IRS Prohibits Future Annuity-to-Lump Sum Conversions for Defined Benefit Plan Retirees Currently Receiving Benefits

On July 9, 2015, the IRS released Notice 2015-49 (the “Notice”) informing taxpayers that the Service and the Treasury intend to amend the required minimum distribution regulations to eliminate the recent defined benefit (“DB”) plan risk management strategy of offering lump sum payments to replace annuity payments to retirees currently receiving joint and survivor, single life, or other life annuity benefit payments. The regulations will provide that DB plans generally will not be permitted to offer retirees an option to replace any annuity currently being paid with a lump sum payment or other accelerated form of distribution. According to the Notice, the amendments to the regulations will be effective as of July 9, 2015, with limited exceptions aimed solely to protect those employers who have already taken sufficient action to announce or establish a limited lump sum payment conversion program for existing in-pay status retirees. The proposed amendments were motivated by growing concerns over the prevalence of these lump sum conversion programs that transfer the investment and life longevity risk from the plan to retirees and whether participants were adequately advised and understood the financial tradeoffs when electing to forego the lifetime annuity for the lump-sum payment.


Over the last few years, since the modest rebound in market conditions and limited increase in interest rates, DB plan sponsors have been exploring affordable options to reduce or transfer risk out of their DB pension plans. One risk management strategy has been to amend their pension plans to offer a limited period (“window”) during which retirees who are currently receiving annuity payments from those plans may elect to convert the annuity into an immediately payable lump sum. This particular, so-called “de-risking” strategy emerged only within the last few years, after the IRS had sanctioned the practice in a couple high-profile private letter rulings (PLRs) that generated significant media attention in light of the notable plan sponsors involved, the number of plan participants affected, and the value of the benefits transferred off the balance sheet. Before these PLRs, the practice of offering retirees an option to convert in-pay status annuities to lump sums was almost nonexistent because of uncertainty over whether these conversion offers to retirees would violate required minimum distribution (RMD) rules under Code Section 401(a)(9). The PLRs eliminated much of the uncertainty by approving these retiree lump-sum conversion offers as falling within a broad RMD regulation exception for post-retirement “increases in benefits.”

IRS Announces Intent To Revise RMD Regulations

Now, with Notice 2015-49, the IRS has announced a change in policy marked by an intent to amend the RMD regulations retroactive to July 9, 2015 that will significantly narrow the RMD regulations to foreclose future use of these retiree lump-sum conversion programs. Accordingly, the Notice explains that the proposed amendments will provide that the types of permitted post-retirement benefit increases described in the RMD regulations will include only those that increase ongoing annuity payments, and do not include those that accelerate annuity payments, as is the case with the conversion of annuity payments to lump sum payments to retirees who are currently receiving benefits.

 Announcement Has No Impact On Other Lump Sum De-Risking Programs

It is important to note that Notice 2015-49 has no impact on the ability to offer DB plan lump sum de-risking programs to either terminated vested (non-retired) participants, or to actively employed participants upon plan termination. The Notice indicates only that the IRS will amend the minimum required distribution regulations so as to prohibit a defined benefit plan from offering immediate lump sum payment conversions (or similarly-styled accelerated payments) to defined benefit plan retirees currently in pay status receiving a form of life contingent annuity.


There are a wide range of corporate financial and plan funding reasons for choosing and designing a lump sum distribution window program. Those factors remain relevant for employers seeking to “de-risk” their pension liabilities by removing liability through payment of lump sums at any time for terminated vested participants, and for active participants only at plan termination. The IRS Notice’s reach is limited; it only forecloses future use of these pension de-risking programs to allow for consensual lump sum cash out of in-pay status retirees.

Reducing Employee Hours to Avoid ACA Obligations to Offer Coverage Violates ERISA § 510, Class Action Suit Alleges

One strategy for minimizing exposure to the employer shared responsibility penalties under the Affordable Care Act (ACA) is to minimize the number of “full-time employees” – that is, the number of employers working 30 or more hours per week on average. Employers can accomplish this through reducing the number of hours certain current and future employees work so that they will not be considered to be “full time” as defined by the ACA, requiring coverage to be offered to a smaller group or none at all. One company’s alleged attempt to do just that is the central claim in a class action lawsuit by an employee alleging the company has interfered with her rights to benefits under ERISA. (Marin v. Dave & Buster’s, Inc., S.D.N.Y., No. 1:15-cv-03608)

The claims are based on Section 510 of ERISA. The relevant section of that law provides:

It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan, this title, section 3001 [29 USC §1201], or the Welfare and Pension Plans Disclosure Act, or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan, this title, or the Welfare and Pension Plans Disclosure Act.

