Employee Benefits & Executive Compensation Blog

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

PBGC Adopts AAA’s Amended Withdrawal Liability Arbitration Rules

Beginning January 1, 2020, the American Arbitration Association (AAA) will: (i) reduce filing fees charged to parties initiating arbitrations of withdrawal liability disputes; (ii) change how costs of arbitrations are allocated among the parties to the disputes; and (iii) amend the process for resolving arbitrator selection disputes.

The new filing fees are modest in comparison to the fee schedule proposed to the Pension Benefit Guaranty Corporation (PBGC) by the AAA in 2013—which imposed a flexible and final fee schedule that in some cases could result in filing fees that were higher by tens of thousands of dollars than the AAA’s original 1986 filing fees.

Although the PBGC had not approved the AAA’s 2013 request to increase fees, the AAA has been applying the 2013 fee schedule to this point.  After the PBGC received commentary that was critical of the AAA’s 2013 fee schedule, the AAA submitted a revised proposal containing a filing fee schedule (removing the flexible and final fees contained in the AAA 2013 fee schedule).  On December 10, 2019, the PBGC adopted the revised proposal (the “2019 Rules”).

2019 Rules: New Filing Fee Schedule:

Disputes below $1 million…………………………………….$2,500 filing fee
Disputes equal to $1 million but less than $5 million………$3,750 filing fee
Disputes equal to $5 million or more…………….…….…….$5,000 filing fee

In addition to AAA’s initial filing fee, parties that proceed to arbitration will still have to pay other costs associated with the arbitration, such as the arbitrator’s fees.  While an employer that initiates arbitration will be required to cover the upfront filing fee, the 2019 Rules provide, subject to the arbitrator’s discretion, that arbitration costs will be borne equally between the parties.

The 2019 Rules will also allow the parties to seek appointment of an arbitrator by a federal district court in the event they are unable to agree on an arbitrator through the AAA mutual selection process.  Under the old rules, the AAA resolved such disputes by appointing an arbitrator if one was not mutually selected.

Also, after the parties receive post-appointment disclosures from an arbitrator who they have mutually selected, either party has 10 days to seek automatic removal of the appointed arbitrator.  In the event of an automatic removal, the AAA will select a new arbitrator using the initial AAA mutual selection process.

Best Practices in Administering Benefit Claims #8 – Facing Litigation of Benefit Claims

Up to now, our blog series has focused on best practices for implementing a plan’s claims and appeals procedure.  We shift gears this week to see how following these best practices pays dividends if a participant’s (or beneficiary’s) claim is denied and the participant decides to pursue the claim for benefits in court (or, if required, arbitration).

After a participant exhausts a plan’s claims procedures, ERISA Section 502(a)(1)(B) authorizes the participant to seek benefits due under the terms of the plan, enforce his or her rights under the terms of the plan, or clarify his or her rights to future benefits under the terms of the plan.

With the plan’s claims process exhausted, the plan administrator defending the benefit claim should be armed with a full administrative record that supports the reasonableness of the decision for denial of benefits.  Participants are entitled under ERISA to request and receive a copy of the administrative record prior to commencing litigation, and participants often make such a request.  Even where a participant does not request the administrative record, consideration should be given to producing the record to the participant.

Strategically, of course, the plan administrator’s goal is to find the quickest means to get the case dismissed.  And, putting the administrative record in the hands of the participant prior to the participant commencing an action often helps put the plan administrator in a better position to try to get the case dismissed on an immediate “motion to dismiss” or “motion for summary judgment.”  As we have explained in prior blog entries, in ERISA benefit claim litigation, discovery typically is limited to the administrative record, and courts are required to defer to the plan administrator’s decision unless it was arbitrary and capricious. The bottom line—a good administrative record is key to setting up the possibility of an early resolution of a benefit claim dispute.

