United States: ERISA Newsletter (July 2017)


Welcome once again to Proskauer's newly revamped ERISA Newsletter. As a reminder, readers can obtain the information in this Newsletter as it is published on our blog.

Our featured article this quarter reviews an interesting circuit split on whether a board of trustees of a Taft-Hartley plan (multiemployer plan) should be considered structurally conflicted when a court reviews its decision to deny a benefit claim or appeal. After reviewing the circuit case law and the rationales behind the decisions, the authors discuss the practical implications for funds operating under the more burdensome rule.

The balance of the Newsletter reviews a number of developments, including updates on the DOL fiduciary rule, the Supreme Court's church plan decision, fee litigation, employer stock fund litigation, retiree benefits, mental health parity, benefit claims, IRS determination letter program, preemption, standing and health care reform.


By Myron Rumeld and Benjamin Saper

Although it has been nearly three decades since the Supreme Court first explained the appropriate standard of review for ERISA benefit claims, there remain unsettled issues that may affect the level of scrutiny that is accorded an administrative determination and, ultimately, the outcome of a claim for benefits. One such issue is whether benefit determinations made by the boards of trustees of Taft-Hartley plans—i.e., multiemployer plans that operate pursuant to the terms of collective bargaining agreements—should be more closely scrutinized by district courts because the boards are considered "structurally conflicted."

On the one hand, Section 302 of the Labor Management Relations Act requires that one-half of the board of a Taft-Hartley plan consist of trustees who are appointed by the employers who fund the plan, and, as such, are arguably motivated to deny the claim for the sake of saving costs. But on the other hand, the other half of the board consists of union-designated trustees who are arguably motivated to grant the claim to help their members. Moreover, the funding requirements for the plan are ordinarily pre-determined by collective bargaining agreements, such that benefit claims determinations do not directly impact employer funding obligations.

A circuit split on the issue has developed, with the Ninth, Sixth, and Fourth Circuits ruling that the boards of trustees of Taft-Hartley plans are not structurally conflicted and the Second Circuit ruling that they are structurally conflicted. This article reviews the underpinnings for the conflict of interest analysis generally and the reasoning of the differing rulings applying this analysis to Taft-Hartley plans. The article then discusses the practical implications for funds operating under the more burdensome Second Circuit rule, including the risk of undergoing additional discovery into the conflict issue, as well as the increased likelihood of an adverse outcome in the case.


Before commencing a claim for benefits under Section 502(a)(1)(B) of ERISA, a plan participant or beneficiary must exhaust his or her administrative claims pursuant to a plan's internal procedures. See, e.g., Kennedy v. Plan Adm'r for DuPont Sav. & Inv. Plan, 555 U.S. 285, 300 (2009). Judicial review of benefit claim denials is de novo unless the plan confers discretionary authority on the administrator to determine eligibility for benefits or to construe the terms of the plan. Where such discretion exists, courts review denials of benefits under an abuse of discretion standard. See Firestone Tire & Rubber Co. v. Burch, 489 U.S. 101 (1989).For many years, courts struggled in deciding what impact, if any, a plan administrator's conflict of interest should have on the appropriate standard of review. For example, if the plan administrator worked for the company that was responsible for paying benefits, should the plan administrator's decision still be entitled to an abuse of discretion review, or should a less deferential standard of review be applied? In Metropolitan Life Ins. Co. v. Glenn, 554 U.S. 105 (2008), the Supreme Court answered those questions and held that a structural conflict is a factor for courts to weigh in determining whether an insurance company abused its discretion in denying a claim for benefits, but does not change the standard of review. Furthermore, the Court stated that the extent to which the structural conflict will impact a court's review will be influenced by such factors as the steps taken to reduce bias in claims determinations, compensation paid to claims decision makers, and a history of biased claims decision making.

Glenn ruled that the existence of a structural conflict "is clear where it is the employer that both funds the plan and evaluates the claims [because] every dollar provided in benefits is a dollar spent by the employer; and every dollar saved is a dollar in the employer's pocket." The Court also found that a structural conflict exists when an insurance company is responsible for paying benefits, as was the case in Glenn. The Court did not address, however, whether a structural conflict of interest exists where the claim decision maker is a board of trustees of a Taft-Hartley plan.

Taft-Hartley Plan Boards of Trustees: Conflict or No Conflict?

Since Glenn, courts have been divided on whether a board of trustees of a Taft-Hartley plan operates under a structural conflict of interest such that the conflict should be taken into account when reviewing its benefit claims decisions in a lawsuit. The Ninth, Fourth, and Sixth Circuit Courts of Appeals have concluded that boards of trustees of Taft-Hartley plans do not operate under a structural conflict of interest, while the Second Circuit has ruled directly to the contrary.