Put simply, the law makes it unlawful for any person to discriminate against a participant or beneficiary for exercising a right granted (or interfering with the attainment of a right) under ERISA or an ERISA employee benefit plan. In this case, the plaintiff is claiming that the employer reduced her hours of work to below that which the ACA would cause her to be a “full-time employee.” In doing so, the defendant avoided the requirement under the ACA to offer her coverage, as well as any the corresponding penalty under Internal Revenue Code Section 4980H if she were a full-time employee. In other words, the essence of the plaintiff’s claim is that by reducing her hours of employment, the employer interfered with her attainment of a right under the plan to be eligible to be offered coverage under the medical plan.

So, plan documents say that if you work 30 or more hours per week on average you will be offered coverage, and that by lowering your hours per week, triggering a loss of eligibility for coverage, the employer has impermissibly interfered with your right to eligibility for benefits. Could this be right? Employers have historically modified their workforces in this manner – trimming work hours and consequently eligibility for welfare benefits – as business needs dictated. COBRA, for example, recognizes this ebb and flow of the workplace providing protection for workers who experience a “qualifying event” when they have a reduction in their hours of employment that leads to a loss of coverage under a group health plan. If successful, one effect of plaintiff’s argument may be that once an employer hires an employee in an eligible classification under an ERISA plan, that employee has a right under ERISA and the plan to be eligible, and any change by the employer in that classification, or what causes the employee to be in that classification, is an impermissible interference with that right.

ERISA 510 claims, however, are not simple to establish and win. For example, a plaintiff generally must show that the employer acted with a specific intent to violate ERISA §510 in order to interfere with the plaintiff’s attaining a right under the plan. This intent can be difficult to prove and, absent direct evidence to the contrary, the defendant may be able to show that its motivation for reducing hours of certain employees was not to interfere with any rights the employees may have had under the medical plan, but was for legitimate, non-discriminatory reasons. In addition, plaintiffs have generally had a difficult time succeeding under ERISA § 510 in regard to welfare benefit plans because of the broad power employers have to amend or terminate benefits under those plans, which typically do not vest like benefits do under retirement plans.

We believe this is the first case in which a court will address this issue and an important case for employers to watch, especially those employers that have taken or are thinking about taking similar steps to address their employer shared responsibility obligations under the ACA.

IRS Makes it Riskier to Maintain Individually-Designed Retirement Plans

The Internal Revenue Service just made it riskier to maintain a tax-qualified individually-designed retirement plan by eliminating the five-year determination letter remedial amendment cycle for these plans, effective January 1, 2017.

Although determination letters are not required for retirement plans to maintain tax-qualified status under the Internal Revenue Code, virtually all employers sponsoring individually-designed retirement plans have long relied on the Internal Revenue Service’s favorable determinations that their plans meet the Code’s and the IRS’ vexingly complex – and ever-changing – technical document requirements. A plan risks losing tax-qualified status (and all the favorable tax treatment that goes along with that status) if the plan document is not timely amended to reflect frequent, sometimes obscure, Code and regulatory changes. In light of that, the IRS has long offered a program for reviewing and approving those plan documents – often conditioning its favorable determination letter on the employer’s adoption of one or more corrective technical amendments. The current program, established in 2005, has provided for a five-year remedial amendment cycle which effectively extended the period of time during which a plan could be amended under certain circumstances to retroactively comply with the ever-changing qualification requirements. Under this determination letter program, employers have filed for determination letters for their individually-designed plans every five years and had an opportunity to fix plan document issues raised by the IRS on review.

The IRS announced elimination of the five-year determination letter remedial amendment cycle in Announcement 2015-19 and said that determination letters for individually-designed plans will be limited to new plans and terminating plans. A transition rule applies for certain plans currently in the five-year cycle (i.e., employers with “Cycle E” or “Cycle A” plans may still file for determination letters) but, effective July 21, 2015, the IRS will not accept off-cycle applications except for new plans and terminating plans.

The IRS said that plan sponsors will be permitted to submit determination letter applications “in certain other limited circumstances that will be determined by Treasury and the IRS” but did not give a hint as to what those circumstances might be. The IRS intends to periodically request comments from the public on what those circumstances ought to be and to then identify those circumstances in future guidance.

