Category Archives: ERISA

DOL ERISA Enforcement

Contributed by William Scogland, February 26, 2018

The U.S. Department of Labor, Employee Benefit Security Administration (EBSA) is responsible for the enforcement of the Employee Retirement Income Security Act of 1975 (ERISA). EBSA recently announced that, in 2017, by enforcing ERISA, it restored $1.1 billion to employee benefit plans. Of this amount, about 60% was from civil investigations and 40% from informal complaint resolutions.

Of course, the flip side of $1.1 billion going to employee benefit plans is $1.1 billion paid by employers, fiduciaries and their insurers.

53855707 - hand holding megaphone - benefits

 hand holding megaphone – benefits

This announcement from EBSA appeared roughly contemporaneously with a number of surveys of defined contribution plan (e.g., 401(k) plan) fiduciaries, which found that an astonishing number, approximately 50%, do not know they are fiduciaries and that, consequently, their assets are potentially exposed under ERISA. Worse, many appear to believe that they can completely shed ERISA liability by hiring a third party.

Clearly, many plan sponsors need to revisit fundamentally their ERISA structures: who is a fiduciary?; who has what fiduciary duties?; what outside help – e.g., investment adviser or investment manager, is needed?; do the fiduciaries have adequate fiduciary liability insurance?; etc. Frequently, existing plan documents will be found inadequate. Perhaps, they were inadequate initially, but many have become outdated because of changing plans, regulatory revisions, personnel turnover, or other factors.

Other than the trustee and the plan administrator, which are always fiduciaries, the definition of an ERISA fiduciary is based on the actions and responsibilities of a person. Under ERISA, a person is a fiduciary to the plan to the extent the individual performs any of the following:

  • Exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets.
  • Renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so.
  • Has any discretionary authority or discretionary responsibility in the administration of such plan.

The extent of fiduciary status can vary from person to person, depending on the specific plan duties each person performs. For example, an individual responsible for investment selection or monitoring will be a fiduciary for the assets under his control, but won’t be a fiduciary when it comes to benefit claim decisions assuming this is outside his or her duties.

ERISA mandates that a plan fiduciary must discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and –

  • for the exclusive purpose of providing benefits to participants and their beneficiaries; and defraying reasonable expenses of administering the plan;
  • with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;
  • by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and
  • in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with ERISA.

A fiduciary should be aware of others who serve as fiduciaries to the same plan because all fiduciaries have potential liability for the actions of their co-fiduciaries. For example, if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach or doesn’t act to correct it, that fiduciary is also liable.

Certain transactions are prohibited under ERISA to prevent parties from exercising improper influence over the plan. Fiduciaries are prohibited from taking advantage of their position or acting in one’s own self-interest rather than in the best interest of the plan.

A fiduciary that breaches any of the responsibilities, obligations or duties imposed under ERISA can be personally liable for reimbursing the plan for any losses. Even if a fiduciary delegates duties to others, the delegating fiduciary retains fiduciary responsibility for prudently monitoring their performance.

Portions of the DOL Fiduciary Rule to go Forward on June 9, 2017

Contributed by Kelly Haab-Tallitsch, May 24, 2017

ERISA

Open book on desk with the words “ERISA The Employee Retirement Income Security Act” written inside

Secretary of Labor Alexander Acosta announced on Monday that portions of the controversial Department of Labor (DOL) fiduciary rule will go into effect as planned on June 9, 2017, with full implementation of the rule on January 1, 2018. Issued in April 2016, the fiduciary rule expanded the definition of a fiduciary under the Employee Retirement Income Security Act (ERISA) and imposed a higher standard of care and significant new procedural requirements on those providing investment advice to retirement plans, plan sponsors and participants. Implementation of the rule was previously delayed from April 10, 2017 to June 9, 2017 and the recent announcement comes as a surprise to many in light of the President’s February 3, 2017 memorandum directing the DOL to review the rule.

