Employee Benefits & Executive Compensation Blog

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

Categorical Conflict of Interest Does Not Alter Standard of Review of Benefit Denials

The Second Circuit held that plaintiffs’ allegations that the defendant suffered from a “categorical potential conflict of interest”—because it both funded the plan and was the claim’s decision-maker—did not affect the application of the arbitrary and capricious standard of review in the absence of a showing by the plaintiffs that the conflict actually affected the plan administrator’s decision-making.  The dispute involved whether plan participants could “grow into” early retirement eligibility for benefits they accrued before the plan sponsor sold their employer’s business.  The plan’s benefits committee determined that participants could not earn service credit after the sale because they were no longer employed by an entity related to the plan sponsor.  Plaintiffs, a group of participants who continued with the business after the sale and eventually reached the required early retirement age, argued that their service after the sale should count because they continued working for the same business.  Applying the arbitrary and capricious standard of review, the Second Circuit concluded that it could not overturn the benefits committee’s decision denying the claim, even though the Court believed the plaintiffs’ reading of the plan language was “more reasonable.”  To overturn the committee’s decision, plaintiffs would have had to show that it was without reason, unsupported by substantial evidence, or erroneous as a matter of law, a standard the plaintiffs were unable to meet. 

The decision illustrates the significance that the standard of review can have on the outcome of a benefit denial challenge.  Had the standard been de novo (where the court takes a fresh look) or the alleged conflict taken into account in determining whether the plaintiffs’ claims were correctly denied, the outcome might have been different.  To preserve the deferential standard of review, plan sponsors should ensure that the governing plan document affords the individual or body that resolves benefit claims interpretive discretion, and that the reviewing body adheres to the procedural requirements that apply to administrative claims and appeals.  The case is Kirkendall v. Halliburton, Inc., No. 17-3487, 2019 WL 325649 (2d Cir. Jan. 24, 2019).

Participants’ ERISA Retaliation Claim Dismissed

A federal district court in Illinois held that participants in a multiemployer pension plan failed to plausibly allege that plan fiduciaries retaliated against them in violation of ERISA § 510 by refusing to consider their employer’s offer to settle its withdrawal liability to the plan.  In lieu of paying withdrawal liability, the employer offered to create a new plan that assumed the former plan’s obligations.  After the plan fiduciaries rejected the proposal, the participants filed suit, alleging that the refusal to negotiate or even consider the employer’s proposal constituted a breach of fiduciary duty.  The plan fiduciaries then informed the employer that they would “either negotiate or litigate but not both.” The participants thereafter amended their complaint to allege that the plan fiduciaries’ position violated Section 510, claiming that the plan fiduciaries’ position was motivated by the participants’ initial decision to file suit.  The district court dismissed the participants’ claim as implausible, pointing to the participants’ admission that the plan fiduciaries refused to consider the employer’s proposal both before and after the participants filed suit.  The court also expressed skepticism that the participants could assert a viable Section 510 claim against plan fiduciaries for “failing to do something [they] never had any legal obligation to do in the first place”—that is, accept the employer’s proposal to settle its withdrawal liability.  The case is Campbell v. Whobrey, 2019 WL 184056 (N.D. Ill. Jan. 14, 2019).

Ninth Circuit Affirms Dismissal of ERISA Claims Against Health Insurers

The Ninth Circuit agreed that the employer-members of Montana’s Chamber of Commerce failed to state a claim for breach of fiduciary duty under ERISA § 502(a)(2) and violations of ERISA’s prohibited transaction rules under ERISA § 502(a)(3) against health insurers as a result of alleged misrepresentations in the marketing and negotiation of the insurers’ fully insured health plans to the Chamber’s members.  The Court first determined that defendants were not fiduciaries because they did not exercise discretion over plan management or control over plan assets.  In so ruling, the Court explained that defendants had no fiduciary relationship to the plans and exercised no discretion over the plans’ management because they were merely negotiating at arms-length to set rates and collect premiums prior to any agreement being executed.  The Court also found that the allegedly excessive premiums that defendants collected did not qualify as plan assets because the plans were fully insured, i.e., the premiums were not held in trust and they were simply fixed fees paid in exchange for defendants’ financial risk of providing the promised benefits. 

