Employee Benefits & Executive Compensation Blog

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

DOL Prevails in Kansas Litigation Challenging Conflict of Interest Rule and Related Exemptions

On November 28, 2016, Judge Crabtree in the U.S. District Court for the District of Kansas ruled in favor of the U.S. Department of Labor and denied the motion for a preliminary injunction filed by the Market Synergy Group, Inc., challenging implementation of the Department’s conflict of interest rule and related exemptions.  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).  The court held that Market Synergy was not likely to prove that:

  1. The Department provided insufficient notice that it would remove fixed indexed annuities (“FIAs”) from the scope of PTE 84-24 because the language of the proposed rulemaking provided the requisite notice and, even if it did not, it amounted to harmless error because commenters made the same comments Market Synergy makes in this action.
  2. The Department arbitrarily treated FIAs differently from all other fixed annuities because the Department provided a reasoned explanation for its decision to move FIAs from the scope of PTE 84-24 to better protect retirement investors.
  3. The Department failed to consider the detrimental effects of its actions on independent insurance agent distribution channels.  To the contrary, the Court found that the Department demonstrated its recognition of the effects that the final rule would have on the industry, but concluded that the need to protect consumers from conflicted investment advice outweighed those concerns.
  4. The Department exceeded its statutory authority by seeking to manipulate the financial product market instead of regulating fiduciary conduct because Congress had authorized the Department to grant exemptions, and it was therefore entitled to great deference.

The Court also noted that even if plaintiff had carried its burden to demonstrate its likely success on the merits, it had not satisfied any of the other requirements for a preliminary injunction: irreparable harm, balance of harms, and public interest.

This victory comes on the heels of the Department’s win in the District Court for the District of Columbia where the court also denied a challenge to the Department’s conflict of interest rule and related exemptions. See Nat’l Ass’n for Fixed Annuities v. Perez, No. CV 16-1035 (RDM), 2016 WL 6573480 (D.D.C. Nov. 4, 2016) (see our blog post here).  The rule and related exemptions also are facing challenges in the Northern District of Texas and District of Minnesota (see our blog post here).

DOL Prevails Again and NAFA Moves on to the Circuit Court Challenging the Conflict of Interest Rule and Related Exemptions

On November 23, 2016, Judge Moss in the U.S. District Court for the District of Columbia again ruled in favor of the Department and denied the renewed motion for a preliminary injunction brought by the National Association for Fixed Annuities (“NAFA”) challenging implementation of the Department’s conflict of interest rule and related exemptions. Nat’l Ass’n for Fixed Annuities v. Perez, No. CV 16-1035 (RDM), 2016 WL 6902113 (D.D.C. Nov. 23, 2016). Here, the Court applied both standards that the appellate court might apply when evaluating a preliminary injunction motion, and concluded that NAFA could not satisfy either standard. First, the court observed that it already had rejected NAFA’s claims on the merits in a final judgment (see our blog available here). Second, the court found that the potential for irreparable harm, balance of equities, and public interest did not weigh so heavily in NAFA’s favor as to outweigh NAFA’s inability to establish a likelihood of success on the merits. The court explained that the types of irreparable harm alleged – e.g., the fixed indexed annuity industry will incur substantial compliance costs, business practices will change when the new rules take effect, and the fixed indexed annuities industry will sustain economic losses from receiving lower commissions – while not insignificant, were outweighed by the potential harm to retirement investors should the rules not be implemented. NAFA has filed an Emergency Motion for an Injunction Pending Appeal with the U.S. Court of Appeals for the District of Columbia urging the Court to stay the April 10, 2017 applicability date of the rule pending appeal of the district court’s rulings in favor of the Department.

IRS Extends Distribution (Not Filing) Deadline for ACA Reporting and Continues Good Faith Standard

Today, the IRS announced (see Notice 2016-70) an extension to the distribution (but not filing) deadline for the Affordable Care Act (ACA) reporting requirements set forth in Sections 6055 and 6056 of the Internal Revenue Code (the “Code”).  Under Code Section 6055, health coverage providers are required to file with the IRS, and distribute to covered individuals, forms showing the months in which the individuals were covered by “minimum essential coverage.”  Under Code Section 6056, applicable large employers (generally, those with 50 or more full-time employees and equivalents) are required to file with the IRS, and distribute to employees, forms containing detailed information regarding offers of, and enrollment in, health coverage.  In most cases, employers and coverage providers will use Forms 1094-B and 1095-B and/or Forms 1094-C and 1095-C. The chart below shows the new deadline for distributing the forms.

