Employee Benefits & Executive Compensation Blog

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

Fifth Circuit Rules that Project Completion Bonus is Not an ERISA Severance Plan

Whether a one-time payment of benefits constitutes an employee benefit plan under ERISA has been the source of some consternation in the courts for many years.  The Fifth Circuit, in Atkins v. CB&I, LLC, recently had occasion to consider the issue and held that a bonus conditioned on completing a project was not an ERISA severance plan.  2021 WL 1085807 (5th Cir. Mar. 22, 2021).

In Atkins, the employer’s “Project Completion Incentive Plan” offered a bonus to employees who worked until completing their roles on a project.  The bonus was styled as a “retention” bonus, but it was payable upon being laid off in a reduction-in-force or transfer to a different project site.  The plaintiffs were five former employees who quit mid-project.  They sued the employer in Louisiana state court alleging that the plan violated state wage law by denying bonuses to employees who quit prior to the project’s completion.  The employer removed the case to federal court on the ground that the plan was an ERISA-governed severance plan.

The district court treated the plan as a severance arrangement and held that ERISA applied because the plan’s individualized eligibility determinations required an “ongoing administrative scheme” typical of ERISA plans.  As a result, the district court concluded that the plan was governed by ERISA, which meant that ERISA preempted plaintiffs’ state law claims and the case would be adjudicated in federal court.

On appeal, the Fifth Circuit vacated the district court’s judgment and remanded the case to state court.  In its view, the plan was not subject to ERISA for several reasons.  First, the bonus was a single payment with a simple calculation: five percent of the employee’s earnings for the project.  Second, an individual’s eligibility coincided with the end of a discrete project and there was little, if any, discretion involved.  Finally, the employer lacked any special administrative procedures for handling claims and appeals, offering the plan on a large scale, or monitoring participants.  As a result, the Court concluded that the plan lacked the “complexity and longevity” typical of ERISA plans and was thus outside its scope.

Proskauer’s Perspective

The question of whether a severance plan requires an ongoing administrative scheme sufficient to be subject to ERISA is fact-specific, and the case law is not consistent from one court to the next, which makes it difficult to predict whether particular arrangements will be subject to ERISA.  This case caught our attention, because it appears that the plan could have been excluded from ERISA under 29 C.F.R. § 2510.3-2(c) by reason of being a bonus program that provided payments for work performed.  Unlike a typical severance arrangement, the plan language described the benefit as a “retention incentive” and payment was tied to completing projects, without regard to whether employment actually terminated.

What Happens Abroad, Apparently Does Not Stay Abroad – DOL Revokes Trump Administration Guidance That Provided Relief to QPAMs for Convictions Under Foreign Law

On November 3, 2020, the U.S. Department of Labor’s Office of the Solicitor of Labor (the “DOL”) issued an opinion letter (the “2020 Letter”) to the Securities Industry and Financial Markets Association (“SIFMA”) stating that it would not view a conviction under foreign law as a disqualifying event under Prohibited Transaction Class Exemption 84-14 (the “QPAM Exemption”).  The 2020 Letter represented a reversal of the DOL’s then longstanding position that a conviction under foreign law would disqualify a manager from being able to rely on the QPAM Exemption for a period of ten years.

However, on March 23, 2021, the DOL issued a follow-up opinion letter (the “2021 Letter”) to SIFMA withdrawing the Trump Administration DOL’s 2020 Letter because it was “issued through a flawed process and was based on a legal analysis that was inadequate to support abandoning the Department’s long standing position.”

The QPAM Exemption provides broad exemptive relief from the prohibited transaction restrictions of Section 406(a) of ERISA for transactions between a “party in interest” with respect to an ERISA plan and an investment fund or separate account holding “plan assets” of such ERISA plan (a “Plan Asset Account”), where the Plan Asset Account is managed by a “qualified professional asset manager” (a “QPAM”) and the other conditions of the QPAM Exemption are met.