That said, sometimes a participant will try to avoid early dismissal of his or her case based on the administrative record by claiming that he or she needs discovery because the plan administrator had a conflict of interest in reaching the decision to deny benefits.  For instance, a participant may claim that because the company was responsible for paying severance benefits and the plan administrator (i.e., the decision-maker) worked for the company, the plan administrator suffered from a conflict of interest—by denying the claim the plan administrator was trying to benefit the very company that he or she worked for.  This, so the argument goes, makes the decision to deny benefits arbitrary and capricious and necessitates discovery beyond the administrative record to get more information about that conflict.  But, a structural conflict such as that just described does not in and of itself warrant additional discovery.  A participant must allege more.  He or she must plausibly allege—in more than a conclusory fashion—that the conflict infected the decision-making process in order to possibly be entitled to discovery on the conflict outside of the administrative record.

In short, with a well-documented administrative record, and application of the highly deferential arbitrary and capricious standard of review, the plan administrator should be well-positioned to minimize costs and obtain immediate dismissal of the action.

Next week, we’ll discuss other techniques for controlling and minimizing the costs of litigation of benefit claims, including contractual limitations clauses and venue selection clauses.

You can find our previously published best practices here:

Seventh Circuit: Agreement for Retiree Healthcare Benefits Survives Agreement’s Termination

The Seventh Circuit held that retirees and their families were entitled to lifetime healthcare benefits because, although the healthcare agreement that had been negotiated by their union had expired, it provided that covered individuals “shall not have such coverage terminated or reduced . . . notwithstanding the expiration of this Agreement, except as the Company and the Union may agree otherwise.”  The Seventh Circuit applied ordinary contract law interpretation principles and concluded that the agreement “unambiguously” provided the retirees with vested healthcare benefits.  And, even if the agreement was viewed to be ambiguous, the Court determined that the parties’ behavior provided enough extrinsic evidence to support the conclusion that retiree benefits had vested.  The case is Stone v. Signode Indus. Grp. LLC, No. 19-1601 (7th Cir. 2019).

Arbitrator To Decide Whether ERISA Fiduciary Claims Should Be Arbitrated

A federal district court in Texas referred to arbitration a 401(k) plan participant’s ERISA breach of fiduciary duty action based on allegations that certain plan investment options charged excessive fees.  In a two-page order, the court instructed the arbitrator to determine whether the arbitrator or a court should determine whether the class action waiver provision in the participant’s arbitration agreement waived her right to bring a representative action under ERISA § 502(a)(2).  The case is Torres v. Greystar Mgmt. Servs., L.P., No. 5:19-cv-00510 (W.D. Tex. Oct. 25, 2019).

Fifth Circuit: Procedural Win Is Not Grounds for Attorney’s Fees

The Fifth Circuit concluded that a plan participant was not entitled to recover attorneys’ fees for obtaining a remand order requiring the district court to apply a de novo, rather than abuse of discretion, standard of review to the administrative determination of her benefit claim.  In so ruling, the Court applied the principles enunciated by the U.S. Supreme Court in Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242 (2010), which held that a plan participant must have “achieved some degree of success on the merits” in order to receive a fee award under ERISA.  The Supreme Court held that, although the participant need not qualify as a “prevailing party,” she must obtain more than “trivial success on the merits or a purely procedural victory.”  The Fifth Circuit applied the “some success on the merits” standard and observed that the remand order here included no comment on the strength of the remanded claim.  The case is Ariana M. v. Humana Health Plan of Texas, Inc., No. 18-cv-20700, 2019 WL 5866677 (5th Cir. Nov. 8, 2019).

IRS Extends ACA Reporting Deadline and Issues Transition Relief

The IRS has not yet finalized the ACA reporting forms (i.e., the 1094-B/C and 1095-B/C) for the 2019 tax year, so it is no surprise that the IRS issued guidance this week extending the deadline to furnish the forms to employees and covered individuals (see Notice 2019-63). In addition to extending the deadline to furnish the forms, the IRS also issued transition relief for “B Form” filers that would waive penalties for failure to furnish the B Forms if certain conditions are met.

