Are You Computing Your Maximum Participant Loan Amount Correctly (or in the Best Interest of Your Plan Participants)?

In late April 2017, the IRS issued a Memorandum for Employee Plans (EP) Examinations Employees providing two alternatives for computing the maximum participant loan amount when the participant has prior loans. Prior to this Memorandum, the law was not clear concerning how to compute the maximum loan amount where a participant had taken a previous loan during the year.

The maximum participant loan amount is the lesser of:

• 50% of the participant’s vested account balance; or
• $50,000 less the highest outstanding balance within one year of the loan request.

The reason for adjusting the maximum by the repayment amount is to prevent an employee from effectively maintaining a permanent outstanding $50,000 loan balance. The question is how to compute the amount of the highest outstanding balance within one year of the request for a new loan.

The issue is best described by an example. Assume the following facts:

• The participant has a vested balance of $150,000.
• The participant borrows $30,000 in February and fully repays that amount in April.
• The participant borrows $20,000 in May and fully repays that amount in July.
• The participant applies for a third loan in December.

What is the highest outstanding loan balance within one year — $50,000 ($20,000 plus $30,000) or $30,000 (the largest loan during the one year period)? What is the highest loan amount this participant can take: $0 ($50,000 less $50,000) or $20,000 ($50,000 less $30,000)?

Until the recent IRS Memorandum, the answer was not clear. The IRS Memorandum answers the question by providing that either amount can be used as the maximum loan amount. Notably, from the participant’s perspective, the $20,000 is a better resolution since the employee can get another loan. Of course, many employers discourage loans and would not want to provide such flexibility.

In any event, whichever approach the plan decides to use, it must be used consistently. In addition, the best practice would be to have the methodology set forth in the plan’s loans procedures.

UPDATE ON UNIVERSITY SECTION 403(b) CASES: INCONSISTENT RULINGS

As a result of rulings on motions to dismiss within a day of each other (May 10 and 11, 2017, respectively), Emory University and Duke University must continue to defend claims challenging aspects of their Section 403(b) retirement plans in plaintiffs’ proposed class actions: Henderson v. Emory Univ., N.D. Ga., No. 1:16-cv-02920-CAP; and Clark v. Duke Univ., M.D.N.C., No. 1:16-cv-01044. As we have previously reported, these cases are two out of a series of twelve proposed class actions filed against the retirement plans of 12 prominent American universities, challenging various aspects of plan management, including excessive fees and fiduciary prudence.

In granting in part and denying in part the Emory defendants’ motion to dismiss, Judge Charles Parnell found that the plaintiffs could move forward with a claim that choosing retail-class shares (with higher expense ratios) over institutional-class shares is imprudent. The plaintiffs allege that Emory could have but did not use its bargaining power to negotiate lower cost fees, and that no reasonable fiduciary would “choose or be complacent with being provided retail-class shares over institutional-class shares.” (Order, Doc. 61, p. 7, Henderson v. Emory Univ., N.D. Ga., No. 1:16-cv-02920-CAP (May 10, 2017)).

A novel theory proceeding in both the Duke and Emory cases is the claim that the defendants were imprudent to hire multiple record keepers, where consolidating services with one record keeper could have resulted in lower fees for participants.

Plaintiffs in both cases also raised the novel theory that the defendants acted imprudently by offering too many investment options—111 at Emory, and more than 400 at Duke. Judge Catherine Eagles, who issued the ruling in the Duke case, allowed this claim to go forward. In contrast, Judge Charles Parnell disagreed with the Emory plaintiffs. In his ruling, he reasoned that “[h]aving too many options does not hurt the Plans’ participants, but instead provides them opportunities to choose the investments that they prefer.” (Order, Doc. 61, p. 7, Henderson v. Emory Univ., N.D. Ga., No. 1:16-cv-02920-CAP (May 10, 2017)).

In Duke, the court dismissed as time-barred plaintiffs’ claims that Duke imprudently “locked” itself into offering TIAA-CREF products and recordkeeping, because the actual act of “locking” into the arrangement with TIAA-CREF occurred more than six years before the complaint was filed. Judge Eagles disagreed with the plaintiffs’ argument that their claim is based on Duke “maintaining” the arrangement with TIAA-CREF, as though the failure to monitor and remove CREF stock from the plan were a continuing violation.

