Employee Benefits & Executive Compensation Blog

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

Best Practices in Administering Benefit Claims #10 – The Three C’s

We conclude our blog series on best practices in administering benefit claims with the three C’s:  be clear, be consistent, and communicate.  The key to effective benefit claim administration ultimately boils down to drafting and maintaining clear plan documents, implementing and enforcing plan terms consistently, and communicating clearly with plan participants and beneficiaries.

First, all documents, from the plan document and summary plan description to the claims procedures, should be drafted as clearly as possible.  That seems obvious and simple enough, but it is not always accomplished.  When the documents are clear in their meanings, plan fiduciaries and administrators, as well as plan participants and beneficiaries, can rest easier knowing that the plan is being properly administered in accordance with its terms.

Second, plan terms should be implemented and enforced consistently.  This is particularly true when fiduciaries have to interpret the plan terms.  Given the importance of consistent plan interpretation, fiduciaries should consider appropriate documentation of their decisions.  This can help minimize the risk of future, unintended inconsistent interpretations.

Third, the importance of clear communications with plan participants and beneficiaries cannot be overstated.  Clear communications can go a long way in providing comfort to participants and beneficiaries that they have an accurate understanding of the benefits provided under the plan (and those that are not).

Keeping in mind the three C’s should help reduce the risk of participant claims and/or litigation about whether the participant is receiving the benefits due under the plan.  If, however, litigation arises, plan sponsors and fiduciaries will be able to take comfort in the fact that they have clear plan documents, that have been consistently enforced, and that have been clearly communicated to participants, all of which will aid in the defense of the litigation.

You can find our previously published best practices here:

Second Circuit Prohibits Retroactive Changes to Withdrawal Liability Interest Rate Assumptions

The Second Circuit Court of Appeals recently issued a withdrawal liability decision of which both multiemployer pension plans and their contributing employers should be aware.  Specifically, in National Retirement Fund v. Metz Culinary Management, Inc., No. 17-1211, 2020 WL 20524 (Jan. 2, 2020), the Second Circuit held that the interest rate used to calculate an employer’s withdrawal liability is the rate that was in effect on the last day of the fund’s plan year preceding the year of the employer’s withdrawal, i.e., the “measurement date.”  In so holding, the Court rejected the plan actuary’s decision to use a lower discount rate adopted after the measurement date that had the effect of substantially increasing the amount of the employer’s liability.  The Court reasoned that retroactive changes to the actuarial methods and assumptions used to calculate withdrawal liability are inconsistent with the legislative history of ERISA § 4214, which requires the fund to provide advance notice to employers of any “plan rules and amendments” that affect withdrawal liability.  The Court also observed that withdrawal liability estimates provided under ERISA § 101(l) would be of “no value” if such retroactive changes were permitted.  Going forward, multiemployer plans may need to coordinate with their actuaries to ensure that decisions regarding the methods and assumptions used to calculate withdrawal liability are made and communicated in a timely manner consistent with this decision.

New Year, New World: A Short Guide to the SECURE Act for Retirement Plan Sponsors and Administrators

The SECURE Act, included as part of the Further Consolidated Appropriations Act, 2020, was signed into law on December 20, 2019.  This new law contains many significant changes that may impact employer-sponsored benefit plans.

Given the scope of the law and the number of changes, we will release a series of blog posts exploring the new rules affecting employer-sponsored benefit plans and outlining best practices for implementation.  For a short summary of the SECURE Act changes to health plans, please click here.  Below is a chronological guide to the key retirement plan issues raised by the new law, most of which we will address in more detail in upcoming blog posts in this series.

SECURE Act Changes Effective Upon Enactment

  • Extends nondiscrimination testing relief for certain closed or “soft-frozen” defined benefit plans, with an option to apply the rules to plan years beginning after December 31, 2013.
  • Adds a new safe harbor for a defined contribution plan fiduciary’s selection of a lifetime income provider.
  • Provides that “qualified disaster distributions” up to $100,000 are exempt from the early distribution penalty tax, if the distribution is taken in connection with federal disasters declared during the period between January 1, 2018 and 60 days after enactment.
  • Prohibits making defined contribution plan loans through prepaid credit cards and other similar arrangements.

