In April 2018, New York University was the first university to take to trial a case claiming it violated its ERISA fiduciary duties. And on July 31, 2018, it became the first university to win. Sacerdote v. New York Univ., No. 16-CV-6284 (KBF), 2018 WL 3629598 (S.D.N.Y. July 31, 2018).

More than a dozen lawsuits have been filed against prestigious colleges and universities claiming that they violated the Employee Retirement Income Security Act of 1974 (ERISA) in the operation of their Code Section 403(b) plans. Within the last year, University of Pennsylvania and Northwestern each won dismissal of their cases, and the University of Chicago settled its claims for $6.5 million. But NYU’s victory was the first to come after a trial, and the court’s finding of facts and conclusions of law provide lessons for ERISA fiduciaries — and not just those embroiled in their own fee cases.

Despite a total defense verdict and a finding that the committee members managing NYU’s plans did not violate their fiduciary duties, the trial court nonetheless found that some committee members who testified “displayed a concerning lack of knowledge.” Here are some tips for ERISA fiduciaries culled from the case:

• Know what an ERISA fiduciary is (and that you are one). The court was concerned that one committee member testified that she did not consider herself a fiduciary and that only the committee was a fiduciary. Consider annual trainings for committee members on the basics of ERISA. Not only will it help them serve the plan and participants better, but also it may save your company from embarrassing (and potentially damaging) testimony.
• Have an investment policy statement. One of the plaintiffs’ claims was that the committee failed as fiduciaries to adopt an investment policy statement. The court found the allegation was not supported by the facts. Written investment policies help guide fiduciaries’ selection and oversight of investment options. Fiduciaries should adopt and follow these policies.
• Learn about the plan’s investments and investing in general. The court criticized the committee’s chair for displaying “a surprising lack of in-depth knowledge concerning the financial aspects of managing a multi-billion dollar pension portfolio.” Not every committee member has to be an account, actuary, or CFO. But if your committee doesn’t know the different between a mutual fund and an annuity, it is time to call in someone who can teach them.
• Seek — and scrutinize — the advice of experts. The court’s opinion teaches that it is OK to ask an expert when you are not one yourself … but don’t accept advice blindly. NYU hired a consultant to help monitor the investments, and the court found the consultant credible. But the court also criticized some committee members for not verifying his advice or scrutinizing his recommendations (while others did). Fiduciaries must exercise independent judgment and question the opinions given by third parties.
• Have a committee charter (if your plan is managed by a committee). Proving you are fulfilling your fiduciary duties requires documents, documents, documents. The charter helps define the committee’s role and responsibilities and provides a backbone for documenting its processes.
• Know and document who is on the committee. The court was rather appalled that one NYU executive (who did not regularly attend meetings) was not even sure if he remained a committee member after he changed jobs. (The next day he confirmed he did not.) Make sure the committee charter has a process for the appointment and removal of members (even if it is simply to indicate that some individuals serve ex officio). And make sure the committee follows that process. Document in the committee minutes when members join and leave.
• Regularly solicit RFPs. NYU’s consultant recommended soliciting requests for proposal from record keepers every five years. Although NYU did not follow the advice perfectly, the court found that the committee used a considered, careful, and prudent process when selecting vendors. It also routinely negotiated lower fees with its record keepers.

If you need help drafting a committee charter or investment policy or think your committee could benefit from an ERISA primer course, please contact any of the attorneys in our Employee Benefits group.

On the same day the Ninth Circuit denied arbitration in Munro v. University of Southern California, a district also denied a motion to compel arbitration of a former employee’s ERISA breach of fiduciary duty and prohibited transaction claims in Brown v. Wilmington Trust, N.A., No. 3:17-cv-250 (S.D. OH July 24, 2018).

The plaintiff was a former employee of Henny Penny Corp. The family that owned the company sold all of its stock to an employee stock ownership plan (ESOP) on Dec. 31, 2014. The defendant served as trustee during the transaction and approved the $165 million stock purchase. In May 2015, the plaintiff left the company, and she cashed out her stock in November 2016. Effective Jan. 1, 2017, the ESOP added an arbitration provision, and later that year, the plaintiff filed her lawsuit against the trustee claiming the stock was overvalued.

