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ERISA Notes

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Health Plan Costs for Coronavirus have been Offset by Reduced Hospital Visits

May 1, 2020

Coronavirus has ravaged the economy, but the one surprising sector that has seen increased profits has been health insurance providers.

As Americans and hospitals have delayed elective surgeries and non-emergency treatment during the Coronavirus pandemic, healthcare spending has actually declined in recent months. Health Plan costs have remained about the same as these reduced services have been offset by the costs of COVID-19 related care.

COVID-19 and California’ Stay at Home Orders have also reduced traffic-related injuries caused by collisions by 60% in the state, and bicyclists and pedestrians saw a 50% reduction in traumatic injuries.  Some auto insurance carriers are offering rate reductions as a consequence.

While this trend may be short term as the economy begins to return to normal, health plans could largely benefit from an overall annual 2020 reduction in costs as COVID-19 related care lessens and the  gradual demand for other services such as elective care resumes.

Impact of CARES Act on
Retirement and Health Plans

March 31, 2020

On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or “Act”) which contains several provisions that will impact employee benefit funds. Below is a summary of the changes, many of which only apply to defined contribution plans and are temporary or apply in times of a medical health crisis only. For retirement plans, CARES Act changes may be adopted immediately, but amendments formally adopting the change need to be enacted by December 31, 2022.  

Retirement Plans

Early Distributions: Waives the 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for COVID-19-related reasons on or after January 1, 2020, for those experiencing hardship from Coronavirus (“Qualified Participant”).  In addition, income from such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions.

Increased Loans Amounts: The CARES Act also increases the limit on loans from qualified plans to $100,000 up to the full vested balance of the Qualifying Participant’s balance. The loan repayment start date may be delayed up to one year for any loan taken before December 31, 2020.

Qualified Participants: Qualified Participants include 1) those diagnosed with Coronavirus, a spouse or a dependent; 2) someone who experiences financial hardship such as being laid off, furloughed, or experiencing reduced hours; or 3) someone who cannot work due to a lack of childcare. Plan administrators may rely exclusively on an employee’s certification that they qualify for early distribution or a loan under the CARES Act.  However, Plans should develop a written or electronic certification process as part as their administrative procedure, to keep the process streamlined, including a list of documentation required by the Plan to be included with the Participant’s claim (e.g., proof of loss of income, etc.).

Temporary Waiver of Minimum Distribution Rules: Waives the required minimum (“RMD”) rules for certain defined contribution plans, e.g., 401K Plans, and IRAs for calendar year 2020. This provision provides relief to individuals who are required to withdraw a limited amount of funds from such retirement accounts during the economic slowdown due to COVID-19 and permits the individual to withdraw more than the RMD without penalty.  Normal taxes would still apply. HOWEVER, the CARES Act is silent on RMDs for defined benefit pension plans.

Single-Employer Defined Benefit Funding Relief: Provides single employer pension plan sponsors with more time to meet their funding obligations by delaying the due date for any contribution otherwise due during 2020 until January 1, 2021. At that time, contributions due earlier would be due with interest.

Expansion of DOL Authority: The DOL may postpone certain ERISA filing deadlines for a period of up to one year in the case of a public health emergency.

HEALTH PLANS

Effective immediately, the following new Coronavirus related requirements are in effect and apply to all group health plans, including self-insured plans and grandfathered plans under the Affordable Care Act (ACA):

Plans must cover Coronavirus tests without cost to participants: Both the Families First Act and the CARES Act require plans to cover services related to testing for Coronavirus. Neither law requires plans to cover services for treating Coronavirus. What this means is Plans must cover the full cost of the test and any appointment relating to testing including in-person or telehealth office visits, urgent care visits and emergency room visits related to Coronavirus testing without co-pays, deductibles, or other limitations (but not treatment).  Some plans are voluntarily adding benefits for treatment so check with yours.

Diagnostic Reimbursement: If the plan has a negotiated rate with the provider that was in effect before January 27, 2020, that rate will apply throughout the public health emergency. If the plan does not have a negotiated rate with the provider, the plan must either reimburse the provider the cash price for the service that is listed by the provider on a website or negotiate a lower reimbursement rate. The CARES Act requires providers of diagnostic tests to post their cash price on a website.

