Employee Benefits & Executive Compensation Blog

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

Third Circuit Rejects Claim for Lifetime Medical Benefits

Several retired employees of Dominion Energy Transmission, Inc. sued their former employer alleging that they were entitled to lifetime healthcare benefits, and the unilateral changes made by Dominion to their post-retirement medical benefits violated ERISA.  The Third Circuit concluded that the retirees failed to state a claim.  Applying ordinary principles of contract interpretation, the Court concluded that the CBA did not “clearly and expressly” vest the retirees with lifetime benefits.  In so ruling, the Court rejected the retirees’ argument that because the Plan required union consent before altering medical benefits and also did not include a general durational clause, it could be inferred that “the parties clearly expressed their intent to vest post-retirement medical benefits.”  The “absence of a termination clause combined with a consent clause does not clearly and expressly vest retirees” with lifetime benefits, said the Third Circuit.  The case is Blankenship v. Dominion Energy Transmission, Inc., No. 19-3374, 2020 WL 3397740 (3d Cir. 2020).

IRS Extends Participant Eligibility for Distributions and Loans Under the CARES Act

In Notice 2020-50, the IRS expanded eligibility for CARES Act distributions and loans, and provided additional guidance.  To recap (as described here), the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) added three types of distribution and loan flexibility under eligible retirement plans for certain “qualified individuals”: (1) “coronavirus-related distributions” (“CRDs”) up to $100,000 that are eligible for favorable tax treatment and generally may be repaid to the plan or an IRA within 3 years, (2) suspension for up to one year of loan repayments otherwise due from March 27, 2020, through December 31, 2020, and (3) increased loan limits.  In May FAQs, the IRS made clear that these provisions are optional.

The CRDs and expanded loan opportunities are available only for “qualified individuals” who are diagnosed, or have a spouse or dependent who is diagnosed, with SARS-CoV-2 or COVID-19, or who otherwise experience “adverse financial consequences” due to various coronavirus-related circumstances.  The qualifying circumstances under the CARES Act statute included things like being furloughed or having hours reduced but did not include a reduction of pay.  Notice 2020-50 expands the list of qualifying circumstances to include the following:

  • Having a reduction in pay or self-employment income;
  • Having a job offer rescinded or a start date delayed;
  • Having a spouse or household member who experiences the consequences described above, or who is quarantined, furloughed or laid off, has hours reduced, or is unable to work due to lack of childcare caused by COVID-19; or
  • Experiencing a closing or reduction of hours of a business owned by the participant’s spouse or a household member.

In addition to expanding eligibility for CRDs and the CARES Act loan relief, the Notice includes the following guidance:

  • Elaborates on the ability to designate distributions as CRDs even if the plan does not have CRD provisions. Qualified individuals may designate as CRDs any distributions of up to $100,000 from “eligible retirement plans” that are made on or after January 1, 2020, and before December 31, 2020—even if the plan has not adopted CRDs.  This includes, for example, periodic payments previously made for minimum required distributions as well as payments received as a beneficiary and offsets to repay qualifying plan loans.  However, corrective distributions, dividends on employer securities, and certain similar distributions are not eligible.  Also, as discussed here, money purchase and defined benefit pension plans are not “eligible retirement plans;” so distributions from those plans are not eligible for CRD treatment.
  • Not all CRDs may be repaid. A CRD may be repaid to the plan or an IRA only if it is eligible for tax-free rollover treatment.  Accordingly, CRDs paid to a non-spouse beneficiary cannot be repaid.
  • Details the individual tax consequences of taking or repaying a CRD. The guidance describes logistics for including CRDs in income ratably over three years and for repaying the CRD.  Because income inclusion for CRDs is delayed, it is possible to repay CRDs before they are ever subject to income tax.  But if a qualified individual repays a CRD after having filed his or her tax return, the individual would have to restate his or her tax return to get full tax-free rollover treatment.
  • Elaborates on withholding and reporting for CRDs. The Notice states that CRDs are not subject to the rules for eligible rollover distributions.  This means that the plan does not have to offer a rollover for a CRD, and CRDs are subject only to voluntary withholding.  The Notice gives flexibility for reporting CRDs on Form 1099-R: they can be reported with distribution code 2 (to note an exception from the 10% additional tax on early distributions) or code 1 (early distribution, no known exception).  Regardless of how the plan reports the CRD, it is the recipient’s responsibility to manage the $100,000 limit on an aggregate basis (counting distributions from multiple plans, if applicable).
  • Provides self-certification language for an individual to claim eligibility for a CRD or loan. The Notice reiterates that plan administrators may rely on individual self-certification of eligibility for a CRD or CARES Act loan, unless the administrator “actual knowledge” to the contrary.  The Notice includes language that can be used for this self-certification.
  • Provides a safe harbor for reamortizing loans after a suspension. For all plans, loan repayments must resume by January 2021.  The Notice recognizes that there can be more than one reasonable way to reamortize the loan when payments restart.  The safe harbor allows substantially equal payments over the remainder of the original loan term plus up to one year.
  • Coordination with non-qualified deferrals. The notice allows a nonqualified deferred compensation plan to treat a CRD like a hardship withdrawal for purposes of canceling deferral elections mid-year.