The court found that the plaintiff’s claim was not subject to arbitration because the plaintiff did not agree to arbitrate and because her claim fell outside of the scope of the arbitration provision.

First, the court found that because the plaintiff had terminated and cashed out her benefit before the arbitration provision was added to the ESOP, she had not agreed to arbitrate. The court distinguished Smith v. Aegon Companies Pension Plan, 769 F.3d 922 (6th Cir. 2014), in which the Sixth Circuit had found that a forum selection clause added after the employee terminated applied to his claim. In Smith, the employee was still receiving pension benefits and, thus, was still a participant under the plan. Here, the plaintiff was no longer a participant under the language of the ESOP. The court found the case more similar to Dorman v. Charles Schwab & Co., Inc., 2018 WL 467357 (N.D. Cal. Jan. 18, 2018), in which the district court had refused to enforce the arbitration agreement under similar circumstances.

Second, the court found that the plaintiff’s claims fell outside of the scope of the arbitration agreement. The provision applied to claims asserted by claimants, which was defined to include employees, participants and beneficiaries. The court found under the ESOP’s language, the plaintiff was no longer a participant because she had been paid all of her benefit. Henny Penny and the trustee argued, however, that if she was not a participant, she did not have statutory standing to sue under ERISA. The court disagreed. Precedent and ERISA’s statutory definition of participant allowed former participants to allege breach of fiduciary duty claims, the court found.

Although Munro and Brown combined to create a bad day for employers seeking to arbitrate ERISA claims, there are lessons that can be learned. Both decisions turned on the language of the arbitration agreement and whether it covered the claim. If an employer wants to include ERISA breach of fiduciary within an employee arbitration agreement, it would be wise to include language covering claims brought by the employee on behalf of third parties, including employee benefit plans. And any arbitration provision in a plan document should include language that covers claims brought by former employees and former participants. The Brown and Dorman courts were troubled by the fact that the arbitration provisions were added after the former participants cashed out of the plans. But proper drafting of the plan and arbitration provision may allow employers to broaden the scope of who assents to the agreement as well.

The U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s opinion that the University of Southern California could not compel arbitration of ERISA claims brought by its employees despite the fact that the parties entered into a broad arbitration agreement. Munro v. University of Southern California, No. 17-55550 (July 24, 2018). The reason? The agreement did not extend to claims brought on behalf of the employees’ retirement plan.

USC and its employees entered into different iterations of an arbitration agreement that covered “all claims . . . that Employee may have against the University or any of its related entities . . . and all claims that the University may have against Employee” including those arising out of federal law. The Ninth Circuit limited its inquiry to whether the arbitration agreement encompassed the dispute at issue and found that it did not.

The court analogized the case to its recent decision in United States ex rel. Welch v. My Left Foot Children’s Therapy, LLC, 871 F.3d 791 (9th Cir. 2017). In Welch, the court found that an employment arbitration agreement did not cover qui tam claims brought by an employee on behalf of the government under the False Claims Act because the claim belonged to the government. Id. at 794. Here, the court reasoned that the breach of fiduciary duty claim is brought on behalf of the plan. Any relief would benefit the plan. Therefore, arbitration agreement does not cover the claim.

The court rejected USC’s argument that because the case involved a defined contribution plan with individual accounts, the relief could individually benefit the plaintiffs, and, therefore, their arbitration agreements covered the claims.

In a footnote, the court refused to reach the employees’ argument that ERISA breach of fiduciary duty claims are inarbitrable as a matter of law, a prior holding of the Ninth Circuit in Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. 1984). The court hinted that it may agree that intervening Supreme Court decisions indicate Amaro should be overruled, but it was unnecessary for the court to decide the issue given its holding.

The Ninth Circuit’s ruling creates an indirect conflict with a Tenth Circuit case, Williams v. Imhoff, 203 F.3d 758 (10th Cir. 2000). In Williams, the court held that ERISA breach of fiduciary duty claims were subject to arbitration. The case arose under the same factual context as USC: The employees and employer entered into a broad arbitration agreement, and then the employees sued under ERISA § 502(a)(2). Neither party raised the issue of whether the plan had consented to arbitration.

As discussed below, even though a church plan was operated in accordance with ERISA and the plan sponsor may have thought it was required to do so, as long as no 410(d) election was made, it is “no harm, no foul” for the plan’s status as a church plan.

