DOL Proposed NEW Electronic Disclosures Rule

Image result for ERISA furnish disclosuresEmployers frustrated with the cumbersome rules and added expenses for furnishing plan documents, summary plan descriptions, notices, and certain other communications may soon get some added relief, at least with respect to their retirement plans. In response to President Donald J. Trump’s Executive Order 13847, Strengthening Retirement Security in America, the U.S. Department of Labor announced a proposed rule to allow online retirement plan disclosures.

According to U.S. Secretary of Labor Eugene Scalia, the DOL’s proposed rule could help “save billions of dollars in costs for the U.S. economy” by “eliminat[ing] unnecessary burdens while furthering the needs of the wage earners, job seekers, and retirees of the United States.” According to the proposed rule, the DOL believes its policy objectives may be best advanced through adoption of a “notice and access” structure, similar to that previously adopted by the Department in FAB 2006-03. In short, this means that plan participants would be notified that information is available online, including instructions for how to access the disclosures and their right to receive paper copies of disclosures.

Some features of the proposed rule include:

    • A new safe harbor. The proposed rule would not replace or modify the existing rules for electronic disclosures. It would add a new safe harbor. And, administrators who choose to rely on the proposed rule would continue to be subject to applicable content, timing, and other provisions.
    • Pension plans only. The proposed rule currently applies only to pension benefit plans as the DOL currently is reserving application of the rule to welfare benefit plans. We suspect many employers will be disappointed considering welfare plan disclosures can be far more voluminous.
    • Covered individuals. Retirement plan disclosures under the proposed rule could be sent to “covered individuals” -participants, beneficiaries, or other individuals entitled to covered documents and who provide an electronic address. This could include the employer-provided email or a personal email account, among other options.
    • Covered documents. The new safe harbor can be applied to furnish any document that the administrator is required to furnish pursuant to Title I of ERISA for a pension benefit plan, except any document that must be furnished upon request, such as under ERISA Sec. 104(b). Examples of documents that can be furnished in this manner include a summaries of material modification or blackout notices.
    • Notice of internet availability. In general, administrators must provide a notice of internet availability for each covered document they plan to provide under the new safe harbor. So, if there are eight different documents, eight different notice of internet availability must be provided. However, there are rules for consolidating these notices.
    • Timing of notice of internet availability. Administrators must furnish notices of internet availability at the time the covered document that is the subject of the notice is made available on the website. Thus, for example, if pension benefit statements must be furnished no later than April 15th of a given year, the administrator could satisfy that obligation by furnishing to covered individuals a notice of internet availability on April 15th and ensuring that the covered document is accessible on the website on that date.
    • Content of notice of internet availability. The notice must include: (i) a prominent statement, such as a subject line that reads, “Disclosure About Your Retirement Plan;” (ii) a statement that, “Important information about your retirement plan is available at the website address below. Please review this information;” (iii) a brief description of the covered document; (iv) the website address where the covered document is available; (v) a statement of the right to request and obtain a paper version of the covered document, free of charge, and an explanation of how to exercise this right; (vi) a statement of the right to opt out of receiving covered documents electronically, and an explanation of how to exercise this right; and (vii) a telephone number to contact the administrator or other designated plan representative. The website address either should lead the covered individual directly to the covered document or to a login page that provides, or immediately after logging in provides, a prominent link to the covered document.
    • Form and manner of furnishing notice of internet availability. The notice of internet availability would need to be clear and concise, convey its importance, and easily call the recipient’s attention to its content. To that end, the proposed rule would establish standards for the form and manner of furnishing the notice. Among other things, the notice must be furnished separately from any other documents or disclosures furnished to covered individuals, subject to some exceptions, and be written in a manner calculated to be understood by the average plan participant. The DOL specifically mentioned use of “short sentences without double negatives, everyday words rather than technical and legal terminology, active voice, and language that results in a Flesch Reading Ease test score of at least 60” to meet this requirement.
    • Severance from employment. The proposed rule also contemplates the need to continue to furnish information following an employee’s severance from employment. In that case, the administrator will need to take measures reasonably calculated to ensure the continued accuracy of the covered individual’s electronic address or number. So, employers might make requesting a new email address part of their employment termination procedures.

