In this episode of the Proskauer Benefits Brief, Paul Hamburger, co-chair of Proskauer’s Employee Benefits & Executive Compensation Group, and associate Joe Clark discuss how the attorney-client privilege rules apply in an employee benefit plan context. The attorney-client privilege allows for the free flow of information between an attorney and a client in order to insure that the client gets the best possible representation. We discuss the various specific rules that apply in the employee benefit plan context where information is often shared between attorneys and plan fiduciaries.
As discussed here, the IRS’s initial interpretation of a new excise tax under Section 4960 of the Internal Revenue Code could catch for-profit employers who set up foundations, trusts, PACs, and other tax-exempt entities off guard. The tax is 21% of certain compensation paid to the top five highest paid employees of the tax-exempt entity. Although the tax was designed to apply for compensation to high-paid executives of tax-exempt entities, an aggregation rule in the IRS’s initial guidance (Notice 2019-9) picks up compensation paid by related employers, even if they are for-profit companies.
For example, suppose a for-profit company controls more than 50% of the board of a tax-exempt foundation, and the company’s treasurer also serves as an officer of the foundation. If the foundation is treated as a common law employer of the treasurer (even if the for-profit company is also a common law employer), the CIO could be a covered employee of the foundation. If the treasurer makes more than $1 million—whether in the current year or in the future—the excise tax can be triggered, even if all of the treasurer’s compensation is paid by the for-profit company. A similar issue could arise if the treasurer receives significant separation pay, even if it does not reach the $1 million threshold. The tax would be owed by the for-profit employer and any others who pay the treasurer’s compensation.
The deadline for submitting comments to the IRS is April 2nd. Employers who are affected by the rule’s broad net should consider submitting comments (and we can help).
The First Circuit held that a plaintiff failed to timely exhaust her administrative remedies under a long-term disability plan because the plan’s 180-day time limit for submitting appeals commenced on the date the plaintiff received notice of the decision that it was going to terminate her long-term disability benefits, not the actual date her benefits were terminated. In so ruling, the Court rejected plaintiff’s argument that the doctrine of substantial compliance and the state’s notice-prejudice rule somehow excused her late-filed appeal. The Court first concluded that the doctrine of substantial compliance, which is sometimes used by a plan administrator to excuse a failure to comply perfectly with ERISA’s notice requirements, could not be used by the plaintiff to excuse her late filing because such an expansion of the doctrine would render it “effectively impossible” for plan administrators to enforce administrative deadlines. The Court also concluded that the plaintiff could not invoke the state’s common law notice-prejudice rule, which requires an insurer to show that it was prejudiced by an untimely notice of appeal in order to deny certain types of claims, because doing so would undercut the policy purposes behind the exhaustion requirement. The case is Fortier v. Hartford Life & Accident Ins. Co., No. 18-1752, 2019 WL 697989 (1st Cir. Feb. 20, 2019).
Massachusetts Institute of Technology persuaded a federal district court to toss a jury demand in a case alleging that the MIT 401(k) plan fiduciaries breached their duties by charging unreasonable administrative and management fees, engaging in prohibited transactions and failing to monitor those to whom the fiduciaries delegated their responsibilities. In so ruling, the court held that plaintiffs had no Seventh Amendment right to a jury trial because actions under ERISA to remedy alleged violations of fiduciary duties are equitable rather than legal in nature. The court explained that the “great weight of authority” has concluded that claims by plan participants against plan fiduciaries are analogous to claims against trustees typically heard only in a court of equity. The case is Tracey v. Massachusetts Institute of Technology, No. 1:16-cv-11620, 2019 WL 1005488 (D. Mass. Feb. 28, 2019).
One de-risking tool for employers with defined benefit pension liabilities is to allow participants to receive lump-sum distributions. Although lump sums result in a short-term cash drain, they reduce the plan’s long-term liability—reducing the sponsor’s exposure to contribution volatility.
Over the last several years, there has been a question whether lump-sum cashouts may be offered to retirees who are already receiving annuities. Ironically, the concern was based on the IRS’s minimum required distribution rules. Although the purpose of minimum required distributions is to force participants to take their money, the rules prohibit an increase to the payment amount after payments start, subject to limited exceptions. The concern is that a lump-sum cashout could be a prohibited increase to the payment amount.
In 2012, the IRS issued two Private Letter Rulings that said a cashout would not be prohibited if (1) cashouts are available only during a limited window and (2) annuitants did not previously have a right to cash out annuities in pay status. The IRS reasoned that, under those circumstances, the increase to the payment amount is caused by an amendment to increase benefits, which is one of the limited circumstances when an increase to the payment amount is permitted. The IRS’s conclusion was consistent with the underlying policy of minimum required distributions: if the annuity in place will pay out fast enough, cashing out must be okay because it results in payment being made even faster.