Following the U.S. Supreme Court’s ruling in Advocate Health Care Network v. Stapleton, 137 S.Ct. 1652 (2017), holding that a church plan need not be established by a church, the IRS has continued to issue rulings affirming its long-standing position that (1) tax-exempt organizations that are controlled by or associated with a church are appropriate entities to sponsor church plans and (2) that a retirement committee, established by the sponsoring organization and controlled by or associated with the church, can satisfy the requirement that the plan be “maintained” by an organization whose principal purpose is the administration or funding of a retirement plan. Most recently, on June 29, 2018, the IRS released a church plan ruling that confirmed these two points, but importantly also concluded that a plan was a church plan even though at some time during its existence it was operated as though it were subject to ERISA.

In PLR 201826009 (133791-17), a church-affiliated organization sponsored a defined benefit pension plan and voluntarily operated it as though it were subject to ERISA. The sponsor filed Form 5500s, paid premiums to the Pension Benefit Guaranty Corporation, and updated and amended the plan on a continuous basis, presumably to comply with rules applicable to plans subject to ERISA. The PLR states that the sponsor “voluntarily” operated the plan to comply with ERISA, but it is unclear whether this was a deliberate choice or inadvertent.

The IRS ruled that church plans that wish to be legally required to comply with ERISA and the Code requirements applicable to plans subject to ERISA must file an election prescribed under Code Section 410(d), commonly called a “410(d) election.” Section 1.410(d)-1(c)(3) of the regulations provides that the plan administrator of the church plan may make the election by attaching an affirmative statement to either (i) the plan’s Treasury Form 5500 filed for the first plan year for which the election is effective or (ii) a written request for a determination letter relating to the qualification of the plan. The IRS concluded, “Section 1.410(d)-1 does not provide for an alternative form of election. Accordingly, we conclude that the administration and operation of … [the Plan], as if it were subject to Title I of ERISA, does not constitute an election under § 410(d).”

I previously examined the proposed rule by the U.S. Department of Labor (DOL) to expand so-called Association Health Plans, or AHPs, under the Employee Retirement Income Security Act of 1974 (ERISA). In a nutshell, the proposed rule was designed to make it easier for employers to form a group in order to provide health benefits to their employees through an AHP. These new AHPs would have more freedom to restrict benefits in order to provide more affordable coverage.

On June 19, 2018, the DOL released its final rule on AHPs, officially creating 29 C.F.R. 2510.3-5, as of Aug. 20, 2018. The final rule clearly makes it easier for employers and sole proprietors to come together to provide health benefits. But the extent to which AHPs will be able to restrict benefits remains to be seen, due to the far-reaching ability of states to regulate AHPs. In this article, I’ll take a look at the final rule, including:

• A description of the final rule, including what changed from the proposed rule and additional guidance offered by the DOL;
• The DOL’s guidance on the application of other federal laws; and
• The future of AHPs.

What changed?

The DOL received over 900 comments on the proposed rule and consulted with other federal agencies. Not surprisingly, the DOL made several important changes in the final rule.

Pre-rule guidance still good law. The DOL has clarified that it is not supplanting its prior guidance on bona fide employer groups, but supplementing such guidance. AHPs formed under the old law are still valid, and new employer groups can still be formed under such rules. The final rule merely sets forth an additional method of forming an employer group. AHPs established under the pre-rule guidance would face different requirements than those established under the final rule. For example, such groups cannot have membership based solely on geography, and they have greater flexibility to discriminate among employers through their premium rating.

Commonality of interest. In maybe its biggest change from pre-rule guidance, the proposed rule would have allowed employer groups to form based on either: (1) being in the same trade, industry, line of business, or profession, regardless of state boundaries; or (2) having a principal place of business within the same state or the same metropolitan area (even if the metropolitan area includes more than one state). Allowing employer groups to form based solely on geography was an entirely new concept. The final rule retained this basic approach with some important clarifications.

