Employee Benefits & Executive Compensation Blog

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

Third Circuit Deepens Circuit Split Over Test for “Top Hat” Status Under ERISA

A Third Circuit decision, Sikora v. UPMC, 876 F.3d 110 (3d Cir. 2017), deepens a circuit split over whether a participant’s bargaining power is relevant to determining whether a plan qualifies for “top hat” status under ERISA.

Plans that qualify for “top hat” status are exempt from ERISA’s eligibility, vesting, funding, and fiduciary requirements. To qualify, a plan must be unfunded and must limit coverage to a “select group of management or highly compensated employees.”  In Sikora, a former employee sued to recover a pension benefit that he forfeited upon termination of his employment on the ground that the forfeiture violated ERISA’s vesting requirements.  To make his case, he argued that the plan did not qualify for “top hat” status — and therefore was not exempt from ERISA’s vesting requirements — because the participants in the plan did not have bargaining power with respect to the plan.  The Third Circuit held that bargaining power over plan design and operation is not relevant to determining whether a plan is limited to a “select group” of employees.  Instead, the Court ruled that the inquiry should focus on the number of participants who are eligible (it should be a small portion of the employee population) and participants’ compensation levels (to satisfy the “highly compensated” requirement). 

In this case, the Third Circuit evaluated the demographics and found that the plan qualified as a “top hat” plan. As a result, ERISA’s vesting requirements did not apply.

The Third Circuit’s test aligns with the First Circuit. In contrast, the Second, Sixth, and Ninth Circuits have interpreted a Department of Labor Opinion Letter from 1990 to mean that courts should inquire as to a plan participant’s bargaining power to determine whether s/he is a member of a “select group of management or highly compensated employees.” The Third Circuit disagreed with that interpretation, stating that the Opinion Letter merely “observ[ed] that participants in top-hat plans were deemed by Congress to possess bargaining power ‘by virtue of their position or compensation level.’”  According to the Third Circuit, “engraft[ing] a bargaining power requirement onto the elements of a top-hat plan” would be contrary to the plain text of the statute and the Opinion Letter.

The Sikora decision serves as a fresh reminder that there is no single test for determining top hat status.  The stakes are high: if an unfunded plan fails to qualify as “top hat,” the sponsor can be forced to pay benefits far in excess of what was anticipated; the sponsor can become subject to funding and fiduciary obligations; and plan participants can be exposed to significant (and unexpected) adverse tax consequences.  As such, it is worthwhile to review eligibility for unfunded plans and balance the desire to provide generous benefits against the risk of becoming subject to ERISA’s eligibility, funding, vesting, and fiduciary rules.

Tackett Redux: Ordinary Principles of Contract Interpretation Mean No Inference of Vesting

In an opinion released yesterday, the Supreme Court reaffirmed that collective bargaining agreements (CBAs) must be interpreted according to “ordinary principles of contract law.” CNH Industrial N.V. v. Reese, No. 17-515, 2018 WL 942419 (U.S. Feb. 20, 2018).  In so ruling, the Court again rejected the Sixth Circuit’s inference from silence that CBAs vested retiree benefits for life.

Three years ago, the Supreme Court decided M&G Polymers USA, LLC v. Tackett, 135 S. Ct. 926 (2015).  In that decision, the Court unanimously held that CBAs must be interpreted according to ordinary principles of contract law, and the Court rejected the Sixth Circuit’s so-called “Yard-Man” inference that if a CBA did not specify that retiree medical and other welfare benefits had a limited duration, the benefits were presumed to be vested.  The Court held that the Yard-Man inference was inconsistent with the application of ordinary principles of contract law and that the inference improperly placed a thumb on the scale in favor of vested retiree rights.

The present dispute arose between retirees and their former employer about whether an expired CBA created a vested right to lifetime health care benefits. In 1998, the Company agreed in a CBA to provide health care benefits to certain “[e]mployees who retire under the . . . Pension Plan.”  Under the CBA, “[a]ll other coverages,” such as life insurance, ceased upon retirement.  The health care benefit was “made part of” the CBA and “r[an] concurrently” with it.  The CBA contained a general durational clause stating that it would terminate in May 2004.  The CBA also stated that it “dispose[d] of any and all bargaining issues, whether or not presented during negotiations.”

After years of litigation, both before and after the Tackett decision, the Sixth Circuit concluded that the CBA’s general durational clause did not apply to retiree health care benefits.  In a split decision, the Sixth Circuit inferred from the CBA’s specific termination provisions for “other coverages” that the parties must have intended to vest health care benefits for life.

