Our “health plan hygiene” series has focused on steps that fiduciaries of employer-sponsored group health plans can take to ensure they meet their fiduciary responsibilities.  This issue has been brought to the forefront recently due to a wave of class action lawsuits that have been brought against group health plan fiduciaries.  In our last post, we discussed the importance of a thorough RFP process and an overview of important contractual provisions.  This post will address the issue at the center of those class action lawsuits:  the fees.   

Third-Party Vendor Fee Arrangements

Health plan fiduciaries have the duty to ensure that the fees paid to third-party vendors are reasonable.  This can feel like an overwhelming task because health plans, especially self-insured health plans, can hire multiple third-party vendors to keep the plan running.  For example, third-party administrators (“TPAs”), network providers, repricing servicers, claims auditors, pharmacy benefit managers (“PBMs”), telehealth providers, and behavioral health providers may all be involved in the administration of a single health plan.  

Health plan fiduciaries should educate themselves on the potential pricing methods and fee arrangements with each of the third-party service providers.  For example:

  • “Bundled” Services and Fee Arrangements.  Because of the seemingly endless number of third-party vendors that may be required for health plan administration, fiduciaries will often rely on one TPA to manage and contract with the other third-party vendors.  While this can ease the burden of tracking multiple vendors, it remains the fiduciaries’ duty to ensure that the fees are reasonable for each vendor.  That means that the fiduciaries must understand the services provided by each vendor, and the fees charged by each vendor.  Fiduciaries should not rely on the TPA to manage the overall fees or to provide one total billed amount for all vendors without a breakdown.
  • Pharmacy Benefit Managers.  The recent class action lawsuits have focused heavily on PBM fees.  PBM fee structures have historically been complex and not particularly transparent, so it is essential that plan fiduciaries understand PBM pricing models. 
    • Pass-Through Pricing.  Under the pass-through pricing model, the PBM charges the plan the drug acquisition cost (the amount paid to the drug manufacturer).  Any negotiated rebates are also passed through to the plan.  The PBM receives compensation from the plan via a per-employee or per-month rate to the plan.  Proponents of the pass-through pricing model argue that pass-through pricing provides the most transparency and consistency for the plan.
    • Spread Pricing.  Under the spread pricing model, the PBM and the plan set the price that the plan pays for prescription drugs by reference to a specific benchmark price.  The PBM then negotiates a lower price with the drug manufacturer, and the PBM receives compensation on the difference (the “spread”) between the PBM’s acquisition cost and the benchmark price.  PBMs in this arrangement are financially motivated not to make formulary decisions based on which drugs have the lowest cost to the plan and beneficiaries but rather based on which drugs have the most significant spread.
    • Rebates.  PBMs negotiate rebates from drug manufacturers. The PBM may keep all or a portion of the rebate instead of paying the rebate back to the plan. 
  • Brokers.  Fiduciaries will often hire brokers to help identify and retain service providers for a health plan.  Brokers can provide an important service.  However, some brokers enter into commission or other compensation arrangements with service providers.  It is essential that plan fiduciaries are aware of any compensation or commission arrangements between a broker and other third-party vendors to ensure that the broker is providing the best objective recommendations, not recommendations motivated by financial gain. 

Potential Impacts

Recent class actions have highlighted the complexities and potential liabilities associated with third-party vendor fees. It is essential fiduciaries be well-informed about current third-party vendor contracts or agreements, including their termination or renewal periods. These periods can offer opportunities to reassess and renegotiate fees.

As your representative, the Jackson Lewis Employee Benefits Practice Group members can assist if you have questions or need assistance, especially when selecting service providers. Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

A health plan’s fiduciaries are responsible for administering the health plan.  Because most employers are not in the business of administering health benefits, they outsource the day-to-day health plan administration to a third-party health plan administrator (TPA).  This outsourcing does not mean the employer is off the hook for their fiduciary obligations under ERISA.  Even the evaluation and selection of a TPA is itself a fiduciary act, and employers must follow a prudent process.

