The Department of Labor (DOL) has issued a final rule amending its claim procedure regulation, 29 C.F.R. § 2560.503-1, to better protect those seeking disability benefits. Disability claims comprise the vast majority of lawsuits seeking benefits under the Employee Retirement Income Security Act of 1974 (ERISA). Employee benefit plans must strictly comply with the new regulatory requirements for all claims filed on or after Jan. 1, 2018 — including any necessary amendments to plan documents and internal claims-handling procedures.

The changes will likely prolong the administrative process and slightly increase plan expenses. There is now a built-in incentive to follow the rules, however, as a non-compliant plan can lose its discretionary authority on a case-by-case basis and have its claims more readily overturned in court. Areas of change plan providers should note include:

1. Loss of discretionary authority

If a plan violates any of the rules for disability claims, the claim is deemed denied without the exercise of discretionary authority. This gives the claimant the right to file a lawsuit without further delay and will allow a court to decide the merits of the claim de novo, without any deference to the fiduciary who violated the rules. As a result, the plan would lose its main judicial advantage (plan decisions and interpretations are reversed only upon an abuse of discretion), and the denial could be more easily overturned.

The only exception to this rule is if the plan’s violation was: (i) de minimis; (ii) non-prejudicial; (iii) attributable to good cause or matters beyond the plan’s control; (iv) in the context of an ongoing good-faith exchange of information; and (v) not reflective of a pattern or practice of non-compliance. This is a much more demanding test than the “substantial compliance” standard most courts currently follow with respect to regulatory compliance.

In addition, a claimant may (but is not required to) request that the plan explain in writing any violation. The plan must respond within 10 days by specifically explaining the violation and why it believes the claimant should not be permitted to file a lawsuit at that time.

2. Independence and impartiality of decision makers

Disability claims must be “adjudicated in a manner designed to ensure the independence and impartiality of the persons involved in making the decision.” This includes a prohibition on rewarding or punishing someone based upon “the likelihood that the individual will support the denial of benefits.” Most courts already weigh such conflicts of interest against plans, which have adapted by avoiding such conflicts in the first place. However, claimants may now be better equipped to obtain discovery of such conflicts in any judicial proceeding. § 2560.503-1(b)(7)

3. Information required with all denial notices

A denial notice must “discuss” the decision, including an explanation of why the plan agreed or disagreed with: (i) the claimant’s treating health care professionals and/or any evaluating vocational professionals; (ii) medical or vocational experts used by the plan, even if not relied upon; and (iii) any Social Security Disability determination provided by the claimant.

A copy of any internal rules and guidelines the plan relied upon must now be affirmatively provided without request to the claimant (or otherwise a statement that such materials do not exist). Previously, such documents only had to be provided upon request. In the preamble to the final rule, the DOL expressed its view that plans may never deny or conceal information by claiming it is proprietary or confidential.

All denials must also include a statement that the claimant is entitled to receive all relevant information upon request and free of charge. Previously, this statement only had to be included in the final denial.

4. All evidence and rationales must be provided before the final denial

Before a plan can deny an appeal, it must first provide the claimant — free of charge — with any new or additional evidence considered, relied upon or generated, as well as any new or additional rationales that will be used to deny benefits. Most likely, such evidence will take the form of an expert medical or vocational opinion. The claimant must be provided a reasonable opportunity to respond before the denial is issued, even if that means an extension must be given. This back-and-forth will go on until there is no new evidence or rationale forthcoming on behalf of the plan.

5. Any plan deadline to file a lawsuit must be disclosed in (and should not expire before) the final denial

In 2013, the U.S. Supreme Court in Heimeshoff v. Hartford Life & Accident Ins. Co. upheld a plan provision that caused the claimant to lose her right to file a lawsuit about a year after receiving her final denial. Recognizing the importance of such provisions, the DOL will require a final denial to describe “any applicable contractual limitations period that applies to the claimant’s right to bring … an action [under ERISA], including the calendar date on which the contractual limitations period expires for the claim.” The DOL clearly states in the preamble to the final rule its belief that any contractual limitations period that expires before the final denial is issued (or even less than a reasonable amount of time thereafter) is per se impermissible.