Old Deadline New Deadline
Deadline to Distribute Forms to Employees and Covered Individuals Jan. 31, 2017 March 2, 2017
Deadline to File with the IRS Feb. 28, 2017 (paper)
March 31, 2017 (electronic)

The regulations issued under Code Section 6055 and 6056 allow for an automatic 30-day extension to distribute and file the forms if good cause exists. An additional 30-day is extension is available upon application to the IRS.  Notice 2016-70 provides that these extensions do not apply to the extended due date for the distribution of the forms, but they do apply to the unchanged deadline to file the forms with the IRS.

In addition to extending the distribution deadline, the IRS continued the interim good faith compliance standard that was in effect for the first year of ACA reporting (for the 2015 year). Under this standard, the IRS will not assess a penalty for incomplete or incorrect information on the reporting forms as long as the forms were filed on time and the filer can show that it completed the forms in good faith.  Thus, it is important to distribute and file the forms on time.

Those that do not file by the new deadlines will be subject to penalties under Code Sections 6721 and 6722. The IRS stated in Notice 2016-70 that it would apply a reasonable cause analysis when determining the penalty amount for a late filer.  According to the IRS, this analysis will take into account such things as whether reasonable efforts were made to prepare for filing (e.g., gathering and transmitting data to an agent or testing its own ability to transmit information to the IRS) and the extent to which the filer is taking steps to ensure that it can comply with the reporting requirements for 2017.

DOL Prevails In First Challenge to the Conflict of Interest Rule and Related Exemptions

On November 4, 2016, Judge Moss in the U.S. District Court for the District of Columbia granted the U.S. Department of Labor’s motion for summary judgment and dismissed claims brought by the National Association for Fixed Annuities (“NAFA”) challenging the Department’s conflict of interest rule and related exemptions. Nat’l Ass’n for Fixed Annuities v. Perez, No. CV 16-1035 (RDM), 2016 WL 6573480 (D.D.C. Nov. 4, 2016).  The decision is the first to be issued among the four pending cases asserting similar challenges. (Our earlier blog posts on the cases are available here.)

NAFA asserted claims under the Administrative Procedures Act, the Regulatory Flexibility Act and the Due Process Clause of the Fifth Amendment, challenging: (i) the Department’s decision to replace the five-part test set forth in the 1975 regulation and, in particular, its decision to eliminate the requirement that advice be offered “on a regular basis;” (ii) the Department’s decision to apply the rules to IRAs and other plans that are not subject to Title I of ERISA; (iii) the written contract requirement contained in the Best Interest Contract (“BIC”) Exemption on the ground that it impermissibly creates a private right of action; (iv) the BIC Exemption on the ground that the “reasonable compensation” condition is vague; (v) the Department’s decision to move fixed indexed annuities (“FIAs”) from PTE 84-24 to the BIC Exemption; and (vi) the effectiveness of the rule for want of a regulatory impact analysis.

First, the court rejected NAFA’s argument that the Department exceeded its statutory authority by abandoning its decades-old five-part test under which an individual was an investment advice “fiduciary” only if they rendered investment advice for a fee “on a regular basis.”  The new rule establishes a broader definition of “investment advice,” which includes advice even if not given “on a regular basis.” In ruling against NAFA, the court held that the Department was entitled to Chevron deference in its interpretation of the term “investment advice,” and that nothing in the statutory text foreclosed the Department’s new interpretation.  In fact, the court concluded that the Department’s new interpretation better comports with the text and purpose of ERISA than the old rule.

Second, the court rejected NAFA’s argument that the Department exceeded its statutory authority by extending fiduciary duties found only in Title I of ERISA to individuals who advise IRAs and other non-Title I plans.  The court determined that the Department had the authority to condition prohibited transactions exemptions on compliance with ERISA’s duties of loyalty and prudence.

Third, the court rejected NAFA’s argument that the new rules impermissibly created a private right of action for violations of the BIC Exemption.  The court concluded that the Department was extending rights that already existed under state law and that any action brought to enforce the terms of the written contract would be brought under state law.

Fourth, the court rejected NAFA’s argument that the “reasonable compensation” requirement of the BIC Exemption was void for vagueness because the concept of “reasonable compensation” is a common one that appears throughout the U.S. Code, including in ERISA.  The court determined that “a reasonably prudent person, familiar with the conditions the BIC Exemption is meant to address and the objectives the exemption and conditions are meant to achieve, would have fair warning of what the regulations require.”