In contrast, the “locked in” claim is moving forward in Emory. Emory made the same arguments that the “locked in” claim is time-barred; however, Judge Parnell was persuaded by plaintiffs’ argument that they challenge not just the initial arrangement, but the maintenance of the arrangement and failure to monitor and remove CREF stock within the six years preceding the complaint. However, the Emory plaintiffs may only recover damages resulting from being “locked in” to TIAA-CREF that occurred within six years before the filing of the complaint.

We’ll continue to post updates as decisions in the other University cases are handed down. In the meantime, if you have any questions about these cases or issues, please contact René Thorne (thorner@jacksonlewis.com), one of the firm’s senior ERISA class action litigators.

THE FIFTH CIRCUIT CALLS INTO QUESTION ITS STANDARD OF REVIEW IN ERISA DENIAL OF BENEFITS CASES

Explaining that “[a]s any sports fan dismayed that instant replay did not overturn a blown call learns, it is difficult to overcome a deferential standard of review,” a panel of the Fifth Circuit Court of Appeals has called for a re-examination of the Court’s standard of review in ERISA denial of benefits cases where the plan does not provide deference to the plan administrator.

Since its 1991 decision in Pierre v. Conn. Gen. Life Ins. Co. of N. Am., 932 F.2d 1552 (5th Cir. 1991), the Fifth Circuit has held that an ERISA plan administrator’s factual conclusions are reviewed for an abuse of discretion even if the plan does not provide deference to the plan administrator. See also, Green v. Life Ins. Co. of N. Am., 754 F.3d 324, 329 (5th Cir. 2014) (noting that the standard of review for factual determinations is abuse of discretion regardless of the presence of a discretionary clause).

Pierre was one of the first cases to address the standard of review for a plan administrator’s factual determinations. Pierre was based on the Fifth Circuit’s interpretation of the Supreme Court’s then relatively new ruling in Firestone v. Bruch, in which the high court drew from the law of trusts, analogized deference to administrative agency decisions, and pointed to concerns about courts’ ability to conduct de novo reviews of factual determinations.

Last month, in Ariana M. v. Humana Health Plan of Tex., Inc., 2017 U.S. App. Lexis 7072 (April 21, 2017), the Fifth Circuit was tasked with reviewing Humana’s decision to deny benefits to a plaintiff diagnosed with eating disorders. The Plan in Ariana did not provide deference to the decisions of Plan Administrator. However, adhering to Pierre and its progeny, the Court applied the abuse of discretion standard to examine the plan administrator’s factual determinations.

The result, not surprisingly, was a decision to affirm the District Court’s grant of summary judgment in favor of Humana. Significantly, however, in a separate concurring opinion (joined by all three judges), the panel called into question the precedent upon which its decision was based.

Taking down the “pillars supporting Pierre” one by one, the Court noted that it is the only circuit that would apply deference to factual determinations made by a plan administrator when the plan does not vest them with that discretion, and also pointed to the growing number of state laws prohibiting discretionary clauses in insurance contracts.

Based on these factors, the concurring opinion concluded that Pierre has not withstood the test of time: “This question concerning the standard of review for ERISA cases is not headline-grabbing. But it is one that potentially affects the millions of Fifth Circuit residents who rely on ERISA plans for their medical care and retirement security.” They concluded that, given the “lopsided split” in the circuits and the potential for conflicting standards across different jurisdictions, further review of Pierre is warranted.

The First Dinosaur Has Died

This is another article in our series which has focused on the deterioration and downward spiral of the multi-employer defined benefit pension fund.

Death Notice

Decedent:  The New York Teamsters Road Carriers Local 707 Pension Fund

Date of Death:  March 2017

Cause of Death:  The failure of successive administrations and Congresses to address the serious underfunding of multi-employer defined benefit pension funds.

Immediate mourners: The 4,000 retirees in the pension fund.

Other mourners:   The American working person.

R.I.P.

