The Ninth Circuit held that employer contributions due to a Taft Hartley fund are not plan assets until they are actually paid to the fund, irrespective of whether the plan document defines plan assets to include unpaid employer contributions. As a result, a fund could not hold a contributing employer’s owner and treasurer personally liable for breach of fiduciary duty for failure to pay the contributions. (The employer was found liable for delinquent contributions under ERISA § 515.) The Ninth Circuit’s decision deepens a split between, on the one hand, the Sixth and Tenth Circuits, which have similarly rejected such claims, and, on the other hand, the Second and Eleventh Circuits, which have recognized that unpaid contributions may be plan assets where the plan document defines plan assets as including unpaid employer contributions. The case is Glazing Health and Welfare Fund v. Lamek, No. 16-16155, 2018 WL 1403579 (9th Cir. Mar. 21, 2018).
Since 2016, record keepers for large 401(k) plans have been defending litigation over investment advice provided by the Financial Engines investment advice algorithm. (This kind of arrangement is commonly referred to as “robo-advice.”) The lawsuits claim, in essence, that fees collected by record keepers for investment advice were unreasonably high, because the fees exceeded the amount actually paid to Financial Engines. The suits claimed that the record keepers did not provide services of sufficient value to justify retaining the spread between the amount charged and the amount actually paid to Financial Engines.
In March, two federal courts dismissed claims against the record keepers, bringing the total to four similar cases that all have been dismissed. The courts ruled that the record keepers were not acting as fiduciaries in setting fees at a level that allowed them to retain an amount in excess of what was paid to Financial Engines and thus plaintiffs could not proceed with claims that the record keepers breached fiduciary duties or engaged in prohibited self-dealing.
Despite the record keepers’ success in this first round of litigation, the courts have not completely foreclosed plaintiffs’ claims. In three of the four cases, the courts gave the plaintiffs a chance to replead their claims. In addition, the courts noted the responsibility of plan sponsors or their designees to review fee arrangements for investment advice (as well as other services) to ensure that the total amount paid is reasonable. That said, the courts have not accepted the plaintiffs’ premise that the fees in any case were unreasonable.
The cases are: Patrico v. Voya Financial, Inc., No. 16-7070, 2018 WL 1319028 (S.D.N.Y. Mar. 13, 2018) (denying leave to amend); Scott v. Aon Hewitt Financial Advisors, LLC, et al., No. 17 C 679, 2018 WL 1384300 (N.D. Ill. Mar. 19, 2018); Chendes v. Xerox HR Solutions, LLC, 2017 WL 4698970 (E.D. Mich. Oct. 19, 2017); and Fleming v. Fid. Mgmt. Tr. Co., No. 16-CV-10918-ADB, 2017 WL 4225624 (D. Mass. Sept. 22, 2017).
A federal district court in Indiana recently granted preliminary approval of a settlement between Anthem and a class seeking coverage of Applied Behavior Analysis (“ABA”) treatment for autism disorders. The three-year old litigation involved claims that Anthem violated the federal Mental Health Parity and Addiction Equity Act (“MHPAEA”) by limiting the hours of ABA therapy that would be covered for children ages seven and older. As part of the settlement, Anthem will pay $1.625 million to a common fund for the benefit of approximately 200 class members; the amount per person will vary based on individual claims for ABA therapy that were denied. Anthem also agreed to stop using guidelines that limited ABA coverage based solely on an individual’s age. Anthem will further require employees who review treatment plans to participate in periodic external continuing education relating to autism and/or ABA therapy.
As we have discussed previously, MHPAEA claims related to ABA treatment have become more common, but courts have yet to issue many substantive decisions on the lawfulness of plans’ ABA restrictions. Plan sponsors and fiduciaries should expect scrutiny of ABA restrictions to continue.
The case is W.P. v. Anthem Ins. Cos., No. 1:15-cv-00562 (S.D. Indiana).
On March 23, 2018, the National Association for Fixed Annuities (“NAFA”) and the Department of Labor filed a Joint Stipulation of Dismissal of litigation involving the Department’s fiduciary rule in the District of Columbia Circuit. NAFA had appealed a district court decision that dismissed NAFA’s challenge to the fiduciary rule. The decision to drop that appeal comes a little over a week after the Fifth Circuit vacated the fiduciary rule. As it stands now, the Fifth Circuit’s decision vacating the fiduciary rule will remain the only appellate decision on the merits of the rule in its entirety. Although the Department announced that it will not enforce the rule, it has not withdrawn the rule and still has a right to request a rehearing on the Fifth Circuit’s decision or it may petition the Supreme Court for certiorari. The case is Nat’l Assoc. for Fixed Annuities v. Acosta, D.C. Cir., No. 16-5345.
