualified administrative committee of no fewer than three members that meets regularly and memorializes its decisions properly
- Utilize a corporate trustee/custodian
- If you adopt an investment policy statement (as you probably should), follow it
- Understand and properly evaluate plan fees and 408(b)(2) disclosures and services and service contracts
- Monitor plan administration
- Memorialize actions taken and the reasons for doing so
- Retain a qualified independent investment advisor (although it may not make financial sense for small plan sponsors to pay for this service)
- Engage in periodic comparisons of fees and services being charged for similar plans (RFPs, RFIs, benchmarking)
- Address participant concerns promptly and, if necessary, seek advice of counsel in responding to participant complaints
- Understand and evaluate a proper operational structure for your plan
- Know the difference between a bundled structure and an unbundled one – with a really good record keeper
- Appreciate the nature of services to be provided
- Evaluate cost to participants and reasonable of fees for needed services
- Determine cost that the plan sponsor is willing to share
- Identify parties that will be making statements regarding the plan and its operation (like the plan’s TPA) and how there is control to avoid misstatements
- Determine responsibility for keeping plan documents current and confirm that it is ongoing
- Determine responsibility for claims processing and confirm that it is ongoing
- Verify that a proper ERISA bond is in place
- Procure fiduciary insurance
- Seek assistance of counsel as needed
- Evaluate the investment platform regularly, and, if a brokerage window is made available, be certain to understand it, how it works, and what its limitations might be
- Assure 404(c) compliance, if applicable
- Understand target date funds and how they work in your plan
- Establish solid internal controls
- Review current systems to confirm segregated responsibilities and that the IT systems being used for the plan (particularly payroll) are effective
- Confirm that those maintaining plan records are knowledgeable
- Confirm “good transfers” regularly
- Make certain that the proper definition of compensations is being used for example, by reviewing payroll coding against the plan document
- Be certain someone is responsible to verify data, particularly for nondiscrimination testing
While this list does not address every possible governance practice, following the applicable items appropriately should result in good plan governance. It will also be of value to your participants by demonstrating that you have their best interests at the forefront of plan operation. Additionally, the result should be better liability protection for you and the other plan fiduciaries. While the list may seem daunting, once you understand each of the steps and implement them, it will become easier and, with regularity, can become second nature.
“Top hat” plans are plans employers maintain for a “select group of management or highly compensated employees.” These plans are exempt from many of ERISA’s protections, including eligibility, vesting, fiduciary responsibility and funding. Thus, they are often used to provide benefits to management employees over and above those provided under the company’s broad-based retirement plans.
Choosing which employees may participate in a “top hat” plan is an important decision, as selecting employees who are ineligible for this type of arrangement may lead to violations of ERISA, penalties, increased taxes, and other liabilities. For years companies, courts, and even the Department of Labor (DOL) have struggled with defining the group of employees who can participate in a “top hat” plan. Two recent federal court cases provide insight into the current state of the law and the factors courts consider when assessing “top hat” status.
In Bond v. Marriott International, Inc., Nos. 15-1160, 15-1199 (4th Cir. 2016) (Unpublished Opinion), the Fourth Circuit held that the plaintiff’s claims were time barred, thus avoiding a decision on whether Marriott’s deferred stock bonus awards program was a “top hat” plan. The Maryland district court, however, had determined that the plan was indeed a “top hat” plan (Bond v. Marriott Int’l, Inc., 296 F.R.D. 403 (D. Md. 2014). Former employees of Marriott asserted that a retirement awards program was not a “top hat” plan and thus subject to the ERISA vesting requirements. The plan used a prorated vesting formula based on each participant’s service until he or she reached age 65. The plaintiffs in the case, who did not fully vest in their benefits as they terminated employment before reaching age 65, argued that this reduction in benefits violated ERISA. The district court accepted Marriott’s reliance on the plan prospectus which stated the plan was “exempt from the participation and vesting, funding and fiduciary responsibility provisions” of ERISA, and Marriott’s granting of retirement awards to less than 2 percent of their total workforce each year.