The Supreme Court unanimously reversed the Sixth Circuit, holding that the Sixth Circuit’s inference of vesting could not be squared with Tackett because it did not comply with Tackett’s direction to apply ordinary contract principles.  According to the Supreme Court, the CBA’s general durational clause applies to all benefits, unless the CBA provides otherwise.  Here, no provision specified that the health care benefits were subject to a different durational clause. The only reasonable interpretation of the CBA was thus that the health care benefits expired when the CBA expired.

The Supreme Court’s decision reaffirms that a court interpreting a CBA should not infer from silence that a retiree welfare benefit is vested for life. We expect that litigation over reductions to retiree medical benefits will continue (both for union employees and non-union employees), particularly in light of skyrocketing health care costs; but the Court’s decision affirms that retirees will bear the burden of demonstrating an intent to vest based on affirmative documentary evidence.

[Podcast]: Severance Pay Plans & ERISA

In a benefits law edition of The Proskauer Brief, senior counsel Anthony Cacace and partner Robert Projansky discuss how severance plans can be subject to ERISA. They also discuss the key advantages of having severance pay arrangements covered by ERISA and what employers can do to design plans that comply with the substantive and procedural requirements of ERISA, but also maximize the likelihood of benefiting from ERISA coverage. Whether a severance plan or arrangement is governed by ERISA is a rather fact-intensive analysis, so be sure to tune in for how those facts and circumstances can give rise to an ERISA plan.

Listen to the podcast.

Read the full transcript of the podcast on our Law and the Workplace blog.

The Bipartisan Budget Act’s Impact on Retirement Plans

On Friday, February 9, 2018, Congress passed, and the President signed, the Bipartisan Budget Act of 2018 (the “Budget Act”). The Budget Act contains a number of provisions that affect qualified retirement plans.  Plan sponsors should consider the impact of the Budget Act on their retirement programs.

  • Hardship Withdrawals. The Budget Act relaxes the rules related to hardship withdrawals applicable to qualified defined contribution plans (and likely to 403(b) plans because the 403(b) regulations incorporate the 401(k) plans by reference), beginning with plan years commencing after December 31, 2018, in three significant ways:
    • First, the Budget Act eliminates the requirement that a participant exhaust the opportunity to take loans under the plan before receiving a hardship withdrawal.
    • Second, the Budget Act allows a participant to take a hardship withdrawal from the participant’s elective deferral contributions, qualified nonelective contributions (“QNECs”), and qualified matching contributions (“QMACs”), as well as from earnings on each of those contribution sources.  Prior to the Budget Act, a participant could take a hardship withdrawal from elective deferral contributions but not from QNECs or QMACs nor from earnings on any of those deferrals or contributions.
    • Third, the Budget Act directs the Secretary of the Treasury to modify existing 401(k) regulations to the remove the rule prohibiting participants from making elective deferrals and other employee contributions to the plan from which the hardship withdrawal was taken and any other plans maintained by the employer (which includes other qualified retirement plans, 403(b) plans, and nonqualified deferred compensation plans) during the six-month period after taking a hardship withdrawal.  The guidance likely will also address what happens to participants who otherwise might be in the middle of a six-month contribution suspension period once the new rule eliminating that suspension becomes effective. Finally, it is noteworthy to consider the potential impact of this new rule on nonqualified deferred compensation plans subject to Code Section 409A. Under the Section 409A regulations a nonqualified deferred compensation plan is allowed to cancel a participant’s deferral election following a 401(k) hardship distribution (as well as an unforeseeable emergency distribution under the deferred compensation plan). Employers should consider whether they wish to continue the practice of cancelling deferred compensation plan deferrals after a 401(k) plan hardship distribution once the new 401(k) rule is in place.
  • California Wildfire Relief. The Budget Act contains special disaster-related rules for the use of retirement funds by an individual whose principal place of residence was in a Presidentially-declared California wildfire disaster area between October 8, 2017, and December 31, 2017, and who incurred an economic loss due to the wildfires (a “Qualified Individual”). This relief is similar to what was enacted last year for the victims of Hurricanes Harvey, Irma and Maria in 2017 as part of the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (enacted on September 29, 2017) and also relief that was included in the Tax Cuts and Jobs Act for plan participants residing in Presidentially-declared disaster areas in 2016 (enacted on December 22, 2017).  Plans are not required to offer this special disaster relief. Plan sponsors who wish to offer this relief to participants impacted by the California wildfires may do so immediately, but their plan document must be amended to conform the terms of the plan to the plan’s operation.  The deadline for amending plans for this relief is the last day of the first plan year beginning on or after January 1, 2019 (i.e., December 31, 2019 for a calendar year plan).
    • A Qualified Individual can take a qualified wildfire distribution of up to $100,000. Qualified wildfire distributions are not subject to the 10% early withdrawal penalty, can be recontributed over a three-year period, and will be included in the participant‘s income ratably over three-years unless the participant elects otherwise.
    • The Budget Act increases the loan amount that a Qualified Individual can take from his account under a qualified retirement plan to the lesser of $100,000 or the full amount of the individual’s vested account balance. Qualified Individuals who have loans outstanding are permitted to delay loan repayments for up to one year.
    • A participant who took a distribution after March 31, 2017, and before January 15, 2018, to purchase or construct a home in the area where the California wildfires occurred is permitted to repay such distribution if the participant was unable to actually purchase or construct the home due to the California wildfires. Such repayment must occur no later than June 30, 2018.
  • Wrongful IRS Levy. If an amount was withdrawn from an IRA or an employer-sponsored retirement plan due to an IRS levy that was later determined to be wrongful, the Budget Act permits the affected individual to recontribute the amount returned (including interest) as a result of the wrongful levy. This provision is effective with respect to “amounts paid” after December 31, 2017, but it is not entirely clear whether this relates to the date that the wrongfully levied amounts were paid from an IRA or plan or the date that the amounts were returned to the affected individual.
  • Multiemployer Pension Plan Committee. To assist in addressing the funding and solvency issues faced by many multiemployer pension plans and the Pension Benefit Guarantee Corporation, the Budget Act establishes the “Joint Select Committee on Solvency of Multiemployer Pension Plans.” This committee is tasked with providing recommendations and legislative language by the end of November 2018 that will “significantly improve multiemployer pension plans and the Pension Benefit Guarantee Corporation.” The bipartisan committee will be composed of 16 members, appointed by party leaders, with an equal number of members from the Senate and the House of Representatives. The co-chairs of the committee must be named by party leadership no later than February 23rd.