We expect many employers and administrators will be tracking the development of the proposed rule very closely considering the potential simplification of a significant aspect of plan administration. For interested parties that have questions or comments, such as whether welfare plans are going to be added, comments will be accepted by the DOL during the 30 day period following October 23, 2019, the expected publication date. Note, however, that employers may not rely on this proposed rule unless and until it is published in final form.

North Carolina Court Awards $41 Thousand-Plus Penalty for Failure to Produce Documents Requested by Plan Participants

Section 104(b)(4) of ERISA provides that a plan administrator must respond to a written request for certain documents (including the plan documents and summary plan description) by a participant or beneficiary by providing the requested documents.  Section 502(c)(1) of ERISA and Regulation § 2575.502(c)-1 provide that a plan administrator who fails to do so within thirty days is liable to such participant or beneficiary in an amount (as determined by the court in its discretion) of up to $110 per day.   A recent decision by the United States District Court for the Western District of North Carolina, Charlotte Division (Kinsinger v. Smartcore LLC, 2019 US Dist. LEXIS 145052 (August 27, 2019)), vividly illustrates the perils in failing to comply with document requests by participants.

Kinsinger involved an employer’s establishment of a group health plan and subsequent failure to pay the premiums.  Ultimately the carrier cancelled the coverage for nonpayment and several individuals (including plaintiffs) had unpaid medical claims.  During this process, on June 3, 2016, plaintiffs requested from the plan administrator many documents within the scope of ERISA Section 104(b)(4), (including the summary plan description, plan document and underlying insurance contracts).

The Plan Administrator never responded to the plaintiffs’ document request.  Although plaintiffs sued for wrongful denial of benefits on November 1, 2017, they did not add a claim for violating ERISA Section 104(b)(4) until March 19, 2018.  The requested documents were not provided to plaintiffs until July 25, 2018, when they were produced in discovery some 748 days after the initial 30-day period had expired!

The Court had little trouble finding for plaintiffs on their claim under ERISA Sections 104(b)(4) and 502(c)(1), The Court’s analysis provides some interesting insight.  The Court noted that the plaintiffs were substantially prejudiced by defendants’ conduct because they were “left in the dark” about the correct appeal process, and also noted that the “failure to provide the requested documents frustrated plaintiffs’ ability to litigate” their dispute due to the lack of essential facts contained in the requested documents.

In response to defendants’ claim that they had produced some of the documents before the initial June 3, 2016, request, the Court found that nothing in the statute “absolves an administrator from their duty to respond to requests for documents because they previously provided participants the documents requested.”  The Court also cited Circuit Court authority (Davis v. Featherstone, 97 F.3d 734, 738 (4th Cir. 1996)) providing that “when there is some doubt about whether a claimant is entitled to the information requested, the Supreme Court has suggested that an administrator should err on the side of caution.”

Regarding the amount of the per day penalty, the court initially cited defendants’ “willingness to exploit plaintiffs’ lack of these documents in litigation” as evidence of their bad faith and malfeasance.   The Court also acknowledged that some delay in producing the requested documents was attributable to factors other than defendants’ conduct; this included plaintiffs’ delay in filing suit initially and subsequently amending their complaint to add the document request claim some four months later.  Ultimately, the Court awarded plaintiffs’ $55 (half of the maximum $110 per day penalty) for each of the 748 days late, for a total of $41,140.

Kinsinger provides a few lessons for plan administrators.  First and foremost, document requests under ERISA Section 104(b)(4) must be promptly addressed and acted upon in good faith.  The best advice?  As noted in Kinsinger, “when there is some doubt about whether a claimant is entitled to the information requested, the Supreme Court has suggested that an administrator should err on the side of caution.” Davis v. Featherstone, 97 F.3d 734, 738 (4th Cir. 1996), citing Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101, 118 (1989).

First Crack in the Armor of the Segal Blend?

