The Employee Benefits practice group is pleased to present the Benefits Developments Newsletter for the month of June, 2017. Click through the links below for more information on each specific development or case.
DOL’s Final Fiduciary Rule is Now Applicable!
On June 9, 2017, the Department of Labor’s (“DOL”) final rule defining fiduciary investment advice became applicable. The newly created Best Interests Contract Exemption and Class Exemption for Principal Transactions also became applicable on that date, but their conditions will be phased in through January 1, 2018. Amendments to certain related prohibited transaction exemptions also became applicable on June 9th. On May 22, 2017, shortly before the applicability date, DOL issued a Temporary Enforcement Policy in which it specifically states that, during the transition period, it will not pursue claims against, or otherwise target, any fiduciary working diligently and in good faith to comply with the rule and related exemptions. Rather, DOL’s goal will be to provide compliance assistance to plans, plan fiduciaries, financial institutions, and others. DOL also issued a Transition Period FAQ on May 22nd that, in addition to discussing compliance requirements during the June 9, 2017 to January 1, 2018 transition period, provides examples of application of the new fiduciary rule in specific scenarios. It should be noted that both items of guidance released on May 22nd make clear that DOL’s re-examination of the rule and related exemptions is not complete. In particular, DOL announced that it plans to soon release a public Request for Information seeking further input on potential changes to the rule and related exemptions in light of recent public comment and developments in the market.
For more details regarding the rule, related exemptions, and related procedural history, please see our previous articles on the subject here and here. DOL also maintains a site dedicated to the rule and related exemptions here.
District Court Holds that Equity Award Share Withholding Exempt Under 16b-3
Jordan v. Flexton (S.D. Tex)
The U.S. District Court for the Southern District of Texas recently dismissed a shareholder’s lawsuit alleging that Section 16(b) of the Securities Exchange Act of 1934 was violated when insiders made nonexempt purchases of the issuer’s stock within six months of having shares withheld to satisfy the income tax withholding associated with restricted stock units awarded to the insiders. Under the shareholder’s interpretation of Section 16(b), unless share withholding to satisfy income tax withholding or the exercise price of an option is mandatory (as opposed to permissive) under the terms of an equity plan, any share withholding by an insider would be required to be “matched” with any non-exempt purchase made by the insider within six months of the share withholding, resulting in the insider being required to repay to the issuer any short-swing profit realized by the insider.
The District Court rejected the shareholder’s argument that Rule 16b-3 exempts share withholding only if the withholding is mandatory under the terms of the plan. However, it should be noted that, to rely on the Rule 16b-3 exemption, an elective share withholding right must generally have been approved in advance by the board of directors or a committee of the board of directors that is comprised solely of two or more non-employee directors (in general, the compensation committee). Jordan v. Flexton (S.D. Tex).
Church-Affiliated Employee Benefit Plans Can Qualify for ERISA’s Church Plan Exemption
Advocate Health Care Network v. Stapleton (2017)
In 2013, an alliance of two plaintiff firms filed class actions against nonprofit religious employers across the nation, contending that their pension plans were not church plans because they were not established by churches.
One such action was filed against Advocate Health Care Network, one of its officers, and two of its benefits-related committees. The plaintiffs in Advocate sought a declaration that Advocate’s pension plan is not a church plan because it was not established by a church. Among other things, the plaintiffs sought a court order directing the plans to comply with ERISA. The federal district court ruled in favor of the plaintiffs, holding that Advocate’s plan was not a church plan because neither a church nor an association of churches initially established the plan. Advocate appealed the decision to the Seventh Circuit Court of Appeals, and the Seventh Circuit affirmed the district court’s decision, holding that church plans must be established by churches.
Advocate then petitioned the Supreme Court which, in a unanimous decision handed down on June 5th, 2017, rejected the holdings of the lower courts, ruling instead that an employee benefit program for employees of a church-affiliated organization can qualify as a “church” plan, if (a) the plan is maintained by an entity (e.g., a retirement benefits committee or pension board) the principal purpose of which is the administration or funding of an employee benefit plan (i.e., a principal purpose organization”); and (b) the “principal purpose organization” is controlled by or associated with a church.
The Supreme Court’s decision validates numerous IRS private letter rulings and United States Department of Labor rulings that stand for the proposition that plans established by church affiliated organizations are exempt regardless of whether a church separately established them. If the plaintiff’s argument had prevailed, hundreds of employee benefit plans established by church-affiliated hospitals, religious schools and universities, old-age homes, youth programs, charitable day care centers, and mental health facilities would have lost their ERISA exemption.
In Advocate, the Supreme Court settled the issue of whether an entity controlled by or associated with a church can establish and maintain a church plan. However, as Justice Sotomayor noted in her concurring opinion, whether an organization is a “principal purpose organization” that is controlled by or affiliated with a church is a different question that should be resolved “with a view toward effecting ERISA’s broad remedial purposes.” If Justice Sotomayor had her way, ERISA’s church plan exemption would be narrowly applied. Church affiliated employers that maintain “church” plans should ensure that their administrative structure and operation conform as closely as possible to the requirements of the exemption. Advocate Health Care Network v. Stapleton (2017)
Employer Who Clearly Communicated Election Process for Lump Sum Retirement Benefit Prevailed Against Claims of Arbitrary and Capricious Benefit Denial
Strang v. Ford Motor Co. Gen’l Ret. Plan, 2017 WL 2210925 (6th Cir.)
