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

DOL’s Latest ESG Proposal: The More Things Change, the More They Stay the Same

By Ira G. Bogner, Robert Projansky, Kate Napalkova, Seth Safra, Adam Scoll and Nicholas LaSpina on November 22, 2021 Posted in Department of Labor, Fiduciary

On October 14, 2021, the U.S. Department of Labor’s Employee Benefits Security Administration (the “DOL”) published in the Federal Register a new proposed regulation (the “Proposed Rules”)[1] on fiduciary responsibility in selecting ERISA plan investments and exercising shareholder rights (proxy voting). The Proposed Rules reflect an effort to “warm” what the current DOL perceives as a “chilling effect” that existing regulations have had on environmental, social, and governance (“ESG”)-themed investing, but they do not include major changes to core principles. Most notably, the Proposed Rules retain the rule that investment decisions and the exercise of shareholder rights must be based solely on risk and return factors (i.e., one may not sacrifice investment returns or take additional risk in support of a collateral objective), and do not offer a “safe harbor” for adding an ESG-themed fund to a 401(k) or 403(b) plan lineup.

Background

The DOL previously issued a final rule on October 30, 2020, regarding the interplay of ERISA’s fiduciary standards with ESG investment considerations.[2] Although the current rule omits any express references to “ESG,” its focus on “pecuniary” and “non-pecuniary” factors is widely viewed as targeting the consideration of ESG-type factors by fiduciaries when selecting ERISA plan investments.

In a separate (but related) ruling, on December 16, 2020, the DOL issued a final rule regarding the exercise of proxy voting responsibilities by ERISA plan fiduciaries, which has had a similar ESG-related effect.[3] Both current rules were effectuated as amendments to the DOL’s “investment duties” regulation at 29 C.F.R. 2550.404a-1 (as would the Proposed Rules if finalized, except they would be restyled as the “investment prudence duties” regulation).

As part of a directive by the Biden administration to review Trump administration-era regulations that were inconsistent with the promotion and protection of public health and the environment, the DOL announced on March 10, 2021 that it would not enforce the current rules until it completed a review thereof and issued further guidance. The Proposed Rules represent the culmination of that review and, if finalized in their current (or substantially similar) form, could reverse some of what some perceive as the “anti-ESG” effects of the Trump-era rules.

ESG-Related Changes in the Proposed Rules

The Proposed Rules would make a number of ESG-related changes to the current investment duties regulation, including the following:

