A Deadline is a Bright Line: How Fessenden Narrows “Substantial Compliance” in the Seventh Circuit

Last week the U.S. Court of Appeals for the Seventh Circuit ruled that the deadline imposed under ERISA for plan administrators to decide on benefit claims is a “bright line” rule. The court held that when a plan administrator misses this deadline, the “substantial compliance” exception to statutory compliance does not apply and the plan administrator loses the benefit of deference, causing a de novo standard of review to apply to the court’s analysis of the plan administrator’s determination.

Donald Fessenden sued Reliance Standard Life Insurance Co. after Reliance denied his claim for long-term disability benefits. Fessenden argued that because Reliance did not enter a final decision denying his claim for long-term disability benefits until after the statutory 45-day deadline for deciding, the plan administrator forfeited its right to a favorable review standard due to the statutory violation. The Seventh Circuit agreed with Fessenden and held that when a plan administrator misses a statutory deadline the administrator is no longer in “substantial compliance” with the statute and the district court should review the administrator’s decision de novo rather than under a deferential standard of review.

Although the court held that a plan administrator that misses a statutory deadline cannot be in “substantial compliance” with the statute, the Seventh Circuit rejected the Second Circuit’s holding in Halo v. Yale Health Plan, 49 F.3d 24 (2d Cir. 2016) and refused to abrogate entirely the doctrine of “substantial compliance.” Rather, the court narrowly held that the doctrine does not apply to the violation of regulatory deadlines, so “when that time is up, it’s up.”

The case is Fessenden v. Reliance Standard Life Ins. Co., 7th Cir., No. 18-1346, 6/25/19.

Key Takeaway: Plan sponsors who want the deferential arbitrary and capricious standard of review to apply to their benefit determinations must remain conscious of, and comply with, applicable claim review deadlines.

How Multiemployer Pension Plans Continue To Extract More From Contributing Employers Than What They Bargained For

Contributing employers to multiemployer pension plans (“MEPPs”) are commonly surprised that their obligations to such a plan can extend well beyond the contributions required under a collective bargaining agreement (“CBA”) negotiated with a union.  The most significant extra-contractual obligation is withdrawal liability, a statutory exit fee imposed on employers that leave a plan that has unfunded vested benefits.

However, even before a withdrawal, an employer’s potential liability can also be affected by the plan rules adopted by the MEPP’s trustees and other federal laws intended to encourage proper funding of the MEPPs as shown by the 4th Circuit case of Bakery & Confectionary Union & Indus. Int’l Pension Fund v. Just Born II, Inc., 888 F.3d 696 (4th Cir. 2018).

The Just Born Case

In the Just Born case, the underfunding of the Bakery and Confectionary Union and Industry International Pension Fund (the “Pension Fund”) required it to be classified in critical status under the Pension Protection Act of 2006 (“PPA”).  As required for MEPPs in critical status, the Pension Fund’s Board of Trustees adopted a rehabilitation plan which is generally a revised schedule of reduced benefits for participants and increased contributions by employers intended to return the plan to financial stability.

While Just Born contributed under the rates of the rehabilitation plan for the term of the CBA in effect at the time, the company demanded that the new CBA being negotiated include terms that contributions for newly hired employees be made to a separate 401(k) plan instead of the Pension Fund.  The union refused those terms, and Just Born under the principles of federal labor law declared a good-faith impasse and unilaterally implemented the terms of its last, best offer to the union.  As a result, Just Born stopped contributing to the Pension Fund for newly hired employees.  The Pension Fund disagreed with Just Born’s actions and sued for the alleged delinquent contributions for new employees.

The 4th Circuit ruled in favor of the Pension Fund, affirming the district court’s ruling for Just Born to pay delinquent contributions, and interest, statutory damages, and attorneys’ fees.  The court found that specific language under the PPA, as amended by the Multiemployer Pension Reform Act of 2014, required Just Born to continue contributing under the terms of the expired CBA (which required contribution for all employees) pending the adoption of a new CBA in compliance with the Pension Fund’s rehabilitation plan, a withdrawal from the Pension Fund, or some other statutorily required act.