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Guidance on the CARES Act and other COVID-19 matters is evolving constantly.  Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns.  Visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take and resources to help manage ongoing operations.

Limitation To Restorative Speech Therapy Does Not Violate MHPAEA

A federal district court in Massachusetts concluded that a health insurance plan did not violate the Mental Health Parity and Addiction Equity Act by denying coverage for speech therapy to a plan beneficiary who required speech therapy in connection with autism spectrum disorder. The plan denied coverage because the speech therapy sought was for non-restorative speech therapy, and the plan only covered restorative speech therapy. The district court concluded that the exclusion on its face did not purport to address only mental health benefits and, in fact, the exclusion evinced no differentiation between mental health benefits and medical/surgical benefits given that the exclusion limited coverage for all speech therapy that is restorative, i.e., intended to regain a level of speech that was previously intact.  The case is N.R. v. Raytheon Co., No. 20-cv-10153 (D. Mass. June 9, 2020).

What Employers Should Know about ACA Shared Responsibility Payments

A recently released redacted report from the Treasury Inspector General for Tax Administration (TIGTA) offers some helpful insights for employers who may be assessed shared responsibility payments because the IRS thinks they failed to offer adequate health coverage, as required by the Affordable Care Act (ACA).

The TIGTA report shows a wide gap between the ACA shared responsibility payment amounts the IRS initially predicted would be assessed in 2015 and 2016 (approximately $17 billion) and the actual amounts assessed once employers were given a chance to contest the proposed amounts ($749 million).  The TIGTA also estimates that longer term revenue from these payments will fall very short of the amount estimated by Congress.  For the 10-year period starting with fiscal year 2016, the Joint Committee on Taxation’s earlier projection was that the shared responsibility payments would generate revenue of $167 billion.  Using the actual assessment rates, the TIGTA’s projection for this same period is approximately $8 billion.

The TIGTA’s report also identified areas where IRS procedural issues or improper employer reporting resulted in an inaccurate initial calculation.  In light of this news, employers should keep in mind a few key points with respect to the employer shared responsibility payments.

Monitor compliance with the ACA shared responsibility mandate.

The first step to avoiding shared responsibility payments is to ensure you’re complying with the ACA shared responsibility mandate (also known as the “Pay or Play” rule).

This rule requires employers with at least 50 or more full-time employees (including full-time equivalent employees) during a calendar year (“Applicable Large Employers”) to offer affordable, minimum essential health coverage to full-time employees and their dependents, and the coverage must provide minimum value.  There are nuances in determining full-time status and full-time equivalence, as well as determining affordability, compliance with minimum value requirements and when the offer must be made.  Accordingly, an employer reviewing operational compliance with the shared responsibility mandate may want to work closely with benefits counsel.