Acknowledges that Consideration of ESG Factors May be Permitted (or Required) as Part of Satisfying Duty of Prudence. Like the current rule, the Proposed Rules would preserve the long-standing requirement for prudent investment and investment courses of action that a fiduciary give “appropriate consideration” to the facts and circumstances that, given the scope of the fiduciary’s investment duties, the fiduciary knows (or should know) are relevant before acting accordingly. “Appropriate consideration” includes, as it does under the current rule, consideration of the projected return of the portfolio relative to the funding objectives of the plan. However, the Proposed Rules now expressly acknowledge that the consideration of projected returns “may often require an evaluation of the economic effects of climate change and other [ESG] factors on the particular investment or investment course of action.”
- The Proposed Rules provide, by way of example, a list of ESG-type factors that, depending on the facts and circumstances, may be material to a fiduciary’s risk-return analysis, including: (i) climate change-related factors, including exposure to physical and transitional risks of climate change itself or the positive or negative effect of regulatory action to mitigate climate change; (ii) governance factors, including board composition, executive compensation, transparency and accountability, and compliance with law; and (iii) workforce practices, including diversity, inclusion, employee hiring and retention, employee training, and labor relations. In the preamble, the DOL expressed its intent that these examples clarify that ESG factors are “no different than other ‘traditional’ material risk-return factors” for purposes of a fiduciary’s exercise of its prudent investment duty, which the DOL also believes is consistent with its prior sub-regulatory guidance.
- Importantly, however, the Proposed Rules do preserve the current rule’s language stating that a fiduciary must take into consideration the risk of loss and opportunity for gain associated with the investment (or investment course of action) compared to the opportunity for gain associated with reasonably available alternatives with similar risks. In other words, although the Proposed Rules acknowledge that ESG-type factors may in fact relate to a fiduciary’s consideration of the economic benefits and projected returns of a particular investment, that consideration occurs in the context of evaluating risks and returns against other alternatives with similar risks (e.g., ESG-themed funds or investments are not considered a special or separate asset class under the Proposed Rules, which also means that there is no “safe harbor” for a fiduciary to, for example, simply add the “best” ESG-themed funds to a 401(k) or 403(b) investment fund lineup).
Clarifies that the Duty of Loyalty Does Not Prohibit Consideration of ESG Factors that Are Material to Investment Value. The Proposed Rules generally preserve the current rule’s recitation of ERISA’s duty of loyalty. That is, a fiduciary cannot subordinate the interests of participants and beneficiaries in retirement income or financial benefits to other objectives, and may not sacrifice investment return or take on additional investment risk to promote benefits or goals unrelated to those interests.
- However, in a significant deviation from the current rule, the Proposed Rules expressly provide that a fiduciary’s evaluation of an investment (or investment course of action) must be based on risk and return factors that the fiduciary prudently determines are material to investment value, using appropriate investment horizons consistent with the plan’s investment objectives and funding policies, which, depending on the facts and circumstances, may include the ESG-factors listed above as potential material risk-return factors.
- The DOL notes in the preamble to the Proposed Rules that this modification is intended to confirm that consideration of an economically material ESG factor is consistent with ERISA’s duty of loyalty.
- Interestingly, in acknowledging that ESG-factors are potentially material risk-return factors, the Proposed Rules in effect impose an affirmative duty on fiduciaries to consider ESG-factors where they have a material economic impact (which, although presented as a “change,” arguably follows what is and has always been required of ERISA fiduciaries – i.e., consideration of all material economic factors).
Eliminates the Bifurcation Between “Pecuniary” and “Non-pecuniary” Factors. The current rule requires that ERISA fiduciaries must generally evaluate investments only on the basis of “pecuniary” factors (which are defined as factors “expected to have a material effect on the risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and…funding policy”). Only in circumstances where a fiduciary is unable to distinguish investment alternatives on the basis of pecuniary factors does the current rule permit a fiduciary to weigh “non-pecuniary” factors.[4] The Proposed Rules eliminate the “pecuniary” versus “non-pecuniary” construct, and instead provide that a fiduciary “may” (read: “should”) consider any factor material to the risk/return analysis, including climate change and other ESG factors.
Broadens the Definition of a “Tie-Breaker.” The Proposed Rules appear to ease the burden of using ESG or other “collateral benefits” as a “tie-breaker” between competing investments.
- Under the current rule, “non-pecuniary” factors could only be considered as a “tiebreaker” if the applicable investments could not be distinguished based on “pecuniary factors” alone, a very difficult standard to meet in practice. The Proposed Rules would instead allow for collateral benefits to be considered as a “tie-breaker” where competing investments “equally serve the financial interests of the plan over the appropriate time horizon”; although not entirely clear what that means, it is clear that the DOL is seeking to make the “tie-breaker” standard easier to satisfy.
- As under the current rule, a fiduciary cannot accept reduced returns or greater risks to secure any such “collateral benefits.”
- Further, under the Proposed Rules, if the fiduciary makes an investment decision based on “collateral benefits” with respect to a designated investment alternative for an individual account plan, the “collateral benefit” characteristic must be prominently displayed in disclosure materials provided to participants and beneficiaries.
- The Proposed Rules would also eliminate the requirement under the current rule that, where a “non-pecuniary” factor is used as a “tie-breaker,” the fiduciary specifically document why it could not distinguish investment alternatives on “pecuniary” factors alone (including documentation regarding how the selected investment compared with alternative investments with regard to the “pecuniary” factors and how the chosen “non-pecuniary” factors are consistent with the interests of participants and beneficiaries in their retirement income or financial benefits under the relevant plan). The DOL believes this additional ESG-specific documentation requirement is unnecessary in light of ERISA’s general prudence obligation, and that this requirement may improperly prevent consideration of otherwise legitimate “collateral benefits” in a “tie-breaker” analysis.
Removes the Prohibition on Funds and Products Supporting “Non-Pecuniary” Goals as Qualified Default Investment Alternatives (“QDIAs”). In a flat reversal from the current rule, the Proposed Rules permit a fund, product, or model portfolio that expressly considers ESG factors to be used as a QDIA as long as it is financially prudent and meets the standards set out in the DOL’s QDIA regulation (29 C.F.R. 2550.404c-5). However, as noted above, the Proposed Rules do require disclosure to plan participants and beneficiaries if a designated investment alternative (including a QDIA) is selected based on a “collateral benefit” in a “tie breaker” scenario.

Key Takeaway: The Proposed Rules (if finalized) should provide ERISA fiduciaries with some comfort that they will not be penalized for appropriately considering ESG-type factors when weighing investment alternatives, where those factors are material to the risk-return analysis. Given the skepticism towards ESG-investing reflected in the current rule, fiduciaries have arguably been hesitant to consider ESG-type factors when making investment decisions. While the Proposed Rules are similar in concept to past, sub-regulatory DOL guidance, it is notable that they more explicitly acknowledge that ESG-type factors may be relevant to a fiduciary’s investment analysis and could impose liability for a breach of fiduciary duty if economically material ESG factors are not appropriately considered by the plan fiduciary.

The Proposed Rules would not provide carte blanche for a fiduciary to select investments solely based on ESG factors that are unrelated to the interests of participants and beneficiaries in retirement income or financial benefits – which would violate ERISA’s statutory duties of investment prudence and loyalty in any event – but should eliminate some of the burdens and uncertainty surrounding ESG-related investment decisions under the current rule. They do not, however, go so far as to label ESG-themed funds or investments as a special or separate asset class, which means that there is no “safe harbor” for a fiduciary to simply add the “best” of a selection of ESG-themed funds to a 401(k) or 403(b) investment fund lineup. Accordingly, since investment decisions are often judged after the fact with benefit of perfect hindsight, if an ESG-themed investment option underperforms its benchmark, the fiduciary will be at risk for such decision.

