Employee Benefits & Executive Compensation Blog

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

Fifth Circuit: Plaintiff Not Entitled to Attorneys’ Fees For Obtaining Remand on Appeal

The Fifth Circuit concluded that an individual plaintiff was not entitled to attorneys’ fees, even though she persuaded the Fifth Circuit to vacate and remand a summary judgment decision in favor of the Humana Health Plan, because her victory was “purely procedural.”  While ERISA section 502(g)(1) provides that a court “in its discretion may allow a reasonable attorney’s fee and costs of action to either party,” the Supreme Court has made it clear that an ERISA fee claimant must show “some degree of success on the merits.”  Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242, 255 (2010).  The Supreme Court also ruled many years ago, in a non-ERISA case, that a claimant whose only “victory” is an interlocutory ruling by a court of appeals has not received any relief on the merits.  Hewitt v. Helms, 482 U.S. 755, 760 (1987).

In the case before the Fifth Circuit, the plaintiff had spent time in an eating disorder treatment center and sought reimbursement of fees incurred from the plan.  The plan declined to provide her with coverage because it determined that her hospitalization was not “medically necessary.”  On appeal, the Fifth Circuit concluded that there were disputed issues of fact about whether the treatments were medically necessary and remanded to the district court for additional proceedings.  While the Fifth Circuit’s decision allowed the plaintiff to proceed with her claim, it did not alter the parties’ legal relationship or require that the defendant do something. Accordingly, she had not achieved some degree of success on the merits and was not entitled to a fee award.

The case is Katherine P. v. Humana Health Plan, Inc., No. 19-50276 (5th Cir. June 29, 2020).

“Divane Intervention”: ERISA 401(k) Plan Investment Claims Dead On Arrival

A federal district court in Illinois recently dismissed “excessive fee” and “imprudent investment” claims against the plan fiduciaries of the CareerBuilder 401(k) plan fiduciaries, relying largely on the Seventh Circuit’s decision in Divane v. Northwestern University, 953 F.3d 980 (7th Cir. 2020).  (Our blog on the Divane decision is available here.)  In the case against the Careerbuilder plan fiduciaries, the plaintiff alleged that defendants breached their duties of prudence and loyalty under ERISA by:

  • Paying excessive recordkeeping fees;
  • Failing to invest in cheaper institutional shares as opposed to retail shares; and
  • Failing to include more passively managed as opposed to actively managed funds.

The court first addressed the recordkeeping fee claim.  The court observed that the fund at issue in Divane charged recordkeeping fees that averaged between $153 and $213 per person and the fees here similarly averaged between $131 and $222 per person.  Because Divane had held that a similar range of fees did not give rise to an inference of imprudence, plaintiff’s allegations here also could not either.  The court further explained that an inference of imprudence was even less plausible here than in Divane because CareerBuilder’s plan had fewer participants and thus less leverage to negotiate lower fees.

The court next quickly disposed of plaintiff’s claim that the plan should have invested in institutional share classes rather than more expensive retail share classes because Divane had held that a fund’s failure to invest in institutional as opposed to retail funds does not give rise to an inference of imprudence.

Turning to plaintiff’s claim that the plans should have included more passively managed funds, the court concluded that defendants’ failure to offer “every index fund under the sun” was not, in and of itself, imprudent as long as the plan offered a mix of investments and there are no other indicia of a flawed process.  The court found that the plan offered an acceptable mix of options with expense ratios ranging from .04% to 1.06%—within the range found to be reasonable as a matter of law by other courts.  The court also found that plaintiff’s allegations that defendants removed or modified a majority of the funds in the plan over a five-year period actually supported an inference that defendants had a prudent process in place for monitoring the plan’s funds.

Finally, the court dismissed plaintiff’s duty of loyalty claims because plaintiff failed to raise an inference of self-dealing and relied largely on facts supporting his duty of prudence claims.

The case is Martin v. CareerBuilder, LLC, No. 19-cv-6463, 2020 WL 3578022 (N.D. Ill. July 1, 2020).