The plan sponsor also prevailed in another recent case, Sikora v. UPMC (12/22/15 W.D. PA), in which the court was called upon to review the criteria for “top hat” status. In Sikora, the district court made clear to be considered a “top hat”, a plan must plainly “cover relatively few employees…and…cover only high level employees.” A former vice president at UPMC sought benefits from his former employer’s non-qualified supplemental benefit plan. Upon his voluntary termination, the plaintiff sought a lump sum payout, but instead received a written decision from the plan administrator informing him that he forfeited his fully vested account balance. Plaintiff filed suit alleging various causes of action while the defendant’s contention was that the plan was a “top hat” plan and exempt from ERISA’s vesting and non-forfeiture provisions. The court granted summary judgment for UPMC based on a plan participation rate of 0.2% and the titles and high compensation of the eligible participants.
Courts have received a variety of arguments discussing factors to be considered for when a plan should meet the “top hat” definition. For instance, in an amicus brief filed in Bond, the DOL asserted the Court should rely on its “bargaining power” interpretation. In 1990, the DOL released an Opinion Letter on this subject which set forth the last official statement of its view, which is that only those employees who “by reason of their position or compensation level, have the ability to affect or substantially influence, through negotiation or otherwise, the design and operation of their deferred compensation plan” are eligible to participate in a “top hat” plan. Remember, an Opinion Letter is not legal precedence, but merely expresses the DOL’s view of how the law should be interpreted.
Bond does not accept the DOL’s views nor expressly reject them. Instead, for a more thorough examination of the factors courts should entertain (and a vigorous repudiation of the DOL’s “bargaining power” view), look no further than the decision in Sikora. There, the court relied on both quantitative and qualitative factors. First, in determining what is a “select group” hinges primarily on the percentage of the workforce participating in the plan. The court noted that several courts have found plans with less than 15% participation to be “select.” Next, the court determined whether the “select group” consists exclusively of high-level employees by considering the following factors: (1) purpose of the setting up the plan, (2) plan eligibility criteria, (3) job titles of participants, (4) average compensation of participants, and (5) whether participants are eligible to participate in other key management or incentive plans.
More than 40 years after ERISA was enacted there is still no bright-line standard for determining “top hat” status. The area remains ripe for litigation as these recent cases demonstrate and a fertile field for employee counsel. Accordingly, we recommend regular review of top-hat plans to ensure they meet regulatory requirements and these outlined factors.
It’s like a simple set of facts on a law school exam with an answer that defies logic. And, yet, Supreme Court precedent has brought us to this illogical conclusion. Facts: Participant agrees to reimburse the plan money it has spent on his medical care. Participant sets aside money to reimburse the plan, but then spends all of the money himself before reimbursing the plan. Question: If the money cannot be traced, can the plan recover the amount it is owed from the participant’s other assets? Answer: Last week, the Supreme Court ruled in Montanile v. Bd. of Trustees of the Nat’l Elevator Indus. Health Benefit Plan that a health plan cannot enforce an equitable lien against a participant’s general assets when the participant has already spent the fund to which the lien attached.
Robert Montanile, a participant in an ERISA-health plan, was seriously injured by a drunk driver in an automobile accident and the plan paid more than $120,000 for his medical care. The plan contained a provision that required reimbursement from a participant who recovered money from a third party for medical expenses. Montanile also signed a reimbursement agreement reaffirming this obligation.
Subsequently, Montanile filed a claim against the drunk driver and received a $500,000 settlement. After settling his attorney’s fees and repayments, the participant had enough funds remaining to repay the amount due to the plan. The funds were held in trust, and the plan sought reimbursement. After negotiations between the parties broke down, Montanile’s attorney distributed the funds from the trust to Montanile.
The plan sued Montanile under ERISA seeking repayment of the amount it had expended on his medical care. Montanile claimed that while he still had some of the settlement proceeds, he had spent most of the funds and could not identify a specific fund separate from his general assets against which an equitable lien could be enforced. The district court ruled in favor of the plan and held that the plan could recover from the participant’s general assets despite the dissipation of the specifically identified fund. The Eleventh Circuit affirmed, reasoning that a plan can enforce an equitable lien once it attaches and dissipation of a specific fund to which it attached cannot destroy the underlying reimbursement obligation.