Proxy Voting Changes in the Proposed Rules

The Proposed Rules would also modify the current investment duties regulation as it applies to the exercise of shareholder rights (including proxy voting) in several key ways:

Clarifies that ESG Factors May Be Considered When Exercising Shareholder Rights. The Proposed Rules would clarify that although a fiduciary is generally required to act “solely in accordance with the economic interest of the plan and its participants and beneficiaries” when exercising shareholder rights, the fiduciary generally may consider ESG-related factors when making such decisions in the same manner as noted above for other investment-related decisions.
Rescinds Statement that Voting of Every Proxy is Not Required. The current rule specifically states that a fiduciary’s duties to manage shareholder rights does not require the voting of every proxy or the exercise of every shareholder right. The DOL, concerned that this statement could be read as broad authorization for fiduciaries to simply abstain from proxy voting (which the DOL describes as a “crucial lever” in ensuring that a plan’s interest as a shareholder is protected), proposes to delete this statement in the Proposed Rules. The preamble to the Proposed Rules does, however, acknowledge that a fiduciary may determine on a case-by-case basis that voting of a proxy may not be in a plan’s best interests (because of, for example, significant costs or efforts associated with voting).
Removes Voting Policy “Safe Harbors.” The current rule permits a fiduciary to discharge its duties with respect to proxy voting by establishing (i) a policy to limit voting resources to particular types of proposals that the fiduciary has prudently determined are substantially related to the relevant issuer’s business or expected to have a material effect on the value of the investment, and/or (ii) a policy of refraining from voting on proposals or particular types of proposals when the plan’s holdings in the relevant issuer are sufficiently small. Although the DOL continues to believe that proxy voting policies can generally help fiduciaries reduce costs and compliance burdens, it fears that these “safe harbor” examples would become widely adopted, and the DOL is not convinced that the examples adequately safeguarded plan participants and beneficiaries.
Streamlines Monitoring Obligations for Delegated Voting Rights and Advisory Services. The current rule provides specific monitoring obligations on plan fiduciaries who delegate proxy voting rights or utilize advisory services of proxy voting firms. The Proposed Rules instead would apply a more general “prudence and diligence” standard in the selection and monitoring of any such delegates or advisors.
Eliminates Recordkeeping Requirement Regarding Proxy Voting Activities. The Proposed Rules would eliminate the requirement that fiduciaries maintain records on proxy voting activities (or other exercises of shareholder rights). The DOL expressed its concern that this recordkeeping requirement could create a misperception that proxy voting (and other exercises of shareholder rights) are disfavored or have heightened fiduciary obligations (and therefore greater potential fiduciary liability) than other fiduciary activities. The DOL views proxy voting as a vital tool in shareholder representation (including for ERISA plan shareholders), and the Proposed Rules attempt to remove such misperception so as to not unnecessarily discourage proxy voting activity by ERISA plan fiduciaries.

Key Takeaway: Driven by a concern that the current rule has had the effect of chilling proxy voting activity by plan fiduciaries, the Proposed Rules would eliminate burdensome recordkeeping requirements and underscore that proxy voting is a key tool in managing investments in issuers that should be taken seriously by ERISA fiduciaries.

* * * * *

The DOL has invited comments on all aspects of the Proposed Rules. Comments are due no later than December 13, 2021.

Although the Proposed Rules (if finalized) would swing the pendulum back in the direction of permitting (as opposed to prohibiting) ERISA fiduciary consideration of ESG factors under certain circumstances, the bedrock principles of ERISA’s fiduciary duties of prudence and loyalty as applied to investment decisions generally remain unchanged – in particular, ERISA plan fiduciaries would still generally be required to base their investment decisions solely on the risk-adjusted value to plan participants and beneficiaries and in a manner so as to not subordinate their economic interests (such as by sacrificing investment returns or taking on additional risk) to unrelated goals or objectives.

We will keep you posted on any new developments in this area.

[1] See https://www.federalregister.gov/documents/2021/10/14/2021-22263/prudence-and-loyalty-in-selecting-plan-investments-and-exercising-shareholder-rights.

[2] For more on the current ESG rule and its history, see here and here.

[3] For more on the current proxy rule and its history, see here.

[4] Although the current rule does not expressly reference “ESG” as a “non-pecuniary” factor, the term is widely understood as targeting ESG-type concerns.

Tags: Department of Labor, DOL, ERISA, ESG, Fiduciary

COBRA Election and Payment Periods: Does One Year of “Tolling” Really Mean One Year?

By Paul M. Hamburger and Roberta Chevlowe on October 8, 2021 Posted in COBRA, Coronavirus

Remember the DOL/Treasury relief that tolled the COBRA election and payment deadlines for up to one year due to the COVID-19 pandemic (referred to below as “Tolling Relief”)? If you have been wondering whether, under that relief, a qualified beneficiary may wait one year to elect COBRA and then wait another year to make their initial premium payment (assuming the COVID-19 “outbreak period” has not ended sooner), the IRS has finally answered your question. (The answer is “no.”)

In Notice 2021-58, the IRS (with the blessing of DOL and HHS) clarified that the one-year Tolling Relief periods for COBRA elections and initial premium payments run concurrently not consecutively. That means that a qualified beneficiary generally will have only one year of total disregarded time for the election and initial payment periods (subject to the ambiguities noted below). The IRS illustrated this point as follows:

If a qualified beneficiary elected COBRA coverage outside of the normal 60-day COBRA election period (i.e., the qualified beneficiary took advantage of the Tolling Relief when electing COBRA coverage), the tolled period for making the initial premium payment begins on the date the COBRA notice was provided, and the payment deadline is one year and 105 days later (i.e., the 60-day election period plus the usual 45-day period in which to make the initial payment).
If the qualified beneficiary elected COBRA within the normal 60-day COBRA election period (i.e., the qualified beneficiary did not take advantage of the Tolling Relief when electing COBRA coverage), the tolled period for making the initial premium payment begins on the date of the COBRA election, and the payment deadline is one year and 45 days later (i.e., to account for the usual 45-day period in which to make the initial payment).

