Employee Benefits & Executive Compensation Blog

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

Choice-of-Law Plan Provision Enforced As A Matter of Federal Common Law

The Tenth Circuit recently concluded that, as a matter of federal common law, a choice-of-law provision in a long-term disability insurance policy, which was part of the plaintiff’s employer’s ERISA plan, must be enforced because a “clear, uniform rule . . . is required to ensure plan administrators enjoy the predictable obligations and reduced administrative costs central to ERISA.”  The central issue on appeal was whether the Court’s review of the decision to deny plaintiff his claim for long-term disability benefits should be governed by the highly deferential arbitrary and capricious standard of review, or reviewed de novo.  The plaintiff commenced the action in Colorado, but the policy had a choice-of-law provision that required the application of Pennsylvania law.  Which law to apply was of paramount importance because Colorado state law bans discretion-granting clauses while Pennsylvania does not.

The Court first determined that it need not decide whether or not ERISA preempts state laws banning discretionary clauses in insurance policies because it concluded that the Colorado law should not apply in light of the policy’s choice-of-law provision.  In so ruling, the Court recognized that other circuits had developed a variety of approaches to determining whether a choice-of-law provision should be enforced, all of which essentially focused on a rule of reasonableness.  Without commenting on how those approaches might be applied in the instant case, the Tenth Circuit found them inappropriate because they “overlook[ed] the uniformity and efficiency objectives” central to ERISA.  The Tenth Circuit further explained that a choice of law doctrine must account for the “centrality” of the plan in ERISA matters and the aims of uniformity and reduced administrative costs.  Accordingly, the Court concluded that if the plan has a legitimate connection to the state whose law is chosen, ERISA’s interest in efficiency and uniformity, as well as its recognition of the primacy of plan documents, compelled the conclusion that the selected law should govern as a matter of federal common law.

In the end, the Court determined that the denial of plaintiff’s claim for long-term disability benefits was not arbitrary and capricious.  The case is Ellis v. Liberty Life Assurance Co. of Boston, No. 1:15-cv-00090 (10th Cir. May 13, 2020).

IRS Expands Mid-Year Change Opportunities for Health and FSA Benefits and Increases Carryover Limit

On May 12, 2020, the IRS released Notice 2020-29, which provides significant flexibility for health insurance and flexible spending account election changes during 2020, and Notice 2020-33, which increases the amount that may be carried over from one year to the next under a health flexible spending account (FSA).  The guidance allows increased flexibility for employees to make or change their elections for calendar year 2020, as well as more time for employees to spend down health and dependent care FSA balances.  These changes are optional and would require plan amendments.

Read below for more details about this relief, including the deadline to make plan amendments.

Mid-Year Election Changes (2020 Only)

Cafeteria plans permit employees to choose to pay for health and certain other benefits on a pre-tax basis.  In general, elections must be made before the plan year starts, and mid-year changes are permitted only if there is a qualifying change in status (such as an employment change, getting married, having a baby, or moving) or a qualifying change to the benefit.

In recognition of the challenges that individuals are facing as a result of the coronavirus pandemic, some employers have permitted employees to change their health coverage mid-year—for example, to elect coverage if they had previously declined it.  Absent relief, these circumstances would not necessarily be sufficient to allow a mid-year change.  Notice 2020-29 makes an exception for the rest of 2020, if the plan is amended to allow the change and the change applies prospectively.  Subject to those conditions, the following changes are permitted for the rest of 2020:

  • Employer-sponsored health coverage: Employees who previously declined employer-provided health coverage may elect coverage on a prospective basis. In addition, employees who previously elected coverage may drop that coverage mid-year in conjunction with enrolling in different health coverage from the same employer or enrolling in other health coverage.  An attestation is required if the employee is enrolling in outside health coverage.
  • Health and Dependent Care FSAs: Employees may make a new election, or increase or decrease an existing election, for the rest of 2020. This relief applies for general purpose and limited purpose health FSAs, as well as for dependent care FSAs.

Employers have significant discretion in applying this relief.  For example, an employer may limit the types of elections that are permitted in order to mitigate adverse selection.  Also, for employers that have already loosened the election change rules, the relief applies retroactively for changes made on or after January 1, 2020.

Increase to Health FSA Carryover Limit (Permanent Change)

In general, flexible spending accounts are subject to a “use it or lose it” rule: balances must be used for eligible expenses incurred during the plan year and unused balances are subject to forfeiture.  There are two exceptions to this rule for health FSAs:

  1. A health FSA may cover eligible expenses that are incurred during a limited “grace period” (up to two months and 15 days after the end of the plan year).
  2. A health FSA may allow employees to “carry over” up to $500 to be used for expenses incurred in the next plan year.

These exceptions are mutually exclusive: a health FSA may allow a grace period or a carryover, but not both.

Carryover Limit is Increased.  Effective for plan years starting on and after January 1, 2020, Notice 2020-33 increases the $500 carryover limit for health FSAs to 20% of the annual salary reduction contribution limit.  This means that the limit is increasing to $550 for 2020 (20% of the $2,750 limit on salary reduction contributions).  Future adjustments will be in $10 increments.  If permitted by the employer’s plan, employees may change their elections for the remainder of 2020 to account for this increase.

