Employee Benefits & Executive Compensation Blog

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

DOL Statement on Private Equity Investment Emphasizes Fiduciary Responsibility

On December 21, 2021, the Department of Labor (the “DOL”) published a Supplemental Statement (the “Supplemental Statement”) to its June 3, 2020 Information Letter (the “2020 Letter”) addressing fiduciary considerations for including private equity within an investment option under an ERISA-covered defined contribution plan (e.g., a 401(k) or 403(b) plan).  In response to questions and reactions that the DOL received from a “range of stakeholders” regarding the 2020 Letter, as well as a “Risk Alert” that the SEC issued in June 2020 regarding compliance issues for managers of private equity and hedge funds, the Supplemental Statement advised that the 2020 Letter should not be “misread[] . . . as saying that PE – as a component of a designated investment alternative – is generally appropriate for a typical 401(k) plan.”

So how did we get here, and what does this mean?

Many investment options under defined contribution plans include exposure to private equity, and plan fiduciaries often consider adding new asset classes to plan lineups, or to investments within plan lineups, for diversification and potential upside.  For a long time, stakeholders have craved clarity on how ERISA’s fiduciary rules apply to these investments; and challenges to the prudence of alternative investment strategies are actively being litigated.

The 2020 Letter was welcomed by many because the DOL stated affirmatively that an investment option under a defined contribution plan could have an allocation to private equity—albeit “limited,” which the DOL suggested meant not more than 15%.  However, the 2020 Letter also had many caveats, including a statement that it did not address private equity being offered as a standalone investment option (noting that direct investments in private equity present “distinct legal and operational issues”), and highlighting a range of considerations for plan fiduciaries to address, with no safe harbor.  Still, its positive tone generated increased interest from plan fiduciaries and asset managers.

The Supplemental Statement is more cautionary, emphasizing that the DOL “did not endorse or recommend” offering designated investment alternatives with private equity components, and that it wanted “to ensure that plan fiduciaries do not expose plan participants and beneficiaries to unwarranted risks by misreading” the 2020 Letter as saying that these investments are “generally appropriate for a typical 401(k) plan.”

The Supplemental Statement highlights the following key points:

  • The DOL agrees with some stakeholders that representations in the 2020 Letter about the benefits of private equity investments were void of counter-arguments and research data from independent sources outside of the private equity industry.
  • Plan fiduciaries have a responsibility to be prudent in selecting and monitoring any investment alternative. Understanding and evaluating exposure to private equity is part of this responsibility.
  • As explained in the 2020 Letter, prudent evaluation of private equity requires specialized expertise. Fiduciaries considering private equity must have this expertise or seek it from qualified managers or advisers.  The DOL is concerned that a “typical” plan fiduciary might not have the expertise.

Ultimately, the Supplemental Statement does not change the bottom line from the 2020 Letter.  Limited private equity allocations within a defined contribution plan investment are still permitted.  The Supplemental Statement simply highlights the importance of rigorous analysis when evaluating the prudence of an investment, and it stresses the particular complexity of private equity.

*          *          *

We doubt the Supplemental Statement will be the last word on this topic.  We will continue to monitor developments.


You Can Go Home Again: Tri-Agencies Release New Group Health Plan Coverage Requirements for Over-the-Counter At-Home COVID-19 Tests

Looking forward to the weekend?  Many employers and plan administrators may also have been . . . up until yesterday, when the government issued new requirements that take effect on Saturday.  Specifically, starting this Saturday, January 15, 2022—yes, that’s four short days from now—and through the end of the public health emergency, group health plans and issuers are required to cover over-the-counter (OTC) at-home COVID-19 tests without participant cost-sharing, preauthorization, or medical management, even if no health care provider was involved in ordering the test.

How Did We Get Here?