The Ninth Circuit was the first to address the issue after Glenn. In Anderson v. Suburban Teamsters of N. Illinois Pension Fund Bd. of Trustees, 588 F.3d 641 (9th Cir. 2009), the Court found that no conflict existed because the participating employers (not the trustees) fund the plan, the trustees have no personal economic interest in the decision to grant or deny benefits, and the board of trustees consists of both employer and employee representatives who determine employee eligibility under the Plan. Having held that the trustees were not conflicted, the Court did not permit discovery outside of the administrative record and found that the trustees did not abuse their discretion in reducing the plaintiff's disability benefits.

A subsequent district court decision elaborated on Anderson's reasoning. In Leblanc v. Motion Picture Indus. Health Plan (C.D. Cal. Dec. 7, 2012), aff'd, 593 F. App'x 729 (9th Cir. 2015), the plaintiff argued that a structural conflict existed because both the contributing employers and the unions shared the same interest in keeping the plan's costs low, since dollars saved from plan funding obligations could be used to increase wages or other benefits. In rejecting this argument, the court explained that the resources of any plan will necessarily be finite, and thus that plan administrators always have a fiduciary obligation to insure the prudent management of plan assets, including when making benefit determinations. Having concluded that there was no structural conflict, the court confined its review to the administrative record and held that the board did not abuse its discretion in reaching its determination and that summary judgment in favor of the board was warranted.

The Sixth Circuit similarly rejected plaintiff's argument that a Taft-Hartley plan's structure created an inherent conflict because the trustees not only approved and denied claims, but also maintained responsibility for ensuring that the plan remain properly funded. Klein v. Central States, Southeast and Southwest Areas Health and Welfare Plan, 346 Fed. App'x 1 (6th Cir. 2009). In so ruling, the Sixth Circuit explained that the board of trustees did not have a profit motive and individual trustees received no personal financial benefit from approving or denying claims. Having concluded there was no structural conflict, the Court reversed the lower court's finding that the plan's determination had been arbitrary and capricious and remanded to the district court for entry of judgment in favor of the plan.

The Fourth Circuit reached a similar conclusion in Parsons v. Power Mountain Coal Co., 604 F.3d 177 (4th Cir. 2010). It explained that "[t]he conflict of interest Glenn envisioned was one in which the plan administrator had a direct financial stake in eligibility determinations." By contrast, it found, the board of trustees of a Taft-Hartley plan does not suffer any economic hardship when the trustees award additional benefits because the plan is funded by multiple employers whose contribution obligations are prescribed by the collective bargaining agreement and are thus unimpacted by the amount of benefits awarded. Having found that the trustees were not conflicted, the Fourth Circuit affirmed the district court's summary judgment decision enforcing the trustees' decision.

Against this backdrop, the Second Circuit reached a different conclusion in Durakovic v. Bldg. Serv. 32 BJ Pension Fund, 609 F.3d 133 (2d Cir. 2010). The Court held that a board of trustees of a Taft-Hartley plan is conflicted within the meaning of Glenn because the evaluation of claims is "entrusted (at least in part) to representatives of the entities that ultimately pay the claims allowed." According to the Court, "[t]hat the board is...evenly balanced between union and employer does not negate the conflict." Having concluded that a conflict existed, the Court next determined that the trustees' decision to deny benefits was arbitrary and capricious, reversed the district court's ruling, and granted summary judgment in favor of the Durakovic. The Court did not explain whether its ruling that the decision was arbitrary and capricious was dependent on its finding of a structural conflict of interest.

Potential Impacts of the Choice of Conflict Rule

Although ERISA § 502(a)(1)(B) cases are generally limited to the administrative record, the choice to treat multiemployer funds as inherently conflicted may cause defendants to undergo discovery on the conflict of interest issue. Courts have reached varying conclusions on whether and to what extent discovery relating to alleged conflicts of interest should be permitted. Where a plaintiff is able to present sufficient facts to the trial court to invoke substantial concerns about whether a conflict affected a benefit determination, targeted discovery may be permitted. On the other hand, courts are likely to deny conflict-of-interest discovery in cases where the plan administrator implemented safeguards against biased decision making, and where discovery on the alleged conflict of interest is unlikely to change the outcome of the case. Thus, it appears that a rule that Taft-Hartley funds are structurally conflicted will not automatically entitle plaintiffs to discovery but may increase the likelihood that courts will order targeted discovery, especially where a plaintiff alleges facts indicating that a benefits decision was improperly influenced by a conflict of interest.

A default rule that Taft-Hartley plans are conflicted also may impact whether courts ultimately uphold a plan's determination to deny a claim for benefits. As is evident from the decisions discussed above, rulings finding that plan fiduciaries abused their discretion will frequently follow predicate findings that the fiduciaries suffered from a conflict of interest. However, outside of the Taft-Hartley context there are many examples of courts upholding benefits decisions notwithstanding a finding of a structural conflict. Thus, while a finding of a structural conflict may increase the risk of an adverse ruling, a plan suffering from a structural conflict may still mount a successful defense.