The New York Teamsters Road Carriers Local 707 Pension Fund (the “Local 707 Pension Fund”) is dead, reportedly having run out of money in early March 2017.

The Pension Benefit Guaranty Corporation (“PBGC”) the federal insurance agency created by ERISA to “back stop” pension payments reportedly has taken over pension payments to retirees. However, those will be paid at a reduced rate.

The projected impact upon retirees will be dramatic. According to the PBGC, prior to its takeover, the average Local 707 Pension Fund retiree was receiving $1,313 per month.  The average monthly payment will be slashed by the PBGC to $570.  This is a reduction of 56% for a population which is aging and unlikely to be able to engage in full-time employment.  This a crisis which is going to get worse.

For a historical perspective, the Local 707 Pension Fund was one of several pension funds that sought relief under the Multiemployer Pension Reform Act of 2014 (“MPRA”) to be permitted to have its participants consider a reduction of core benefits. However, its application was rejected by the Department of Treasury.  At that time, the fate of the Local 707 Pension Fund was clear.

The Central States Southeast and Southwest Areas Pension Fund, one of the largest pension funds in the country, also sought relief under the MPRA. Like the Local 707 Pension Fund’s submission, its application was rejected by Department of Treasury after a much publicized campaign spearheaded by Senator Elizabeth Warren of Massachusetts. More than twenty Senators formally joined Senator Warren in expressing their disapproval of granting relief.

Although the financial impact upon retirees is clear, employers should not lose sight that they are not immune. Moneys which employers agree to contribute on behalf of their employees to the multi-employer defined benefit pension funds in future negotiations will not benefit their employees.   Therefore, employers should consider strategies to address this problem.

Be Wary of Designs to Avoid Employment Taxes through Wellness Plan Benefits

We are aware that employers are being marketed various types of benefit arrangements designed to reduce the employer’s tax obligations by using a combination of wellness programs, voluntary benefits, and cafeteria plans. Not surprisingly, the Internal Revenue Service (IRS) has taken interest in these designs and has provided guidance which may dampen the enthusiasm for such arrangements.

In the IRS Chief Council Advice Memorandum 201622031, the IRS addresses the tax treatment of three different situations in which wellness benefits result in taxable income to employees.

Situation 1: The employer provides health coverage, with a separate no-cost wellness program that provides health screenings and other services that generally qualify as a tax-favored accident and health plan under Internal Revenue Code (Code) section 106. Employees that participate in the wellness program may also earn cash rewards and other benefits that do not qualify as Code section 213(d) medical expenses, such as gym memberships. Those cash rewards are taxable income to the employee and subject to income tax withholding and employment taxes. Similarly, benefits not otherwise excludible from income, such as the payment of gym membership fees, are included in employee’s gross income at fair market value and are also subject to income tax withholding and employment taxes.

Situation 2: The same as situation 1 except that to participate in the wellness program, employees pay pre-tax premiums through a Code section 125 cafeteria plan. The use of the cafeteria plan makes no difference as to the tax treatment of cash rewards and other benefits not excludible from income. They are taxable income subject to income tax withholding and employment taxes.

Situation 3: The same as above with the added wrinkle that the wellness program benefits include reimbursement of the wellness program premiums made by the employee. The IRS found the reimbursements should be included in the employee’s gross income and be subject to income tax withholding and employment taxes.

The IRS reviewed similar wellness plan arrangements in IRS Chief Council Advice Memorandum 201703013. In that memo, the IRS addressed the tax treatment of fixed indemnity cash payments paid by a wellness plan without regard to the amount of medical expenses incurred by the employee, where the employee is paying premiums to participate in the wellness program. If the premiums are paid on a pre-tax basis through a Code section 125 cafeteria plan, any amounts paid by the plan are included in the employee’s gross income and subject to income tax withholding and employment taxes. Of course, this raises the administrative issue of how the employer is to account for the taxes if the payments are from the third-party insurance carrier.

Key Employer Takeaway

Note, though the Chief Counsel Advice Memoranda cannot be used or cited as precedent, they do provide useful insight into the IRS’s interpretation of the law. Accordingly, employers being marketed these or similar arrangements should take care that the offered program comports with this IRS guidance.