Generally, if the employer does not offer coverage to at least 95% of full-time employees and their dependents and even one full-time employee receives a premium tax credit, the employer is subject to a shared responsibility payment under the “A” penalty (under I.R.C. Section 4980H(a)).  The A penalty can be quite steep – it is calculated as the “applicable payment amount” ($2,080 in 2014, adjusted for each year thereafter) multiplied by the total number of full-time employees.

Even if the employer offers coverage to at least 95% of its full-time employees, if a full-time employee receives a premium tax credit because coverage was not offered, was not affordable or did not provide minimum value, then the employer is subject to a shared responsibility payment under the “B” penalty (under I.R.C. Section 4980H(b)).  The B penalty is calculated only based on the number of full-time employees who receive a premium tax credit, and was $3,000 in 2014, adjusted for each year thereafter.

Take care in reporting.

Applicable Large Employers must annually file information returns with the IRS on Forms 1094-C and 1095-C.  Once the IRS has analyzed the Forms 1094-C and 1095-C for a tax year, it will calculate potential shared responsibility payments that may be owed and send inquiry letters to employers.  Historically this process has taken a couple of years.

To reduce the likelihood of receiving an inquiry letter, an employer should carefully and accurately complete these forms. According to the TIGTA report, a majority of the adjustments to the IRS’s initially proposed share responsibility payment amounts were the result of employer reporting issues. Many employers inaccurately reported on their Form 1094-C that they did not offer health insurance to employees, and when they subsequently notified the IRS of this error, the assessed amount was adjusted accordingly.

Scrutinize any shared responsibility payment notices carefully.

The IRS’s initial inquiry letter will notify an employer of the proposed shared liability payment.  The inquiry letter will also enclose a form for the employer to complete and return with either the payment or a statement as to why it disagrees with the proposed shared liability payment.  Generally, the employer has 30 days to respond.  However, in our experience, the IRS will work with employers that need more time to pull together the information necessary to respond.  It is important that an employer respond to an inquiry letter in a timely way.

If you do receive an inquiry letter proposing a shared responsibility payment, it is important to review it carefully and enlist legal counsel as needed.  TIGTA’s report shows that in 2015 and 2015, the initial calculations included with the IRS’s inquiry letters were reduced significantly based on employer responses.  In our experience, we also find many of these letters to have erroneous assessments. The only way to find out if the calculated payment amount is wrong is to scrutinize the assessment carefully and compare it to the information on the reporting forms.  Then, a timely response, including clear explanations and proof as to why the assessment was wrong, can help reduce or eliminate the possible shared responsibility payment obligation.

DOL Information Letter Outlines Fiduciary Considerations for Including Private Equity Allocations in Defined Contribution Plan Investments

On June 3, 2020, the Department of Labor (the “DOL”) published an Information Letter confirming that investment options under a defined contribution plan (e.g., a 401(k) or 403(b) plan) may include a limited allocation to private equity.  Notably, the Letter does not discuss direct investment in private equity funds (for example, by adding a PE fund to the plan’s investment lineup).  Rather, the Letter discusses including private equity as a small allocation within a diversified designated investment option such as a balanced fund or a target date fund (a footnote in the Letter suggests no more than 15%); and the Letter notes that direct investment in private equity would “present distinct legal and operational issues.”

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One Problem Solved: Notice 2020-42 Provides Temporary Relief for Witnessing Spousal Consents

This afternoon, the Treasury Department issued Notice 2020-42, ending the uncertainty surrounding spousal consents to retirement plan distributions and loans in the socially distanced COVID-19 world.

As plan administrators know, when spousal consent is required for a plan distribution or loan, the law requires that the consent be witnessed by a notary public or plan representative. Although the applicable Treasury Regulations allow the actual notarization or acknowledgment of the witnessing to be signed electronically consistent with ESIGN, the Regulations still require that the notary or plan representative witness the spouse’s signature in the physical presence of the signer.