However, just to keep everyone on their toes, the IRS included an exception to the above rules, in the form of “transition relief.” Under the transition rule, a plan may not require a qualified beneficiary to make an initial COBRA premium payment before November 1, 2021, as long as the payment is made within one year and 45 days of the individual’s COBRA election. This is the IRS’s way of protecting individuals who may have thought they had a longer period in which to make their first COBRA payment (i.e., a new one-year tolling period applicable to their initial payment after delaying their COBRA election via the Tolling Relief).

With regard to payment deadlines for periods not covered by the initial COBRA premium payment (i.e., generally, premiums due each subsequent month), the IRS Notice indicates that the payments are due one year from the date that the payment originally would have been due, taking into account the normal 30-day grace period. In addition, the Notice reminds us of the earlier guidance stating that the Tolling Relief does not apply to elections of ARPA’s no-cost COBRA coverage.

Before anyone assumes that the IRS clarification is entirely clear, it is worth pointing out a couple of ambiguities introduced in the IRS Notice. The Notice provides that individuals have to make the initial COBRA election by “the earlier of (1) one year and 60 days after the individual’s receipt of the COBRA election notice, or (2) the end of the Outbreak Period.” Why did the IRS Notice refer to the date a COBRA notice was “received” as opposed to what appears in the immediately prior paragraph in the Notice where the IRS referred to the date COBRA notices were “provided”? We do not know. It is clear that existing COBRA guidance measures periods from when notices were provided, not received.

Here’s another ambiguity. What happens if a plan administrator delayed sending COBRA notices due to the Tolling Relief? The IRS Notice seems to suggest that each party involved in COBRA gets a separate one-year tolling period. There is one tolling period for qualified beneficiaries and one tolling period for plan administrators. So if the plan administrator provided the COBRA notice late, as permitted by the Tolling Relief, there could be a disregarded period of longer than one year in total for the qualified beneficiary.

The IRS Notice contains numerous examples illustrating how these rules work in real life, and is a must-read for anyone who is responsible for determining whether a COBRA election or payment is timely in these tolled times.

Tags: COBRA, coronavirus, tolling

District Court Dismisses Investment and Recordkeeping Claims Against 401(k) Plan Fiduciaries

By Tulio Chirinos and Jessica Guarracino on September 22, 2021 Posted in 401(k) Plans, Fiduciary Breach

A Kentucky federal district court ruled that a participant in CommonSpirit Health’s 401(k) plan failed to state plausible claims for breach of fiduciary duty related to the fees and performance of actively managed target date funds and recordkeeping fees.

The court first rejected plaintiff’s claim that the plan fiduciaries should have offered a passively managed target date suite in lieu of a more expensive and underperforming actively managed target date suite because “actively managed funds and passively managed funds are not ideal comparators.” The court also concluded that, even if the index funds were a viable comparator, there was no reason to infer a breach on account of the fact that: (i) the actively managed funds underperformed by less than 1%; and (ii) plaintiff’s reliance on a five-year “snapshot” of the actively managed funds’ underperformance was “relatively short” and excluded the funds’ later outperformance of the chosen benchmark. Similarly, the court dismissed plaintiff’s claims that two other actively managed funds underperformed for failure to provide meaningful benchmarks. Lastly, the court also disposed of plaintiff’s claims that, as a whole, the plan’s investment options were too expensive and that the plan’s recordkeeping fees were too high. In so ruling, the court explained that the plaintiff failed to provide an accurate calculation of the expenses and failed to identify another recordkeeper that would have been willing to conduct the same services for a lesser amount.

Before addressing the plaintiff’s allegations, the court rejected defendant’s argument that the plaintiff lacked Article III standing to bring claims related to investment options in which she did not invest because, in the court’s view, the claims were brought on behalf of the plan participants and alleged similar misconduct.

The case is Smith v. CommonSpirit Health, No. 20-cv-95, 2021 WL 4097052 (E.D. Ky. Sept. 8, 2021).

Tags: 401(k) Plans, Fiduciary Breach

EPCRS Update Offers New Tools to Correct Retirement Plan Errors

By Steven Weinstein and Jennifer Rigterink on September 21, 2021 Posted in Employee Plans Compliance Resolutions System

The IRS recently updated its “Employee Plans Compliance Resolution System” (EPCRS). By way of background, EPCRS is a correction program administered by the IRS for plan sponsors to correct certain retirement plan errors. EPCRS is comprised of three different components: the Self-Correction Program, the Voluntary Correction Program, and the Audit Closing Agreement Program.

The updated version of EPCRS, which was published in Revenue Procedure 2021-30, supersedes the prior version of EPCRS. Plan sponsors and administrators should familiarize themselves with the EPCRS changes, which are generally effective July 16, 2021. The following provides an overview of some of the significant changes made to EPCRS.

New Flexibility to Correct Retirement Plan Overpayments

Correcting retirement plan overpayments—which occur when a retirement plan has paid more to a participant or beneficiary than permitted under the terms of the plan—can be a hassle. Under EPCRS, plan sponsors are charged with recouping overpayments from participants and beneficiaries, or, if that fails, making a corrective contribution to the plan in the amount of the overpayment. Any overpayment reimbursements must be adjusted for earnings.

To simplify the process of correcting overpayments from well-funded defined benefit plans, the EPCRS update provides two new alternative correction methods for defined benefit plan overpayments: (1) the funding exception correction method, and (2) the contribution credit correction method. To rely on either method, the overpayment cannot be associated with a qualified plan limit failure, nor can the overpayment recipient be a disqualified person. Each method is explained in more detail below.

