In three decisions issued on the same day, the Sixth Circuit held that Meritor retirees were not entitled to lifetime health benefits, while retirees at Kelsey-Hayes and CNH Industries were entitled to contractually vested health benefits. In the first case, a group of former Meritor employees filed suit after the company reduced their healthcare benefits. The CBAs provided that retiree healthcare coverage “shall be continued,” but also set forth a general durational clause terminating the CBAs after three years and provided that healthcare benefits would remain in effect until the termination of the CBAs. The CBAs also stated that pension benefits were vested and did not say anything similar for retiree health benefits. Taking into account all of these terms, the Sixth Circuit held that the CBAs were unambiguous and that retirees were guaranteed benefits for only the three-year term of the CBAs. Cole v. Meritor, Inc., No. 06-2224, 2017 WL 1404188 (6th Cir. 2017). However, in cases against Kelsey-Hayes Co. and CNH Industrial N.V., the Sixth Circuit ruled against the employers. The principal difference in UAW v. Kelsey-Hayes was that the CBA contained a general durational clause that required mutual action to terminate the agreement. The Court determined that there was ambiguity when applying the general durational clause and, after looking at extrinsic evidence, concluded that the CBA vested employees with lifetime healthcare benefits. UAW v. Kelsey-Hayes Co., No. 15-2285, 2017 WL 1404189 (6th Cir. 2017). Similarly, in CNH Industrial, the Sixth Circuit found the CBA to be ambiguous because it was silent on the duration of health care coverage and the general durational clause carved out other benefits. Furthermore, the Court observed that eligibility for healthcare benefits was tied to pension eligibility. After looking at extrinsic evidence, the Court determined that the parties intended for retiree healthcare benefits to vest. Reese v. CNH Indus. N.V., No. 15-2382, 2017 WL 1404390 (6th Cir. 2017).
A district court in Rhode Island dismissed claims by participants in the CVS Employee Stock Ownership Plan that plan fiduciaries imprudently invested plan assets in the plan’s stable value fund. Plaintiffs argued that the stable value fund had an excessive concentration of investments with ultra-short durations and excessive liquidity, both of which caused the fund to underperform comparable stable value funds. The court dismissed the complaint because the stable value fund “was invested in conformance with its stated objective and whether that strategy was prudent cannot be measured in hindsight” simply by judging its performance against industry averages. The case is Barchock v. CVS Health Corp., No. 16-601, slip op. (D.R.I. Apr. 18, 2017).
The Sixth Circuit affirmed the dismissal of ERISA stock drop claims by participants in the Cliffs Natural Resources’ 401(k) Plan. The participants alleged fiduciary breach claims based on public and non-public information arising out of the collapse in iron ore prices that caused the company’s stock price to decline 95%. With respect to the public information claim, the Court held that a “fiduciary’s failure to investigate the merits of investing in a publicly traded company” is not the type of “special circumstance” that can support a claim based on public information, and that plaintiffs also must plead “what, if anything, the fiduciaries might’ve gleaned from publicly available information that would undermine reliance on the market price.” With respect to the non-public information claim, the Court rejected plaintiffs’ allegations that a prudent fiduciary could not have concluded that disclosing the inside information or halting additional contributions would do more harm than good. In so ruling, the Court determined that the plan fiduciaries could have concluded that divulging inside information would have caused the company’s stock price to collapse, further harming participants already invested in the fund. The Court also determined that closing the fund without explanation might be even more harmful: “It signals that something may be deeply wrong inside a company but doesn’t provide the market with information to gauge the stock’s true value.” The case is Saumer v. Cliffs Natural Resources, Inc., No. 16-3449 (6th Cir. Apr. 7, 2017).
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.
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).
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.
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).
The American Health Care Act (“AHCA”), the legislation intended to “repeal and replace” the Affordable Care Act (“ACA”), was shelved on Friday, March 24, 2017, ending for now efforts to repeal the ACA. The AHCA, described in our recent blog entry, was introduced on March 6, 2017 and immediately faced strong opposition from both sides of aisle. After failing to negotiate a compromise, President Trump issued an ultimatum to Congress to pass the legislation by March 24, 2017 or else the ACA would remain in place. Unable to muster enough support for the AHCA, Congress withdrew the bill.
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).
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).