The Court next dismissed the prohibited transaction claims because the nature of the underlying remedies sought, restitution and disgorgement, were not equitable in nature.  The Court held that the remedy of restitution was legal because the premium payments plaintiffs sought to recover had no connection to any particular fund and plaintiffs failed to identify a specific fund to which they were entitled.  Similarly, the Court held that disgorgement was not equitable because plaintiff did not identify any particular property from which defendants derived an improper profit or benefit. 

Finally, the Court reversed the dismissal of plaintiffs’ state law claims alleging fraud and misrepresentation and remanded for further proceedings. The Court held that plaintiffs’ state law claims were not preempted by ERISA because they did not have an impermissible connection with an ERISA plan, but rather were connected to negotiations occurring prior to any ERISA-regulated relationship.  In this vein, the Court characterized the case as one about fraud and misrepresentation in the sale of health insurance policies, rather than as a case implicating ERISA.  

The case is The Depot Inc. v. Caring for Montanans Inc., No. 9:16-cv-00074, 2019 WL 453485 (9th Cir. Feb. 6, 2019).

Georgetown Prevails In ERISA Fee Litigation Case

A federal district court in the District of Columbia dismissed ERISA fiduciary-breach claims by participants in Georgetown’s 403(b) retirement plans that were predicated on allegations that the trustees invested in funds that allegedly charged excessive fees and underperformed relative to alleged comparable funds, and that the fund paid excessive recordkeeping fees.  To begin with, the court concluded that plaintiffs lacked Article III standing, i.e., they had not experienced any harm, as to three of the challenged funds because they failed to allege that:  (i) they were invested in the challenged funds, (ii) the challenged funds outperformed plaintiffs’ alleged comparable investment fund, and/or (iii) that they had withdrawn, or planned to withdraw from, one of the funds that charged an allegedly excessive 2.5% early-withdrawal fee in exchange for a lump-sum payout.  Next, the court rejected plaintiffs’ arguments that the plan’s fiduciaries acted imprudently by retaining a fund that allegedly had underperformed because:  (i) a fiduciary is not required to select the best performing fund, and (ii) plaintiffs’ alleged comparable fund had a different underlying allocation of domestic investments.  Lastly, the court rejected plaintiffs’ excessive recordkeeping fee claim because plaintiffs did not show that the fees were excessive relative to the services that were being offered.  In so ruling, the court stated that since fiduciaries may structure their plans in different ways, the plaintiffs’ allegations that the funds could hypothetically be structured to charge a lower fee did not state a viable claim for an imprudent process with respect to the record-keeping fees.  The case is Wilcox v. Georgetown University, 2019 WL 132281 (D.D.C. Jan. 8, 2019).

Let’s Talk – PBGC Pilot Mediation Project is Now Permanent

The Pension Benefit Guaranty Corporation (the “PBGC”) launched a Pilot Mediation Project in October 2017 to provide plan sponsors an opportunity to negotiate resolutions in Early Warning Program cases and in termination liability cases (see our prior post). Following its trial run, the PBGC announced last month that it would make the Mediation Program permanent, and also expanded its use to include fiduciary breach cases involving terminated plans.

The Mediation Program remains voluntary and available only for certain cases and eligible plan sponsors. Cases are generally ineligible for the program if: (1) the plan sponsor has a minimal ability to pay; (2) there is a pending court proceeding; or (3) there is limited time to act and the plan sponsor has declined to sign a standstill or tolling agreement.

Early Warning Program cases are those where a plan sponsor is involved in a corporate transaction that the PBGC thinks could affect the plan sponsor’s ability to continue to support its pension plan. In an eligible case, the PBGC will inform the plan sponsor of the availability of mediation at the onset of negotiations and mediation will begin after the PBGC receives sufficient responses to its information requests. However, the transaction’s timing will limit the window for mediation. The parties must complete mediation before the transaction closes and with sufficient time to document the resolution or for PBGC to institute legal action.

Termination liability cases are those that require a determination of the amount that a plan sponsor and its controlled group members must pay to the PBGC when a pension plan is terminated and transferred to the PBGC. Plan sponsors have 120 days after the plan’s termination date is established to disclose required information about its controlled group’s net worth. The PBGC will then make mediation available within a reasonable time after it reviews the information submitted by the plan sponsor.