Funding exception correction method: This method provides that no corrective payment with respect to an overpayment is required, provided that the plan meets certain funding levels. To rely on this method, the plan must meet the following funding levels as of the date of correction: (1) For a single employer plan, the plan’s certified or presumed adjusted funding target attainment percentage (AFTAP) is at least 100%, and (2) For a multiemployer plan, the plan’s most recent annual funding certification indicates the plan is in the “green zone.” Future benefit payments must be reduced to the correct payment amount. In addition, if a plan sponsor relies on this method, the plan sponsor cannot seek additional corrective payments related to the overpayment from any party (including the overpayment recipient, and, any spouse or beneficiary of an overpayment recipient).
Contribution credit correction method: This method reduces the corrective payment that would otherwise be required to be made with respect to the overpayment by a “contribution credit.” At a high level, the contribution credit comprises two parts: (1) the amount by which the overpayment amount has already been reflected in an increase in the required minimum funding contribution to the plan, and (2) certain additional contributions in excess of minimum funding requirements paid to the plan after the date of the overpayment. If the contribution credit exceeds the amount of overpayment, no corrective payment to the plan is due and the plan sponsor cannot seek additional corrective payments from any party (including the overpayment recipient, and, any spouse or beneficiary of an overpayment recipient). If a net overpayment remains after application of the contribution credit, the plan sponsor or another party must take further corrective action to reimburse the plan for the remaining overpayment. Like the funding exception method, future benefit payments must be reduced to the correct amount.

Both of the new overpayment correction methods described above are optional. Consistent with the prior version of EPCRS, plan sponsors may continue to correct overpayments by recovering the amount of the overpayment from the overpayment recipient and contributing that amount to the plan (adjusted for earnings). However, to the extent that recoupment of overpayments has proved impractical or time-consuming, the updated version of EPCRS provides useful tools to correct well-funded defined benefit plan overpayments.

In addition to the changes related to the correction of defined benefit plan overpayments summarized above, the EPCRS update makes two overpayment correction changes that apply to retirement plans generally, which are summarized below:

Increase to small overpayment limit: The threshold for small retirement plan overpayments for which no correction is required is increased from $100 to $250. This increase potentially reduces the correction burden for plans with large numbers of small overpayments.
Repayment through installment agreement: Plan sponsors seeking to recoup overpayments from recipients may now permit the recipient to make repayment through an installment agreement, in addition to a single lump sum. This change should provide additional flexibility for recipients to reimburse plan overpayments.

Expansion of Self-Correction Program

The Self-Correction Program (SCP) under EPCRS permits plan sponsors to correct certain failures without IRS involvement or approval (and without compliance fees). The updated version of EPCRS provides additional flexibility for plan sponsors to use SCP by extending the period during which plan sponsors can correct significant failures under SCP by an additional year, as well as by expanding the eligibility requirements to correct certain operational errors by retroactive plan amendment. These changes are discussed in more detail below.

Self-correction period for significant failures extended by one year: Under the prior version of EPCRS, “significant” failures were eligible for correction under SCP during the period ending on the last day of the second plan year following the plan year in which the failure occurred. The EPCRS update extends the SCP period by an additional year to the last day of the third plan year following the plan year in which the failure occurred. This provides additional time for plan sponsors to correct significant failures under SCP. Relatedly, because the EPCRS safe harbor correction methods for certain employee elective deferral failures are keyed to the SCP correction period, this one-year extension also extends the availability of the safe harbor correction method for those failures.
Expanded self-correction by retroactive plan amendment: EPCRS allows plan sponsors to correct certain operational failures by adopting a retroactive plan amendment to make the terms of the plan conform to its operation—provided that the amendment results in an increase to a benefit, right, and feature (BRF) that applies to all eligible employees. The EPCRS update eliminates the requirement that the increased BRF apply to all eligible employees, making it possible to correct additional types of errors by retroactive plan amendment under SCP.
Extension of automatic enrollment safe harbor correction sunset date to December 31, 2023: Certain 401(k) plans provide for “automatic enrollment,” whereby employees are deemed to automatically enroll in the plan at a specified deferral rate. Under the prior version of EPCRS, errors relating to implementation of a plan’s automatic enrollment feature could be corrected without making the qualified nonelective contribution that would otherwise be required for the missed deferral opportunity (assuming certain notice and timing requirement were met), provided the error first occurred on or before December 31, 2020. Effective January 1, 2021, the EPCRS update extends the sunset date for this correction method to errors first occurring on or before December 31, 2023.

Elimination of Anonymous VCP Submissions, Addition of Pre-Submission Conference

Plan sponsors may utilize the Voluntary Correction Program (VCP) for errors not eligible for correction under the Self-Correction Program. Filing a VCP application permits a plan sponsor to apply to the IRS for approval of the proposed correction method. For several years, VCP has included an optional “anonymous” submission process whereby plan sponsors could submit VCP applications without identifying information, meaning that the IRS could approve the proposed correction before learning the sponsor’s identity. Effective January 1, 2022, the anonymous VCP submission process is eliminated.

Instead, effective January 1, 2022, plan sponsors may submit a request for an anonymous pre-submission conference with the IRS regarding any proposed correction method that is not a “safe harbor” correction method under EPCRS. Any request must be written and include all relevant facts. If the conference request is granted, the IRS will provide verbal feedback about the proposed correction method; however, any feedback is advisory only and not binding on the IRS in any future VCP application regarding the issues discussed at the conference.

