Employee Benefits & Executive Compensation Blog

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

Fifth Circuit Affirms Dismissal of ERISA Stock Drop Action

The Fifth Circuit agreed that a participant in Idearc’s 401(k) plan failed to plausibly plead that the plan fiduciary’s failure to act on publicly available information about Idearc amounted to a breach of fiduciary duty in connection with making Idearc stock available as an investment option in the plan.  The decision was guided by an earlier Supreme Court decision in which the Court ruled that allegations that a fiduciary should have recognized from publicly available information alone that the market was overvaluing or undervaluing the stock are implausible as a general rule, at least in the absence of “special circumstances.”  The Fifth Circuit first rejected the participant’s argument that where, as here, an imprudence claim was based on publicly available information, he need not prove “special circumstances” if the underlying allegations are that the stock was too risky as opposed to artificially inflated.  The Fifth Circuit also disagreed with the participant’s assertion that defendants’ alleged fraud constituted a “special circumstance,” because the alleged fraud was “by definition not public information” and the participant did not allege how the alleged fraud would affect the stock’s market price in light of all public information.  Second, the Fifth Circuit concluded that, even if defendants acted imprudently by failing to consider alternatives to continuing to invest in Idearc stock, Kopp failed to allege facts supporting the conclusion that defendants would have acted differently had they engaged in proper monitoring of the stock, and that an alternative course of action could have prevented the plan’s losses.  Lastly, the Fifth Circuit declined to infer that defendants acted with inappropriate motivations by maintaining the stock fund as an investment option because they stood to gain financially from Idearc’s success.  In so ruling, the Court found that a potential conflict does not equate to a plausible disloyalty claim, and that Kopp’s allegations at most showed that defendants acted to protect the value of Idearc stock, which was consistent with protecting the plan.  The case is Kopp v. Klein, 2018 WL 3149151 (5th Cir. June 27, 2018).

[Podcast]: QDROs in 10 Easy Steps

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In this episode of the Proskauer Benefits Brief, Paul Hamburger, co-chair of Proskauer’s Employee Benefits & Executive Compensation Group, and partner Robert Projansky discuss ten basic steps for how to manage qualified domestic relations orders (QDROs). A QDRO is a judgment, decree or order for a retirement plan to pay child support, alimony or marital property rights to a spouse, former spouse, child or other dependent of a participant. Many of our clients and plan administrators spend a significant amount of time on QDROs. Tune in and listen to how we make it easier for them to handle QDRO issues and administration.

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Second Circuit Requires Reevaluation of ERISA Attorney Fee Judgment

The Second Circuit determined that a district court erred when it denied an attorney fee award to an ERISA plaintiff who had sought benefits from a plan. In so ruling, the Second Circuit first concluded the district court incorrectly determined that the plaintiff had not achieved “some success”—a threshold requirement for an ERISA fee award—because “some success” was achieved by getting the district court to vacate its earlier decision based on an intervening Second Circuit decision. The underlying issue pertained to the appropriate standard of review where a plan allegedly did not have claims procedures that complied with the DOL regulations. The Second Circuit next determined that the district court’s ruling failed to adequately apply the five-factor test used to determine the propriety of a fee award. Those factors include: (1) the offending party’s culpability or bad faith, (2) the offending party’s ability to satisfy an award, (3) whether an award would deter similarly conduct, (4) the merits of the parties’ positions, and (5) whether the action conferred a common benefit on other participants. The Second Circuit explained that the district court relied too heavily on its conclusion that defendants demonstrated no bad faith, neglected to consider plaintiff’s success on the merits, and failed to assess the extent of defendants’ culpability or their ability to pay an award. The Second Circuit thus vacated the district court’s decision and remanded for further consideration. The case is Tedesco v. I.B.E.W. Local 1249 Ins. Fund, No. 17-cv-3404, 2018 WL 3323640 (2d Cir. July 6, 2018).


Ninth Circuit Rejects Bid To Arbitrate ERISA Plans’ Claims

The Ninth Circuit held that employees’ agreements to arbitrate all claims the employees may have did not extend to claims brought on behalf of two ERISA plans under ERISA § 502(a)(2). In so ruling, the Court explained that the employees could not agree to arbitrate claims on behalf of the plans in individual employment contracts because those employees cannot waive the plans’ rights. The Court also rejected an argument that the employees were, as a practical matter, seeking individual relief for their own plan accounts because relief flows to the plans as a whole from a winning fiduciary breach claim, even when the plan is a defined contribution plan. The case is Munro v. Univ. of S. California, No. 17-55550, 2018 WL 3542996 (9th Cir. July 24, 2018).