Fiduciary breach cases are those that involve situations where fiduciaries of a terminated plan allegedly took actions that violated their fiduciary duties under ERISA. In these cases, the PBGC will include an option to mediate in its demand letters. Importantly, the Mediation Program only applies to fiduciary breach claims asserted by the PBGC with respect to terminated pension plans. It does not cover other fiduciary breach claims.

The Federal Mediation and Conciliation Service will continue to facilitate all mediations, with costs shared by the PBGC and the plan sponsor.

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Although the PBGC stated that it will generally inform plan sponsors when a case is eligible for the Mediation Program, plan sponsors that are particularly interested in using the Program should consider voicing their interest at the start of discussions with the PBGC.

Nationwide Injunction Halts Exemptions and Accommodations to the ACA Contraceptive Coverage Mandate

On January 14, 2019, a district court in the Eastern District of Pennsylvania granted a nationwide preliminary injunction halting the application of final regulations governing religious and moral-based exemptions from the Affordable Care Act (“ACA”) mandate to cover contraceptives without cost sharing. The final regulations would have dramatically expanded the scope of existing exemptions and accommodations rules related to the contraceptive coverage mandate. The case is Commonwealth of Pennsylvania v. Trump et al., No. 2:17-cv-04540 (E.D. Pa. Jan. 14, 2019).

Interestingly, just one day before the Commonwealth of Pennsylvania case, a court in the Northern District of California granted a preliminary injunction against application of the final regulations, but limited its order to the thirteen states and Washington, D.C that are parties to that case. See State of California et al. v. Health and Human Services et al., No. 4:17-cv-05783 (N.D. Cal. Jan. 13, 2019).

Below, we briefly review the legal landscape leading up to the Commonwealth of Pennsylvania court’s nationwide injunction, the decision itself, and the potential implications going forward.

Background

The ACA generally requires group health plans and insurance providers to provide preventive care and screenings, including specified contraceptive methods, with no cost sharing. In 2012, the Department of Health and Human Services, the Department of Labor, and the Department of Treasury (collectively “the Agencies”) issued a final rule to exempt qualified “religious employers” from this contraceptive coverage mandate. In 2013, the Agencies issued another final rule that (1) expanded the “religious employers” exemption and (2) created an accommodation for “eligible organizations” with religious objections to providing contraceptive coverage.

The contraceptive coverage mandate has been the subject of numerous lawsuits. For example, the Supreme Court has heard issues related to the mandate on three separate occasions: (1) in 2014, the Court held that the application of the contraceptive coverage mandate to closely-held corporations violated the Religious Freedom Restoration Act (“RFRA”) (Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751); (2) in 2014, the Court enjoined the government from enforcing the self-certification requirements on an organization eligible for an accommodation, pending final disposition of the litigation (Wheaton College v. Burwell, 134 S. Ct. 2806); and (3) in 2016, the Court remanded a case for the parties to consider an alternative approach that can both accommodate religious exercise and ensure that women receive contraceptive coverage (Zubik v. Burwell, 136 S. Ct. 1557).

In 2017, the Agencies issued two interim final rules that, generally speaking, would allow many non-profit and for-profit organizations to seek exemptions and accommodations from the ACA contraceptive coverage mandate based on “sincerely held” religious or moral convictions. In December 2017, a preliminary injunction was granted to block enforcement of the rules on the ground that the rules likely violated the Administrative Procedure Act (“APA”).

In 2018, the Agencies issued the final religious and moral exemption regulations which are the subject of the dispute in Commonwealth of Pennsylvania.

The Commonwealth of Pennsylvania Decision

The Commonwealth of Pennsylvania and the State of New Jersey sued the Trump Administration to enjoin implementation of the final regulations arguing that the final regulations violated the APA and various other constitutional requirements.

The court first noted that the final regulations made only minor revisions to the 2017 interim final rules and explained that the issuance of procedurally flawed interim final rules “fatally taint[s] the issuance of the Final Rules.” Furthermore, the court stated that the Agencies did not have authority under the ACA or the RFRA to pass the final regulations. Under the ACA, the court explained, Congress directed that any “group health plan” or “health insurance issuer offering group or individual insurance coverage” must provide “preventative care and screenings.” Because there is no ambiguity over who must abide by the Congressional directive, the Agencies did not have the power to establish exceptions. Additionally, RFRA grants the courts, not the Agencies, the power to determine “whether generally applicable laws violate a person’s religious exercise.” The court noted that although it was unclear whether the contraceptive coverage mandate violates RFRA, it is clear that the RFRA does not require the final regulations.