HSA-qualified HDHPs may provide remote-care services before the deductible is met: The CARES 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, without impacting the plan’s status as an HDHP. This is not limited to COVID-19, and remote care services can be provided for non-Coronavirus reasons. They may also choose to provide treatment services for Coronavirus before the deductible is met.

Coverage of Qualifying Coronavirus Preventive Services and Vaccines: The Act requires plans to cover any coronavirus preventive services without cost-sharing.  In addition, HSA and Flexible Spending Account funds may be used for the purchase of over-the-counter medical products, including those needed in quarantine and social distancing, without a prescription from a physician. The Act also redefines feminine hygiene products as HSA covered products which can be purchased with pre-tax dollars.

Form 5500 Filings

Updated March 25, 2020

For those Plans intending to file Form 5500s this year, please note the DOL has not extended the filing date as of this writing.  The Form is still due by July 31, 2020 for those Plans whose Plan year ended prior to that and after July 31, 2019. 

However, the DOL has recently issued guidance, not specifically applicable to Form 5500s, extending filing dates for required public disclosure-related filings. Since the DOL has recognized that due to the disruption caused by COVID-19, it may be difficult or impossible to meet public disclosure filing requirements in a timely manner, all that is required is a “good faith effort to file required public disclosure reports.” In such cases, the DOL will not pursue a civil enforcement action with regard to a delinquent or deficient report when these reporting violations are attributable to COVID-19.  If you are in this situation, we recommend you contact the DOL in advance of the due date and provide a proposed definite date upon which the Form 5500 will be filed.

Check with your Accountants or our firm for updates.

Plan Professionals Need to Know About Coronavirus

March 11, 2020

While the situation is changing fast, literally daily, we believe there are certain conclusions and recommendations we can make to aid Trustees and Plan professionals in taking steps to fulfill their responsibilities to the Plans on which they sit and to those Plan participants.

As the situation develops, watch this article for updates.

Impact on Health and Retirement Plans

Health plans should make sure they are structured to deal with significant numbers of their own employees as well as plan participants needing either prolonged leave and/or medical treatment. Trustees, plan participants, and plan professionals should review their SPDs and other documents to make sure they know what coverage exists for testing and treatment and that the financial condition of the Plan is viable during a sustained period of economic slowdown. Most recently, many insurance plans have unilaterally announced special coverage for Coronavirus testing and treatment. Should any emergency changes to these plans with respect to contribution levels, coverage, or investment policies be necessary, the Trustees as well as bargaining parties must be involved and ready to act.

For Retirement Plans, staying the course is key. The investments in which these plans are engaged, as guided by competent plan professionals, e.g. investment consultants, actuaries, accountants and the like, should not be harmed by short term market swings, especially if sufficiently diversified.  Therefore, unless this outbreak becomes prolonged and lasts for years, there should be little concern about the long term health of Retirement Plans. 

Coronavirus and Market Predictions applicable to both Health & Welfare and Retirement Funds

As Coronavirus spreads rapidly, it is likely to have a large impact on First Quarter earnings for many funds. While some investments may rebound quickly, others in manufacturing, travel, and entertainment industries could be hit hard with a lingering effect. This last week, the mortality rate stood at 3% of all reported cases, and for the first time new cases are spreading faster in countries outside of China, such as Italy, than within China where it originated. If Coronavirus hits pandemic status in the United States, this will further impact economic growth for entertainment and travel companies, as Americans spend the most on travel followed by the Chinese.

In an effort to stem the spread of the economic impact, the United States Federal Reserve used their emergency powers to cut rates last week, something they have not done since the 2008 Financial Crisis. Although this rate cut did not help initially, in the long run it will likely soften the blow to the U.S. economy. However, it is difficult to determine how and when the global economy will rebound from this downturn.  As of now, Asian economies are the most vulnerable and if the virus is not contained quickly, there may be a recession in East Asia.

Economic Impact

Plan professionals should expect volatility to remain elevated and should plan for this outbreak to continue for the foreseeable future.  Growth rates will be very low for many companies, and may be near zero for Chinese companies. Therefore, investors must continue to be cautious moving forward, to diversify Plan assets, and implement defensive strategies.   