However, the Supreme Court held that an ERISA fiduciary cannot enforce an equitable lien on a participant’s general assets if the participant has spent the settlement funds on nontraceable items. In the Court’s view, enforcement of such a lien would not constitute “appropriate equitable relief” under ERISA. Citing its prior cases, the Court stated that “equitable relief” is limited to the types of relief which were typically available in equity, and, under those principles, the plan must identify a specific fund in the participant’s possession to enforce a lien.
Is this really the answer? We previously posted that the Supreme Court’s decision in this case could provide more insight into best practices for drafting subrogation provisions in medical plans. But, it didn’t provide such insights. Even a subrogation provision supplemented by a separate reimbursement agreement proved insufficient to avoid this unfavorable outcome. Is the answer really a race, encouraging one party to run to the courthouse and the other to spend as much money as possible as quickly as possible? There may be other novel theories of recovery, but, for now, at least one consideration for plans will be whether to closely monitor participant litigation against third parties in order to be ready to litigate quickly.
In a rebuke to the Ninth Circuit, the Supreme Court granted the Amgen defendants’ petition for certiorari, reversed the Ninth Circuit’s judgment and remanded the case for further proceedings consistent with its opinion in the district court. The unanimous per curiam opinion was issued without further briefing and oral argument, an unusual step in civil cases. The substance of the opinion and its handling by summary disposition sends a clear message: the Court meant what it said in Dudenhoeffer when it stressed the role of motions to dismiss in “divid[ing] the plausible sheep from the meritless goats” and crafted new liability requirements that plaintiffs must plausibly allege are met in order to state a claim. Admittedly, we steal liberally from Judge Kozinski’s dissent in Amgen in characterizing the opinion this way. But the Court’s summary handling of the Ninth Circuit’s judgment leaves no doubt that motions to dismiss must be given serious consideration and that boilerplate allegations will not suffice.
A Short Review of Amgen’s Long History
The continuing Amgen litigation began in 2007 when former employees filed a class action against Amgen defendants alleging that the fiduciaries violated the duty of prudence under ERISA. The complaint alleged that the fiduciaries knew or should have known, on the basis of inside information, that the company’s stock price was inflated. The district court dismissed the original complaint for lack of standing and other non-merits grounds. After the Ninth Circuit reversed and remanded, the district court dismissed again, this time for failure to state a claim. Nothing if not consistent, the Ninth Circuit again reversed the district court’s dismissal. The Amgen defendants petitioned for certiorari and asked the Supreme Court to hold the case pending the Dudenhoeffer decision. Following its opinion in Dudenhoeffer, the Supreme Court granted certiorari, vacated the Ninth Circuit decision, and remanded the decision back to the Ninth Circuit for further consideration in light of Dudenhoeffer. The Ninth Circuit reissued its prior opinion with minor changes, and Amgen filed another petition for certiorari.
Supreme Court – Take Two
Today’s opinion once again reversed the Ninth Circuit’s determination that the complaint states a sufficient claim for breach of the duty of prudence. The Court repeated the Dudenhoeffer standard for assessing claims based on the fiduciaries’ possession of inside information: “[A] plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” The Ninth Circuit had defended its decision by reasoning that it is “quite plausible” that removing the Amgen Common Stock Fund from available investment options would not cause undue harm. The Supreme Court’s response to this assertion was pointed. The Ninth Circuit’s conclusion regarding alternative actions might be true but “[h]aving examined the complaint, the Court has not found sufficient facts and allegations to state a claim for breach of the duty of prudence.” Neither conclusory allegations nor court guesswork provide what Dudenhoeffer requires. The Court left to the district court to determine in the first instance whether the stockholders may amend their complaint to adequately plead a claim. As we said in analyzing Dudenhoeffer in 2014, good luck with that.
They Really, Really Mean It
Together, Dudenhoeffer and Amgen serve notice that a complaint must do much more than allege a drop in stock price. The complaint must plead special circumstances showing that the market did not provide a reliable indication of price; where, as in Amgen, the complaint relies on the plan fiduciaries’ failure to act on nonpublic information, it must identify the action which the fiduciaries should have taken which would not have violated federal securities law prohibitions on insider trading as well as facts showing that a prudent fiduciary would not have viewed the action as more likely to harm the stock fund than to help it. These high standards are not satisfied by the complaints routinely filed upon a substantial drop a company’s stock price.