* * *

The EPCRS update includes significant new tools for plan sponsors to correct common retirement plan errors. Plan sponsors and administrators should familiarize themselves with the new rules, and evaluate whether any ongoing correction projects started under the prior version of EPCRS should be adjusted to reflect the EPCRS update.

Tags: Employee Plans Compliance Resolution System, EPCRS, Voluntary Correction Program

[Podcast]: Special Financial Assistance for Multi-employer Pension Plans (Part 2)

By Robert Projansky and Justin Alex on August 20, 2021 Posted in Benefits Brief Podcast, PBGC

This episode of The Proskauer Benefits Brief is the second of our three-part series analyzing the Pension Benefit Guaranty Corporation (PBGC) guidance on the new special financial assistance program for troubled multiemployer pension plans that was created by the American Rescue Plan Act (ARPA). Tune in as Rob Projansky and Justin Alex dig into more details on the guidance and the program.

Listen to the podcast

Tags: American Rescue Plan Act, American Rescue Plan Act of 2021, Multiemployer Pension Fund, multiemployer pension plan, PBGC, Pension Benefit Guaranty Corporation

District Court Partially Dismisses ERISA 401(k) Fee and Performance Claims for Lack of Standing

By Myron Rumeld and Kyle Hansen on August 10, 2021 Posted in 401(k) Plans, Standing

A federal district court in New York recently granted Omnicom Group Inc.’s (“Omnicom’s”) motion to dismiss, for lack of Article III standing, claims challenging the offering of investment options in Omnicom’s 401(k) plan in which the plaintiff participants did not invest. The court denied Omnicom’s motion to dismiss, however, with respect to the remainder of the claims, which alleged that Omnicom’s administrative committee breached its fiduciary duties under ERISA by including allegedly costly and underperforming funds in its 401(k) plan, causing the plan to pay excessive recordkeeping fees and offering an investment lineup that was overly expensive.

With respect to the standing argument, the court first rejected defendants’ reliance on the Supreme Court’s recent decision in Thole v. U.S. Bank N.A., 140 S. Ct. 1615 (2020), which held that participants in a defined benefit plan do not have standing to sue when they personally suffered no monetary injury. The court concluded that it was of “decisive importance” that Thole involved a defined benefit plan as opposed to a defined contribution plan, like the one at issue here. Nevertheless the court held that this did not change the fact that a plaintiff must allege and show that she has been personally injured to demonstrate injury-in-fact as required under Article III. Relying on analogous case law from the Second Circuit, the court concluded that a plaintiff in a defined contribution plan who does not personally invest in a challenged fund lacks Article III standing to sue.

In so ruling, the court rejected the notion that plaintiffs suing derivatively on behalf of a plan under ERISA § 502(a)(2) automatically have standing. The court explained that a plaintiff must assert both a cause of action under ERISA and a constitutionally cognizable injury-in-fact. Since plaintiffs could not have suffered an injury from the alleged mismanagement of funds in which they did not invest, the court concluded that plaintiffs could not demonstrate the requisite injury. Similarly, the court concluded that merely because plaintiffs filed their lawsuit as a class action did not change the analysis because the requirements of Article III are “no less true with respect to class actions” than with other suits. Finally, despite its finding that Thole was inapplicable, the court did cite Thole for its statement that “there is no ERISA exception to Article III.”

The court then concluded that plaintiffs can only seek relief with respect to funds in which they were invested. The court did, however, allow plaintiffs to challenge the entire suite of target date funds even though plaintiffs invested in only five of the thirteen funds, because the funds were all part of the same product line.

With respect to the claims for which plaintiffs had standing, the court rejected defendants’ arguments for dismissal. It concluded that plaintiffs stated a claim for imprudence with respect to the suite of target date funds because plaintiffs sufficiently alleged that the funds charged higher fees, or underperformed relative to comparable funds. In so ruling, the court referenced what it found to be the trend among courts in the Second Circuit to defer deciding whether the complaint identified suitable comparator funds until after discovery. For the same reason, the court declined to dismiss plaintiffs’ claim that the overall investment menu was overly expensive.

The court also declined to dismiss plaintiffs’ claim that the plan paid excessive recordkeeping fees because, it found, plaintiffs provided sufficient evidence that comparable plans paid lower fees and defendants’ arguments to the contrary were more appropriately evaluated after discovery. Finally, the court allowed plaintiffs’ failure to monitor and knowing breach of trust claims to proceed because plaintiffs plausibly alleged an underlying breach of fiduciary duty and that defendants knew or should have known of the alleged breaches.

View from Proskauer

The court’s ruling on the standing issue is potentially significant because plaintiffs frequently challenge the prudence of funds in which they did not personally invest. It is unclear how helpful it will ultimately prove to be, however, because many courts have already ruled that plaintiffs do have standing to challenge funds in which they did not invest. Hopefully, courts examining fresh challenges on standing grounds will follow this court’s lead, given the thorough and persuasive manner in which the court presented its rationale for the ruling.

The case is In re Omnicom ERISA Litig., No. 20-cv-4141 (S.D.N.Y. Aug. 2, 2021).