View from Proskauer

The circuit split as to whether the board of trustees of a Taft-Hartley fund is structurally conflicted is significant because a finding of a structural conflict could affect the outcome of a benefit claim, and at a minimum could affect the scope of discovery conducted before the claim is adjudicated. It is hoped that the majority rule ultimately prevails, as it appears to be more consistent with the reality of what we observe when representing Taft-Hartley plans. But pending a resolution of the split, Taft-Hartley plans must be administered with an eye toward the risk that their boards will be found to be structurally conflicted.

In order to protect against the potential adverse implications of such a finding, a board of trustees will want to administer their review of benefit claims in a manner that removes any basis for believing that a structural conflict actually affected the benefit determination. Toward that end, a board of trustees should be particularly vigilant in maintaining a complete record of the basis for the determination, including all objective advice on which it relied. Furthermore, it may help if the record makes clear that the full board of trustees participated in the decision, and thus that the decision was not controlled by employer trustees who, according to the Second Circuit, might have an enhanced motivation to deny the claim. If such safeguards are sufficiently documented, reviewing courts are more likely to conclude that discovery into conflict issues is not warranted, and are similarly less likely to conclude that the structural conflict impacted the decision-making process. In short, the same "best practices" that apply to claims administration generally take on particular significance in the Taft-Hartley arena given the uncertain legal environment in which these plans' benefit determinations presently operate.



DOL Again Seeks Comments on New Fiduciary Rules and Exemptions

By Russell Hirschhorn, Seth Safra and Benjamin Saper

On June 29, 2017, the Department of Labor ("DOL") requested another round of public comment on its fiduciary rule—this time in the form of a Request ("RFI") for Information. The RFI seeks input on (a) whether to extend the January 1, 2018, applicability date for parts of the rule that are not yet in effect, and (b) changes to make the rule more workable. The RFI expresses an openness to modifying existing exemptions and adopting new ones.

The RFI has two deadlines for submitting comments: 15 days for comments on whether to extend the January 1, 2018, applicability date, and 30 days for other comments. Days will be counted from when the RFI is published in the Federal Register, which we expect will occur during the week of July 3rd.

The RFI has 18 specific questions, all of which are aimed at collecting more information for the DOL's review of whether and how the fiduciary rule affects retirement investors. The tone of the questions suggests that DOL is committed to the basic principle of protecting consumers from conflicts of interest, but open to constructive feedback to make the rule and its exemptions more workable.

The following are sample themes raised in the RFI:

  • DOL wants to know more about innovations in the industry to protect against conflicts of interest, such as technology-driven advice, "clean shares" in the mutual fund industry, and fee-based annuities.
  • There are questions about the best interest contract exemption, including whether the contract should be "eliminated or substantially altered" for IRAs. DOL is interested in cost-benefit analysis and proposals for alternative approaches.
  • DOL suggests the possibility of a "streamlined exemption" that is based on following model policies and procedures.
  • There are questions related to product sales and advice on contributions, including the possibility of exempting recommendations to make or increase contributions and the possibility of expanding the "seller's" exception. (The existing seller's exception is available only if the customer is represented by a sophisticated independent fiduciary.)
  • DOL is open to considering special rules for cash sweep services, bank deposit products, and health savings accounts.
  • The RFI asks for input on coordination with the SEC, self-regulatory bodies, and other regulators.

Department of Labor's New Fiduciary Rule Will Go Into Effect June 9th

By Russell Hirschhorn, Seth Safra and Benjamin Saper

The Department of Labor has announced that the new fiduciary conflict of interest rule and related exemptions will begin taking effect on June 9, 2017, ending speculation of further delay. At the same time, the Department announced a relaxed enforcement standard for the rest of 2017. See our blog post on the delayed effective date here.

The effect of the Department's announcement is that the new standard for when communications rise to the level of fiduciary advice will go into effect at 11:59 p.m. on June 9th. After that time, service providers who are deemed to provide investment advice—for example, by suggesting a particular investment or strategy, or recommending a rollover—will be subject to ERISA's duties of prudence and loyalty, as well as ERISA's prohibited transaction rules.

This is the first time that ERISA's requirements of prudence and loyalty will expressly apply for advisers to IRAs, HSAs, and other non-ERISA accounts that are subject to the prohibited transaction rules under the Internal Revenue Code. At least for now, however, there will continue to be no private right of action against advisers to non-ERISA accounts for breach of the duty of prudence or loyalty. The consequence of non-compliance will be a self-reporting excise tax under Section 4975 of the Internal Revenue Code.