By way of background, almost two years ago, pursuant to the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), group health plans and issuers were required to cover “FDA-approved” COVID-19 testing without participant cost-sharing, preauthorization, or medical management.  Until relatively recently, FDA-approved COVID-19 testing required the involvement of a health care provider.  Once FDA-approved at-home COVID-19 tests that could be self-administered and self-read became widely available, it was unclear whether these tests were subject to the same coverage requirements that applied to COVID-19 testing involving a health care provider.

In response to a directive issued by the White House on December 2, 2021 to “clarify” the treatment of such at-home COVID-19 tests, the Departments of Labor, Treasury, and HHS released a set of “FAQs” on January 10, 2022, confirming that group health plans and issuers must provide coverage of OTC at-home COVID-19 tests without participant cost-sharing, preauthorization, or medical management.  This marks a significant expansion of the prior guidance on COVID-19 testing,[1] which mandated coverage of at-home COVID-19 tests only when required as a result of an individualized assessment or a test order from a health care provider.

What is the Scope of the Coverage Mandate for OTC At-Home COVID-19 Tests?

Group health plans and issuers will now be required to cover FDA-approved OTC at-home COVID-19 tests, regardless of whether a health care provider ordered the test or examined the individual to determine the need for a test (unless the FDA approval for the test requires the provider to have done so).  This coverage must be provided without participant cost sharing, preauthorization or medical management.

In the FAQs, the Departments affirmed that the new requirements do not impact prior guidance mandating coverage of COVID-19 testing ordered by an attending health care provider.  The Departments also confirmed that the new requirements do not alter prior guidance stating that employment-based COVID-19 testing (i.e., surveillance testing) is not required to be covered by group health plans and issuers.

How Is the Payment Made by the Plan or Issuer?

Group health plans and issuers can choose whether to pay sellers of COVID-19 tests directly (what the agencies call “direct coverage”) or require the covered individual to pay for it at the point of sale and then submit a reimbursement request to the plan or issuer.  The guidance strongly encourages direct coverage of OTC at-home COVID-19 testing.

Does the Guidance Require Unlimited Coverage of OTC At-Home COVID-19 Tests?

In a word, almost.  Coverage may not be limited to preferred pharmacies or retailers and must be provided without participant cost-sharing or medical management.

However, the guidance outlines a limited non-enforcement policy whereby plans and issuers may, under certain circumstances limit (1) the amount paid for at-home COVID-19 tests obtained from non-network pharmacies and retailers, but only if certain safe harbor requirements are met, and (2) the number of tests eligible for reimbursement in a 30-day period. These exceptions are described in more detail below.

In addition, although applying medical management techniques to at-home COVID-19 tests is prohibited, plans and issuers may take steps to prevent, detect, and address fraud and abuse.  Examples of permissible actions include requiring participant attestations that tests were purchased for personal use and not for employment-based or resale purposes, and, requiring documentation of a proof of purchase for tests showing the purchase price and date.

Proskauer observation: While the guidance is explicit that these steps cannot be overly burdensome, even an attestation can be somewhat useful (albeit hardly perfect) in mitigating the risk of fraud and abuse.

Can Plans and Issuers Limit the Amount They Reimburse Non-Network/Non-Preferred Pharmacies and Retailers for OTC At-Home COVID-19 Tests?

Generally, no, but the guidance includes a limited non-enforcement policy whereby a plan or issuer that meets certain requirements may limit the amount of reimbursement for tests from non-network pharmacies or retailers to the lesser of (1) the actual price of the test, or (2) $12.

This safe harbor may be used only if the plan or issuer makes direct coverage of at-home tests available through its pharmacy network and a direct-to-consumer shipping program at no cost to participants. Moreover, to use this safe harbor, access to an adequate number of tests must be available through direct coverage, based on a facts and circumstances analysis.  If there are not adequate tests through direct coverage, the plan or issuer would need to meet the normal requirements and could not set limits on the reimbursement amount for tests obtained from non-network pharmacies or retailers.