Fifth, the court rejected NAFA’s argument that the Department failed to give fair warning or an opportunity to comment on the Department’s decision to make FIAs ineligible for PTE 84-24.  Although the decision to subject FIAs to the more onerous BIC Exemption is different than the proposed rule, the court held that the Department had satisfied the notice requirements because the final rule was a “logical outgrowth of the notice.”

Lastly, the court rejected NAFA’s argument that the Department failed to accompany the final rule with a “final regulatory flexibility analysis.” According to the court, the final regulatory flexibility analysis is only a procedural requirement, and it is not for the court to analyze whether the agency’s analysis was correct.  Rather, the only question for the court was whether the Department put forth a reasonable good-faith effort to comply with the procedural steps laid out in the statute.  The court concluded that the Department’s 382-page final analysis satisfied the requirement.

Proskauer’s Perspective

Although the Department scored an early victory in the NAFA litigation, it will certainly not be the last word on the Department’s conflict of interest rule and related exemptions.  NAFA already has filed an appeal to the D.C. Circuit and that appeal, along with the three other cases, remain to be decided.

In the lawsuit filed by Market Synergy Group, the U.S. District Court in Kansas heard oral argument on September 21, 2016. In the consolidated case led by the U.S. Chamber of Commerce, the U.S. District Court for the Northern District of Texas heard oral argument on November 17, 2016.  In the case filed by Thrivent Financial, the U.S. District Court in Minnesota is scheduled to hear oral argument on March 3, 2017.  Unlike the cases filed by Market Synergy and the Chamber, Thrivent Financial challenges the rule on the ground that it impermissibly requires the resolution of disputes in federal court rather than allowing for alternative dispute resolution methods.

It also remains to be seen what action, if any, the Trump administration will take. President-elect Trump has expressed a desire to reduce regulation and the Republican-controlled Congress previously passed legislation that would have undone the regulation (but was vetoed by President Obama).  Although nothing is certain – and there has been no announcement – the April 10, 2017 applicability date very well may be delayed.

Oregon State Court of Appeals Recognizes Federal Slayer Law

Oregon, like many states, has on its books a “slayer statute,” which generally prohibits a slayer or abuser of a decedent from obtaining benefits by virtue of the death of the decedent.  The parents of Julianne Herinckx sought to enforce the Oregon slayer statute and preclude their daughter’s murderers from receiving life insurance benefits payable from a policy held through her former employer.  The Oregon state trial and appellate courts determined that Oregon’s slayer statute was preempted by ERISA because it impermissibly governed the payment of benefits and interfered with ERISA’s intended national uniformity in the administration of benefits. However, the appellate court also concluded that the decedent’s parents should have been permitted to amend their complaint to assert a claim for benefits as a matter of federal common law, which includes a slayer law.  The case was thus remanded to the district court for further proceedings.  The case is Herinckx v. Sanelle, 2016 WL 6246921 (Or. Ct. App. Oct. 26, 2016).

AARP Files Suit to Block the EEOC’s Final Rules on Employee Wellness Programs

As we have previously discussed in detail in several blogs (New EEOC Regulations Provide Roadmap for Wellness Programs; EEOC Issues Final Rules On Employer-Sponsored Wellness Program Compliance Under the ADA and GINA; and District Court Decision Upholds Employer’s Wellness Program But Signals Support for EEOC Positions Going Forward), the EEOC issued final rules in May 2016 on the extent to which an employer may offer incentives to participate in a wellness program without violating the Americans with Disabilities Act (ADA) or the Genetic Information Nondiscrimination Act (GINA).  The final rules were intended to put to rest uncertainty as to the line between a permissible incentive to participate in a wellness program and an impermissible penalty for not participating in the program.  The line that the EEOC drew appeared to be consistent with an authorization for wellness programs under the Affordable Care Act.

AARP has now sued the EEOC to block the May final rules.  In its complaint, AARP asserts that the EEOC’s final rules did not go far enough to avoid compelling participation.  AARP asserts that the incentives permitted by the final rules “enable employers to pressure employees to divulge their own confidential health information and the confidential genetic information of their spouses as part of an employee ‘wellness’ program.”  AARP argues that the final rules “depart starkly from the EEOC’s longstanding position” that “employee wellness programs implicating confidential medical information are voluntary only if employers neither require participation nor penalize employees who choose to keep their medical and genetic information private.”   The complaint alleges that the final rules are contrary with Congressional intent and that the EEOC did not adequately justify the standard for voluntariness in its final rule.

AARP is seeking a preliminary injunction that would keep the final regulations from going into effect on January 1.  If AARP is successful, common wellness programs will again be called into question—for example, premium discounts and prizes for participating in health risk assessments and screenings.