In addition, the IRS said that it is “considering ways to make it easier for plan sponsors to comply with the qualified plan document requirements” which might include providing model amendments, not requiring amendments for irrelevant technical changes, or permitting more liberal incorporation by reference.

Comments on the issues raised in the Announcement – e.g., what changes should be made to the standard remedial amendment period rule, what considerations ought to be taken into account regarding interim amendments, and what assistance should be given to plan sponsors wishing to convert to pre-approved plans – may be submitted to the IRS until October 1, 2015. We anticipate submitting comments on behalf of clients who want to continue to sponsor individually-designed plans rather than resigning themselves to the limitations of pre-approved plans.


Frequently a plan sponsor’s operational failure to follow the terms of its 401(k) or other qualified plan can be corrected under the IRS’s Employee Plans Compliance Resolution System (“EPCRS”) (described at with a retroactive amendment instead of a sometimes expensive financial correction. This possibility should not be surprising, given that the maintenance of qualified plans depends heavily on IRS rules and procedures that permit plan sponsors to keep plan documents in compliance with all legally required written provisions by retroactively adopting required restatements and amendments. Apart from what the plan document states, however, the IRS also considers any uncorrected failure to follow the terms of the plan to constitute a qualification defect that threatens the current income exemption and other tax benefits of the plan.

Under EPCRS, a few operational failures, such as making hardship distributions or plan loans from a plan that has no plan terms allowing such distributions or loans, may be self-corrected by the plan sponsor with a retroactive amendment. In general, however, a retroactive amendment fix will require the employer or other sponsor to submit an application to the IRS under the Voluntary Correction Program (“VCP”) to get IRS approval.

As a threshold requirement, the way the plan was actually operated must have been permissible under the law and regulations in order to obtain approval for a retroactive amendment conforming the plan terms to that operation. For example, a retroactive amendment can be considered if a 401(k) plan actually allowed deferrals on bonuses even though the plan’s definition of compensation did not include bonuses, because the plan could have so provided under the law. If the plan was a prototype or volume submitter, then the amendment must also be permitted under the vendor’s pre-approved document.

IRS standards for approving a retroactive amendment fix are not formally set out anywhere. In practice, however, the IRS normally needs to see some convincing documentary evidence indicating that the way the plan was actually operated was the way the sponsor, participants and any relevant TPAs or vendors assumed the plan was written. A summary plan description (“SPD”) that provides for the particular event or practice that occurred is usually considered the best evidence. However, other good evidence might be emails, internal memoranda or correspondence that reflect the way some or all parties thought the plan actually read.

A retroactive amendment is often appropriate to correct a failure to follow plan terms that occurs after a sponsor restates its plan on the pre-approved form of a new vendor as part of a change in plan investments and/or administrative services. In such cases, even though it is clear from the record that no plan design change was intended in conjunction with the vendor change, the plan is sometimes incorrectly mapped over to the new document. The IRS frequently approves a retroactive amendment in such cases as long as the amendment is permissible under the vendor’s document.

New Regulatory Guidance Issued on Plan Benefit Suspensions and Plan Partitions for Multiemployer Pension Plans at Risk of Insolvency

As part of on-going efforts to prevent the collapse of financially troubled multiemployer pension plans, the Pension Benefit Guaranty Corporation (“PBGC”) and Internal Revenue Service (“IRS”) have issued regulatory guidance under the Multiemployer Pension Reform Act of 2014 (“MPRA”). Together, the Treasury Proposed and Temporary Regulations, a new Revenue Ruling, and PBGC interim rule prescribe how multiemployer pension plans in critical and declining status can apply for plan partitions and plan benefit suspensions.

Plan Partitions

A partition order provides for the transfer of an original multiemployer pension plan’s liabilities to a successor plan backed by the PBGC. The amount transferred from the original plan is the minimum amount necessary to keep the original plan solvent. Prior to the MPRA, partitions were not available to multiemployer plans unless a participating employer member was involved in bankruptcy. The PBGC’s authority to partition plans has been expanded under the MPRA and implemented under the interim final rule, which sets forth partition application and notice requirements under ERISA § 4233 (29 USC § 1413).   Partitions may now be sought by “eligible multiemployer pension plans.” Under ERISA, a plan is an “eligible multiemployer plan” if:

  • The plan is in critical and declining status (as defined under ERISA, The plan sponsor has demonstrated all reasonable measures have been taken to avoid insolvency (including “maximum benefit suspensions”);
  • The PBGC has determined a partition is necessary for the plan to remain solvent and will reduce the PBGC’s expected long-term loss with regards to the plan;
  • The PBGC can meet its existing financial obligations to assisting other plans (as certified to Congress); and,
  • Costs for partition are paid entirely from PBGC’s fund for basic benefits guaranteed for multiemployer plans.