SECURE Act Becomes Law

January 29, 2020

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019.  It is possibly the worst acronym for a law we have ever heard.  In any event, the SECURE Act and other provisions in the new law are touted as bipartisan reforms that will increase access to workplace retirement plans and expand retirement savings. We view them as largely favoring businesses, but, in this instance, is not a particularly bad result, although much more could have been done for the benefit of workers. The legislation will impact defined contribution (DC) plans, defined benefit (DB) plans, individual retirement accounts (IRAs), and 529 plans.

Importantly, some key provisions of the new law include reforms to help address the retirement “coverage gap” by permitting open multiple employer plans (MEPs), thereby expanding access for workers currently without a workplace savings plan. Other provisions, including delaying the starting age for required minimum distributions (RMDs) from age 70½ to age 72; increasing the automatic-enrollment safe harbor escalation cap to 15%; and eliminating the age limit for contributing to a traditional IRA, enable workers to save more and longer, thus enhancing their ability to strengthen their retirement savings.

This legislation may have an almost immediate impact on plan sponsors, participants, and those of you who have, or your members who have, invested in IRAs, with some of the provisions effective on January 1, 2020.  The legislative changes may require Plan Amendments and other administrative adjustments, so be sure to consult your plan professionals.

Specific descriptions of the provisions in the new law are available HERE. If you would like more information, please contact us through the website.

Pension Reform Update

January, 2020

Now that Democrats have taken control of the House, there is renewed interest in building a case for saving underfunded corporate and union-sponsored defined benefit pension plans, by passing the “Butch Lewis Act,” on which we previously reported. Without passage, some economists are predicting a failure-to-act will cost taxpayers nearly $500 billion.  At present, the Butch Lewis Act has passed the House, but the Senate has expressed no interest in voting on the proposal and is, instead, considering a far more conservative possible legislative alternative.

On November 20, 2019, Senators Chuck Grassley and Lamar Alexander released a Multiemployer Pension Recapitalization and Reform Plan proposal. The proposal was released in the form of a white paper and a technical explanation and has not been introduced as a legislative bill yet. The proposal incorporates the work of the 2018 Joint Select Committee on the Solvency of the Multiemployer Pension System. Generally, it seeks to have the Pension Benefit Guaranty Corporation (PBGC) multiemployer pension plan insurance program adopt characteristics of the single employer pension insurance program.

The Multiemployer Pension Recapitalization and Reform Plan proposal is based on a shared responsibility framework in which employers, unions, workers and retirees would make a sacrifice to shore up the PBGC’s role as an insurance company. A “limited infusion of taxpayer dollars” would be proposed to help the PBGC insure some liabilities of soon-to-be insolvent plans. Without reforms, the PBGC reports the multiemployer insurance program would be insolvent no later than 2026. The PBGC fiscal year 2019 report showed a deficit of $65.2 billion, compared to a deficit of $53.9 billion in 2018.

Here are some characteristics of the Senate proposal:

Expand PBGC Existing Partition Authority

Partitioning permits PBGC to carve off “orphan” pension benefit liabilities attributable to employees whose employers previously withdrew from the multiemployer plan. The plan with unfunded liabilities requires financial assistance from the PBGC while the healthy plan continues.

PBGC would only grant an order for a special partition if it determines that the plan sponsor has adopted all reasonable measures to avoid insolvency, including benefit suspensions no greater than 10%.

The Teamsters Central States Pension Plan, the Road Carriers Local 707 Pension Plan and the United Mine Workers of America Plan would be automatically eligible for partition.

In order for the partition program to operate effectively, a limited amount of federal taxpayer funds would be transferred to PBGC. There would be provisions intended to protect taxpayers from risk.

Plans approved for a liability removal under the new partition program would be subject to the following conditions: PBGC would appoint an independent trustee to the board, PBGC would be authorized to remove the board of trustees if it can demonstrate mismanagement and replace the board with an independent trustee pursuant to a court order, Trustees would have ten-year term limits with a transition rule for existing trustees, Executive directors would have 12-year service limits with a transition rule for an existing director.

Increase the PBGC Maximum Monthly Benefit

The PBGC maximum guaranteed monthly benefit would increase by about $600 per month. This is intended to reduce the risk of significant reductions in retirees’ benefit payments should a plan become insolvent.

Increase the Multiemployer Plan Flat-Rate Premiums

Multiemployer plan flat-rate premiums would significantly increase from $29 (in 2019) to $80 per participant per year. For comparison, the single employer plan flat-rate premium is $80 (in 2019) per participant per year.