DOL Continues Investigating Defined Benefit Plans Regarding Procedures for Locating Participants and Paying Benefits at Mandatory Retirement Age

The U.S. Department of Labor (DOL) publicized last year its stepped up enforcement efforts inquiring about procedures used by larger defined benefit plans for locating, and then beginning payment of benefits to, terminated vested participants who have reached the age when the plan mandates benefits must begin. Those audit activities are continuing. For years, the Social Security Administration (SSA) has tracked retirement plan reporting of terminated participants with deferred vested benefits, and used those reports to notify SSA old-age benefit payment recipients that they may be entitled to an employer based pension benefit. Many retirement plan administrators are familiar with participant benefit eligibility inquiries based on these SSA reports.

The DOL reportedly has experienced an increase in retirement benefit inquiries based on these same SSA statements. In response, DOL began investigating larger defined benefit plans to determine if they are paying benefits to their retirement-eligible participants when the plan requires payments to begin. DOL’s focus appears to be primarily on those participants who terminate employment prior to normal retirement age with a deferred vested benefit, and particularly those who are past their mandatory age 70 ½ required beginning date. The DOL found that many plans had inadequate procedures (including lapses in following existing procedures) for locating participants when benefits are required to begin. The DOL has expressed the view that these failures could amount to a breach of fiduciary duty under the Employee Retirement Income Security Act of 1974, as amended (ERISA).

Pension Issues Affecting Benefits for Missing Participants

Defined benefit plans can have various provisions mandating the latest date when participants must commence payment of benefits. For participants who terminate with a vested benefit prior to normal retirement age (e.g. age 65), defined benefit plans commonly require benefits to begin at normal retirement age. Under the “minimum required distribution” rules, benefits must begin no later than April 1 following the end of the calendar year during which occurs the later of the participant’s reaching age 70 ½, or separating employment.

ERISA and the Internal Revenue Code (Code) also mandate that vested benefits for terminated participants must be nonforfeitable at normal retirement, which means the “value” of that benefit must be preserved. For example, if a terminated vested participant reaches normal retirement age, but the plan does not locate the participant to begin payment until three years later, the plan must “restore” the value of the benefits the participant did not receive for those three years to avoid an impermissible forfeiture. The actual cost for restoring that lost value can result in additional actuarial cost for the plan.

However, plans may and generally do require that a participant must apply for benefits as a pre-condition for payment to begin. This is a procedural requirement necessary to protect the plan.

Retirement plans may also include terms for forfeiting benefits after participants have been missing for some stated time period. Notice requirements may apply, and forfeited benefits must be restored if the participant is later located. These forfeiture clauses can be useful to defend against State authorities asserting claims for lost pension benefits under State escheat laws, without having to resort to complex ERISA preemption legal arguments.

Form 5500 reporting for both large and small plans has included a question since 2009 asking, “Has the plan failed to provide any benefit when due under the plan?” In the absence of other guidance, the IRS informally stated late last year that plans do not need to report “unpaid required minimum distribution amounts for participants who have retired or separated from service, or their beneficiaries, who cannot be located after reasonable efforts or where the plan is in the process of engaging in such reasonable efforts at the end of the plan year reporting period.”

Locating Participants When Benefits Are Due

The challenges and costs of meeting ERISA and Code compliance and reporting requirements for missing terminated vested participants and retirees entitled to benefits can be significant and difficult, for example when attempting to pay required nonforfeitable lifetime benefits to a missing retiree who is identified as deceased. Defined benefit plans increasingly include an older participant population approaching retirement age, and maintaining effective procedures for communicating with these participants as they approach retirement age is both good fiduciary practice and provides protection in the event of a government agency audit.

The demise of IRS and SSA programs for locating missing participants, has caused pension plan sponsors to increasingly rely on their plan record keepers to locate missing participants. Many of these vendors use their own locator services. Other independent locator services are also available such as the National Change of Address Registry (maintained by the U.S. Postal Service), various credit service bureaus, and subscription services.

