United States: Benefits Counselor July 2018


Fifth Circuit Vacates DOL Fiduciary Rule

On June 21, 2018, the Fifth Circuit Court of Appeals formally vacated the Department of Labor's ("DOL") Fiduciary Rule, including the Best Interest Contract and Principal Transactions Exemptions, effective immediately. This order finalizes the Fifth Circuit's March 15 decision in U.S. Chamber of Commerce v. DOL, where the court held that the DOL exceeded its authority in promulgating the Fiduciary Rule. The DOL was directed to pay the appeal costs of the financial industry groups that challenged the rule.

Consequently, the "five part test" from the 1975 regulations for determining who is a fiduciary is restored. However, as discussed in our June 2018 Benefits Counselor, the DOL issued a temporary nonenforcement policy in its Field Assistance Bulletin 2018 02 ("FAB 2018 02"), under which the DOL will not pursue prohibited transaction claims against fiduciaries working diligently and in good faith to comply with the exemptions' impartial conduct standards until the DOL issues new guidance.

Ninth Circuit Holds That Constructive Notice Is Sufficient to Impose Withdrawal Liability on Successor Employer

On June 1, 2018, in Heavenly Hana LLC v. Hotel Industry of Hawaii Pension Plan, the Ninth Circuit Court of Appeals held that a successor employer assumes liability for the predecessor employer's unpaid withdrawal liability under the Multiemployer Pension Plan Amendment Act ("MPPAA") because the successor employer had constructive notice thereof. In this case, Heavenly Hana LLC and Green Tree Management, and their parent company, Amstar39 (collectively, "Amstar"), purchased the Ohana Hotel ("Ohana"). Ohana contributed to the Hotel Union & Hotel Industry of Hawaii Pension Plan (the "Plan") until 10 days prior to the closing date, and formally withdrew from the Plan on the closing date.

Ohana's withdrawal triggered withdrawal liability of over $750,000. The Plan assessed this liability against Amstar, as Ohana's successor, and Amstar challenged the assessment on the grounds that Amstar did not have actual notice of the withdrawal liability. Reversing the lower court, the Ninth Circuit ruled that withdrawal liability can attach if the buyer has constructive notice thereof, which it deemed as "consistent with the MPPAA's intended purpose and liberal construction." The court noted the Ninth and other Circuits have adopted the constructive notice standard in other contexts (such as labor and employment cases).

Applying this constructive notice standard, the court determined Amstar indeed had constructive notice because a reasonable buyer would have discovered Ohana's withdrawal liability. The court based its determination on the fact that (a) Amstar had previously operated a hotel that participated in a multiemployer pension plan, (b) Amstar knew that Ohana's employees were unionized and that Ohana contributed to a multiemployer plan, and (c) the Plan's annual funding notices, which revealed the Plan's underfunded status, were publicly available on the internet.

PBGC Changes Disaster Relief Announcement Procedure

In an effort to simplify how it provides relief from filing deadlines and penalties following a disaster, the Pension Benefit Guaranty Corporation's ("PBGC") disaster relief announcements will now be tied to the disaster relief announcements issued by the Internal Revenue Service ("IRS"). Historically, the PBGC issued stand alone announcements after the IRS granted relief. Consequently, filers were required to wait for the PBGC to act after any given IRS disaster relief announcement to confirm that the PBGC was also providing relief.

Going forward, the PBGC will issue a one time announcement explaining the applicable PBGC disaster relief each time the IRS grants relief in response to a particular disaster. Unless a filing is on the Exceptions List (see below), the PBGC will grant relief when, where and for the same time duration the IRS grants relief for affected taxpayers. The Exceptions List includes: certain notices of reportable events under ERISA section 4043; notices of large missed contributions under ERISA section 303(k); and obligations related to distress terminations for which the PBGC has issued a distribution notice.