Required Minimum Distributions

The aging of the baby boomer generation has increased the level of scrutiny with which the Department of Labor, Employee Benefits Security Administration (“EBSA”) will review the efforts of pension plans to locate missing plan participants who did not receive reported benefits.  The focus of the EBSA which began with a review of the efforts of defined benefit plans to find and pay benefits to participants has now expanded to include defined contribution plans.

Specifically, the EBSA is reviewing efforts of those plans to locate participants who reached age 70 ½ and failed to take a required minimum distribution (“RMD”) as of April of the year after which they turned 70 ½.

There are three areas of review by the EBSA:

  1. The locating of missing participants;
  2. The informing terminated, vested participants that a retirement benefit was due to be taken; and
  3. Beginning benefit payments when the participant attained the age of 70 ½.

Unlike most EBSA initiatives which begin with the hierarchy of the EBSA, the increased interest in retirees over the age of 70 ½ began in the Philadelphia regional office because social security advised new recipients of entitlement to possible benefits from long forgotten retirement plans.  Those individuals were primarily, terminated participants who had left employment after vesting.  More than half a billion dollars of unpaid retirement benefits were discovered in only six defined benefit plans.

The discovery of these long-forgotten pension entitlements was also a victory for the Internal Revenue Service.  Distributions over the age of 70 ½ known as Required Minimum Distributions (“RMD’s”) are subject to taxation.  Failure of a participant to take his RMD can expose that participant to penalties in addition to taxation.

The EBSA is intent on policing efforts to locate those participants.  Ironically, despite the initiative, the EBSA, the PBGC, and the IRS have been reluctant to issue guidelines for locating participants.  Plan Sponsors have been left to their own devices to structure these programs.  Programs which seem to have the greatest probability of approval are those that can demonstrate formal procedures, maintenance of accurate participant data, and continued efforts to find participants.

A plan must send a letter to a participant at age 70 ½ and each year thereafter until the participant takes a distribution.  The EBSA is demanding proof that employers are sending the letters every year.

A plan must demonstrate efforts to use all available data tools.  Several companies specialize in research services, databases for postal services, obituary searches, and social security death index.  A plan must use those services regularly to reflect that the plan is moving in a pro-active manner.

It is important to understand that liability does not end with the participant.  Recent efforts by the EBSA have resulted in the opening of investigations against trustees, plan administrators and Third Party Administrators.  The focus is on the efforts made at age 70 ½ and each year thereafter until the participant takes the RMD.  The proof must consist of “hard proof”, such as the address of participant and proof of mailing that communications were regularly sent to terminated, vested participants.

The investigations by the EBSA are cumbersome because of a lack of guidance, thereby requiring an enormous amount of work by the plan and forcing the plan to incur professional fees.

The initiative which began on the east coast with the Philadelphia office has now migrated to west coast offices.  Trustees, plan administrators, and TPAs should take these investigations seriously.

IRS Releases Proposed Form W-4 Redesign

On Friday, May 31, 2019, the IRS released a new proposed design of the IRS Form W-4 to be used starting in 2020.  The goal is to make it easier for employees to calculate accurate withholdings under the 2017 Tax Cuts and Jobs Act.  Employees who already have completed a Form W-4 will not be required to submit a new Form W-4 simply due to the redesign.  However, once finalized, the new Form will be required for employees hired on or after January 1, 2020.  More information is available here.

To Withhold or Not to Withhold on Pension Distributions: A New Proposed Regulation Clarifies Obligations

On May 31, the IRS issued a proposed regulation — presented in Q & A format — concerning income tax withholding obligations on non-rollover distributions from employer-sponsored plans — including pension, annuity, profit sharing, stock bonus and any other deferred compensation plan — to destinations outside the U.S. Unlike U.S. payees, non-U.S. payees cannot elect to forego income tax withholding on such distributions.

Current Guidance

Notice 87-7 provides current guidance concerning withholding obligations on non-rollover distributions. The Notice provides:

• If the payee provides the payor with a residential address outside the U.S., the payor is required to withhold.

• If the payee provides the payor with a residential address within the U.S., the payor is required to withhold unless the payee has elected no withholding.

• If the payee does not provide any residential address, the payor is required to withhold.

Proposed Regulation

The proposed regulation is based on, and provides clarification concerning, the guidance provided in Notice 87-7. The proposed regulation provides:

• Withholding obligations apply and cannot be waived where the payee provides a U.S. residential address but provides payment instructions indicating the funds are to be delivered outside of the U.S.