First, while the DOL refused to explicitly define “the same trade, industry, line of business, or profession,” it did state that it “intends for these terms to be construed broadly to expand employer and employee access to AHP coverage.” The DOL approved use of the following:

• North American Industry Classification System (NAICS) codes (also used in Form 5500 Annual Reports);
• Standard Industrial Classification codes (which precede the NAICS);
• The OECD International Standard Industrial Classification;
• Any other “generally-accepted classification system” of the same sort; and/or
• The “line of business” test set forth in Treasury Regulations governing membership in a voluntary employees’ beneficiary association (VEBA). Specifically, “employees of one or more employers engaged in the same line of business in the same geographic locale will be considered to share an employment-related bond for purposes of an organization through which their employers provide benefits.”

Second, for employer groups based on metropolitan areas, the DOL stated that “an area that matches a Metropolitan Statistical Area or a Combined Statistical Area, as defined by the OMB” suffices. But the DOL intentionally left the door open for other areas to qualify based on the facts and circumstances, “[f]or instance, the area from which a city regularly draws its commuters may qualify as a metropolitan area.”

Finally, the DOL clarified that subgroups of an otherwise bona fide employer group can also constitute a bona fide group and establish an AHP (provided it is not a pretext for discrimination on a health factor). For example, a subgroup might consist of employers owned by women minorities, veterans, or employee stock ownership plans (ESOPs).

Substantial business purpose now required. Under pre-rule guidance, employer groups could not form for the purpose of providing health benefits; they had to exist for an entirely different reason. The proposed rule would have allowed employer groups to form for the exclusive purpose of creating an AHP. The final rule walks that back a step and now requires an employer group to have at least one “substantial business purpose” other than establishing an AHP, although the AHP can still be the primary purpose of the group. The change was made to prevent fraudulent associations, as groups formed with a business purpose — such as more traditional industry and trade groups — “have strong incentives to maintain their good reputation.”

This will make it slightly more challenging to establish an employer group, as the member employers must decide what other business purpose the group will serve and what “substantial” activity it will perform in furtherance of that purpose. Notably, the DOL did not define “substantial business purpose,” but the regulation does provide some guidance:

[A]s a safe harbor, a substantial business purpose is considered to exist if the group or association would be a viable entity in the absence of sponsoring an employee benefit plan. … [A] business purpose includes promoting common business interests of its members or the common economic interests in a given trade or employer community, and is not required to be a for-profit activity.

The preamble to the final rule includes several illustrations of the concept:

• Offering services to member employers, “such as convening conferences or offering classes or educational materials on business issues of interest to the association members”;
• Being “a standard-setting organization that establishes business standards or practices”;
• “[P]ublic relations activities such as advertising, education, and publishing on business issues of interest to association members unrelated to sponsorship of an AHP”; and
• Advancing the well-being of the members’ industry through substantial activity (other than providing an AHP).

Working owners. In another major break with pre-rule guidance, the proposed rule would have allowed certain sole proprietors and partners in a partnership (i.e., “working owners”) to join an employer group and enroll in the AHP, even though they have no common law employees. The final rule changed four aspects of the proposed rule.

First, under the proposed rule, the employer group could rely on a person’s written representation of his or her eligibility as a working owner. The DOL deleted this provision, believing it could be inconsistent with the fiduciary duty to act with reasonable care, skill, prudence, and diligence. In its place, the final rule requires a working owner’s continued eligibility to be “periodically confirmed pursuant to reasonable monitoring procedures.” The DOL declined to specify what these reasonable monitoring procedures must look like, except that reliance on a written representation might be reasonable, if there is nothing to question its accuracy.

Second, the proposed rule required that a working owner either: (1) work at least 30 hours per week or 120 hours per month providing personal services to the business; or (2) have earned income from the business that at least equals the cost of covering the owner and any of his or her dependents on the group health plan. To provide flexibility to industries that would make it difficult to satisfy the 30/120 rule, the DOL lowered it to a 20/80 rule. This can be shown by “evidence of a work history or [by] a reasonable projection of expected self-employment hours worked in a trade or business.”

Third, the proposed rule barred working owners from being eligible for the AHP if they were eligible to enroll in subsidized group health coverage maintained by another employer or through a spouse. This was opposed by many commenters and was deleted due to its harshness and the difficulty of enforcement.

Finally, if it is determined that a working owner participating in an AHP no longer meets the requirements, the working owner will be unable to participate in the AHP the following plan year (not the current year). However, assuming COBRA continuation coverage is available to the working owner (see below), he or she could still enroll in COBRA coverage under the AHP after his or her regular coverage expires.