Congress Delays the “Cadillac Tax” and Other ACA-Related Taxes and Fees

On January 22, 2018 Congress passed (and the President signed) the Federal Register Printing Savings Act (the “Act”), which temporarily (until February 8, 2018) continued funding federal government activity and appropriates funds to various health-related programs (e.g., the Children’s Health Insurance Program, Medicaid, and childhood obesity programs).  In addition to providing for appropriations, the Act also addressed the following taxes and fees established under the Affordable Care Act (“ACA”):

  • The effective date for the controversial 40% excise tax on high-cost health care (commonly referred to as the “Cadillac Tax”) was delayed until 2022.  The Cadillac Tax was originally scheduled to become effective in 2018, but in 2015 it was delayed (also in connection with budget legislation) until 2020.  At a minimum, the new two-year delay gives employers and plan sponsors more time to adjust health plan design to avoid the Cadillac Tax.  However, whether the Cadillac Tax ever becomes effective is certainly in doubt, as the tax is unpopular on both sides of the aisle.
  • A new moratorium on assessment and collection of the fee imposed on health insurers under Section 9010 of the ACA will be applied to 2019.  The fee, which was also subject to a moratorium in 2017, will still be assessed and collected for 2018.
  • The moratorium on application of the 2.3% tax on medical device sales was extended through 2019.  Absent future legislation extending the moratorium or repealing the tax, it will become effective on January 1, 2020.

The three taxes and fees described above were also targeted by the failed attempts at health care reform in 2017 (i.e., the American Health Care Act and the Better Care Reconciliation Act).  Those legislative attempts at health care reform also included delays or repeals of many other revenue-related provisions of the ACA.  As noted above, the Act only funds the federal government until February 8, 2018, so additional budget legislation will be considered by Congress soon.  It is possible that this future budget legislation will target other ACA-related provisions.

Annual IRS Revenue Procedure Includes Surprising Change to User Fees

On January 2, 2018, the IRS published its annual bulletin that updates procedures for requesting rulings, determinations, and other guidance from the IRS. As in past years, the bulletin includes new user fees for determination requests and submissions under the Voluntary Correction Program (“VCP”). But this year’s update includes a significant surprise for the VCP program; and while changes in past years typically went into effect about a month after they were announced, this year’s changes are effective immediately.

For many VCP filings, the new fees are significantly lower than in the past. Instead of fees based on the number of participants and capped at $15,000, the new fee schedule is based on plan assets and caps out at $3,500 (for a plan with over $10 million in assets). While this is certainly a welcome change, the IRS has eliminated the availability of reduced fees for streamlined filings. For example, in 2017 plan sponsors could correct minor plan loan and minimum required distribution errors for as little as $300; these streamlined options are no longer available.

Under the new fee schedule, the user fee for a VCP filing is the same for any type of error and there is no limit on the number of errors that can be included in a submission. Plan sponsors considering the pros and cons of self-correction vs. VCP should consider the new fee schedule.

In addition to the VCP change, the user fee for a Form 5310 filing (a determination letter application for a terminating plan) has increased from $2,300 to $3,000.