Between now and the end of the year, the Department will continue to review the fiduciary rule and related exemptions. The Department announced that it intends to publish a Request For Information and that it will be receptive to comments related to the new rule's requirements. Secretary Acosta has also indicated (in a Wall Street Journal op-ed) that the Department is hoping to collaborate with the Securities and Exchange Commission on a more uniform standard.

Through the end of the year, the Department "will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions." This relaxed approach to enforcement is consistent with the Department's emphasis on compliance rather than penalties.

DOL Fiduciary Rule Delayed, But At Least Parts Might Be Here to Stay

By Seth Safra and Russell Hirschhorn

On April 4, 2017, the U.S. Department of Labor issued a final rule postponing applicability of the conflict of interest rule and related exemptions for sixty days, until June 9, 2017. The stated purpose of the extension is to allow more time to: (i) complete the examination required by President Trump's February 3, 2017 memorandum, which focuses on the rule's impact on access to retirement products, advice, and information (see our blog here); and (ii) consider possible changes with respect to the conflict of interest rule and related exemptions based on new evidence or analysis developed pursuant to the examination. The Department stated that it received 193,000 comment and petition letters expressing views on whether it should grant the delay Its 63-page release includes a discussion of the comments and hints of "a more balanced approach than simply granting a flat delay and all associated obligations for a protracted period."

In addition to the general 60-day delay, the Department has delayed most of the requirements for the best interest contract and other new exemptions through January 1, 2018.

In setting separate applicability dates, the Department distinguished between (i) the rule on fiduciary status (who is a fiduciary) and the "Impartial Conduct" standard (acting in the client's best interest), and (ii) the more onerous requirements of the various exemptions. The Department hinted that it might let the rule on fiduciary status and the Impartial Conduct standard go into effect as early as June 9th. In fact, the Department stated:

"[T]here is fairly widespread, although not universal, agreement about the basic Impartial Conduct Standards, which require advisers to make recommendations that are in the customer's best interest (i.e., advice that is prudent and loyal), avoid misleading statements, and charge no more than reasonable compensation for services (which is already an obligation under ERISA and the Code, irrespective of this rulemaking."

The Department further stated that it "finds little basis for concluding that advisers need more time to give advice that is in the retirement investors' best interest and free from misrepresentations in exchange for reasonable compensation."

In contrast, the Department observed that the onerous requirements for the various exemptions – including the "best interest contract," which would create a private right of action for IRA clients to sue their advisers over prudence and loyalty – can lead to increased compliance costs in a way that reduces access to retirement products, advice, and information. The Department emphasized a "compliance first" policy, whereby the Department intends to focus more on assistance in eliminating conflicts and improving compliance more generally than on citing violations and imposing penalties.

The Department is continuing to accept comments on the substance of the fiduciary rule and related exemptions: the formal comment period ends on April 17, 2017, but the Department stated that it will be open to helpful comments even after that date.

In sum, the message seems to be that the Department is not leaning toward tossing the rule in its entirety or leaving the fiduciary standard to the SEC, but it remains open to analysis of the rule's impact and thoughtful suggestions for how to reduce conflicts of interest without unduly burdening the retirement advice industry.


The United States Supreme Court Rules in Favor of Hospitals on "Church Plan" ERISA Exemption

By Howard Shapiro, Stacey Cerrone and Madeline Chimento Rea

The United States Supreme Court unanimously ruled in favor of religiously-affiliated hospitals and healthcare organizations in holding that a pension plan need not be established by a church in order to qualify for ERISA's church plan exemption. Petitioners are religiously affiliated non-profit healthcare organizations appealing decisions by the Third, Seventh, and Ninth Circuit Courts of Appeal that a church must establish an ERISA-exempt church plan. Respondents are current and former employees of these organizations.

Justice Kagan explained that the plain language of the statutory text clearly supported petitioners' view that a pension plan need not be established by a church to qualify for the exemption. Rather, a pension plan can qualify as a church plan if it is maintained by an organization whose principal purpose is to administer or fund a benefits plan or program for church employees if the organization is controlled by or associated with a church ("principal purpose organization") regardless of who established the plan. The Supreme Court's decision left unresolved several key questions, including whether petitioners and similar organizations are sufficiently church-affiliated to qualify for the exemption and whether these organizations' benefit committees are principal-purpose organizations. Justice Sotomayor agreed with the decision and its reasoning but she concurred to note her concern about the potential consequences of leaving employees of these organizations unprotected by ERISA. Justice Gorsuch took no part in the decision. The case is Advocate Health Care Network v. Stapleton, No. 16-74 (2017).