The PBGC will not recognize an application as complete until all required information is provided, which includes plan information, partition information, financial and actuarial information about the plan (including its most recent actuarial report and certification of critical and declining status), plan participant census data used for actuarial and financial projections, and any additional information related to the plan’s request for PBGC assistance. Once an application is deemed complete, the PBGC provides notice to the plan sponsor and has 270 days to review. The plan sponsor must provide notice to interested parties within 30 days of receiving notice that a complete partition application has been accepted.

Since a partition applicant must show it has taken “all reasonable measures”—including benefit suspensions—to avoid insolvency, the PBGC expects that plans seeking partitions will also apply for proposed suspension of benefits. Therefore, the PBGC strongly recommends that plan sponsors file concurrent applications for partition and suspension of benefits. If a plan seeks both a suspension of benefits and a plan partition, the partition must occur first.

Suspension of Benefits

Multiemployer pension plans in “critical and declining status” may seek approval for proposed benefit suspensions in certain situations under the Treasury’s Temporary Regulations, Proposed Regulations, and the new Revenue Procedure 2015-24. Plan proposals for suspension of benefits must satisfy certain statutory requirements (i.e., actuarial certification and plan-sponsor determinations). Additionally, certain limitations and exemptions apply; for example, benefits may not be suspended for certain categories of individuals based upon age or for benefits based upon disability. Applications for benefit suspensions must be certified by an authorized trustee on behalf of the board of trustees, and each application with supporting material is to be published for public disclosure on the Treasure Department website.

Public Comment

Partition application requirements issued by the PBGC apply to applications received as of June 19, 2015. The PBGC is seeking comments on its interim final rule. Comments may be submitted on or before August 18, 2015. Although the IRS has begun accepting applications for proposals of suspension of benefits, the Treasury will not approve proposal applications until regulations are finalized. Public comment on the Treasury’s proposed regulations is set for September 10, 2015.

What the Supreme Court’s Decision on Affordable Care Act Subsidies Means for Employers

The Internal Revenue Service was authorized to issue regulations extending health insurance subsidies to coverage purchased through health insurance exchanges run by the federal government or a state, the U.S. Supreme Court has ruled in a 6-3 decision. King v. Burwell, No. 14-114 (June 25, 2015).

This means employers cannot avoid employer shared responsibility penalties under Internal Revenue Code section 4980H (“Code § 4980H”) with respect to an employee solely because the employee obtained subsidized exchange coverage in a state that has a health insurance exchange set up by the federal government instead of by the state. It also means that President Barack Obama’s 2010 health care reform law will not be unraveled by the Supreme Court’s decision in this case. The law’s requirements applicable to employers and group health plans continue to apply without change.

What Was the Case About?

Internal Revenue Code section 36B (“Code § 36B”), created by the Patient Protection and Affordable Care Act of 2010 (“ACA”), provides that an individual who buys health insurance “through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act” (emphasis added) generally is entitled to subsidies unless the individual’s income is too high (or too low, in which case, the individual is entitled to Medicaid or another subsidized health program). Thus, the words of the statute conditioned one’s right to Code § 36B subsidies on one’s purchase of ACA § 1311 state-run exchange coverage.

Since 2014, an individual who fails to maintain health insurance for any month generally is subject to a tax penalty under Code § 5000A unless the individual can show that no affordable coverage was available. The law defines affordability for this purpose in such a way that, without a subsidy, health insurance would be unaffordable for most people.

The plaintiffs in King, residents of one of the 34 states that did not establish a health insurance exchange under ACA § 1311 (hereinafter called a “1311 exchange”), argued that if subsidies were not available to them, no health insurance coverage would be affordable for them and they would not be required to pay a penalty for failing to maintain health insurance. The IRS, however, made subsidized exchange coverage available to them just as if they resided in a state with a 1311 exchange.