Special Relief for Non-Calendar Year Plans and Plans With Grace Periods (2020 Only)

Notice 2020-29 also includes special relief for plans under which the deadline to incur expenses ends during 2020 (before December 31st)—whether due to a grace period that ends during 2020 or a non-calendar plan year that ends during 2020.  Under this relief, a plan may extend the deadline to incur expenses to December 31, 2020.  For example, if the grace period for incurring claims under a health FSA ended on March 15, 2020, the plan may be amended to allow remaining balances to be used for eligible health expenses incurred later in calendar year 2020.  Similarly, if the plan year for a flexible spending account (health or dependent care) ends on June 30, 2020, the plan may be amended to allow the FSAs to be used for eligible expenses incurred later in calendar year 2020.

Again, these changes are optional, and they are not all or nothing.  Employers may choose which relief to make available (if any).

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Plan sponsors that wish to make changes for 2020 should communicate the changes to affected employees in time to be useful and must adopt conforming plan amendments no later than December 31, 2021.

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.

New IRS Guidance Answers Pressing CARES Act Questions for Retirement Plans

On May 4th, the IRS released a set of FAQs focused on the special coronavirus-related distribution (“CRD”) and plan loan options under the CARES Act (described here).

To recap, the CARES Act allows expanded distribution options and favorable tax treatment for up to $100,000 of CRDs from eligible retirement plans (including section 401(k) and 403(b) plans, and IRAs), as well as an opportunity to repay the CRDs.  The Act also increases the limits for plan loans and allows certain loan repayments to be deferred by up to an additional year.  These opportunities are available only to individuals who satisfy specified conditions related to COVID-19, and the expanded distribution and loan opportunities sunset at the end of 2020.

The FAQs offer helpful guidance for sponsors of retirement plans who are considering adding special distribution and/or loan options for participants affected by COVID-19. The following are some of the highlights:

  • When in doubt, follow the KETRA playbook.  The FAQs say the IRS anticipates releasing more comprehensive guidance “in the near future.”  The IRS anticipates the guidance will apply the principles of its guidance under the Katrina Emergency Tax Relief Act of 2005 (“KETRA”), which provided loan and distribution relief that was very similar to the relief offered under the CARES Act.  The KETRA guidance is set forth in IRS Notice 2005-92.
  • Participants may self-certify that they are eligible, but there is a price to pay for misrepresentations. The FAQs reinforce that a plan administrator may rely on a participant’s self-certification that he or she satisfies the conditions for a CARES Act loan or distribution.  However, the favorable tax treatment for CRDs (that is, the ability to recognize income over three years and avoid the 10% additional tax on early distributions) is conditioned on the individual actually meeting the conditions.  In other words, a misrepresentation by a participant should not cause a plan to be disqualified (assuming the plan administrator does not know about the misrepresentation), but the individual who makes misrepresentations can be subject to tax penalties.
  • CRDs and CARES Act Loans are optional. The FAQs confirm that a plan sponsor may choose whether, and to what extent, to offer CRDs and/or loan relief under the CARES Act.  For example, a plan sponsor could amend its plan to allow for CRDs and the suspension of loan repayments, but choose not to increase plan loan limits.  Similarly, a plan could be amended to allow CRDs from some contribution sources but not others or to impose a cap on CRDs that is lower than the $100,000 permitted by the CARES Act.  Regardless of whether a plan is  amended to allow CRDs, an individual who satisfies the conditions for a CRD may claim the favorable tax treatment for any distribution that satisfies the CRD requirements and is (or was) received during 2020 (before December 31st).
  • The IRS “anticipates” that plans will accept repayment of CRDs, but acceptance of repayments is not necessarily required. The CARES Act allows participants to repay CRDs to an eligible retirement plan or IRA, and specifies that repayments will be treated as rollover contributions. The FAQs clarify that if a plan does not accept rollover contributions, the plan is not required to accept repayments of CRDs.  However, the FAQs do not say whether plans that accept rollover distributions may choose not to accept CRD repayments.
  • Additional restrictions apply for pension plans. The FAQs state that the CARES Act relief for in-service withdrawals is limited to section 401(k), 403(b), and governmental 457(b) plans.  The CARES Act does not change the rules for when a distribution from a defined benefit or money purchase plan is permitted.  In general, this means that distributions from a defined benefit or money purchase plan would not be permitted before age 59½, severance from employment, or disability.  In addition, the FAQs clarify that spousal consent is required for a CRD if required by the plan.
  • More to come on how to report CRDs. The FAQs state that the payment of a CRD must be reported by the plan on a Form 1099-R, even if the participant repays the CRD in the same year. The FAQs do not specify how to report the CRD; the IRS expects to issue guidance on that later in 2020.  In the meantime, the FAQs refer generally to section 3 of the KETRA guidance.

