In 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 deemed to be holding ERISA plan assets.
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:
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)
The Second Circuit reinstated a claim for breach of fiduciary duty under ERISA brought by participants in IBM’s 401(k) plan who suffered losses from their investment in IBM stock. Jander v. Retirement Plans Committee of IBM, et al. 2018 WL 6441116 (2d Cir. Dec. 10, 2018). In so ruling, the Second Circuit became the first circuit court since the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014), to allow such a claim to survive a motion to dismiss. According to media reports, this has sparked renewed hope within the ERISA plaintiffs’ bar in the viability of these claims. Below, we briefly review the Supreme Court and Circuit Court precedent leading up to the Second Circuit’s IBM decision, the IBM decision itself, and its potential implications going forward.
The Supreme Court’s Decisions in Dudenhoeffer v. Fifth Third and Amgen v. Harris
In Dudenhoeffer, a unanimous Supreme Court held that there are no unique pleading standards for employer stock claims under ERISA, but nevertheless provided more rigid criteria for satisfying these standards, particularly in claims alleging that insider fiduciaries breached their fiduciary duties by failing to act on non-public information to prevent losses from investments in allegedly overvalued employer stock. The Supreme Court held that, to satisfy the pleading requirements, the plaintiff must allege an alternative action that the plan fiduciary could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances could not have viewed as more likely to harm the fund than to help it. Three considerations informed the Court’s development of this standard: (1) fiduciaries are not required to break the law, (2) disclosures under ERISA could conflict with the letter and objectives of insider trading and other securities laws, and (3) acting on inside information could cause a drop in the stock price and do more harm than good to the stock already held by the plan.
The Supreme Court subsequently confirmed that the Dudenhoeffer standard sets a high bar. In Amgen Inc. v. Harris, 136 S. Ct. 758 (2016), the Court ruled that the Ninth Circuit erred by permitting a breach of fiduciary duty claim to proceed without first determining whether the complaint contained facts and allegations supporting a claim that removal of the Amgen stock fund was an alternative action that no prudent fiduciary could have concluded would cause more harm than good.
Four Circuit Courts Have Affirmed Judgments Dismissing ERISA Stock-Drop Claims
Following Amgen, four circuit courts—the Second, Fifth, Sixth, and Ninth Circuits—had occasion to consider whether a 401(k) plan participant satisfied the Dudenhoeffer standard by alleging an alternative action that a plan fiduciary could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances could not have viewed as more likely to harm the fund than to help it. All four circuits concluded that the participants had failed to satisfy this standard and affirmed the dismissal of the claims. In each case, the court held that a prudent fiduciary could have concluded that a premature disclosure of negative company information outside normal corporate channels of communication would do more harm than good to a plan. Laffen v. Hewlett-Packard Co., 721 F. App’x 642, 644–45 (9th Cir. 2018); Martone v. Robb, 902 F.3d 519, 526–27 (5th Cir. 2018); Graham v. Fearon, 721 F. App’x 429, 437 (6th Cir. 2018); Saumer v. Cliffs Nat’l Res. Inc., 853 F.3d 855, 861 (6th Cir. 2017); Loeza v. John Does 1-10, 659 F. App’x 44, 45–46 (2d Cir. 2016); Whitley v. BP, P.L.C., 838 F.3d 523, 529 (5th Cir. 2016); Rinehart v. Lehman Bros. Holdings Inc., 817 F.3d 56, 68 (2d Cir. 2016). The courts reasoned that a prudent fiduciary could have concluded that an unusual disclosure of negative news by a plan fiduciary before the issues had been fully investigated would spook the market into believing that problems at the company were worse than they actually were and thus harm plan participants already invested in the company stock fund. The Ninth Circuit also concluded that public disclosure of allegations that are not yet fully investigated would be inconsistent with the objectives of the securities laws. In re HP, 2015 WL 3749565, at *7 (N.D. Cal. June 15, 2015), aff’d sub. nom Laffen, 721 F. App’x 642.