Retiree John Strang was receiving a pension from Ford Motor Company when the company announced it would offer participants the option to take a lump sum distribution of their remaining retirement benefit. Ford offered staggered election periods, assigned randomly, and required participants to complete an election package. No exceptions were offered to this procedure.
Shortly after Ford’s announcement of the lump sum election opportunity, Strang was diagnosed with terminal cancer. Strang made multiple calls requesting an expedited election, but was refused. He also wrote to the company purporting to elect a lump sum option. Strang died before his assigned election period and Ford denied his widow’s request for a lump sum payment because Strang did not submit the required election forms during his assigned election window.
Strang’s widow appealed the resulting $463,254 reduction in her benefit. Ford denied her appeal and prevailed in federal district court against the widow’s claims that the denial of Strang’s lump sum benefit election was arbitrary and capricious and constituted a breach of fiduciary duty.
The Sixth Circuit upheld the district court’s determination that Ford did not act in an arbitrary and capricious manner because the plan clearly provided that completing the election package during an assigned enrollment window was a prerequisite to receiving a benefit. The Sixth Circuit held that Strang’s impending death did not obligate the employer to create a new claim system based on his unique circumstances. Fiduciary claims were also dismissed because they were duplicative of the widow’s claim for benefits and did not identify a separate harm to the plan to justify alternative relief. Strang v. Ford Motor Co. Gen’l Ret. Plan, (6th Cir., 2017).
Multiemployer Pension Fund Additional Assessment Upheld on Procedural Grounds
WestRock RKT Co. v. Pace Indus. Union-Mgmt. Pension Fund (11th Cir., 2017)
The Pace Industry Union-Management Pension Fund is a multi-employer defined benefit plan. The Fund is in critical status and pursuant to the Pension Protection Act of 2006 it was required to adopt a rehabilitation plan to improve its funding position. The Fund initially adopted this Plan in 2008. Subsequently, in 2010, the Fund amended its rehabilitation plan and provided that an employer who withdrew from the Fund must pay a portion of the Fund’s accumulated funding deficiency. An accumulated funding deficiency arises even in multiemployer plans when total contributions by employers are less than the required amount calculated under Internal Revenue Code funding requirements. Once a multiemployer plan adopts a rehabilitation plan, the funding standard requirements do not apply during the period the rehabilitation plan is in effect. As a consequence of the Fund’s actions, an employer that withdraws from the Fund must pay any withdrawal liability due to the Fund plus, under the rehabilitation plan provision, would be required to pay its share of the accumulated funding deficiency that arose prior to the rehabilitation plan’s adoption.
WestRock RKT Company was a contributing employer to the Fund. WestRock brought an action challenging the Fund’s ability to require withdrawing employers to pay their share of accumulated funding deficiencies that exists within the Fund. The Court of Appeals for the 11th Circuit held that WestRock did not bring a proper action to challenge the Fund’s adoption of the rehabilitation plan provision.
WestRock brought its action under two provisions of ERISA. The first was under ERISA §502(a)(10)(B) which allows a claim if the Fund sponsor fails to update or comply with the terms of its rehabilitation plan. WestRock sought an expansive reading of this provision. The Court rejected this claim finding that WestRock did not allege that Fund’s rehabilitation plan failed to meet the ERISA requirements. Further, the Court found that the provisions of the Pension Protection Act of 2006 do not preclude a multiemployer plan from adopting such a provision.
As a second claim WestRock challenged the provision under ERISA §4301 as an improper amendment relating to the calculation of withdrawal liability. The Court rejected this argument finding the claim for accumulated funding deficiencies was not part of the withdrawal liability assessment, it was in addition to that assessment, and therefore, the claim could not properly brought under the provisions of ERISA §4301. WestRock RKT Co. v. Pace Indus. Union-Mgmt. Pension Fund (11th Cir., 2017).
Court Rules Health Plan Entitled to Reimbursement from Participant’s Third Party Settlement
Rhea v. Alan Ritchey, Inc. Welfare Benefit Plan (5th Cir., 2017)
The United States Court of Appeals for the Fifth Circuit recently ruled that a health plan could enforce its reimbursement provision, even though that provision was part of a Summary Plan Description (“SPD”) and there was no separate plan document. The Employee Retirement Income Security Act (“ERISA”) requires plan administrators to furnish SPDs to plan beneficiaries. In addition, ERISA requires plans to be “established and maintained pursuant to a written instrument.” In this case, a plan participant was allegedly injured as a result of medical malpractice. The health plan covered the participant’s medical expenses and after she settled her malpractice claim, the plan sought reimbursement. The plan administrator sought to enforce the reimbursement provision in the SPD that stated “if a third party causes a Sickness or Injury for which you receive a settlement, judgment, or other recovery, you must use those proceeds to fully return to the Plan 100% of any Benefits you received for that Sickness or Injury.” However, the SPD also referenced a separate Plan Document that did not exist. The participant refused to reimburse the plan, arguing that the employer did not have an ERISA compliant written instrument. Although noting that the SPD was sloppy, the court determined that, in the absence of a separate plan document, the SPD would serve as the plan document and its terms would be enforceable. Although the plan administrator was ultimately successful, this case highlights the importance of plan documents. Plan sponsors should review their plan documents carefully to ensure they contain important provisions, and that the plan is coordinated with other relevant documents, such as an SPD or benefit booklet. Rhea v. Alan Ritchey, Inc. Welfare Benefit Plan (5th Cir., 2017).