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

DOL/Treasury COVID-19 Relief Includes Long Extension of Participant Deadlines and Rule of Reasonableness for Plan Administration

On April 29, 2020, the U.S. Departments of Labor (Employee Benefits Security Administration, “EBSA”) and Treasury (IRS) published a final regulation, and EBSA issued a package of guidance and relief, for employee benefit plans affected by the COVID-19 outbreak.  EBSA’s package includes (i) EBSA Disaster Relief Notice 2020-1, (ii) DOL COVID-19 FAQs for Participants and Beneficiaries (answering basic participant questions), and (iii) a press release.  At a high level, the package includes important guidance and extensions of various deadlines.  The IRS/DOL regulation is particularly noteworthy because it provides an extended period for employees to elect health coverage retroactively.

Highlights from the final regulation and the EBSA Disaster Relief Notice are described below.  Both pieces of guidance state that the U.S. Department of Health and Human Services has reviewed, concurs, and will exercise its enforcement discretion to adopt a temporary policy of measured enforcement to extend certain similar timeframes.

Final Regulation Extending Certain Deadlines

Under the final regulation, all group health plans, disability, and other employee welfare plans, and all pension plans that are subject to ERISA or the Internal Revenue Code, must disregard the “Outbreak Period” for purposes of determining certain deadlines.  The “Outbreak Period” runs from March 1, 2020 until 60 days after the COVID-19 National Emergency ends (or such other date as the agencies announce).  If there are different Outbreak Period end dates for different parts of the country, the agencies will issue additional guidance for relevant areas.

The Outbreak Period must be disregarded for purposes of:

  • The special enrollment period for enrolling in a health plan after a loss of coverage or acquiring a new dependent due to birth, marriage, adoption, or placement of adoption. Without the extension, the special enrollment period would be 30 days (or 60 days in the case of special enrollment rights under CHIP);
  • The period to elect COBRA coverage. Without the extension, the election period would be 60 days from the time the election notice is provided;
  • The deadline to pay COBRA premiums;
  • The period to file a claim or appeal for benefits (but not the period for deciding the claim);
  • The period to request external review under a health plan; and
  • The deadline for a plan to provide COBRA election notices.

For example, suppose an employee terminated employment and lost health coverage on February 29, 2020.  The employer would have had 14 days to provide a COBRA election notice (deadline March 14, 2020), and the employee then would have had 60 days to make an election (deadline May 13, 2020) and another 45 days to make the first premium payment (deadline June 27, 2020).  With the extension, the period from March 1, 2020, until 60 days after the National Emergency ends is disregarded.  Assuming that the COBRA notice would have already been provided, this means that the employee would have until 120 days after the National Emergency ends to elect COBRA—retroactive to March 1, 2020—and another 45 days after that to make the first premium payment.

EBSA Disaster Relief Notice 2020-01: Guidance and Relief for Employee Benefit Plans Due to the COVID-19 (Novel Coronavirus) Outbreak

In addition to the relief described above for plan participants and beneficiaries, EBSA Disaster Relief Notice 2020-01 includes more limited relief for plan sponsors, fiduciaries, and service providers.  Rather than waive technical obligations or provide wholesale extensions of deadlines, the Notice recognizes that plan sponsors, fiduciaries, and service providers might face challenges in meeting ERISA requirements during the Outbreak Period and applies a rule of reasonableness.  EBSA outlines the following guiding principles for plan sponsors, fiduciaries, and service providers who encounter problems during the Outbreak Period:

  • Act reasonably, prudently, and in the interest of the covered workers and their families who rely on the plans for physical and economic well-being.
  • Make reasonable accommodations to prevent the loss of benefits or undue delay in benefit payments, and attempt to minimize the possibility of individuals losing benefits because of a failure to comply with pre-established timeframes.
  • EBSA’s enforcement efforts will emphasize compliance assistance, including grace periods and other relief where appropriate, such as where physical disruption to a plan or service provider’s principal place of business makes compliance with pre-established timeframes impossible.

The Notice also includes the following specific relief, all of which is subject to the caveat that the relief is available only to the extent it is needed:

  • Delayed remittance of participant contributions and loan repayments to plans. In general, participant contributions and loan repayments must be remitted to the plan as soon as they can reasonably be segregated from the employer’s general assets.  Remittance may be temporarily delayed if solely attributable to the outbreak.
  • Notices and disclosures. A responsible plan fiduciary will not be in violation of ERISA for failure to timely furnish a notice (including a blackout notice), disclosure, or other document required under Title I of ERISA, if:
  • The responsible fiduciary acts in good faith; and
  • The notice, disclosure, or document is furnished as soon as administratively practicable under the circumstances.

Good faith includes using electronic alternative means of communicating with plan participants and beneficiaries who the plan fiduciary reasonably believes have effective access, including email, text messages, and continuous access websites (for example, an intranet site).

  • Temporary relaxation of ERISA plan loan and distribution verification requirements. A failure to follow plan verification procedures for loans or distributions will be excused for purposes of Title I of ERISA if:
  • The failure is solely attributable to the outbreak;
  • The plan administrator makes a good-faith diligent effort under the circumstances to comply with plan procedures; and
  • The plan administrator makes a reasonable attempt to correct any procedural deficiencies (g., assemble missing documentation) as soon as administratively practicable.