The Segal Group is the premier actuarial firm in the country providing services for hundreds of multi-employer pension funds.  For almost 40 years it has used its own methodology, known as the “Segal Blend” to calculate employers’ withdrawal liability successfully without an adverse ruling by either a court or an arbitrator in hundreds of cases.

The Segal Blend calculates the discount rate used in determining the present value of pension benefits for payment by a pension fund in the future.  This methodology has been the basis for the discount rate used in calculating withdrawal liability for hundreds of multi-employer plans.  Because the Segal Blend typically results in using a lower interest rate to calculate withdrawal liability than is typically used for funding purposes, a calculation of withdrawal liability is generally greater using the Segal Blend rate.  This has permitted pension funds to collect additional withdrawal liability from hundreds of employers.

Despite being challenged often by employers, the Segal Blend had enjoyed a perfect record of being upheld in every arbitration and court decision until March 26, 2018.  In a decision by the United States District Court for the Southern District of New York, Judge Sweet in New York Times Company and the Newspaper and Mail Deliverers ‘-Publishers ‘ Pension Fund found that the Segal Blend violated ERISA.  Specifically, the District Court found that the actuary’s “best estimate” of anticipated experience under the plan would have required an interest rate assumption of 7.5%, the rate used for funding purposes, rather than the 6.5% interest rate produced by the Segal Blend.  The District Court ordered the Pension Fund to recalculate the withdrawal liability using the higher interest rate.

The matter was appealed to the United States Court of Appeals for the Second Circuit.  In May 2019, oral argument was held.  Last week the case ended.  Surprisingly, the parties stipulated by which the appeal was withdrawn with prejudice and counsel fees were not sought.    Importantly, for employers the stipulation left intact Judge Sweet’s decision that using the Segal Blend violated ERISA.  The Second Circuit approved that settlement on September 16, 2019.

What are the implications of that stipulation for employers and what factors in Judge Sweet’s decision contributed to the resolution?  In New York Times, the decision reduced a withdrawal liability assessment of $26,000,000 to zero.  Employers contributing to funds using the Segal Blend should not hesitate to retain actuaries to calculate the withdrawal liability using the rate for funding purposes.

Although the ruling does provide another arrow in an employer’s quiver to use in combatting the predominantly fund favored withdrawal liability process, it does not resolve or even clarify the issue.

Almost concurrently with Judge Sweet’s ruling, District Judge McNulty of the United States District Court for the District of New Jersey in Manhattan Ford Lincoln, Inc. v. UAW Local 259 Pension Plan (“Manhattan Ford”) upheld an arbitrator’s ruling that using a plan’s funding assumption is not required to determine withdrawal liability.  In so ruling, the Court determined that the employer had failed to prove that the Pension Fund’s use of the Segal Blend in calculating withdrawal liability was not reasonable.  Notably, use of the 7.5% interest rate for funding purposes would have resulted in no withdrawal liability.

Manhattan Ford was appealed to the United States Court of Appeals for the Third Circuit but was settled before the court reached a decision.

Although the Segal Blend issue has not been resolved, the recent resolution should provide an incentive for employers to conduct additional research into the funds to which they contribute and to retain ERISA counsel with specific experience and expertise in withdrawal liability.  Jackson Lewis can assist you with all multi-employer pension fund issues.

Don’t Overlook Your Employee Benefit Plans as You Evaluate the Effect of the Final Overtime Rule

Before employers implement their proposed workforce changes resulting from the finalization of the new overtime rule, released September 24, 2019, see our article for more information, employers should consider what impact those proposed workforce changes may have on their employee benefit plans.

Employee benefit plans with criteria for eligibility, contribution, etc. based on the classification of salary/hourly or exempt/non-exempt may see participant shifts, e.g., a currently exempt employee, participating in the salary only retirement and welfare plans, makes $475 a week in 2019.  On January 1, 2020, that employee, still making $475 a week, is a non-exempt employee and no longer eligible for the salary only employee benefit plans.

The effects of employees shifting from one plan to another effective January 1, 2020, could create issues with non-discrimination testing, top-heavy results, or a reduction in certain benefits going forward (which may require advance notice to the affected participants).  Less obvious effects could be hiding in the compensation definition.  As employers grapple with how to boost an employee into the exempt compensation tier, employers need to consider whether that classification of compensation is in the definition of compensation in the plan document and if so, is the payroll system considering it for the plan-related calculations based on compensation?