Below, we provide information for employers regarding the selection, evaluation, and contracting with a TPA:

Rely on the Experts

Just as most employers are not in the business of administering health benefits, most employers are not in the business of evaluating and selecting TPAs.  To help ensure this process complies with ERISA’s fiduciary duties, employers often rely on a broker or consultant and legal counsel.  Brokers and consultants will identify TPAs that are appropriate for the employer’s size, industry, and location, provide guidance regarding the reasonableness of the TPA’s fees, and help with fee negotiation.  Legal counsel will help the fiduciary with legal compliance and contract negotiation. 

Conduct a Request for Proposal

The broker/consultant and legal counsel will help conduct a request for proposal (RFP) for a TPA.  The RFP will invite potential TPAs to submit bids and information regarding the health plan’s administration.  With the RFP, the fiduciary should: 

  • Invite several providers to respond to the request for proposal;
  • Prepare specific questions that are relevant and important to the plan’s administration;
  • Make sure the TPA’s fees are reasonable;  
  • Request sample contracts to identify any “dealbreaker” provisions; and
  • Identify potential internal conflicts that could taint the process (e.g., TPAs with other relationships with the employer). 

Thorough Review and Negotiation of Services Agreement

The employer should select a potential TPA well before the implementation date so that there is time for legal counsel and the broker/consultant to negotiate the services agreement and fees and, if necessary, select an alternate TPA if the negotiations fall apart.  Key contractual provisions include: 

  1. Indemnification provisions.  TPAs expect plan fiduciaries to indemnify the TPA against third-party claims, losses, or suits based on the services provided by the TPA to the plan and the participants.  However, the plan fiduciaries should not indemnify the TPA for claims based on the TPA’s negligence, misconduct, or fiduciary breach.  Instead, the TPA should be liable for any claims based on the TPA’s “bad actions,” and the TPA should indemnify the plan against those claims.    
  2. Accepting fiduciary responsibility.  If the TPA is authorized to interpret the plan provisions, for example, if the TPA is delegated the authority to handle claims and appeals under the plan, the TPA is acting as a fiduciary under ERISA.  In that case, the services agreement should expressly state that the TPA acknowledges its fiduciary status. 
  3. Audit rights.  Reserving the right to audit the TPA’s performance under the service agreement is important.  Beware of onerous restrictions on “claims” audits.  To avoid negative findings in audit reports, some service providers limit the number of audits a plan sponsor may undertake, establish long notice periods, or, in extreme cases, provide an exclusive list of auditors or prohibit certain auditors from conducting audits.    
  4. Termination provisions. ERISA generally prohibits fiduciaries from entering into contracts that cannot be terminated without substantial penalties or within a reasonable period. The service agreement should give the employer the flexibility to terminate. 
  5. Claims litigation. Make sure the agreement clearly states which party will handle claims litigation and which party will indemnify the other for any damages.      

Measure Twice, Cut Once

The process of selecting and contracting with a new TPA can seem overwhelming, time-consuming, and exhausting. However, taking the proper steps to ensure that the process is completed in accordance with ERISA’s fiduciary duties can save employers from costly mistakes.  

The Jackson Lewis Employee Benefits Practice Group members can assist if you have questions or need assistance. Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

A little more than three years ago, the U.S. Department of Labor (DOL) posted cybersecurity guidance on its website for ERISA plan fiduciaries. That guidance extended only to ERISA-covered retirement plans, despite health and welfare plans facing similar risks to participant data.

Last Friday, the DOL’s Employee Benefits Security Administration (EBSA) issued Compliance Assistance Release No. 2024-01. The EBSA’s purpose for the guidance was simple – confirm that the agency’s 2021 guidance generally applies to all ERISA-covered employee benefit plans, including health and welfare plans. In doing so, EBSA reiterated its view of the expanding role for ERISA plan fiduciaries relating to protecting plan data:

“Responsible plan fiduciaries have an obligation to ensure proper mitigation of cybersecurity risks.“

In 2021, we outlined the DOL’s requirements for plan fiduciaries here, and in a subsequent post discussed DOL audit activity that followed shortly after the DOL issued its newly minted cybersecurity requirements.