6. Culturally and linguistically appropriate notices

Plans must provide language services, such as a telephone customer assistance hotline, that will include answering questions and providing assistance in any “applicable non-English language,” which means any non-English language in which 10 percent or more of the county’s population  is literate only in that language. Denial notices must include a prominently displayed explanation of how to access these language services.

7. Retroactive rescissions of coverage included

The claims procedures apply to any “adverse benefit determination,” which now specifically includes any rescission of disability coverage having retroactive effect (unless it was caused by a failure to pay required premiums or contributions on time).

All plans providing any benefits conditioned on a finding of disability must be prepared to comply with these rules beginning in 2018. If you have any questions or concerns about the new rules, please contact an attorney in our Employee Benefits group.

In an earlier post, I discussed the spread of 401(k) litigation and the fact that smaller plans were becoming targets for aggressive litigators. As the pool of large plans diminishes and the litigation theories become well-known, it is inevitable that the volume of 401(k) litigation will expand. Fortunately, most plan sponsors can avoid 401(k) litigation by taking a few obvious steps. Here are some suggestions.

Identify and monitor fees. The most frequent claim in 401(k) litigation is that the plan fiduciaries allowed the plan to pay excessive fees for investments and administration. A plan fiduciary, whether a sponsor or a trustee, has a duty to identify fees being paid by the plan or from plan assets. Once identified, those fees and expenses need to be compared against other providers in the 401(k) marketplace. Benchmarking services are available to compare fees. A service provider does not need to be the cheapest. However, fees must be reasonable based on the services being provided.

Fiduciaries should document their review of fees charged by service providers and investment funds. Documentation should demonstrate the process undertaken in reviewing fees, including an analysis of fees charged, the services received and the benchmarking of those fees. Selection of the correct share class of a particular mutual fund is important, as different share classes have different expense ratios. This review process should be regular and ongoing.

Monitor and review investment performance. A second basis for claims against fiduciaries is poor performance by plan investments. This can be avoided if plan fiduciaries regularly monitor, and when necessary, replace poorly performing plan investments.  

The first step to avoid issues in this area is for plan fiduciaries to adopt an investment policy statement (IPS) for the plan that sets forth the types of investments to be offered and the criteria for retaining or replacing specific investment vehicles. Once the IPS is in place, it is important that it be followed.

It is recommended that fiduciaries engage third-party investment experts to review the performance of funds offered by the plan and the fees charged by those funds. Special scrutiny should be undertaken when using proprietary funds offered by a bundled provider. Funds that are consistently underperforming or that do not meet the criteria set forth in the IPS should be replaced immediately.

Protect your fiduciaries. A couple of additional simple steps should be taken to protect the plan sponsor and individuals serving as plan fiduciaries. The first is to conduct a fiduciary audit of plan practices to ensure that the plan operations are being undertaken in full compliance with ERISA. A second step is to ensure that there is adequate fiduciary liability insurance to protect plan fiduciaries in the event that a claim is made with respect to plan operations and fiduciary responsibility. By taking these simple steps, plan fiduciaries are less likely to be a target of litigation and, if sued, will be in a better position to defend that litigation.

Donald Trump’s victory in the presidential election, combined with the Republican Party’s retention of a majority in both houses of Congress, is likely to lead to significant changes in laws, regulations and policies that will impact many aspects of life and business in the United States for the foreseeable future. In the coming weeks and months, many employers will be asking how the election will affect the benefits they provide to employees.

Although it is impossible to predict what will happen with any reasonable degree of certainty, the following are a few possible areas of change.

