Employee Benefits & Executive Compensation Blog

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

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.

PBGC Adopts AAA’s Amended Withdrawal Liability Arbitration Rules

Beginning January 1, 2020, the American Arbitration Association (AAA) will: (i) reduce filing fees charged to parties initiating arbitrations of withdrawal liability disputes; (ii) change how costs of arbitrations are allocated among the parties to the disputes; and (iii) amend the process for resolving arbitrator selection disputes.

The new filing fees are modest in comparison to the fee schedule proposed to the Pension Benefit Guaranty Corporation (PBGC) by the AAA in 2013—which imposed a flexible and final fee schedule that in some cases could result in filing fees that were higher by tens of thousands of dollars than the AAA’s original 1986 filing fees.

Although the PBGC had not approved the AAA’s 2013 request to increase fees, the AAA has been applying the 2013 fee schedule to this point.  After the PBGC received commentary that was critical of the AAA’s 2013 fee schedule, the AAA submitted a revised proposal containing a filing fee schedule (removing the flexible and final fees contained in the AAA 2013 fee schedule).  On December 10, 2019, the PBGC adopted the revised proposal (the “2019 Rules”).

2019 Rules: New Filing Fee Schedule:

Disputes below $1 million…………………………………….$2,500 filing fee
Disputes equal to $1 million but less than $5 million………$3,750 filing fee
Disputes equal to $5 million or more…………….…….…….$5,000 filing fee

In addition to AAA’s initial filing fee, parties that proceed to arbitration will still have to pay other costs associated with the arbitration, such as the arbitrator’s fees.  While an employer that initiates arbitration will be required to cover the upfront filing fee, the 2019 Rules provide, subject to the arbitrator’s discretion, that arbitration costs will be borne equally between the parties.

The 2019 Rules will also allow the parties to seek appointment of an arbitrator by a federal district court in the event they are unable to agree on an arbitrator through the AAA mutual selection process.  Under the old rules, the AAA resolved such disputes by appointing an arbitrator if one was not mutually selected.

Also, after the parties receive post-appointment disclosures from an arbitrator who they have mutually selected, either party has 10 days to seek automatic removal of the appointed arbitrator.  In the event of an automatic removal, the AAA will select a new arbitrator using the initial AAA mutual selection process.

Best Practices in Administering Benefit Claims #8 – Facing Litigation of Benefit Claims

Up to now, our blog series has focused on best practices for implementing a plan’s claims and appeals procedure.  We shift gears this week to see how following these best practices pays dividends if a participant’s (or beneficiary’s) claim is denied and the participant decides to pursue the claim for benefits in court (or, if required, arbitration).

After a participant exhausts a plan’s claims procedures, ERISA Section 502(a)(1)(B) authorizes the participant to seek benefits due under the terms of the plan, enforce his or her rights under the terms of the plan, or clarify his or her rights to future benefits under the terms of the plan.

With the plan’s claims process exhausted, the plan administrator defending the benefit claim should be armed with a full administrative record that supports the reasonableness of the decision for denial of benefits.  Participants are entitled under ERISA to request and receive a copy of the administrative record prior to commencing litigation, and participants often make such a request.  Even where a participant does not request the administrative record, consideration should be given to producing the record to the participant.

Strategically, of course, the plan administrator’s goal is to find the quickest means to get the case dismissed.  And, putting the administrative record in the hands of the participant prior to the participant commencing an action often helps put the plan administrator in a better position to try to get the case dismissed on an immediate “motion to dismiss” or “motion for summary judgment.”  As we have explained in prior blog entries, in ERISA benefit claim litigation, discovery typically is limited to the administrative record, and courts are required to defer to the plan administrator’s decision unless it was arbitrary and capricious. The bottom line—a good administrative record is key to setting up the possibility of an early resolution of a benefit claim dispute.

That said, sometimes a participant will try to avoid early dismissal of his or her case based on the administrative record by claiming that he or she needs discovery because the plan administrator had a conflict of interest in reaching the decision to deny benefits.  For instance, a participant may claim that because the company was responsible for paying severance benefits and the plan administrator (i.e., the decision-maker) worked for the company, the plan administrator suffered from a conflict of interest—by denying the claim the plan administrator was trying to benefit the very company that he or she worked for.  This, so the argument goes, makes the decision to deny benefits arbitrary and capricious and necessitates discovery beyond the administrative record to get more information about that conflict.  But, a structural conflict such as that just described does not in and of itself warrant additional discovery.  A participant must allege more.  He or she must plausibly allege—in more than a conclusory fashion—that the conflict infected the decision-making process in order to possibly be entitled to discovery on the conflict outside of the administrative record.

In short, with a well-documented administrative record, and application of the highly deferential arbitrary and capricious standard of review, the plan administrator should be well-positioned to minimize costs and obtain immediate dismissal of the action.

Next week, we’ll discuss other techniques for controlling and minimizing the costs of litigation of benefit claims, including contractual limitations clauses and venue selection clauses.

You can find our previously published best practices here:

Seventh Circuit: Agreement for Retiree Healthcare Benefits Survives Agreement’s Termination

The Seventh Circuit held that retirees and their families were entitled to lifetime healthcare benefits because, although the healthcare agreement that had been negotiated by their union had expired, it provided that covered individuals “shall not have such coverage terminated or reduced . . . notwithstanding the expiration of this Agreement, except as the Company and the Union may agree otherwise.”  The Seventh Circuit applied ordinary contract law interpretation principles and concluded that the agreement “unambiguously” provided the retirees with vested healthcare benefits.  And, even if the agreement was viewed to be ambiguous, the Court determined that the parties’ behavior provided enough extrinsic evidence to support the conclusion that retiree benefits had vested.  The case is Stone v. Signode Indus. Grp. LLC, No. 19-1601 (7th Cir. 2019).

Arbitrator To Decide Whether ERISA Fiduciary Claims Should Be Arbitrated

A federal district court in Texas referred to arbitration a 401(k) plan participant’s ERISA breach of fiduciary duty action based on allegations that certain plan investment options charged excessive fees.  In a two-page order, the court instructed the arbitrator to determine whether the arbitrator or a court should determine whether the class action waiver provision in the participant’s arbitration agreement waived her right to bring a representative action under ERISA § 502(a)(2).  The case is Torres v. Greystar Mgmt. Servs., L.P., No. 5:19-cv-00510 (W.D. Tex. Oct. 25, 2019).

Fifth Circuit: Procedural Win Is Not Grounds for Attorney’s Fees

The Fifth Circuit concluded that a plan participant was not entitled to recover attorneys’ fees for obtaining a remand order requiring the district court to apply a de novo, rather than abuse of discretion, standard of review to the administrative determination of her benefit claim.  In so ruling, the Court applied the principles enunciated by the U.S. Supreme Court in Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242 (2010), which held that a plan participant must have “achieved some degree of success on the merits” in order to receive a fee award under ERISA.  The Supreme Court held that, although the participant need not qualify as a “prevailing party,” she must obtain more than “trivial success on the merits or a purely procedural victory.”  The Fifth Circuit applied the “some success on the merits” standard and observed that the remand order here included no comment on the strength of the remanded claim.  The case is Ariana M. v. Humana Health Plan of Texas, Inc., No. 18-cv-20700, 2019 WL 5866677 (5th Cir. Nov. 8, 2019).