The DOL Field Assistance Bulletin No. 2017-02, issued May 22, 2017, announces a temporary enforcement policy related to the fiduciary rule and explains that the expanded definition of a fiduciary and the “impartial conduct standards” requirement for fiduciaries will go into effect on June 9, 2017, with many of the written contract and disclosure requirements effective for 2018. Beginning June 9th, advisers to retirement investors must give advice that’s in the best interest of the retirement investor, charge no more than reasonable compensation, and make no misleading statements.

Most importantly, the DOL announced that so long as fiduciaries are working diligently and in good faith to comply with the fiduciary rule the agency will not pursue claims against them or treat those fiduciaries as being in violation of the rule.

What Does This Mean for Your Retirement Plan?

Many of the compliance activities related to the fiduciary rule fall on investment advisors and are occurring behind the scenes for plan sponsors. However plan sponsors will begin to see increased written disclosures from their advisors and lengthier contracts.

What’s Next?

The DOL is continuing its review of the rule and has stated that additional changes may be proposed, based on the results of the examination. The agency announced its intention to issue a Request for Information for additional public input, including thoughts on a potential delay to the Jan. 1 effective date.

Penalty for Failure to File Form 5500 Almost Doubles

Contributed by Kelly Haab-Tallitsch, July 29, 2016

On July 1, 2016, the DOL issued an interim final rule that significantly increases the penalty amounts that may be imposed on plan sponsors for certain ERISA violations. The final rule ups the penalties for certain failures including failure to file an annual Form 5500 and failure to provide the Summary of Benefits and Coverage, as required by the Affordable Care Act.

calendarThese increases are the result of the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 whereby federal agencies were directed to adjust their civil monetary penalties for inflation each year. The increased penalty amounts will become effective Aug. 1, 2016, and may apply for any violations occurring after Nov. 2, 2015.

The new penalty amounts will affect both retirement and health and welfare plans, and some increases are substantial. Examples of increased maximum penalty amounts are below:

  • Failure to file a Form 5500: $2,063 per day (from $1,100 per day)
  • Failure of a multiple employer welfare arrangement to file a Form M-1: $1,502 per day (from $1,100 per day)
  • Failure to furnish plan-related information requested by the DOL: $147 per day, up to $1,472 per request (from $110 per day, up to $1,100 per request)
  • Willful failure by a health plan sponsor to provide a Summary of Benefits and Coverage: $1,087 per failure (from $1,000 per failure)
  • Failure of a defined contribution plan to provide participants with blackout notices or notice of the right to divest employer securities: $131 per day (from $100 per day)
  • Payment by a pension plan in violation of benefit restrictions and limitations: $15,909 per distribution (from $10,000 per distribution)
  • Failure of a pension plan to:
    • notify participants of certain benefit restrictions and/or benefit limitations
    • furnish certain multiemployer plan financial and actuarial reports upon request
    • furnish an estimate of withdrawal liability
    • furnish automatic contribution arrangement notices: $1,632 per day (from $1,000 per day)

Beginning in 2017, ERISA penalties will be adjusted on an annual basis no later than Jan. 15 of each year.

The increased penalty amounts are a reminder that it’s important for employers to understand the requirements imposed on them by ERISA and make sure they are in compliance with those requirements to avoid potential penalties at the newly increased rates.

ERISA Plans: Don’t Wait Until the Money’s All Gone

By: Rebecca Dobbs Bush

On January 20, 2016, the Supreme Court made it clear, in Montanile v. Board of Trustees of National Elevator Industry Health Benefit Plan, that ERISA plans wanting to enforce subrogation rights against a participant need to act quickly. If the participant spends all of his/her settlement funds on nontraceable items before the plan files suit for reimbursement, the plan is out of luck.

In December of 2008, plan participant, Robert Montanile, was severely injured when a Health Insurance and Moneydrunk driver ran through a stop sign and crashed into his vehicle. The health plan, in which Montanile was a participant, paid at least $121,044.02 for Montanile’s initial medical care. Not only did Montanile’s health plan contain a typical subrogation provision, Montanile also signed a separate reimbursement agreement reaffirming his obligation to reimburse the plan from any recovery or settlement he received.

Montanile pursued litigation against the drunk driver and obtained a $500,000 settlement. From those funds, Montanile paid his attorneys $200,000 plus $60,000 for costs advanced to him during the litigation. Montanile’s attorney set aside the remaining $240,000 in a client trust account.

