Benefits Catch-Up - Q1 2025

Retirement plans 

Verizon Pension Risk Transfer (PRT) Litigation

In late 2024, Verizon retirees filed a lawsuit alleging that pension plan fiduciaries violated their fiduciary duties when they transferred nearly $6 billion in plan liabilities by choosing the least expensive insurance option rather than the safest option. The case is not the first lawsuit involving PRTs; however, many earlier suits targeted PRTs involving insurance companies backed by private equity, while this latest suit focuses on more traditional insurers. Eversheds Sutherland Observation: This suggests that PRTs and the insurer selection process will continue to be scrutinized, and plan sponsors should ensure that they engage in a careful and well-documented selection process for any PRT.

IRS Issues Catch-Up Guidance

In January, the IRS issued proposed regulations on two new catch-up provisions under the SECURE 2.0 Act: (1) the provision that allows participants age 60 through 63 to make increased catch-up contributions beginning in 2025 (so-called “super” catch-up contributions); and (2) the requirement that catch-up contributions for higher income participants be designated as Roth contributions, beginning in 2026. The proposed regulations provide helpful guidance but also highlight the need for plan sponsors to begin working with payroll providers and recordkeepers to develop a process for identifying impacted participants and implementing the deemed Roth catch-up contributions well in advance of the January 1, 2026 effective date. See our legal alert here.

Spence v. American Airlines

In January, the Northern District of Texas found that fiduciaries of an American Airlines retirement plan breached their duty of loyalty by retaining a particular investment manager as the investment manager for funds in the plans’ investment lineup. The plaintiffs alleged that the investment manager was voting proxies and engaging in shareholder activism with respect to the retirement assets it managed to pursue an environmental, social and governance (ESG) agenda. The plaintiffs claimed that this essentially converted the plans’ core investment options into ESG funds, which aligned with American Airlines’ own ESG goals. Eversheds Sutherland Observation: Plan fiduciaries that delegate proxy voting to their fund investment managers may want to consider performing greater diligence on their manager voting policies.

Increased Support of Cryptocurrency

In March, President Trump issued an executive order establishing a “Strategic Bitcoin Reserve” consisting of bitcoin seized by federal law enforcement and a “Digital Asset Stockpile” consisting of digital assets other than bitcoin. Several weeks after the order was issued, two Republicans reproposed the “Financial Freedom Act,” which would prohibit the Department of Labor (DOL) from limiting the investment options offered under a 401(k) plan’s self-directed brokerage account. The act attempts to reverse the DOL’s informal guidance from 2022, discouraging the use of cryptocurrency as a 401(k) plan investment, even in self-directed brokerage accounts. Eversheds Sutherland Observation: The moves suggest a continued shift towards policies benefiting cryptocurrency.

Cunningham v. Cornell University

The Supreme Court issued a unanimous decision in April 2025 that could have a lasting impact on retirement plan litigation. The decision clarifies that when plaintiffs bring prohibited transaction claims under ERISA section 406(a), they are simply required to allege that a prohibited transaction has occurred. Eversheds Sutherland Observation: As a result of this decision, plaintiffs claiming that excessive fees were paid to service providers, among other claims, may now find it easier to defeat motions to dismiss and reach the discovery stage of litigation, which is costly for plan sponsors. The ruling likely gives plaintiffs an advantage and could increase the frequency of settlements between plaintiffs and plan sponsors. See our legal alert here.

Health and welfare benefits

Telehealth Exception Not Extended

For several years, under the CARES Act and subsequent extensions, high-deductible health plans (HDHPs) have been permitted to cover telehealth services before participants satisfy their deductible without jeopardizing Health Savings Account (HSA) eligibility. For many plans, this led to a significant expansion of telehealth services and programs. This telehealth relief was extended through the end of 2024 but has not been subsequently extended beyond the end of 2024. Accordingly, HDHPs covering telehealth services before participants reach their deductibles may need to reevaluate these programs to ensure they are preserving participant HSA eligibility.

Surrogacy Expenses

In January, the IRS released a new private letter ruling (PLR 202505002) addressing whether expenses related to IVF and gestational surrogacy are deductible as medical expenses under Internal Revenue Code Section 213. The PLR reiterated prior guidance that expenses for procedures not performed directly on the taxpayers (including both expenses performed directly on a surrogate and expenses effectuating the surrogacy) are not deductible medical expenses. As a result, the costs of the egg donor, egg retrieval, sperm freezing, IVF, surrogacy legal and agency fees, surrogate medical insurance, and any other expenses directly related to the surrogacy are not deductible medical expenses. However, expenses for procedures directly performed on the taxpayers, such as the costs of sperm donation, are deductible medical expenses.

Pharmacy Benefit Manager (PBM) Litigation

In 2024, plaintiffs filed lawsuits against Johnson & Johnson and Wells Fargo alleging that plan fiduciaries violated their fiduciary duties by failing to monitor and manage their PBMs, which resulted in excessive premiums and other out-of-pocket costs for plan participants. In January, the Johnson & Johnson case was partially dismissed, with the court stating that the plaintiff lacked standing because the alleged higher participant costs were speculative and hypothetical. The Wells Fargo case was also dismissed for similar reasons in March. However, also in March, employees of JP Morgan Chase filed a similar class action lawsuit again alleging that plan fiduciaries failed to properly oversee their PBM arrangement. Eversheds Sutherland Observation: While the Johnson & Johnson and Wells Fargo rulings provide some relief to employers, employer plan sponsors should continue to ensure that they are fulfilling their ERISA fiduciary duties by carefully reviewing any costs related to their group health plans. 

State PBM Laws

States such as Florida and Arkansas have introduced new PBM reporting laws which regulate PBMs but also impact self-insured ERISA plans. Some of these laws may arguably be preempted by ERISA, but the laws themselves specifically state that they apply to self-insured ERISA plans. Eversheds Sutherland Observation: There appears to be a growing number of these types of laws, so plan sponsors should pay attention to any communications from their PBMs regarding any reporting or other requirements and consider whether they should opt out of any optional reporting if possible.

Executive compensation

Proposed Regulations Under 162(m)

In January, the Department of the Treasury and the IRS issued proposed regulations relating to the expansion of the definition of “covered employees” under Internal Revenue Code Section 162(m) as part of the American Rescue Plan Act of 2021 (ARPA).The ARPA broadened the definition of covered employee for taxable years beginning after December 31, 2026 to include the next five highest-compensated employees for the taxable year in addition to the CEO, CFO and next three highest-paid officers. The proposed regulations provide guidance on identifying the next five highest-compensated employees under Section 162(m). See our legal alert here.