• Withholding obligations apply and cannot be waived where the payee provides a non-U.S. residential address, without regard to the delivery instructions — including an instruction to deliver the distribution to a financial institution located in the U.S.

This clarification is an acknowledgement of the ease with which funds deposited in a U.S. financial institution can be withdrawn by a person located outside the U.S. and of the fact that a payee’s residential address is most likely the location of ultimate distribution.

• Withholding obligations apply and cannot be waived where the payee has not provided a residential address.

• Withholding obligations apply and can be waived where the payee provides a military or diplomatic post office address.

Proposed Applicability Date

The new withholding rules will apply to distributions that occur after the proposed regulation is finalized, at which point it will supersede Notice 87-7. Until then, payors can continue to rely on Notice 87-7 as well as the proposed regulation’s rule concerning military and diplomatic post office addresses.


The list of the federal courts of appeals enforcing unambiguous anti-assignment provisions in ERISA health benefit plans continues to grow:  almost exactly one year ago, the Third Circuit joined its sister circuits in holding “that anti-assignment clauses in ERISA-governed health insurance plans as a general matter are enforceable.” As the Third Circuit opinion noted, every circuit court to address the issue – seven to date (the First, Second, Third, Fifth, Ninth, Tenth, and Eleventh) – has reached this same conclusion of law.

This very issue was recently addressed by the Eastern District of New York in Long Island Neurological Assocs., P.C. v. Highmark Blue Shield, No. 2:18-cv-81 (DRH)(AYS), 2019 U.S. Dist. LEXIS 46176 (E.D.N.Y. Mar. 20, 2019).[1] But, in that case, the court concluded the otherwise unambiguous anti-assignment provision at issue was unenforceable.

The problem was not that the district court went against precedent.  The problem was the document in which the anti-assignment provision appeared.  It was not in a formal plan document, nor in a Summary Plan Description or a Statement of Material Modification. It was contained in the Administrative Services Agreement (“ASA”) between the plan insurer and the plan sponsor. The court determined that, for purposes of enforcing a provision against plan participants, the provision must appear in a “plan document.” The court explained, “For ERISA-purposes, a plan document is one which a plan participant could read to determine his or her rights or obligations under the plan.” Because the ASA at issue was not a document designed to inform participants of their rights and obligations, and as, apparently, there was no language in the formal plan document that arguably incorporated the ASA by reference, the court held the anti-assignment provision was unenforceable.

This decision demonstrates the importance of keeping the formal plan document properly updated, as opposed to attempting to utilize ancillary documents to modify controlling plan terms.  To be sure, the use of ancillary documents to establish the terms of a plan can be appropriate, but only if the formal plan document expressly anticipates and authorizes the expansion of plan terms through incorporation of other documents, such as summary plan descriptions or insurance policies, or, possibly, administrative services agreements.  It appears there were no such provisions in the plan at issue in Long Island Neurological Assocs., P.C. v. Highmark Blue Shield. As a result, an otherwise proper anti-assignment provision was ruled ineffective.


[1] At the time of posting, the caption for this case in Lexis identified the Plaintiff as “Long Island Neurological Assocs.” We note the caption for the matter reported on PACER reads “Long Island Neurosurgical Assocs.”

Changes to Employee Benefit Plans May Create Unforeseen Disclosure Deadlines

Believe it or not, it may be time to distribute a new Summary Plan Description (SPD) to include all changes made since the last issuance or a Summary of Material Modifications (SMM) for any amendments adopted during the 2018 plan year.

The Rules:  The Department of Labor (DOL) regulations and Employee Retirement Income Security Act (ERISA) require qualified retirement plans distribute an updated SPD to participants and beneficiaries within 210 days following the end of the 5th plan year in which the plan issues the last updated SPD.  An exception applies if a plan has had no amendments in the prior five years.  But really, who among us has not had amendments in the last five years where we saw natural disasters, a fiduciary rule roller coaster, the Tax Cuts and Jobs Act, the Bipartisan Budget Act, new disability claims procedures, etc.  If you have not amended your plan in the last 5 years, you may qualify for a longer period before you must distribute an updated SPD.  The alternative to sending a new SPD for every amendment is the SMM, containing only the information changed by a material amendment (material being based on facts and circumstances).  Plans must distribute SMMs within 210 days of the end of the plan year which includes the change.  Examples of a material change can include

  • name and address of the employer, plan sponsor, plan administrator, trustees;
  • collective bargaining agreements;
  • vesting;
  • eligibility for participation & plan benefits;
  • circumstances which may cause plan disqualification;
  • circumstances which may cause denial or loss of benefits or ineligibility;
  • plan year-end date; and
  • benefit claim procedures and remedies available for denied claims.