Court Approves $5.45 Million Settlement Between DOL and ESOP Trustee

The DOL has reached a $5.45 million settlement with the fiduciaries of the Cactus Feeders Inc. Employee Stock Ownership Plan (the "ESOP") and the ESOP's trustee, Lubbock National Bank ("Lubbock"), thereby resolving Acosta v. Cactus Feeders. On June 15, 2018, the court approved the settlement. In this case, the DOL alleged the ESOP's fiduciaries and Lubbock improperly relied on a deficient valuation analysis, despite having the requisite knowledge and experience to have discovered the analysis's defects, and that they caused the ESOP to overpay for the shares it purchased.

The settlement includes a process agreement requiring Lubbock to follow certain policies and procedures when serving as a trustee or ERISA fiduciary in future stock purchase or sale transactions (the "Lubbock Agreement"). This marks the fifth settlement agreement between the DOL and an ESOP trustee. Collectively, these settlement agreements are viewed as representing trustee best practices in ESOP transactions.

The first such agreement, in 2014, between the DOL and GreatBanc Trust Company (the "GBTC Agreement") provided a template for subsequent settlement agreements. Although the DOL modified subsequent agreements as necessary to address additional deficiencies, the Lubbock Agreement is noteworthy in that it is identical to the GBTC Agreement and does not impose any new requirements on Lubbock beyond those imposed on GreatBanc.


DOL Finalizes Association Health Plan Rule

On June 21, 2018, the DOL published the final Association Health Plan rule under ERISA (the "AHP Final Rule"). The AHP Final Rule amends the definition of "employer" under ERISA and expands the criteria for determining when employers may join together in an association to act as a single employer sponsor of an AHP. Specifically, the AHP Final Rule allows a "bona fide group or association" to establish a single employer AHP, provided it meets the following criteria:

  1. Purpose. The group or association must have at least one substantial business purpose unrelated to providing health coverage or other benefits to its employer members and their employees.
  2. Commonality of Interest. The employer members must have a commonality of interest; that is, the employer members are either (a) in the same trade, industry or profession; or (b) in the same principal place of business within the same state, or a common metropolitan area (even if the area straddles state lines).
  3. Organization. The group or association must have a formal organizational structure, including a governing body and by laws (or other similar formalities).
  4. Employer Control. The employer members must have control, in form and substance, over the functions and activities of the group or association, including its establishment and maintenance of the group health plan (to be determined on a facts and circumstances basis).
  5. Participation. The group or association may only offer coverage to employees of the employer members, the employees' eligible dependents, and certain eligible former employees of an employer member.
  6. Nondiscrimination. The AHP must comply with the health nondiscrimination rules of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and the Affordable Care Act (ACA), including not conditioning membership upon health factors.
  7. Health Insurance Issuer. Health insurance issuers may not constitute or control the group or association.
  8. Direct Employer. Each employer member must be a person acting directly as the employer of at least one person who is a participant in the group health plan.

In a departure from the previous rule, the AHP Final Rule permits working-owners without other employees to participate in an AHP and receive coverage for themselves and their eligible dependents. The new rule also permits existing AHPs to elect to operate as before under the former regulations or elect to follow the AHP Final Rule. Similarly, a group or association may form new group health plans and follow either the previous rule or the AHP Final Rule.

Ninth Circuit Holds Plan Must Cover Room and Board at Residential Treatment Facility

The Ninth Circuit Court of Appeals held that a group health plan which covered room and board costs at a skilled nursing facility violated the Mental Health Parity and Addiction Equity Act of 2008 ("MHPAEA") by denying the same coverage at a residential treatment facility for mental health. Danny P. v. Catholic Health Initiatives. The court held that, because the plan covered room and board (and other ancillary services) at skilled nursing facilities for medical treatment, the MHPAEA required it to equally cover residential treatment facilities for mental health; that is, one policy of coverage cannot be more restrictive than another.