Add Multiemployer Plan Variable-Rate Premiums

Multiemployer plan variable-rate premiums for underfunded plans would be payable to PBGC. The per-participant amount of the variable-rate premium would equal 1% of the current unfunded liability divided by the number of participants and would be determined on a per-participant basis for purposes of applying a cap. In no case would the cap be higher than $250 per participant. For comparison, the single employer plan variable-rate premium cap is $561 per participant in 2019.

Add Employer, Union and Retiree Copayments

A monthly $2.50 fixed rate copayment would be imposed on each union and participating employer for each active employee covered under the plan pursuant to a collective bargaining agreement. Multiemployer plans would be responsible for collecting the copayments and transmitting them to PBGC on a monthly basis.

Plans would be required to withhold copayments from retirees receiving benefit payments and transmit the “premiums” to PBGC on a monthly basis. The copayments would be a fixed percentage of benefit payments with the percentage determined by the funding zone status ranging between 3% (for a plan in endangered status) and 10% (for a partition plan). Retirees who are elderly or disabled would generally be exempt.

Change Funding Zone Status Categories and Measurement

Plans would be required to look further into the future in estimating their financial status, institute a form of “stress testing” to check whether a plan can remain financially sustainable through potential economic and demographic “shocks,” and bolster the steps a plan must take when it begins to show signs of financial hardship. New incentives for multiemployer plans to improve their funding status would be available by establishing new upper-tier zones for very healthy plans, which would be subject to fewer restrictions as long as they continue to demonstrate financial health and an ability to weather potential financial shocks and protect participant benefits.

Add Incentives for Mergers

The proposal would eliminate the MPRA requirement to restore benefit suspensions in a merger between a stable zone or higher plan and a critical zone plan. PBGC would be directed to create withdrawal liability methods that would permanently insulate employers in a stable zone or higher plan that merges with a declining plan from withdrawal liability attributable to the unfunded liabilities of a declining plan at the time of the merger. The proposal would eliminate the MPRA requirement that financial assistance in a facilitated merger be necessary for the merged plan to remain solvent before PBGC may provide such assistance.

Change Withdrawal Liability Calculation

The proposal would replace the calculation of withdrawal liability under current law with a new basis for determining the liability based on a specified duration of annual payments that would correspond with the plan’s funded percentage. Mass withdrawal liability would be eliminated. Plans would be required to provide withdrawal-liability estimates to all contributing employers free of charge every three years. These changes are intended to encourage current employers to stay in the plan and new ones to join.

Modify Disclosure Requirements and Penalties

The annual funding notice and zone status notice would be modified. Information related to the multiemployer plan’s endangered or critical status would be shifted from the annual funding to the zone status notice. A more streamlined annual funding notice would provide information relevant to participants in better funded plans. A simplified zone status notice would offer more targeted information to participants in distressed plans. The notices would be required to be provided to participants and beneficiaries, to the bargaining parties, and jointly in electronic format to the PBGC and the secretaries of the Department of the Treasury and Department of Labor. Penalties for failure to provide information to government agencies and participants would be established or increased.

Establish New Composite Plans

Taking an idea from The Butch Lewis Act, with significant changes, multiemployer plans would be able to set up a new hybrid pension plan on a prospective basis, called a composite plan, which would pool employer contributions for investing but would only provide benefits to participants based on the contributions and any associated gains on their investment. Employers establishing a new composite plan would be relieved of withdrawal liability for benefits in the new plan. The new plan would not be PBGC-insured, so there would be no premiums to pay. The defined benefit plan would become a legacy plan. The proposal would include provisions to preserve legacy plan funding.

Next Steps for the Multiemployer Pension Recapitalization and Reform Plan Proposal

It’s likely the Senate Finance Committee members will be the first Congressional group to try to resolve differences. For example, Senator Sherrod Brown has concerns with some provisions, and Senator Rob Portman said the proposal will require some changes. Several members expressed a willingness to work together and compromise where needed. PBGC Director Gordon Hartogensis has said the Administration stands ready to work with Congress. As for the House, since this proposal does not include the Butch Lewis Act which was passed by the House, it is unclear how the Multiemployer Pension Recapitalization and Reform Plan proposal will be received by the House.