At issue in the DOL’s guidance is the condition set forth in Section I(g) of the QPAM Exemption that prohibits a QPAM from relying on the exemption for a period of ten years if the QPAM (or a five percent or more owner or affiliate of the QPAM) is convicted of certain enumerated crimes that involve abuse or misuse of a position of trust or felonies described in Section 411 of ERISA[1], and whether or not a conviction under foreign law would prevent the QPAM from being able to satisfy such condition.

In the 2020 Letter, the DOL cited the plain language of Section 411 of ERISA, applicable legislative history, and persuasive Supreme Court case law, in stating its view that a conviction under foreign law would not prohibit a QPAM from relying on the QPAM Exemption if the other conditions of the exemption were satisfied.  In particular, the DOL noted that Section 411 of ERISA refers to Federal, State and local offenses, courts and prosecuting officials, but that nothing therein indicates that its listed crimes include foreign equivalents.  The DOL further noted that neither the language of the QPAM Exemption nor any associated guidance indicates that Section I(g) was intended to include foreign equivalents; in fact, the plain language of the QPAM Exemption expressly references concepts (e.g., “felonies,” “judgments” and “appeals”) that are generally only applicable to U.S. court systems.  The DOL was also not deterred by the fact that it previously took the position that convictions under foreign law would be a disqualifying event and, in light thereof, had granted administrative exemptions to Plan Asset Account managers allowing the QPAM Exemption to be available notwithstanding a conviction under foreign law.

However, in withdrawing the 2020 Letter, the DOL stated that the legal conclusions therein “were based on an inadequate analysis of the relevant issues and legal authorities as they pertain to prohibited transaction exemptions.”  In particular, the DOL stated that the 2020 Letter focused too heavily on an analysis of the reach of Section 411 of ERISA without acknowledging the differences between such provision and Section I(g) of the QPAM Exemption and their contexts.  Furthermore, the 2020 Letter “glossed over issues of substantial concern” and improperly bypassed and disregarded the Employee Benefits Security Administration’s (“EBSA”) role and expertise in administering the DOL’s prohibited transaction exemption program.  The 2020 Letter was issued directly to SIFMA and was not posted to the DOL’s website for over two months, which apparently bypassed a number of the DOL’s procedural requirements for issuing binding guidance, including EBSA’s advisory opinion process.

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The DOL noted that it would engage in a thorough analysis of these rules while it considers additional guidance.  In the interim, Plan Asset Account managers should assume that the DOL will treat convictions under foreign law as disqualifying events under the QPAM Exemption, and be prepared to have to rely on another exemption to the extent necessary.  The 2020 Letter and the 2021 Letter do not have any impact on QPAM-related individual exemptions previously granted by the DOL.

For ERISA plan fiduciaries, it is important to recognize that ERISA’s fiduciary duties of prudence and loyalty apply in the context of hiring, monitoring and retaining/firing a Plan Asset Account manager regardless of whether the Plan Asset Account manager may utilize the QPAM Exemption.  Accordingly, in making such decisions, ERISA plan fiduciaries should continue to diligence and take into account as appropriate whether a Plan Asset Account manager has a foreign law conviction and the possibility that Congress or the DOL could in the future revise the QPAM Exemption in a manner that would allow a Plan Asset Account manager with a foreign law conviction to utilize the QPAM Exemption.

[1] Section 411 of ERISA includes references to the following crimes: robbery, bribery, extortion, embezzlement, fraud, grand larceny, burglary, arson, murder, rape, kidnapping, perjury, and assault with intent to kill.

Some Family Members May Not Be Eligible for the ARPA COBRA Premium Subsidy

The American Rescue Plan Act of 2021 (“ARPA”) includes a 100% COBRA premium subsidy for “assistance eligible individuals,” for periods of coverage occurring between April 1, 2021 and September 30, 2021, as described in earlier blog posts.  An “assistance eligible individual” is any COBRA “qualified beneficiary” who loses group health coverage on account of a covered employee’s reduction in hours of employment or involuntary termination of employment. However, the subsidy is not available if the individual is eligible for other group health coverage or Medicare.