Proskauer’s Perspective

The court granted the injunction the day the final regulations were scheduled to take effect. Thus, as a practical matter, the ruling maintains the status quo for now. A notice of appeal has been filed, which means that this litigation will continue for the foreseeable future. Should the Trump Administration ultimately prevail, non-profit and for-profit organizations will be able to rely on the regulations to seek exemptions from the ACA’s contraceptive coverage mandate.

Eighth Circuit Decision On“Cross-Plan Offsetting” Illustrates Importance Of Careful Plan Drafting

The U.S. Court of Appeals for the Eighth Circuit recently weighed in on a practice for recovering health plan overpayments known as “cross-plan offsetting.” In addition to shining a light on the controversial (but potentially useful) practice, the decision offers an important lesson in plan drafting that extends beyond the particular case. The case is Louis J. Peterson, D.C., et al. v. UnitedHealth Group Inc., et al., no. 17-1744 (8th Cir. Jan. 15, 2019).

From time to time, group health plans inadvertently pay the wrong amount to doctors, clinics, and other providers. When the amount paid is more than what the plan allows (an “overpayment”), the plan generally must be made whole; to make this happen, administrators typically try to recover the overpayment from the provider. But what happens when the provider refuses to return the overpayment?

Plans often authorize the administrator to recover the overpayment by offsetting it against future payments owed by the same plan to the same provider. This approach works well if another plan participant uses the same provider, but it is not helpful if the plan does not have other bills from the provider from which it can recover. Enter “cross-plan offsetting,” where a third-party administrator with multiple clients collects the overpayment by offsetting it against another plan’s bills from the same provider. If the amount of the offset is credited back to the first plan, then both plans, the provider, and the affected participants can get back to where they would have been had the error not occurred. But the practice exposes the offsetting plan and its participants to some risk, and it raises questions under ERISA’s prohibited transaction and fiduciary rules because assets of one plan are being used to solve a problem for another plan.

In a 2017 amicus brief, the U.S. Department of Labor (“DOL”) took the position that cross-plan offsetting violated ERISA’s prohibited transaction and fiduciary rules, at least where overpayments from a plan insured by the administrator are recovered from amounts owed by a separate self-insured plan. DOL reasoned that cross-plan offsetting imposed on “innocent participants a financial risk and potential harm in order to recoup an alleged, unrelated overpayment for another plan.” DOL concluded that the insurer received an improper benefit, because recoveries out of the self-insured plans’ assets flowed back to plans for which the insurer was financially responsible.

In the Peterson decision, the Eighth Circuit stated that cross-plan offsetting was “questionable at the very least,” in “tension with the requirements of ERISA,” and straddling the “line of what is permissible.” But the court did not actually reach the merits on the legal question of cross-plan offsetting. Instead, the court concluded that the practice was not authorized by the plan that was seeking recovery.

The third-party administrator argued that its use of cross-plan offsetting was authorized general language that gave the plan administrator discretion to interpret and implement the plan’s terms. The Eighth Circuit held that this language was not specific enough to authorize cross-plan offsetting, reasoning that such an interpretation would be “akin to adopting a rule that anything not forbidden by the plan is permissible.”

The Eighth Circuit’s holding leaves the legal status of cross-plan offsetting unresolved. The practice might be permissible under certain circumstances but it raises important considerations for plan sponsors and fiduciaries. The immediate lesson is that if a plan sponsor wants cross-plan offsetting to be available as a remedy for overpayments (even if the remedy might rarely be pursued), the plan must expressly authorize the practice.

More generally, plan sponsors and fiduciaries should consult with counsel to consider options for addressing overpayments. Under appropriate circumstances, cross-plan offsetting might be desirable, but it is important to be careful about how and when the practice is used.

In short, the Eighth Circuit’s decision offers two important take-aways:

  1. Plan language matters. It is important to review and update plan documents to ensure that they authorize the latest approaches for recovering overpayments; and care should be taken in drafting to avoid authorizing non-compliant remedies.
  2. Understand how cross-plan offsetting is used. Plan fiduciaries should review their administrative service agreements to understand whether and when cross-plan offsetting might be used. In particular, it is important to review risks to the plan and participants if the third-party administrator refuses to pay legitimate claims in order to recover another plan’s overpayments.