As a quick background, the ACA reporting requirements are 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. Highlights of the IRS’s recent guidance are provided below.

Section 6055 Transition Relief

When enacted, Section 6055 served two primary purposes: (1) to allow covered individuals to substantiate compliance with the individual mandate, and (2) to provide the IRS with information necessary to determine whether covered individuals were eligible for premium tax credits on the ACA Marketplace. Now that the individual mandate has been repealed, covered individuals no longer need documentation showing that they were enrolled in minimum essential coverage.

The IRS explained that it is evaluating whether and how the Section 6055 reporting requirements should change given the individual mandate’s repeal. In the meantime, the IRS issued transition relief for the 2019 tax year such that no penalties will be assessed against a B Form filer for failing to furnish the forms to covered individuals if two requirements are met. First, the coverage provider must post a notice on its website stating that an individual’s B Form is available and can be requested at any time. This notice must include an email address and physical address where the request can be sent and a phone number where individuals can get additional information. Second, the coverage provider must provide any requested form within 30 days of the request.

This transition relief will primarily benefit insurance companies providing coverage in the group market, non-applicable large employers, and non-employer group coverage providers (such as multiemployer plans). Applicable large employers sponsoring self-insured plans are generally required to use the C Forms, which combine the reporting obligations under Sections 6055 and 6056. The IRS explains that the transition relief does not apply to forms to be furnished to full-time employees of applicable large employers.

Importantly, the transition relief applies only the requirement to furnish the forms to covered individuals. The B Forms still must be submitted to the IRS by the deadline noted below.

Deadline Extended

As it has in the past when necessary, the IRS extended the deadline to furnish the ACA reporting forms to employees and covered individuals. The deadline to file with the IRS, however, was not extended.

  Old Deadline New Deadline
Deadline to Distribute Forms to Employees and Covered Individuals Jan. 31, 2020 March 2, 2020
Deadline to File with the IRS Feb. 28, 2020 (paper)

March 31, 2020 (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. Consistent with prior extensions, Notice 2019-63 provides that 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.

Good Faith Compliance Standard Renewed

The IRS also 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 in prior years, 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. In that case, the IRS would apply a reasonable cause analysis when determining the penalty amount for a late filer. As noted by the IRS in prior guidance, 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 2019.

Sun Capital Update: First Circuit Reverses District Court’s “Partnership-in-Fact” Holding and Finds Private Equity Funds Not Part of Controlled Group and Not Liable for Portfolio Company’s Pension Liabilities

Last Friday, the U.S. Court of Appeals for the First Circuit ruled that two co-investing Sun Capital private equity funds (the Sun Funds)[1] had not created an implied “partnership-in-fact” for purposes of determining whether the Sun Funds were under “common control” with their portfolio company, Scott Brass, Inc. (SBI) – resulting in a ruling that the Sun Funds were not under “common control” with SBI or a part of SBI’s “controlled group” and, therefore, that the Sun Funds could not be held liable for SBI’s multiemployer pension fund withdrawal liability.  This ruling marks the end (for now) to the seven-year Sun Capital dispute (see our prior client alert here).  Read below for a high-level summary of the First Circuit’s ruling, as well as key takeaways for private investment funds and multiemployer pension funds. A forthcoming client alert will include more detailed analysis of the First Circuit’s decision, the history of the Sun Capital saga, and the implications for private investment funds and multiemployer pension funds.  Check back here for the link to the alert.

Factual and Procedural Background

As a refresher, in Sun Capital, the Sun Funds acquired 100% of SBI through SBI’s ultimate parent, Sun Scott Brass, LLC (SSB).  Sun Fund III owned 30% of SSB while Sun Fund IV owned 70% of SSB.  SBI eventually filed for bankruptcy and withdrew from a multiemployer pension fund.  As a result, the pension fund asserted withdrawal liability against the Sun Funds on the theory that the Sun Funds were both (i) under “common control” with SBI (which, in relevant part, generally requires an 80% or greater ownership interest), and (ii) engaged in a “trade or business” and, therefore, in SBI’s “controlled group” (which, if true, meant the Sun Funds would be jointly and severally liable for SBI’s withdrawal liability).