It is ACA § 1311 that established the funding and other incentives for “the States” to each establish a state-run exchange through which residents of the state could buy health insurance. Section 1311 also provides that the Secretary of the Treasury will appropriate funds to “make available to each State” and that the “State shall use amounts awarded … for activities (including planning activities) related to establishing an American Health Benefit Exchange.” Section 1311 describes an “American Health Benefit Exchange” as follows:

Each State shall, not later than January 1, 2014, establish an American Health Benefit Exchange (referred to in this title as an “Exchange”) for the State that (A) facilitates the purchase of qualified health plans; (B) provides for the establishment of a Small Business Health Options Program … and (C) meets [specific requirements enumerated].

Section 1311 further provides for the Secretary of the Treasury to impose certain administrative and operational requirements on each state in order for the state to receive funding for its 1311 exchange. An entirely separate section of the ACA provides for the establishment of a federally-run exchange for individuals to buy health insurance if they reside in a state that does not establish a 1311 exchange. That section – ACA § 1321 – also withholds funding from a state that has failed to establish a 1311 exchange.

Notwithstanding the statutory language Congress used in the ACA (i.e., literally conditioning an individual’s eligibility subsidized exchange coverage on the purchase of health insurance through a state’s 1311 exchange), the Supreme Court determined that the language is ambiguous. Having found that the text is ambiguous, the Court stated that it must determine what Congress really meant by considering the language in context and with a view to the placement of the words in the overall statutory scheme.

When viewed in this context, the Court concluded that the plain language could not be what Congress actually meant, as such interpretation would destabilize the individual insurance market in those states with a federal exchange and likely create the “death spirals” the ACA was designed to avoid. The Court reasoned that Congress could not have intended to delegate to the IRS the authority to determine whether subsidies would be available only on 1311 exchanges because the issue is of such deep economic and political significance. The Court further noted that “had Congress wished to assign that question to an agency, it surely would have done so expressly” and “[i]t is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort.”

What Now?

“Move along – nothing to see here, folks!” Regardless of whether one agrees with the Supreme Court’s King decision, the decision obviates any practical purpose for further discussion about whether the IRS had authority to extend taxpayer subsidies to individuals who buy health insurance coverage on federal exchanges.

Move on to the ACA’s next major compliance requirements for employers: Employers with fifty or more fulltime and fulltime equivalent employees need to ensure that they are tracking hours of service and are otherwise prepared to meet the large employer reporting requirements for 2015 (due in early 2016) ). (For details, see our article, Health Care Reform: Employers Should Prepare Now for 2015 to Avoid Penalties.) Employers of any size that sponsor self-funded group health plans need to ensure that they are prepared to meet the health plan reporting requirements for 2015 (also due in early 2016). All employers that sponsor group health plans also should be considering whether and to what extent the so-called Cadillac tax could apply beginning in 2018.

If you have any questions about this or other workplace developments, please contact the Jackson Lewis attorney with whom you regularly work.

A Look Ahead to The Supreme Court’s 2015-16 Term

As the Supreme Court winds down its 2014-15 term, the Benefits Law Advisor looks ahead to the ERISA cases and issues the Supreme Court may confront in its next terms. The Supreme Court’s recent ERISA jurisprudence has touched on issues such as remedies (CIGNA Corp. v. Amara and US Airways v. McCutchen), retiree entitlement to healthcare benefits (M&G Polymers v. Tackett), time-based defenses to ERISA claims (Tibble v. Edison Int’l and Heimeshoff v. Hartford Life & Accident Ins.), and the now-defunct “presumption of prudence” that lower courts had applied to ERISA plans’ decision to offer employer stock as an investment option (Fifth Third Bank v. Dudenhoeffer).

As of this writing, the Court has only granted certiorari in one ERISA case for next year’s term, Montanile v. Board of Trustees, No. 14-723, cert. granted Mar. 30, 2015. The Montanile case arose from the familiar situation where an ERISA plan seeks to recover medical benefits paid to an injured participant, after that participant receives a tort recovery for those injuries. Both lower courts granted summary judgment to the plan, with the additional proviso that the plan could impose an equitable lien (under the terms of the plan) on Montanile’s settlement proceeds, even if those monies have been dissipated.

In granting Montanile’s petition, the Court interprets, once again, the term “equitable relief” in ERISA §502(a)(3) – an issue the Court has repeatedly revisited. In particular, the Montanile case gives the Court a chance to address an open question from its equitable-remedies jurisprudence: is there an “equitable tracing” requirement that obligates ERISA plaintiffs to identify a specific sum of money that may be the subject of an equitable recovery?