[Podcast]: Key Considerations for ERISA Plan Fiduciaries When Delegating Investment Authority

proskauer benefits brief podcastIn this episode of The Proskauer Benefits Brief, partner Ira Bogner and senior counsel Adam Scoll discuss the key considerations for ERISA plan fiduciaries when delegating investment authority over plan assets.  We will break down some of the material ERISA issues that may apply when an ERISA plan hires a separate account investment manager or invests in a private investment fund deemed to be holding ERISA plan assets.


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Interim Guidance Released on Excise Tax on Executive Compensation Paid by Tax-Exempt Organizations

The Department of the Treasury and the Internal Revenue Service recently released Notice 2019-09 (the “Notice”), which provides interim guidance under Section 4960 of the Internal Revenue Code.

Section 4960 was added to the Internal Revenue Code as part of the tax reform legislation that was enacted on December 22, 2017. Very generally, Section 4960 imposes a 21% excise tax (based upon the current corporate tax rate) on certain tax-exempt entities (and related organizations) that pay remuneration in excess of $1 million to certain highly-paid individuals or that make “excess parachute payments” to this class of highly-paid individuals.

The Notice provides interim guidance on how to interpret and apply Section 4960, including answering questions concerning:

  • Which tax-exempt organizations does the excise tax apply to?
  • How does the excise tax apply to related organizations and entities, including for-profit and governmental entities?
  • How should an organization determine which employees are covered?
  • How to determine if an employee receives remuneration in excess of $1 million?
  • What are excess parachute payments that could subject an organization to the excise tax?
  • How should the excise tax be reported and paid?

We have provided more information regarding the guidance contained in the Notice on our Not for Profit/Exempt Organization Blog, available at the following link:

IRS Releases Interim Guidance on New Excise Tax on Executive Compensation Paid by Tax-Exempt Organizations

ERISA Implications for Firing A Whistleblower

The Ninth Circuit unanimously concluded that a trustee and lawyer for certain multiemployer funds violated ERISA § 510 by unlawfully firing a whistleblower in the funds’ collections department, but, in a split decision, concluded that the retaliation did not amount to a breach of fiduciary duty.  The whistleblower was cooperating with a DOL criminal investigation of one of the trustees and had raised concerns to another trustee and the funds’ third-party administrator that the trustee under investigation was actively hindering the funds’ efforts to collect contributions from certain contributing employers.  After the trustee and the funds’ counsel, who were carrying on a romantic relationship, caught wind of the investigation, they set in motion votes by the full board of trustees to place the whistleblower on administrative leave and ultimately to terminate her employment.  The Secretary of Labor filed a civil enforcement action against the trustee and the funds’ counsel, alleging that they engaged in unlawful retaliation under ERISA § 510 and a breach of fiduciary duty under ERISA § 404.  The Secretary settled similar claims against the full board of trustees and other third-parties.  Following a bench trial, the district court entered judgment in favor of the Secretary and against the trustee and funds’ counsel on both claims.

The Ninth Circuit unanimously affirmed the district court’s ruling that the trustee and counsel engaged in unlawful retaliation in violation of Section 510.  The Court held that the whistleblower’s cooperation with the DOL was quintessential protected activity, and that defendants were liable because they arranged the vote by the full board of trustees that resulted in the whistleblower’s termination, they influenced the vote by recommending the whistleblower’s termination, and the trustee had the authority to remove other union trustees or have their positions with the union terminated.

However, the Ninth Circuit, in a split decision, reversed the district court’s ruling that the retaliation against the whistleblower constituted a breach of fiduciary duty.  In so ruling, the Court concluded that the district court failed to address the threshold question of whether the union trustee was acting in a fiduciary capacity when he engaged in the challenged conduct, i.e., placing the whistleblower on leave or terminating her employment.  The dissenting judge opined that the trustee’s effort to terminate the whistleblower was a fiduciary act because it was “inextricably intertwined” with management and administration of the funds, it was designed to shield the trustee’s role in the funds’ mismanagement from additional scrutiny, and a contrary result would subvert ERISA’s goal to safeguard plan assets.

The case is Acosta v. Brain, Nos. 16-56529, 16-56532, 2018 WL 6314617 (9th Cir. Dec. 4, 2018)

 

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