Generally, there is not much legislative activity expected in 2020 because of the November presidential election.

We are watching legislative developments in this area closely and will keep this section updated as we learn more.

ERISA Litigation Summary

January, 2020

Although most analysts predicted a likely uptick in the pace of Employee Retirement Income Security Act (ERISA) lawsuits filed against retirement or health and welfare plans in 2019, few significant decisions at the Appellate level issued. 

It was expected that much of the litigation would be tied to the fact that ERISA’s key concepts of “prudence” and “loyalty” are not set in stone.  The law is designed to give plan sponsors discretion; but by the same token, this also gives plaintiffs more latitude to second guess Plan decisions.

Turning to some specific cases, a late 2018 appellate court decision in a lawsuit alleging self-dealing by Wells Fargo is instructive. In that case, the 8th U.S. Circuit Court of Appeals confirmed a lower court’s dismissal of claims alleging Wells Fargo engaged in self-dealing and imprudent investing of its own 401(k) plan’s assets by offering its own proprietary target-date funds (TDFs) to participants. The appellate court agreed that allegations that the bank breached its fiduciary duty simply by continuing to invest in its own TDFs when potentially better-performing funds were available at a lower cost are insufficient to plausibly allege a breach of fiduciary duty. Specifically, the 8th U.S. Circuit Court of Appeals said the plaintiff did not plead facts showing that the Wells Fargo TDFs were underperforming funds. 

We view this case as showing the importance of motions to dismiss in ERISA cases. These motions can be an important tool that plan sponsor defendants should utilize to try to get a meritless case thrown out before going through an expensive discovery process.  Many federal judges lack familiarity with these types of cases, and these motions can serve as an educational device for the court.  Recently, our firm was successful in achieving a dismissal of an ERISA claim that lacked merit, brought against one of our clients where the liability could have been significant.  It took two (2) motions to dismiss, but our client ultimately prevailed.

One important appellate decision involving a health and welfare plan was issued in January 2019. The Eighth Circuit weighed in on a practice for recovering plan overpayments known as “cross-plan offsetting.” In addition to shining a light on the practice of some third party plan administrators, the decision offers an important lesson in plan drafting.

From time to time, group health plans inadvertently pay the wrong amount to doctors, clinics, and other providers. When the amount paid is more than what the plan allows (“overpayment”), the plan generally must be made whole.  To make this happen, administrators typically try to recover the overpayment from the provider. When the provider refuses to return the overpayment, the overpayment is often offset against future payments owed by the same plan to the same provider. This approach works well if another plan participant uses the same provider, but it is not helpful if the plan does not have other bills from the same provider.  Thus, some plans have authorized their administrators to engage in “cross-plan offsetting,” where a third-party administrator with multiple clients collects the overpayment by offsetting it against another plan’s bills from the same provider.  This practice exposes the offsetting plan and its participants to some risk; and it raises questions under ERISA’s prohibited transaction and fiduciary rules, because assets of one plan are being used to solve a problem for another plan.

The Eighth Circuit stated that cross-plan offsetting was “questionable at the very least,” in “tension with the requirements of ERISA,” and straddling the “line of what is permissible.” However, the court did not actually reach the merits on the legal question of cross-plan offsetting. Instead, the court concluded that the practice was not authorized by the plan that was seeking recovery.

The third-party administrator argued that its use of cross-plan offsetting was authorized by general language that gave the plan administrator discretion to interpret and implement the plan’s terms. The Eighth Circuit held that this language was not specific enough to authorize cross-plan offsetting, reasoning that such an interpretation would be “akin to adopting a rule that anything not forbidden by the plan is permissible.”

The Eighth Circuit’s holding leaves the legal status of cross-plan offsetting unresolved. The practice might be permissible under certain circumstances, but it raises important considerations for plan sponsors and fiduciaries. The immediate lesson is that the plan must expressly authorize the practice should it choose to do so. 

More generally, we continue to recommend that plan sponsors and fiduciaries consult with ERISA counsel to consider options for addressing overpayments, and we stress that plan language matters. It is important to review and update plan documents to ensure they expressly authorize appropriate methods for recovering overpayments. Care should be taken when drafting to avoid authorizing non-compliant remedies.