In general, COBRA’s definition of a “qualified beneficiary” includes only a covered employee and his or her spouse and dependent children who were covered under the health plan on the day before the COBRA qualifying event, as well as children born to or adopted by the employee during a period of COBRA coverage. Thus, other individuals who are receiving continued health coverage are not eligible for the ARPA premium subsidy. For example, some group health plans offer “COBRA-like” continuation coverage to an employee’s covered domestic partner, but domestic partners are not qualified beneficiaries under COBRA’s definition. In addition, if a former employee gets married while receiving COBRA coverage, the employee may enroll his or her new spouse in COBRA coverage in accordance with HIPAA’s special enrollment rules, but the spouse still is not a “qualified beneficiary” for COBRA purposes, because the spouse was not covered by the plan on the day before the employee’s qualifying event.

If a former employee who is an assistance eligible individual elects COBRA coverage that includes a family member who is not a qualified beneficiary (e.g., a domestic partner or a new spouse to whom the employee was not married at the time of the qualifying event), how much of the premium is not subsidized? And how much is the payroll tax credit to which the employer (or multiemployer plan or insurer) is entitled?

The IRS has not yet issued guidance on the ARPA premium subsidy. However, it may be instructive to review the guidance issued in 2009 when Congress enacted a similar COBRA subsidy as part of the American Recovery and Reinvestment Act (ARRA).  Although there is no assurance that the IRS will reach the same conclusions under ARPA, it may be helpful from a planning perspective to understand how this issue was previously addressed. CAUTION: The following analysis is based on the 2009 ARRA guidance and should not be relied upon without further guidance from the government. 

In connection with the 2009 ARRA COBRA premium subsidy (which was a 65% government subsidy), the IRS took an incremental approach when determining the amount eligible for the subsidy (and payroll tax credit).  In other words, if the cost of covering a non-qualified beneficiary did not add to the cost of covering the eligible individuals, then the COBRA premium for the non-qualified beneficiary is zero for purposes of the subsidy, and the entire premium was eligible for the subsidy. If the cost of covering a non-qualified beneficiary added to the cost of coverage, then the incremental cost to cover the non-qualified beneficiary was not eligible for the COBRA premium subsidy.

Example 1: Susan, an assistance eligible individual, elects COBRA coverage due to her involuntary termination from employment. She elects coverage for herself and all of her family members (who were covered under the plan on the day before the qualifying event), which includes her two dependent children and her domestic partner.  Susan and her family members are not eligible for other group health coverage or Medicare.

Under the terms of the plan, COBRA coverage for an employee plus-two-or-more-dependents costs $800 per month.  Therefore, the additional cost to cover Susan’s domestic partner is $0 per month. As a result, Susan would be entitled to the ARPA COBRA premium subsidy for the full $800 per month, and her former employer may claim the payroll tax credit for the full $800 per month.

Example 2:  Same facts as Example 1, except that Susan has only one child.  Although Susan still would be required to pay $800 per month for COBRA coverage for herself and two or more dependents, the COBRA premium is only $600 per month for self-plus-one-dependent. Accordingly, the incremental cost of covering her domestic partner is $200 per month. Therefore, Susan would be entitled to the ARPA subsidy in the amount of $600 per month (and must pay $200 per month for COBRA coverage for her domestic partner). The employer could claim the payroll tax credit for only $600 per month for the coverage for assistance eligible individuals.

This is just one of many questions that arise under the ARPA COBRA subsidy. We expect the government agencies to issue guidance soon.  Until then, the guidance issued in connection with the 2009 ARRA premium subsidy may be instructive as plan sponsors get ready to administer the ARPA subsidy.

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Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns. We will continue to evaluate the American Rescue Plan Act, the CARES Act, the Consolidated Appropriations Act, 2021, related regulations and any subsequent legislation to provide our clients guidance in real time. Please visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take, and resources to help manage ongoing operations.

ARPA COBRA Subsidy – When is a Termination of Employment Involuntary?

As we previously explained in our prior blogs, both here and here, on the new COBRA subsidy rules, the American Rescue Plan Act of 2021 (“ARPA”), includes a 100% COBRA premium subsidy for periods of coverage occurring between April 1 and September 30, 2021.  The subsidy is available to qualified beneficiaries who are eligible for COBRA coverage due to a covered employee’s reduction in hours of employment or involuntary termination of employment.