Following an initial round of rulings, in 2016, the U.S. District Court for the District of Massachusetts determined that the Sun Funds had formed a “partnership-in-fact” that was part of SBI’s “controlled group” because the implied “partnership-in-fact” was deemed to own 100% of SSB (and, therefore, SBI) and was engaged in a “trade or business”; and, that the Sun Funds could therefore be held liable for SBI’s withdrawal liability as partners in the implied “partnership-in-fact”.

First Circuit Decision

On appeal of the District Court’s decision, the First Circuit limited its analysis to a single issue: whether the record demonstrated that the Sun Funds had formed a “partnership-in-fact” under the U.S. Tax Court’s eight-factor Luna test.

The First Circuit noted that several facts in the record supported finding a partnership-in-fact between the Sun Funds.  For example, the Sun Funds, through their manager Sun Capital Advisors, Inc. (SCAI), developed restructuring and operating plans for target portfolio companies before actually acquiring them through limited liability companies; the two individuals in control of the general partners of the Sun Funds “essentially ran things” for the Sun Funds and SBI, including placing SCAI employees in two out of three director positions at SBI, allowing SCAI to “control” SBI; the Sun Funds had leveraged SCAI’s resources and expertise to not only identify, acquire, and manage portfolio companies, and structure their acquisitions, but also to provide management consulting and employees to the portfolio companies; and the record did not show a single disagreement between the Sun Funds regarding the operation of SSB.

However, on balance, the First Circuit concluded that more factors weighed in favor of finding that a partnership-in-fact did not exist, pointing to the following facts: the Sun Funds did not intend to form a partnership beyond their coordination within SSB and expressly disclaimed any sort of partnership; most of the limited partners in Sun Fund IV were not limited partners in Sun Fund III; the Sun Funds filed separate tax returns, kept separate books and maintained separate bank accounts; the Sun Funds did not invest in parallel in the same companies at a fixed or even variable ratio – which the First Circuit observed showed “some independence in activity and structure”; and the creation of a limited liability company (i.e., SSB) by the Sun Funds showed an “intent” not to form a partnership, and prevented them from conducting their business in their joint names and limited the manner in which they could exercise mutual control over and assume mutual responsibilities for managing SBI.

Having determined that the record pointed away from concluding that the Sun Funds had created an implied “partnership-in-fact” in connection with their investment in SBI – meaning their ownership interests could not be aggregated for purposes of determining whether they were under “common control” with SBI – the First Circuit held that the Sun Funds could not be held liable for SBI’s multiemployer pension fund withdrawal liability.  The First Circuit expressly declined to reach the other legal issues in the case – including whether the Sun Funds were engaged in a “trade or business.”  The First Circuit remanded the case to the District Court for entry of summary judgment in favor of the Sun Funds.

Key Takeaways

In light of the First Circuit’s decision, here are a few key points for private investment funds and multiemployer pension plans to consider:

  • The First Circuit did not rule on the “trade or business” issue, so the existing Sun Capital “trade or business” analysis remains intact. Further, there is still the possibility of two or more co-investing private investment funds being deemed to be engaged in a “trade or business” and under “common control” with a portfolio company under a “partnership-in-fact” analysis. While the First Circuit found that such a “partnership-in-fact” did not exist here under the facts, different facts could lead to a different holding in the future.
  • Accordingly, this ruling should not preclude, but it may hamper, the efforts of multiemployer pension plans and the PBGC to collect plan termination and withdrawal liability from private investment funds (and their other portfolio companies) based on a “partnership-in-fact” analysis.
  • In any event, as we have previously noted, private equity fund sponsors should be aware that (i) acquiring an 80% (or more) interest in a portfolio company, whether within one private equity fund or pursuant to a “joint venture” between related (and maybe even unrelated) funds, may trigger joint and several liability for the portfolio company’s underfunded pension or withdrawal liabilities, and (ii) even a smaller ownership interest percentage could possibly trigger the ERISA “controlled group” rules based on complicated “common control” determinations.