Proskauer observation: This safe harbor is an important limitation that helps address the risk of unscrupulous retailers significantly raising prices in order to take advantage of payors.  However, the scope and utility of this safe harbor is somewhat unclear in times like the present where there is a shortage of OTC tests. In any case, plans sponsors will want to contact their pharmacy benefit managers or other networks in short order to determine whether they have a direct coverage solution that will satisfy the safe harbor requirements and allow the plan to impose a dollar limitation on out-of-network costs.

Can Plans and Issuers Set Limits on the Number of OTC At-Home COVID-19 Tests Eligible for Reimbursement?

Yes. The guidance provides a limited non-enforcement policy under which a plan or issuer may limit the frequency of at-home COVID-19 tests to 8 tests per 30-day period (or calendar month).  This limit is applied on a per-participant or per-beneficiary basis, and cannot be limited to a smaller number of tests over a shorter period (e.g., 4 tests in a 15-day period).

Proskauer observation: While the limitation should still be sufficiently generous to provide coverage where necessary, it is welcome in that it helps limit fraud and abuse, as well as the potential for hoarding, which limits test availability.

Can Plans and Issuers Educate Participants on OTC Testing?

Yes, as long as the educational and informational resources provided by the plan or issuer are consistent with the FDA’s authorization for the tests and make clear that OTC testing coverage is provided as required.  The information could include an explanation of the differences between OTC tests and those performed/ordered by a provider and/or processed in a lab, quality information for specific tests (e.g., shelf life, expected test performance, etc.), how to obtain tests directly from the plan or network providers and how to submit a claim for reimbursement.

Proskauer observation: Plans and issuers may wish to consider taking the Departments up on this suggestion, as it may make it more likely that OTC testing is used effectively and does not result in duplicative or excess costs.

[1]  See Part 43 (https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-43.pdf) and Part 44 (https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-44.pdf) of the Affordable Care Act Implementation Frequently Asked Questions, and, in particular, Q4 of Part 43.

IRS Proposal Extending Deadlines for ACA Reports to Individuals

The Internal Revenue Service (“IRS”) recently issued proposed regulations affecting certain reporting deadlines under the Patient Protection and Affordable Care Act (“ACA”).  Specifically, proposed regulations would make permanent an automatic 30-day extension for issuing Forms 1095-B and 1095-C to covered individuals and employees, which would otherwise be due by January 31. The proposed regulations also introduce an alternative method for providing these forms to individuals, which may reduce the reporting burden, and eliminated the good faith relief for reporting entities whose ACA forms are incomplete or inaccurate.

While the proposed regulations technically would become effective for coverage in calendar years beginning January 1, 2022, the IRS has indicated that reporting entities may rely on them starting with the reports due for 2021 (provided to covered individuals and employees in 2022).

Background on Required ACA Forms

Pursuant to Sections 6055 and 6056 of the Internal Revenue Code (the “Code”), providers of health coverage (insurance companies or self-insured plans) and applicable large employers (“ALEs,” generally those with 50+ full-time or full-time equivalent employees) must file statements with the IRS, and distribute statements to covered individuals or employees (as applicable) regarding whether they were offered or provided “minimal essential coverage” each month of the prior year. The prescribed forms for these statements are:

  • To the IRS: Form 1094-B (from insurers) and Form 1094-C (from ALEs) – currently due on or before February 28 (or March 31 if filed electronically)
  • To individuals: Forms 1095-B (from insurers) and 1095-C (from ALEs) – currently due on or before January 31

Applicable regulations also permit reporting entities to apply for a 30-day extension for good cause for providing Forms 1095-B and 1095-C to individuals, and provide authority for the Commissioner to issue guidance granting automatic 30-day extensions.

From 2015 to 2020, the IRS recognized the difficulty of a January 31 turn-around and issued temporary relief in the form of automatic 30-day extensions of the deadline to provide Forms 1095-B and 1095-C to individuals. See, e.g., IRS Notice 2020-76.  Although the temporary relief did not extend the deadline to file the required information to the IRS.

