Employee Benefits & Executive Compensation Blog

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

Northwestern University’s Alternative Explanations Not Strong Enough To Defeat ERISA Excessive Fee Claims

On remand from the U.S. Supreme Court, the Seventh Circuit issued its opinion in Hughes v. Northwestern University, concluding that participants in two Northwestern 403(b) plans plausibly pled fiduciary-breach claims based on allegations of excessive recordkeeping and investment management fees, but dismissed their claim that too many investment options caused them “decision paralysis.”  In so ruling, the Seventh Circuit applied a pleading standard that could increase the likelihood that such run-of-the-mill claims survive dismissal.  As discussed below, the Seventh Circuit’s ruling appears to be an unfortunate development for plan sponsors and fiduciaries and arguably stands in stark contrast to the recent trend of circuit court opinions dismissing many of these claims. The case is Hughes v. Northwestern Univ., __F.4th__, No. 18-cv-2569, 2023 WL 2607921 (7th Cir. Mar. 23, 2023).


In January 2022, we reported here on the Supreme Court’s decision in Hughes v. Northwestern University, 142 S. Ct. 737 (2022) and observed that the decision was a disappointment to many in the ERISA community because it failed to provide concrete guidance to the lower courts on the pleading standard applicable to fiduciary-breach claims predicated on excessive recordkeeping and investment management fees.  Instead, the Court simply held that the Seventh Circuit erred insofar as it found that the availability of a menu including investment options with lower fees was a sufficient basis to warrant dismissal of plaintiffs’ excessive fee claims.  The Supreme Court determined that the Seventh Circuit’s rationale was inconsistent with Tibble v. Edison Int’l, 575 U.S. 523 (2015), which demands that plan fiduciaries monitor each investment option to ensure that it is prudent and remove imprudent funds within a reasonable time.  The Court remanded the case to the Seventh Circuit with instructions to follow the requirements of Tibble and apply the pleading standards of Bell Atlantic v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009).  The Court also reiterated its views from Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014):  “Because the content of the duty of prudence turns on ‘the circumstances . . . prevailing’ at the time the fiduciary acts, § 1104(a)(1)(B), the appropriate inquiry will necessarily be context specific.  At times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”

Subsequent to Hughes, the Sixth, Seventh, and Eighth Circuits have largely affirmed dismissal of excessive fee claims (as discussed here).  In general, these courts required that plaintiffs plead specific facts about the fees and performance of the challenged investments and recordkeeping fees, so as to allow for a contextual evaluation of whether the allegations give rise to an inference of imprudence.  For example:

  • The Sixth Circuit held that a claim based on the use of actively managed funds in lieu of passively managed funds could not survive dismissal because common sense and the strength of defendants’ competing explanations rendered the claim implausible. It also found implausible plaintiff’s excessive recordkeeping fees claim because plaintiffs failed to allege that services provided to the defendants’ plan were equivalent to the services of alleged comparator plans.
  • The Seventh Circuit rejected an excessive recordkeeping fees claim—where the alleged fees were two to three times as much as plaintiff alleged they should be—because the complaint was devoid of any allegations as to the quality or type of recordkeeping services provided by the alleged comparator plans.
  • The Eighth Circuit rejected claims of excessive recordkeeping and investment management fees where plaintiffs simply relied on industry-wide averages because such averages were not informative and failed to provide a meaningful benchmark.

These rulings proved especially damaging to copycat complaints devoid of plan-specific details about the targeted service providers.  District courts in these circuits and elsewhere subsequently dismissed excessive fee cases at a much higher rate.

The one notable exception has been the so-called “share-class” claim.  In some cases, plaintiffs contend that defendants imprudently offered the retail share class of a mutual fund with higher fees when they could have offered the institutional share class of the exact same mutual fund with lower fees.  Even though there is an obvious explanation for doing so—namely, that revenue sharing arrangements may rebate a portion of the fees to plan participants, thus making the retail share class effectively cheaper than the institutional share class—courts have been reluctant to dismiss this type of claim at the pleading stage.  For example, the Sixth Circuit determined that plaintiffs’ share-class claim could survive dismissal because, “taken in their most flattering light,” plaintiffs plausibly pled allegations that the exact same investment was available in a cheaper share class and while “equally reasonable inferences” could exonerate defendants, it was not appropriate to resolve this issue at the pleading stage.

The Seventh Circuit’s Decision on Remand

On remand, the Seventh Circuit reconsidered the viability of claims as to whether Northwestern (1) incurred excessive recordkeeping fees, (2) used more expensive retail share classes when less expensive, identical institutional share classes were available, and (3) retained duplicative investment options.  The Seventh Circuit reaffirmed, without discussion, the dismissal of plaintiffs’ prohibited transaction claims and demand for a jury trial because they had not been appealed to the Supreme Court.

Impact of Supreme Court’s Ruling on Prior Precedent

As a preliminary matter, the Seventh Circuit considered whether, and the extent to which, the Supreme Court’s opinion impacted its prior decisions in Loomis v. Exelon Corp., 658 F.3d 667 (7th Cir. 2011) and Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009).  On the one hand, the Seventh Circuit recognized that the Supreme Court “abrogated a line of reasoning derived from” its prior rulings that a share-class claim was not plausible if the plan offered a range of investment options, including plaintiffs’ preferred type of low-cost investments.  On the other hand, the Seventh Circuit concluded that three principles from Loomis and Hecker remain undisturbed:  the use of revenue sharing for plan expenses does not amount to a per se violation of ERISA; nothing in ERISA requires plan fiduciaries to scour the market for the cheapest investment options or the cheapest recordkeeping fees, or to “constantly solicit quotes for recordkeeping services” to comply with their fiduciary duty of prudence; and plan fiduciaries may offer a wide range of investment options and fees without breaching their fiduciary duties.