The Plans:  Qualified plans, including health and welfare plans, individually designed plans (IDPs), and pre-approved plans are subject to the SPD and SMM timing and distribution requirements.  If the issue date of your active SPD is before or within 2013, your plan may be due to distribute an updated SPD within 210 days of the plan year ending in 2018.  For calendar year plans, that date is Monday, July 29, 2019.  The updated SPD should contain all the information from any SMMs distributed over that period.

Penalties:  Failure to adhere to these requirements can trigger criminal penalties against the plan sponsor and personally against the plan fiduciaries up to $500,000 for the Plan Sponsor and $100,000 or up to 10 years imprisonment for the individual fiduciaries.

What to do:  If your plan is not among those due for the full SPD update distribution and your plan adopted any amendments during the plan year ending in 2018, the 210 day distribution requirement for the SMM will be here before you know it.  For calendar year plans, that date is Monday, July 29, 2019.

Contact your local Jackson Lewis office for assistance in determining your plan’s timetable for distribution of an SPD or SMM.  The “How” to distribute warrants its own article, but we can help with that too.

The IRS Reopens the Determination Letter Program for Merged Plans and Cash Balance Plans

On May 1, 2019, the IRS issued Revenue Procedure 2019-20, which reopens the determination letter program in a limited manner for individually designed plans that are merged plans or statutory hybrid plans, such as cash balance plans. The new IRS guidance provides that sponsors of merged plans may request determination letters going forward, while sponsors of statutory hybrid plans may request determination letters only during a limited window of time. The effective date of the new guidance is September 1, 2019.

As background information, the IRS closed the determination letter program for individually designed plans in 2016, with the final five-year cycle ending on January 31, 2017. From that point, sponsors of individually designed plans generally could request determination letters only upon the initial adoption or termination of a plan. The 2016 change to the determination letter program increased uncertainty and risk associated with the sponsorship of individually designed plans, causing many plan sponsors to move their individually designed plans to preapproved plan documents.

Beginning September 1, 2019, and continuing on an ongoing basis, merged plans that satisfy the requirements of Rev. Proc. 2019-20 may apply for a determination letter. When applicable, sponsors of individually designed plans that are the subject of a merger, should consider a determination letter application during the post-closing benefits integration process. To qualify for the expanded determination letter program, a business transaction, such as a merger or acquisition, must occur involving two or more entities that are not in the same controlled group or affiliated service group. Following the business transaction, two or more plans must be merged into a single individually designed plan.

Rev. Proc. 2019-20 defines a merged plan as a plan that results from the merger or consolidation of two or more plans into a single individually designed plan under a plan merger that occurs no later than the last day of the first plan year that begins after the plan year that includes the date of a business transaction. Thus, the plan merger must occur during the Code Section 410(b)(6)(C) transition period for mergers and acquisitions.  Plan Sponsors must submit the determination letter application to the IRS no earlier than the date of the plan merger and no later than the last day of the first plan year that begins after the date of the plan merger.

Under Rev. Proc. 2019-20, statutory hybrid plans may apply for a determination letter during the twelve-month period beginning on September 1, 2019, and ending on August 31, 2020. A statutory hybrid plan is a defined benefit plan that contains a lump sum based formula or a formula with an effect similar to a lump sum based formula. A lump sum based formula is a formula used to determine all or a part of a participant’s accumulated benefit where the formula is expressed as either the current balance of a hypothetical account maintained for the participant or the current value of the accumulated percentage of a participant’s final average compensation.  Examples of statutory hybrid plans include cash balance plans and pension equity plans. Sponsors of hybrid plans must act quickly to capitalize on the limited window to obtain a determination letter.

Although the expansion of the determination letter program under Rev. Proc. 2019-20 is welcome news, it is still relatively limited in scope. Plan sponsors and practitioners would welcome additional, periodic opportunities to obtain determination letters on other individually designed plans.