Record-Keeper Defeats Second Round of Robo-Adviser Fee Litigation

As we reported here, record-keepers for large 401(k) plans have thus far been successful in defending ERISA fiduciary-breach litigation over investment advice powered by Financial Engines.  These lawsuits generally claim that fees collected by record-keepers for investment advice were unreasonably high because the fees exceeded the amount actually paid to Financial Engines.  Plaintiffs in Chendes v. Xerox HR Solutions, LLC were given a second chance to plead their claims, this time alleging that the defendant record-keeper was a fiduciary because it “used its influence” as the plan’s record-keeper to force the plan sponsor to engage Financial Engines—primarily by refusing to use any other investment adviser—and therefore exercised de facto control over the plan’s retention of Financial Engines.  The court rejected the argument that constraining the plan’s service provider choices amounted to de facto control since the plan had other alternatives to choose from (such as not using an investment adviser or changing record-keepers) and dismissed the claim without leave to amend, ending the case at the district court.  The case is Chendes v. Xerox HR Solutions, LLC., Case No. 2:16-cv-1398, ECF No. 63 (E.D. Mich., June 25, 2018).

[Podcast]: Fixing Retirement Plan Overpayments

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In this episode of the Proskauer Benefits Brief, Paul Hamburger, co-chair of Proskauer’s Employee Benefits & Executive Compensation Group, and associate Katrina McCann discuss how to fix retirement plan overpayments, based on (1) the type of plan (i.e., defined contribution or defined benefit plan), (2) whether the overpayment was with respect to a lump sum or ongoing payments, (3) the type of overpayment (whether it was to the wrong person or paid at the wrong time), and (4) who caused the overpayment.  They discuss the requirements, the decisions involved, and certain ERISA and taxation issues that can arise when addressing these overpayments.

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As DOL Fiduciary Rule is Officially Vacated, Focus Shifts to SEC

After nearly a decade in the making, the Department of Labor’s fiduciary rule appears to be officially dead.  On June 21st, the U.S. Court of Appeals for the Fifth Circuit issued its mandate that finalized its earlier decision vacating the rule—discussed here.  Along with the regulation that expanded the definition of investment fiduciary, the mandate wipes out the Best Interest Contract and Principal Transaction exemptions.  Recognizing that many fiduciaries have invested significant compliance resources in reliance on those exemptions, however, the Department of Labor has issued a “no enforcement” policy that continues prohibited transaction relief as if those exemptions were still available.  The “no enforcement” policy applies for fiduciaries who “are working diligently and in good faith to comply with the [exemptions’] impartial conduct standards.”  It is discussed here and will remain in effect until DOL issues new guidance.  Meanwhile, the SEC published proposed conflict of interest rules for broker-dealers and investment advisers.  The comment period for the SEC’s proposal runs to August 7, 2018—discussed here.

[Podcast]: Cybersecurity & Employee Benefit Plans

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In this episode of the Proskauer Benefits Brief, partner Neal Schelberg and associate Miriam Dubin discuss cybersecurity issues impacting employee benefit plans. Data breaches are occurring with increased frequency in today’s digital environment. Benefit plans in particular are uniquely susceptible to cyber-risks because they store large amounts of sensitive employee information and share it with multiple third parties. In this episode, we discuss the developing legal framework in the area of cybersecurity and outline practical tips that plan sponsors and record-keepers may use to secure plan data. So be sure to tune in for this very important issue impacting employee benefit plans.

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Proposed Mental Health Parity Guidance Focuses on Nonquantitative Treatment Limitations

On April 23, 2018, the Departments of Labor (DOL), Health and Human Services (HHS) and Treasury (together, the “Agencies”) released proposed frequently asked questions (“FAQs”) related to nonquantitative treatment limitations (“NQTLs”) under the Mental Health Parity and Addiction Equity Act (“MHPAEA”).  The Agencies also provided guidance on new disclosure requirements (which were described in our May 15, 2018 blog entry) and released a self-compliance tool.

Perhaps one of the more difficult aspects of mental health parity compliance is applying the parity rules to NQTLs.  There is a dearth of concrete guidance on what constitutes a NQTL and how the parity rules apply to NQTLs.  The Agencies’ most recent proposed guidance, FAQs about Mental Health and Substance Abuse Disorder Parity Implementation and the 21st Century Cures Act, Part 39 (“FAQs Part 39”), expands on prior NQTL-related guidance by explaining how the parity rules would apply in various hypothetical situations involving NQTLs.