Pleading Standard

The Seventh Circuit next considered the applicable pleading standard, observing that the Supreme Court’s opinion provided guidance but stopped short of pronouncing a concrete standard.

The Seventh Circuit first rejected defendants’ contention that Dudenhoeffer required plaintiffs to plead facts that an alternative prudent action that the fiduciary should have taken was “actually available” and rule out defendants’ reasonable explanations for the failure to take that action.  In so ruling, the court characterized Dudenhoeffer’s pleading standard as a “heightened” pleading standard and determined that it should not be applied outside the context of an employee stock ownership plan.  As discussed below, the Seventh Circuit’s conclusion is difficult to reconcile with the fact that the Supreme Court expressly rejected the idea that a heightened pleading standard exists for any ERISA breach of fiduciary duty claims.  In any event, the fact that the Seventh Circuit declined to rely on Dudenhoeffer may ultimately prove to be a distinction without a difference.

Turning to the pleading standard of Iqbal and Twombly, the Seventh Circuit explained the application of that pleading standard in the context of a breach of fiduciary duty claim as follows:  A plaintiff need not rule out non-obvious explanations for defendant’s allegedly imprudent conduct.  Where a defendant offers an “obvious alternative explanation” for a fiduciary’s conduct that would be prudent, “something more” is necessary for a complaint to survive dismissal.  But that “something more” is satisfied if a plaintiff can provide a plausible showing that such alternative explanations may not account for defendant’s conduct.  Furthermore, although dismissal is warranted if an allegedly prudent course of action was unavailable, if the course of action was only “possibly unavailable” then dismissal would not be appropriate.  Finally, the court explained that courts should “not hesitate” to dismiss the claim if a fiduciary’s conduct is “patently” more reasonable and better supported by the facts.  The court did not explain how defendants would show such facts at the motion to dismiss stage and what it means to be “more reasonable.”

Evaluation of Plaintiffs’ Claims

Applying these principles to the case at hand, the Seventh Circuit concluded that plaintiffs plausibly pled fiduciary-breach claims based on allegations of excessive recordkeeping and investment management fees.  But it again dismissed the claim of fiduciary breach that was based on Northwestern having offered too many investment options.

With respect to the excessive recordkeeping claim, the Seventh Circuit found the following allegations sufficient to withstand a motion to dismiss:  (i) the plans’ recordkeeping fees were four to five times higher than the fees of plaintiffs’ comparator plans, which allegedly should have been no more than $35 per participant; and (ii) other universities had recently consolidated recordkeepers, switched pricing models, and negotiated down recordkeeping fees.  The court rejected Northwestern’s alternative explanations, including that it could not consolidate its recordkeepers because one of them, TIAA, would not allow other recordkeepers to administer its products, because plaintiffs alleged that other universities had consolidated to one non-TIAA recordkeeper while still retaining the TIAA products.  At bottom, the court determined that Northwestern’s alternative explanations were not “strong enough” to justify dismissal of plaintiffs’ excessive recordkeeping fee claim.

In so ruling, the court distinguished, and seemingly provided plaintiffs an easy way to sidestep, its previous decision in Albert v. Oshkosh, 47 F.4th 570 (7th Cir. 2022).  The court explained that, whereas the Albert plaintiff failed to provide allegations as to the quality or type of recordkeeping services the allegedly cheaper comparator plans provided, the Hughes plaintiffs specifically alleged that the recordkeeping services are commoditized, there are numerous recordkeepers equally capable of providing such services, and that these recordkeepers will aggressively bid to offer the best price in an effort to win business.

Turning next to the claim that Northwestern imprudently retained higher fee share classes of investment options despite the availability of lower fee share classes, the Seventh Circuit was in the first instance influenced by the “similarity” between the share-class claims asserted in Tibble, which survived dismissal, and the share-class claims asserted by plaintiffs in Hughes.  The Seventh Circuit then rejected Northwestern’s alternative explanation that it could not have invested in the cheaper institutional share classes because the plan did not satisfy the threshold investment requirements, finding that plaintiffs plausibly alleged that waivers of investment minimums were possible and provided an example of another plan that obtained such a waiver.  The court also rejected Northwestern’s “obvious explanation” that the higher fee share classes provided revenue sharing that was rebated to the plans and helped defray the overall recordkeeping fees because this explanation was not “so much more obvious” than plaintiffs’ explanation, particularly since plaintiffs alleged that the plans collectively paid about four to five times more for recordkeeping fees than other plans.

Finally, the Seventh Circuit affirmed dismissal of the claim that offering too many or duplicative investment options caused participants decision paralysis or confusion because plaintiffs did not identify how they were confused or what injury they suffered.

Proskauer’s Perspective

The Seventh Circuit’s decision may prove to be an unfortunate development for plan sponsors and fiduciaries, particularly if other circuits follow suit.  As discussed above, the decision appears to reverse what previously appeared to have been a trend favoring tighter controls on excessive fee litigations at the pleading stage, and to possibly suggest that, through more careful and specific pleading, plaintiffs can overcome any obstacles to proceeding to discovery with their claims.  Particularly disturbing is the fact that although the Seventh Circuit left plaintiffs with the burden to overcome obvious explanations, it allows plaintiffs to defeat such obvious alternative explanations by merely proffering other potentially plausible explanations.  As an example of this standard’s weakness, it is difficult to imagine a more obvious alternative explanation for offering retail share classes of mutual funds than the benefits of revenue sharing that pays for recordkeeping fees, which are not offered by institutional share classes, but the Seventh Circuit was not moved by this obvious explanation.