It is not news that Americans aren’t saving enough for retirement. But, what is news, is that this Administration seems to be bent on making some meaningful change on that front with the enactment of one particular solution – state-based retirement plans. After hearing the marching orders of the President to clear the path for state-based retirement savings initiatives (including legislation that automatically enrolls employees in IRAs), the Department of Labor has declared VICTORY!
But let’s take a closer look. What did the Department actually do? And will it withstand public commentary, let alone judicial scrutiny?
Last week, the Department issued two pieces of guidance: an Interpretive Bulletin and a Proposed Regulation. Each attempts to tackle a different element of the state-based IRA arena:
- ERISA-Covered Plans, But No Preemption?
Performing a little fancy footwork, the Department issued an “Interpretive Bulletin” (which is, in effect, an interpretation of the Department’s reading of ERISA) in which it describes three specific platforms which purport to allow voluntary employee savings in IRAs. While the Department admits that ERISA will apply in these situations, it rather boldly asserts that the broad preemption provision embedded in the ERISA statute will not preempt these platforms.
Let’s set the scene: ERISA Section 514(a) outlines a sweeping preemption clause claim that ERISA “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan”. Guided by its desired result (allowing state laws which help employers establish ERISA-covered plans for their employees), the Department interprets ERISA as “leav[ing]room for states to sponsor or facilitate ERISA-based retirement savings options for private sector employees, provided employers participate voluntarily and ERISA’s requirements, liability provisions, and remedies fully apply to the state programs.”
The only three approaches that the Department avails this special treatment are:
- The Marketplace: Borrowing language from the ACA, the private savings marketplace approach contemplates a state establishing centralized location where private sector employers could “shop” from a menu of savings arrangements. The marketplace would not itself be an ERISA-covered plan, and the arrangements available to employers through the marketplace could include both ERISA-covered plans and other non-ERISA savings arrangements.
- The Prototype: Again borrowing from another employee benefit concept, the Department describes the “prototype” approach in which a state would make available a “prototype plan” that individual employers could choose to adopt. Under this approach, any employer that adopts the prototype would sponsor an ERISA plan for its employees, and the state or a designated third-party could assume responsibility for most administrative and asset management functions of an employer’s prototype plan.
- The MEP: The final approach described in the interpretive bulletin is the statement’s establishment of a “multiple-employer plan” or MEP. Eligible employers could, at their election, join the State MEP rather than establish their own separate plan. The MEP would be run by the state or a designated third-party.
The Department’s described reasoning for finding that these three approaches will not be swept up by ERISA’s preemptive principles is that these approaches, and the involved state activity, do not “undermine” ERISA’s exclusive federal regulation of covered employee benefit plans. These approaches do not mandate employers to adopt or participate in ERISA plans, nor do they mandate any particular benefit structure. The key for the Department is that these programs will remain fully subject to ERISA’s regulations, obligations, and remedies.
- State-Required Payroll Deduction IRAs are NOT ERISA Plans?
The DOL issued proposed rules “clarifying” the definition of “employee pension benefit plan” to carve-out payroll deduction programs required by state law. Since these plans purportedly will not qualify as employee benefit plans, they therefore should not be preempted by ERISA. This new “safe harbor” builds off the 1975 “safe harbor” regulation the Department issued to clarify the circumstances under which IRAs funded by payroll deductions would not be treated as ERISA plans.