We will continue to monitor this case and report on further developments.

Update on Lawsuits Challenging the U.S. Department of Labor’s Fiduciary Rule

In this update on the litigation challenging the U.S. Department of Labor’s new fiduciary rule, we note that there has been a sixth lawsuit filed and oral arguments in two other cases.  (Our previous reports are available here, and our Client Alert on the new rule is available here.)

Thrivent Financial for Lutherans, a Christian fraternal benefit society that provides insurance and financial services to its members, filed a sixth lawsuit challenging the fiduciary rule on September 29, 2016 in the U.S. District Court for the District of Minnesota (captioned Thrivent Financial for Lutherans v. Perez et al., Case No. 0:16-cv-03289).  The Thrivent suit challenges the rule’s “best interest contract exemption” (“BICE”), which requires the resolution of disputes in federal court rather than allowing for alternative dispute resolution methods.  Thrivent takes issue with this requirement because it believes that its arbitration system is essential to the fraternal nature of the relationship between Thrivent and its members.  Thrivent claims that the DOL has exceeded its statutory authority under the Administrative Procedures Act because nothing in ERISA indicates Congress intended to require an exclusive judicial remedy, and Congress has supported arbitration agreements as a preferred means of resolving disputes through the Federal Arbitration Act.

In the litigation pending in the U.S. District Court for the District of Columbia, The National Association for Fixed Annuities v. Thomas E. Perez et al., Case No. 16-cv-1035, the court held a hearing on August 25, 2016 to address the National Association for Fixed Annuities’ motion for a preliminary injunction and for summary judgment, and the DOL’s cross-motion for summary judgment.  Much of the argument was devoted to the new rule’s creation of a private right of action for violations of the BICE.  Judge Moss has not yet issued a ruling on those motions.  A summary of the parties’ arguments from their briefs appears here.

In the litigation pending in the U.S. District of Kansas, Market Synergy Group, Inc. v. U.S. Dept. of Labor, et al., Case No. 16-cv-4083, the court held oral argument on September 2, 2016.  Market Synergy argued that the DOL failed to prove the current state-based regulation of fixed-indexed annuities (“FIAs”) was broken, and that the judge should “hit the pause” button on including them in the DOL’s rule.  Following the hearing, the parties filed supplementary briefs focused on the DOL’s failure to give notice and receive public comments on the inclusion of FIAs in the BICE.  Market Synergy wrote that “[b]ecause the Department never indicated that it might view [fixed indexed annuities] as dissimilar from other fixed annuities or discussed [fixed indexed annuities] in its notice, nobody submitted a comment on that issue.”  The DOL argued that any oversight in its rulemaking was “harmless error” because the DOL considered all public comments and the public was not prejudiced by the notice failure.  The court has not yet rendered a decision.

Oral argument is scheduled for November 17, 2016 in lawsuits filed in the Northern District of Texas and consolidated under Chamber of Commerce of the U.S., et al., v. Perez, et al., Case No. 16-cv-1476-M.  As previously reported here, the Chamber of Commerce and its co-plaintiffs argue that the new rule unlawfully creates a private right of action, that the rule violates the First Amendment as applied to truthful commercial speech, and that the DOL exceeded its statutory authority and acted arbitrarily and capriciously in imposing fiduciary obligations on non-fiduciary speech and disfavoring annuities.  They also argue that the rulemaking process was inadequate.

IRS Issues New EPCRS Guidelines to Coordinate with Limited Determination Letter Program

On September 29, 2016, the IRS released new guidelines under its Employee Plans Compliance Resolution System (EPCRS).  EPCRS consists of three programs by which plan sponsors can correct plan documentation or operational errors – the Self-Correction Program, the Voluntary Correction Program and the Audit Closing Agreement Program.   Rev. Proc. 2016-51 supersedes the older guidelines (Rev. Proc. 2013-12) and incorporates certain more recent developments affecting qualified plan corrections. Below are the key changes that plan sponsors should be aware of:

1. Coordination with Determination Letter Program. As set forth in Proc. 2016-37, the IRS has curtailed its determination letter program with respect to individually-designed plans.  Rev. Proc. 2016-37 formalized what the IRS had for months said was coming – the remedial amendment cycle program, which permitted individually-designed plans to file for a determination letter every five years, is ending effective January 1, 2017.  Beginning on that date, plan sponsors may request a determination letter for an individually-designed plan only if the plan has never received a letter (such as a new plan) or the plan is terminating.  Note that the final cycle, Cycle A, does not end until January 31, 2017, so Cycle A filers are permitted to submit determination letter applications until that date.