Important Ninth Circuit Decision Allows for Mandatory Arbitration Clauses

August 30, 2019

On August 20, 2019, the Ninth Circuit Court of Appeals issued an important opinion with respect to what may or may not be contained in an ERISA Plan Document.  Specifically, Dorman v. Charles Schwab Corporation (“Dorman Decision”) overruled a thirty five (35) year old Ninth Circuit precedent which barred the enforceability of mandatory arbitration clauses in ERISA Plan Documents. 

The Dorman Decision is sweeping in scope and indicates the Ninth Circuit may very well enforce mandatory arbitration clauses contained in ERISA Plan Documents which require arbitration in lieu of litigation over issues that relate to plan administration, investment decisions made by Trustees, eligibility questions, enrollment issues, coverage issues, etc. 

At this stage, Dorman will become final around approximately the end of October or early November, 2019.  Should Dorman stand, trust funds may want to consider inserting an arbitration clause into their Plan Documents and Summary Plan Descriptions requiring ERISA and other related claims by a participant/beneficiary against the Fund be submitted to arbitration in lieu of litigation.  Assuming Dorman becomes precedential, such an arbitration clause incorporating a fair arbitration procedure may very likely be enforceable and binding a Fund’s participants and beneficiaries.  You should consult counsel about this potential as the use of arbitration can be a valuable cost containment measure.

New Department of Labor Claims Processing Rules for Disability Plans

August 2, 2019

Many, but not all, Taft-Hartley health and welfare and retirement plans contain disability benefit components.  Additionally, some collective bargaining agreements include provisions granting an employee the ability to participate in a supplemental group disability policy under specified terms.

Recently, the United States Department of Labor – through the Employee Benefit Security Administration – issued new guidelines with regard to the processing of claims relating to disability benefits.  Prior to the issuance of these new rules, the processing of disability claims was largely exempt from the reach of the DOL’s regulations that generally applied to other  Plan claims.

Under the new DOL disability plan regulations, all claims for disability benefits are to be processed in the same manner as any other benefit claims.  This means a fair and reasonable claims processing system, with the ability to appeal an adverse claim decision.

What’s more, the regulations actually reduce the time frame for the initial duration and decision on a disability claim.  Here, the DOL regulations cut the time from the normal sixty (60) days to forty-five (45) days.  However, the ability of a plan to obtain additional time to process a claim (because, for example, the plan requires additional information) still exists and this time frame can be extended for another thirty (30) days.

Thus, if your ERISA plan sponsors and provides disability benefits, your plan must now comply with the new DOL regulations.  Fiduciary responsibility and prudence dictate that any Trustee of an ERISA plan inquire as to whether their plan does provide disability benefits which may be covered by the DOL regulations and, if that is the case, to seek assurances that your plan is in compliance with the new DOL regulations.   

Supreme Court to Decide New ERISA Case - Can Uninjured Parties Sue for Mismanagement? 

August 2, 2019

The US Supreme Court has accepted an ERISA case which will be decided in the next term and is worth watching. The case will determine whether participants can still sue their plan fiduciaries for mismanagement even if the fiduciaries contribute to the Plan to cover the loss.

In Theole vs. U.S. Bank, the 8th Circuit Court of Appeals said participants could not assert a breach of fiduciary duty if they did not suffer financial harm. In this case, the Plan Trustees who are, of course, fiduciaries, ignored the advice of their consultants, under-diversified the Plan’s assets, invested them in high-risk equities, and caused a much larger loss than was considered normal during the 2008 market crash. They attempted to rectify this by contributing $339 million of Plan sponsor assets to the Plan, bringing it back to overfunded status. Because the participants lost the same amount a diversified portfolio incurred during that period, after the contribution -- the Court said, no harm, no foul.

Not only does this completely fail to hold fiduciaries accountable for mismanagement, it encourages risky and unethical behavior that could put many more participants in harm’s way.  We will keep a close eye on this case as it develops. 

IT JUST BECAME EASIER FOR EMPLOYERS TO DUMP RETIREE PENSIONS

March 29, 2019

On March 6, 2019, the IRS issued Notice 2019-18, abandoning its previous position and announcing that they no longer plan to amend regulations to prohibit the practice of offering lump-sum buyout windows to retirees collecting pensions.