SECURE Act Changes Effective for Distributions Made After December 31, 2019

  • Adds an option for penalty-free withdrawals from defined contribution plan accounts of up to $5,000 (per individual) within one year after birth or adoption of a qualifying child, with an option to “repay” qualified birth or adoption distributions under certain circumstances.
  • Delays the “required beginning age” for minimum required distributions from qualified retirement plans from age 70½ to age 72 with respect to individuals who attain age 70½ after December 31, 2019.
  • Caps the period to “stretch” post-death defined contribution plan distributions to 10 years (with exceptions for surviving spouses, minor children, disabled or chronically ill persons, or any person not more than 10 years younger than the employee). Effective for distributions with respect to employees who die after December 31, 2019 (with a delayed effective date for certain collectively bargained plans).

SECURE Act Changes Effective for Plan Years Beginning After December 31, 2019

  • Reduces the earliest age that an employee can receive in-service retirement benefits from a pension plan from age 62 to age 59½.
  • Increases the cap on the default contribution rate for qualified automatic contribution arrangements from 10% to 15% (but retains the 10% cap for the first year of participation).
  • Eliminates the annual safe harbor notice requirement for nonelective 401(k) safe harbor plans.
  • Adds an option to retroactively amend a 401(k) plan to become a nonelective safe harbor plan. If the nonelective contribution is at least 4% of compensation, the amendment could be made up until the end of the next following plan year.
  • Allows plan participants invested in lifetime income investment options to take a distribution of the investment without regard to plan distribution restrictions—provided that the investment is no longer authorized to be held under the plan and the distribution is made by a direct transfer to another retirement plan or IRA or by distribution of the annuity contract.

SECURE Act Changes Effective for Plan Years Beginning After December 31, 2020

  • Requires 401(k) plan sponsors to permit long-term, part-time employees who have at least 500 hours of service (but less than 1,000 hours) in each of the immediately preceding three consecutive 12-month periods to participate in the 401(k) plan for the sole purpose of making elective deferrals. Hours of service during 12-month periods beginning before January 1, 2021, are not taken into account for this rule.
  • Permits unrelated employers to participate in an “open” multiple employer retirement plan (eliminating the current employment “nexus” rule) and generally eliminates the “one bad apple” rule under which a tax-qualification violation by one participating employer could potentially disqualify the entire multiple employer plan.

SECURE Act Changes Effective for Plan Years Beginning After December 31, 2021

  • Directs the Department of Treasury and the Department of Labor to modify annual reporting rules to permit certain related individual account or defined contribution plans (i.e., plans with the same trustee, fiduciary, administrator, plan year, and investment selections) to file a consolidated Form 5500. Applies to returns and reports for plan years beginning after December 31, 2021.

SECURE Act Changes – Special Effective Dates

  • Requires that the Department of Treasury issue guidance within six months of enactment providing that individual 403(b) custodial accounts may be distributed in-kind to a participant or beneficiary in the event of a 403(b) plan termination, with the guidance retroactively effective for taxable years beginning after December 31, 2008.
  • Requires defined contribution plan sponsors to provide participants with an annual estimate of monthly income that a participant could receive in retirement if an annuity were purchased with his or her plan account balance—regardless of whether an annuity distribution option is available under the plan. Effective twelve months after the release of DOL guidance.

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Almost all tax-qualified retirement plans will need to be reviewed for possible amendments to reflect the SECURE Act, which provides for a remedial amendment period for making these amendments until the last day of the first plan year beginning on or after January 1, 2022 (with a delayed deadline for certain collectively bargained plans).

Check back here for more detailed analysis of these topics, as our next post will cover key points in the SECURE Act for defined benefit plans.  For a more comprehensive list of SECURE Act changes for employer-sponsored retirement and health plans, please click here.

[Podcast]: VCOC Management Rights

proskauer benefits brief podcast

In this episode of the Proskauer Benefits Brief, partner Ira Bogner and senior counsel Adam Scoll discuss VCOC “Management Rights.”  For VCOC compliance purposes, “management rights” are contractual rights directly between an investing entity and an operating company by which the investing entity can substantially participate in, or substantially influence the conduct of, the management of the operating company.  Unfortunately, there is not a ton of guidance out there explaining what constitutes sufficient VCOC “management rights,” so make sure to tune in to this podcast to hear our views.