Key Plan Sponsor Takeaways

Defined benefit plan sponsors can minimize the above complexities associated with compliance by adopting and implementing procedures for maintaining contact with participants and timely commencing payment of benefits. Steps employers might wish to take include:

• Determine when plan benefits are required to commence under the terms of the Plan, including payments to:
 Terminated vested participants over normal retirement age, where a plan provides that these participants must commence at that time;
 Participants who are required to receive automatic payments under the terms of the plan, but who have not yet paid; and
 Beneficiaries who should have commenced receiving payments under the terms of the plan, but who have not yet commenced receiving payments;
• Determine if participant date of birth data is available to identify when payment must begin;
• Review procedures with financial institutions for uncashed stale checks, plan forfeiture provisions, role of state escheat;
• Implement addressing procedures, including use of return addresses, address updating, other security measures when annual plan mailings such as Annual Funding Notices are returned undeliverable;
• Within a reasonable period prior to the required benefit start date:
 Verify participant addresses;
 Notify participants of requirement to begin receipt of benefits;
 Verify role of record keeper and review administrative service agreements;
 Maintain logs to demonstrate practices and failed attempts.

The above are a few of the “best practices” developed by record keepers and advisors that help plan sponsors minimize issues arising in connection with missing participants.

DEPARTMENT OF LABOR ANNOUNCES FIDUCIARY RULE DELAY: WHAT DOES IT MEAN FOR EMPLOYERS WHO SPONSOR RETIREMENT PLANS?

The Department of Labor (“DOL”) recently published a final regulation providing a 60-day extension (from April 10th to June 9th) of the applicability date for the Fiduciary Rule — the rule that expands the definition of an employee benefit plan “fiduciary” to include members of the financial services industry — as well as exemptions from that definition, including the Best Interest Contract Exemption (“BIC Exemption”) (PTE 2016-01) and the Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (PTE 2016-02).

The DOL’s final regulation also requires those fiduciaries who rely on the exemptions — which include securities broker/dealers, agents, insurance companies and benefit consultants who advise employee benefit plans — to adhere to “Impartial Conduct Standards” through a new transition period from June 9, 2017 to January 1, 2018.

Effective January 1, 2018, the Impartial Conduct Standards require written statements to appear in any contract for services when a securities broker/dealer, agent or consultant renders advice to an employee benefit plan in exchange for fees or commissions. The Impartial Conduct Standards also require, among other things, that such broker/dealers, agents or consultants disclose in a written contract that they are ERISA fiduciaries, that they will render advice solely for the benefit of the plan, that they will charge a reasonable fee, that they will disclose any conflicts of interest, and that they will not receive incentives for recommending any particular investment.

Also extended for 60 days are the new amendments to prohibited transaction rules: PTEs 75-1, 7-4, 80-83, 84-24, and 86-128. These amended PTEs provide relief from prohibited transaction excise taxes when securities are sold to employee benefit plans, when plan assets are deposited in mutual funds, when securities are sold to generate funds to be paid out as retirement benefits to plan participants, and when non-discretionary trustees or other fiduciaries receive fees in connection with plan investment transactions.

What does this mean for employers who sponsor retirement plans, such as 401(k) and 403(b) plans? Employers need to be aware that the Fiduciary Rule — and any delay of the applicability date thereof — does not impact employer fiduciary responsibility under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) with regard to the retirement plans they sponsor. Employers should expect that their financial service industry plan service providers will be in touch concerning amendments to service agreements to incorporate the terms required by the Impartial Conduct Standards.

For more information on the DOL announcement, please see https://federalregister.gov/d/2017-06914.

Where Do We Stand with Health Care?

The American Heath Care Act was designed to provide health care reform and to replace former President Obama’s Affordable Care Act (the “ACA”). However, the House of Representatives, under President Trump’s direction, cancelled its vote in late March because of lack of overall support from Republicans to get passage of the bill in the House. Now what?

ACA is Still in Effect

The stop-and-start and vacillation regarding health care reform produces confusion: for those on the Hill, for businesses, for lawyers, for individuals and for those in the health insurance business itself. For now, however, the ACA remains the law of the land.
Companies.