Following those rulings, many employers looked into offering cashout windows to retirees in pay status. Seeing the interest, IRS officials stated informally that it considered the analysis in the Private Letter Rulings to be settled law, and the IRS issued favorable determination letters for plans that allowed cashout windows.
But the IRS changed course in 2015. In Notice 2015-49, the IRS recanted its 2012 analysis. Instead, the IRS said it intended to amend its minimum required distribution regulation to state that cashing out annuities in pay status would be a prohibited acceleration; the IRS also said the new regulation would be effective July 9, 2015. With that, the opportunity to cash out annuities in pay status went away.
In the time since, the IRS never issued the intended regulation, and the project was eventually removed from the Treasury Department’s Priority Guidance Plan. On March 6, 2019, in [Notice 2019-18] the IRS announced that it no longer intends to amend the minimum required distribution regulation. Until further notice, the IRS will not assert that a window to cash out annuities in pay status violates the minimum required distribution rules.
The IRS cautioned that it will continue to examine the issue, and nothing prohibits the IRS from changing its view. In addition, the IRS cautioned that any cashout window must comply with all of the other requirements for tax-qualification.
For now, the guidance gives plan sponsors another de-risking tool.
In a unanimous decision authored by Justice Sotomayor on February 26, 2019, the Supreme Court held that the 14-day deadline to seek permission to appeal a decision granting or denying class certification under Federal Rule of Civil Procedure 23(f) cannot be extended through the doctrine of equitable tolling. Nutraceutical Corp. v. Lambert. The Court reversed the Ninth Circuit’s decision, which had accepted a petition filed more than 14 days after the trial court’s decertification order, because the plaintiff had “acted diligently.”
In Notice 2008-59, the IRS provided certain limited exceptions to its previously stated general position that employers may not recoup any portion of the employer’s contribution to an HSA. Specifically, Notice 2008-59 provided that an employer may recover amounts that it contributes to an HSA account if: (i) the employee for whom the contribution was made was never eligible for an HSA contribution, provided the contribution is returned by the end of the tax year for which it was contributed, or (ii) the employer contributed an amount to the employee’s HSA in excess of the maximum amount permitted under the Internal Revenue Code due to an error. The IRS has stated that employers generally cannot recover amounts from an HSA other than for the two reasons described in Notice 2008-59.
In response to a request for additional guidance relating to the ability of employer’s to recover mistaken contributions to HSAs, the IRS recently released Information Letter 2018-0033. The Information Letter clarifies that Notice 2008-59 was not meant to provide an exhaustive list of situations in which employers could recover contributions to an HSA that were made as a result of the employer’s (or its provider’s) administrative errors. Rather, if there is “clear documentary evidence” that demonstrates an administrative error, the employer may request a return of contributions under other circumstances to the extent necessary to correct the error.
In the Information Letter, the IRS provided the following examples of errors that may be corrected under this standard:
- An amount is withheld and deposited in an employee’s HSA for a pay period that exceeds the amount shown on the employee’s HSA salary reduction election.
- An amount received as an employer contribution to an HSA that the employer did not intend to contribute, but was transmitted because an incorrect spreadsheet was accessed or because employees with similar names were confused with each other.
- An amount received as an HSA contribution because it was incorrectly entered by a payroll administrator (whether in-house or third-party) causing the incorrect amount to be withheld and contributed.
- An amount received as a second HSA contribution because duplicate payroll files were transmitted.
- An amount received as an HSA contribution because a change in employee payroll elections was not processed timely so that amounts withheld and contributed were greater than (or less than) the employee elected.
- An amount received because an HSA contribution amount was calculated incorrectly (e.g., where an employee elects a total amount for the year that is allocated by the system over an incorrect number of pay periods).
- An amount received as an HSA contribution because the decimal position was set incorrectly resulting in a contribution greater than intended.
- Because the Information Letter list is intended to provide examples of correctable errors, there are presumably other situations where a return of contributions from an employee’s HSA may be warranted if an administrative error can be clearly demonstrated. In any case, where a corrective action is to be taken, an employer should make sure to maintain documentation to support its conclusion that a mistaken contribution has occurred as the result of an administrative error.
 An “information letter” is used by the IRS to provide a general statement of well-defined law without applying it to a specific set of facts and is given in response to requests for general information by taxpayers or by Congress.