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The Saga Continues – Fifth Circuit Affirms ACA Individual Mandate’s Unconstitutionality; Remands for Further Consideration

Roughly a year ago, we reported on a district court judge’s determination that the Affordable Care Act’s (“ACA”) individual mandate was unconstitutional and that, therefore, the entire ACA was invalid. A detailed summary of the district court’s decision can be found in our December 17, 2018 post. Not surprisingly, this ruling was appealed to the 5th Circuit Court of Appeals.

On December 18, 2019, the 5th Circuit issued its ruling affirming the district court’s determination that the individual mandate was unconstitutional. In 2012, the United States Supreme Court upheld the individual mandate as a constitutional application of Congress’ taxing power. The 5th Circuit agreed with the district court that the individual mandate can no longer stand as a tax given that penalties under the individual mandate were reduced to zero in 2017.

The 5th Circuit, however, was not willing to go as far as the district court and declare the entire ACA unconstitutional. Instead, the 5th Circuit remanded the litigation back to the district court for a detailed analysis on which other provisions of the ACA are severable from the individual mandate and can therefore remain intact. A district court determination that the individual mandate cannot be severed from the rest of the ACA will undoubtedly be appealed to the 5th Circuit and, perhaps, the United States Supreme Court.

Although this litigation will not likely be resolved within the next year or two, it nevertheless creates uncertainty regarding which of the ACA’s other provisions will be invalidated along with the individual mandate. For the time being, what is left of the ACA beyond the individual mandate is still the law, so employers and plan sponsors should continue to comply with the ACA’s coverage mandates and, if applicable, the employer shared responsibility mandate.

New IRS Guidance for Tax-Exempt Entities Funding Employee Benefits

The IRS recently released a final regulation clarifying how voluntary employees’ beneficiary associations (VEBAs) and supplemental unemployment benefit trusts (SUBs) should calculate unrelated business taxable income. VEBAs and SUBs are tax-exempt entities that are used to fund employee benefit programs. Read below for background, details of the final regulation, and the applicability date.


Although VEBAs and SUBs are tax-exempt entities, they are subject to tax on their unrelated business taxable income. However, under an exception to this general rule, collectively-bargained VEBAs and SUBs are not subject to tax on their unrelated business income. The analysis below applies to non-collectively bargained VEBAs and SUBs.

For VEBAs and SUBs, unrelated business taxable income is defined to include all gross income earned during the year, but excluding member contributions and excluding amounts set aside to pay benefits and related costs up to the IRC section 419A account limit for the year (which, generally speaking, is the amount necessary to pay incurred but unpaid benefit claims at year-end). Amounts set aside to pay benefits in excess of the IRC section 419A account limit are included in unrelated business taxable income and subject to tax.

Against this backdrop, some taxpayers had taken the position that VEBA or SUB investment income earned during the year but spent on benefits was not included in unrelated business taxable income for the year. The U.S. Court of Appeals for the Sixth Circuit endorsed this interpretation in Sherwin-Williams Co. Employee Health Plan Trust v. Commissioner (6th Cir. 2003), and concluded that a VEBA’s investment income spent on administrative costs was not included in unrelated business taxable income for that year.

Final regulation and applicability date

The final regulation clarifies that, for VEBAs and SUBs, investment income earned during the year is subject to unrelated business income tax to the extent it exceeds the IRC section 419A account limit for the year. This rule applies regardless of whether the investment income is spent on benefits during the year. Recognizing that VEBAs and SUBs under the Sixth Circuit’s jurisdiction may have been operating in good faith reliance on the Sixth Circuit’s decision in Sherwin-Williams, the IRS provided a delayed applicability date for the final regulation. The final regulation will apply to taxable years beginning on or after the date of publication of the final regulation (December 10, 2019).

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Plan sponsors should carefully review the current treatment of non-collectively bargained VEBA and SUB investment income to confirm that their approach complies with the final regulation.