If someone’s entitlement to COBRA coverage is due to a reduction in hours of employment (leave of absence, for example), the question of whether it is voluntary or involuntary does not apply.  ARPA’s exclusion from the subsidy only applies to voluntary terminations of employment.

One of the key interpretive questions, therefore is “what is an involuntary termination of employment”?  Given the various factual situations that could arise, it is not surprising that this is one of the most frequently asked questions on the ARPA premium subsidy.  Back in 2009, Congress enacted another version of a COBRA subsidy and, at that time, the IRS issued guidance to help define an “involuntary” termination of employment.  There is no assurance that the IRS will reach the same conclusions under ARPA; but for those of you who are planning, the following criteria were relevant in 2009 and may be relevant today.

Under the 2009 rules, the basic principles are that an involuntary termination means:

  • a severance from employment;
  • due to the independent exercise of the unilateral authority of the employer to terminate the employment, other than due to the employee’s implicit or explicit request;
  • where the employee was willing and able to continue performing services.

In the end, the determination of whether a termination is involuntary is based on all the facts and circumstances. So just because a termination of employment is labeled as “voluntary” does not mean it is voluntary for ARPA purposes. Again, here are some key scenarios from the 2009 guidance.

CAUTION: The following information is from 2009 guidance on COBRA subsidies and cannot be relied upon until the IRS and/or DOL issues ARPA guidance:

Layoffs

An involuntary reduction of employment to zero hours, such as a layoff, furlough or other suspension of employment, resulting in a loss of health coverage was treated as an involuntary termination. This was true even if the layoff included recall rights. Unlike the 2009 ARRA subsidy provisions, however, ARPA includes reduction in hours of employment as one of the qualifying events that trigger eligibility for the COBRA subsidy. Thus, a qualified beneficiary who loses coverage in these circumstances should be eligible for the ARPA COBRA subsidy without having to treat it as an “involuntary termination of employment,” assuming they satisfy the other eligibility requirements.

Strikes/lockouts

Generally, an employee-initiated strike was not treated as an “involuntary” termination of employment. However, a lockout initiated by the employer was an involuntary termination.

Severance deals/‘buy-outs’

The IRS included in the category of involuntary terminations a termination elected by the employee in return for a severance package (a “buy-out”) where the employer indicates that after the offer period for the severance package, a certain number of remaining employees in the employee’s group will be terminated. What was less clear was how a truly voluntary buy-out would be treated.

Constructive termination/‘good reason’ quits

Another important category of “involuntary” terminations from 2009 included so-called “good reason” terminations. This refers to an employee-initiated termination from employment where the termination occurred by the employee for good reason due to employer action that caused a material negative change in the employment relationship for the employee. This could also apply if there is a significant change in the geographic location of where the services are performed.

Limited duration contract/seasonal employees

Some employees are hired through a voluntary but limited duration employment agreement. For example, an employee might be hired for six months. Or an employee might be hired for a particular season that begins in April and ends in September. In these cases, does reaching the end of the limited duration mean that there has been an involuntary termination of employment? As a general rule, the IRS view articulated in 2009 was that failure to return to work after the end of the initial contract was an involuntary termination. Specifically, an involuntary termination could include the employer’s failure to renew a contract at the time the contract expires, if the employee was willing and able to execute a new contract providing terms and conditions similar to those in the expiring contract and to continue providing the services. This was true even if the employer simply failed to offer additional work and was not limited to a case where the employer specifically terminates the employee.

Retirements

If an employee retires, some might think that this means the individual was not involuntarily terminated. However, that may not necessarily be correct for purposes of ARPA. Under the 2009 guidance, if the facts and circumstances indicate that, absent retirement, the employer would have terminated the employee’s services, and the employee had knowledge that he or she would be terminated, the retirement would be treated as an involuntary termination. Moreover, in many cases, to “retire” simply means that the employee met certain age and service conditions at the time of a termination of employment. So if the employer fires an employee, if that employee met the age and service conditions, he or she could retire, but  still be considered to have involuntarily terminated employment.