The existence of an equitable-tracing requirement has been hotly debated since at least 2003, when the Court’s decision in Great West Life & Annuity v. Knudson firmly established that equitable relief under ERISA was limited to those forms of relief traditionally available in the courts of equity. Since Knudson, many ERISA defendants have successfully argued that equitable relief was only available where plaintiff could identify a particular asset or sum of money that could be made subject to a restitutionary recovery, constructive trust or equitable lien. As a result, the Court has struggled (in this author’s view) with how to apply traditional “tracing” rules, because the Court’s answer could have far-reaching implications both for plans seeking reimbursement, and for participants invoking ERISA §502(a)(3) for redress in fiduciary-breach claims or other violations of ERISA.

It seems that the Court is ready to answer that question in Montanile, judging from the question presented in the Court’s writ. Another similar case, Elem v. AirTran Airways, No. 14-1061 (cert. pet. filed Feb. 27, 2015). is pending before the Court on the participant’s petition.

Beyond Montanile, the Court has several other writ petitions pending, including three cases where the Court has invited the Solicitor of Labor to weigh in with an amicus brief. These cases include:

  • Smith v. Aegon Cos. Pension Plan – In this case, the lower courts dismissed benefits claims on grounds of improper venue. In doing so, the lower courts held that an exclusive-venue provision in the plan required the participant to bring his benefits suit in the specified venue. The Department of Labor (DOL) had submitted an amicus brief to the Sixth Circuit, arguing that venue-selection provisions ran afoul of ERISA’s goal of providing participants with ready access to the courts. The Sixth Circuit, however, rejected DOL’s position and enforced the plan’s venue provision. A Supreme Court decision on this issue would likely be significant, because many plan sponsors are using the plan document to “hard wire” certain defenses to benefits claims – for example, the Court’s recent Heimeshoff decision approved a limitations period established by the plan.
  • Gobeille v. Liberty Mut. Ins. Co. – This case presents a pre-emption question – specifically, whether ERISA pre-empts a Vermont law requiring healthcare payors (including ERISA plans) to submit certain claims data to the state. A split panel of the Second Circuit held the Vermont law was pre-empted because it imposed additional reporting requirements on those already imposed by ERISA. At the Court’s invitation, DOL filed an amicus brief opining that ERISA does not pre-empt the Vermont statute because it applies to non-ERISA entities, as well, and does not impose significant reporting burdens. The DOL brief added, however, that the Court’s review was not currently warranted, and suggested that “further percolation” of the issue in the appellate courts would be beneficial. Given that the Court’s last decision on ERISA pre-emption was over 10 years ago, the Court may nevertheless be signaling its readiness to take the case, and to issue further guidance on ERISA’s pre-emptive reach.
  • RJR Pension Inv. Comm. v. Tatum – The Tatum case arose from a dispute over plan fiduciaries’ decision to divert the plan of company stock, at a time when the stock was distressed. After the company stock recovered dramatically, participants asserted ERISA claims that plan fiduciaries had acted imprudently in selling the stock at a time when the price was down significantly. The Fourth Circuit held, among other things, that (1) the burden of proving loss causation shifted to plan fiduciaries, upon a showing that the fiduciaries had breached their duty of prudent investment; and (2) plan fiduciaries must show a hypothetical prudent fiduciary “would have” (as opposed to “could have”) made the same investment decision, where there was no evidence that the plan’s fiduciaries had undertaken robust deliberations before divesting the plan’s holdings in company stock. The Court invited the DOL to brief both issues. If the Court takes the case, its decision could be significant. On the former issue, a decision from the Court would resolve diverging lower-court decisions on whether the plaintiff bears the ultimate burden of proof (including loss causation), or whether the burden-shifting approach of trust law – requiring a trustee, upon a showing of a breach of duty, to demonstrate that the breach did not cause the loss – is more appropriate for ERISA cases. On the latter issue, a decision from the Court could provide much-needed guidance on the proper scope of judicial review of fiduciary decision-making.