“Cadillac Tax” on High-Cost Group Health Plans Repealed

On December 20, 2019, the President signed into law the “Further Consolidated Appropriations Act, 2020” (the “Act”). Among many other things, the Act repeals the Affordable Care Act’s controversial 40% excise tax on high-cost health care (commonly referred to as the “Cadillac Tax”). From an economic perspective, the Cadillac Tax was intended to generate tax revenue and drive down utilization of unnecessary health care services. Originally scheduled to become effective in 2018, two separate legislative acts pushed the effective date to 2022. Given the Cadillac Tax’s unpopularity on both sides of the aisle, it seemed that it was only a matter of time before the tax was repealed.

The Act also repealed two other healthcare-related taxes established by the Affordable Care Act – the medical device tax and the tax on health insurance providers. Both of these taxes were also delayed or paused in prior legislation.

Best Practices in Administering Benefit Claims #9 – Managing Litigation

As we shifted focus last week from a plan’s administrative claims procedures to defending against a claim for benefits in court, we explained how a well-documented administrative record can enhance the chances of getting a case dismissed at the outset without the need for protracted litigation.  This week, we offer three opportunities to further manage litigation by adding one or more of the following provisions to plans:  a contractual limitations period, a forum selection clause, and/or a mandatory arbitration provision.

  • Contractual Limitations Periods. ERISA does not specify a statute of limitations for claims for benefits under Section 502(a)(1)(B).  Thus, courts borrow the state statute of limitations for the state claim that is most analogous to a claim for benefits, which, in most cases, is a breach of contract claim.  In New York, for example, a claim for benefits is generally subject to a six-year statute of limitations.  In other jurisdictions, the statute of limitations has been determined to be as many as fifteen years.  There is a separate issue of when the statute of limitations begins to accrue, which is typically governed by the federal discovery rule, i.e., when a participant knew or should have known that he or she was not entitled to benefits.  In light of the length of these limitations periods, plan sponsors often include a contractual limitations period in the plan document and summary plan description that considerably shortens the statute of limitations and also specifies when the period begins to run.  Depending on the type of plan, we have seen limitations periods in plan documents that range from a couple of years to as few as a couple of months.  Although there is little, if any, dispute that contractual limitations periods are enforceable, it is important that they be reasonable, be published in the summary plan description, and be included in all benefit denial letters.  By drafting clear contractual limitations periods that also specify precisely when the period is triggered, plan sponsors can limit the ability of participants and beneficiaries to bring suits based on events that occurred many years earlier.
  • Forum Selection Clauses. ERISA contains a venue provision, which provides that a claim under ERISA “may be brought in the district where the plan is administered, where the breach took place, or where a defendant resides or may be found.”  ERISA § 502(e)(2).  ERISA’s broad venue provision can make it costly to defend a case, particularly if a participant with a claim works in or retires to a location that is far from where the plan is administered.  Most courts have concluded that ERISA’s venue provision is permissive, not mandatory.  As such, plan sponsors are free to draft a plan provision that requires all ERISA claims to be commenced in particular state and/or court.  By dictating where the plan will be required to defend against ERISA claims (of any kind), plan sponsors can help reduce the costs and burdens of the plan being involved in litigation.
  • Mandatory Arbitration Provisions. It is well-established that plan sponsors and plan fiduciaries may require claims for benefits, after the claim is processed through the plan’s administrative claims procedures, to be arbitrated rather than litigated in court.  Because arbitration is generally viewed to be less costly than litigation, plan sponsors may wish to consider the relative pros and cons of arbitration.  When doing so, there are a multitude of factors to consider, including the following:  Which arbitration forum should be used—AAA, JAMS or something else?  Should the plan create its own arbitration procedures?  Where should the arbitration be commenced?  How many arbitrators should there be—one or a panel of three?  Who should pay for the arbitration?  Should class-wide arbitration be prohibited?  What appellate rights should be provided following arbitration?  There are many answers to these questions, and there is not necessarily a one-size-fits-all answer to them.  The answers may very well differ depending on, among other things, the type of ERISA claim.  The answers to these questions are well beyond the scope of this blog, but the important thing to recognize here is that arbitration is available and that there are many important questions that must answered besides the most fundamental one—does the plan and/or plan sponsor want to arbitrate ERISA claims?