Proposed Extended Deadline for Forms 1095-B and 1095-C (to Individuals)

The proposed regulations would now make permanent and automatic the 30-day extension for Forms 1095-B and 1095-C – employers and insurance providers would not be required to demonstrate good cause.  No further extensions are contemplated – the good cause provision and the authority for the Commissioner to issue additional automatic extensions are eliminated. Similar to the previous temporary extensions, the proposed regulations do not extend the deadline to file this information with the IRS.

    Old Deadline New Deadline
Deadline to Distribute Forms to Employees and Other Covered Individuals

(Forms 1095-B and 1095-C)

  January 31, 2022


With possible 30-day extension for good cause upon application to the IRS

March 2, 2022
Deadline to File with the IRS

(Forms 1094-B and 1094-C)

  Paper: February 28, 2022

Electronic: March 31, 2022

(note: electronic filing is required if filing 250+ forms)

With possible 30-day extension upon application to the IRS using Form 8809


Alternative Methods of Furnishing Statements to Individuals

The proposed regulations would also codify and expand on previous temporary relief that provided alternative methods of complying with the requirements to furnish notices to individuals. Specifically, as long as the shared responsibility penalty remains at $0, reporting entities will be deemed to comply with the requirements to furnish notices to certain individuals if they timely post a “clear and conspicuous” notice on their website, through October 15, with contact information and an explanation of how the individual could receive a copy of the applicable form. If requested by an individual, the form must be furnished within 30 days.

This relief applies to ALEs, insurers and multiemployer plans as follows:

  • For ALEs: applies to the requirement to provide Forms 1095-C (and/or Forms 1095-B if the coverage is self-insured), but only with respect to non-full-time employees and non-employees enrolled in the self-insured plan. Thus, ALEs will still have to furnish the applicable forms to full-time employees in the traditional manner.
  • For insurers and multiemployer plans: applies to the requirement to provide Forms 1095-B to all covered individuals.

The relief does not change any of the requirements for reporting to the IRS. Thus, even if an ALE or plan that takes advantage of the relief, it will still have to complete Forms 1095-B and 1095-C in order to file them with the IRS.

Reporting entities should also be aware that, notwithstanding (and in some cases as a result of) the elimination of the penalty under the federal individual mandate, five states and Washington, D.C. have their own individual mandates and concomitant information reporting requirements.  Reporting entities should look to their particular state’s requirements because state information reporting requirements may not align with the federal guidance, including with respect to the requirement to send reporting forms to employees or other covered individuals.

Transitional Good Faith Relief Eliminated

The transitional good faith relief from penalties under Code Section 6721 and 6722 (i.e., the penalties for reporting incorrect or incomplete information on returns or individual statements) will not be extended for tax year 2021. The IRS concluded that this relief was no longer appropriate because the six years that the relief was in place provided sufficient time for reporting entities to familiarize themselves with the nuances of the reporting requirements.


Reporting entities may rely on the automatic extension relief for their 2021 reports, meaning Forms 1095-B and 1095-C must be provided to the applicable individuals no later than March 2, 2022 (no further extensions permitted).

Additionally, reporting entities may want to review their practices and consider the alternative methods of furnishing these forms where permitted, while also keeping in mind possible state law requirements.  In any case, the proposed regulations should not impact their practices with respect to filing ACA forms with the IRS.

Finally, reporting entities should carefully complete all forms and reach out to counsel if they have any questions, as they will no longer have the benefit of good faith relief from penalties if forms are inaccurate or incomplete.

ARPA Final Rule Expected in January

I was a summer associate back in 1996 when, just steps from our old offices at 1585 Broadway, people lined up for blocks outside the Nederlander Theatre in the hopes of getting tickets to the hot, new-to-Broadway show that was captivating audiences nightly.  Those lucky enough to score tickets to Rent would soon get to hear Mimi, played by original cast member Daphne Rubin-Vega, belt out the famous lyrics, “It’s gonna be a happy new year.”