For companies, the “play or pay” provisions of the ACA apply only to “Applicable Large Employers” (“ALEs”), generally those with 50 or more full-time employees in the prior calendar year, including full-time equivalent employees. A company with fewer than 50 full-time employees, including full-time equivalent employees, is not an ALE subject to the ACA (and not subject to the employer shared responsibility provisions or the employer information reporting provisions). Those companies that are not ALEs may be eligible for the Small Business Health Care Tax Credit and should seek advice to determine how the ACA affects them.

• We often see clients encounter problems in determining “full-time” employees and how “full-time equivalent” plays into the calculation. Knowing the difference between those terms and what the ACA requires is why a company, who may have 80 full-time equivalents, has to offer health care to only its subset of 40 full-timers, as the ACA imposes a penalty only for the failure to extend an offer of coverage to full-time employees, but not those who are counted as part of the full-time equivalent formula.

• We also see clients considering shifting their employees between related companies (to a parent company, a subsidiary, or a company owned by a spouse), so that each company has an employee count below the ALE threshold of 50 full-time equivalents. For the most part, such maneuvering will not work, as related companies are generally grouped together as one ALE under ACA controlled group rules.

• We also caution against simply reducing an employee’s work hours to below 30 hours (the hour requirement for an employee to be considered “full-time”), in an effort to avoid having to offer health care to that now lower-hour employee. Since the enactment of ACA, there has been a rise in claims from employees who were denied health care because employers reduced their hours, under what ostensibly could have looked like a viable business solution.

Generally, ALEs must either (a) offer “affordable” “minimum essential coverage” that provides “minimum value” to “full-time employees” (and offer coverage to the full-time employees’ “dependents”) or (b) pay an employer shared responsibility excise tax. All the quoted terms have complex meanings, and compliance often requires a company to coordinate with outside experts to ensure that any offered health care program meets applicable requirements. Even when a company unequivocally has the requisite “affordable” “minimum essential coverage” with “minimum value,” if the company fails to offer such health coverage to enough of its full-time employees, there can be a substantial penalty.
We also have clients who decide simply not to offer health care at all to their employees, choosing instead to pay the non-deductible employer shared responsibility tax.
With the ACA still in effect, so too are the IRS mandatory health insurance reporting requirements. For employers, this generally includes reporting the value of the health insurance coverage provided to each employee on Form W-2 and certain information regarding health insurance offerings to full time and other individuals on Forms 1094-C and 1095-C. The IRS uses the information provided on such information returns to administer the employer shared responsibility provisions.

Individuals.

Under the ACA, individuals must report qualifying health coverage for themselves, their spouse (if filing jointly), and any of their dependents on an individually-filed federal tax return, or pay a penalty. In fact, Line 11 on Form 1040-EZ and Line 61 on Form 1040 asks for self-disclosure:

Health Care [Tax]: individual responsibility. . . Full year coverage [check for yes; pay tax if no]

IRS Enforcement of ACA

President Trump’s very first Executive Order “Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal,” released on the day of his inauguration, mandated:

Sec. 2. To the maximum extent permitted by law, the Secretary of Health and Human Services (Secretary) and the heads of all other executive departments and agencies (agencies) with authorities and responsibilities under the Act shall exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the [Patient Protection and Affordable Care] Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications.

Now that initial repeal and replace efforts have failed, and the ACA remains governing law, focus turns to whether we will see relaxed enforcement as a response to the President’s Executive Order. It is unclear how and when the IRS and other agencies will act to “exercise authority and discretion available to them to…reduce [the ACA’s] burden.”

Because there is nothing published indicating how the IRS will respond to the Executive Order, companies should continue to comply with their obligations under the ACA. With respect to individuals, the IRS has already indicated that it will accept electronic and paper Forms 1040 and 1040-EZ returns for processing even if those forms not indicate compliance with the individual health care coverage requirement. We will continue to monitor the Executive Order’s impact on enforcement activities, especially with respect to employer penalties.

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We blog and publish regularly on all things Employment and Employee Benefits, including topics that relate to the still-evolving health care law. Sign up at http://www.jacksonlewis.com/publications or contact me at Jewell.Esposito@JacksonLewis.com or 703.483.8300.