The Second Circuit held that plaintiffs’ allegations that the defendant suffered from a “categorical potential conflict of interest”—because it both funded the plan and was the claim’s decision-maker—did not affect the application of the arbitrary and capricious standard of review in the absence of a showing by the plaintiffs that the conflict actually affected the plan administrator’s decision-making. The dispute involved whether plan participants could “grow into” early retirement eligibility for benefits they accrued before the plan sponsor sold their employer’s business. The plan’s benefits committee determined that participants could not earn service credit after the sale because they were no longer employed by an entity related to the plan sponsor. Plaintiffs, a group of participants who continued with the business after the sale and eventually reached the required early retirement age, argued that their service after the sale should count because they continued working for the same business. Applying the arbitrary and capricious standard of review, the Second Circuit concluded that it could not overturn the benefits committee’s decision denying the claim, even though the Court believed the plaintiffs’ reading of the plan language was “more reasonable.” To overturn the committee’s decision, plaintiffs would have had to show that it was without reason, unsupported by substantial evidence, or erroneous as a matter of law, a standard the plaintiffs were unable to meet.
The decision illustrates the significance that the standard of review can have on the outcome of a benefit denial challenge. Had the standard been de novo (where the court takes a fresh look) or the alleged conflict taken into account in determining whether the plaintiffs’ claims were correctly denied, the outcome might have been different. To preserve the deferential standard of review, plan sponsors should ensure that the governing plan document affords the individual or body that resolves benefit claims interpretive discretion, and that the reviewing body adheres to the procedural requirements that apply to administrative claims and appeals. The case is Kirkendall v. Halliburton, Inc., No. 17-3487, 2019 WL 325649 (2d Cir. Jan. 24, 2019).
A federal district court in Illinois held that participants in a multiemployer pension plan failed to plausibly allege that plan fiduciaries retaliated against them in violation of ERISA § 510 by refusing to consider their employer’s offer to settle its withdrawal liability to the plan. In lieu of paying withdrawal liability, the employer offered to create a new plan that assumed the former plan’s obligations. After the plan fiduciaries rejected the proposal, the participants filed suit, alleging that the refusal to negotiate or even consider the employer’s proposal constituted a breach of fiduciary duty. The plan fiduciaries then informed the employer that they would “either negotiate or litigate but not both.” The participants thereafter amended their complaint to allege that the plan fiduciaries’ position violated Section 510, claiming that the plan fiduciaries’ position was motivated by the participants’ initial decision to file suit. The district court dismissed the participants’ claim as implausible, pointing to the participants’ admission that the plan fiduciaries refused to consider the employer’s proposal both before and after the participants filed suit. The court also expressed skepticism that the participants could assert a viable Section 510 claim against plan fiduciaries for “failing to do something [they] never had any legal obligation to do in the first place”—that is, accept the employer’s proposal to settle its withdrawal liability. The case is Campbell v. Whobrey, 2019 WL 184056 (N.D. Ill. Jan. 14, 2019).
The Ninth Circuit agreed that the employer-members of Montana’s Chamber of Commerce failed to state a claim for breach of fiduciary duty under ERISA § 502(a)(2) and violations of ERISA’s prohibited transaction rules under ERISA § 502(a)(3) against health insurers as a result of alleged misrepresentations in the marketing and negotiation of the insurers’ fully insured health plans to the Chamber’s members. The Court first determined that defendants were not fiduciaries because they did not exercise discretion over plan management or control over plan assets. In so ruling, the Court explained that defendants had no fiduciary relationship to the plans and exercised no discretion over the plans’ management because they were merely negotiating at arms-length to set rates and collect premiums prior to any agreement being executed. The Court also found that the allegedly excessive premiums that defendants collected did not qualify as plan assets because the plans were fully insured, i.e., the premiums were not held in trust and they were simply fixed fees paid in exchange for defendants’ financial risk of providing the promised benefits.
The Court next dismissed the prohibited transaction claims because the nature of the underlying remedies sought, restitution and disgorgement, were not equitable in nature. The Court held that the remedy of restitution was legal because the premium payments plaintiffs sought to recover had no connection to any particular fund and plaintiffs failed to identify a specific fund to which they were entitled. Similarly, the Court held that disgorgement was not equitable because plaintiff did not identify any particular property from which defendants derived an improper profit or benefit.
Finally, the Court reversed the dismissal of plaintiffs’ state law claims alleging fraud and misrepresentation and remanded for further proceedings. The Court held that plaintiffs’ state law claims were not preempted by ERISA because they did not have an impermissible connection with an ERISA plan, but rather were connected to negotiations occurring prior to any ERISA-regulated relationship. In this vein, the Court characterized the case as one about fraud and misrepresentation in the sale of health insurance policies, rather than as a case implicating ERISA.
The case is The Depot Inc. v. Caring for Montanans Inc., No. 9:16-cv-00074, 2019 WL 453485 (9th Cir. Feb. 6, 2019).