For a multiemployer pension fund to hold an asset purchaser liable for withdrawal liability as a successor-in-interest, the fund must establish that the purchaser was (i) on notice of the seller’s withdrawal liability, and (ii) the purchaser “substantially continued” the seller’s operations. In Ind. Elec. Workers Pension Benefit Fund v. ManWeb Servs., No. 16-cv-2840, 2018 WL 1250471 (7th Cir. Mar. 12, 2018), the Seventh Circuit rejected the purchaser’s so-called “big buyer” defense that it did not substantially continue the seller’s business because the seller’s operations made up only a small proportion of the purchaser’s operations. In so ruling, the Court explained that the appropriate inquiry was the extent to which the purchaser continues the seller’s business after the asset purchase, which required an evaluation of the totality of the circumstances. Here, the Court observed that the “big buyer” defense would allow a large buyer that continued its predecessor’s business under a different name to escape liability simply because of its size, contrary to the goals of the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”) to protect multiemployer plans from the damaging consequences of employer withdrawals. In rejecting the “big buyer” defense, the Seventh Circuit distinguished as outdated an earlier decision by the Ninth Circuit in Resilient Floor Covering Pension Tr. Fund Bd. of Trustees v. Michael’s Floor Covering, Inc., 801 F.3d 1079, 1098 (9th Cir. 2015), which had held that the appropriate inquiry was whether a majority of the buyer’s workforce consisted of the seller’s former employees.
In a 2-1 decision, the U.S. Court of Appeals for the Fifth Circuit vacated the Department of Labor’s fiduciary rule, including the expanded definition of “investment advice fiduciary” and the associated exemptions. The decision nullifies the Department’s 2016 regulation—at least in the Fifth Circuit, which includes Texas, Louisiana, and Mississippi, and arguably nationwide—but is not likely to be the last word on this topic. The case is U.S. Chamber of Commerce v. DOL, No. 17-10238, 2018 WL 1325019 (5th Cir Mar. 15, 2018). In response to the Fifth Circuit’s decision, the Department announced that it will not enforce the fiduciary rule, pending further review. However, the Department did not withdraw the rule or speak for the IRS.
Over the course of more than forty pages, the majority decision recounted the history of ERISA’s definition of fiduciary and concluded that the Department’s expansion of the definition reflected a policy decision that was beyond the Department’s authority. In so holding, the Court explained that expansion of service providers’ obligations under the law and individuals’ ability to enforce the law in court requires an act of Congress rather than an unelected agency of the Executive branch.
The Court first determined that the statute’s definition of fiduciary was not ambiguous and must be interpreted consistently with the common law. In particular, the Court highlighted a distinction in the common law between an “investment adviser,” who regularly gives advice that is the primary basis for investment decisions, and a broker-dealer, whose principal role is sales. The Court concluded that the Department’s 1975 definition of “investment advice fiduciary”—the five-part test that the Department said was outdated and too narrow—properly reflected that distinction. Although the Court left the door open for the Department to make changes to the definition, the Court rejected the Department’s justification for a complete rewrite:
That times have changed, the financial market has become more complex, and IRA accounts have assumed enormous importance are arguments for Congress to make adjustments in the law, or for other appropriate federal or state regulators to act within their authority.
Second, even assuming that the statute’s definition of fiduciary was ambiguous, the majority concluded that the Department’s expanded definition was not a “reasonable” interpretation of the statute. The Court detailed a number of reasons for this conclusion, including the following:
- The fiduciary rule ignores Congress’s decision in ERISA to subject employer-sponsored plans to a different regime than IRAs. In particular, the Court observed that the statute does not subject IRA fiduciaries to ERISA’s duties of prudence and loyalty or to ERISA’s private right of action. The new Best Interest Contract Exemption would wipe away this distinction, because its conditions include a contractual commitment to the duties of prudence and loyalty that can be enforced by a private right of action.