*          *          *

As noted above, a forthcoming client alert will include more detailed analysis of the First Circuit’s decision and the implications for private investment funds and multiemployer pension funds.  Check back here for the link to the alert.

[1]              Although the First Circuit referred to “two” co-investing funds, there were actually three separate funds –Sun Capital III, LP, Sun Capital III QP, LP and Sun Capital IV, LP (Sun Fund IV). The First Circuit treated the two Sun Capital III funds (i.e., Sun Capital III, LP and Sun Capital III QP, LP) (Sun Fund III) as one fund because they are parallel funds run by the same general partner and generally make the same investments in the same proportions. Accordingly, the remainder of this blog generally follows the First Circuit’s analysis as though there were only two funds, Sun Fund III and Sun Fund IV.

Best Practices in Administering Benefit Claims #7 – Understanding Attorney-Client Privilege in the Benefits Claims Process

When a plan administrator is attending to a benefit claim and thinks it is time to call in an attorney, are those discussions privileged and protected from disclosure to claimants?  In this week’s blog, we take a look at some of those communications between attorneys and plan administrators and examine whether or not they are privileged.  To the surprise of many, communications between a plan administrator and the plan’s attorney may not be protected from disclosure by the attorney-client privilege.

Let’s start with the basics:  The attorney-client privilege generally protects communications (and the substance of those communications) between an attorney and a client that are made in confidence for the purpose of obtaining or providing legal assistance to the client.  In the ordinary course, those communications are privileged and not discoverable by anyone in litigation (or in other proceedings).  This privilege exists to ensure the free flow of information between the attorney and client.

When addressing a claim for plan benefits, however, communications between the plan administrator and the plan’s attorney may not benefit from that privilege.  As the courts have explained, a plan fiduciary must act solely in the interests of participants and beneficiaries.  Therefore, when a plan fiduciary speaks with a lawyer about matters relating to plan administration, the “real client” vis-à-vis the plan attorney is the participant or beneficiary who is impacted by the issue and not the plan fiduciary.  This is often referred to as the “fiduciary exception” to the attorney-client privilege.

In the benefit claim context, the so-called fiduciary exception may require the production of communications between a plan administrator and plan counsel concerning plan administration.  For example, an email or memorandum from the plan’s lawyer to the plan administrator addressing whether or not a participant is entitled to benefits under a plan may be discoverable by the participant as part of the administrative record.  The fact that the email or memorandum was written by a lawyer may not necessarily shield it from production.

At the same time, the fiduciary exception is not without its limits.  For instance, once the interests of the parties are clearly adverse (they diverge), a plan administrator may engage counsel and the attorney-client privilege should protect from disclosure communications about a participant’s claim.  As a practical matter, some courts have concluded that the interests sufficiently diverge once a participant’s appeal (not claim) for benefits is finally denied.  In addition, communications between a plan attorney and a plan fiduciary about a plan fiduciary’s personal liability also are not discoverable by a participant or beneficiary.

There are many nuances to the fiduciary exception, and it is important to be mindful of its application during the administration of claims for benefits and appeals.

For further discussion of the attorney-client privilege and fiduciary exception, you can check out our Benefits Brief Podcast.

On the blog next week, we’ll discuss managing litigation of a benefits claim.

You can find our previously published best practices here:

Best Practices in Administering Benefit Claims #6 – Distinguishing an Inquiry from a Claim

It’s Week #6, and we have turned the corner in our Top 10 Best Practices in Administering Benefit Claims.  In case you missed any (or all) of the first five best practices, links to each of them appear below.  This week we discuss how to distinguish an inquiry from a claim for benefits.