Tempering these concerns somewhat is the fact that the same circuit that rendered this decision also dismissed recordkeeping claims in Albert v. Oshkosh, in which plaintiff brought excessive recordkeeping fee claims where the plan allegedly paid $87 per participant and invested in allegedly expensive and poorly performing funds.  In purporting to distinguish Albert, the court seized on a number of facts and circumstances unique to this case, including a more significant recordkeeping fee disparity and that the alternative explanations proffered by defendants were specifically refuted by the pleadings.  That being said, the court essentially credited allegations that could be (and have been) made in every case and, if followed by other circuits, could provide the plaintiffs’ bar with a roadmap on how to plead dismissal-proof excessive recordkeeping fee claims in the future.

Our reading of the Seventh Circuit’s decision in Hughes, particularly in the wake of Albert and some of the dismissals in other jurisdictions, leaves us with the impression that we will continue to see seemingly irreconcilable rulings until there is further clarity from the Supreme Court.

[Podcast]: Rep and Warranty Insurance and Executive Compensation and Employees Benefits

In this episode of The Proskauer Benefits Brief, David Teigman, partner in the Employee Benefits and Executive Compensation Group, Simon Sharpe, partner and member of ourproskauer benefits brief podcast Private Equity and Mergers & Acquisitions groups and Nick LaSpina, senior counsel in the Employee Benefits and Executive Compensation Group discuss rep and warranty insurance (RWI) in the mergers and acquisitions context. They also focus on certain aspects of this insurance product as it relates to executive compensation and employee benefits matters. For the last 10 years, we have only seen the use of this insurance product proliferate, so be sure to tune in as these issues will continue to be highly relevant in any transactional practice.

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It’s Over: DOL, Treasury, and HHS Confirm End of (Most) COVID-19 Rules for Health Plans

Update: On April 10, 2023, President Biden signed into law legislation ending the COVID-19 National Emergency prior to the previously announced May 11, 2023 date.  See our blog on this new development here.  The legislation does not impact the end of the COVID-19 Public Health Emergency. 

Earlier this week, the Departments of Labor, Treasury, and Health and Human Services (the “Departments”) jointly issued guidance confirming that most COVID-19-related benefit coverage mandates, as well as the special tolling of benefit plan deadlines, will terminate in connection with the expected end of the Public Health Emergency (PHE) and the COVID-19 National Emergency on May 11, 2023.  The guidance, which was issued in the form of FAQs, can be downloaded here.

How did we get here?

Over three years ago, the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act imposed a number of COVID-19-related coverage mandates on group health plans.  For the duration of the PHE, most group health plans were required to cover, regardless of whether provided in-network or out-of-network: (1) COVID-19 testing and administration (including over-the-counter COVID-19 tests), and (2) COVID-19 vaccines and administration—without participant cost-sharing, medical management, or prior authorization.

Separately, on May 4, 2020, the DOL, IRS, and Treasury announced that health and retirement benefit plans were required to toll participant deadlines for making COBRA and special enrollment elections, filing claims and appeals, and making COBRA premium payments until sixty days after the end of the COVID-19 National Emergency (referred to as the “Outbreak Period”).  Later guidance confirmed that the tolling period applied until the earlier of: (1) one year from the date the participant would have been required to take action; or (2) the end of the Outbreak Period.

What changed?

Earlier this year, the Biden Administration and the Department of Health and Human Services announced they intended to jointly end the COVID-19 National Emergency and the PHE on May 11, 2023.  This announcement means that the special benefit plan mandates in place during the COVID-19 pandemic will also end, leading the Departments to issue guidance about the timing and scope of these changes.

Are group health plans required to cover COVID-19 testing after the PHE ends?

No.  While the FFCRA requires plans to cover COVID-19 testing and related items and services furnished during the PHE without participant cost-sharing, the guidance confirms that this requirement does not apply after the PHE ends.  If a plan chooses to provide coverage for COVID-19 testing after the PHE ends (including over-the-counter COVID-19 testing), the plan may impose cost-sharing, prior authorization, or other medical management rules.  In the FAQs, the Departments clarified that if the COVID-19 test is furnished during the PHE, the fact that the laboratory analysis occurs after the PHE ends does not eliminate the plan’s obligation to cover the COVID-19 test without cost-sharing.

Are group health plans required to cover COVID-19 vaccines after the PHE ends?

Yes, if the plan is a non-grandfathered plan because COVID-19 vaccines are preventive services under the Affordable Care Act.  However, the coverage requirement is limited to in-network COVID-19 vaccines.

During the PHE, non-grandfathered group health plans must cover COVID-19 vaccines and administration without participant cost-sharing, regardless of whether the vaccine is administered in-network or out-of-network.  After the PHE ends, non-grandfathered plans must continue to cover COVID-19 vaccines and administration provided in-network without participant cost-sharing but may either: (1) not cover out-of-network COVID-19 vaccines; or (2) impose participant cost-sharing on out-of-network COVID-19 vaccines.  However, if the plan does not have any in-network COVID-19 vaccine providers, the plan must cover out-of-network COVID-19 vaccines without participant cost-sharing.

Are group health plans required to provide advance notice before discontinuing or reducing coverage for COVID-19 vaccines or COVID-19 tests?

Yes, in most cases.  In general, if a group health plan were to discontinue coverage of COVID-19 items and services mid-plan year and that change would affect the content of the plan’s most recently provided summary of benefits and coverage (SBC), the plan must provide 60 days’ advance notice of the modification.  However, the Departments confirmed two exceptions to this rule: (1) If the plan previously notified participants that the special COVID-19 coverage rules would apply only during the PHE, or (2) If the plan provides advance notice “within a reasonable timeframe in advance of the reversal of the changes.”