Essential health benefits. Health plans in the individual and small group markets have to provide essential health benefits (EHBs) under the Affordable Care Act (ACA). Large group plans (more than 50 employees) do not have to provide EHBs. Under pre-rule guidance, if an employer group was formed based on geography or if such group included working owners, the sole proprietors and any small employers in the group would still be required to provide EHBs, even though the AHP covered more than 50 employees in the aggregate among all member employers.

One of the main purposes of the proposed rule was to allow AHPs based on geography and/or including working owners to still be treated as a single large plan, so that they will not have to provide EHBs at all. Many commenters opposed this. However, the DOL declined to change it. Besides being contrary to the purpose of the rule, the DOL noted that AHPs will face other coverage mandates under federal and state laws, including:

• To the extent an AHP chooses to cover any EHBs, the AHP will also have to comply with the ACA’s limit on maximum out-of-pocket costs and the prohibition on annual or lifetime dollar limits with respect to such covered EHBs.
• The ACA requires AHPs to cover certain preventive services for adults and children without cost-sharing.
• The ACA requires AHPs to provide “minimum value,” which means: (1) covering at least 60 percent of the cost of covered benefits; and (2) providing substantial coverage for inpatient hospitalizations and physician services.
• The Pregnancy Discrimination Act (PDA) requires pregnancy-related expenses for employees and their spouses to be reimbursed in the same manner as other medical conditions. The DOL asserted that the PDA would only apply to individual member employers with 15 or more employees (not the total number of employees covered by the AHP in the aggregate), but that the AHP could provide such benefits across all member employers for administrative simplicity.
• The Newborns’ and Mothers’ Health Protection Act requires an AHP covering hospital stays in connection with childbirth to cover hospital stays for at least 48 hours following a vaginal birth or 96 hours following a caesarian section.
• Applicable state-level mandates on AHPs also will require compliance.

ERISA pre-emption remains unchanged. An AHP is considered a multiple employer welfare arrangement (MEWA) under ERISA. In an effort to combat fraud and abuse by MEWAs, Congress gave states substantial authority to regulate such entities. Specifically, fully insured plans can be regulated with respect to certain aspects (e.g., contribution and reserve levels, licensing, registration, financial reporting, etc.), while self-insured and partially insured plans can be regulated in any manner so long as not inconsistent with ERISA. The final rule does nothing to change the ability of states to regulate AHPs. Neither was the DOL willing to opine on the enforceability of particular state laws.

Membership control. Similar to pre-rule guidance, the proposed rule required the member employers to control the employer group. The final rule slightly modifies the rule, consistent with such pre-rule guidance, by clarifying that control must exist in “form and substance.” The DOL will determine this based on all the relevant facts and circumstances, including:

• “[W]hether employer members regularly nominate and elect directors, officers, trustees, or other similar persons that constitute the governing body or authority of the employer group or association and plan”;
• “[W]hether employer members have authority to remove any such director, officer, trustees, or other similar person with or without cause; and
• “[W]hether employer members that participate in the plan have the authority and opportunity to approve or veto decisions or activities which relate to the formation, design, amendment, and termination of the plan, for example, material amendments to the plan, including changes in coverage, benefits, and premiums.”

The proposed rule also barred the employer group from being a health insurance issuer or being owned or controlled by a health insurance issuer. The final rule adds subsidiaries or affiliates of health insurance issuers to the list of banned entities but also clarifies that banned entities can still participate in an AHP in their capacity as member employers of a bona fide employer group.

In addition, the DOL emphasized in the preamble to the final rule that any employer group or AHP controlled by a “network provider, a healthcare organization, or some other business entity that is part of the U.S. healthcare delivery system” would not qualify as a bona fide employer group. However, such entities could provide administrative services to an AHP.

Nondiscrimination. To combat adverse selection, the proposed rule barred employer groups from discriminating against employers or individuals based on health factors with respect to membership or benefits. The final rule clarifies that AHPs may discriminate among member employers on non-health factors, such as “industry, occupation, or geography,” provided it is not a pretext for discriminating against one or more individuals. The DOL added several examples to the regulation illustrating this ability. At one point, the DOL also suggested that rating premiums on gender is permissible, such that young women, for example, could be charged significantly higher premiums than young men.