As noted in our initial post, the EBSA’s best practices included:

  • Maintain a formal, well documented cybersecurity program.
  • Conduct prudent annual risk assessments.
  • Implement a reliable annual third-party audit of security controls.
  • Follow strong access control procedures.
  • Ensure that any assets or data stored in a cloud or managed by a third-party service provider are subject to appropriate security reviews and independent security assessments.
  • Conduct periodic cybersecurity awareness training.
  • Have an effective business resiliency program addressing business continuity, disaster recovery, and incident response.
  • Encrypt sensitive data, stored and in transit.

Indeed, the substance of the guidance is largely the same, as indicated above, and still covers three areas – Tips for Hiring a Service Provider, Cybersecurity Program Best Practices, and Online Security Tips (for plan participants). What is different are some of the issues raised by the new plans to which the expanded guidance applies – health and welfare plans. Here are some examples.

  • The plans covered by the DOL’s guidance. As noted, the DOL’s cybersecurity guidance now extends to health and welfare plans. This includes plans such as medical, dental, and vision plans. It also includes other familiar benefit plans for employees, including plans that provide life and AD&D insurance, LTD benefits, business travel insurance, certain employee assistance programs and wellness programs, most health flexible spending arrangements, health reimbursement arrangements, and other benefit plans covered by ERISA. Recall that an “employee welfare benefit plan” under ERISA generally includes:

“any plan, fund, or program…established or maintained by an employer or by an employee organization…for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise…medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services.“

A threshold compliance step for ERISA fiduciaries, therefore, will be to identify the plans in scope. However, cybersecurity should be a significant compliance concern for just about any benefit offered to employees, whether covered by ERISA or not.

  • Identifying service providers. It is tempting to focus on a plan’s most prominent service providers – the insurance carrier, claims administrator, etc. However, the DOL’s guidance extends to all service providers, such as brokers, consultants, auditors, actuaries, wellness providers, concierge services, cloud storage companies, etc. Fiduciaries will need to identify what individuals and/or entities are providing services to the plan.
  • Understanding the features of plan administration. The nature and extent of plan administration for retirement plans as compared to health and welfare plans often is significantly different, despite both being covered by ERISA which includes a similar set of compliance requirements. For instance, retirement plans tend to collect personal information only about the employee, although there may be a beneficiary or two. However, health and welfare plans, particularly medical plans, often cover an employee’s spouse and dependents. Additionally, for many companies, different groups of employees monitor retirement plans versus health and welfare plans. And, of course, more often than not, there are different vendors servicing these categories employee benefit plans.
  • What about HIPAA? Since 2003, certain group health plans have had to comply with the privacy and security regulations issued under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The DOL’s cybersecurity guidance, however, raises several distinct issues. First, the DOL’s recent pronouncements concerning cybersecurity are directed at fiduciaries, who as a result may need to take a more active role in compliance efforts. Second, obligations under the DOL’s guidance are not limited to group health plans or plans that reimburse the cost of health care. As noted above, popular benefits for employees such as life and disability benefits are covered by the DOL cybersecurity rule, not HIPAA. Third, the DOL guidance appears to require greater oversight and monitoring of plan service providers than HIPAA requires of business associates. In several places, the Office of Civil Rights’ guidance for HIPAA compliance states that covered entities are not required to monitor a business associate’s HIPAA compliance. See, e.g., here and here.  

The EBSA’s Compliance Assistance Release No. 2024-01 significantly expands the scope of compliance for ERISA fiduciaries with respect to their employee benefit plans and cybersecurity, and by extension the service providers to those plans. Third-party plan service providers and plan fiduciaries should begin taking reasonable and prudent steps to implement safeguards that will adequately protect plan data. EBSA’s guidance should help the responsible parties get there, along with the plan fiduciaries and plan sponsors’ trusted counsel and other advisors.

The Employee Retirement Income Security Act of 1974 (ERISA) regulates most private employee benefit retirement and welfare plans. This statute’s purview is vast; it governs employer-sponsored defined benefit and defined contribution retirement plans and an array of welfare plans.