Lump-Sum Buyouts on the Rise

Pensions cover 26.2 million people and provide financial security to retirees, offering a guaranteed monthly income for as long as someone lives. For years, employers have sought ways to de-risk their pension plans and transfer the financial risk to retirees or insurance companies.

Plan sponsors were able to find a loophole in IRS Code 401(a)(9) to help companies dump their pension obligations through the filing of a plan amendment regarding participants in pay-status.  The plan sponsor could offer the retiree a one-time lump sum payment of the pension’s estimated worth instead of guaranteed lifetime monthly payments.  Since 2012, more and more companies began “de-risking” and offloading their pensions through this “retiree lump-sum window” offer. 

2015 Changes Protect Pension Security

IRS Notice 2015-49 disallowed lump-sum buyouts after the retiree was already receiving payments, stating the buyout violates the required minimum distribution rules (RMD) of section 401(a)(9). However, the retiree could still elect to receive a lump sum payment at the beginning of distribution if the plan allowed such an election. The notice also stated the IRS intended to file amendments asserting the lump-sum windows are disallowed.

IRS Changes Course

On March 6, 2019, the IRS issued Notice 2019-18, abandoning its previous position, announcing that lump-sum windows are no longer deemed to violate the RMD rules. The IRS claims they will continue to research this matter.  In the meantime, plan sponsors can once again offer retiree lump-sum windows as a strategy to offload pension risks and obligations.

We do not anticipate much effort on the part of our Taft Hartley funds to take advantage of this new rule since Union Trustees are uniformly opposed to these buyouts, except in extraordinary circumstances.  For those of you who are receiving your benefits from employer-sponsored Plans, we urge you to consult with your legal and financial advisors before accepting any offered buyouts.  Some commentators have suggested that these payouts are ultimately less valuable than regular monthly payments for life, and there is no doubt you will assume the investment risk if you decide to accept a buyout. 

Court Rules on ERISA’s Statute of Limitations

February 28, 2019

A federal district court dismissed a breach of fiduciary duty action based on a plaintiff’s failure to timely file his suit. Under ERISA, there are two (2) rather complicated statutes of limitations:

1)   Three (3) years from the earliest date on which the Plaintiff had actual knowledge of the breach; -or-

2)   Six (6) years from the date of the act that constitutes the breach or, in the case of a failure to act, the latest date on which the failure occurred or the act could have been cured.

In this decision, the court determined that the applicable limitations period began to run on February 17, 2011, which was the date certain amendments were made to plan documents.  That was the date of the act that constituted the breach. Because the plaintiff failed to bring his action until September 2017, seven (7) months longer than the six (6) year statute, the court found that the lawsuit was time barred under ERISA.

Federal District Court Enforces Plan Documents

A federal district court in Georgia recently concluded that ERISA requires courts, when determining what benefits are available under an ERISA plan, to follow and enforce the relevant plan document.  Thus, where a plan document excludes a specific class of person or employee from its coverage, that exclusion must be enforced by the courts, and, unless illegality is shown, the court will have no jurisdiction to unilaterally reform or modify the plan document.

In this case, the relevant plan document specifically excluded a certain class of employee from a plan based upon the employee’s occupation and job duties.  Because this exclusion was not based upon a prohibited factor - such as age, race, health, marital status, etc. – the court found that the exclusion was lawful, and as such, enforceable.

Health & Welfare Plan Notes

Under the Affordable Care Act, “large employers” – those who employ over 50 workers – remain covered by the ACA’s health insurance coverage mandate.  The ACA’s large employer mandate requires affected large employers to confirm with their health insurance providers that the coverage provided by the large employer conforms to the ACA.

An employer failing to timely file the appropriate IRS form confirming that the employer’s coverage complies with the ACA can be subject to a substantial fine.  Thus, large employers are required by the ACA to affirmatively confirm that the health insurance coverages they provide to their employees qualify under the ACA.  In this regard, Taft-Hartley Health and Welfare funds must be prepared to issue to a participating large employer, correspondence confirming that the plan(s) coverage conform to the ACA.  These confirmation letters should be backed, as well, by opinions from the plan’s professionals that the coverages provided by the plan are at least as good, if not better than, the coverages required by the ACA.

Many plans report being inundated by employer requests for confirmation of ACA compliance. By following the above steps and having a form letter ready to send to all participating employers, your plan will greatly assist participating employers.