In light of the stay-at-home and social distancing orders that have swept the country during the COVID-19 outbreak, this physical presence requirement has been a huge roadblock to plan administration of loans and distributions because many participants and their spouses simply did not have physical access to a notary or plan representative or were concerned about interacting with people outside their homes. Many states have relaxed their notarization rules and allowed for remote electronic notarization, but this was of limited utility for retirement plan purposes because of the federal physical presence requirement for spousal consents.

That all changed this morning with IRS Notice 2020-42, which finally provides temporary relief from the physical presence requirement for calendar year 2020 (retroactive to January 1).

Specifically, the physical presence of a notary or witness for spousal consent is not required during this period if certain rules are satisfied. In the case of the notary, this will apply to any consent witnessed by a notary of a state that permits remote electronic notarization. The execution by the notary would have to be through a live audio-video conference meeting the state’s requirements for remote notarization, as well as the normal regulatory requirements for electronic signature.

Where remote notarization is not available or inconvenient, the use of a plan representative to witness spousal consent is a helpful alternative (assuming the plan permits it or is amended to do so). To satisfy Notice 2020-24, this method must incorporate a live audio-video conference that meets the following requirements (which, unsurprisingly, are not dissimilar to many states’ remote notarization rules):

  • The spouse must present valid photo ID during the conference (not before or after);
  • The conference must allow for direct interaction between the spouse and the plan representative (meaning, for example, that the representative cannot watch a pre-recorded video of the person signing);
  • On the day the document is signed, the spouse must send a legible copy of the signed document electronically or by fax directly to the plan representative;
  • After receiving the signed document, the plan representative must acknowledge that the signature has been witnessed by the plan representative in accordance with these requirements; and
  • The plan representative must send the signed document and acknowledgement back to the spouse under a system that satisfies certain regulatory requirements for electronic notice (i.e., the recipient has to have the effective ability to access the electronic medium used, the recipient must be told of the right to request a paper copy at no charge and such a paper copy must be provided on request).

This is welcome relief for many retirement plan administrators who were unsure how to act in the face of a requirement that became entirely impractical due to circumstances that no one could have foreseen. Those administrators that adopted alternative procedures in advance of this guidance should consider comparing their procedures to those set forth in Notice 2020-24 and determining whether any prospective or retrospective action is appropriate.

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Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns.  Visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take and resources to help manage ongoing operations.


U.S. Supreme Court Holds ERISA Defined Benefit Plan Participants Without Monetary Losses Lack Article III Standing to Assert Breach of Fiduciary Duty Claims

Earlier today, the U.S. Supreme Court affirmed a decision by the Eighth Circuit holding that ERISA plan participants lack Article III standing to sue for breach of fiduciary duty to recover investment losses in a defined benefit fund that was not underfunded.  The Court concluded that the participants lacked a concrete stake in the dispute because they would receive the full value of their promised benefits regardless of the outcome.  In so holding, the Court rejected all four of plaintiffs’ alternative standing arguments, finding that: (i) in the defined benefit plan context, the trust law principle that an injury to the plan is an injury to the participant is inapplicable because participants’ benefits are fixed and do not depend on the value of the plan; (ii) asserting a claim on behalf of an ERISA plan under Section 502(a) does not alleviate the requirement under Article III that the named plaintiff suffer an injury-in-fact; (iii) satisfying statutory standing (i.e., being a person authorized to sue to vindicate the statute) does not mean that a plaintiff “automatically” satisfies Article III’s injury-in-fact requirement; and (iv) the question of whether there are independent means to regulate fiduciary conduct is irrelevant to the Article III standing issue and, in any event, defined benefit plans are regulated and monitored in multiple ways, including by the Department of Labor.

Justice Thomas concurred in the Court’s opinion but wrote separately to again set forth his objection to the Court’s practice of using the common law of trusts as a “starting point” for interpreting ERISA instead of the language of ERISA itself.  Justice Sotomayor authored a lengthy dissent arguing that plan participants have standing to sue for violations of ERISA fiduciary duties regardless of whether the plan’s losses reduced participant benefits.

The case is Thole v. U.S. Bank, Nat’l Ass’n, 2020 WL 2814294 (U.S. June 1, 2020).