The Notice states that this relief does not relax requirements under the Internal Revenue Code, such as spousal consent requirements (where applicable).

  • Clarification with respect to the CARES Act. The Notice confirms that the expansion of loan rights under the CARES Act (described here) will not violate Title I of ERISA.
  • Extension of the deadline for Form M-1 filings. The deadline for Form M-1 filings (for MEWAs and certain entities claiming exception) has been extended to align with the deadline for filing the Form 5500 (e., filings otherwise due from April 1, 2020 through July 14, 2020 are now due on July 15, 2020).

The guidance does not get into details on logistics for implementation.  Plan sponsors and fiduciaries will need to grapple with issues such as:

  • When and how to communicate the extensions to affected participants and beneficiaries. For example, should form notices for COBRA and special enrollment periods be updated?  What format, and how much detail is appropriate, given that the extension period is fluid and will be short-lived?  What should be done for people who are already in election periods and were previously informed of a deadline that has now been extended?
  • Whether and how past actions can be undone. For example, if an individual’s COBRA coverage was previously canceled for not paying premiums, can it be reinstated?  What happens if an eligible COBRA beneficiary already obtained coverage somewhere else?

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

PBGC Announces COVID-19 Extensions for Premium Payments and Other Filing Deadlines

On April 10, 2020, the Pension Benefit Guaranty Corporation (the “PBGC”) announced that deadlines for upcoming premium payments and certain other required filings due from April 1, 2020 through July 14, 2020 will be extended to July 15, 2020 as further described below.

The PBGC’s announcement came a day after the Internal Revenue Service (the “IRS”) issued Notice 2020-23, which extended certain deadlines, including for Form 5500 returns, to July 15, 2020 as a result of COVID-19. Under the PBGC’s disaster relief policy, when the IRS announces disaster relief that includes a filing extension for Form 5500 returns, the PBGC will generally grant relief that extends certain deadlines for the same geographic area and relief period. Importantly, the IRS Notice applies nationwide and without regard to whether the applicable person is directly impacted by COVID-19, so the PBGC’s relief is effectively available to all plan sponsors, administrators, and service providers.

Automatic Extensions

The PBGC’s relief automatically applies to the due date for any PBGC filing, payment, or other action (including PBGC premium filings and premium payments) other than the following filings and actions on the PBGC’s “Exceptions List”:

  • Notices of missed contributions over $1,000,000 (reported on Form 200);
  • Advance reportable event notices (reported on Form 10-Advance);
  • Post-event reportable event notices (reported on Form 10) for: (i) a failure to make required contributions under $1,000,000; (ii) an inability to pay benefits when due; (iii) a liquidation; (iv) a loan default; or (v) an insolvency or similar settlement; and
  • Actions related to distress terminations for which the PBGC has issued a distribution notice.

Note, however, that the Coronavirus Aid, Relief, and Economic Security Act extended the deadline for all required minimum contributions to tax-qualified defined benefit plans that would have otherwise been due in the 2020 calendar year to January 1, 2021. As a result, notices to the PBGC for missed required contributions in 2020 should not be required.

In order to take advantage of the relief for premium filings, the filer must notify the PBGC as part of its Comprehensive Premium Filing, but filers are also encouraged to notify the PBGC by email to premiums@pbgc.gov referencing:

  • IRS Notice 2020-23;
  • Identifying information for the plan (i.e., plan name, EIN, and plan number); and
  • The name and address of the affected filer.

For all other filings, the filer must notify the PBGC as soon as reasonably possible (and no later than the end of the relief period) by email to the address included in the instructions for the filing in question, and with the same information listed above.

Case-by-Case Extensions

For filings on the PBGC’s “Exceptions List,” the PBGC may grant relief on a case-by-case basis. Interested filers should follow the instructions for requesting a waiver or extension in the regulations or instructions for completing the filing in question or, if no such guidance is available, by contacting the PBGC as soon as reasonably possible by phone or email.

Key Considerations

The PBGC’s disaster relief policy provides some welcome relief for plan sponsors, administrators, and service providers during a time when many resources are stretched thin. The PBGC premium filing and payment extensions in particular may help some plan sponsors that are facing short-term liquidity issues in light of the current business environment. Plan sponsors planning to take advantage of the relief under this policy should provide timely notice to the PBGC and should be sure that the stakeholders and resources necessary to make the delayed filings are available prior to the July 15th deadline.


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.

Seventh Circuit Upholds Dismissal of 403(b) Plan Lawsuit Against Northwestern University in Apparent Split with Third Circuit

Since the beginning of 2016, the ERISA plaintiffs’ bar has filed nearly two dozen complaints targeting university-sponsored 403(b) plans.  The majority of these lawsuits assert that plan fiduciaries breached their duties and engaged in prohibited transactions by (1) “packing” a plan with too many investment options that underperformed and were more expensive relative to other investment options, and/or (2) retaining too many record-keepers and paying record-keepers unreasonable fees.  To date, these cases have had mixed results:  some have been dismissed at the initial pleading stage, others have settled after the denial of motions to dismiss, and one was dismissed after trial.  In a significant development, the Seventh Circuit recently issued its decision in the case against Northwestern University and, in doing so, became the first court of appeals to uphold the dismissal of such claims in their entirety.  Divane v. N.W.U., No. 18-2569, 2020 WL 1444966 (7th Cir. Mar. 25, 2020).