Key to the first exception is a statement by the Departments that a notification made with respect to a prior plan year would not be sufficient to provide advance notice for coverage in the current plan year.  This suggests that unless the plan already provided notice with respect to the 2023 plan year confirming that special COVID-19 coverage would apply only during the PHE, the plan would be required to provide reasonable advance notice before discontinuing COVID-19 coverage.

What is not clearly addressed by the guidance is whether advance notice is needed at all if the plan’s SBC was never updated to reflect the special coverage of COVID-19-related services.  In that case, even while reasonable advance notice may not be required, it is worth considering.

May high deductible health plans continue to provide coverage for COVID-19-related services before satisfaction of the minimum deductible without impacting HSA eligibility?

For the time being, yes.  By way of reminder, a high deductible health plan (HDHP) cannot provide coverage for medical items and services before the participant satisfies the minimum deductible (with limited exceptions) without impacting a covered participant’s ability to make contributions to a health savings account (HSA).  At the beginning of the COVID-19 pandemic, the IRS issued guidance confirming that an HDHP could provide coverage for COVID-19 testing and treatment before satisfying the minimum deductible without impacting the participant’s eligibility to contribute to an HSA.  In the FAQs, the Departments confirmed that this rule remains in place until further guidance is issued and stated that any future modifications to this rule would not require mid-plan-year changes.

When does the required tolling of benefit plan deadlines end?

July 10, 2023— 60 days after the COVID-19 National Emergency is scheduled to end.

As a reminder, under the current status quo, for purposes of determining participant deadlines to make COBRA elections and payments, request HIPAA special enrollment, and file claims and appeals, benefit plan administrators are required to disregard the period ending on the earlier of: (1) 60 days after the COVID-19 National Emergency ends, or (2) one year from the date on which the participant was first eligible for the tolling relief.  In the FAQs, the Departments confirmed that benefit plan deadlines previously required to be suspended under this rule would begin to run again after July 10, 2023.

If a participant’s benefit plan deadline was tolled, does the participant need to take action by July 10, 2023?

No.  Plan administrators are not required to toll benefit plan deadlines after July 10, 2023, but this does not mean that the participant must take action by July 10, 2023.  Stated differently, benefit plan deadlines previously tolled during the COVID-19 National Emergency will start to run after July 10, 2023, but the participant would still have the benefit of the otherwise applicable deadline period to take action.

By way of example, if a participant were provided a COBRA election notice on May 1, 2023, the deadline for the participant to elect COBRA would be September 8, 2023 (60 days after July 10, 2023, because the period from May 1 to July 10 would not count toward the 60-day COBRA election period).  As another example, if an individual had a child on April 1, 2023, the participant would have until August 9, 2023 (30 days after July 10, 2023) to exercise the individual’s HIPAA special enrollment rights to enroll in the plan, provided that premiums are paid for the period of coverage after the birth.

Takeaways for plan sponsors?

Plan sponsors and administrators should be aware of the effect that the expiration of the two emergency periods will have on their benefit plans and consider whether they intend to allow previously mandated COVID-19 benefits to lapse after the PHE ends or to voluntarily continue them as-is or in a revised form (e.g., by imposing cost-sharing on COVID-19 testing) for some period of time, as well as whether to continue benefit plan deadline tolling.  In any case, plan sponsors and administrators will want to consider whether and how to timely communicate with participants about these issues, even if they are not obligated to do so.

[Podcast]: DOL’s 2022 Final ESG Rules

In this episode of The Proskauer Benefits Brief, Proskauer partners Ira Bogner and Adam Scoll and law clerk Tanushaproskauer benefits brief podcast Yarlagadda discuss the Department of Labor’s final ESG rules issued on November 22, 2022, and how those rules affect the consideration by ERISA fiduciaries of environmental, social, and governance or “ESG” factors when making investment decisions and exercising shareholder rights, such as voting proxies.  Although these final rules generally became effective on January 30, 2023, they are currently being challenged both in the courts and in Congress.

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Missed Payroll in the Wake of Bank Collapse: Implications, Strategies, and Minimizing Risk

In the wake of the recent news of bank failures, businesses—and their investors—are rightly concerned about the implications of a missed or delayed payroll.  Let’s look at those implications, and strategies for minimizing risk.

Obligation to Make Payroll

Under federal and most state laws, employers have both timing-of-pay and frequency-of-pay obligations.  Under most of these laws, wages earned in a particular workweek must be paid on the regular pay day for the period in which such workweek ends.  Under some of these laws, payment of certain kinds of wages (e.g., overtime wages) can be delayed until the following regularly scheduled pay day, but only if the wages cannot be computed in time with reasonable diligence.  Here, however, the issue is likely not one of computation—but of availability of funds.


Employees who do not receive timely payment of wages can sue, and can seek not only their unpaid wages, but liquidated damages equal to 100% (and in certain states 200%) of the amount of wages not timely paid.  In many jurisdictions, civil penalties and attorneys’ fees are also available to prevailing plaintiffs in wage lawsuits.  Unfortunately, the wage laws do not provide a defense based on lost access to payroll funds.  In addition, while an employer may have rights or claims vis-a-vis their banks or insurers, the employer is the entity with responsibility for compliance with wage and hour laws, and third-party liability won’t absolve the employer of its responsibility to make timely payroll.

Investor and Individual Liability

To what extent can an investor (e.g., a private equity or venture firm) or an individual (e.g., a director or officer) be liable to employees for unpaid or late-paid wages?  The short answer is it depends.  Employees and plaintiffs’ lawyers may pursue different theories of liability depending on the jurisdiction, and most depend on an analysis of multiple considerations.