The new safe harbor regulation attempts to follow the structure of laws implemented or proposed to date in certain states (including Oregon, Illinois, and California) and hinges on the existence of the central role played by the state contrary to the limited role played by the employer. In order to qualify for the safe harbor exemption from ERISA, the following program requirements must be met:
- The program must be established by a State pursuant to State law
- It must be administered by the State that established the program, or by a governmental agency or instrumentality of the State (Note, however, that one or more service or investment providers may be engaged to help operate and administer the program, provided that the State (or its agency/instrumentality) retains full responsibility for the operation and administration of the program)
- The State (or its agency/instrumentality) must be responsible for investing the employee savings or for selecting investment alternatives from which employees may choose
- The State must assume responsibility for the security of payroll deductions and employee savings
- The State must adopt measures to notify employees of their rights under the program and must create an enforcement of rights mechanism
- Participation in the program must be voluntary for employees (Note, however, since the requirement is not “completely voluntary,” both the automatic enrollment with opt out and automatic increase contribution features continue to be allowed)
- The program cannot require that employees keep any portion of contributions or earnings in his/her IRA
- The program cannot impose any restrictions on withdrawals or impose any cost or penalty on transfers or rollovers permitted under the Internal Revenue Code
- All rights under the program are enforceable only by the employee, former employee, beneficiary, an authorized representative of such a person, or by the State (or its agency/instrumentality)
- An employer’s participation in the program must be required by State law
- A participating employer must have no discretionary authority, control or responsibility under the program
- A participating employer can receive no direct or indirect consideration other than the reimbursement of the actual costs of facilitating the program
- The involvement of the employer is limited in certain specific ways
Employer involvement is limited to ministerial tasks, which include the following: (i) collecting employee contributions through payroll deductions and remitting them to the program; (ii) providing notice to the employees (and maintaining records) regarding the employer’s collection and remittance of payments under the program; (iii) providing information to the State (or its agency/instrumentality) necessary to facilitate the operation of the program; (iv) distributing program information to employees from the State (or its agency/instrumentality); and (v) permitting the State or such entity to publicize the program to employees.
Employers are expressly prohibited from contributing employer funds (other than payroll deduction) to the program. Employers call cannot provide any “bonus” or other monetary incentive to employees for participating.
The proposed regulation has a 60-day comment period which is set to expire January 19, 2016. Commentary has already started in the industry, with stark criticism of the proposal which gives state-run programs an “unfair” advantage over private sector products aimed at achieving the same goals.
So, what’s your assessment? Did the Department pave the way for more saving for retirement? If so, did it do so within its legal boundaries. Only time will tell how the public and judicial branch view this guidance. And, if we have a change in political parties in the Oval Office come next November… One thing is safe to say; this is not the last word on state-based retirement savings.
A recent case from a federal court in the Northern District of Georgia provides an interesting perspective on the termination of a nonqualified retirement plan with a traditional defined benefit formula offering lifetime annuity payments. In Taylor v. NCR Corporation et. al., NCR elected to terminate such a nonqualified retirement plan. The termination decision not only precluded new entrants to the plan and the cessation of benefit accruals for active employees, but it also affected retirees in payout status receiving lifetime payments. Those retirees received lump sum payments discounted to present value in lieu of the lifetime payments then being paid to them.
At the time NCR terminated the plan, its provisions apparently provided that the plan could be terminated at any time provided that “no such action shall adversely affect any Participant’s, former Participant’s or Spouse’s accrued benefits prior to such action under the Plan. . . ” The plaintiff was a retiree receiving a lifetime joint and survivor annuity of approximately $29,000 annually. As a result of the plan’s termination, NCR calculated a lump sum benefit for the plaintiff of approximately $441,000, with the plaintiff ultimately receiving a net payment of approximately $254,000 after federal and state income tax withholdings.
The key allegations made by the plaintiff, as recited by the court, were (1) that the lump sum payment caused the plaintiff to incur a significant taxable event and (2) that the plaintiff objected to the use of a discount factor to reduce the value of the lump sum payment being made to him.
The court rejected the first claim by citing widely established precedent that tax losses do not fall within the relief available under ERISA. The court also rejected the plaintiff’s complaint about the actuarial reduction, citing an Eleventh Circuit decision, Holloman v. Mail-Well Corp., in which the Eleventh Circuit seemed to conclude that the power to accelerate a stream of benefit payments necessarily included the ability to discount the value of those future payments to a present value lump sum.
The court faulted the plaintiff’s allegations for simply complaining about the use of an actuarial reduction. The court stated that the allegation “that the present value reduction factor decreased his further monthly payments as correct, but irrelevant” as a present value decrease of future payments was “precisely the purpose of applying a present value reduction factor.” Furthermore, the court said that the allegation that “the use of the present value reduction factor was, in itself, improper because it amounted to a reduction of his future monthly payments under the plan” was “incorrect as a matter of law.”
The most interesting aspect of this case is how willing the court was to read a broad grant of authority into a very simple and concise reservation of an employer’s right to terminate a nonqualified retirement plan. The court was willing to infer that the power to terminate necessarily includes the power to commute annuity payments to lump sums and to discount the value of those annuity payments using appropriate actuarial assumptions, including discount rates. This case did not survive NCR’s motion to dismiss. The court indicated that it may have at least survived that stage of the litigation had the plaintiff alleged that the actuarial assumptions used by NCR were improper, rather than simply complaining about the mere use of such factors.