Military call-up

In its 2009 guidance, the IRS indicated that an employee who was a member of a military Reserve unit or the National Guard and who was called up to active duty is to be treated as involuntarily terminated from employment. On a related note, the IRS also clarified that eligibility for coverage under TRICARE would not end entitlement to a premium subsidy.

Failure to be re-elected

The IRS indicated in its 2009 guidance that an elected official who completed his or her term of office and was not reelected was treated as involuntarily terminated. Similarly, an elected official who could not run again due to term limits was treated as involuntarily terminated at the end of his or her term of office. However, if an elected official simply failed to run for reelection when eligible, the termination was treated as voluntary.

These are just a few of the many scenarios that will arise in interpreting an “involuntary” termination of employment.  Hopefully, future IRS and/or DOL guidance will clarify the rules.

DOL Will Not Enforce Trump Administration’s ERISA “ESG” Investing and Proxy Voting Rules

On March 10, 2021, the U.S. Department of Labor (the “DOL”) issued a statement that it intends to revisit its final rules issued late last year on “Financial Factors in Selecting Plan Investments” (summarized here) and “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights” (summarized here), which some viewed as restricting “do-good” or “ESG” investing by investors subject to the U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”).  The DOL further stated that, until it issues further guidance, the DOL will not enforce either rule or otherwise pursue enforcement actions against any ERISA plan fiduciary based on a failure to comply with those final rules with respect to an investment (including a “Qualified Default Investment Alternative” offered under a 401(k)- or 403(b)-type plan) or investment course of action or with respect to an exercise of shareholder rights.

The DOL undertook a review of these rules as part of the Biden administration’s directive to review Trump administration regulations that were inconsistent with, or presented obstacles to, the promotion and protection of public health and the environment.  The DOL reportedly heard from a wide variety of stakeholders, including asset managers, labor organizations and other plan sponsors, consumer groups, service providers, and investment advisers, who expressed the following highlighted concerns: (i) the rules did not properly reflect the scope of an ERISA plan fiduciary’s duties of prudence and loyalty, (ii) the rulemakings were unnecessarily rushed and failed to consider and address evidence from public commenters on the use of “ESG” to improve ERISA plan investment returns, and (iii) the rules (and confusion about the rules) already have had a chilling effect on the appropriate integration of “ESG” factors in ERISA plan investment decisions.

Notwithstanding the DOL’s non-enforcement statement, the regulations have not been rescinded.  Accordingly, ERISA plan fiduciaries should continue to step carefully when making “ESG”-related investment decisions and when exercising shareholder rights based on “ESG” considerations.

We will keep you posted as and when the DOL issues further guidance in this area.

COVID-19 Stimulus Bill Includes Six Months of Free COBRA Health Coverage

The American Rescue Plan Act of 2021 (“ARPA”), which was just passed by Congress and will be sent to President Biden for signature, includes an opportunity for free COBRA coverage for a six-month period from April through September 2021 for employees (and their family members) who experience a loss of group health coverage due to reduced hours of employment or involuntary termination of employment (other than for gross misconduct).

The ARPA COBRA subsidy appears to be designed to capture all employees who lost job-based health coverage due to a loss of work (other than a voluntary termination of employment) since the COVID-19 pandemic began.  Any employee who lost coverage as of April 2020 (when the pandemic began impacting employment) is potentially eligible for the entire six-month subsidy, since their 18-month COBRA period would include the period from April 1 through September 30, 2021 when the subsidy ends. Even employees who lost health coverage as far back as November 2019 may benefit from the subsidy, since their 18-month maximum COBRA period will not expire until the end of April 2021. However, individuals who are eligible for other group health coverage or Medicare are not eligible for the subsidy.