However, when the plan sought reimbursement, Montanile’s attorney did not agree.  Settlement discussions eventually broke down. At that point, Montanile’s attorney notified the plan that he was distributing the entire $240,000 directly to Montanile unless they objected within 14 days. The plan didn’t respond and instead, six months later, filed federal litigation seeking reimbursement pursuant to ERISA §502(a)(3). Meanwhile, Montanile’s settlement funds were disappearing.

The Supreme Court confirmed in its opinion that ERISA §502(a)(3) limits subrogation claims to equitable relief. More simply put, a plan is only allowed to collect from the specific funds that a participant receives as settlement or judgment resulting from his/her injury. The Court held that if Montanile did not keep the settlement funds in a separate account or if he spent the whole settlement on nontraceable items (for instance, on services or consumable items like food), there would be nothing else that ERISA would allow the plan to seek reimbursement from – regardless of Montanile’s wrongful behavior.

The Court acknowledged the plan’s concerns that such an interpretation of ERISA would take away effective or cost efficient remedies for plans and encourage participants to spend settlement funds as quickly as possible. However, the Court indicated that health plans are in a position to control and prevent such behavior by monitoring medical care participants require and tracking and investigating expensive claims.

What does it all mean for employers? Employers with fully-insured health plans can most likely leave it to their insurance carrier to track and investigate expensive claims. However, employers with self-insured health plans should work with their TPA to make sure a process is in place to monitor and track expensive claims preserving their right to subrogation.

Does Tibble Really Cause Trouble for Employers with 401(k) Plans?

Contributed by Rebecca Dobbs Bush

The articles claiming the U.S. Supreme Court decision in Tibble v. Edison International are plentiful.  Each one seems to claim with a great sense of urgency that a new increased liability is now imposed on employers.  If you read enough of them, the sky seems to be falling on all those who operate and administer 401(k) plans.  In reality, most of these articles appear to be quoting language from the decision completely out of context.  Where an employer has been advised properly, Tibble should not require any change in the administration of an employer’s 401(k) plan.

In Tibble, the Supreme Court basically made a decision about the statute of limitations and how it should be applied in the context of a lawsuit relating to 401(k) plan administration brought under ERISA.  The Supreme Court reviewed whether a “continuing duty” tolled the participants’ lawsuit (contrary to what the lower courts had determined).  In the end, the Supreme Court decided that a lawsuit filed in 2007 criticizing mutual funds selected back in 1999 (more than 6 years ago), could go forward.  Essentially, the lawsuit could go forward based on the theory that the employer didn’t just act when it selected the mutual funds, the employer also acted each time a decision was made to maintain that selection.

In its fairly brief written opinion, the Supreme Court stated absolutely nothing about what the scope of an employer’s “continuing duty” was.  In fact, the Court was pretty clear that their decision did not speak to that issue:  “The parties disagree, however, with respect to the scope of that responsibility.  Did it require a review of the contested mutual funds here, and if so, just what kind of review did it require?”  The Court went on to state, “We express no view on the scope of respondents’ fiduciary duty in this case.  We remand for the Ninth Circuit to consider petitioner’s claims that respondents breached their duties within the relevant 6-year period under §1113, recognizing the importance of analogous trust law.”

Common sense should have dictated to most employers that they cannot simply set up a 401(k) plan and then stick their head in the sand for the rest of the plan’s existence.  In addition, experienced ERISA counsel and 401(k) plan advisors have long been advising employers of this continuing duty and advocating for periodic review.

In the end, as Tibble does not provide any insight at all on the appropriate scope of the periodic review each employer should undertake, the Tibble decision is not going to be a reason or basis for diligent employers with 401(k) plans to change existing practices.  That said, if an employer hasn’t yet been advised to undertake periodic review of their 401(k) plan, that employer may want to consider seeking out a different source for advice on the administration of their plan.

Summary Plan Description Posted on Company Intranet Does Not Satisfy ERISA Electronic Disclosure Rules

Contributed by Kelly Haab-Tallitsch

A recent court decision from the Eastern District of New York found that posting a summary plan description (SPD) on a company Intranet, without additional notice to participants, does not satisfy the electronic disclosure rules for employee benefit plans under ERISA.