Tags: 401(k), Article III, Standing

Fifth Circuit Holds Participants Lack Standing To Challenge Plan Investment Options

By Myron Rumeld, Tulio Chirinos and Sydney Juliano on August 5, 2021 Posted in 401(k) Plans

The Fifth Circuit affirmed the dismissal, for lack of standing, of a fiduciary breach representative action against American Airlines and its 401(k) plan investment committee. Ortiz v. American Airlines, Inc., No. 20-10817, 2021 WL 3030550 (5th Cir. July 19, 2021). As discussed in an earlier post, two former American Airlines employees brought this suit in 2016 on behalf of the American Airlines 401(k) plan, alleging that the plan fiduciaries’ investment decisions breached their fiduciary duties of loyalty and prudence and violated ERISA’s prohibited transaction rules. In particular, plaintiffs alleged the defendants imprudently selected and retained a demand-deposit fund—sponsored and managed by American Airlines Federal Credit Union—as a plan investment option instead of a stable value fund, which had a higher rate of return. Both named plaintiffs invested in the credit union fund but did not invest in a stable value fund that was added to the plan’s investment menu during the relevant statutory period.

Last year, a judge in the Northern District of Texas dismissed the case, holding that plaintiffs lacked Article III standing to pursue their claims. In so holding, the court explained that any harm from defendants’ failure to offer a stable value fund was speculative since: (i) plaintiffs did not show they would have invested in a stable value fund had it been available to them; and (ii) even when it did become available, plaintiffs did not invest in it.

The Fifth Circuit agreed with the district court’s conclusion that the plaintiffs lacked standing to bring their claims, but employed slightly different reasoning. At the outset, the Court rejected the application of a recent Supreme Court case, Thole v. U.S. Bank N.A., 140 S. Ct. 1615 (2020), to the issue of whether plaintiffs suffered a cognizable injury for purposes of Article III standing. The Court wrote that the defendants could not rely on Thole to argue that plaintiffs did not suffer a concrete injury because the Supreme Court “explicitly drew a distinction” between the defined benefit plan at issue there—in which participants’ entitlements to benefits are fixed independent of fiduciaries’ investment decisions—and defined contribution plans such as the American Airlines 401(k) plan, in which participants’ benefits are tied to their account value and thus to plan fiduciaries’ investment decisions.

The Fifth Circuit’s decision instead focused on the causation prong of the Article III standing analysis. Unlike the district court, the Court did not focus only on whether plaintiffs would have invested in a stable value offering if one was available, but on whether plaintiffs would have done so if, counterfactually, the plan never offered the demand-deposit option at all. Here, because plaintiffs did not transfer out of the demand-deposit fund even when a stable value option became available, the Court found it unlikely that plaintiffs would have invested in a stable value option even if the demand-deposit fund was never available. Accordingly, the Court held that to the extent plaintiffs suffered injuries, those injuries were caused by their own investment decisions and not by defendants.

Proskauer’s Perspective

Ortiz is notable because it appears to be the first appellate court to consider whether Thole’s holding applies in the defined contribution plan context. The decision is also notable for its causation analysis for purposes of determining Article III standing. This could prove to be significant in light of the Supreme Court’s ruling in CIGNA Corp. v. Amara, 563 U.S. 421 (2011), which held that plaintiffs seeking plan reformation to remedy a misleading plan communication need not prove detrimental reliance on the communication. Ortiz suggests that, in spite of Amara, defendants may be able to effectively reinstate a detrimental reliance requirement by arguing that, in the absence of detrimental reliance, there is no showing of causation and harm sufficient to satisfy constitutional standing requirements.

Tags: 401(k) Plans, Article III, Fiduciary Breach, fifth circuit

[Podcast]: Special Financial Assistance for Multiemployer Pension Plans (Part 1)

By Robert Projansky and Justin Alex on August 3, 2021 Posted in Benefits Brief Podcast, PBGC

This episode of The Proskauer Benefits Brief is the first of our three-part series analyzing the Pension Benefit Guaranty Corporation (PBGC) guidance on the new special financial assistance program for troubled multiemployer pension plans that was created by the American Rescue Plan Act (ARPA). In this initial episode, partner Rob Projansky and senior counsel Justin Alex cover the basic contours of the program.

Listen to the podcast

Tags: American Rescue Plan Act, American Rescue Plan Act of 2021, Multiemployer Pension Fund, multiemployer pension plan, PBGC, Pension Benefit Guaranty Corporation

An Additional Word from IRS Regarding the ARP COBRA Subsidy

By Paul M. Hamburger and Roberta Chevlowe on July 27, 2021 Posted in COBRA

The IRS just released some new supplemental guidance on the COBRA premium subsidy in the American Rescue Plan Act (“ARP”). IRS Notice 2021-46, released July 26, 2021 provides additional color on a handful of discrete subsidy issues that had been addressed in earlier guidance but still caused some confusion. The guidance, in Q&A format, addresses:

the availability of the subsidy during extended coverage periods due to disability determinations, second qualifying events, and state law extensions,
ineligibility for the subsidy due to other group health coverage or Medicare,
when a state continuation coverage program qualifies as “comparable” to federal COBRA coverage, and
who is the “premium payee’ for purpose of claiming the tax credit, including in the context of controlled groups, MEWAs, and business reorganizations.

The Notice can be found here. For more information on how to claim the ARP COBRA tax credit, see our blog here.

Tags: American Rescue Plan Act of 2021, ARP, ARPA, calculate, COBRA, COBRA Subsidy, Consolidated Omnibus Budget Reconciliation Act, DOL, Health and Welfare, IRS, notice 2021-31, premium assistance, tax credit

A Practical Guide to Claiming the COBRA Premium Assistance Tax Credit

By Paul M. Hamburger, Tanusha Yarlagadda and Jennifer Rigterink on July 26, 2021 Posted in COBRA

Over the last few months, employers and plan administrators have concentrated on identifying qualifying individuals eligible for COBRA premium assistance under the American Rescue Plan Act of 2021 (“ARP”), sending out proper notices, and collecting election forms. Now that the dust has settled on the first round of election notices, employers and plans have turned their attention to another pressing topic: claiming the COBRA premium assistance tax credit.