Federal Law

Under the Fair Labor Standards Act (“FLSA”), an employer is defined as “any person acting directly or indirectly in the interest of an employer in relation to an employee.” It’s possible for more than one entity or individual to be an “employer” of the same individuals under the FLSA, and all such “employers” are jointly and severally liable for wages—meaning any of them can be sued for the full amount of unpaid wages.  To determine whether an individual or third party is an “employer” for purposes of FLSA liability, most courts apply a version of the “economic reality” test that considers whether the individual or third party (1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and/or (4) maintained employment records.  None of the factors individually is dispositive, and the inquiry is fact specific.

The FLSA’s definition of a “person” includes an individual, partnership, association, corporation, business trust, legal representative, or any organized group of persons.  As such, a corporation, partnership, or limited liability company could be held liable for unpaid or delayed wages if it otherwise qualified as an “employer” under the FLSA.

While individual officers and directors can (depending on the facts) be deemed “employers” under the FLSA, many courts have held that individuals who are not directly involved in employment decisions and/or who do not have economic control over employees are not liable under the FLSA.  By contrast, courts have found that individual defendants who are directly involved in employment decisions and/or who have economic control over the at-issue employees may be liable as “employers.”

State Liability

As with all wage and hour issues, state laws may require a different analysis of individual or third-party liability.  For example, under the Wage Orders of California’s Industrial Welfare Commission, an individual or third party may be deemed an employer—or joint employer—if they “directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person.”  For a discussion on the consequences of a missed payroll under California law, see our blog here.

Separate and apart from whether individuals and third-parties can be held directly liable for wages as employers or joint employers, some states have statutes that allow employees to seek relief against shareholders.  For example, under Section 630 of New York’s Business Corporations Law, the top ten shareholders of a corporation (determined based on the fair value of their respective beneficial interests) are jointly and severally liable for amounts owed in respect of unpaid services performed in New York, including:

  • wages;
  • vacation, holiday, and severance pay;
  • employer contributions to or payments of insurance or welfare benefits;
  • employer contributions to pension or annuity funds; and
  • other amounts due and payable for services rendered by the employee.

Because liability is joint and several, employees can elect to recover from only one, a few or all of the top ten shareholders, though shareholders that pay more than their pro rata share are entitled to contribution from the other shareholders.

Under the New York law, to seek relief from the top ten shareholders, plaintiffs must:

  • first give written notice to the applicable shareholder(s) that they intend to hold such shareholder(s) liable within 180 days of the termination of the services performed in New York (or, if within such time period the employee demands an inspection of the corporation’s records to determine the top ten shareholders, within 60 days of being granted such inspection);
  • seek to recover the amounts owed from the corporation and obtain a judgment against the corporation that remains unsatisfied prior to commencing an action against the shareholder(s); and
  • commence such action within 90 days after the judgment against the corporation is unsatisfied.

The requirement that the employee first obtain a judgment against the corporation is of particular importance because it has the effect of limiting the potential for shareholder liability to situations in which the corporation is insolvent or bankrupt.  In all other contexts, the corporation should generally be able to satisfy the claim directly without the need to shift the liability to its shareholders.  Similar relief is available against the ten members of a limited liability company with the largest percentage ownership interest, under Section 609 of New York’s Limited Liability Company Law.

California also has unique laws that could implicate a company’s directors and officers.  For example, under Section 558.1 of the California Labor Code, an “owner, director, officer, or managing agent” of an employer may be held personally liable for violating or causing a violation of any provision of the Labor Code relating to minimum wages or hours and days of work in any Wage Order of the Industrial Welfare Commission.  California courts have held that the key inquiry for liability under Section 558.1 is whether the individual had “personal involvement” in violating a labor statute or causing the violation.  In 2021, the Court of Appeal held that a company’s owner was not liable because her involvement in the operation and management of the business was “extremely limited” and “she did not participate in the day-to-day operational/management decisions of the company.”

Employee Benefits Considerations

Missed payroll can impact employee benefit plans.  First, employee contributions (e.g., to health or 401(k) plans) will need to resume when payroll resumes.  Employees can miss out on 401(k) and similar deferral opportunities if payroll does not resume by year-end.  Second, employers that are unable to make matching or other employer contributions should consider whether the plan can be amended to cut off the employer’s obligation.  Third, employers should contact their insurers to ensure there are no gaps in coverage.  If employers are resorting to manual adjustments to payroll or moving to new providers, they should confirm that employee contribution elections are implemented correctly.  If any employees’ benefit elections are missed, employers should discuss with counsel the available options to correct the error.

Avoiding Section 409A Issues

If pay is delayed beyond March 15, 2024, employers can be exposed to adverse tax consequences under Section 409A of the Internal Revenue Code.  To avoid this tax, the employer will need to make payment as soon as practicable and establish either (a) that it was “administratively impracticable” to make the payment earlier and the impracticability was unforeseeable, or (b) that earlier payment would jeopardize the employer’s ability to continue as a going concern.

Practical Considerations

Employers that no longer have access to their payroll accounts should, of course, be actively seeking alternative sources of funds to make payroll (e.g., from cash reserves in other accounts, credit lines, etc.).