In Thomas v. CIGNA Group Ins, an employee was participating in her employer’s life insurance plan at the time she became disabled. She stopped working and ceased paying the insurance premiums. The life insurance plan included a waiver of premium provision under which a disabled employee could request that life insurance coverage continue without payment of premiums. However, the employee never requested the waiver of premium and her life insurance coverage lapsed.

After her death, her beneficiary filed for life insurance benefits. The insurer denied the beneficiary’s claim arguing that the employee did not request a premium waiver, as required by the plan, and therefore was not covered by the plan at the time of her death. The beneficiary sued the plan saying that the premium waiver requirement had not been communicated to the employee.

The employer argued that the employee should have known about the premium waiver requirements because they were included in the plan’s SPD. The SPD was posted on the employer’s Intranet site, but was not specifically forwarded to participants. The employer argued that the employee was notified that she could access the Intranet in her initial employment confirmation letter, two years prior to her disability.

The court found in favor of the beneficiary and ruled that the employee’s estate was entitled to the death benefit. The court noted that simply posting the SPD on the company Intranet was considered insufficient delivery for ERISA plans under Department of Labor electronic disclosure rules. Those rules require the employer to provide notice to employees directing them to the website where the SPD is located, notification of the SPD’s significance, and notice of the right to request a paper copy. The rules also require notice each time a new electronic document is furnished.

Employers need to be aware of the rules regarding distribution of notices electronically and should review their distribution practices. While posting an SPD on a company Intranet is permissible, it alone does not satisfy the Department of Labor’s electronic distribution rules.

When distributing an SPD by making it available on a company Intranet, employers must also provide notice to participants informing them of the availability of the SPD and how to access it, the significance of the SPD, and the participant’s right to request a paper copy.

Supreme Court Rejects the Presumption of Prudence in Employer “Stock Drop” Claims Under ERISA

Contributed by Kelly Haab-Tallitsch

In Fifth Third Bancorp v. Dudenhoeffer, No. 12-751 (June 25, 2014), the Supreme Court overhauled the legal landscape of ERISA “stock drop” litigation. The case was brought by 401(k) plan participants after Fifth Third’s employer matching contributions, made in company stock to an ESOP component of the plan, dropped 74% over a two-year period. Plaintiffs argued that plan fiduciaries breached their duties under ERISA by investing in and maintaining investments in Fifth Third stock in light of the risks associated with the employer’s subprime lending practices.

In a substantial departure from the presumption widely accepted by appellate courts, the Supreme Court held that ESOP fiduciaries are not entitled to a special “presumption of prudence” in lawsuits challenging their decision to invest plan assets in company stock.  Instead, ESOP fiduciaries are subject to the same duty of prudence that applies to ERISA fiduciaries in general, minus the diversification requirements.

ERISA imposes a “prudent person” standard of care on retirement plan fiduciaries, and courts prior to Dudenhoeffer applied that standard using a presumption that an ESOP fiduciaries’ decision to remain invested in employer stock was reasonable. But the Court rejected the argument that an ESOP’s explicit requirement to invest primarily in company stock should trump the duty of prudence, ruling that ESOP fiduciaries should be held to the same standards as other retirement plan fiduciaries. Thus, the Court made clear that ESOP fiduciaries must be vigilant in making investment decisions, and do not have a free pass to invest in company stock when doing so is not prudent.

However, the Court also recognized the importance of weeding out “meritless claims” and rejected the plaintiffs’ arguments that the fiduciaries should have recognized the market was overvaluing the employer stock and should have acted on any inside information they possessed. The Court held that fiduciaries need not second-guess whether the market price of a publicly traded stock accurately reflects its value, nor do they have an obligation to trade based on material insider information.

The Supreme Court’s ruling could result in an uptick in ERISA stock drop suits initially, but the high pleading standards set forth by the Court make it more difficult for plaintiffs to survive a motion to dismiss.  Thus, on balance, Dudenhoeffer is unlikely to create significant additional liability for employers.