Fast forwarding to the year 2022, will it be a happy new year? Many multiemployer plans and their participants, contributing employers and unions certainly hope so, as they eagerly anticipate the issuance of a Pension Benefit Guaranty Corporation (“PBGC”) final rule that may answer the question for them.  Specifically, in its recent Statement of Regulatory and Deregulatory Priorities, released on December 10, the PBGC reported that it expects to publish in January 2022 a final rule on multiemployer pension relief for troubled plans, known as “special financial assistance.”

As we previously reported, on July 9, 2021, the PBGC issued an interim final rule pursuant to the American Rescue Plan Act of 2021 (“ARP”) explaining how it intends to calculate the special financial assistance for multiemployer plans in critical and declining status (i.e., generally, expected to be insolvent in 20 years) and certain other troubled plans.

Many troubled multiemployer plans were disappointed because, in that interim final rule, the PBGC took at relatively narrow view of the statutory language, which provided that the amount of special financial assistance is the “amount required for the plan to pay all benefits due during the period beginning on the date of payment of the special financial assistance payment and ending on the last day of the plan year ending in 2051.”  Moreover, the interim final rule allowed special financial assistance to be invested only in investment grade bonds, which for most plans produces a far lower return than the interest rate plans were required to use to calculate the amount of the special financial assistance.

These interpretations created a real possibility that many plans eligible for relief would not avoid insolvency permanently or even until 2051 (and some plans eligible for relief would have their relief calculated at $0), which many believe is inconsistent with ARP’s statutory intent.  As a result, troubled multiemployer plans and other interested parties are watching carefully to see whether PBGC’s final rule changes some of the more troubling provisions in its interim final rule.

Perhaps the most likely provision to change is the definition of permissible investments.  This could be an important step toward protecting the solvency of plans at least through 2051 because it could allow plans to invest the assets they receive through special financial assistance in a manner that would achieve a rate of return that more closely approximates the interest rate used to calculate the amount of the assistance needed in the first instance.

By way of background, the statute itself permits special financial assistance to be invested “in investment-grade bonds or other investments permitted by [PBGC]” (emphasis added).  The interim final rule permitted special financial assistance to be invested only in investment-grade bonds (and certain commingled vehicles and derivatives that provide exposure to these bonds), and it did not take Congress up on its “offer” to permit other types of investments.  However, the PBGC did seek comment on whether it should expand this interpretation.

As time passed, there was some room for optimism.  In a session I moderated at the International Foundation of Employee Benefit Plans Annual Conference in October, representatives from the PBGC acknowledged that the PBGC took a conservative approach in the interim final rule.  Notably, the representatives also stated that they understood the problem and that PBGC was taking a “close look” at stakeholder comments on the interim final rule that urged PBGC to expand the scope of permissible investments.

While no promises were made, these comments provided some hope that the final rule will modify the interim final rule in a way that addresses, at least to some extent, its perceived shortcomings.  It will not be long before we find out whether Ms. Rubin-Vega was prescient and, for troubled multiemployer plans, it will, in fact, be a happy new year.

In the interim, on behalf of our entire Employee Benefits and Executive Compensation Group at Proskauer, allow me to wish all of our clients and friends a very happy holiday season and, of course, a Happy New Year!

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

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.


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.

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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.

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

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.

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

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).

EPCRS Update Offers New Tools to Correct Retirement Plan Errors

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.

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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.

[Podcast]: Special Financial Assistance for Multiemployer Pension Plans (Part 3)

proskauer benefits brief podcastThis episode is the final installment of our three-part series on a new special financial assistance program created by the American Rescue Plan Act of 2021 for troubled multiemployer plans and the interim guidance issued by the Pension Benefit Guaranty Corporation regarding the program. Be sure to listen as Rob Projansky and Justin Alex cover the special rules that apply to plans that receive the assistance and other details including how the program impacts withdrawal liability for employers.

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

proskauer benefits brief podcastThis 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.

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