Tag 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.

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 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 Perhaps, they were inadequate initially, but many have become outdated because of changing plans, regulatory revisions, personnel turnover, or other factors.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.

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.

Spring Cleaning? It’s Time for Your Benefit Plan Housekeeping Too

Contributed by Kelly Haab-Tallitsch

The number of DOL benefit plan audits held steady in 2013 with the Employee Benefit Security Administration (EBSA) recently announcing that 3,677 civil investigations were closed in 2013, resulting in $1.7B in corrections, restored plan assets and fines. With that in mind, it’s a good time for plan sponsors and administrators to turn their attention to some basic housekeeping.

If the thought of a DOL plan audit makes you nervous, there’s good reason! DOL investigations find a failure in over 70 percent of plan audits. Failures typically result from defects in plan administration or a misinterpretation of plan provisions. There are common areas of risk in an audit and with fewer resources devoted to plan administration, smaller companies often bear the brunt of this risk.

What can you do to minimize risk? Prepare ahead of time. You may not be able to prevent an audit, but you can reduce the risk of fines and penalties and increase the odds that the process will go smoothly.

Prepare in Advance

Plan sponsors should prepare for an audit on an annual basis by reviewing the following:

1)      Plan Documents

With the Supreme Court affirming the plan document’s central role in the administration of an ERISA plan (read my post on the case here), your plan document – and adherence to it – can make or break a plan audit. Make sure that plan documents are in compliance with laws and regulations and required amendments have been made.

2)      Day-to-Day Operations

Operations of the plan must be in compliance with the plan document. Make sure that the people running the plan know the plan document inside and out. Compliance with ERISA is largely about having, documenting and following a process. Define roles regarding plan administration and clarify responsibilities. Address any recommendations from your accountants and engage outside counsel to do an internal review and develop a compliance checklist.

 3)      Plan Records

Get your records in order before a plan audit. Audits can be time-consuming and disruptive to day-to-day operations. To minimize disruption, maintain organized, complete records in a central location.

In addition to copies of plan documents, filings and participant notices, maintain records necessary to show how decisions were made and processes followed. This includes copies of employee contribution records, remittance statements, benefit statements and resolutions from benefit or investment committee meetings.

Areas of Risk

Two common areas of risk for plan sponsors include Summary Plan Descriptions (“SPD”) and Health Insurance Portability and Accountability Act (“HIPPA”) compliance.

  • Summary Plan Descriptions – SPDs have numerous requirements and the rules have changed significantly since their inception, making this a frequent problem area. Most noncompliance is inadvertent and the result of a failure to understand the requirements, such as reliance on an insurance carrier’s plan booklet as an SPD (without an ERISA compliant “wrap-around” plan document) or discrepancies between an SPD and plan document.
  • HIPPA Compliance – The HIPPA requirement that plan administrators inform participants about enrollment rights is an area the DOL focuses in on, as well as the processes for handling personal health information.

With benefit plan audits continuing to rank high on the DOL’s agenda, plan sponsors should set aside time in 2014 to prepare for a possible plan review.

An ERISA Plan’s Contractual Limitations Period Is Enforceable, Says The U.S. Supreme Court

Contributed by Kelly Haab-Tallitsch

The U.S. Supreme Court continues to rule in favor of the ERISA plan document.

A disability plan’s three-year limitations period doesn’t violate the Employee Retirement Income Security Act (ERISA), a unanimous Court ruled on December 16, 2013 in Heimeshoff v. Hartford Life & Accident Ins. Co. “[A] participant and a plan may agree by contract to a particular limitations period, even one that starts to run before the cause of action accrues,” held the Court. ERISA itself does not specify a statute of limitations for claims brought under covered plans.

 In Heimeshoff, the plaintiff challenged her disability plan’s limitations period because it began to run before she could exhaust her administrative remedies. The plan requires participants to bring suit within three-years after “proof of loss” is due. Proof of loss is due before a claim can be processed, and therefore before a plan’s administrative remedies are exhausted. Because courts generally require a participant to exhaust all administrative remedies before seeking judicial review, this overlap can shorten the period of time in which a suit can be filed.

In her appeal, the plaintiff argued that permitting a limitations period to begin before the exhaustion of administrative remedies conflicts with the general rule that limitations periods begin upon the accrual of the cause of action. The Court rejected the argument, holding that parties can not only agree to the length of time of a limitations period, as long as it is reasonable and there is no controlling statute to the contrary, as previously held in Order of United Commercial Travelers of America v. Wolfe, 331 U.S. 586 (1947), but also as to when that limitation period begins.

The Court rejected the plaintiff’s argument that the limitations period conflicted with ERISA’s two-tiered remedial scheme by undermining the administrative review process and limiting judicial review. It found the suggestion that the scheme encourages participants to “shortchange their own rights” during the administrative review process “highly dubious,” noting that plan participants have an interest in a thorough administrative review process.

Finding the availability of judicial review to be largely unaffected by limitations periods, the Court stated that in the handful of cases identified by the plaintiff where participants’ claims were barred by a limitations period, the participants had not “diligently pursued their own rights.” The Court added that existing judicial doctrines, such as estoppel and equitable tolling, are available to district courts to address situations in which a plan participant’s rights have been adversely affected by a limitations period.

What Does This Mean?

On a practical note, if your ERISA plan has a three-year limitations period, it is most likely enforceable. If it doesn’t have a limitations period, now is the time to speak with your counsel about putting one in.

But more importantly, this was another decision by the Supreme Court illustrating its preference for enforcing ERISA plan provisions as written, following its decision in US Airways, Inc. v.McCutchen earlier this year and a signal that courts will likely continue to enforce ERISA plan documents as written. This is good news for plans sponsors and participants as it keeps administration and litigation costs down, keeping plans available and affordable.

The U.S. Supreme Court Is Back In Session – What Does This Mean For Employers?

Contributed by Heather Bailey

As with every Fall, the United States Supreme Court is back in session with less than the normal amount of employment cases, but important ones nonetheless.  This session includes the following employment (and employment-related) cases up for decision by our highest court:

  • To be a true “supervisor” for purposes of Title VII (i.e., race harassment), does the individual have to have authority to hire, fire, and discipline the alleged victim in order for the employer to be vicariously liable?  The problem is that some federal appeals courts and the Equal Employment Opportunity Commission find that just overseeing and managing the employees’ day-to-day duties is sufficient.
  • There are two pending class action disputes – i) does the employer’s offer of judgment (aka settlement offer) that satisfies the solo plaintiff’s claims moot the Fair Labor Standards Act’s collective action, vitiating the other member’s ability to be part of the class action; and ii) can a court certify a class of individuals under Rule 23 without the plaintiff(s) first having to show with admissible evidence that all of the class members are entitled to some damages?
  • One ERISA case will be decided as to whether an employer’s health benefit plan can seek full reimbursement from plan participants where the participants sought additional recovery from third parties during personal injury settlements. What is a fiduciary’s “appropriate equitable relief” will be challenged because there are times the participant’s third party recovery is less than the medical expenses accrued.
  • An affirmative action case against the University of Texas — although not employment-related — could have a significant impact on future employment litigation.  Here, the woman is alleging that the use of affirmative action racial quotas for admission is a violation of her Constitutional rights.  The Equal Employment Advisory Council filed a brief for neither party, but asked the Court to take into consideration its decision will have on future employment affirmative action cases for private employers.

Stay tuned as SmithAmundsen will report back immediately once decisions are rendered in these cases.