- By the Department’s own admission, the new definition of “investment advice fiduciary” could “sweep in some relationships that are not appropriately regarded as fiduciary in nature.” The Court rejected the Best Interest Contract Exemption as a solution to this defect because the exemption is conditioned on taking on the very fiduciary status, responsibility, and risk that the Department acknowledged may not have been intended.
- The Best Interest Contract Exemption violates Constitutional separation of powers: only Congress may create privately enforceable rights of action. In addition, the exemption’s restriction of arbitration provisions (subsequently abandoned by the Department) violates the Federal Arbitration Act.
- The fiduciary rule essentially outflanks Congressional initiatives under the Dodd-Frank Act to bestow oversight of broker/dealers upon the SEC. “Rather than infringing on SEC turf, DOL ought to have deferred to Congress’s very specific Dodd-Frank delegations and conferred with and supported SEC practices to assist IRA and all other individual investors.”
What does this all mean? The direct consequence of the Court’s decision is that the expanded definition of “investment advice fiduciary” is no longer enforceable, at least within the Fifth Circuit. Pending review of the decision, the Department is not enforcing the fiduciary rule. We do not expect this to be the final word, however. The rule has not been withdrawn and the Department can still seek rehearing by the Fifth Circuit (either by the same panel or by the full Court) and/or review by the U.S. Supreme Court.
More indirectly, the decision articulates principles that could embolden the Trump administration’s general deregulatory agenda and might affect the Department’s review of the fiduciary rule. Even if other courts continue to disagree with the Fifth Circuit’s conclusion (as the Tenth Circuit did most recently, discussed here), the decision further clears a path for withdrawing the fiduciary rule or a regulatory compromise that softens its impact—for example, by expanding the “seller’s” exception and eliminating the most onerous requirements for the Best Interest Contract Exemption.
In the coming months and years, we expect to see continued focus on the fiduciary standard in all three branches of government:
- Challenges related to the Department’s authority (both to create the new rule and to scale it back) are likely to continue in the courts.
- So far, the Department is continuing its review of the rule; and even if the Department puts it aside, a future administration could reopen the project.
- Members of Congress are likely to continue proposing legislation going both ways—with one side of the aisle seeking to expand the definition of fiduciary legislatively and the other side seeking consistency between DOL and the SEC.
It is too soon to guess where things will end up, and probably premature to change compliance strategies dramatically. Stay tuned.
The Tenth Circuit recently affirmed the Department of Labor’s authority to impose new conditions for exemption from prohibited transaction rules with respect to the sale of annuity contracts. The case related to the Department’s decision, as part of the 2016 “fiduciary rule,” to make sales of fixed indexed annuities ineligible for Prohibited Transaction Exemption 84-24, requiring instead that sales of those products satisfy the more onerous requirements of the new Best Interest Contract Exemption (“BIC Exemption”).
The plaintiff in the case, Market Synergy Group, alleged that the Department had not satisfied its obligation under the Administrative Procedure Act to provide advance notice of “either the terms or substance of the proposed rule or a description of the subjects and issues involved.” The Department’s proposed rule would have affected only “variable annuity contracts and other annuity contracts that are securities under federal securities laws.” Because they are not treated as securities under federal securities laws, fixed indexed annuities would not have been affected. But the Department requested comments on whether its proposal “[struck] the appropriate balance.”
The Tenth Circuit held that the Department’s request for comments on whether it had struck the appropriate balance was sufficient to satisfy the Department’s notice obligations. In light of the request for comments, the court reasoned that extending the new requirements to fixed indexed annuities was a “logical outgrowth” of the initial proposal.
In addition to holding that the Department had satisfied its notice obligation, the Court also ruled that:
- It was not arbitrary to treat fixed indexed annuities like variable annuities (and less favorably than traditional fixed annuities), because the record established that the Department had sufficiently considered the products’ complexity and risk, and potential conflicts of interest in the sales process; and
- The Department’s regulatory impact analysis sufficiently addressed the effect that the more onerous BIC Exemption requirements would have on the insurance market before concluding that fears of increased costs were (1) overstated and (2) counteracted by the benefit to investors.
Meanwhile, the more onerous BIC Exemption requirements that were the subject of the litigation remain on hold until July 2019, pending the Department’s review of the fiduciary rule. That review can still lead to a loosening of the conditions for the exemption, and possibly even a decision to put fixed indexed annuities back within the scope of PTE 84-24. The Court’s decision leaves the Department leeway to make a final decision through the administrative process.