Why is it Important to Apply for the Tax Credit?

ARP provides a 100% COBRA premium subsidy for qualifying individuals from April 1, 2021, through September 30, 2021. This subsidy is implemented by a tax credit mechanism. This means that the person to whom the COBRA premiums would otherwise be payable in the absence of the COBRA subsidy—generally, the employer or the plan and, sometimes, the insurer—must claim the tax credit to be reimbursed for the cost of providing “free” COBRA coverage to qualifying individuals. For details on determining who the “premium payee” is for purposes of the COBRA premium subsidy, please see our blog post overview.

What Taxes are Offset by the Credit?

The tax credit is intended to offset Medicare tax liability. If the amount of COBRA premium assistance provided to qualifying individuals exceeds the Medicare tax payable (for example, in the case of a multiemployer plan that does not have any Medicare tax liability), a refund of the excess amount can be requested.

How Is the Tax Credit Claimed?

The tax credit is generally claimed by reporting the COBRA premium assistance provided to qualifying individuals on the quarterly employment tax return (IRS Form 941). (Premium payees that do not normally file the IRS Form 941 because they do not have federal employment tax liability, such as some multiemployer plans, will have to do so to claim the tax credit.) There is a worksheet provided with the instructions to the IRS Form 941 that outlines how to calculate the two parts of the tax credit: (1) First, the non-refundable portion of the tax credit (the amount by which the COBRA premium assistance is offset by the Medicare tax liability); and (2) Second, the refundable portion of the tax credit (the excess, if any, of the COBRA premium assistance provided over the Medicare tax liability).

For more information about calculating the amount of the COBRA premium assistance that can be claimed as a tax credit, please see our blog post.

How Can the Tax Credit be Paid in Advance?

It is possible to claim the tax credit even before the IRS Form 941 filing deadline. There are two additional steps needed to get the credit faster. (1) First, an employer (or plan with federal employment tax liability, such as a multiemployer plan with employees or a multiemployer plan that makes benefit payments subject to withholding) may reduce the federal employment taxes it would otherwise be required to deposit up to the amount of the anticipated COBRA premium assistance tax credit. (2) Second, an advance of the anticipated tax credit after reducing available federal employment tax deposits may be claimed by filing an IRS Form 7200 with the IRS.

Practice Pointer: If a plan does not have any federal employment tax liabilities to reduce in step one (for example, in the case of a multiemployer plan that does not have employees and does not make any benefit payments subject to withholding), the plan can go straight to step two and file an IRS Form 7200 to request the anticipated tax credit.
Practice Pointer: IRS Form 7200 must be faxed to the IRS.

Even if the two steps above are used to claim the tax credit in advance, an IRS Form 941 is still required to complete the full claim for the tax credit. Any advance of the tax credit will need to be reconciled when IRS Form 941 is filed.

When Can the Tax Credit be Claimed?

Claiming the tax credit operates on a rolling deadline basis. There are two key dates, each described below.

Date of COBRA Election: The person to whom premiums are payable (e., the employer or the plan) becomes eligible to claim a tax credit for the COBRA premiums not paid by the qualifying individual so far on the date that it first receives the qualifying individual’s COBRA election. For example, if an employer receives a qualifying individual’s COBRA election on June 17, and the individual has not paid premiums starting April 1, the employer would become eligible on June 17 to claim the tax credit for the period of coverage from April 1 through June 30.
Beginning of Subsequent Periods of Coverage: At the beginning of each subsequent period of coverage, the person to whom premiums are payable becomes eligible to claim a tax credit for that coverage period (provided the individual remains eligible for COBRA premium assistance for that coverage period). Returning to the facts used above, the employer would become eligible on July 1 to claim the tax credit for coverage provided from July 1 through July 31.

When Can the Tax Credit be taken as an Advance?

If an advance of the tax credit is desired, different timing rules apply.

As a reminder, to claim the tax credit before filing an IRS Form 941, there are two steps: (1) Reduce federal employment tax deposits, and (2) Following the reduction of employment tax deposits to the extent available, file an IRS Form 7200 with the IRS to request an advance of the anticipated excess tax credit. The timing rules for eligibility to reduce federal employment tax deposits use the same schedule described above. However, if the employer or plan wants to file an IRS Form 7200 to request the anticipated excess tax credit following reduction of deposits, it must wait until the end of the payroll period in which it becomes eligible to claim the tax credit.

Returning to the second part of our example above, for coverage provided from July 1 through July 31, the employer would become eligible to reduce employment tax deposits on July 1—the first day of that coverage period. To file IRS Form 7200 to request an advance of the tax credit for coverage provided from July 1 through July 31, the employer would need to wait until July 16—after the end of the payroll period in which the employer first become eligible to claim the July credit (assuming the employer’s payroll period ran from July 1 through July 15).

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Takeaway

This blog post provides a general overview on how to claim the COBRA premium assistance tax credit. Employers and plans should develop a course of action to ensure timely recovery of any tax credits to which they are entitled. But don’t delay – for most employers and plans, the next Form 941 filing deadline is July 31, 2021, so the time to act is now.

Tags: ARP, ARPA, COBRA, COBRA Subsidy, premium assistance, tax credit

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