Litigation over disparities between mental health and medical benefits persist

Under both the ACA and the mental health parity and addiction equity act of 2008, “MHPAEA,” covered plans may not discriminate against the provision of mental health benefits–where coverage for a specific benefit, i.e., in-office doctor visits – is covered by the medical benefit component of a plan.  The mental component of that plan – if it exists – must provide coverage on the same basis and without discrimination.

Many plans sponsored by employers do not meet the requirements of the ACA nor the MHPAEA regarding discrimination between mental health and medical benefits.  Recently, a federal court in New York allowed a lawsuit to go forward on theory that the Defendant employer’s benefit plan violated both the ACA and the MHPAEA because the plan(s) treated the coverage/out-of-pocket/reimbursement rates differently for the same type of doctor consultation, depending on whether the claim was for a medical event or for a mental health event.

Should the Plaintiff prevail, remedies would include a reformation of the plan to comply with the ACA and MHPAEA, applicable fines, and attorneys’ fees.  We recommend that all trustees review the benefit structures of their medical and mental health plans to insure that these structures comply with the ACA and MHPAEA.

California Court of Appeals Rules on How and When a Public Pension System can Recoup an Overpayment to a Participant 

Unfortunately, this particular fact situation seems to come up all too often:  public employee retirees think all is well with their retirement benefit because they have spent the last thirty (30) years sacrificing a portion of their wages in order to earn that retirement benefit. Low and behold, five (5) years later, retiree receives a letter from the Public Pension Plan claiming an overpayment of twenty thousand dollars ($20,000) and a demand that the retiree write a check back to the Pension Plan. 

In Krolikowski v. San Diego Employees’ Retirement System (“Krolikowski”), decided in June, the California Court of Appeals faced just such a fact pattern.  Apparently, the Retirement System had incorrectly calculated Mr. Krolikowski’s benefits to the upside and then discovered its error.

Turning away multiple arguments as to why the Retirement System had no legal grounds to seek the recoupment from the employee, the Court of Appeals essentially held that a public employee retirement system has every right to seek and obtain a judgment for an overpayment.  This is true even if the employee has adjusted their living standard to the inflated pension payment, and if the employee relied to his/her detriment on the inflated pension payment, and even if the retirement system went around its own administrative process and sues the employee directly in court. 

The basic lesson from Krolikowski is: there is virtually no defense available to a public employee who has received an overpayment from a Public Employee Pension Fund.  In California, a public employee has no reasonable expectation of keeping a public pension overpayment.  

Of course, this reasoning, under federally regulated private retirement funds, has been applicable under ERISA precedent for years.  If your fund discovers an overpayment, it is advisable to seek recoupment promptly upon discovery and if a fund with which you are associated does not have a regular procedure in place for discovering, by way of audit, and recovering overpayments, it should have.  Call us if you have any questions.

PBGC Offers to Locate Lost Participants

The PBGC was given the authority by Congress to ensure that participants in single employer defined benefit plan receive their vested benefits when the plan terminates. The PBGC will now extend its protective reach to defined contributions plans and small professional service defined benefit plans.

Under the expanded rule an employer, may voluntarily, when terminating an ERISA covered defined contribution plan: (1) transfer funds owed to the missing participant(s) to the PBGC or (2) send the PBGC information about the entity (or broker) that is holding the investments of the participant to the PBGC. The employer must also remit a one-time fee to the PBGC to cover the costs associated with locating the missing participant(s). Once the PBGC locates the missing participant(s), then the PBGC will either turn over the money or the name of the entity that is holding the participant’s money.

The process mentioned above for defined contribution plans is very similar to the process for small professional service defined benefit plans. First, an employer who operated a small professional service defined benefit plan may choose to work with the PBGC. If the employer chooses to use the PBGC’s program, they must: (1) transfer funds owed to the missing participant(s) to the PBGC, or (2) send the PBGC information about the entity (or broker) that is holding the investments of the participant(s) to the PBGC. Once the employer transfers the money or the information about the participant’s account to the PBGC, they must also pay a one-time fee to the PBGC. The PBGC will then locate the missing participant(s) on behalf of the employer.

While there are different rules for each type of plan, if you believe that you were a participant in a defined contribution or small professional service defined benefit plan from a former employer we recommend that you contact ERISA counsel to ensure that your retirement assets are protected.

 

 



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