Under ERISA, a plan fiduciary is an entity that exercises authority or control over the management or disposition of plan assets. Within the ERISA context, “fiduciary” is a functional title rather than a job title. A fiduciary need not know that they have assumed fiduciary status to be liable for a potential fiduciary breach. If one fiduciary fails to meet their responsibilities, other fiduciaries may be held accountable, even if they were not directly involved. This is known as “joint and several liability.”

What are a fiduciary’s obligations under ERISA?

ERISA Section 404 and Section 2550.404a-1 of the Department of Labor’s regulations outline fiduciary obligations. The provisions demand that a fiduciary:

  • Act solely in the interest of the participants and beneficiaries, exclusively to provide benefits to them and defray reasonable expenses of the plan.
  • Carry out their duties prudently.  
  • Follow the plan documents, except where the plan document conflicts with ERISA.
  • Diversify plan investments to minimize the risk of significant losses.
  • Pay only reasonable plan expenses.

How can a plan fiduciary ensure it is fulfilling its obligations?

  • Differentiate between “fiduciary” and “settlor” functions. Not all functions related to employee benefit plans are fiduciary functions. Fiduciaries must carry out their duties in the best interests of plan participants. The administration of the plan is generally a fiduciary function. Settlor functions, in contrast, may be carried out in the best interests of the plan sponsor and may include adopting, amending, or terminating a benefits plan.
  • Manage plan administration using well-documented, rigorous decision-making processes. The fiduciary duty of prudence is a process requirement. The fiduciary does not have a duty to maximize plan asset growth or minimize plan expenses absolutely. Instead, the fiduciary has the duty to administer the plan using reasonable, rational decision-making processes. “Prudent” processes cited in recent cases include reviewing quarterly reports, engaging an investment consultant, using a watch list and investment policy statement in decision-making, and actively monitoring underperforming funds.
  • Follow the plan’s terms—and design the plan to make that possible. If a provision is written into the plan and does not conflict with ERISA, the fiduciary is bound to follow the terms of each such provision to remain in compliance. 

The Bottom Line

  • The role of a fiduciary under ERISA is both critical and complex. Fiduciaries are responsible for managing the plan’s assets and safeguarding the interests of the participants and beneficiaries. While the path to compliance with ERISA’s fiduciary obligations may seem daunting, it is based on loyalty, prudence, and adherence to the plan’s terms. By understanding and respecting these principles, fiduciaries can navigate their responsibilities.
  • The essence of fiduciary duty under ERISA is about making informed, well-considered decisions that align with the best interests of the plan participants and beneficiaries.

The Jackson Lewis Employee Benefits Practice Group members can assist if you have questions or need assistance. Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

During the next several weeks, we will publish a series of articles that dive deeply into “health plan hygiene” relating to health and welfare benefit plan fiduciary issues and how employers can protect themselves in this quickly evolving area.

Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (ERISA) requires certain disclosures regarding employee benefit plan fees.  When this so-called fee disclosure rule was put in place for retirement plans, it sparked litigation regarding whether the fees paid by defined contribution retirement plans for recordkeeping, plan administration, and investment management are too high.  These cases have included claims of ERISA fiduciary breaches and prohibited transactions and have plagued the retirement plan industry for the last two decades.

The disclosure rule was expanded by the Consolidated Appropriations Act of 2021 to apply to welfare plans, and several notable cases have already been filed against welfare benefit plan sponsors. These recent cases have included claims that the benefits committees have been imprudent in their plan design, have overpaid for benefits, have set their premiums too high because of commissions being paid to brokers, have improperly retained rebates, and have had a conflict of interest when selecting plan partners.

Note that while there is no law requiring employers to sponsor a retirement plan for their employees, the same is not necessarily true for welfare benefits. Under the Affordable Care Act, certain large employers are required to offer medical insurance to full-time employees or risk a penalty from the Internal Revenue Service.  As a result, employers who offer group health insurance will be at risk for claims regarding these benefits and services and cannot protect themselves by simply not offering the benefit.

Now is the time for plan fiduciaries to protect themselves from potential claims by revisiting their fiduciary practices as they apply to health and welfare plan administration.  