DEATH OF THE SUBSTANTIAL COMPLIANCE DOCTRINE?

In Halo v. Yale Health Plan, decided in April of 2016, the Second Circuit expressly rejected the “substantial compliance” doctrine with respect to alleged violations of the ERISA Claims Procedure regulation. Instead, the Court held that, in order to preserve otherwise properly reserved discretionary authority, the decisionmaker must demonstrate that any deviation from the requirements of the regulation in the processing of a particular claim was “inadvertent and harmless,” and that the plan’s claim and appeal procedures were otherwise fully compliant with the regulation.

District courts within the Second Circuit have issued numerous decisions interpreting Halo since then, but none have been as harsh as a recent decision issued by the Southern District of New York on February 28, 2017. Salisbury v. Prudential Ins. Co. of Am., 2017 U.S. Dist. LEXIS 27983 (S.D.N.Y. Feb. 28, 2017). In that decision, the court held de novo review was required under the Halo standard, even though the decisionmaker’s determination was otherwise timely. The court reasoned the claim administrator’s letter, which advised the claimant that it was invoking the regulation’s 45-day extension for issuing appeal determinations “to allow for review of the information in [the claimant’s] file which remains under physician and vocational review,” did not sufficiently specify the “special circumstances” necessitating the extension as required by the regulation. In reaching this conclusion, the court recognized the result “may appear harsh,” but found that Second Circuit law requires “strict compliance” with the Claims Procedure regulation. While the insurer-defendant explained to the court that the extension was needed because the claim file was “voluminous, containing 4,623 pages of medical records and several days of surveillance,” the court held this explanation came too late.

The days of the substantial compliance doctrine thus appear to be at an end in the Second Circuit. But plan fiduciaries expecting to rest easy, because their ERISA disability benefits litigations are likely to arise elsewhere, should think again. On December 16, 2016, the DOL issued final revisions to the Claims Procedure regulation that, among other mischief, provide as follows regarding disability claims: “if the plan fails to strictly adhere to all the requirements of this section with respect to a claim, … the claim or appeal is deemed denied on review without the exercise of discretion by an appropriate fiduciary.” As if this language were not enough to put the final nail in the coffin of the substantial compliance doctrine for disability claims, the same provision goes on to explain that loss of deferential review is prevented only by “de minimis violations that do not cause, and are not likely to cause, prejudice or harm to the claimant so long as the plan demonstrates that the violation was for good cause or due to matters beyond the control of the plan and that the violation occurred in the context of an ongoing, good faith exchange of information between the plan and the claimant.” Note that the burden is upon the decisionmaker to prove violations were “de minimis.” This particular provision of the final revised regulation, along with certain other new provisions, is slated to become effective for disability claims filed on or after January 1, 2018. Despite President Trump’s Executive Order of January 20, 2017, which placed regulations published, but first effective on or after January 20, 2017, on administrative hold for sixty days pending further consideration, we are aware of no indication from the Department of Labor that any sections of the revised Claims Procedure regulation that have a delayed effective date are under any kind of review.
Accordingly, plan fiduciaries can likely expect courts all over the country to increase scrutiny of administrators’ claim handling procedures, especially with respect to disability claims. Therefore, we recommend plan administrators and third-party administrators audit their claim handling procedures to ensure compliance with the regulation’s requirements. Regarding requirements for invoking decision deadline extensions, we offer the following suggested guidelines:

• Requests for extensions of determination deadlines should be the exception, not the rule, especially for appeal decisions.
• Letters notifying claimants of an extension should explain:
o why more time is needed,
o why the need for more time is beyond the control of the decisionmaker,
o a description of any unusual difficulties with the claim,
o if the delay is because the claimant needs to submit additional information, the date established by the decisionmaker for furnishing such requested information, and
o the date by which the decisionmaker expects to make a decision.

• When a claim determination is delayed by the need for additional information from the claimant, notify the claimant that the determination deadline has been suspended (tolled) from the date of the extension notification to the claimant to the earlier of:
o The date on which a response from the claimant is received by the plan, or
o The date established by the decisionmaker for the furnishing of the requested information, which should be at least 45 days, but advising that an additional reasonable amount of time will be granted provided the claimant so requests.

