Employee Benefits & Executive Compensation Blog

The View from Proskauer on Developments in the World of Employee Benefits, Executive Compensation & ERISA Litigation

DOL Fiduciary Rule Delayed, But At Least Parts Might Be Here to Stay

On April 4, 2017, the U.S. Department of Labor issued a final rule postponing applicability of the conflict of interest rule and related exemptions for sixty days, until June 9, 2017.  The stated purpose of the extension is to allow more time to:  (i) complete the examination required by President Trump’s February 3, 2017 memorandum, which focuses on the rule’s impact on access to retirement products, advice, and information (see our blog here); and (ii) consider possible changes with respect to the conflict of interest rule and related exemptions based on new evidence or analysis developed pursuant to the examination.  The Department stated that it received 193,000 comment and petition letters expressing views on whether it should grant the delay.  Its 63-page release includes a discussion of the comments and hints of “a more balanced approach than simply granting a flat delay and all associated obligations for a protracted period.”

In addition to the general 60-day delay, the Department has delayed most of the requirements for the best interest contract and other new exemptions through January 1, 2018.

In setting separate applicability dates, the Department distinguished between (i) the rule on fiduciary status (who is a fiduciary) and the “Impartial Conduct” standard (acting in the client’s best interest), and (ii) the more onerous requirements of the various exemptions.  The Department hinted that it might let the rule on fiduciary status and the Impartial Conduct standard go into effect as early as June 9th.  In fact, the Department stated:

“[T]here is fairly widespread, although not universal, agreement about the basic Impartial Conduct Standards, which require advisers to make recommendations that are in the customer’s best interest (i.e., advice that is prudent and loyal), avoid misleading statements, and charge no more than reasonable compensation for services (which is already an obligation under ERISA and the Code, irrespective of this rulemaking.”

The Department further stated that it “finds little basis for concluding that advisers need more time to give advice that is in the retirement investors’ best interest and free from misrepresentations in exchange for reasonable compensation.”

In contrast, the Department observed that the onerous requirements for the various exemptions – including the “best interest contract,” which would create a private right of action for IRA clients to sue their advisers over prudence and loyalty – can lead to increased compliance costs in a way that reduces access to retirement products, advice, and information.  The Department emphasized a “compliance first” policy, whereby the Department intends to focus more on assistance in eliminating conflicts and improving compliance more generally than on citing violations and imposing penalties.

The Department is continuing to accept comments on the substance of the fiduciary rule and related exemptions:  the formal comment period ends on April 17, 2017, but the Department stated that it will be open to helpful comments even after that date.

In sum, the message seems to be that the Department is not leaning toward tossing the rule in its entirety or leaving the fiduciary standard to the SEC, but it remains open to analysis of the rule’s impact and thoughtful suggestions for how to reduce conflicts of interest without unduly burdening the retirement advice industry.

Ninth Circuit: Medical Providers Lack ERISA Standing

The Ninth Circuit affirmed two district court decisions that concluded medical providers were not “beneficiaries” under Section 502(a) of ERISA and therefore lacked standing to bring an ERISA claim. The Court explained that, in one case, the provider had an assignment from the participants, but the assignment was invalid because the plan contained a non-assignment clause that overrode any purported assignments. In the other case, the assignment to the provider did not include authority to seek declaratory, injunctive, or monetary relief. The Court observed that its holding was in line with its own prior precedent and consistent with decisions in the Third, Sixth, Seventh, and Eleventh Circuits. The case is DB Healthcare, LLC, v. Blue Cross Blue Shield of Arizona, Inc., No. 14-16518, 2017 WL 1075050 (9th Cir. Mar. 22, 2017).

IRS Issues Temporary Enforcement Policy In Line with DOL FAB 2017-01

On the heels of the Department of Labor’s temporary enforcement policy concerning the DOL conflict of interest rule and related exemptions (see our blog post here), the IRS announced that it is providing relief from excise taxes under Code § 4975 that conforms to the DOL’s temporary enforcement policy described in FAB 2017-01. The IRS’s action ensures that enforcement of the prohibited transaction rules by DOL and IRS will remain in synch.

Fourth Circuit Rejects Retirees’ Claim for Vested Health Benefits

The Fourth Circuit upheld an employer’s unilateral decision to amend a collective bargaining agreement to cap employer contributions to retiree health benefits and freeze Medicare reimbursements for hourly retirees. In so ruling, the Court applied general contract principles, as required by the Supreme Court’s decision in M&G Polymers USA, LLC v. Tackett, 135 S. Ct. 926 (2015), and concluded that: (i) the applicable CBA and SPD were properly construed to limit the provision of retiree health benefits to the term of the agreement, which meant that the benefits did not vest; and (ii) because the SPD unequivocally stated that pension benefits vested, it was reasonable to conclude that the parties did not intend for health benefits to vest. The case is Barton v. Constellium Rolled Prods.-Ravenswood, LLC, No. 16-1103, 2017 WL 1078540 (4th Cir. 2017).

Sixth Circuit: ERISA Exhaustion Not Required in Plan Amendment Suit

The Sixth Circuit held that retirement plan participants were not required to exhaust their administrative remedies prior to bringing a claim alleging that a plan amendment violated ERISA.  In so holding, the Court agreed with the opinions of the Third, Fourth, Fifth, Ninth, Tenth, and D.C. Circuits and disagreed with the opinions of the Seventh and Eleventh Circuits.  In the view of the Sixth Circuit, challenges that are “directed to the legality of the plan, not to a mere interpretation of it,” do not require exhaustion.  The case is Hitchcock v. Cumberland Univ. 403(b) DC Plan, No. 16-5942, 2017 WL 971790 (6th Cir. Mar. 14, 2017).