As with so many other workplace issues, early and open communication with impacted employees—combined with frequent updates as to the status of remediation efforts—is a key strategy that can help to create and maintain trust and minimize the risk of legal claims.  Employers that have lost access to their payroll accounts and will miss a payroll as a consequence should immediately notify employees of the development and the plan to make payroll on the next possible date.  In that communication, the employer should designate a contact person or team to field questions from employees, and that contact person/team should respond to all employee inquiries in real time.  Employers should send regular updates to impacted employees (e.g., every 24 hours) as to when they expect to make payroll.  Assuring employees that they will be paid notwithstanding the circumstances—and keeping them well-informed as to timing—should help alleviate what is likely the primary concern in most workers’ minds, particularly for those who rely on a predictable payroll to meet their financial obligations.

As with all wage and hour and benefits issues, state law may require a different or more nuanced approach.  Employers with multi-state operations must consider both federal and state law in devising a strategy to address a missed payroll.

Proskauer’s Wage and Hour Group is comprised of seasoned litigators who regularly advise the world’s leading companies to help them avoid, minimize, and manage exposure to wage and hour-related risk.  Subscribe to our wage and hour blog to stay current on the latest developments.

District Courts Reach Opposite Conclusions on 401(k) Excessive Fee Claims

A district court in the Southern District of Ohio and one in the Western District of Wisconsin reached opposite conclusions on motions to dismiss claims for fiduciary breach based on allegations that recordkeeping fees were unreasonably high.  Dismissal was granted in Sigetich v. The Kroger Co., No. 21-cv-697, 2023 WL 2431667 (S.D. Oh. Mar. 9, 2023); dismissal was denied in Lucero v. Credit Union Retirement Plan Association, No. 22-cv-208, 2023 WL 2424787 (W.D. Wis. Mar. 9, 2023).  Although the disparate results can arguably be rationalized by the underlying facts in each case, the opinions show that district courts continue to apply inconsistent principles in adjudicating these claims at the motion to dismiss stage.


In both cases, the complaint alleged that the defendants breached the fiduciary duty of prudence by permitting their respective plans to pay excessive amounts for recordkeeping. As is typical, the plaintiffs in both cases attempted to support their claims by comparing the recordkeeping cost per year per participant for the target plans to the costs in comparable plans.  In the Ohio case, where the plan had approximately 90,000 participants, the alleged cost was $32 per participant, of which the plan sponsor absorbed $27 (an employer subsidy that is not legally required).  In the Wisconsin case, where the plan had between 9,000 and 20,000 participants, the alleged cost was between $235 and $271 per participant.

The Sixth and Seventh Circuits, which cover the district courts here, both issued decisions last year rejecting excessive recordkeeping fees claims in large part because of plaintiffs’ failure to allege information showing the comparability of services provided by the plan’s recordkeeper and the recordkeeper for other allegedly comparable plans that paid less for recordkeeping.  We discussed the Sixth Circuit’s decision here and the Seventh Circuit’s here.  These and other recent circuit court decisions have directed the district courts to engage in “careful, context-sensitive scrutiny” to ensure that plaintiffs have made comparisons to meaningful benchmarks.  Meaningful comparisons account for variables such as plan size, participant count, and the nature and quality of services.

The Courts’ Decisions

The Ohio court dismissed the complaint, explaining that the plaintiffs failed to provide necessary context to support the comparisons on which their complaint was premised. In so ruling, the court found implausible plaintiffs’ contention that evaluation of the services rendered was unnecessary because the recordkeeping services across plans are basically the same and minor variations have no material impact on price. The court also found plaintiffs’ comparisons unhelpful because many comparator plans had substantially different amounts of assets and participants as compared to the target plan.

In denying the motion to dismiss, the Wisconsin court held that, although the question was a “close one” the plaintiffs provided enough context to support their claims. In direct opposition to the Ohio court, this court credited plaintiffs’ allegation that recordkeeping services across plans are basically the same and minor variations have no impact on price. Further, the court found that any differences between services rendered to the plan and comparators could not account for the plan’s high fees. The court explained that the fees of the target plan were about ten times higher than the fees of similarly sized plans, and were also substantially higher than even much smaller plans.  The court acknowledged defendants’ explanation that as a multiple-employer plan, it did not scale as efficiently as the single-employer plans to which it was compared, but found the explanation could not account for the plan’s high fees.

Proskauer’s Perspective

While recent circuit court decisions suggest an increased likelihood of dismissal of bare-boned recordkeeping claims, the contrasting results in these two litigations show that the outcomes are still fact specific and court specific. Clearly, a key driver of the Wisconsin decision was the very high per participant fee. But it is nevertheless discouraging to see the court reach its result based on rationales that directly conflict with the rationales applied by the Ohio court. Ultimately, the same principles should apply to all such claims.

Now Live: Tri-Agencies Release Guidance for Group Health Plan “No Gag Clause” Attestations

On February 23, 2023, the Departments of Labor, Treasury, and Health and Human Services (the “Departments”) issued new guidance (in the form of FAQs) implementing the No Surprises Act’s prohibition on “gag clauses” in agreements between health plans and service providers.  While the attestation requirement has been effective since December 27, 2020, the Departments had previously stated that, pending the issuance of guidance, plans, and issuers could rely on a good-faith, reasonable interpretation of the statute.  The new guidance provides directions on how to submit the attestations, as well as further guidance on the types of provisions that the Departments consider to be “gag clauses.”

By way of brief background, the No Surprises Act requires group health plans and issuers to attest annually that the plan or issuer does not have agreements with providers, networks, third-party administrators (TPAs), or other service providers that would directly or indirectly restrict the plan or issuer from: (1) disclosing provider-specific cost or quality-of-care information to the plan sponsor, referring providers, participants, or individuals eligible to participate in the plan, (2) electronic accessing de-identified claims and encounter information (consistent with applicable privacy protections) on a per-claim basis, or (3) sharing the information described in (1) or (2) with a business associate.