Importantly, the subsidy is available to employees who did not elect COBRA coverage during their original election period, as well as those who initially elected COBRA but let their coverage lapse.  These individuals must be offered an additional window of at least 60 days to elect COBRA coverage. Of course, since COBRA election deadlines have been extended during the pandemic as a result of the DOL/IRS deadline tolling guidance, many individuals are still within their original COBRA election periods. However, this special election opportunity allows these individuals to make a prospective COBRA election for the period beginning April 1, 2021, without requiring payment of premiums retroactive to the original loss of coverage, which is a departure from the normal COBRA rules. The maximum COBRA period is not extended in such a case (that is, it is still counted from the date of the original qualifying event).

Plan administrators are required to begin notifying eligible individuals of the COBRA subsidy within 60 days of April 1, 2021. The U.S. Department of Labor is required to issue model COBRA notices addressing the subsidy, and we expect the government agencies to issue guidance on various issues related to the subsidy in the coming weeks.

Stay Tuned– We will post a comprehensive summary of ARPA’s COBRA subsidy provisions, including the various notification and other requirements, soon.

 

COVID-19 Stimulus Bill to Include Significant Pension Reforms and Expand Scope of 162(m) Compensation Deduction Limit

Today, the House of Representatives passed the $1.9 trillion American Rescue Plan Act of 2021 (the “ARPA”). The ARPA has already been approved by the Senate and is expected to be quickly signed into law by President Biden. We recently published a client alert addressing Title IX, Subtitle H of the new legislation, which includes significant pension reforms for multiemployer and single-employer pension plans, and expands the number of covered employees for the limitation on the deductibility of executive compensation under Section 162(m) of the Tax Code.

Read the full client alert here.

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Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns. We will continue to evaluate the CARES Act, the Consolidated Appropriations Act, 2021, related regulations and any subsequent legislation to provide our clients guidance in real time. Please visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take, and resources to help manage ongoing operations.

Second Circuit Rules ERISA Fiduciary-Breach Claims Are Outside the Scope of General Employment Arbitration Agreement

In response to the deluge of ERISA class action breach of fiduciary duty claims, plan sponsors and fiduciaries have increasingly sought to compel individual arbitration of such claims pursuant to arbitration clauses in employment agreements or plan documents.  As discussed in an earlier blog post, the Ninth Circuit previously enforced such an arbitration provision when contained in the Plan document.

The Second Circuit recently concluded, however, that because a plaintiff’s ERISA fiduciary-breach claims against a third-party investment manager did not “relate to” his employment, they were not subject to a general employment arbitration agreement.  Cooper v. Ruane Cunniff & Goldfarb Inc., No. 17-2805, 2021 WL 821390 (2d Cir. Mar. 4, 2021).

The plaintiff, a participant in his employer’s 401(k) profit-sharing plan, alleged that the plan’s third-party investment advisor mismanaged plan assets by over-investing in a failing stock.  The plaintiff brought class claims on behalf of the plan under Section 502(a)(2) of ERISA, arguing that the plan fiduciary’s investment decisions breached its fiduciary duties of prudence and loyalty.  The third-party investment advisor sought to compel arbitration by invoking the employer’s arbitration agreement, which mandated individual arbitration of “all legal claims arising out of or relating to employment” except for claims specifically excluded therein.  At issue was whether the plaintiff’s fiduciary-breach claims “related to” his employment, and if so, whether the third-party investment advisor could compel arbitration thereof despite not being a signatory to the agreement.

The district court answered both questions in the affirmative and granted the third-party investment advisor’s motion to compel arbitration.  The court first concluded that the plaintiff’s claims fell within the arbitration agreement, in part because the plan assets that the third-party investment advisor allegedly mismanaged were part of the compensation that the plaintiff received in consideration for his employment.  The court then held that the third-party investment advisor, though not a party to the agreement, could enforce the employer’s arbitration rights given its relationship with the employer and the degree to which plaintiff’s ERISA claims were intertwined with the subject matter of the agreement.

