In late October 2024, the United States Court of Appeals for the Eleventh Circuit ruled in Romano v. Hancock Life Insurance Company, F.4th 729 (11th Cir. 2024) that certain foreign tax credits that were generated as a result of 401(k) plan investments in separate accounts owned by John Hancock Life Insurance Company (“JHLIC”) were not “plan assets” for purposes of the U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”).  As a result, the Court also held that JHLIC was not a fiduciary under ERISA, and, therefore, it did not breach or violate any fiduciary duties or prohibited transaction rules under ERISA by reason of not passing through such foreign tax credits to its 401(k) plan clients.

Background

JHLIC is an insurance company that provides investment, administrative and recordkeeping services to 401(k) plan clients.  In particular, JHLIC and the plaintiffs’ ERISA-covered 401(k) plan (the “Plan”) entered into a “signature” platform group variable annuity contract, which made a menu of investment options (including mutual funds) available to the Plan and its participants.  Neither the Plan nor its participants actually invested directly in the mutual funds.  Instead, the group annuity contract allowed the Plan to make contributions into JHLIC-owned “separate accounts,” which were divided into sub-accounts that corresponded to the mutual funds and other investment options available under the contracts that JHLIC maintained with its 401(k) plan clients.  The Plan’s assets were accordingly allocated among such sub-accounts, which were established, administered, owned and managed by JHLIC.

Although JHLIC remained the legal and taxable owner of the underlying assets of such sub-accounts, JHLIC did not have any discretionary authority or responsibility for the management or control of such assets – all sub-account transactions were processed only at the direction of the Plan and its participants.  The contractual arrangements between the Plan and JHLIC made clear that JHLIC was not assuming any ERISA fiduciary responsibilities with respect to the Plan.

Certain of the mutual funds held by the sub-accounts invested in foreign securities that ultimately generated foreign tax credits for the mutual funds.  Mutual funds are permitted to pass through such foreign tax credits to their shareholders, and JHLIC did just that with respect to the mutual funds in question.  However, since JHLIC was the shareholder in the mutual funds (not the Plan), such foreign tax credits were passed through to (and retained by) JHLIC.

For its services to the Plan, JHLIC was entitled to receive an annual fee, which was to be reduced by certain revenue sharing and credits generated by the underlying investment vehicles.  JHLIC did not reduce its annual fee by the value of the foreign tax credits.

The Plan claimed that such foreign tax credits should have been passed through to the Plan and/or reduced JHLIC’s annual fee.

The trustees of the Plan subsequently commenced litigation against JHLIC on the basis that its decision to retain the foreign tax credits was a breach of JHLIC’s fiduciary obligations under ERISA to discharge its duties solely in the interest of the Plan and its participants and a violation of ERISA’s prohibited transaction rules which prohibit a fiduciary from dealing with the assets of the Plan for its own interest or account.

The District Court granted summary judgment in favor of JHLIC, finding that JHLIC was not an ERISA fiduciary in regard to its retention of the foreign tax credits at issue and, therefore, did not breach any ERISA fiduciary duties or engage in any ERISA prohibited transactions.  The plaintiffs appealed the order granting summary judgment to JHLIC.

The Eleventh Circuit’s Analysis

The plaintiffs’ claims centered on the obligations and restrictions ERISA imposes on fiduciaries, and so it was critical to determine whether or not JHLIC was an ERISA fiduciary with respect to the Plan or the foreign tax credits.

The Court held that JHLIC was not an ERISA fiduciary with respect to the foreign tax credits because the foreign tax credits were not considered “plan assets” under ERISA.  After determining that ERISA’s plan asset regulations did not address the matter, the Court applied “ordinary notions of property rights under non-ERISA law” to determine what qualifies as “plan assets” for such purposes.  This definition of property rights includes “any property, tangible or intangible, in which the plan has a beneficial ownership interest” and requires consideration of the applicable contractual arrangement and actions and representations of the parties.

The Court held that the Plan did not hold a beneficial ownership interest in the foreign tax credits because they were not owned by the Plan or held in trust for the benefit of the Plan, nor could the Plan, as a tax-exempt entity, otherwise use or benefit from the foreign tax credits.  

The Court went on to examine whether the service agreements between the Plan and JHLIC granted the Plan a beneficial ownership interest in the foreign tax credits.  Although the documents required JHLIC to reduce its annual fee by certain credits received by JHLIC, the Court found that they did not specifically require JHLIC to reduce its annual fee by any foreign tax credits received by JHLIC, nor did they otherwise provide the Plan with a contractual beneficial ownership interest in the foreign tax credits at issue.  Accordingly, the Court held that there was no basis to conclude that the foreign tax credits were “plan assets” under ERISA. 

The Court also held that JHLIC was not otherwise an ERISA fiduciary with respect to the Plan because JHLIC did not have any discretionary authority or control over the Plan or its investments.  This holding was consistent with the terms of the contractual agreements of the parties, which provided that all such transactions were processed only at the direction of the Plan and its participants and made clear that JHLIC was not assuming any ERISA fiduciary responsibilities with respect to the Plan.

In concluding that the foreign tax credits were not “plan assets” and that JHLIC was not acting as an ERISA fiduciary with respect to its retention of such foreign tax credits, the Court ultimately affirmed the District Court’s ruling that JHLIC did not breach any ERISA fiduciary duties or engage in any ERISA prohibited transactions.