Under pre-rule guidance, there is nothing barring an AHP from treating individual member employers as distinct groups of similarly situated individuals. In other words, it is easier for individual employers to be excluded from the group and therefore be ineligible for the AHP, and also for benefits and premiums under the AHP to vary from one employer to another. To the extent employer groups choose to form under pre-rule guidance, it may increase adverse selection by pushing sicker individuals out of AHPs and back into the individual and small group markets.

Formal organizational structure. The proposed rule required the employer group to have a formal organizational structure, similar to pre-rule guidance. The final rule made no change to this requirement.

Guidance on other federal laws

Mental Health Parity and Addiction Equity Act (MHPAEA). The MHPAEA is a complicated law that generally bars group health plans from treating mental health and substance use conditions differently from medical conditions (although it does not require mental health and substance use conditions to be covered in the first place). However, the MHPAEA exempts certain small employers (up to 50 employees) from its requirements.

After consulting with the Department of Health & Human Services (HHS), the DOL determined that whether the small employer exception to the MHPAEA applies depends upon the aggregate size of the AHP — more specifically, the number of employees employed during the preceding calendar year by all member employers. As a result, as long as there are more than 50 employees in the aggregate, the AHP will have to comply with the MHPAEA.

COBRA continuation coverage. The preamble and the final rule are clear that AHPs must comply with COBRA continuation coverage requirements when applicable. But when are they applicable? COBRA does not apply to a group health plan if “all employers maintaining such plan normally employed fewer than 20 employees on a typical business day” in the preceding year. Because the COBRA rules are interpreted by the IRS, the DOL declined to opine on whether the employees of all employers in the employer group are aggregated or looked at individually. Most likely, the employees will be aggregated, but future guidance may provide differently.

Wellness programs. The DOL makes clear that an AHP can offer wellness programs to incentivize participants to choose healthy behaviors. The DOL notes that, under the wellness program regulations, rewards or penalties can be as much as 30 percent of the cost of coverage under the AHP, or up to 50 percent with respect to tobacco use.

Voluntary employees’ beneficiary associations. A VEBA is a tax-exempt entity that can be used to hold plan assets for health and welfare plans, including MEWAs. The VEBA requirements under Section 501(c)(9) of the Tax Code vary from the new rules for AHPs, which may make it difficult or impossible for some organizations creating AHPs to be funded through a VEBA. Nonetheless, to the extent a VEBA is used, the AHP and VEBA requirements would have to be met.

Other federal laws. The DOL declined to opine on the applicability of other federal laws, such as employer shared responsibility payments under the ACA, premium tax credit eligibility rules under the ACA, network adequacy standards, Medicare secondary payer rules, and other federal laws.

The future of AHPs

The Congressional Budget Office (CBO) estimates that 4 million new individuals will enroll in AHPs by 2023 under the final rule, including 400,000 who would otherwise be uninsured.

Litigation. The attorneys general for New York and Massachusetts have already announced their intent to sue to block the final rule, believing that it reduces consumer health protections and invites fraud, mismanagement, and abuse. Some commenters to the proposed rule argued that the final rule violated the ACA by undoing the definitions of the individual, small group, and large group markets. The DOL, in consultation with HHS, however, disagreed.

State and federal collaboration. MEWAs have a history of fraud and abuse. Since 1985, the DOL has pursued 968 civil enforcement cases and 317 criminal cases involving MEWAs, affecting over 3 million participants. Combined, the violations yielded more than $235 million in civil restitution and $173 million in court-ordered restitution in criminal cases. Simultaneously with expanding AHPs, the DOL was concerned about the potential expansion of fraud and abuse.

To give the DOL and state authorities more time to address these concerns before the rules go fully into effect, the final rule has a staggered effective date:

• Sept. 1, 2018: Fully insured AHPs.
• Jan. 1, 2019: Existing self-insured AHPs that seek to expand under the final rule.
• April 1, 2019: New self-insured AHPs complying with the final rule.

In addition, the DOL specifically stated its intent to “increase its focus on compliance guidance and enforcement in collaboration with the States.” As a result, expect ongoing activity at the state and federal levels to regulate and monitor new AHPs.