Is Your Employer Worksite Medical Clinic a Group Health Plan?

Worksite medical clinics, some offering round-the-clock access to medical providers via telemedicine, seem to be growing in popularity.  Promoters tout cost savings resulting from what would otherwise be lost productivity (employees whiling away afternoons waiting to see their private doctors or having to drive long distances to have blood drawn for routine laboratory work) and expenses otherwise borne by self-insured group health plans at a far higher cost per service.  Some worksite clinics have existed for decades for reasons other than cost-savings – for example, to ensure immediate treatment is available to employees if work-related injuries or illnesses occur or as part of a workplace well-being program.

The variety of reasons for having worksite clinics has caused at least as much variety in worksite clinic designs – from those that provide only first aid treatment to employees if workplace injuries occur to those that provide a full array of primary medical care services to employees and family members despite the source of injury or illness.  There also are a variety of legal considerations applicable when employers provide medical care at the worksite – particularly if the arrangement constitutes an employer group health plan.

An employer group health plan is an arrangement established by an employer to provide or pay for medical care – something all worksite clinics do.  Group health plans generally are subject to specific disclosure and reporting requirements under the Employee Retirement Income Security Act (ERISA), continuation requirements under the Consolidated Omnibus Budget Reconciliation Act (COBRA), special tax treatment conditions under the Internal Revenue Code (IRC), privacy and other requirements under the Health Insurance Portability and Accountability Act (HIPAA), and health care reform provisions under the Patient Protection and Affordable Care Act (ACA).  That said, a worksite clinic might be exempt from some or all of these requirements.

Unfortunately, whether a worksite clinic is exempt from one or another compliance requirement is a murky issue.  If the worksite clinic does more than treat minor workplace injuries and illnesses during work hours, it will be subject to ERISA, including the requirements of issuing a summary plan description and filing an annual Form 5500.  It also will be subject to COBRA, unless it is primarily providing free first aid treatment to employees for workplace injuries and illnesses.  The employer must consider how it will satisfy these disclosure, reporting and coverage continuation requirements or manage the risk of violating those requirements.  How would the employer respond to a terminated employee’s assertion of a COBRA right to continued access to the clinic?

An ERISA-covered worksite clinic might still escape other requirements unique to group health plans under HIPAA and the ACA if it qualifies as an excepted benefit by virtue of being a worksite medical clinic.  However, the enforcement agencies have not defined a worksite medical clinic for these purposes.  Given the nature of the other enumerated excepted benefits – all of which are secondary or incidental to group health benefits – it is unlikely that a worksite clinic providing services (beyond workplace first aid for employees) that supplant benefits ordinarily provided under a group health plan would qualify as an excepted benefit.  How would the worksite clinic comply with the ACA’s coverage mandates – particularly regarding employees and family members not enrolled in the employer’s otherwise compliant group health plan?

In addition to litigation that can arise over group health plan noncompliance, the enforcement agencies – primarily the Department of Labor, Internal Revenue Service and Department of Health and Human Services, can impose significant penalties on employers for violating the myriad of compliance requirements applicable to group health plans.

The bottom line is that an employer maintaining a workplace clinic (or considering one) needs to understand the group health plan compliance risks and the general risks associated with doing so and take reasonable steps to mitigate those risks.

A Quick Form W-4 Reminder for Employers: May 10, 2019 Deadline for Updates

The Tax Cuts and Jobs Act (the “Tax Act”) significantly changed the federal income tax rules.  Several of these changes impact income tax withholding, including changes to the tax rates and brackets, increasing the standard deduction, and eliminating personal exemptions.

Normally, employees must provide their employers with an updated Form W-4 within 10 days of a change in their personal circumstances that affects their withholding.  However, the IRS in Notice 2018-92 gave employees a temporary reprieve from this 10-day rule when their withholding changed solely as a result of the Tax Act.  In these circumstances, employees must update their Form W-4 within 10 days of April 30, 2019 – or by May 10, 2019.

With the 2018, individual tax filing season in the rearview mirror, now is a great time to remind employees about the requirement to update their Form W-4 and to encourage them to take advantage of the IRS withholding calculator to determine if updates are needed.  The IRS withholding calculator is available here.