The overtime rule change could affect more than the status of an employee as either exempt or non-exempt, but it may be overwhelming to consider all the ancillary areas the new rule touches.  Contact a Jackson Lewis Employee Benefits attorney for guidance as you evaluate your workforce under the new overtime rule.

District of Columbia Commuter Benefits: New Penalties, Fines

Penalties and fines for non-compliance with Washington, D.C.’s law requiring D.C. employers to offer commuter benefits to their D.C. employees will take effect beginning on November 14, 2019.  The law, which became effective on January 1, 2016, requires employers with at least 20 employees in D.C. to offer commuter benefits to their covered employees.  Please see our in-depth article for a full discussion of the law’s requirements.

The Final Regulations For 401(k)/403(b) Hardship Distributions

On September 23, 2019, the Treasury Department and IRS published final regulations for hardship distributions from both 401(k) and 403(b) plans (the “Final Regulations”).  Essentially the hardship distributions changes relax the hardship distribution requirements (i.e., making it easier for participants to obtain hardship distributions) and eliminate many burdens following a hardship distribution (i.e., allowing participants the flexibility to contribute to their retirement plan account shortly after obtaining a hardship distribution).

The Final Regulations respond to comments on the earlier proposed regulations issued in November 2018 (see our previous blog here).  As expected, the Final Regulations closely mirror the proposed regulations.  So, any 401(k) or 403(b) plans amended to comply with the proposed regulations will most likely satisfy the Final Regulations.

The Final Regulations make the following required and permissive changes to the hardship distribution requirements:

  • Elimination of 6-Month Suspension – The Final Regulations remove the 6-month suspension rule which prevents participants who have taken hardship distributions from contributing to the plan for 6 months following the hardship distribution.
    • This is a required change on or after January 1, 2020, but a plan may elect to remove the 6-month suspension requirement as early as January 1, 2019.
  • Expansion of Available Hardship Sources to include elective contributions, QNECs, QMACs, safe harbor contributions, and earnings – The Final Regulations remove the restriction against hardship distributions from qualified non-elective contributions (QNECs), qualified matching contributions (QMACs), earnings on these amounts, and earnings on elective contributions no matter when contributed or earned.  But for Section 403(b) plans, the Final Regulations only permit hardship distributions on qualified non-elective contributions (QNECs) and qualified matching contributions (QMACs) that are not in a custodial account (i.e., they are held in an annuity).  For 403(b) plans, earnings on elective deferrals remain ineligible for hardship withdrawal.
    • This is a permissive change. 
  • Elimination of the Plan Loan Requirement – The Final Regulations remove the requirement that participants take all available plan loans before taking a hardship distribution (although participants still must exhaust all other in-service withdrawals available under the plan).
    • This is a permissive change.
  • Creation of a General Financial Need Standard – The Final Regulations eliminate the rule under which the determination of whether a distribution is necessary to satisfy a financial need is based on all the relevant facts and circumstances and provide one general standard for determining whether a distribution is necessary to satisfy an immediate and heavy financial need.  Under this general rule, (1) a hardship distribution may not exceed the amount of the need, (2) the employee must have obtained other available distributions under the employer’s plans, and (3) the applicable employee must represent (in writing, electronically, or in another form permitted by the IRS) that he/she has insufficient cash or other liquid assets to satisfy the immediate and financial need for which the hardship is being sought.  The Final Regulations provide that a plan may provide additional conditions for employees to demonstrate that a distribution is necessary to satisfy an immediate and heavy financial need; however, the Final Regulations do not permit a suspension of elective contributions or employee contributions as a condition of obtaining a hardship distribution.
    • This is a required change for hardship distributions on or after January 1, 2020, and may be a permissive change for hardship distributions as early as of January 1, 2019.
  • Creation of New Safe Harbor Circumstance for Immediate and Heavy Financial Need – The Final Regulations expand the situations deemed to create an “immediate and heavy financial need” to include expenses and losses incurred by the employee because of a federally declared disaster, if the employee’s principal residence or place of employment was in the disaster area at the time of the disaster.  Of note, there is no deadline by which a disaster-related hardship distribution must be made following the federal disaster.
    • This is a permissive change. 
  • Expansion of Safe Harbor Circumstances for Qualified Beneficiary Expenses – The Final Regulations expand the safe harbor circumstances to include qualifying medical, educational, and funeral expenses for a participant’s “primary beneficiary under the plan” (i.e., an individual named as beneficiary under the plan that has an unconditional right upon the participant’s death, to all or a portion of the participant’s account balance under the plan)
    • This is a permissive change. 
  • Clarification of Safe Harbor Circumstances for Casualty Loss Reason – The Final Regulations provide clarification that home casualty losses (under Code Section 165) do not have to be tied to a federal disaster to be eligible for a hardship distribution.
    • This is a permissive change.