We will write separately to set forth Proskauer’s perspective on some of the potential implications of the Court’s ruling.

Department of Labor Finalizes New Safe Harbor for Electronic Delivery of Retirement Plan Disclosures

On May 21, 2020, the U.S. Department of Labor (the “DOL”) finalized its proposed regulation expanding electronic delivery for retirement plan disclosures.  On balance, the final regulation is generally consistent with the proposed regulation, although there are a number of key differences, including the addition of a new “direct email” delivery option not included in the proposed regulation.

The final regulation will likely provide welcome relief for plan sponsors and administrators frustrated by the limitations of the current DOL safe harbor for employees with work-related computer access (“wired at work”) or who have consented to electronic delivery (“consumer consent”).  However, there are detailed content, notice, and timing requirements in the new electronic delivery safe harbor that require careful review before implementation.

Threshold Requirements For Using New Electronic Delivery Safe Harbor

To take advantage of the new electronic delivery safe harbor, there are three threshold rules:

  • Applies Only to Retirement Plan Disclosures. The safe harbor applies only to the delivery of certain “covered” documents, which generally include any document or information that must be furnished by a retirement plan pursuant to Title I of ERISA, except for any document that must be furnished only upon request.  To the disappointment of many commenters on the proposed regulation, the new safe harbor does not apply to health or other welfare benefit plan disclosures.
  • Covered Individual Must Have Provided Electronic Address. To provide covered documents to an individual under the new safe harbor, the individual entitled to the documents must have provided an “electronic address,” such as an email address or internet-enabled smartphone number, to the employer, plan sponsor, or plan administrator.  Employer-assigned electronic addresses may be treated as provided by the individual, as long as the electronic address is not assigned for the sole purpose of receiving retirement plan disclosures (i.e., it must have a separate employment-related purpose).
  • Must Distribute Initial Notice on Paper. Prior to reliance on the safe harbor, a plan administrator must distribute an initial notice on paper to covered individuals, advising them that disclosures will be electronically provided unless they affirmatively opt out.  The requirement to provide this notice on paper is absolute, even for individuals who are already “wired at work” or previously provided consumer consent.  The initial notice must identify the individual’s electronic address and meet other detailed content requirements.

Two Ways to Deliver: “Notice-and-Access” and “Direct Email

Provided the threshold requirements for relying on the electronic delivery safe harbor are met, plan sponsors and administrators have two options for delivering covered documents electronically:

  • “Notice-and-Access” Option. This option requires posting covered documents on electronic media, such as a website or mobile application, and notifying covered individuals that the document is posted by sending them a separate “Notice of Internet Availability” (the “NOIA”).  The NOIA must comply with detailed content requirements, including an identification of the covered document, the electronic address (or hyperlink to the address) where the individual can access the document, and several required statements that advise individuals of their right to opt out of electronic delivery and to receive free paper copies.
  • “Direct Email” Option. In lieu of using the “notice-and-access” option described above, covered documents may be sent via “direct email” to covered individuals who have provided email addresses or have employer-assigned email addresses.  (This method cannot be used if the only electronic address for an individual is his or her smartphone number.)  A covered document may be sent in the body of an email or as an attachment.  The email message itself is subject to specific content requirements.

Additional Requirements For Using New Electronic Delivery Safe Harbor

Reliance on the new electronic delivery safe harbor is subject to detailed content, notice, and timing requirements, some of which are noted below.