State EHBs? Also expect many states to enact new coverage mandates on AHPs, similar to EHBs. The DOL recognizes that, to the extent states adopt their own minimum benefit standards, “AHPs will have less opportunity to expand choices of more affordable coverage options for many small businesses.” AHPs spanning more than one state will face an especially difficult task of complying with multiple and sometimes conflicting sets of state requirements.

Harmful effect on other markets. Premiums in the individual and small group markets will rise due to the final rule, although it is not clear by how much. According to one report, premiums in the individual group market will rise 2.7 percent to 4 percent, while they will rise in the small group market between 0.1 percent and 1.9 percent. The CBO estimated that premiums will increase 2 percent to 3 percent. The chief actuary for the Centers for Medicare & Medicaid Services estimated a 6 percent increase.

But the overall effect on premiums in the marketplace will depend heavily on state regulation and the design of AHPs. For example, AHPs may use wellness programs to dissuade less healthy individuals from joining, which may increase adverse selection and intensify premium increases in the individual and small group markets.

In addition, beginning in 2019, Congress eliminated the tax on individuals for not having health insurance. This may cause some individuals to simply go uninsured rather than join an AHP.

Please contact any of the attorneys in our Employee Benefits group if you have questions about AHPs or are interested in forming an employer group or creating an AHP.

In an unpublished opinion, the U.S. Court of Appeals for the Fourth Circuit found a lower court did not err when awarding no relief for a breach of fiduciary duty. (Pender v. Bank of America Corp., No. 17-1485, June 5, 2018.) Although Bank of America violated the Employee Retirement Income Security Act of 1974 (ERISA), the court found that it did not profit from its actions and, therefore, awarding damages would not be appropriate equitable relief.

The case stems from a 1998 decision to offer 401(k) participants the option of moving their account balances into its cash balance defined benefit plan to be commingled with that fund. Bank of America believed it could obtain a higher return for participants than they could on their own. As part of the offer, Bank of America guaranteed that the participants’ balances would not fall below the amount they were at the time of transfer. Participants and beneficiaries transferred $2 billion as a result of the offer.

In 2005, the IRS concluded that the transfer violated ERISA’s anti-cutback provision because the assets no longer had their “separate account feature.” Three years later, Bank of America paid the IRS a $10 million penalty, set up a special purpose 401(k) plan to receive the transferred accounts, and made additional payments to certain participants’ accounts.

Simultaneously, participants filed a class action lawsuit, alleging a variety of equitable and statutory claims. All of the plaintiffs’ other claims were dismissed or not part of the appeal.

Plaintiffs argued to the lower court and on appeal that because their money was improperly commingled with other money, they should receive a proportionate share of the whole of the profits Bank of America made on the combined assets. Bank of America argued that relief was inappropriate because it did not profit. Bank of America closely tracked participants’ notational accounts and used a different investment strategy for their accounts than it did for the pension assets. Although the pension assets performed well, the participants’ investments underperformed.

Both courts rejected the plaintiffs’ argument that the district court was required to reward proportionate-share-of-the-whole relief. ERISA requires equitable relief to be “appropriate” and thus does not mandate a remedy. The Fourth Circuit also found that the district court did not clearly err when accepting factual evidence that Bank of America did not profit.

After 13 years of litigation and three trips to the Fourth Circuit, the plaintiffs were left empty-handed despite the IRS and district courts finding that Bank of America violated ERISA. By choosing to file an unpublished opinion and stressing that the opinion only applied to the facts of this case, the Fourth Circuit signaled that it did not necessarily agree with the lower court but was constrained by its standard of review. Judge Keenan, who dissented, did not feel so constrained and stated that the lower court abused its discretion. She agreed that the lower court was not mandated to award a proportionate share of Bank of American’s profits but disagreed with the opinion that Bank of America did not profit. She found that awarding a share of the profits would have been appropriate.

Northwestern University recently defeated a lawsuit alleging that it violated the Employee Retirement Income Security Act (ERISA) while managing its retirement plans. The plaintiffs brought ERISA breach of fiduciary duty and prohibited transaction claims, alleging the university’s retirement plans featured imprudent investments and paid excessive fees. On May 25, 2018, the U.S. District Court for the Northern District of Illinois dismissed the lawsuit in its entirety and denied the plaintiffs’ motion to amend to add additional counts, finding them futile.