No Emergency Injunction Appeal in Chamber’s Challenge to DOL Rule

On March 20, 2017, a federal court in the Northern District of Texas denied the U.S. Chamber of Commerce’s emergency motion for an injunction pending appeal challenging implementation of the Department’s conflict of interest rule and related exemptions. The court applied the standard for evaluating a preliminary injunction motion and concluded that: (i) the Department already had prevailed on summary judgment (see our blog available here); (ii) the potential for irreparable harm to Plaintiffs was small because the Department had proposed a delay in the rule’s applicability date; (iii) the Department would be harmed by an injunction because it “would interfere with the Department’s statutory authority, its expertise, and its policy-making role;” and (iv) the public interest weighed against granting an injunction because the Department had already made reasonable conclusions during the rule making process that the rule was in the public interest.  The case is Chamber of Commerce v. Hugler, No. 3:16-cv-01476-M, 2017 BL 87076 (N.D. Tex. Mar. 20, 2017).

U.S. DOL Proposes Delay of Conflict of Interest Rule and Related Exemptions

On March 1, 2017, the U.S. Department of Labor proposed a 60-day delay of the conflict of interest rule and related exemptions (currently set to be applicable on April 10, 2017). The Department opened two comment periods related to the rule:

  1. A 15-day comment period (ending March 17, 2017) on whether enforcement of the rule should be delayed; and
  2. A 45-day comment period (ending April 17, 2017) on the rule’s substance.

The proposal and requests for comments relate to President Trump’s Memorandum, issued on February 3, 2017, in which he directed the Department to examine the rule and related exemptions and prepare an updated economic and legal analysis concerning their likely impact, including:

  • Whether the anticipated applicability of the final rule has harmed or is likely to harm investors due to a reduction of Americans’ access to certain retirement savings offerings, retirement product structures, retirement savings information, or related financial advice;
  • Whether the anticipated applicability of the final rule has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees; and
  • Whether the rule is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services.

The President directed that if the Department concludes for any reason that the rule and related exemptions are inconsistent with the Administration’s priority “to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses, such as buying a home and paying for college, and to withstand unexpected financial emergencies,” then the Department must propose to rescind or revise the rule.

The proposed 60-day delay observes that the time required for the review directed by the February 3 Memorandum will extend past the rule’s April 10 scheduled applicability date. Furthermore, the Department noted the potential for disruption and unnecessary compliance expenditures if the rule is allowed to go into effect when there is still a chance of rescission or significant revisions.  The proposal also notes that a 60-day delay might not be sufficient for the Department to complete its work and requested comments on the impact of a longer delay – “6 months, a year, or more”.

View From Proskauer – While no one can predict the future, the proposed rule suggests that the Department is taking a close look at the rule and related exemptions and is prepared to delay the rule’s applicability date until it is comfortable that the rule strikes an appropriate balance between regulatory burdens and protecting against conflicts of interest. Although the administration has made public statements denigrating the rule, the proposal suggests that full rescission is not a fait accompli.  We expect to hear comments from diverse interests over the next 15 days, arguing for and against a delay of the applicability date.  It also is reasonable to expect that the Department will wait to make final decision until after a Secretary of Labor is confirmed and leadership of the Employee Benefits Security Administration is in place, to allow the new leadership sufficient time to review the rule and its impact before starting to enforce it or proposing major changes (or full rescission).

Notice Requirement for Small Employer HRAs Delayed Pending Regulations

On February 27, 2017, the Internal Revenue Service issued Notice 2017-20 delaying the notice requirement for qualified small employer health reimbursement arrangements (“QSEHRAs”).  By way of background, prior to enactment of the 21st Century Cures Act (“Cures Act”) in December 2016, the Affordable Care Act prohibited HRAs unless they were integrated with group health plans.  This meant that HRAs could not be used to reimburse premiums purchased on the individual market.  The Cures Act created QSEHRAs so that small employers could offer non-integrated HRAs that would enable employees to, among other things, purchase individual market coverage.  Additional detail on QSEHRAs and their requirements can be found in our December 19, 2016 blog entry.

One of the requirements for QSEHRAs is that employees must receive a written notice no later than 90 days before the start of the plan year (or the start of eligibility for a new employee) describing the amount of reimbursement available under the QSEHRA and explaining that the employee must disclose the presence of the QSEHRA when applying for or renewing coverage purchased from the Marketplace. If an employer fails to provide the notice, the employer could face a penalty of $50 per employee per failure with a maximum penalty of $2,500.

Under the Cures Act, QSEHRAs in place on January 1, 2017 were required to provide this notice no later than March 13, 2017 (i.e., 90 days after enactment of the Cures Act). However, the IRS has not yet published regulations or other guidance governing the operation of these arrangements.  In the absence of guidance, the IRS issued Notice 2017-20 to delay the notice requirement and suspend potential notice penalties until the IRS issues further guidance.  Once guidance is issued, employers will have at least 90 days to provide the QSEHRA notice to employees.

LexBlog