• Consider including a description of the appeals process with each notification sent to claimants.

Just how the courts will apply the provisions of the revised regulation regarding determination deadline extensions remains to be seen (except probably for the courts within the Second Circuit, which already has a position similar to the new regulatory requirements). The new sections of the regulation, overall, reflect a clear intent by the DOL to force courts into an increased role as “substitute plan administrators” – a role courts have generally eschewed so far. See Perry v. Simplicity Eng’g, Div. of Lukens Gen. Indus., 900 F.2d 963, 966 (6th Cir. 1990) (“Nothing in the legislative history suggests that Congress intended that federal district courts would function as substitute plan administrators.”). Following the above suggestions should at least provide a reluctant court with plausible grounds for avoiding the role of substitute plan administrator in spite of the revised regulation.

Please watch this blog for future discussions regarding other significant new requirements imposed on disability claim administration under the revised Claims Procedure regulation.

SUPREME COURT HEARS “CHURCH PLAN” ERISA CLASS ACTION CASES

On Monday, the Supreme Court heard oral argument in the consolidated “church plan” cases, Advocate Health Care Network v. StapletonSt. Peter’s Healthcare System v. Kaplan, and Dignity Health v. Rollins.  As an initial matter, unless the Senate confirms Neil Gorsuch in the very near future, the case will be decided by an eight-Justice court.  While it’s impossible to say for sure how Justices will vote, there may be cause for optimism for the Defendants (against whom the lower courts ruled in all three cases).

At first, Justices Sotomayor and Kagan both seemed hostile to the Defendants’ view of the construction of the church-plan exemption.  But this view seemed to change during the Plaintiffs’ presentation.  Justice Sotomayor commented to Plaintiffs’ counsel “I’m torn,” and – saying that ERISA’s church-plan provision “could be read either way” – asked counsel how to “break the tie.”  Both Sotomayor and Kagan also appeared to struggle with the idea that Plaintiffs’ reading would likely exclude some of the organizations that the 1980 amendments to the church plan exemption were intended to encompass.

Justices Alito and Kennedy seemed to focus on church-plan sponsors’ long-standing reliance on the IRS/PBGC interpretations of the exemption.  Defendants’ counsel noted that their liability for penalties alone could exceed $66 billion.  Justice Alito seized on Plaintiffs’ counsel suggestion that the church-plan cases were “primarily about forward-looking relief” (as opposed to penalties), going so far as to ask counsel to disavow seeking penalties in light of Defendants’ reliance on IRS letters.

Justice Kennedy also seemed concerned that hundreds of plans had sought and obtained the blessing of the IRS and/or PBGC, and could still face liability 30 years later.  Chief Justice Roberts appeared to align with this view, asking Plaintiffs’ counsel why those agencies took a view opposite to Plaintiffs’ interpretation.

Not surprisingly, Justice Ginsberg seemed to be squarely in Plaintiffs’ camp, and dismissed other Justices’ concerns by noting that the lower courts could fashion a remedy that takes Defendants’ good faith into account.

Justice Breyer took a pragmatic approach – he asked several hypotheticals, pressing Plaintiffs’ counsel to say whether a plan would be a church plan in each scenario.  This line of questioning seemed to highlight for Justice Sotomayor that Plaintiffs’ reading would deny church-plan status to many of the plans that lobbied for the 1980 amendments.

As usual, Justice Thomas was silent throughout.

In short, although any prediction would be speculative, the Justices’ questions suggest that Alito and Kennedy would take the defense view, based on the reliance concerns, likely joined by Roberts.  And it’s probably safe to assume Justice Thomas would side with these Justices.

Justices Sotomayor and Kagan could go either way, but if they adopt the Defendants’ view of the statute, it will probably be based on their concerns that the Plaintiffs’ reading ignores the purpose of the 1980 amendments (i.e., exempting plans maintained by church-affiliated groups).  If the conservative wing of the Court holds together, then the addition of either Sotomayor or Kagan would yield a victory.

However, if the usual ideological split prevails, a 4-4 tie would leave the adverse rulings intact.

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