Employee Benefits & Executive Compensation Blog

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

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.

USDOL Prevails in Kansas in Another Decision on Fiduciary Rule

On February 17, 2017, a federal district Court in Kansas upheld the U.S. Department of Labor’s conflict of interest rule and related exemptions in a suit brought by Market Synergy Group, Inc. This ruling on the merits follows the court’s prior ruling in November 2016 denying Market Synergy Group’s request for a temporary injunction.  The court determined that:  (1) the Department satisfied the Administrative Procedure Act’s requirement of providing fair notice of the proposed rule change; (2) the Department’s decision to treat fixed indexed annuities differently than all other fixed annuities in PTE 84-24 was not arbitrary and capricious; (3) the Department adequately considered the economic impact that the final rule would impose on independent insurance agent distribution channels; and (4) the Department’s issuance of PTE 84-24 does not exceed the agency’s statutory authority.  The case is Mkt. Synergy Grp., Inc. v. United States Dep’t of Labor, No. 16-CV-4083-DDC-KGS, 2016 WL 6948061 (D. Kan. Nov. 28, 2016).

Like the prior rulings, the court’s decision relates only to the Department’s authority to issue the rule.  It does not address the Trump administration’s proposal to delay or change the rule.  A delay proposal is currently being reviewed by the Office of Management and Budget, and is expected to be released in the next couple weeks.

Update on the USDOL Conflict of Interest Rule and Related Exemptions

There were two key developments last week concerning the ongoing challenges to the U.S. Department of Labor (USDOL) conflict of interest rule and related exemptions:  a Presidential Memorandum calling for a review of the rule, and a ruling by a federal court in Texas rejecting the U.S. Chamber of Commerce’s challenges to the rule.

Presidential Memorandum

On February 3, 2017, President Trump issued a Presidential Memorandum ordering the USDOL to conduct an economic and legal analysis of the conflict of interest rule and associated exemptions.  The Memorandum requires the USDOL to rescind the rule if it finds that it is inconsistent with the Trump Administration’s policies.  The Memorandum does not explicitly call for an extension of the rule’s April 10, 2017 applicability date.  However, the USDOL has filed a notice with the Office of Management and Budget indicating that it intends to delay implementation and open up a new comment period.  The details have not been made public.

District Court Decision

On February 8, 2017, a federal district court in Texas granted the USDOL’s motion for summary judgment and rejected the Chamber of Commerce’s many challenges to the conflict of interest rule and related exemptions.  This decision represents the third federal district court to uphold the rule and exemptions as a permitted exercise of the USDOL’s authority.  It followed federal district courts in Washington D.C. and Kansas.  The decision does not opine on the new administration’s authority to rescind the rule, delay enforcement, or issue a different rule, subject to the procedural requirements of the Administrative Procedure Act.

IRS Announces the Last Day of the Remedial Amendment Period for 403(b) Plans

The Internal Revenue Service recently issued Revenue Procedure 2017-18, which provides that the last day of the remedial amendment period for Code Section 403(b) retirement plans will be March 31, 2020. As discussed below, this means that a sponsor of a Code Section 403(b) plan who timely adopted a Code Section 403(b) retirement plan document that was intended to comply with the Code will have until March 31, 2020 to retroactively correct any defects to the form of the plan document, either by amending its plan document or adopting a pre-approved plan document.

Background

Under final Treasury regulations that were issued in 2007, effective January 1, 2009, a sponsor of Code Section 403(b) retirement plan is generally required to maintain its plan pursuant to a written plan document that complies with the requirements of these final Treasury regulations in both form and operation.

In March of 2013, the IRS issued Revenue Procedure 2013-22, which set out new procedures for the IRS to issue opinion and advisory letters for pre-approved plan documents for Code Section 403(b) retirement plans (i.e., prototype and volume submitter plan documents).  The IRS does not issue determination letters on individually designed Code Section 403(b) retirement plans.

Revenue Procedure 2013-22 also included information about a remedial amendment period that would allow a plan sponsor to retroactively correct defects in the form of its Code Section 403(b) plan document, provided that the correction is made prior to the end of the remedial amendment period. For this purpose, a “defect” is a provision, or absence of a required provision, that causes the plan to fail to satisfy the requirements of Code Section 403(b).  Generally, the remedial amendment period is available only if an employer adopted a written plan document intended to satisfy the requirements of Code Section 403(b) on or before January 1, 2010 or, if later, the first day of the plan’s effective date.  Revenue Procedure 2013-22 provided that any defect must be corrected on or before the last day of the remedial amendment period.  However, the guidance did not state when the last day of the remedial amendment period would occur.

The Last Day of the Remedial Amendment Period Announced

With the issuance of Revenue Procedure 2017-18, the IRS announced that the last day of the remedial amendment period for Code Section 403(b) retirement plans will be March 31, 2020. Therefore, if the form of a Code Section 403(b) retirement plan does not satisfy the requirements of Code Section 403(b) during the remedial amendment period but is properly retroactively amended by March 31, 2020, the plan will be considered to have satisfied the requirements for the entire remedial amendment period (which begins on January 1, 2010 or, if later, the effective date of the plan).  Generally, a Code Section 403(b) retirement plan will automatically satisfy the IRS requirements that the form of the document complies with the Code Section 403(b) if the plan sponsor adopts a pre-approved plan document on or before the last day of the remedial amendment period.

According to Revenue Procedure 2017-18, the Department of Treasury and IRS intend to issue future guidance with respect to the timing of Code Sec. 403(b) retirement plan amendments made after Mar. 31, 2020.

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