The new limited determination letter program created uncertainty under existing EPCRS guidance because applications for correction under EPCRS often required contemporaneous submission of a determination letter application.  Additionally, to use the self-correction procedures under EPCRS for significant errors, a plan needed to have a current determination letter.  Rev. Proc. 2016-51 modifies the EPCRS guidance to clarify that (i) determination letter applications are no longer required when applying for correction under EPCRS (including correction by a plan amendment) and (ii) self-correction for significant errors is available as long as the plan has a determination letter (whether or not “current”).

2. Incorporation of Rev. Procs. 2015-27 and 2015-28. In 2015, the IRS modified EPCRS guidelines to provide alternative correction options for certain overpayments ( Proc. 2015-27) and to relax correction requirements for certain elective deferral errors (Rev. Proc. 2015-28).  Prior blog posts summarizing these modifications can be found here and here.  The new EPCRS guidelines incorporate these modifications and supersede the 2015 Revenue Procedures.

3. Fees. The new EPCRS guidelines no longer set forth the filing fees owed for use of the correction program.  Instead, fees will published annually by the IRS.

4. Audit CAP Program. The new guidelines modify the IRS method of determining sanctions under the Audit Closing Agreement Program (Audit CAP).  Under this program, if significant plan errors are uncovered during audit or examination (i.e., the plan sponsor does not voluntarily seek correction before the IRS finds the error(s) on audit), the plan sponsor is entitled to use the Audit CAP.  Prior to Rev. Proc. 2016-51, sanctions under Audit CAP were a negotiated percentage of the maximum payment amount, which is based on the potential tax liability that would be incurred in open tax years if the plan was actually disqualified.  Under the new EPCRS guidelines sanctions are no longer solely determined based on the maximum payment amount.  Instead, the maximum payment amount will be one of many facts and circumstances that the IRS will take into account when determining the sanction.

5. Anonymous VCP Fees. Under the Voluntary Correction Program (VCP), plan sponsors are able to submit a plan to the IRS anonymously and get conditional approval of a proposed correction prior to identifying the plan and plan sponsor.  If approval cannot be obtained, a plan sponsor can withdraw the application.  The current guidelines provide that the IRS will refund 50% of the VCP filing fee if the anonymous application is withdrawn.  Effective January 1, 2017, however, the IRS will no longer refund any portion of the user fee if an anonymous VCP application is withdrawn.

Rev. Proc. 2016-51 provides a necessary update of the EPCRS guidelines because of the changes to the determination letter program.  The new EPCRS guidelines are technically effective beginning January 1, 2017, but many of the changes reflect prior guidance (such as Rev. Procs. 2015-27 and 2015-28) that has been effective for quite some time.  Additionally, the IRS has informally indicated that although plan sponsors can submit determination letter applications along with VCP submissions for the remainder of 2016 (in accordance with Rev. Proc. 2013-12, as modified), the IRS will not require them to do so.

Eighth Circuit Affirms Enforcement of ERISA Plan Forum Selection Clause

The Eighth Circuit enforced an ERISA plan’s forum selection clause and denied plaintiff’s appeal to have her lawsuit for disability benefits transferred back to the District of Arizona.  Plaintiff Lorna Clause, who lives in Arizona, is a participant of the Ascension Long-Term Disability Plan.  Her application for disability benefits was denied.  After exhausting her administrative remedies, Clause filed suit against Defendants in the District of Arizona.  Defendants moved to transfer the case to the Eastern District of Missouri based on the Plan’s forum selection clause.  The Arizona court granted the motion, reasoning that Clause had notice of the forum selection clause from the summary plan description, there was no bad faith or overreaching on the part of defendants, and any information sought from defendants in the litigation would likely be located in Missouri.  Interestingly, the Arizona court did not address the issue taken on by many courts to have considered the enforceability of forum selection clauses in ERISA plans, i.e., whether a forum selection clause is consistent with ERISA’s policy to provide litigants “ready access to the Federal courts.”  See our blog post here for more discussion on that point.  Once transferred to federal court in Missouri, Clause moved to transfer the case back to Arizona, but the court in Missouri denied the motion.  The court rejected Clause’s contention that ERISA’s venue selection clause does not permit modification because ERISA does not expressly prohibit the use of such clauses, and denied the motion based on a wealth of decisions enforcing forum selection clauses in ERISA plans. Clause then filed a writ of mandamus before the Eighth Circuit, which the Circuit denied in a one-line order.  The case is In re Lorna Clause, No. 16-2607 (8th Cir. Sept. 27, 2016).