The Second Circuit’s IBM Decision
In IBM, the plaintiff alleged that the defendants knew of, and should have disclosed to plan participants, certain accounting irregularities—for which the defendants themselves were allegedly responsible. According to the complaint, the failure to disclose left IBM’s stock price artificially inflated and harmed participants when the irregularities were eventually disclosed and the price of the stock declined by more than $12 per share.
The district court had twice dismissed the participants’ claim based on its finding that the complaint lacked context-specific allegations as to why a prudent fiduciary could not have concluded that plaintiff’s proposed alternatives were more likely to do harm than good and therefore failed to satisfy the Dudenhoeffer pleading standard.
On appeal, the Second Circuit reversed and concluded that the plaintiff had pled a plausible claim. The Court first explained that the Supreme Court’s Dudenhoeffer test was not clear because it initially asked whether a prudent fiduciary in the same circumstances would not have viewed an alternative action as more likely to harm the fund than to help it, and then reframed the question as whether a prudent fiduciary could not have concluded that the action would do more harm than good by dropping the stock price. According to the Court, the use of the “would not have” phrase considers the conclusions that an “average prudent fiduciary” may reach, and the use of the “could not have” phrase suggests a more restrictive standard requiring consideration of whether “any prudent fiduciary” could conclude that the alleged alternative actions would do more harm than good.
The Court found it unnecessary to decide which formulation applies because, in the Court’s view, the Complaint’s allegations satisfied either standard. According to the Court, the plan participant pled a plausible fiduciary breach claim because: (i) the plan fiduciaries allegedly knew that company stock was artificially inflated; (ii) the defendants were “uniquely situated to fix [the accounting irregularities] inasmuch as they had primary responsibility for the public disclosures that had artificially inflated the stock price to begin with” and disclosure could have been made within IBM’s quarterly SEC filings; (iii) the failure to promptly disclose the truth allegedly caused reputational harm to the company that exacerbated the harm to the stock price; (iv) the stock traded on an efficient market and there was thus no need to fear that disclosure would result in an overreaction by the market; and (v) disclosure of the truth was inevitable. Accordingly, the Court reversed the district court’s judgment dismissing the complaint and remanded the case for further proceedings.
The Second Circuit’s ruling in IBM contrasts sharply with every other court that has considered this issue, even within the Second Circuit. Perhaps most significantly, the Court’s view that disclosure could have occurred within the securities laws’ normal reporting regime conflicts with earlier circuit court decisions (including the Second Circuit) clearly holding that public disclosures on behalf of a company, e.g., SEC filings, are made in a corporate, and not fiduciary, capacity and thus are not a basis for ERISA fiduciary liability.
IBM has since petitioned the Circuit for rehearing en banc. We are hopeful that the full circuit or, if necessary, the Supreme Court will ultimately reject the approach taken by the panel in IBM in much the same way that the Supreme Court ruled in Amgen that the Ninth Circuit erred by permitting a similar claim to proceed without first determining whether the complaint contained facts and allegations satisfying the Dudenhoeffer standard.
A federal district court in Florida granted Aetna’s motion to dismiss claims that it violated ERISA and the Mental Health Parity and Addiction Act of 2008 (MHPAA) by refusing to cover the cost of wilderness therapy programs in Colorado and Utah. The court determined that the plaintiffs failed to state a plausible claim under their respective plans because they did not allege facts sufficient to show that the wilderness therapy programs qualified for coverage under the terms of their plans.
One of the plans covered treatment performed at a “residential treatment facility” and listed detailed requirements a facility must meet to qualify for coverage. The court found that the complaint did not contain sufficient information to show that the wilderness program met those requirements; there were no allegations that the program had licensed behavioral providers on site at all hours, or that access to necessary medical services was always available, among other things. The other plan covered “residential treatment services,” defined in relevant part as services that are licensed in accordance with the laws of the “appropriate legally authorized agency.” The court dismissed the claims because the complaint alleged that the wilderness plan was licensed under Utah law as an “outdoor youth treatment program,” rather than as a “residential treatment service,” thus failing to meet the plan’s requirements.