The new guidance requires that plans and issuers submit their first attestations on December 31, 2023, which will cover the period from December 27, 2020 (or, if later, the effective date of the plan or insurance coverage) through the date of attestation.  Subsequent annual attestations will be due every December 31.  Like prescription drug reporting, the attestations must be submitted through a dedicated CMS website.  Some technical steps are required to register to submit the attestation, which can be found on the dedicated website.

In terms of who may submit the attestation: Self-insured plans may contract with a third-party administrator to submit the attestation on the plan’s behalf; however, the obligation to make a complete and accurate attestation ultimately remains with the plan, not the TPA.  For fully-insured plans, while the plan and the issuer are each required to annually submit the attestation, if the issuer submits an attestation on behalf of the fully-insured plan, both will be deemed to have satisfied the attestation requirement.  The guidance clarifies that an issuer that offers both group health insurance and acts as a TPA for self-insured plans may submit a single attestation on behalf of itself, its fully-insured group health plan policyholders, and its self-insured health plan clients.

Separately, the new guidance provides additional details about the types of provisions that the Departments consider to be “gag clauses.”  The Departments clarify that gag clauses include restrictions on the disclosure of provider rates regardless of whether the TPA considers them “proprietary,” or provisions that allow access to provider-specific cost and quality-of-care information only at a TPA’s discretion.  In addition, provisions that indirectly operate to restrict access to or disclosure of applicable information violate the prohibition on gag clauses—even if they don’t expressly restrict disclosure.  Consistent with the statute, the guidance notes that “reasonable restrictions” may be placed on public disclosure of certain information.

Next Steps: While many plan sponsors have already reviewed service agreements to confirm the existence of any gag clauses and made necessary amendments, the new guidance on provisions considered to be “gag clauses” may require a second pass through the relevant agreements to confirm compliance.  From a practical perspective, plan sponsors should coordinate the required reporting well in advance of the December 31st deadline to confirm the submission is completed correctly and on time.

Industry Coalition Unites to Support Dismissal of ERISA Fiduciary-Breach Claims Related To BlackRock Target Date Funds

The filing of a new 401(k) plan “excessive fee” or “investment underperformance” complaint is hardly “news” these days given the proliferation of suits that have been filed over the past several years.  In fact, hardly a week goes by when at least one new lawsuit has not been commenced.  Still, plan sponsors and fiduciaries were surprised when, in the summer of 2022, one law firm filed eleven class action complaints targeting 401(k) plan sponsors and fiduciaries for offering the BlackRock Life Path Index Target Date Funds—one of the most popular target date fund suites on the market—as investment options in their respective 401(k) plans.

These lawsuits also caught the attention of a number of trade organizations, many of whom decided to file amicus curiae briefs—friend-of-the-court briefs—to assist the courts in understanding the potentially devastating industry-wide impact that complaints such as these could cause were they not immediately dismissed.  While there is much to be said about these lawsuits (and much already has been said), we take a look here at what the Amici had to say about the allegations and also provide a brief update on the status of these cases.

The Eleven Complaints

The allegations supporting the claims of fiduciary breach were simple and virtually identical in all of the complaints.  The plaintiffs in each of these cases alleged that the BlackRock Target Date Funds were “significantly worse performing than many of the mutual fund alternatives offered by [other target date fund providers],” and further alleged that the plan fiduciaries chased the low fees associated with these funds without regard to whether they performed well.  On the basis of these allegations, the plaintiffs asserted multiple claims for breach of fiduciary duty.

Defendants’ Motions to Dismiss

In all eleven cases, the defendants filed motions to dismiss the complaints for failure to state a claim for relief and advanced several arguments in support thereof.  Among the arguments advanced by the defendants was that the Supreme Court previously ruled that prudence is flexible and context-specific and thus courts “must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”  Here, the plaintiffs did nothing more than advance allegations of short-term, modest underperformance and, moreover, for various time periods the performance was frequently better than the plaintiffs’ alleged comparator funds.  Allegations such as these, the defendants argued, could not withstand dismissal in light of the Supreme Court’s prior ruling.

Amici Briefs

As noted, the eleven copy-cat complaints caught the attention of the ERISA community.  Many expressed the concern that if allegations such as those asserted here could survive a motion to dismiss and proceed into class action discovery, it would be open season on any 401(k) plan fiduciary for not making available at all times anything but the best-performing investment fund.

Four trade organizations thus banded together to submit an amici brief in support of the plan sponsors and fiduciaries and, in particular, to provide the courts with their views on why the complaints should be dismissed.  These four organizations included the American Benefits Council, The ERISA Industry Committee, American Retirement Association, and The Committee on Investment of Employee Benefit Assets.  Amici were represented by Proskauer.

Amici advanced several arguments, including the following:

  • If allowed to proceed, the lawsuits would put plan fiduciaries in a no-win situation. The plaintiffs claim imprudence exclusively based on the fiduciaries’ selection of the BlackRock Target Date Funds that allegedly underperformed a set of four so-called comparators funds having little in common with the challenged BlackRock funds.
  • The plaintiffs’ myopic fixation on a single variable among many that fiduciaries must consider in determining plan investment offerings creates a particularly menacing prototype for fiduciary strike suits. It translates into a request for a declaration that a fund suite is per se imprudent if it underperforms other funds, without regard to its fees, risk profile, or rating among market analysts.
  • A finding that a claim of imprudence is sufficiently alleged based on the offering of a fund that earned lower returns for specified past periods than the top performers in the same broad fund category would subject every plan that does not select the best fund in each asset category to costly litigation—a catastrophic outcome for both the court system and the private retirement system.