Please contact your preferred Jackson Lewis attorney for assistance applying the Final Regulations to your plan and preparing or reviewing necessary amendments.

COBRA Notice Litigation Resulting in Big Dollar Claims

Can you imagine something as simple as a COBRA Notice missing a few technical requirements resulting in an employer needing to pay a 6 or 7-digit damages award?  That is happening in Florida.  Employers in and out of Florida should pay attention to this news, as what doesn’t start in California often starts in Florida.

There have been a flurry of cases in Florida over the past year.  In these cases, a COBRA notice is provided to covered persons experiencing a qualifying event, albeit sometimes late.  Yet the notice is alleged to be missing key details that are required by the COBRA regulations, such as the name and contact information of the Plan Administrator or the address for the remittance of payments.  Much of the missing content is called for by the Department of Labor’s model notices.  Yet, in our experience, these fields are often unknown or overlooked and therefore omitted.

Because of these deficiencies, the Plaintiffs allege they are entitled to the statutory penalty.  There are few instances in the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) that a plaintiff can receive cash damages.  ERISA typically provides for a “make whole” recovery – providing the benefits that were due.  However, the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), which amended and supplemented ERISA, included an avenue under ERISA Section 502(c)(1) for qualified beneficiaries to receive up to $110 per day per person for plan administrator’s failure to provide the required initial COBRA notice or the COBRA election notice.  Plus, the court has the discretion to award legal fees under ERISA Section 502(g)(1).

So, although $110 per person per day does not sound terribly bad, imagine a class of qualified beneficiaries consisting of 100 people who lost their coverage as part of a reduction in force (RIF) 2 years ago and whose COBRA notices were arguably deficient.  That math is $110 x 365 days x 2 years = $80,300.  Now imagine several RIFs over the course of several years or simply adding a zero with a failure affecting 1000 or more people.  This is how the numbers get so big.    Plus, when you add in the prospect of receiving a legal fee award, you have a stimulus.

There are steps employers can take today to mitigate the risk of being the next target for this litigation.  Simply using the Department of Labor’s model notices often is not enough if they are incomplete or not provided timely.  We recommend employers ensure they understand what is required, including knowing what notices are needed and when, examine their notices and their administrative practices for conformity with the regulations, and know compliance soft spots so they can proactively protect themselves against a claim.

Department of Labor Provides Guidance on Retirement Plan Obligations When Employees Return From Military Service

The Department of Labor recently issued a fact sheet intended to help employers understand their retirement plan obligations under the Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”).  The law provides that eligible employees that return to employment following qualified military service must be treated as though their military service was not a break in service for purposes of participation, vesting and benefit accrual under their employer’s retirement plan.[1]

Among other things, USERRA requires the following for retirement plans:

  • Service credits:
    • The plan generally must credit the entire period of the employee’s absence for qualified military service as it would credit service by the employee if he/she had not been out on military leave.
  • Employee contributions:
    • The employee is entitled (but not required) to make up all or part of their missed contributions. The employee has up to three times the duration of the military service (not to exceed 5 years) to contribute those makeup contributions to the plan.
  • Employer contributions:
    • Plans with employee contributions – the employer must make all contributions that are contingent on an employee’s contributions to the plan, but only to the extent of the employee’s makeup contributions. For instance, an employer need not provide employer matching contributions to the employee for the period of military service unless the employee contributes makeup matching eligible contributions to the plan.
    • Plans without employee contributions – any required employer contribution attributable to the employee’s absence must be made within 90 days after reemployment, or when plan contributions are made for the year of the military service, whichever is later.