Check our blog regularly for more information on this topic.  In the meantime, please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

Of interest to 401(k) plan sponsors and administrators, the IRS recently issued Notice 2024-55, providing guidance on SECURE 2.0’s new exceptions—effective January 1, 2024—to the additional 10% tax on early qualified retirement plan distributions for emergency personal expenses and victims of domestic abuse.  Both types of distributions are optional and may be adopted through discretionary plan amendments. 

Emergency personal expense distributions are those made to an individual to meet unforeseeable or immediate financial needs relating to necessary personal or family expenses.  Participants are limited to one emergency personal expense distribution per calendar year, and the distribution cannot exceed $1,000 (not indexed for inflation) or, if less, the excess of the participant’s vested account balance.  In addition, once an emergency personal expense distribution is taken, the participant cannot take another emergency personal expense distribution during the following 3 calendar years unless the previous distribution has been repaid or the participant’s contributions to the plan at least equal the amount of the unpaid distribution.      

Domestic abuse victim distributions are those made to a domestic abuse victim during the 1-year period beginning on the date the individual is a victim of domestic abuse by a spouse or domestic partner.  “Domestic abuse” is defined as physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim or to undermine the victim’s ability to reason independently, including by means of abusing the victim’s child or another family member living in the household.  Domestic abuse victim distributions are limited to $10,000 (indexed for inflation) or, if less, 50% of the participant’s account balance.

Plan sponsors can rely on a participant’s written certification that the distribution is due to an emergency personal expense or being the victim of domestic abuse.  In addition, a participant must be allowed to repay any emergency personal expense or domestic abuse victim distribution during the 3-year period following the date the distribution was received if the participant is eligible to make rollover contributions.  Finally, such distributions are not treated as eligible rollover distributions, and Code Section 402(f) notices and 20% mandatory income tax withholding are not required.

The IRS has invited comments on all the matters discussed in the Notice, including whether exceptions should be created to plan sponsor reliance on participant certification and whether procedures to address employee misrepresentations should be included.

We are available to help plan sponsors understand and implement SECURE 2.0’s requirements.  If you have questions or need assistance, please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

For the last 40 years, judges were required to defer to administrative agencies’ reasonable interpretations of ambiguous federal statutes under Chevron v. Natural Resources Defense Council. The Supreme Court upended that precedent in Friday’s 6-3 ruling in Loper Bright Enters. v. Raimondo, which overturned Chevron and instructs judges to rely on their own judgment in determining whether an agency’s regulation falls within its authority.  

Chevron’s repeal has both immediate and concrete impacts on ERISA’s interpretation, as well as the potential for significant, broader effects.  More…

When an employee is on an extended leave of absence, there is often confusion regarding whether and to what extent the employer must continue to provide coverage to the employee under the employer-provided health plan.  To determine whether coverage is required, the employer should consider the terms of the plan, COBRA requirements, and whether the leave is covered by FMLA. 

The Plan Terms.  Employer-provided health plans include continuing service requirements for continuing eligibility.  For example, it is common for a health plan to require employees to perform an average of at least 30 hours of service per week to be eligible for coverage under the plan.  When an employee goes out on a leave of absence, and the employee’s average hours of service typically fall below the minimum coverage requirement, the employee may no longer be eligible for coverage under the plan.   

FMLA Leave. Suppose an employer is subject to the Family and Medical Leave Act (FMLA). In that case, the employer must maintain group health benefits to employees on FMLA leave “on the same basis as coverage would have been provided” had the employee been employed throughout the leave period.  This means, for example, that if an employer pays a portion of the group health plan premiums for active employees, the employer must pay the same portion for employees on FMLA leave.  The obligation to continue active-employee coverage under FMLA terminates if the employee does not return to work at the end of the FMLA leave.   For this purpose, the “end of the FMLA leave” is generally the last scheduled day of the FMLA leave.  That said, if the employee “unequivocally” communicates to the employer that the employee does not intend to return to work before the last scheduled day of the FMLA leave, the end of the FMLA leave is the day that the employee communicates such intent.   