Participants in Northwestern University’s 403(b) plans had alleged that the plan fiduciaries breached their fiduciary duties by:  (1) entering a bundled service agreement with one of the plans’ record-keepers that mandated the inclusion of a suite of the record-keepers’ investment options, including some allegedly imprudent investment options; (2) maintaining multiple record-keepers and paying record-keeping fees through an asset-based arrangement instead of a flat per-participant fee; and (3) offering too many investment options where many underperformed readily available and cheaper alternatives.  The complaint also had alleged that each of these fiduciary decisions violated ERISA’s prohibited transaction rules.

On appeal, the Seventh Circuit affirmed the district court’s dismissal of all claims and concluded that plaintiffs’ claims did not assert plausible ERISA violations, but rather merely amounted to plaintiffs’ “preference” for certain investment options and record-keeping arrangements.  Before turning to the specific claims, the Seventh Circuit characterized plaintiffs’ 287 paragraph complaint as “massive” and observed that the majority of the allegations complained about common plan practices not specific to the defendants or the plans, including paying record-keeping fees through revenue sharing and the offering of a wide range of investment options.

Turning first to the “bundled service agreement” claim, the Court concluded that the complaint itself undermined plaintiffs’ claim that the plan fiduciaries breached their duties by entering into this agreement because the complaint acknowledged that one of the plans’ best investment options, a traditional annuity, would not have been available absent the bundled service agreement.  The Court also explained that nothing in the plans required participants to invest in the purportedly underperforming products and, moreover, plaintiffs failed to evaluate the decision to enter into a bundled service agreement against a relevant standard.  Rather than allege what a “hypothetical prudent fiduciary” would have done differently, the complaint merely criticized Northwestern for making a rational business decision.  The challenge to specific options included under the agreement also failed because, according to the Court, “it would be beyond the court’s role to seize ERISA” as a means to eliminate those options disfavored by individual litigants where the plans also included the lower-cost, conservative options they preferred.

Turning next to plaintiffs’ record-keeping fees claim, the Court explained that ERISA does not require (i) a plan to negotiate a record-keeping agreement that charges a fixed per-participant fee (as opposed to the asset-based agreement negotiated by Northwestern), or (ii) a plan to have one record-keeper or mandate a specific record-keeping arrangement.  Furthermore, plaintiffs did not explain how it was better to have a fixed per participant fee and conceded that the plans had “valid reasons” for maintaining multiple record-keepers, including that doing so allowed the plans to include the various options preferred by participants.

The Court then addressed plaintiffs’ claim that plan fiduciaries breached their duties by offering an investment lineup that contained an excessive number of expensive, underperforming options.  The Court concluded that, even if plaintiffs were correct that the plans offered retail share class options with “layers of fees,” this was not in and of itself sufficient to sustain a claim because plaintiffs failed to allege that the plans omitted their preferred low-cost index fund alternatives.  The Court also held that “the ultimate outcome of an investment is not proof of imprudence” and plan fiduciaries “may generally offer a wide range of investment options and fees without breaching any fiduciary duty.”

In reaching these conclusions, the Court briefly commented on plaintiffs’ reliance on the Third Circuit’s decision in Sweda v. Univ. of Penn., No. 17-3244, 2019 WL 1941310 (3d Cir. May 2, 2019) and, in particular, plaintiffs’ argument that the Third Circuit held that plan fiduciaries cannot satisfy their obligations by simply offering a wide range of investment options.  The Seventh Circuit observed that the Third Circuit’s ruling merely held that offering a wide range of investment options in and of itself did not insulate fiduciaries from misconduct and that, in addition to evaluating the plan as a whole, courts must also consider the prudence of the challenged actions.  Without assessing the specific allegations at issue in Sweda, the Seventh Circuit stated that the Third Circuit’s approach was “sound.”

Lastly, the Court held that plaintiffs’ prohibited transaction claims were properly dismissed because they were simply repackaged imprudence claims, and agreed with the district court that a jury trial would not be permissible for the claims asserted even if the case had proceeded.

Proskauer’s Perspective

The Seventh Circuit’s ruling in Divane appears to create a circuit split with the Third Circuit’s ruling in Sweda.  Although the Seventh Circuit purported to agree with the framework applied by the Third Circuit, the fact remains that many of the allegations in the case against the University of Pennsylvania that were allowed to proceed were nearly identical to those asserted against Northwestern and dismissed.  For instance, in both cases, plaintiffs claimed that the plans entered into a bundled service arrangement with the same record-keeper; paid unreasonable administrative fees by using two record-keepers; paid fees through an asset-based arrangement; offered numerous duplicative investment options; and retained expensive, underperforming funds, with many of the funds at issue being identical.  Not surprisingly, the University of Pennsylvania contended that the Seventh Circuit’s opinion opened a split in the Circuits, and filed a supplemental brief in support of its petition for certiorari with the Supreme Court.  The Supreme Court, however, declined to accept the case for review.