HIPAA Covered Entity Required to Pay $4.3 Million in Penalties for Data Breaches

A U.S. Department of Health and Human Services Administrative Law Judge ("ALJ") held that the University of Texas MD Anderson Cancer Center ("MD Anderson") must pay $4.3 million in penalties for data breaches. The Office for Civil Rights ("OCR") investigated MD Anderson following reports of three data breaches. The breaches involved the theft of an unencrypted laptop from an employee's home and the loss of 2 unencrypted USB thumb drives containing the electronic protected health information ("ePHI") of over 33,000 individuals. The OCR's investigation revealed that MD Anderson had encryption policies dating back to 2006 and MD Anderson's internal risk analysis found that a lack of device-level encryption posed a high risk to the ePHI. Notwithstanding these encryption policies and high risk findings, MD Anderson failed to encrypt all of its devices. Based on these discoveries, the OCR imposed a fine for each day of HIPAA noncompliance and each record exposed, which tallied $4,348,000 in penalties.

In the OCR's history of HIPAA enforcement, this is only the second summary judgment granted in its favor, and $4.3 million is the fourth largest HIPAA violation penalty ever awarded by an ALJ or settlement for HIPAA violations.

Aetna Faces Class Action Over Wilderness Therapy Exclusion

Aetna Life Insurance Co. ("Aetna") has become the latest major health insurance carrier to be sued over its wilderness therapy exclusion. H.H. et al. v. Aetna Life Insurance Co. According to the lawsuit filed in the U.S. District Court for the Southern District of Florida on June 14, 2018, Aetna is alleged to have violated ERISA and the MHPAEA by denying coverage for medically necessary mental health and substance abuse treatment rendered at licensed wilderness therapy programs and residential treatment centers. This is the latest legal challenge regarding coverage for these types of programs.

Michigan Proposes to Appeal HICA Tax

Michigan acted to repeal and replace the Michigan Health Insurance Claims Assessment ("HICA") tax, pending approval of the tax's replacement by the Centers for Medicare & Medicaid Services ("CMS"). HICA imposes a 1% tax on all paid health care claims in Michigan to fund the state's Medicaid program. The tax is imposed on carriers of fully insured group health plans and third party administrators ("TPA") of self funded group health plans. The replacement tax, the Insurance Provider Assessment ("IPA"), would not apply to self funded group health plans and their TPAs, and further excludes individuals enrolled in a variety of types of coverage (e.g., accidental death and dismemberment, long term care, Medicare supplement, stand alone dental, dental, Medicare, Medicare Advantage, Medicare Part D, vision and prescription). Upon approval by CMS, the HICA tax will be repealed and the IPA will be effective on the later of the first day of the calendar quarter wherein CMS grants the approval, or October 1, 2018.


2017 Form 5500 for Calendar Year Plans. Plan administrators of ERISA plans must generally file the Form 5500 by the last day of the seventh month following the end of the plan year. For calendar year plans, the 2017 Form 5500 is due July 31, 2018. Plan administrators can request an extension of time to file the Form 5500 (up to two and one half months) by filing Form 5558 by July 31, 2018.

Health Plan Compliance Deadlines and Reminders

PCORI Fee Due by July 31, 2018. Plan sponsors of self funded health plans must report and pay the 2017 Patient Centered Outcomes Research Institute ("PCORI") fee by filing Form 720 by July 31, 2018. The applicable rate for plan years ending on or after October 1, 2017 through December 31, 2017 is $2.39 per covered life. The total fee amount is based on the average number of covered lives under the plan during the plan year that ended in the preceding calendar year (i.e., for calendar year plans, December 31, 2017). The fee sunsets with plan years ending before October 1, 2019.

Retirement Plan Compliance Deadlines and Reminders

Annual Funding Notice. Calendar year defined benefit plans with 100 or fewer participants (i.e., small plans) must provide an annual funding notice by the earlier of the Form 5500 due date or the date of the Form 5500 filing, including extensions. Calendar year defined benefit plans with 100 or more participants (i.e., large plans) must provide an annual funding notice to required recipients within 120 days after the close of the plan year.

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