While active coverage terminates as of the last day of the FMLA leave, the employer may have an obligation to permit the employee to elect to continue coverage under COBRA following the end of the FMLA leave.

COBRA, Generally.  Under the Consolidated Omnibus Budget Reconciliation Act (COBRA), an employee must be given the right to elect to continue coverage under an employer-provided health plan (at the employee’s expense) if the employee would otherwise lose coverage due to a “qualifying event.”  An employee’s termination of employment and reduction in hours are considered “qualifying events.”  So when an employee goes out on leave (i.e., the employee’s hours are reduced) and the leave causes the employee to lose coverage under the group health plan, the employee should be offered COBRA continuation coverage.  The end of an employee’s FMLA leave is also a COBRA qualifying event.  An employee who does not return to work and loses coverage as of the end of the employee’s FMLA leave should also be offered the opportunity to elect COBRA continuation coverage. 

Leave Policies.  Often, employers will let employees continue coverage under the employer-provided health plan during a leave of absence or after an FMLA leave, either because the employer is unclear about the coverage requirements or out of a desire to help the employee.  While generally well-intentioned, this practice could lead to an insurer’s refusal to cover the employee’s claims (or, in the case of a self-insured plan, the stop-loss carrier’s refusal to cover the employee’s claims).  In that case, the employer may be liable for all or some costs of the employee’s claims.  In addition, the employer may be penalized for failing to comply with COBRA requirements.  It is essential that employers review and understand the coverage requirements of the employer’s group health plan and implement written policies to properly administer the group health plan in connection with employee leaves of absence.   

The Jackson Lewis Employee Benefits Practice Group members can assist if you have questions or need assistance.  Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

A recent rash of class action lawsuits in California claim that using forfeitures to reduce future employer contributions to tax-qualified retirement plans runs afoul of the Employee Retirement Income Security Act (ERISA). These cases have continued to advance despite their central claim seeming to contradict long-standing Internal Revenue Service (IRS) guidance for the permitted use of plan forfeitures.  (Retirement plans are governed by both ERISA and the Internal Revenue Code (Code).)  Considering these developments, how can an employer best use the forfeiture dollars without risking exposure to litigation?

Background

Certain employer contributions to tax-qualified retirement plans may be subject to vesting requirements. When an employee separates from service with the employer before these contributions fully vest, the unvested contributions will be forfeited back to the plan. Forfeitures attributable to a plan year generally must be used before the end of the following plan year.

The use of plan forfeitures is subject to limits imposed by the Code. For example, the Code prevents forfeited contributions from being returned to the employer – they must stay in the plan to be used to benefit plan participants. Prior IRS guidance, along with the proposed regulations issued by the IRS in February 2023, indicates that employers may use forfeitures to offset future employer contributions, to pay for plan administrative expenses, and/or to provide additional contributions to participants. We discussed the IRS’s proposed regulations here. Yet recent lawsuits claim that plan fiduciaries violate ERISA when they choose to use forfeitures to offset employer contributions rather than allocating such forfeitures to plan participants or paying reasonable plan expenses.

The litigants allege that when an employer uses forfeitures to offset future employer contributions, it benefits the employer rather than the participants and that the plan cannot grow as large as it would if it had the benefit of both the forfeitures and future employer contributions. The former is an alleged breach of the duty of loyalty, which requires that the plan administrator act solely in the interest of the plan’s participants and beneficiaries. The latter is an alleged breach of the plan sponsor’s fiduciary duty, which litigants argue obligates the fiduciary to maximize asset growth. Further, by not applying forfeitures to the plan’s administrative costs, those costs may instead be borne by the plan participants, which is also an alleged breach of the duty of loyalty.

How can companies mitigate their litigation risk?