The lawsuit is one of more than 20 brought against prominent universities regarding their 403(b) plans. For a full article regarding litigation risks for 403(b) plans, click here. University of Pennsylvania also successfully defended its suit on a motion to dismiss. Judges, however, allowed suits to proceed against Columbia, Emory, Johns Hopkins, and Princeton. New York University recently completed a bench trial and is awaiting a ruling. University of Chicago became the first college to settle, inking an agreement to pay $6.5 million to its plan.

Similar to complaints against other universities, plaintiffs took issue with Northwestern’s use of TIAA-CREF and Fidelity as dual record-keepers. They alleged that inclusion of a CREF Stock fund was a breach of fiduciary duty because the fund underperformed and charged a high expense ratio. The court refused to find that including the fund was a breach of fiduciary duty. “The court also notes that the mere fact that plaintiffs believe index funds are a better long-term investment than the CREF Stock Account does not a fiduciary breach make.”

The plaintiffs also objected to the plans’ practice of paying record-keeping expenses through revenue sharing. The court found Seventh Circuit precedent precluded the claims. The court also rejected the plaintiffs’ allegation that offering too many funds was a breach of fiduciary duty, finding the plans offered them the types of funds they wanted — low-cost index funds.

The plaintiffs alleged that the same actions also constituted prohibited transactions, claims the court rejected because plan assets were not involved and because the fees paid, based on the information in the complaint, were reasonable as a matter of law.

In a 5-4 decision written by newcomer Justice Gorsuch, the U.S. Supreme Court upheld employment agreements that require employees to individually arbitrate disputes with their employers.

The May 21, 2018, opinion in Epic Systems Corp. v. Lewis resolves a trio of cases before the Supreme Court in which employees brought suits against their employers alleging state and federal wage and hour violations. In each situation, the employees had signed contracts agreeing to resolve any employment-related disputes in individualized arbitration. Nevertheless, they sought to litigate their claims in class or collective actions. 

The Federal Arbitration Act (FAA) generally requires courts to enforce such arbitration agreements as written. Yet the employees argued that the National Labor Relations Act’s (NLRA) guarantee that employees may engage in concerted activities conflicts with the FAA’s directive. As a result, the employees argued that the class waivers in question were unenforceable.

The court disagreed, explaining that courts are only relieved of their obligation to give effect to arbitration agreements when a traditional rationale for the rescission of a contract is presented, such as fraud or duress. Additionally, the court found that the NLRA gives no indication that Congress intended to displace the FAA’s general scheme: The NLRA does not mention class or collective procedures and those methods of dispute resolution were, in fact, “hardly known” when the NLRA was adopted.

The court also explained that participation in class or collective actions does not qualify as “concerted activities” under the NLRA because that term only refers to actions that “employees ‘just do’ for themselves in the course of exercising their right to free association in the workplace.” In other words, the NLRA’s protection does not extend to the “highly regulated, courtroom-bound ‘activities’ of class and joint litigation.”

The court explained that its conclusion was entirely in line with its longstanding precedent of rejecting efforts to “conjure conflicts between the [FAA] and other federal statutes.” The court also emphasized that its decision is consistent with nearly 80 years of case law that remained largely untouched until the National Labor Relations Board asserted for the first time in 2012 that the NLRA nullifies the FAA in some cases.

As a result of this ruling, employers are free to incorporate class and collective action waivers into agreements with employees, although as Justice Gorsuch recognized, “Congress is always free to amend this judgment.”

If crafted properly, then such an agreement also would apply to claims employees may bring under the Employee Retirement Income Security Act of 1974 (ERISA). However, employees have successfully argued that claims for fiduciary breaches brought under ERISA § 502(a)(2), 29 U.S.C. § 1132(A)(2), are not subject to arbitration agreements with class action waivers. ERISA § 502(a)(2) claims, employees assert, are brought on behalf of the plan, and employees cannot waive the plan’s rights to litigation. The Ninth Circuit will soon decide this issue in Munro v. USC, and it is likely that issue will continue to be litigated in district and circuit courts.

For more information about this case or for assistance in drafting enforceable arbitration or other employment agreements, contact our attorneys in the Employment & Labor or Employee Benefits Practice Groups.