The claims and appeals procedures only apply insofar as there has been a “claim for benefits” under the plan.  In general, a “claim for benefits” is a request for benefits made by a claimant in accordance with the plan’s reasonable procedures for filing such claims.  Ideally, a participant or beneficiary would specify in their communications that s/he is making a “claim for benefits” or otherwise asserting that s/he is entitled to some benefits under the plan.  Unfortunately, participants and beneficiaries (and even their authorized representatives) are often less than clear about what it is they are seeking.

The U.S. Department of Labor is of the view that mere casual inquiries about benefits or when benefits might be paid do not qualify as formal “claims for benefits.”  Similarly, an individual’s question concerning his/her eligibility for coverage and the administrator’s subsequent eligibility determination is not subject to the claims and appeals procedures.  On the other hand, if an individual files a claim for benefits and the administrator denies that claim on the basis of ineligibility, then the claims and appeals procedures are triggered even though the denial is based on an eligibility issue.

Careful consideration should be given to whether a participant’s (or beneficiary’s) communication triggers the plan’s claims process.  For instance, does the plan require claims to be in writing, or are telephonic claims accepted?  Has the participant or beneficiary submitted all required documentation with the claim?  Should an inquiry, although not technically a claim, be processed through the plan’s claims procedures?  When is it appropriate to do so?  Are there strategic reasons to do so in the particular situation?  There is no one-size-fits-all answer to many of these considerations and each inquiry and claim should be evaluated on its own facts, while ensuring that there is consistency in the way inquiries and claims are managed.

In our next best practice, we’ll discuss the “fiduciary exception” to the attorney-client privilege.

You can find our previously published best practices here:

Best Practices in Administering Benefit Claims #5 – Establishing (and Following) a Good Claims Process

This week we discuss the importance of establishing good claims procedures and the benefits of following those procedures.

A plan’s claims procedures should be spelled out clearly in both the plan document and the summary plan description (where the two documents are not one in the same).  In addition to setting all of the applicable deadlines for submitting claims and appeals (as we discussed last week), the procedures should inform claimants of:  optional levels of appeal or review (if any); procedures for designating an authorized representative; the requirement to exhaust the plan’s claims procedures before commencing an action; and their right to review documents relevant to the claim decision.  Good claims procedures also will confer final, decision-making authority on one or more people, or a committee.  Importantly, the claims procedures must be made known to all participants because, of course, without knowledge of what the claims procedures are, a participant cannot reasonably be expected to utilize them.

The claims process, contrary to what may be intuitive to many, is not generally viewed by the courts to be an adversarial process—at least not at the beginning stages.  That is because plan fiduciaries—such as those responsible for deciding claims and appeals—owe a fiduciary duty of loyalty to participants.  Now, that is certainly not to say that claims decisions must always be in the participant’s favor.  It does mean, however, that participants must be given an opportunity to present their position on why they believe they are entitled to benefits and that the plan fiduciary should consider and evaluate all of their arguments at the claim and appeal stages.  The fiduciary should give careful consideration to the evaluation of a participant’s claims and arguments, particularly since the participant is generally entitled to all documents that are considered by the claims fiduciary in making its decision—even if the documents are not relied upon in reaching the decision.

There are many benefits to making sure the claims fiduciary follows the plan’s claims procedures.  For instance, a court (or arbitrator) will require a claimant to first exhaust the plan’s administrative process before s/he brings an action for benefits under ERISA section 502(a).  And, if after exhausting the claims procedures, the participant pursues a claim for benefits in court (or arbitration), the judge (or arbitrator) is required to defer to the claims fiduciary’s decision unless it was arbitrary and capricious.  Unlike giving the claim a fresh review, the arbitrary and capricious standard of review is highly deferential to the plan fiduciary’s decision.  Furthermore, the participant generally will not be entitled to discovery in litigation (or arbitration) outside of the administrative record.  This has the added benefit of reducing litigation (or arbitration) costs.

Next week, we’ll discuss the mechanics of benefit claim administration, including dealing with the fiduciary exception to attorney-client privilege.

You can find our previously published best practices here: