Benefits Biz Blog
Baker & Daniels' BEC Team: February 2008 Archives
A Potentially Dangerous 'Safe Harbor'
Written by: Nick Curabba and Bob Toth
Participant contributions to small employee benefit plans will not be considered "plan assets" before being placed in the plan if they are deposited within seven business days, under a new proposal from the Department of Labor published in today's Federal Register. The proposal comes less than a month after a DOL Field Assistance Bulletin (FAB 2008-01A) squarely placed primary responsibility for collecting delinquent contributions on the plan trustee (see our earlier Client Alert for more detail). The combination of the two new rules could increase compliance costs for trustees of small plans, especially if the seven-day safe harbor opportunity is enforced as the rule when DOL investigators come knocking.
Because the proposal is a safe harbor, the general rule under the plan asset/participant contribution regulations will continue to apply. That means that participant contributions will still be required to be deposited into "an account of the plan" as soon as the amounts can reasonably be segregated from the plan sponsor's general assets. The safe harbor will act as a deeming rule: if small plan sponsors deposit participant contributions within seven business days, they will be deemed to have satisfied the regulations' timing requirements. For purposes of the safe harbor, a "small plan" is one with less than 100 participants at the beginning of the plan year. Plans with 100 or more participants will not be allowed in the safe harbor, although the Department indicated a willingness to change its mind on that point if public comments are persuasive.
As with any safe harbor, of course, the seven-day safe harbor could easily become the expected standard practice. We might even expect future investigations by the Department to focus on whether contributions were forwarded within seven days, rather than attempt to determine when assets were reasonably segregable. In other words, everything outside of the safe harbor could become dangerous waters for plan sponsors.
Combine this with FAB 2008-01A , which makes trustees responsible for ensuring that contributions are forwarded to trust, and you may have the potential for trouble. As we noted earlier, the Department's recent FAB appears to expand the scope of trustee responsibility. Now the insurance companies serving in "trustee-like" roles and the trustee component of a bundled plan arrangement offered by a financial services company will need to vigilantly track the timing of employer and employee contributions.
The impact on contributory health plans is a bit unclear. In an illustrative example included with the proposal, the Department indicates that COBRA premium payments made by former employees to a self-insured group health plan are deposited "with the plan" within seven days of having receiving them, the COBRA payments would be deemed to have been made within the required time frame.
Under 1992 Labor Department non-enforcement policy, however, contributory health plans are permitted to avoid ERISA's trust and reporting/disclosure requirements, pending further consideration by the Department as to whether such plans should be exempt from the trust requirements all together. The non-enforcement policy remains in place, as the Department has never formally articulated an exemption from ERISA trust requirement for contributory health plans. Interestingly, however, in a footnote, the Department explains that since "most of these plans are not affected by the regulation, because they are not required to comply with ERISA's trust requirement," they need not be a part of the cost/benefit analysis. Given this somewhat conflicting guidance, we would expect the Department to receive some comments requesting clarification.
DOL 'Preempts' Congress
Written by: Nick Curabba
The Department of Labor last week posted on its website Advisory Opinion 2008-02A expressing its opinion that, at least when it comes to ERISA preemption, Congress is…well…kind of irrelevant.
The advisory opinion is in response former to Solicitor of Labor Eugene Scalia's questions on behalf of Sprint-Nextel's automatic enrollment cafeteria plan, which automatically defaults non-electing employees into a health plan. Importantly, the default plan requires employee cost sharing in the form of payroll deductions.
Notwithstanding the recent expansion of ERISA's preemptive power to facilitate automatic enrollment for 401(k) plans, the Department took the position in the advisory opinion that plain vanilla, pre-PPA preemption works just fine to trump those pesky state withholding laws. For the countless lobbyists, lawyers, trade associations, and others in the benefits commentariat that urged Congress to expand ERISA's preemptive power to facilitate automatic enrollment 401(k) plans, the Department's new opinion may come as somewhat of a surprise.
Indeed, one of the key rationales for statutory expansion of ERISA § 514 was the perceived lack of clarity and inadequacy of pre-PPA preemption to effectively impose uniform federal standards in the face of conflicting state statutes. In the absence of such clarity, Congress was compelled to act.
And act they did. Section 902 of the PPA expanded the scope of ERISA preemption to specifically trump state laws that the interfere with certain types of automatic contribution arrangements, paving the way for more employers to adopt "automatic 401(k)s." The expansion did not come, however, without a cost.
In order to get to the new-and-improved preemption, automatic contribution arrangements must meet a series of preconditions, including requirements as to how the defaulted contributions must be invested, periodic election opportunities for defaulted participants, and new disclosure and notice requirements. Failure to meet those disclosure requirements could result in civil penalties of up to $1,000 a day under new section 502(c)(2), also enacted as part of PPA.
With the statement of its position in Advisory Opinion 2008-02A, the Department appears to suggest that the effort to enact the new preemption provision was unneeded. Worse still, because the Department's position is the new preemption preconditions apply only to individual account plans (see footnote 3 in Ad. Op. 2008-02A), there now appears to be a two-tiered preemption system, with extraneous preconditions still required for automatic contribution arrangements, but an easier path to preemption for non-individual account plans.
The 'Changing Landscape' of ERISA Litigation
Written by: Nick Curabba
February 20, 2008 -- A unanimous Supreme Court today ruled that an individual 401(k) plan participant can sue under ERISA to recover losses to his account allegedly caused by the plan fiduciary's failure to follow the participant's investment directions. The High Court's much-anticipated decision in LaRue v. DeWolff, Boberg & Associates settles -- at least for now -- confusion over the reach of ERISA's remedial provisions that courts and litigants have wrestled with since the last time the Court considered the issue in the 1985 case of Massachusetts Mutual Life Insurance Company v. Russell, 437 U.S. 134 (1985).
Writing for the Court, Justice Stevens' opinion was influenced by the changing nature of employer-sponsored retirement plans. When the Court decided Russell 23 years ago, it emphasized that ERISA sections 502(a)(2) and 409(a) permit monetary recovery from fiduciaries for losses to "the entire plan," indicating among other things that "the crucible of congressional concern" when enacting ERISA was the misuse of plan assets by plan fiduciaries. That emphasis on protecting the "entire plan," however, "reflects the former landscape of employee benefit plans," Justice Stevens wrote. "That landscape has changed."
Now, since "(d)efined contribution plans dominate the retirement plan scene," a different emphasis is required. Treating the "entire plan" language in Russell as dicta, Justice Stevens harkened back to ERISA's legislative history and found that a fiduciary breach that diminishes the assets in a particular individual account "creates the kind of harms that concerned the draftsmen of § 409."
For Court-watchers, it will not be surprising to learn that Justices Thomas and Scalia, while agreeing with the Court's outcome, took issue with Justice Steven's reliance on legislative intent. The Court's most ardent strict constructionists noted that it is "ERISA's text and 'not the kind of harms that concerned [ERISA's] draftsmen' that compels" the Court's result. The right of an individual to sue for losses, wrote Justice Thomas, should not be "contingent on trends in the pension plan market…(or) on the ostensible 'concerns' of ERISA's drafters." Since ERISA § 409 permits recovery to any participant for losses to "the plan," the only question is whether losses to an individual account is the same as losses to the plan. In the opinion of Justice Thomas, since individual accounts in a defined contribution plan represent little more than bookkeeping entries, each of which are comprised of plan assets, harm suffered by one account represents a loss to the plan.
A defined contribution plan is not merely a collection of unrelated accounts. Rather, ERISA requires a plan's combined assets to be held in trust and legally owned by the plan trustees…In short, the assets of a defined contribution plans under ERISA constitute, at the very least, the sum of all the assets allocated for bookkeeping purposes to the participant's individual accounts. Because a defined contribution plan is essentially the sum of its parts, losses attributable to the account of an individual participant are necessarily 'losses to the plan' for purposes of § 409(a).
In an even more narrowly drawn concurring opinion, Chief Justice Roberts agreed with the Court
that the decision below by the Fourth Circuit should be reversed, but did not necessarily agree that ERISA § 502(a)(2) is the appropriate remedial vehicle for this type of lawsuit. Rather, it may be more appropriate to have similar individual account complaints proceed under § 502(a)(1)(B), which provides a cause of action to recover benefits due under the plan. Among other things, a suit under § 502(a)(1)(B) carries with it the requirement (in most circuits) that a participant exhaust a plan's internal administrative remedies before pursuing federal district court litigation. The internal administrative review protects plan sponsors from precipitous litigation, creates a record for courts to review, and creates a favorable environment for employers to voluntarily sponsor a benefit plan. Permitting participants to recast a claim for benefits as a fiduciary breach would circumvent these protections, according to the Chief.
Among other things, the concurrence by Chief Justice Roberts may fuel additional arguments already being made in district court litigation about how an ERISA claim should be cast. Plan sponsors and fiduciaries will take comfort in the Chief's analysis and likely will continue to push for the safeguards sec. 502(a)(1)(B) provides (see amicus brief by the ERISA Industry Committee). Given that the Court let 23 years elapse between Russell and LaRue, we are not holding our breath for a quick resolution of the issue.
What's Old is New Again: 'Harris Trust' Makes a Comeback
Written by Bob Toth
Yes, Virginia, there is a Harris Trust (with apologies to Francis Church).
No, my friends, Harris Trust has never really gone away. But it has been so long ago now since we have had to really deal with this matter, it fades from memory. The "new guys" look at us with quizzical looks (or maybe blank stares) when we even mention the words "Harris Trust." They ask us to “explain it again,” almost as if saying “that can’t be true.”
For the uninitiated, "Harris Trust" is a reference to string of litigation and appeals which ended up with SCOTUS deciding (not quite) on the matter of Harris Trust v. John Hancock. (Opinion and recording of oral arguments available here). In it, the Supreme Court further confused an issue the DOL has always been reluctant to address (and do you blame them?) of when an insurance policy is considered a "guaranteed benefit policy" under ERISA. It is this case which led to the issuance of a prohibited transaction exemption 95-60 and the eventual passage of ERISA § 401(c). This was an important issue to the insurance and investment industries, because pension contracts which failed to be recognized as guaranteed benefit policies could have subjected billions and billions of dollars held in general accounts to ERISA's prohibited transaction rules. It really threw the investment folks into a tizzy for a while, as they now had to figure out how to design their exotic transactions around ERISA's PT rules. And worse than that, they had to talk to ERISA lawyers! Ahhh, the good ol' days.
So why does this matter to anyone today? Well, the industry got its affairs in order following Harris Trust. In response to the Court's decision, the issuance of 95-60, the passage of 401(c) and the DOL's promulgating the regs attempting to define an arcane creature called "transition policies," much of the insurance industry amended its group annuity contracts to qualify as guaranteed benefits policies. But that was years ago. And with the designs of a whole new generation of pension-related annuity products now underway, the current designers may not fully appreciate the Harris Trust solutions which we so carefully crafted.
So a few words to the wise (or at least to the young). Harris Trust lives. You just may not know it.
Alarming Question: MetLife v. Glenn
Written by: Philip J. Gutwein II
In the wake of yesterday's landmark decision in LaRue, it may be tempting to think that the Supreme Court will leave ERISA alone for the rest of the term. No such luck.
On January 18, 2008, the Court announced that it had granted certiorari in the Sixth Circuit case of MetLife v. Glenn, No. 06-923, on a single issue: "If an administrator that both determines and pays claims under an ERISA plan is deemed to be operating under a conflict of interest, how should that conflict be taken into account on judicial review of a discretionary benefit determination?"
To an ERISA defense lawyer, the Court's construction of the issue is alarming. Why? Because it suggests that an administrator that both determines and pays claims under an ERISA plan may be deemed—perhaps even presumed—to operate under a conflict of interest that affects the standard of review, such that the real question is exactly how that conflict should be taken in account on judicial review of a discretionary benefit determination.
The issue of whether an administrator that determines and pays claims is presumed to operate under a conflict of interest is a source of splintered jurisprudence across the federal circuits. The disparate rules from the Sixth and Seventh Circuits provide an example. In Glenn, the Sixth Circuit held that, because MetLife was "authorized both to decide whether an employee is eligible for benefits and to pay those benefits," its "dual function create[d] an apparent conflict of interest" that must be taken into account in assessing whether MetLife abused its discretion in deciding Glenn's claim. 461 F.3d 660, 666 (6th Cir. 2006). In contrast, the Seventh Circuit has concluded that there is not "an inherent conflict of interest due to [a party's] dual role as insurer and administrator of the Plan." Kobs v. United Wis. Ins. Co., 400 F.3d 1036, 1039 (7th Cir. 2005). Rather, the Seventh Circuit "presume[s] that a fiduciary is acting neutrally unless a claimant shows by providing specific evidence of actual bias that there is a significant conflict.” Id.
To ERISA litigators, therefore, the Court has granted cert in Glenn on what are actually two distinct issues: (i) whether an administrator that both determines and pays claims under an ERISA plan is presumed to operate under a conflict of interest; and, if so, (ii) how that conflict should be taken into account on judicial review of a discretionary benefit determination. ERISA defense counsel hope that the Court's description of the issue does not foreshadow its ruling on the threshold question of whether a conflict is presumed to exist when an administrator both decides and pays claims. Irrespective, Glenn is poised to produce a rule from the Court with profound implications for entities that serve the dual function under an ERISA plan of deciding and paying claims—and that means that insurance companies, which are frequently responsible for deciding claims under the ERISA plans they fund, are watching this case closely. So, too, should employers who sponsor and decided appeals under a self-funded plan.
Sovereign Immunity for School Districts 403(b) Fiduciary Choices?
Written by: Bob Toth
Many professionals have been advising certain governmental employers for a while that just because ERISA doesn't apply to their 403(b) plans, state trust and fiduciary laws do. The IRS's new 403(b) regulations have exacerbated that exposure to state law liability by now requiring plan documents be maintained, that the employer be actively involved in approving vendors, and that the employer make other determinations under their plan.
We've heard several people comment that this fiduciary exposure may not be of particular concern to organizations like school districts because of the broad application of the sovereign immunity doctrine. We took a quick look at it in several states, and encourage you to do the same. The law varies from state to state, but it appears that sovereign immunity coverage for school districts may not be as broad as one would assume.
While the decision to adopt a 403(b) plan appears immune from claims, it also appears that, in many states, the ministerial act of implementing the plan may have only limited, if any, immunity. This especially may become an issue when the school district endeavors to decide whether or not to approve a 403(b) transfer from one vendor to another. Though the IRS regulations were designed with regulatory compliance in mind, the act of approval of a particular investment vendor implicates the fiduciary's role-even in the non-ERISA setting.
Annuity Framing Matters
Written by: Nick Curabba
Here is an interesting post from Tim Burnes, blogger at Fiduciary Investor, about the virtues of deferred retirement annuities. Also known in some circles as "longevity insurance," these are annuity products designed to guard against the risk of extreme old age. The concept has some supporters (some life companies even sell them), and federal legislation to make longevity insurance more attractive to 401(k) participants has been kicking around for a few years.
We wanted to highlight one aspect of the Fiduciary Investor piece that was especially interesting. According to this recent study by Jeffrey Brown, Jeffrey Kling, Sendhil Mullainathan, and Marian Wrobel, people are more willing to consider annuities if they are presented in the right context. The authors make the point that annuities are best sold as consumption, rather than an alternative investment, and should be discussed in the context of planning for decumulation, rather than asset accumulation.
If their conclusions are right, they validate the on-going efforts of the insurance industry to educate policymakers and the public about the true insurance aspects of annuities. People don't generally consider premiums on their homeowner's insurance to be a "bad deal" unless those premiums are recouped, with interest. Burns suggests that annuities should be thought of similarly : "It seems likely that a partial annuitization would more easily be framed and accepted by individuals as an insurance or consumption decision where the payment is akin to an insurance premium rather than a capital investment."
FMLA: One Way to Define a Service Member's 'Qualifying Exigency'
Written by: Bob Kistler
The recent extension of the Family and Medical Leave Act permits certain relatives and the spouses of active duty service members to take unpaid leave when the service member experiences a "qualifying exigency" in support of a "contingency operation." The Secretary of Defense designates, or statutory provisions define, "contingency operations"; however, defining "qualifying exigency" is left to the Labor Department.
One perfect example of a "qualifying exigency" results from the Department of Defense requirement that single parents and dual military parents create a comprehensive Family Care Plan, which, among other things, puts into place procedures for child care during times of deployment (both short-term and long-term providers). Close family members, especially grandparents, are frequently chosen for the role.
Since the military defines "contingency readiness" in hours, rather than days, guardians must be prepared to receive children displaced by contingency deployments on very short notice. While challenging for any guardian, this is particularly difficult for guardians working full-time. Physically transporting the child to the guardian's home and arranging for child care can be time-consuming. (Any working parent can appreciate that while the military may be ready on a moment's notice, most child care centers are not.)
While the DOL will define "qualifying exigency" in due course, any single parent or couple with both parents in the military has nightmares which leave little ambiguity regarding one conceivable meaning. Thus, the DOL should consider such a scenario when defining or illustrating a "qualifying exigency."
Privacy and the New 403(b) Rules
Written by: Bob Toth
For all the talk of consolidated plan administration in the 403(b) world in the wake of the IRS's new regulations, there's a real monster lurking in the bushes which isn't getting much attention: the state law privacy rules which apply to individually owned 403(b) annuity contracts and custodial accounts in non-ERISA plans.
Privacy doesn't appear to be an issue for ERISA plans, because of ERISA's likely preemption of state privacy rules; or where the employer owns the contract or custodial agreement; or where Gramm Leach Bliley may be implicated. It doesn't even appear to be much of a problem under the rules requiring information sharing agreements because those rules only apply upon the transfer of a 403(b) account when presumably, the plan participant will agree to the release of data. And it shouldn't even be much of a problem on newly issued individual contracts, as long as vendors build consent into application forms.
But what of that large block of individually owned 403(b) contracts over which the employer has no authority, and the plan participant is unwilling to grant consent? It can be a real wrench thrown in the gearhouse of consolidated administration.
Cycle C Applications: Will the Service 'Accept or Reject'?
Thanks to the PPA Blog for this good catch: Looks like the IRS will require some additional documentation for the next round of determination letter applications. In addition to the standard submission consisting of a Form 5300, including several explanatory attachments; Form 8717, with appropriate user fee; Form 2848; a complete copy of the plan document, with all amendments; the most recent favorable determination letter; a copy of the trust document, with amendments; and a statement explaining how any amendments made to the plan since the last favorable determination letter affect the plan, the Service wants even more.
According to Revenue Procedure 2008-6, Cycle C determination letter submissions also must include a copy of the plan and trust in which "all changes made to the most recently approved version of the plan (are) redlined or highlighted. An application will be returned as incomplete if it fails to include a copy of the plan that redlines or highlights the changes to the most recently approved version of the plan."
One can only wonder what the Service may have in mind for Cycle D submissions...