Although the Court has taken no action yet on the petition, it may be worth watching to see whether the Court takes up the case of UnitedHealthcare of Arizona, Inc. v. Spinedex Physical Therapy USA, Inc., No. 14-1286 (cert. pet. filed April 24, 2015). There, the Ninth Circuit held that a claims administrator is a proper party defendant in a medical benefits claim, even though it otherwise had no obligation as the benefits payer. Because ERISA §502(a)(1)(B) only authorizes suit for “benefits due … under the terms of his plan,” the Ninth Circuit’s reading of the statute – which purports to make claims administrators liable for benefits in a manner not contemplated by “the terms of the plan” – clearly seems overbroad. If left unaddressed, the Spinedex decision could ultimately prove counter-productive, in that it will inevitably raise costs for service providers, which in turn, will be passed along to the plans, and ultimately to the participants in the form of higher premiums, larger deductibles, or less-generous coverage.

The Supreme Court has demonstrated some enthusiasm for ERISA in recent years. The Montanile case represents a significant beginning to the Court’s ERISA work for the next term. Given the cases and issues before it, however, the odds are that the Court will consider more ERISA cases in the next twelve months. The Benefits Law Advisor will continue to monitor the Court’s docket, and report on significant developments.


When a Deferred Compensation Plan Qualifies for “Top-Hat” Plan Status under ERISA

In a recent decision, Tolbert v. RBC Capital Markets Corp., _________ (S.D. Texas April 28, 2015), the district court wrestled with the question of how to determine whether a deferred compensation plan was a “top-hat” plan exempt from many of the substantive requirements of the Employee Retirement Income Security Act (“ERISA”).

The Fifth Circuit previously had determined that the deferred compensation plan was a “pension plan” covered by ERISA. ERISA defines a “pension plan” to be any plan, fund, or program established or maintained by an employer which (1) provides retirement income to employees OR (2) results in a deferral of income for periods extending to the termination of covered employment or beyond. Section 3(2) of ERISA. Under this definition, some but not all, deferred compensation plans will be subject to ERISA.

ERISA generally requires pension plans to comply detailed and complex requirements with respect to participation, vesting, funding, and reporting and disclosure. However, a retirement or deferred compensation plan, however, will be exempt from these requirements if (1) the plan is an “unfunded” plan within the meaning of Title I of ERISA, and (2) the plan is maintained “primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.” Such plans are commonly referred to as “top-hat” plans.

There are no explicit statutory or regulatory guidelines under ERISA for determining whether employees covered by a plan constitute “a select group of management or highly compensated employees.” Individually issued opinions of the Department of Labor (“DOL”), as well as its informal public statements, have evidenced a significant degree of ambivalence in making this determination. Similarly, the courts have not applied consistent guidelines in determining whether a plan covers a “select group”.

Several court decisions and some old DOL Advisory Opinions have taken a fairly mathematical approach focusing on the size of the covered group in relation to the employer’s total workforce and the select group’s average salary in relation to the remainder of the workforce in determining whether the covered employees constitute a “select group”.

In Advisory Opinion 90-14A (May 8, 1990), the DOL indicated that it would take a more subjective approach and look at the job positions included in the covered group in determining whether the “top-hat” requirements have been met – in particular, whether a covered employee has the ability to influence his or her compensation. The DOL also took the position that a plan which extended coverage to employees who were not part of a “select group of management or highly compensated employees” would not constitute a “top-hat” plan. The DOL, however, did not include any examples in Advisory Opinion 90-14A and, to date, has not provided any additional discussion or details as to its view of the application of the select group requirement of the “top-hat” plan exemption.

The district court had to wrestle with this definitional question and held that too many factors remained at issue to determine whether the plan was a top-hat plan exempt from most of the ERISA requirements.

It is important to note that the top-hat status question is much more likely to come up in a situation involving employer contributions (and the forfeiture of those contributions) as opposed to pure employee-only compensation deferrals.


The DOL’s Employee Benefits Security Administration (“EBSA”) recently completed its report on the quality of audit work performed on employee benefit plans by independent qualified public accountants (“IQPA”) and was not pleased with the results. EBSA reviewed a sample of the 81,000 audits completed as a part of each plan’s Annual Report/Form 5500 filing requirement and found that only 61% of the audits fully complied with the applicable standards or had only minor deficiencies. That means that nearly 4 out of 10 audit reports contained “major deficiencies” which places “$653 billion and 22.5 million plan participants and beneficiaries at risk.”