By way of background, the MHPAEA requires that group health plans provide mental health and substance abuse benefits in parity with medical and surgical benefits.  Although the requirements are complex (a summary can be found here), the basic structure of the law is that both quantitative limitations (e.g., dollar and visit limits) and NQTLs (e.g., medical management techniques) applied to mental health and substance abuse benefits must be in parity with the predominant limitations applied to substantially all medical and surgical benefits.  This “predominant/substantially all” requirement applies on a classification-by-classification basis, based on six classifications of benefits: (i) inpatient, in-network; (ii) inpatient, out-of-network; (iii) outpatient, in-network; (iv) outpatient, out-of-network; (v) emergency care; and (vi) prescription drugs.

As explained in FAQs Part 39, a plan cannot impose a NQTL with respect to mental health or substance abuse benefits “unless, under the terms of the plan…as written and in operation, any processes, strategies, evidentiary standards, or other factors used in applying the NQTL to [mental health and substance abuse] in the classification are comparable to, and are applied no more stringently than the processes, strategies, evidentiary standards, or other factors used in applying the limitation to medical/surgical benefits in the same classification.”  A summary of the key aspects of the Agencies’ guidance on NQTLs is provided below.

  • Blanket Coverage Exclusions. The MHPAEA does not require that a group health plan provide coverage for any particular mental health or substance abuse condition.  However, once a plan covers a mental health or substance abuse condition, any quantitative limitations or NQTLs applied to the condition must be in parity with medical/surgical benefits.  For example, a group health plan could exclude all services and treatments related to bipolar disorder without violating the MHPAEA.  However, if some services or treatments for bipolar disorder are covered, then any limitation applied to that coverage must meet the MHPAEA requirement that coverage for bipolar disorders be in parity with medical/surgical benefits within the relevant classification.

Even though the MHPAEA is not a coverage mandate, plan sponsors of fully-insured plans should be aware that state law coverage mandates might require coverage of particular mental health and substance abuse disorders.

  • Experimental/Investigational Exclusions. An exclusion based on the experimental or investigational nature of a service or treatment is a NQTL.  Therefore, the method by which a service or treatment is determined to be experimental or investigational cannot be applied more stringently to mental health and substance abuse benefits than it is to medical/surgical benefits.  For example, suppose a plan provides that any treatment (whether mental health/substance abuse or medical/surgical) will be denied as experimental when no professionally recognized treatment guidelines define clinically appropriate standards of care and fewer than two randomized controlled trials support the treatment’s use for a particular condition.  Despite the plan language, the plan is administered such that it covers treatment for a medical/surgical condition with only one supporting randomized trial, but it still requires two supporting randomized trials before covering treatment for a mental health/substance abuse condition in the same MHPAEA classification.  Because the plan’s experimental/investigational exclusion is applied more stringently to mental health/substance abuse benefits, a MHPAEA violation would have occurred.

That experimental/investigational exclusions are NQTLs is not particularly surprising, as these types of exclusions are one way in which plans can manage medical costs.  Nevertheless, the description of this NQTL in the FAQs is noteworthy because the example used involves “applied behavioral analysis” (“ABA”) for treatment of autism spectrum disorder.  Many insurers and plans have excluded ABA on the basis that the treatment is experimental or investigational and this has spawned numerous lawsuits alleging violations of state and federal mental health parity laws.  Plans that do cover ABA but apply age or other treatment limitations on ABA might also face litigation if the limits are not in parity with limits applied to medical/surgical benefits.

Plans that cover treatment for autism spectrum disorder but deny coverage for ABA therapy under an experimental/investigational exclusion should be mindful of ABA’s growing acceptance as a standard treatment.  Continued application of this type of exclusion to ABA may become more difficult to justify over time.

  • Other NQTLs. The Agencies also identified and provided examples for the following NQTLs: prescription drug dosage limitations, step therapy programs, healthcare facility restrictions, and provider network administration (such as network access standard and network adequacy measurements).  The message is clear – if any of these limitations are applied to mental health and substance abuse benefits, the method by which a plan determines whether to apply the NQTL and the method to determine the scope of the NQTL cannot be applied more stringently to mental health and substance abuse benefits than it is applied to medical and surgical benefits.

Monitoring compliance with the MHPAEA’s requirements for NQTLs is extremely complicated.  In our next blog on mental health parity, we will provide practical steps that plan sponsors and administrators can take to review and monitor compliance.  This includes using the new self-compliance tool provided by the Agencies.