IRS Once Again Extends Distribution (Not Filing) Deadline for ACA Reporting and Continues Good Faith Standard

Following the old “better late than never” axiom, the IRS recently announced (see Notice 2018-06) that once again it would be extending the distribution (but not filing) deadline for the Affordable Care Act (ACA) reporting requirements set forth in Sections 6055 and 6056 of the Internal Revenue Code (the “Code”). Under Code Section 6055, health coverage providers are required to file with the IRS, and distribute to covered individuals, forms showing the months in which the individuals were covered by “minimum essential coverage.” Under Code Section 6056, applicable large employers (generally, those with 50 or more full-time employees and equivalents) are required to file with the IRS, and distribute to employees, forms containing detailed information regarding offers of, and enrollment in, health coverage. In most cases, employers and coverage providers will use Forms 1094-B and 1095-B and/or Forms 1094-C and 1095-C. The chart below shows the new deadline for distributing the forms.

  Old Deadline New Deadline
Deadline to Distribute Forms to Employees and Covered Individuals Jan. 31, 2018 March 2, 2018
Deadline to File with the IRS Feb. 28, 2018 (paper)

April 2, 2018 (electronic)


The regulations issued under Code Section 6055 and 6056 allow for an automatic 30-day extension to distribute and file the forms if good cause exists. An additional 30-day is extension is available upon application to the IRS. Notice 2018-06 provides that, as was the case last year, these extensions do not apply to the extended due date for the distribution of the forms, but they do apply to the unchanged deadline to file the forms with the IRS.

Perhaps more significantly to many, the IRS carried over from last year a second valuable measure of relief. Specifically, the IRS continued the interim good faith compliance standard under which the IRS will not assess a penalty for incomplete or incorrect information on the reporting forms if a filer can show that it completed the forms in good faith. As was the case last year, this relief only applies if the forms were filed on time. Thus, filers would be wise to distribute and file forms, even imperfect ones, timely and should document their good faith efforts.

Those that do not file by the new deadlines have a more uphill battle to avoid penalties under Code Sections 6721 and 6722. The IRS stated in Notice 2018-06 that it would apply a reasonable cause analysis when determining the penalty amount for a late filer. According to the IRS, this analysis will take into account such things as whether reasonable efforts were made to prepare for filing (e.g., gathering and transmitting data to an agent or testing its own ability to transmit information to the IRS) and the extent to which the filer is taking steps to ensure that it can comply with the reporting requirements for 2017.

Plaintiffs Lack Standing to Bring ERISA Fee Litigation Case

A federal district court in Georgia dismissed claims by participants in Delta Air Lines, Inc.’s 401(k) plan who alleged that Delta breached its ERISA fiduciary duties by allowing the plan to invest in funds that allegedly charged excessive fees and unperformed against comparable funds. Consistent with rulings in other jurisdictions, the court held that plaintiffs lacked Article III standing because they failed to allege that they were invested in the challenged funds or that they paid excessive fees. In so holding, the court explained that personal injury is a prerequisite to standing even when plaintiffs purport to bring their claims on behalf of a 401(k) plan. The court also rejected plaintiffs’ argument that the mere fact that defendants allegedly violated ERISA rights creates an injury to them. The case is Johnson v. Delta Air Lines, Inc., No. 1:17-cv-02608, ECF No. 53 (N.D. Ga. Dec. 12, 2017).

Tax Reform Act Denies Deductions for Some Sexual Harassment Settlements

In a little-noticed provision buried deep inside the new Tax Cuts and Jobs Act (signed into law on Dec. 22) is the following “denial of deduction”:

Payments related to sexual harassment and sexual abuse – No deduction shall be allowed under this chapter for –

  • any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement; or
  • attorney’s fees related to such a settlement or payment.”

The statute adds a new Section 162(q) to the Internal Revenue Code, effective for amounts paid or incurred after December 22, 2017.  Where applicable, it may require taxpayers to choose between non-deductibility of the payment and non-disclosure of the settlement.

For a summary of the statue, please see our California Employment Law Update blog post.

Fifth Circuit Borrows One-Year Statute of Limitations for Section 502(c)(1) Claim

The Fifth Circuit held that the statute of limitations for an ERISA § 502(c)(1) claim—a claim for penalties for failure to provide certain documents within thirty days of a written request—was subject to a one-year statute of limitations.  In so holding, the Court borrowed the statute of limitations from the Louisiana Civil Code for claims alleging a violation of a general duty owed, and rejected plaintiff’s argument in favor of the ten-year breach of contract statute of limitations. Accordingly, the Court ruled that the claim expired one year and thirty days from the date of the request for documents. The case is Babin v. Quality Energy Servs., Inc., No. 17-civ-30059, 2017 WL 6374738 (5th Cir. Dec. 14, 2017).