In Roger Miller’s 1964 hit by the above name, he tells the tale of “a man of means by no means,” a man just scraping to get by. While he may not have a phone, a pool, pets, or cigarettes (and really, what does he need that last item for anyway?), after the Supreme Court’s 6-3 decision on June 25, however, such a man might be able to secure a premium tax credit to help pay for health insurance (yes, we realize he’d probably be Medicaid eligible, but just work with us here).
But what does the ruling mean for employers? At first, it might appear that it doesn’t mean very much; life under the Affordable Care Act will continue to move along much as it has for the last few years. That’s basically true, but there are some points to consider:
- This solidifies that the employer “play or pay” mandate is now effective nationwide. Because an employee must receive a premium tax credit to trigger the penalty, a decision the other way would have rendered the mandate ineffective in states with federal exchanges.
- For employers perhaps continuing to adopt a “wait and see” (or “ostrich,” depending on your point of view) approach to ACA implementation, the truth is that you’re already late. But given this decision, now is the time to start, if you haven’t already, getting your offers of coverage and reporting requirements in a row.
- This isn’t changing without legislation from Congress (and, really, what’s the likelihood of that in this political climate?). The Supreme Court’s decision basically said that Congress clearly intended for subsidies to be available for policies purchased through federal exchanges (more on that below). The Supreme Court could have followed the reasoning of one of the lower courts and said that the statute was ambiguous and the IRS’s interpretation was reasonable so it would be upheld. However, had they followed that analysis, it could have theoretically left the door open for the next administration to change the rule and say that subsidies were only available through State-run exchanges (the likelihood of that is another matter). By ruling the way they did, the Court basically left it up to Congress to change the law, if they want it changed.
That last piece of the analysis is interesting because, despite ruling for the government, the Chief Justice, in the majority opinion, took Congress to task on how the law was written. Specifically, the opinion says, “The Affordable Care Act contains more than a few examples of inartful drafting” and, “the Act does not reflect the type of care and deliberation that one might expect of such significant legislation.” For those of us who deal with this law frequently, neither of those statements is a surprise. And yet, despite this apparent lack of artful, thoughtful drafting, the Court nevertheless was able to discern a clear enough Congressional intent to reach its result. To us, it seems like an argument only a lawyer could love.
As has now been widely reported, the Supreme Court ruled on June 26 (the second anniversary of the Windsor decision) that same-sex couples have a right to marry in any part of the United States. Despite being hailed as a victory for marriage equality, as this New York Times article points out, it may not be such happy news for currently unwed domestic partners. Specifically, there is a concern, as the article points out, that employers who previously extended coverage to domestic partners out of a sense of equity may now decide not to since both opposite-sex and same-sex couples can now marry.
As the article mentions, there was a concern at one time that domestic partnership rules would be used by some employees to cover individuals with whom they are not really in a committed relationship. Given that not all states have registration requirements or clear standards, it was largely up to employers to set the standards for what constituted enough of a commitment for a domestic partner to warrant coverage. The difficulty was that employers had to balance not covering individuals who really were not in committed relationships with setting a standard low enough that those who really were in such relationships could qualify. The article says that it does not appear that this was really a problem, but of course, the validity of such relationships are more difficult to verify than a marriage.
What the article also fails to point out is that there are some valid reasons why employers may want to eliminate coverage for unmarried domestic partners. Health coverage provided to a spouse is generally nontaxable under federal and state laws. However, domestic partnerships, by contrast, are subject to a patchwork of various rules ranging from essentially marriage equivalence in some states to complete non-recognition in others. This means that, in many cases, domestic partner health coverage results in imputed (that is, non-cash) income to employees for federal and some state purposes. The calculation of that imputed income is not 100% clear and the administration of those benefits can be complex.
Many employers who saw extending coverage to same-sex couples as important were willing to suffer those difficulties and take on that risk of the IRS or state agencies second-guessing their calculations when marriage was not uniformly available to those couples. Now that it is, those employers have to engage in a cost-benefit analysis to determine if the complexity and risk are worth it on a going-forward basis.