If the rationale applied by the Seventh Circuit becomes the prevailing view, it will create good opportunities for Plan sponsors and fiduciaries to prevent or defend future lawsuits challenging the administration of 401(k) and 403(b) plans.  To begin with, the case recognizes that the decision to offer a particular investment alternative is less likely to be assailable when other investment alternatives are offered with comparable investment strategies.  Secondly, the decision presents the opportunity for eliminating lawsuits of this type in the early stages, and thereby preventing discovery into the prudence of the decision-making process, based on the complaint’s failure to plead with plausibility that the challenged practices were different from what a “hypothetical prudent fiduciary” would have chosen.

EBSA FY 2019 MHPAEA Enforcement

The Employee Benefits Security Administration (EBSA) is charged with ensuring that plans comply with ERISA, including the Mental Health Parity and Addiction Equity Act (MHPAEA).  EBSA recently released its MHPAEA report for Fiscal Year (FY) 2019.  We provide below highlights from EBSA’s report and also note some comparisons to FY 2018.

In FY 2019, EBSA investigated and closed 186 health plan investigations (nearly all of the plans were subject to the MHPAEA) and cited 12 MHPAEA violations.  By comparison, in FY 2018, EBSA investigated and closed 285 health plan investigations (less than half of the plans were subject to the MHPAEA) and cited 21 MHPAEA violations.

EBSA reported that it in FY 2019 it investigated MHPAEA violations in the following six categories:

(1) Annual dollar limits on the total amount of specified benefits that may be paid in a 12-month period under a group health plan or health insurance coverage for any coverage unit (such as self-only or family coverage);

(2) Aggregate lifetime dollar limits on the total amount of specified benefits that may be paid under a group health plan or health insurance coverage for any coverage unit;

(3) The requirement that if a plan or issuer provides mental health or substance use disorder benefits in any classification described in the regulations, then such benefits must be provided in every classification in which medical/surgical benefits are provided;

(4) Financial requirements relating to deductibles, copayments, coinsurance, and/or out-of-pocket maximums;

(5) Quantitative and nonquantitative treatment limitations; and

(6) Cumulative financial requirements and quantitative treatment limitations that determine whether or to what extent benefits are provided based on certain accumulated amounts, including deductibles, out-of-pocket maximums, and annual or lifetime day or visit limits.

The cited violations included:  5 non-quantitative treatment limitations, 5 quantitative treatment limitations, 1 benefits in all classifications, and 1 in cumulative financial requirements and quantitative treatment limitations.

A copy of EBSA’s report is available at https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/laws/mental-health-parity/mhpaea-enforcement-2019.pdf.

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The uptick in EBSA investigations of plans subject to MHPAEA appears to be consistent with the uptick in litigation activity we have seen challenging plan rules as not being in compliance with MHPAEA.  As such, plan sponsors and fiduciaries are well advised to review their plan terms to ensure compliance with MHPAEA.

Minimizing the Risk of ERISA Litigation in a Turbulent Economic Climate

As recent history has shown, ERISA claims seeking recovery of investment losses tend to proliferate during times of market volatility.  The Coronavirus (COVID-19) pandemic presents a unique opportunity for plaintiffs to search for and bring fiduciary-breach claims based on the underperformance of company stock funds and other available investment options in 401(k) and 403(b) plans.  The pandemic has had an extraordinarily disruptive impact on the economic markets since spreading globally and into the United States.  Recent swings have seen historic losses in market prices, and although all investments are feeling the hit and some slightly rebounded after Congress passed the $2.2 trillion CARES Act, some will be more adversely affected than others.  This is precisely the environment in which plaintiffs can make hindsight accusations against ERISA plan fiduciaries for offering allegedly imprudent investment options.

Based on past litigation experience, we find that there are some types of investments that are considerably more likely to be the target of claims under ERISA.  We review these claims below, and also offer some thoughts on preventative measures that plan sponsors and fiduciaries can consider.

Company Stock Fund Claims

For decades, the ERISA plaintiffs’ bar has attempted to hold employee stock ownership plan (ESOP) fiduciaries liable for breaching their fiduciary duties when the price of a company stock declines.  The claims typically allege that the ESOP fiduciaries breached their fiduciary duties by allowing plan participants to continue to invest in company stock funds at a time when (i) such funds were artificially inflated as a result of some undisclosed event, or (ii) there were some “special circumstances” that made the company stock funds too risky to be a suitable investment option in a 401(k) plan.