The Second Circuit reversed, holding, as a threshold matter, that the plaintiff’s fiduciary-breach claims were not subject to the arbitration agreement because they did not “relate to” the plaintiff’s employment.  The Court held that a claim only “relates to” employment if its merits involve facts particular to the plaintiff’s own employment, including his performance, amount of compensation, or workplace conditions.  In so ruling, the Second Circuit held that while the plaintiff’s stake in the plan comprised part of his compensation, and claims regarding his compensation might “relate to” his employment, the substance of his ERISA claims were disconnected from his individual employment experience.  Instead, the claims hinged entirely on the third-party investment advisor’s investment decisions and could have been brought by non-employees, including other plan beneficiaries, plan fiduciaries, or the Secretary of Labor.  Having found the plaintiff’s claims not subject to the arbitration agreement in the first place, the Court did not reach the question of whether the third-party investment advisor could enforce it as a non-signatory.

The Second Circuit went on to state, in dicta, that mandating individual arbitration of fiduciary-breach claims would likely contravene the Second Circuit’s “adequacy” requirement for such actions.  On this front, the Court cited its previous ruling that the representative nature of ERISA section 502(a)(2) requires plaintiffs to protect other participants’ interests by invoking procedures, such as class certification or joinder of parties, that are necessarily unavailable in individual arbitration.  While the Court suggested that employers could avoid this obstacle by including explicit language in their arbitration agreements to cover ERISA breach of fiduciary duty claims, it did not address whether such language would be enforceable.

Proskauer’s Perspective

In terms of its holding, this decision is already notable because it rejects the application of general employment arbitration agreements to ERISA breach of fiduciary duty claims in the Second Circuit.  However, the decision could have broader implications insofar as the Court expressed doubts about the enforceability of any class action waivers in fiduciary-breach claims, which arguably could lead to a split with the Ninth Circuit. Given defendants’ increased resort to arbitration agreements governing ERISA claims, this issue could very well find its way to the Supreme Court in the relatively near future.

We Now Know For Whom the Statute Tolls

In our February 12th blog post, we raised the question of how to interpret the duration of the DOL/Treasury relief tolling certain benefit plan deadlines  due to the COVID-19 pandemic. Without guidance from the agencies, it was unclear whether the relief was set to expire in a few days (on February 28, 2021) due to a one-year tolling limit in ERISA and the Internal Revenue Code, or whether it would continue for a longer period. Now we have our answer.

In EBSA Disaster Relief Notice 2021-01, the DOL explains that the one-year tolling period will be applied on an individual-by-individual basis, meaning that a deadline will be tolled until the earlier of (i) one year from the date the individual was first eligible for the relief, or (ii) the end of the Outbreak Period (i.e., 60 days after the announced end of the National Emergency, which is ongoing).  This means that every plan participant and beneficiary who was subject to a deadline that expired March 1, 2020 or later will have until the one-year anniversary of that deadline to take the required action (i.e., elect or pay for COBRA coverage, exercise a special enrollment right, or file a claim or appeal), unless the Outbreak Period ends sooner. Somewhat unexpectedly, this includes individuals who have a deadline that expires after February 28, 2021.

What to do now? Plans need to consider the types of notices and/or announcements they should make to participants and beneficiaries, and whether those notices can be general in nature or need to be more individualized. In this regard, the DOL suggests that plans should consider affirmatively sending a notice regarding the end of the relief period if it knows or has reason to know that an individual’s relief period is ending. Plans also should review the notices they sent when this began, as the notices likely will need to be updated depending on how they were worded. Interestingly, the DOL Notice goes a step further by suggesting that plans consider ways to ensure that participants and beneficiaries who are losing group health coverage are aware of other options that may be available, such as Marketplace coverage, particularly in light of new special enrollment opportunities in certain states.

While the agencies’ position may be unwelcome news for some who expected the administrative burdens of tolling to end at the end of the one-year period on February 28,, 2021, it is not entirely unexpected. The DOL reiterates that, in light of the ongoing issues caused by the pandemic, plans should be administered in a reasonable manner taking into account the difficulties facing individuals due to the pandemic and the fact that they rely on the plans’ benefits for their well-being. With this guidance in mind, plan administrators should exercise caution and provide appropriate notice before denying an individual a benefit or right based on a failure to take action within the applicable timeframes.

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