The DOL fact sheet provides examples that discuss how to deal with difficult scenarios related to pension accruals for periods of military leave.  Many pension plans calculate accruals based (at least in part) on an employee’s compensation, and the examples focus on how to calculate the compensation an employee would have earned had the employee not been out on military leave.   The compensation used to calculate the accruals must be based on what the employee would have received but for the leave, if that can be determined with reasonable certainty.  If it cannot be determined with reasonable certainty, the employer generally must use the employee’s average rate of compensation for the 12 months before the military leave.

  • An employee receiving pension accruals based on her compensation is scheduled for 40 hours a week but works 50 hours per week (with overtime) in the 9 weeks leading up to her 2-week deployment.

In that case, the DOL says the pension accrual should be calculated as though the employee had worked 50 hours (with overtime) for each week of the absence.

  • An employee receiving pension accruals based on her compensation is guaranteed to be paid for 75 hours per month. For the 8 months before her 1-month military leave, the employee worked 80 hours per month.

In that case, the DOL says the pension accrual should be calculated based on working 80 hours per month (not the guaranteed 75 hours).

  • An employee receiving pension accruals based on her compensation is guaranteed to be paid for 75 hours per month. For the 8 months before her 3-year military leave, the employee worked 80 hours per month.  Upon reemployment, the employee’s position is a promoted position earning a higher rate of pay than before her deployment.

In that case, the DOL says the pension accrual should be calculated considering the point in time the promotion is reasonably certain to have occurred.  For instance, if the promotion would have occurred after 1-year of deployment, the pension accrual should use the rate of pay before the military service for the first year.  For the second and third years, the accrual should be based on the post-promotion rate of pay.

  • An employee receiving pension accruals based on her compensation is scheduled to work 40 hours per week. After being employed for 6 weeks, she is absent for 1 week of military service.  In the 6 weeks leading up to the military service, the employee had a varying number of hours each week (ranging from 30-50 hours per week).

In that case, the DOL says the pension accrual should be based on the average number of hours the employee worked per week before the military service.

  • An employee receiving pension accruals based on her compensation works 40 hours per week and earns base pay plus commission. The amount of commission varies each week.  After 2 years of employment, the employee goes on military leave for 1 month.

In that case, the DOL says the pension accrual should be calculated based on the average of the employee’s compensation for the previous 12 months.  This is because the employer cannot calculate the compensation the employee would have earned but for the military leave with reasonable certainty due to the variable nature of her commission earnings.

  • An employee receiving pension accruals based on her compensation works 40 hours per week and earns commission only. The amount of commission varies each week.  The employee has been employed for 6 years with the employer.  She returned from a previous one-year deployment 6 months ago.  Now she is going on military leave for 2 weeks.

For the 2-week absence, the DOL says the pension accrual should be calculated based on the average rate of compensation earned during the previous 12 months. However, because of the previous military leave, the first 6 months of that 12-month period should be ignored.  The next 6 months of compensation should be averaged to determine the average rate of compensation.

  • An employee receiving pension accruals based on her compensation is scheduled to work 40 hours per week, but the hours actually worked were variable. The employee has been employed for 10 years with the employer.  She returned from a previous 1-week military leave 3 months ago.  Now she is going on military leave for 1 month.

For the 1-month absence, the DOL says the pension accrual should be calculated based on the average rate of compensation earned during the previous 12 months, excluding the previous 1-week of military leave.

If you would like assistance regarding your obligations under USERRA, please contact your preferred Jackson Lewis attorney.

[1] USERRA affects benefits other than retirement plans and affects other aspects of the employment relationship.  This blog post is not a broad discussion of all aspects of USERRA but focuses on some of the issues discussed in the recent Department of Labor guidance.