District Court Dismisses Allegations That Stable Value Fund is Too Conservative

By Neil Shah

A district court in Rhode Island dismissed claims by participants in the CVS Employee Stock Ownership Plan that plan fiduciaries imprudently invested plan assets in the plan's stable value fund. Plaintiffs argued that the stable value fund had an excessive concentration of investments with ultra-short durations and excessive liquidity, both of which caused the fund to underperform comparable stable value funds. The court dismissed the complaint because the stable value fund "was invested in conformance with its stated objective and whether that strategy was prudent cannot be measured in hindsight" simply by judging its performance against industry averages. The case is Barchock v. CVS Health Corp., No. 16-601, slip op. (D.R.I. Apr. 18, 2017).

Claims Against Investment Adviser in ERISA Fee Litigation Case Dismissed

By Tulio Chirinos

A federal district court in North Carolina dismissed claims by BB&T Corp.'s 401(k) plan participants that Cardinal Investment Advisors, LLC, the plan's outside investment advisor, breached its ERISA fiduciary duties by allowing the plan to invest in BB&T proprietary funds. The proprietary funds, according to plaintiffs, charged excessive fees and underperformed non-proprietary funds. The court dismissed the complaint against Cardinal because plaintiffs alleged only that Cardinal gave BB&T general investment advice and failed to allege any specific facts that Cardinal breached its fiduciary duty to the plan. The case is Bowers v. BB&T Corp., No. 1:15-cv-00732, ECF No. 150 (M.D.N.C. Apr. 18, 2017). Last year, the court summarily denied the BB&T defendants' motion to dismiss because plaintiffs' complaint adequately alleged claims for which relief may be granted. Bowers v. BB&T Corp., No. 1:15-cv-00732, ECF No. 58 (M.D.N.C. Apr. 18, 2016). The case against the BB&T defendants is ongoing.


Sixth Circuit Dismisses ERISA Stock Drop Action Against Cliffs Natural Resources

By Neil Shah

The Sixth Circuit affirmed the dismissal of ERISA stock drop claims by participants in the Cliffs Natural Resources' 401(k) Plan. The participants alleged fiduciary breach claims based on public and non-public information arising out of the collapse in iron ore prices that caused the company's stock price to decline 95%. With respect to the public information claim, the Court held that a "fiduciary's failure to investigate the merits of investing in a publicly traded company" is not the type of "special circumstance" that can support a claim based on public information, and that plaintiffs also must plead "what, if anything, the fiduciaries might've gleaned from publicly available information that would undermine reliance on the market price." With respect to the non-public information claim, the Court rejected plaintiffs' allegations that a prudent fiduciary could not have concluded that disclosing the inside information or halting additional contributions would do more harm than good. In so ruling, the Court determined that the plan fiduciaries could have concluded that divulging inside information would have caused the company's stock price to collapse, further harming participants already invested in the fund. The Court also determined that closing the fund without explanation might be even more harmful: "It signals that something may be deeply wrong inside a company but doesn't provide the market with information to gauge the stock's true value." The case is Saumer v. Cliffs Natural Resources, Inc., No. 16-3449 (6th Cir. Apr. 7, 2017).


Sixth Circuit Issues Trilogy on Retiree Health Benefits

By Madeline Chimento Rea

In three decisions issued on the same day, the Sixth Circuit held that Meritor retirees were not entitled to lifetime health benefits, while retirees at Kelsey-Hayes and CNH Industries were entitled to contractually vested health benefits. In the first case, a group of former Meritor employees filed suit after the company reduced their healthcare benefits. The CBAs provided that retiree healthcare coverage "shall be continued," but also set forth a general durational clause terminating the CBAs after three years and provided that healthcare benefits would remain in effect until the termination of the CBAs. The CBAs also stated that pension benefits were vested and did not say anything similar for retiree health benefits. Taking into account all of these terms, the Sixth Circuit held that the CBAs were unambiguous and that retirees were guaranteed benefits for only the three-year term of the CBAs. Cole v. Meritor, Inc., No. 06-2224, 2017 WL 1404188 (6th Cir. 2017). However, in cases against Kelsey-Hayes Co. and CNH Industrial N.V., the Sixth Circuit ruled against the employers. The principal difference in UAW v. Kelsey-Hayes was that the CBA contained a general durational clause that required mutual action to terminate the agreement. The Court determined that there was ambiguity when applying the general durational clause and, after looking at extrinsic evidence, concluded that the CBA vested employees with lifetime healthcare benefits. UAW v. Kelsey-Hayes Co., No. 15-2285, 2017 WL 1404189 (6th Cir. 2017). Similarly, in CNH Industrial, the Sixth Circuit found the CBA to be ambiguous because it was silent on the duration of health care coverage and the general durational clause carved out other benefits. Furthermore, the Court observed that eligibility for healthcare benefits was tied to pension eligibility. After looking at extrinsic evidence, the Court determined that the parties intended for retiree healthcare benefits to vest. Reese v. CNH Indus. N.V., No. 15-2382, 2017 WL 1404390 (6th Cir. 2017).