  • Ensure plan documents allow the use of forfeitures in the manner intended by the plan fiduciary. For example, if the employer wishes to maintain flexibility, the plan document should clearly state that forfeitures may be used for any of the above purposes. A case arising from forfeitures being used in accordance with the terms of the plan document is easier for an employer to defend.
  • Establish a policy outside the plan if the plan document provides discretion over the use of forfeitures. Employers may find that their plan document, particularly a pre-approved document that cannot be revised, allows the use of forfeitures for all three purposes but then provides discretion to the employer regarding the hierarchy of how forfeitures are used. An employer may wish to establish a separate policy outside the plan that memorializes the intended hierarchy for forfeiture use.
  • Establish a well-documented fiduciary review process. The fiduciary duty of prudence is a test of process.A well-documented and reasonable decision-making process offers a strong defense against forfeiture claims and other types of claims that may be brought against plan fiduciaries. In the forfeiture context, it means demonstrating an adherence to the plan terms and any standing policy/procedure regarding the order and use of forfeitures. 

The Jackson Lewis Employee Benefits Practice Group members continue to monitor developments in forfeiture-related cases and are here to help employers with questions on best practices for using forfeitures. Please contact a Practice Group member or the Jackson Lewis attorney with whom you regularly work for assistance.

The November 30, 2023, opinion of a New York administrative law judge in In the Matter of the Petition of Edward A. and Doris Zelinsky upholds the state’s so-called income tax “convenience rule” with an expanded legal rationale that New York employers with remote and hybrid employees outside of New York State will want to note. The case is now pending in the New York Tax Appeals Tribunal.

The convenience rule is an income-sourcing rule applicable to New York state income tax. According to current administrative guidance, days worked by a non-New York resident at home out of state are considered workdays in New York if

  • the employee’s “assigned or primary work location” is at an established office or other bona fide place of business of the employer in New York State; and
  • the employee performs the work outside of New York not because the employer’s business requires it but rather for the convenience of the parties, especially the employee.

New York is one of six states with similar versions of a convenience rule, but New York’s is arguably the most aggressively interpreted and enforced. In addition to double state income taxation of the employee on the same wages earned physically outside of New York, the rule often requires New York employers to withhold from the same wages both state income tax for the employee’s resident state and New York income tax. This is because most resident states in which the employee may be working for a New York employer do not grant a tax or wage withholding credit against the resident state’s required tax withholding for wages that are merely deemed to be worked in New York rather than earned while the employee is physically in New York.

In the post-pandemic world of rapidly increasing remote and hybrid employment, the employers most adversely affected by the New York convenience rule are those with no offices or facilities outside of New York. Such employers cannot plausibly reassign employees working in other states to an office in a state with no convenience rule.

The 26-page opinion addresses New York convenience rule taxation of wages from remote work performed in Connecticut, both before the pandemic (2019) and during the pandemic (2020), by a law professor at a New York City law school. Part of the opinion relates only to remote work in 2020 pursuant to pandemic work-from-home requirements. Moreover, some of the authorities and grounds, in the opinion, assume the nonresident employee works in New York for at least part of a tax year. However, much of the opinion’s reasoning would apply to the ongoing enforcement of the rule to withholding on wages of pure remote employees who are hired to work outside of New York exclusively and may never set foot in New York during a tax year.

In this regard, the opinion includes a rationale for the rule based on the 2018 U.S. Supreme Court sales tax “nexus” opinion in South Dakota v. Wayfair, Inc. Wayfair overturned prior precedent that required a business to have a physical presence in a state in order to have sufficient constitutional nexus for the state to impose sales taxes on the business. Relying on Wayfair, the judge stated that Professor Zelinsky’s use of Zoom classes and other Internet collaborative tools to connect him with his students gave him a “virtual” presence in New York that justified imposition of New York income tax on his wages earned while at his home in Connecticut.

New York’s convenience rule ultimately depends on the legal significance of the remote or hybrid employee’s deemed presence in the state; however, reliance on a sales tax constitutional nexus case to find a legally sufficient non-physical presence is highly questionable in an income tax sourcing issue for an individual.  In addition to the employee’s residence, the almost universal income tax sourcing factor for wages and other personal service income is the place where the work is physically performed. Nevertheless, this virtual presence argument now appears to be a part of New York’s position for continued application of the convenience rule to hybrid and remote employees, including those initially hired to work solely remotely and who may never actually go to New York for work.

We will follow and report on future developments in this case. The Jackson Lewis Employee Benefits Practice Group members can assist if you have questions or need assistance. Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.