The court also dismissed the MHPAA claims due to a lack of factual allegations to support them. First, plaintiffs brought a categorical challenge that Aetna “excluded all coverage for mental health treatment received at residential treatment center programs,” but covered medical and surgical services received at skilled nursing facilities. The court found, however, that the plans’ terms plainly provided coverage for treatment by residential treatment center programs. Second, plaintiffs alleged that the plans did not impose similar definitional requirements for skilled nursing facilities and residential treatment facilities. The court determined that those allegations were insufficient because the complaint did not allege what criteria Aetna required of skilled nursing facilities. Third, plaintiffs argued that Aetna used different standards in assessing medical services rendered at residential treatment center programs than the standards used to assess services rendered at skilled nursing facilities. The court found this allegation “conclusory” and “unsupported by anything in the complaint.”
The case is H.H. v. Aetna Insurance Co., 2018 WL 6614223 (S.D. Fla. Dec. 13, 2018).
In this episode of the Proskauer Benefits Brief, Paul Hamburger co-chair of Proskauer’s Employee Benefits & Executive Compensation Group, and associate Steven Einhorn discuss the recently proposed IRS regulations addressing the hardship withdrawal rules affecting 401(k) and 403(b) plans. We will discuss challenging questions employers and administrators face as they work through the new requirements, which include the elimination of the six-month contribution suspension for participants who take a hardship withdrawal and how many plans will need to be amended as a result of these new proposed regulations.
In this episode of the Proskauer Benefits Brief, partner Robert Projansky and associate Katrina McCann discuss the recent district court case, Texas et al. v. The United States of America, which declared the Affordable Care Act (ACA) unconstitutional. On December 14, 2018, a district court judge in the Northern District of Texas deemed the entirety of the Affordable Care Act invalid because he found the individual mandate to be unconstitutional. From what would happen to the employer mandate to emergency care coverage, tune in as we discuss what these changes could mean for employers and plan sponsors if the court’s decision is ultimately upheld.
In a surprising turn of events, on Friday, December 14th, a district court judge in the Northern District of Texas declared that the Affordable Care Act’s (“ACA”) individual mandate is unconstitutional and that, a result, the entire ACA is invalid. Although the ACA remains in effect for the time being and an immediate appeal to the 5th Circuit is a near certainty, the decision, if upheld, could be expected to have a significant impact on health care delivery. Following a high-level summary of the litigation, we highlight the major implications this ruling could have on employers and plan sponsors.
The IRS recently issued Notice 2018-95 to provide transition relief to 403(b) plans that erroneously excluded part-time employees from eligibility to make elective deferrals when the employees should have been eligible to participate under the “once-in-always-in” requirement (“OIAI”). Under the OIAI requirement, once an employee is eligible to make elective deferrals, the employee may not be excluded from eligibility for making elective deferrals in any later year on the basis that the employee is a part-time employee. The IRS issued Notice 2018-95 to provide transition relief because many employers that sponsored 403(b) plans did not realize that the OIAI requirement applied to the part-time exclusion. Continue Reading
Massachusetts recently published guidance regarding its new Health Insurance Responsibility Disclosure (HIRD) annual filing, which is due for the first time on November 30, 2018 and then annually thereafter. This new HIRD form replaces one that was suspended in 2014 because it became unnecessary due to the ACA’s reporting requirements.
The new HIRD requirement consists of a relatively simple employer filing requirement (i.e., employees are no longer required to complete a form) and is intended to help Massachusetts determine who might be eligible for premium assistance under the state’s MassHealth Program. The filing requirement applies to every employer that has (or had) six or more Massachusetts-based employees during any month in the 12 months prior to November 30 of the filing year. An individual is considered an employee for this purpose if the employer including the individual in the quarterly wage report filed with the Massachusetts Department of Unemployment Assistance. Similar to the ACA reporting forms, HIRD forms are filed on an EIN-by-EIN basis. This means that a separate form must be filed for each company with its own EIN. Continue Reading