New Class Action Lawsuits Asserting Violations of the MHPAEA

By Steven A. Sutro

Banner Health and the Kaiser Foundation were recently hit with separate class action lawsuits challenging their denials of certain mental health care coverage. In the case against Banner Health, plaintiffs challenge Banner Health's exclusion of applied behavior analysis therapy from coverage for autism spectrum disorder as "experimental or investigational." Plaintiffs allege that the failure to provide such coverage violates the Mental Health Parity and Addiction Equity Act ("MHPAEA"). The case against Kaiser Foundation challenges the denial of coverage for residential treatment and hospitalization for eating disorders. Plaintiff alleges that physicians determined that hospitalization was needed to treat his severe eating disorder, but he could not get the required authorization from the Kaiser Foundation and the denial violates the MHPAEA. The cases are Etter v. Banner Health, D. Ariz., No. 2:17-cv-01288 (filed May 1, 2017) and Moura v. Kaiser Foundation Health Plan, Inc., N.D. Cal., No. 3:17-cv-02475, (filed May 1, 2017).


Fifth Circuit Enforces Reimbursement Provision in One-Page Welfare Plan

By Tulio Chirinos

The Fifth Circuit upheld the reimbursement and subrogation terms found in a welfare benefit plan's one-page SPD that also served as the plan document. Plaintiff, a plan beneficiary, received $71,644.77 from the plan to cover medical expenses incurred as a result of injuries sustained during a laparoscopic exam. Plaintiff's injuries were allegedly the result of medical malpractice for which she received a settlement for more than the amount of her medical expenses. The plan sought to recover the $71,644.77 pursuant to the plan's reimbursement and subrogation clause. Plaintiff refused and instead sought a declaratory judgment that she was not required to reimburse the plan because the plan did not have an ERISA-compliant written instrument in place when the plan paid the medical expenses. The plan countersued seeking reimbursement for the medical expenses and attorneys' fees. Plaintiff first argued that in order for the plan to comply with ERISA it had to have both an SPD and a written instrument and provide detailed information on how the plan is funded and amended. The Fifth Circuit rejected both arguments explaining that: (i) plans commonly use a single document as both the SPD and written instrument and that the practice is widely accepted by courts; and (ii) the plan's brief description of the funding and amendment procedures was sufficient to satisfy ERISA. The Court likewise rejected plaintiff's argument that the plan misrepresented material facts because the SPD referenced a nonexistent "official plan document" noting that such an errant disclaimer does not rise to the level of misrepresentation that would invalidate a plan document. The case is Rhea v. Alan Ritchey, Inc. Welfare Benefit Plan., No. 16-41032 (5th Cir. May 30, 2017).


Protecting Your Qualified Retirement Plan Now that the IRS Determination Program is (Mostly) Closed

By Paul M. Hamburger, Cristopher Jones, Robert Projansky, Seth Safra and Steven Weinstein

A lot has been written over the last few months about what to do now that the IRS has closed its determination letter program for ongoing individually designed tax-qualified retirement plans. Some see this as cause for celebration because we no longer have to go through the trouble of collecting documents, filling out forms, and negotiating with the IRS over renewals of qualification determinations. Another "positive" result of the IRS position is that existing determination letters will no longer expire—although they will become stale as time passes, due to plan changes and legal developments.

But most of the focus seems to have been on fear: as time passes, how will we know whether a retirement or 401(k) plan is still qualified? The answer to this question is important because plan sponsors and administrators have historically relied on determination letters for a host of purposes, including:

  • Representations for M&A, financing, and other corporate transactions;
  • Representations to auditors;
  • Representations to investment trustees and fund managers;
  • Government audits; and
  • Rollovers and other plan asset transfers.

We have seen a range of ideas, from moving to a prototype or volume submitter plan to obtaining a law firm or consulting firm "opinion" that is marketed as analogous to an IRS determination letter. In our view, a more practical solution is to continue the discipline forced by the old determination program and use that discipline for systematic reviews of ongoing compliance. This does not mean constant full-scale review, but rather setting up a system to ensure that key elements of the plan document and administration will be reviewed periodically (perhaps a little at a time to keep things manageable).

We have developed tools to help clients with this process, ranging from self-help diagnostic checklists (at no cost) to larger-scale compliance reviews with specific analysis and recommendations, all designed to manage compliance risk, add value, and protect confidentiality—think of it as the Proskauer Compliance Resolution System (PCRS).