Internal Revenue Service Provides Temporary Relief and Other Guidance on Mid-Year Reductions of Safe Harbor Contributions to 401(k) Plans due to COVID-19

On June 29, 2020, the Internal Revenue Service (the “IRS”) issued Notice 2020-52 that provides temporarily relief to plan sponsors that amend their safe harbor Section 401(k) or 401(m) plans (“Safe Harbor Plans”) mid-year to reduce or suspend employer safe harbor matching or nonelective contributions due to the COVID-19 pandemic.  To qualify for the relief, a Safe Harbor Plan would need to be amended between March 13, 2020 and August 31, 2020.


Under current IRS regulations and related guidance, a Safe Harbor Plan may be amended mid-year to reduce or suspend the employer’s safe harbor matching or nonelective contributions only if all of the following requirements are met:

  • The employer either (i) is operating under an economic loss for the year (which is generally a facts and circumstances test), or (ii) included a statement in the original safe harbor notice given to participants before the start of the plan year (“Original Notice”) that the employer may reduce or suspend contributions mid-year and that the reduction or suspension will not apply until at least 30 days after participants are provided notice of the reduction or suspension (“Required Reservation”).
  • All eligible participants are provided with a supplemental notice that explains (i) the consequences of the amendment that reduces or suspends the future safe harbor contributions, (ii) the procedures for participants to change their cash or deferred elections, and (iii) the effective date of the amendment (“Supplemental Notice”);
  • The reduction or suspension of safe harbor contributions is effective no earlier than the later of the date the amendment is adopted or 30 days after eligible employees are provided the Supplemental Notice;
  • Participants must be given a reasonable opportunity (including a reasonable period after receipt of the Supplemental Notice) prior to the reduction or suspension of safe harbor contributions to change their 401(k) elections;
  • The plan must be amended to provide that the ADP test and the ACP test (if applicable) will be satisfied for the entire plan year using the “current year testing method” (i.e., the plan can no longer use the safe harbor to satisfy such testing for the year); and
  • The plan must make the pre-amendment safe harbor contributions through the effective date of the amendment.

Temporary Relief and Other Guidance Provided Under Notice 2020-52

Due to unprecedented circumstances resulting from the COVID-19 pandemic, Notice 2020-52 provides the following additional temporary relief from the general prohibition on mid-year reductions or suspensions of safe harbor contributions:

  • For a plan amendment adopted between March 13, 2020 and August 31, 2020, a plan will not be treated as failing to satisfy the requirement that the employer either is operating under an economic loss for the year or included the Required Reservation in the Original Notice given to participants.
  • For a plan amendment that reduces or suspends safe harbor nonelective contributions adopted between March 13, 2020 and August 31, 2020, the plan will not be treated as failing to satisfy the requirement that participants be provided the Supplemental Notice at least 30 days prior to the effective date of the reduction or suspension, so long as (i) the Supplemental Notice is provided to participants no later than August 31, 2020, and (ii) the plan amendment is adopted no later than the effective date of the reduction or suspension of safe harbor nonelective contributions. This relief does not apply to mid-year reductions or suspensions of safe harbor matching contributions.
  • The temporary relief described above also will apply on similar terms to Section 403(b) plans that apply the Section 401(m) safe harbor rules to satisfy the nondiscrimination rules applicable to such plans.

Separately, Notice 2020-52 clarifies that, because contributions made on behalf of highly compensated employees (“HCEs”) are not included in the definition of safe harbor contributions, a mid-year change that reduces only the contributions of HCEs is not considered a suspension or reduction of safe harbor contributions that requires an employer to satisfy the rules described above.  However, such a mid-year change would be a change to the content of plan’s Original Notice, and pursuant to prior guidance issued in IRS Notice 2016-16 an updated safe harbor notice and an election opportunity must be provided to HCEs to whom the mid-year change applies.

Many employers have implemented or are considering changes to their 401(k) plan matching and nonelective contributions in light of the economic situation related to the COVID-19 pandemic. There are a number of considerations with any of these changes and employers should consider them carefully with counsel. IRS Notice 2020-52 provides welcome guidance in this regard for employers considering changes to Safe Harbor Plans.

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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