A decision by the plan sponsor and/or plan fiduciary to include some or all of these provisions in the plan (and summary plan description) can serve to help avoid and/or minimize the costs and burdens of ERISA litigation.  Careful consideration should be given to determining whether any of these provisions are a good choice for your plan.

Next week, we wrap-up with some final thoughts on best practices in benefit claim administration.

You can find our previously published best practices here:

District Court Enforces Forum Selection Clause in Employer’s Benefits Plan

A federal district court in North Carolina enforced a forum selection clause in a short-term disability plan and on that basis transferred the case to Wisconsin federal court.  In so ruling, the court explained that ERISA’s venue provision is permissive, not mandatory, and thus rejected the plaintiff’s argument that ERISA’s venue provision guaranteed her a right to litigate in her choice of one of the three designated venues in ERISA § 502(e), i.e., where the action “may be brought in the district where the plan is administered, where the breach took place, or where a defendant resides or may be found.”  The court also found it irrelevant whether the plaintiff was made aware of the forum selection clause when her claim for benefits was denied by the plan fiduciary.  The case is Manuel-Clark v. ManpowerGroup Short-Term Disability Plan, No. 19-cv-147, 2019 WL 5558406 (E.D.N.C. Oct. 28, 2019).

IRS Reiterates Requirement to Sign Plan Documents and Amendments

At the heart of tax qualified retirement plan compliance is a requirement to timely adopt plans and plan amendments. Failure to adopt plan amendments when required can result in plan disqualification. Accordingly, it is very important for plan sponsors to prove that amendments were properly executed in a timely manner.  In a General Legal Advice Memorandum from the IRS’s Office of Chief Counsel dated December 13, 2019, the IRS provided a reminder of this important qualification requirement and the ramifications of noncompliance.

(The issue of when plan amendments must be made is a technical issue and will vary based on a number of factors, including whether the amendment is a legally-required amendment, an optional/design amendment, or an amendment required as a condition of obtaining a favorable IRS determination letter for the plan. This blog addresses the separate technical requirement to prove that a plan amendment was properly adopted.)

The question of how to prove timely adoption of plan amendments arose following the Tax Court’s decision in Val Lanes Recreation Center v. Commissioner, TC Memo 2018-92. The taxpayer in Val Lanes was an employer sponsoring an employee stock ownership plan (ESOP) that was under examination by the IRS. The IRS proposed to disqualify the ESOP for several reasons, one of which was that the employer could not prove timely adoption of a plan amendment.  All that was in the record was an unsigned amendment that the employer agreed to adopt upon receipt of its favorable determination letter; but the employer could not later produce a signed version of the amendment. The problem was that the employer’s records were destroyed when bad weather caused extensive damage to the business premises and the employer thought the signed plan amendment might have been destroyed.  However, the employer could credibly show that it had a practice of always signing plan documents sent by its tax advisor. After considering all the facts, the Tax Court agreed with the employer and determined that the plan amendment in question was indeed validly executed by the employer in a timely fashion.

In the General Legal Advice Memorandum, the IRS emphasized that employers should not try to rely on the arguments presented in Val Lanes because they were highly fact-specific.  The burden of proof to show timely adoption, according to the IRS, is on the plan sponsor. The IRS emphasized that it would be unlikely for a plan sponsor to meet its burden of proof that a plan amendment had been executed without providing an actual signed plan amendment. Therefore, the IRS concluded by stating that “it is appropriate for IRS exam agents and others to pursue plan disqualification if a signed plan document cannot be produced by the taxpayer.”

As this IRS memorandum emphasizes, plan sponsors should make sure that all plan amendments are properly and timely adopted.  Sometimes plan sponsors might simply rely on board resolutions or committee resolutions as proof of adoption without a corresponding signed document.  In light of the IRS emphasis on relying on signed documentation, plan sponsors should consider how best to document proper and timely adoption. For example, a contemporaneous signed certificate of the corporate secretary might corroborate the timing of unsigned board resolutions. It would also help plan sponsors to keep clear records (perhaps in a plan amendment tracking chart like this sample chart identifying plan amendments and when they were adopted.

The bottom line is that the IRS General Legal Advice Memorandum serves as a reminder that this is an issue the IRS will be looking for on examination and that plan qualification could hang in the balance.