In considering a prudent path forward, it is important to think about what an IRS determination letter is, and what it isn't. An IRS determination letter reflects the IRS's binding determination that a plan's written document satisfies the formal requirements for tax qualification. An IRS determination letter is binding on the IRS; it precludes the IRS from retroactively disqualifying a plan because of a defect in the plan's language.

But even if a plan has a favorable determination letter, the IRS can still disqualify the plan for many reasons, including.

  1. If the IRS discovers that the plan is not operating in accordance with its terms;
  2. If the IRS finds that a once-compliant plan document was not amended to comply with a change in law or was amended in a way that violates a technical qualification requirement; or
  3. If the IRS finds that the language in a previously approved plan was impermissible and should not have been approved. In this case, a prior determination letter protects against disqualification retroactively; but the IRS would still require a change going forward, and dealing with the IRS tends to be complicated if the change involves a potential cut-back of benefits or rights.

Separately, a favorable IRS determination letter generally does not help in defense of claims by participants and beneficiaries under Title I of ERISA, such as a claim for benefits owed or a breach of fiduciary duty. So even with an up-to-date determination letter, plan sponsors and administrators need to stay on top of plan document and operational compliance.

Given these limitations, the real question for plan sponsors and administrators is how best to manage ongoing plan qualification and compliance risk. A formal opinion letter from a private third party, like a law firm or consulting firm, might seem like an attractive way to make up for losing the determination letter piece of the puzzle. It is undoubtedly worthwhile to review the plan document—and ideally its administration too—and to correct any defects before the IRS or a disgruntled plan participant discovers them.

But the value in any qualified plan compliance exercise is found more in the quality of the review and steps taken to mitigate risk than in what is written into a third party's formal written opinion. For example, when the IRS audits a qualified plan, the existence of a third-party opinion letter is not likely to affect the auditor's independent findings and may have little or no bearing on the penalties that the IRS may assess if it concludes there is an error. Similarly, in a benefit claim or litigation, a third party's written opinion is not likely to persuade a fact-finder. To the contrary, an opinion can potentially cause harm if it leaves a discovery trail of issues that were identified but not adequately corrected, or issues that were spotted but ultimately resolved without action due to a plan-favorable interpretation of the law.

In most cases, the best value is to emphasize substance over form by working with reliable and pragmatic counsel, and by continuing to allocate resources to proactive plan compliance efforts. Systematic ongoing review is the best way to mitigate risks that arise from a technical web of constantly changing rules and an ever-more-creative plaintiffs' bar.

Compliance reviews come in many varieties. For example, when merging a small and simple plan into a larger, more complex plan, a quick review of required documents and basic processes might be enough. In other cases, a more detailed review is warranted. The important point is that every plan needs to be reviewed periodically to stay up to date and to ensure that operations remain consistent with plan terms and best practices.

At Proskauer, we are partnering with our clients to develop cost-effective compliance review programs. We have developed self-help tools, and we work with clients to understand and manage risk, while maintaining confidentiality and focusing on the needs of their particular organizations.

The Time is Right to Contact Recordkeepers About Hardship Substantiation

By Robert Projansky and Seth Safra

If your 401(k) plan recordkeeper has not talked to your company lately about hardship distributions, it may be time to reach out to the recordkeeper. The short story is that the IRS recently issued an internal memorandum (found here) providing guidance to its employee plans examination group on the substantiation requirements for hardship distributions from a section 401(k) plan. While this is not binding on the IRS as a statement of the law, it is useful in that it provides some indication of how the IRS would approach this issue in an audit.

By way of background, the law provides a list of expenses and costs for which a distribution would be considered on account of immediate and heavy financial need. Historically, plan administrators and recordkeepers have struggled to find a balance between ensuring compliance with the need requirement and making the process more efficient for plan participants. A number of recordkeepers allowed participants to "self-certify" electronically and required little substantiation of the expenses, but IRS officials informally questioned whether self-certification was sufficient—most recently in a 2015 post in Employee Plans News that said plan sponsors should retain documentation and that "electronic self-certification is not sufficient documentation of the nature of a participant's hardship."

The latest guidance maintains the position that self-certification alone is not enough, but offers an acceptable alternative to full substantiation.

Specifically, the guidance seems to provide two substantiation options.

First, the recordkeeper could require that a participant provide full underlying documentation (or what it calls source documents) substantiating the claim, such as estimates, contracts, bills and statements from third parties.