ESOP fiduciaries may be particularly vulnerable to employer stock fund claims during this period of the COVID-19 pandemic in light of the risk of a substantial downward movement of the stock—one that is larger than the market generally.  This risk would seem to be particularly pronounced in the industries most impacted by the stay-at-home orders, such as the retail, airline, and hospitality industries.  The vulnerability to claims increases if the plan fiduciaries include corporate officials with knowledge of nonpublic information that could severely affect the stock price, such as whether their company plans to implement a significant reduction-in-force or file for bankruptcy protection.  The failure to protect plan participants against the anticipated drop in the price of the stock once these plans become public could give rise to a subsequent ERISA lawsuit.  While there would certainly be available defenses to such claims, plan fiduciaries who are looking to avoid them altogether may wish to consider at this time implementing changes to the fiduciary decision making structure that would remove senior executives who may be privy to nonpublic information, including the possible retention of an independent fiduciary to be responsible for the ESOP.

Other Investment Vehicles That May Become Litigation Targets

The plaintiffs’ bar also has brought suits challenging other investment offerings in 401(k) and 403(b) plans.  Certain types of funds have proven to be particularly vulnerable to challenge, and we can expect that to be even more so the case in this volatile environment.

  • Stable Value Funds. Stable value funds are typically offered as plan investment options to participants seeking capital preservation.  Plaintiffs have brought a variety of claims challenging the offering of these funds, including claims alleging that a stable value fund was not sufficiently diversified and, as a result, underperformed other available stable value funds.  In these volatile times, plan fiduciaries would be well advised to conduct a review of their capital preservation options, including their stable value funds, to determine whether they are in fact serving the objective of capital preservation, and whether more conservative options, like money market funds, should be offered as well.  As with all fiduciary conduct, the review and the rationale for any resulting decisions should be well documented.
  • Alternative Investments. Some plans offer as investment options alternative investments, such as hedge funds and private equity investments.  In many cases, these investments are offered because they can function as a hedge against declining prices in the domestic equity market.  Nevertheless, plaintiffs have challenged their use whenever they underperform and have contended that they are imprudent because of their high fees, volatility, or exotic nature.  We can expect the same to occur if it should turn out that, during this period of market volatility, alternative investments underperform other investment alternatives.  In anticipation of such claims, plan fiduciaries should pay particular attention to developing a clear record of the rationale for maintaining these investments, and that this rationale is clearly reflected in participant communications.
  • Actively Managed Funds. Some plans continue to offer actively managed funds in lieu of index funds.  Index funds are generally less expensive than actively managed funds and frequently have performed better during the steady gains of the S&P 500 during the last decade.  Depending on their investment philosophy or market sectors, actively managed funds may outperform index funds in these volatile times.  But those that do not may be the target of the ERISA plaintiffs’ bar.  If they are not already doing so, plan fiduciaries may wish to consider supplementing actively managed products with index fund alternatives in the same market sectors.
  • Proprietary Funds. Plans in the financial sector (and less frequently in other sectors) sometimes offer proprietary (or affiliated) investment options.  These funds have been particularly vulnerable to claims when they underperform, net of fees, since participants will argue that the funds were offered in order to enrich the corporate plan sponsor.  This will be particularly the case if a proprietary fund underperforms in this economic climate, when relative losses could prove to be very large.  Plan fiduciaries may want to consider supplementing their plan offerings with nonproprietary options as a means to reduce the risk of such challenges.

Proskauer’s Perspective

It would be truly unfortunate if companies that are already struggling to survive in the face of COVID-19 have to confront costly ERISA litigation over the retirement plans they sponsor.  There is no sure way to avoid such litigation.  But, at a time when plan sponsors and fiduciaries may be distracted by more emergent issues, it is important to keep in mind that ERISA fiduciary breach claims are best defended by a clear record of an objective decision-making process.  Whether or not a regularly scheduled meeting is coming up, plan sponsors and fiduciaries may wish to schedule one soon for the purpose of thoroughly reviewing their investment offerings and the decision-making process, and with an eye toward the potential risks outlined above.

Plan participant communications also should be reviewed to make certain that they fully inform participants of the rewards and risks presented by their investment options in a volatile market.  These reviews should be done in coordination with, and with the assistance of, competent service providers who are asked to fully review the alternatives available in these challenging times.  Any changes made to the plan as a result of these reviews, and the reasons why, should be clearly communicated to plan participants.

In sum, the best defense to anticipated litigation in this volatile market is a proactive approach that enhances the fiduciary decision-making process.

Executive Compensation Considerations for COVID-19 (Salary/Wage Reductions)

COVID-19 has had significant impacts on all aspects of business.  While employers are assessing how to handle immediate employee needs related to sick leave, family leave and benefits claims, employers should also consider the impact that changes in their workforce or economic conditions will have on their compensation plans and programs.

Click here to read the next post in a series addressing the impact that COVID-19 has had on executive compensation issues.  In their second post, our colleagues Andrea Rattner, Colleen Hart, Josh Miller, Seth Safra, Kate Napalkova and Katrine Magas discuss certain issues that employers should take into consideration before implementing salary and wage reductions.

Coronavirus Stimulus Deal’s Impact on Employee Benefit Plans

On March 27th, Congress passed a stimulus package in response to the Coronavirus/COVID-19 pandemic.  The package, which is entitled the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or the “Act”), contains several provisions that affect employee benefits.