The case is Mkt. Synergy Grp., Inc. v. United States Dep’t of Labor, No. 17-3038, 2018 WL 1279743 (10th Cir. Mar. 13, 2018).
On March 5, 2018, the IRS released Revenue Procedure 2018-18, which, among other things, adjusts downward the 2018 total contribution limit to health savings accounts (HSAs) for individuals enrolled in family coverage. In late 2017, the IRS announced that the 2018 HSA limit for individuals enrolled in family coverage would be $6,900. The recently enacted tax reform legislation, however, required application of a new method of calculating inflation adjustments (i.e., Chained Consumer Price Index for All Urban Consumers, or C-CPI-U) beginning in 2018. Using the C-CPI-U method, the IRS adjusted the HSA limit for individuals enrolled in family coverage downward to $6,850. The HSA limit for individuals enrolled in self-only coverage, and the deductible parameters for high deductible health plans did not change.
The downward adjustment of the HSA limit for individuals enrolled in family coverage presents administrative issues for employers and HSA administrators as many HSA enrollees may have already maxed out their family contributions. This is particularly challenging if an individual had contributed the IRS-approved $6,900 maximum amount and used all of the funds for permitted medical expenses only to find out, after the start of 2018, that the limit was lowered.
In the absence of transition relief (Rev. Proc. 2018-18 did not include any relief), it would seem that any contribution above the $6,850 limit would be treated as an “excess” contribution, even if the contribution is only equal to the $50 previously permitted by the IRS. Under current IRS guidance, taxpayers would have until the filing deadline for individual income tax returns (here, in most cases, April 15, 2019) to remove any excess contributions (and any earnings attributable to them). If the excess contribution (and earnings) is not timely distributed, it would be subject to a 6% excise tax (which would be triggered each year until removed from the HSA).
Although this downward adjustment of the 2018 HSA limit after the beginning of 2018 may be unwelcome news for individuals, employers, and HSA administrators, there is still time to take corrective action if necessary. It is possible that the IRS might re-consider the application of this lower limit to individuals who otherwise contributed in excess of the $6,850 limit (in reliance on earlier IRS guidance). Therefore, one approach might be to wait for a while and see if the IRS issues some form of transition relief. If not, taxpayers who contributed in excess of the $6,850 limit for family coverage should consider their options for correction.
The Seventh Circuit rejected a disability plan participant’s argument that an untimely decision denying his claim for long-term disability benefits warranted changing the standard of review from arbitrary and capricious to de novo. In so ruling, the Court explained that had plaintiff filed suit once the time for a timely decision had passed (because his claim was deemed exhausted under applicable regulations), rather than pursue an administrative appeal, the court would have considered an appropriate remedy, e.g., whether the claim should be reviewed de novo. By pursuing an administrative appeal, the Court concluded that the participant waived his right to a remedy for an untimely decision. The case is Dragus v. Reliance Standard Life Ins. Co., No. 17-1752, 2018 WL 851164 (7th Cir. Feb. 14, 2018).
A recent Third Circuit decision reinforced the need for ERISA plaintiffs to plead injury-in-fact to establish Article III standing. In Krauter v. Siemens Corp., No. 17-1662, 2018 WL 921542 (3d Cir. Feb. 16, 2018), the plaintiff was a beneficiary of four pension plans that had been sponsored by Siemens. After the Plaintiff’s retirement, Siemens sold a division and transferred responsibility for Plaintiff’s benefit obligations to the buyer. Plaintiff filed suit claiming that the transfer of his benefit obligation increased his risk of loss, although the Plaintiff never alleged that he was not paid the benefits he was owed. The Third Circuit held that the Plaintiff lacked standing: (i) to pursue claims based on his participation in the defined benefit plans because allegations of a risk of future adverse effects on benefits were not sufficient to confer Article III standing; and (ii) to pursue claims based on his participation in the deferred compensation plan because allegations that fees increased and investment options changed did not sufficiently allege actual harm. However, the Plaintiff did have standing to pursue a claim based on his participation in the 401(k) plan because he alleged that fees increased at the same time investment gains decreased, which, according to the Court, sufficiently alleged actual harm. Nonetheless, the Court affirmed dismissal of the claim because plaintiff failed to sufficiently plead facts to sustain his claims.