Additionally, it is unclear what the effect of state domestic partner and civil union laws will be after the Obergefell decision. Even though marriage is now available to same-sex couples, the decision did not remove those laws from the states’ books. What movement, if any, states make in this regard will likely influence what employers do going forward as well.
The talent recruitment marketplace will eventually sort this out, but in the interim, employers should at least consider evaluating whether offering unmarried domestic partner benefits continues to be important as part of their recruitment and retention strategy.
Everyone seems to be talking about last month’s Supreme Court decision in Tibble v. Edison International, even though its holding wasn’t all that momentous. But I’m not complaining. As an ERISA lawyer, I love when ERISA developments hit mainstream news because, for at least one brief fleeting moment, there is a connection between the ERISA world in which I dwell and the rest of the world.
That said, some question whether Tibble warrants the level of attention it is generating. Some say Tibble merely affirms a well-known principle of ERISA law—that is that an ERISA fiduciary has an ongoing duty to monitor plan investments. Others see Tibble as a reflection of enhanced scrutiny of the duty to monitor plan investments, as well as recognition of a statute of limitations that facilitates enforcement of that duty.
Specifically, the Supreme Court found in Tibble that because retirement plan sponsors, as fiduciaries, have a “continuing duty to monitor trust investments and remove imprudent ones,” plaintiffs may allege that a plan sponsor breached a duty of prudence by failing to properly monitor investments and remove imprudent ones. Further, the Court found that such a claim is timely as long as it is filed within six years of the alleged breach of continuing duty.
Facts: Tibble arose when current and former employees of Edison who were participants in a 401(k) savings plan offered by Edison brought suit against the company and other fiduciaries for alleged breaches of fiduciary duty. The alleged breaches occurred with respect to six retail class mutual funds selected for the savings plan, a group of three selected in 1999 and an additional group of three selected in 2002. The plaintiffs objected to these retail class mutual funds because similar institutional funds were available at a lower cost. Under ERISA, a plaintiff has six years after “the date of the last action which constituted a part of the breach or violation” to bring a claim. At commencement of the suit, the two groups of funds straddled the 6-year period from the date of their selection. If the only date that triggers the running of the statute of limitations is the date the funds were selected, the case would be simple. However, the law clearly provides a plaintiff with six years after the most recent action that constitutes a breach of fiduciary duty to bring their claim. Though this seems straightforward, what exactly comprises a breach or violation of a fiduciary duty has arguably not been clear.
In an attempt to resolve the uncertainty, the Ninth Circuit held that the continued offering of an allegedly imprudent investment is not sufficient on its own to trigger a new breach upon which plaintiffs can base a timely claim. Although the Ninth Circuit rejected the continued offering theory, it acknowledged that a showing of changed circumstances that occurred within the six-year period that would have prompted a replacement of existing funds may constitute a new breach upon which plaintiffs can base a timely claim.
The Supreme Court decided to clarify the issue and began by criticizing the Ninth Circuit for failing to consider the law of trusts in formulating its decision. Relying on trust law, the Supreme Court vacated and remanded the Ninth Circuit’s decision, holding that “a trustee has a continuing duty to monitor trust investments and remove imprudent ones,” and this continuing fiduciary duty allows a plaintiff to allege that “a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones.” So long as the alleged breach of the continuing duty to monitor the investment occurred within the six-year statutory bar, the claim is timely.
Where are we now? So where do we stand today? The Supreme Court has reiterated that a continuing fiduciary duty to review plan investments attaches to plan sponsors and fiduciaries; although there is still uncertainty with regard to the precise scope of that duty. The extent to which fiduciaries must monitor plan investments will surely be the subject of future litigation. In the meantime, plan sponsors and fiduciaries should review their current processes and procedures for monitoring ERISA plan investments in light of their recognized fiduciary obligations. They should ensure that their investment reviews are properly documented and that they take into account the reasonableness and allocation of plan fees, performance, diversification and all other relevant facts. If Tibble can prompt such reviews, then the headlines will have served a far greater purpose than a momentary validation of my professional relevance – they will have enhanced participant protections and reduced fiduciary exposure with respect to plan investments. In that case, the “ado” would be warranted.