Status of the Cases

Thus far, courts have dismissed three of the cases.  In two of the cases, the same judge granted the motions to dismiss immediately after oral argument without written opinions.  Another judge dismissed the third case, holding that the plaintiffs’ imprudence claim was speculative, i.e., the plaintiffs failed to allege facts that would tend to exclude the possibility that defendants had lawful reasons to retain the BlackRock Target Date Funds.  In so holding, the court explained that plaintiffs’ allegations were merely consistent with their favored explanation of a fiduciary breach but they were also consistent with prudent explanations for the defendants’ decisions.  The allegations showed only that defendants could have chosen different investment vehicles, but the fact that different vehicles may have previously outperformed does not establish anything about whether the BlackRock funds were an imprudent choice.  Amended complaints have been filed in all three of these cases.  The motions to dismiss in the other cases are pending.

Proskauer’s Perspective

The decisions dismissing the three complaints are welcome news to plan sponsors and fiduciaries.  As Amici pointed out, any other result very well may lead to a flood of complaints accusing plan fiduciaries of breaching their duties whenever a plan investment option is not the best performing fund.  We will continue to monitor developments in these suits and provide periodic updates.

SECURE 2.0 Opens the Door on Retirement Match Based on Student Loan Payments

The grab bag of retirement provisions in the SECURE 2.0 legislation that was enacted at the end of 2022 included an expansion of the ability for a section 401(k) or 403(b) plan, or a governmental section 457(b) plan, to provide matching contributions on participants’ student loan payments.  Effective for plan years starting after December 31, 2023, the change can help employees who might otherwise forgo matching contributions to pay off student debt.

Prior to SECURE 2.0, IRS guidance allowed employers to make contributions to a section 401(k) plan on account of student loan payments, but participating employees had to opt out of the regular match and the contributions had to be treated as “non-elective” contributions. This meant that the student loan benefit could not be offered under a safe harbor plan and employees receiving the student loan contribution had to be counted as zeroes for nondiscrimination testing of the regular 401(k) match. These requirements made the benefit unattractive for many employers. SECURE 2.0 solves that problem by allowing qualified student loan payments to be treated like elective deferrals for purposes of a plan’s matching contribution provisions.

The statute specifies the following conditions for employer matching contributions based on qualified student loan payments:

  • The student loan payment must be made by an employee to repay a qualified education loan that the employee incurred to pay for qualified higher education expenses (i.e., the cost of attendance at an eligible education institution). Unlike the student loan benefit under section 127 of the Internal Revenue Code (the “Code”), the SECURE 2.0 rule does not specify that the loan be for the employee’s own education. Although not entirely clear, this suggests that a match could be provided on repayments of loans taken by an employee for the education of the employee’s child or grandchild.
  • All employees who are eligible for the plan’s regular match must also be eligible for the match on qualified student loan payments, and vice versa.
  • The rate of match on qualified student loan payments must be the same as the rate of match on elective deferrals.
  • The vesting rules for the match on qualified student loan payments must be the same as for matching contributions on elective deferrals.
  • Matched student loan payments count toward the limit on elective deferrals under section 402(g) of the Code (the “Elective Deferral Limit”). Employees may choose to make elective deferrals (pre-tax and/or Roth), qualified student loan payments, or a combination of both, as long as the combined total does not exceed the Elective Deferral Limit.

Procedural Options.  The statute contemplates two types of procedural flexibility for the new match:

  • The match on qualified student loan payments may be made at the same frequency as the match on elective deferrals or at a different frequency, as long as the match on qualified student loan payments is provided at least once per year.
  • Employers may rely on employees’ certification that eligible payments were made.

Although the new rules will allow qualified student loan payments to be treated as elective deferrals for matching purposes, they generally may not be treated as elective deferrals for other purposes. For example, qualified student loan payments will not be treated as elective deferrals for purposes of the average deferral percentage (“ADP”) test. This means that employees who make student loan payments in lieu of elective deferrals would count as zeroes for purposes of the ADP test. However, the rules will allow separate testing for employees who receive the match on qualified student loan payments, and ADP testing still will not be required for safe harbor plans.

The statute directs the U.S. Treasury Department to issue implementing regulations that cover certain procedural requirements and to promulgate model plan amendments to implement the match on qualified student loan payments. We are hopeful that guidance will be issued sometime in 2023. Be on the lookout for updates.

PBGC (Slightly) Opens Door to Exceptions From Special Withdrawal Liability Rules for SFA Multiemployer Pension Plans

As previously discussed, the Pension Benefit Guaranty Corporation (the “PBGC”) issued final regulations in July 2022 for plans that receive special financial assistance (“SFA”) under the American Rescue Plan Act of 2021 (“ARPA”).  Among other things, the regulations imposed special withdrawal liability rules on plans that receive SFA – including a phase-in period for the treatment of SFA as a plan asset and an obligation to use mass withdrawal assumptions during a certain period after receiving SFA.  Although the regulations were “final,” the PBGC invited comments on the phase-in rule in particular.

On January 26, 2023, the PBGC released an update to the final regulations in response to the comments that it received, with one change. In response to a comment from a multiemployer pension fund with an alternative withdrawal liability allocation method – the New England Teamsters and Trucking Industry Pension Fund – that the requirement to use mass withdrawal assumptions and to phase-in SFA as a plan asset could incentivize employers to withdraw in some cases, the PBGC added a process for plans to request exceptions from those requirements under narrow circumstances. The details of the process are outlined in the update to the final regulations.

The exception process is separate from the SFA application process, and plan sponsors may submit their exception requests to PBGC before filing an initial application or a revised application for SFA. It is not expected that the PBGC will grant many exceptions.


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