Retirement Plans

  • Early “Coronavirus-Related Distributions”: The CARES Act allows plans to offer “coronavirus-related distributions” up to $100,000 (from all plans in the controlled group combined).  These distributions would be taken into income over three years (unless the participant elects otherwise) and are not subject to the 10% additional tax for withdrawal before age 59 ½.  To qualify, the distribution must be taken during 2020 (before December 31st), and the participant must (i) have been diagnosed or have a spouse or dependent who was diagnosed with SARS–CoV–2 or COVID-19 by a test approved by the CDC, or (ii) have experienced “adverse financial consequences” as a result of being quarantined, furloughed, laid off, unable to work due to lack of child care, experiencing a closing or reduction of hours of a business owned by the individual, or other factors determined by the Secretary of Treasury.   Similar to other recent qualified disaster relief and the adoption expense provision in the SECURE Act, these distributions may be repaid within three years after the distribution.
  • Increased Loans from Qualified Plans: The Act also increases the limit on loans from qualified employer plans from $50,000 to $100,000 if the individual is a “qualified individual” (meaning someone who meets the requirements for a coronavirus-related distribution, as described above).  The qualified individual’s full vested balance (rather than the usual cap of one-half of the balance) is available for this loan.  In addition, the Act delays by one year the deadline for qualified individuals to make loan repayments that are otherwise due between the date of enactment and December 31, 2020.  Unlike suspension of payments for other leaves, a suspension under the Act will extend the maximum permitted term of the loan (5 years for non-residence loans).
  • Waiver of Required Minimum Distributions (“RMDs”): The Act allows a temporary waiver for defined contribution plan RMDs that would otherwise have to be paid for calendar year 2020. The delay is available for section 401(a), 403(a), 403(b), and governmental 457(b) plans (in each case defined contribution only) and IRAs.
  • Plan Amendments: A plan sponsor could adopt the above changes immediately, but it will eventually need to adopt plan amendments to reflect the changes.  The deadline to adopt the amendments is extended to December 31, 2022 (or, for non-calendar year plans, the end of the plan year that starts in 2022).  For governmental plans, amendments reflecting the RMD change may be adopted as late as the end of the 2024 plan year.
  • Single-Employer Defined Benefit Funding Relief: The CARES Act allows sponsors of single-employer defined benefit plans to delay payment of minimum required contributions for calendar year 2020.  Delayed contributions must be made with interest by January 1, 2021.  A plan sponsor also has the option under the Act to use the plan’s adjusted funding target attainment percentage for the last plan year ending before January 1, 2020 as the percentage for plan years which include calendar year 2020.

Health Plans

  • Expansion of Tests Covered under Families First Act: The CARES Act amends the recent Families First Coronavirus Response Act (the “FFCRA”), which was discussed in a previous blog, to expand the types of SARS-CoV-2 and COVID-19 tests that group health plans and health insurance issuers must cover without cost-sharing, prior authorization, and other medical management requirements.  The new tests to be covered include tests for which the developer has requested “emergency use authorization” under the Federal Food, Drug, and Cosmetic Act and tests authorized and used by a state to diagnose patients.
  • Transparency in Pricing of Tests: The Act generally requires providers to publicize the prices of COVID-19 tests.  Plans and issuers paying for the tests under the FFCRA then have to reimburse the provider in accordance with the negotiated rate that it had with the provider before the COVID-19 public health emergency or, if no negotiated rate, whatever is the publicized cash price.
  • Coverage of Qualifying Coronavirus Preventive Services and Vaccines: The Act also directs the Secretaries of Health and Human Services, Labor, and Treasury to require plans and issuers to cover any coronavirus preventive services without cost-sharing.  Such services include vaccines and any other services that are determined by the CDC or U.S. Preventive Services Task Force to prevent or mitigate COVID-19.
  • Telehealth under a High-Deductible Health Plan (“HDHP”): Expanding on the IRS’s Notice with respect to HDHPs’ coverage of COVID-19 costs, the Act permits (but does not require) HDHPs to waive deductibles for all telehealth or remote care services in plan years beginning on or before December 31, 2021 (even if not related to COVID-19) without impacting the plan’s status as an HDHP.
  • Over-the-Counter Drugs and Menstrual Care Products: The Act eliminates the requirement to have a prescription for over-the-counter drugs to qualify for tax-favored reimbursement from health savings accounts (“HSAs”), health reimbursement accounts (“HRAs”), and health flexible spending arrangements (“FSAs”), effective as of January 1, 2020.  Menstrual care products likewise will be considered qualified medical expenses payable from those accounts.

Student Loans

The Act allows employers to reimburse or pay up to $5,250 of an employee’s student loan payments through a Code Section 127 education assistance plan.  This expansion applies only for loan payments (whether to the employee or directly to the lender) made by the employer after enactment and before January 1, 2021. The $5,250 limit is an aggregate limit for other permitted educational assistance and loan repayments combined.  Section 127 arrangements are subject to certain technical requirements, including nondiscrimination and a plan document.  For employers that already have Section 127 plans, this change can be implemented by an amendment to the definition of qualifying expenses.  The Act also prohibits “double-dipping” by employees: employees may not deduct amounts that are reimbursed or paid by the employer.

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