Second, the recordkeeper could require that the participant provide a summary of the information contained in the source documents. The summary could be in paper or electronic form or in telephone records. But if the summary is used, there are additional requirements:

  • The summary information provided by the participant must include (i) the participant's name; (ii) the total cost of the hardship event; (iii) the amount of distribution requested; and (iv) certification by the participant that the information provided is true and accurate.
  • The summary from the participant must also include additional information that depends on the type of hardship. For example, for medical expense hardship, the information must include (i) the name of the person incurring the expense; (ii) the relationship to the participant; (iii) the general category of the purpose of the medical care (e.g., diagnosis, treatment, prevention, associated transportation, long-term care); (iv) name and address of the service provider; and (v) the amount of medical expenses not covered by insurance. Each type of hardship has its own enumerated list.
  • The recordkeeper must notify the participant that (i) the hardship distribution is taxable and additional taxes could apply; (ii) the amount of the distribution cannot exceed the immediate and heavy financial need; and (iii) hardship distributions cannot be made from earnings on elective contributions or from qualified nonelective or qualified matching contribution accounts (if applicable). Of these requirements, only item (ii) is directly related to the form of substantiation.
  • The participant must also agree to preserve source documents and to make them available at any time, upon request, to the employer or recordkeeper.

In addition to the substantiation requirements, the IRS expects the recordkeeper to provide to the employer reports or other access to data on hardship distribution at least annually.

The guidance further suggests that IRS auditors might be skeptical of hardship distributions when summary documentation is used. In particular, the IRS is concerned about cases where an employee has more than two hardship distributions in a plan year. Absent an adequate explanation (e.g., tuition on a quarterly calendar), the IRS might ask for source documents. Auditors might also ask for source documentation if the employee's summary is incomplete or inconsistent on its face.

The IRS's openness to substantiation in a summary form will be welcome news to many administrators and plan sponsors. But accepting summary substantiation will require careful review by the recordkeeper and, even with that review, administrators and sponsors will have to rely on participants to maintain records.

Recordkeepers have now had a few months to process this recent guidance and react.Thus, now is a good time for plan sponsors to contact their recordkeepers to review their processes for approving hardship distributions and decide how best to proceed. Plan sponsors should consider whether the efficiency from reduced documentation is worth the potential for headaches in an IRS audit.


Out-of-Network Physician's Claim Against Insurer Not Preempted by ERISA

By Lindsey Chopin

The Second Circuit concluded that a promissory estoppel claim by an out-of-network provider against an insurer was not completely preempted by ERISA and thus remanded the claim to state court for further proceedings. The provider's claim was predicated on its assertion that the insurer made certain representations about coverage for the insured. The Court held that the provider was not the type of party that can bring an ERISA benefit claim because the plan at issue bars assignments of an insured's right to benefits to out-of-network providers. In so ruling, the Court rejected several arguments. First, the Court ruled that a determination about whether the purported assignment was valid under the terms of the plan is not an issue that must be decided under ERISA. Second, the Court determined that the provider's claim could not be construed as a claim for benefits because the provider had no pre-existing relationship with the insurer and was not a valid assignee of benefits. Third, the Court found inapplicable its prior conclusion that a provider's pre-approval telephone call to an insurer can never "give rise to an independent legal duty" enforced outside of ERISA. Here, unlike in previous cases, the provider's lack of a contractual relationship with the plan or the insurer meant that it was not required to call the insurer to receive pre-approval; rather, the provider called the insurer for its own benefit. Thus, the provider's suit to enforce the alleged promises made during the call is one to enforce its own rights that exist independent from the plan. The case is McCulloch Orthopaedic Surgical Services, PLLC v. Aetna Inc., 2017 WL 2173651 (2d Cir. May 18, 2017).

First Circuit Enforces Arbitration of ERISA Dispute

By Madeline Chimento Rea

The First Circuit concluded that, pursuant to the applicable collective bargaining agreement, it was for an arbitrator, not the court, to decide whether the union's claim that the employer failed to properly fund a defined benefit pension plan was preempted by ERISA. The First Circuit explained that the arbitration clause in the CBA clearly applied to the dispute and there is no prohibition on the arbitration of ERISA claims. The case is Prime Healthcare Servs.–Landmark LLC v. United Nurses & Allied Prof's, 848 F.3d 41 (1st Cir. 2017).


Ninth Circuit: Medical Providers Lack ERISA Standing

By Steven A. Sutro

The Ninth Circuit affirmed two district court decisions that concluded medical providers were not "beneficiaries" under Section 502(a) of ERISA and therefore lacked standing to bring an ERISA claim. The Court explained that, in one case, the provider had an assignment from the participants, but the assignment was invalid because the plan contained a non-assignment clause that overrode any purported assignments. In the other case, the assignment to the provider did not include authority to seek declaratory, injunctive, or monetary relief. The Court observed that its holding was in line with its own prior precedent and consistent with decisions in the Third, Sixth, Seventh, and Eleventh Circuits. The case is DB Healthcare, LLC, v. Blue Cross Blue Shield of Arizona, Inc., No. 14-16518, 2017 WL 1075050 (9th Cir. Mar. 22, 2017).

To read this newsletter in full, please click here.

ERISA Newsletter (July 2017)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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