  • Global Opt-Out of Electronic Delivery. Covered individuals must be permitted to globally opt out of electronic delivery of all covered documents and receive paper copies at no cost.  This marks a change from the proposed regulation, which allowed individuals to pick and choose which documents they wanted to receive on paper.  For administrative ease, the regulatory preamble indicates that plan administrators may continue to deliver electronic notices and disclosures to individuals who have opted out, as long as paper copies are also provided.
  • Consolidated NOIA. As noted above, using the “notice-and-access” option requires providing a NOIA to covered individuals each time a covered document is posted—which could lead to “NOIA fatigue.”  However, the final regulation permits using a single consolidated NOIA for certain documents in lieu of sending a separate NOIA each time a document is posted.  A consolidated NOIA is limited to covering the summary plan description and certain annual disclosures (such as an annual funding notice, SAR, and QDIA notice), as well as other documents authorized by the DOL and the Department of Treasury.  Notably, quarterly pension benefit statements are not eligible for the consolidated NOIA, meaning a separate NOIA for each statement is needed.  The consolidated NOIA must be provided at least once every plan year (but not less than once every 14 months).
  • Does Not Replace “Wired at Work” or Consumer Consent Safe Harbor; 18-Month Transition Period for Prior Interpretive Guidance. The new safe harbor is an additional option for electronic disclosure, and does not replace the prior DOL “wired at work” or consumer consent safe harbor for electronic delivery.  In addition to the prior DOL safe harbor, the DOL previously issued interpretive guidance permitting electronic delivery for specific documents (pension benefit statements, QDIA notices, and participant-level investment disclosures), provided certain requirements were met.  In the interest of establishing a “uniform” electronic delivery system, the ability to rely on the prior interpretive guidance is eliminated.  However, recognizing that some time is needed to adjust to the new standard, plan administrators may rely on the interpretive guidance for 18 months following the effective date of the final regulation (July 26, 2020).
  • Bright-Line Retention Rule for Covered Documents Posted on Electronic Media. If the “notice-and-access” option is used, the final regulation requires that covered documents remain posted and available until superseded by a subsequent version.  However, the final regulation provides a bright-line retention rule of at least one year for documents that are not subject to supersession (such as a blackout notice).  This rule does not alter the general retention, recordkeeping, and reporting requirements that otherwise apply under ERISA.
  • Plan Administrator Must Have System For Identifying Bounce Backs. The electronic delivery system must be designed to alert the plan administrator of a covered individual’s invalid or inoperable electronic address (a bounce back).  If a bounce back is received, the plan administrator must promptly take reasonable steps to cure the problem, by sending the NOIA or email to a secondary electronic address on file, obtaining a new valid and operable electronic address, or treating the covered individual as having globally opted out of electronic disclosures.
  • Maintenance of “Reasonable” Opt-Out Procedures. The final regulation requires the plan administrator to maintain “reasonable procedures” permitting covered individuals to opt out of electronic delivery and to request paper copies of any document furnished electronically.  Presumably, limiting election changes and requests to certain time intervals (e.g., changes to opt-out elections once per quarter) would be “reasonable” under the rule, but further guidance confirming the reasonableness standard in this context would be helpful.
  • Steps to Ensure Continued Viability of Electronic Address After Severance from Employment. For covered individuals with employer-assigned electronic addresses, the plan administrator must take “measures reasonably calculated” to ensure the accuracy and availability of the covered individual’s electronic address or to obtain a new address that enables receipt of covered documents after severance from employment. However, if the individual already receives covered documents via a personal electronic address (e.g., a personal email or smartphone number), the plan administrator is not required to take any additional steps to ensure the continued viability of the electronic address after termination of employment, subject to the otherwise applicable rules in the safe harbor (e.g., maintenance of a system to identify bounce backs).
  • Transition Rule For Electronic Addresses Already On File. The final regulation requires that the individual provide the electronic address to the plan sponsor or administrator.  However, for plan administrators transitioning to the new safe harbor, electronic addresses already in the possession of the plan sponsor or plan administrator may be used without verifying the address was provided “by” the individual, as long as such reliance is in good faith and otherwise complies with the rules of the new safe harbor.

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Plan sponsors and administrators may rely on the new electronic delivery safe harbor immediately.  However, there are several practical matters that should be considered before implementing the new safe harbor, such as coordinating with vendors and adjusting existing service agreements that apply to the delivery of retirement plan disclosures.  In addition, plan sponsors and administrators that currently rely on the prior DOL interpretive guidance for electronic delivery of certain documents should consider how best to adjust those delivery methods before the end of the 18-month transition period.