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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. 


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. 

Pension Reform Update

March 7, 2019

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.

The House Education and Labor subcommittee recently heard testimony from a half-dozen witnesses, including actuaries, business leaders, and retired union members — all of whom agreed some sort of government intervention is needed to prop up these underfunded pension plans.  The consensus ended there, however, with lawmakers on both sides of the aisle staking out the same partisan positions that led to a stalemate last year by the joint super-committee studying pension solvency we previously described.

Sadly, lawmakers remain divided at this time, and no real progress can be foreseen through this Congress. 

Full committee chair Bobby Scott (D-Va.) and subcommittee chair Frederica Wilson (D-Fla.) both pointed out during the recent hearing that unofficial cost estimates of enacting Butch Lewis range from $34 billion to $100 billion. That’s roughly half what doing nothing is predicted to drain from the economy.  To make it real, one witness, James Morgan, a 57-year-old union member who spent three decades working at a Wonder Bread bakery, urged lawmakers to work out their differences before it is too late:  “I need my pension to get by every day,” he said.

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

ERISA Litigation Summary

March 7, 2019

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 this year, few decisions at the Appellate level have 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 of this year.  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.

Court Rules on ERISA’s Statute of Limitations

February 28, 2019

In a recent decision, 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 retires thinking  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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