Even though the DOL may be over-dramatizing the “risk” to plan assets and participants, the report’s findings speak for themselves. In 2011, there were 7,330 different CPA firms performing plan audits. Most of those firms perform only a small number of plan audits and those are the firms that appear to be most concerning to the DOL. The EBSA’s report determined that “CPAs who performed the fewest number of employee benefit plan audits annually had a 76% deficiency rate” versus “the firms performing the most plan audits [that] had a deficiency rate of only 12%.”

Many plan administrators have received deficiency notices from EBSA regarding their audit report and have experienced the time, effort, and expense of coordinating and re-submitting their Annual Report/Form 5500 in order to avoid ERISA’s $1,100 per day civil penalty. EBSA is proposing to make the auditors accountable for the deficient audits and responsible for those penalties, but that recommendation would require legislative action from Congress to amend ERISA. The other noteworthy recommendation in EBSA’s report is that the agency should re-evaluate its enforcement targets and focus on CPAs with smaller employee benefit plan audit practices. This recommendation does not require Congressional approval so we expect to see an uptick in IQPA investigations in the near future.

Plan auditors are not the only benefit plan service provider in the EBSA’s enforcement spotlight. The report comes on the heels of the proposed changes to ERISA’s definition of fiduciary that would broaden that definition to include a greater number of service providers giving investment advice for a fee. This sharpened focus on service providers falls in line with EBSA’s trend towards targeting service providers for investigations instead of individual plans.

What does this mean for retirement plan sponsors and administrators?

Although there appears to be a greater EBSA focus on enforcement against plan service providers, it is important to remember that plan fiduciaries are ultimately responsible for the proper administration of an employee benefit plan. Thus, plan fiduciaries should be sure to act in accordance with ERISA in selecting and monitoring plan service providers. With respect to plan auditors, care should be taken to ensure, among other things, that the plan’s auditor is experienced in auditing employee benefit plans and continues to spend a significant time of his or her practice auditing such plans.

401(k) Plan Investment Committee Best Practices After Tibble v. Edison

On May 18, 2015, the United States Supreme Court, in a unanimous decision, held that an ERISA fiduciary responsible for the selection of ERISA plan investment choices has an ongoing duty to monitor such choices.

As discussed in greater detail in our May 18th Benefits Law Advisor post, Tibble v. Edison International, No. 13-550 (U.S. May 18, 2015) involved a plan’s selection of six mutual funds offered as plan investment options. Three of the funds were selected in 1999 and three were chosen in 2002. All were so-called “retail class” funds that were identical (other than carrying higher fees) to other available “institutional class” funds with lower expenses (and consequently higher returns). The plaintiffs argued that the selection of the costlier funds, where identical lower-cost funds were available, was a breach of fiduciary duty under ERISA.

The principal legal issue in the case was whether, since the selection decision was made more than 6 years after the action was commenced, the claims were barred by ERISA’s 6-year statute of limitations. The United States District Court for the Central District of California dismissed the claims as time-barred, and the Ninth Circuit affirmed, based on Ninth Circuit precedent holding that there is no “continuing violation” theory under ERISA.

In a rare unanimous ERISA decision, the Supreme Court reversed. The Court held that ERISA fiduciary duty “is derived from the common law of trusts,” that at common law a trustee had a continuing duty “to monitor, and remove, imprudent investments,” and that, as a result, an ERISA fiduciary has a continuing duty to monitor investments that “exists separate and apart from the trustee’s duty to exercise prudence in selecting investments.”

Tibble is unremarkable in that it broke no new ground; the ongoing “duty to monitor” has been long-recognized by both fiduciaries and attorneys alike. The principle take-away from Tibble is the reiteration of risk mitigation best practices for fiduciaries tasked with the selection of investment options for an ERISA plan.

At minimum, these best practices should include:

  • Establishing a 401(k) investment committee comprised of members both willing and able to fully understand the roles and responsibilities of the position and educated on the basics of ERISA fiduciary responsibility, plan procedures, investment review guidelines, and plan documents.
  • Establishing and adhering to procedures for the selection and periodic review of investment choices. These procedures are generally set forth in an “investment policy statement” which includes suggested guidelines for both initial selection and monitoring of investment alternatives.
  • Holding regularly-scheduled committee meetings, generally quarterly.
  • Regularly reviewing of the fees associated with investment choices and other service providers (such as record keepers), including compliance with the Department of Labor’s fee disclosure requirements.
  • Perhaps most importantly, clearly and thoroughly documenting, via committee meeting minutes, both the decisions resultant from the investment committee’s periodic review and the empirical rationale for such decisions.