1. The Affordable Care Act (ACA)

The ACA (or “Obamacare,” as many have called it) was the subject of much discussion during the campaign and has been criticized recently for rising premiums and insurers dropping out of the health insurance marketplaces. Trump has explicitly stated that he will “ask Congress to immediately deliver a full repeal of Obamacare.”

A complete repeal of Obamacare may not be possible because, even with a majority in the House and Senate, Republicans do not have the 60 votes needed to overcome a Democratic filibuster of a repeal bill. However, Republicans most likely can pass legislation that modifies or eliminates key provisions of Obamacare through a budget reconciliation bill that cannot be filibustered. Such a bill would require only a majority vote, which the Republicans will have (absent any defectors).

Therefore, it is likely we will see significant changes to Obamacare in the coming year that will be tantamount to a repeal. Some provisions (such as limits on pre-existing condition exclusions and coverage of children up to age 26) have been widely popular and might be retained. Other more controversial provisions will likely be eliminated. Trump’s position paper on health care specifically identifies the individual mandate as a provision that must be eliminated. Trump also has said he will seek to eliminate the “Cadillac tax.” While Trump’s position paper does not specifically list the employer mandate as a provision to be eliminated, in light of the stated desire to “completely repeal Obamacare,” an effort to eliminate the employer mandate is likely as well. The employer mandate and corresponding penalty and annual reporting provisions are among the provisions that are of the greatest concern to employers.

If Obamacare is repealed (or effectively repealed), Congress and the president will seek to replace it with other initiatives. Trump has outlined plans that will expand the use of consumer-driven health plans (such as HSAs) and provide tax deductions to individuals for health insurance premiums. He has also stated that he will seek changes to the health insurance industry that are designed to increase competition and reduce costs for individuals and employers.

2. Department of Labor Fiduciary Regulations

Trump hasn’t specifically addressed the DOL’s fiduciary regulation in any position papers or during his campaign. However, he has said he will seek to eliminate wasteful, unnecessary and intrusive regulations. The DOL’s fiduciary regulation, which is scheduled to take effect in April 2017, expands ERISA’s definition of fiduciary and creates additional standards for investment advisors. It has been very controversial. Opponents of the regulation cite increased compliance expenses and higher costs of providing investment advice (which undoubtedly will be passed on to investors such as retirement plans) as a primary reason why the regulation should be eliminated. Congress even passed a Republican-sponsored bill to halt implementation of the regulation. As expected, President Obama vetoed the bill.

In light of the widespread criticism of the rule and the efforts to stop its implementation, it is possible that the fiduciary regulation will be among the regulations that will be targeted for elimination. However, this is probably relatively low on Trump’s list of priorities (if it appears on the list at all). Therefore, the rule will likely take effect and could remain in place for some time.

3. DOL Enforcement Activities

Throughout the last decade, the Employee Benefits Security Administration (EBSA) of the DOL has become increasingly aggressive in investigating the operation of ERISA plans and the activities of plan fiduciaries. The time and cost involved in responding to DOL requests have skyrocketed. Although EBSA’s investigations involving all types of plans have become more difficult to deal with, investigations of employee stock ownership plans have become particularly onerous.

In light of Trump’s stated goal of reducing wasteful, unnecessary and intrusive regulations, it is possible that his administration will refocus EBSA’s compliance efforts into more productive and reasonable inquiries that will efficiently identify areas of noncompliance without wasting valuable government and employer resources.

4. Public Company Executive Compensation

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires public companies to make certain disclosures regarding executive compensation and to “claw back” incentive compensation from executives in some circumstances. Trump has been critical of certain aspects of Dodd-Frank and is likely to seek to repeal or significantly weaken the law and its impact. Although it is not clear whether efforts to weaken the law would include its provisions regarding executive compensation, a complete repeal would obviously eliminate those provisions.

The election’s impact on other areas of concern for employers (such as regulation of retirement plans and multiemployer withdrawal liability, for example) are almost total unknowns. Trump has not taken any specific positions regarding these issues (nor has he even mentioned them, to my knowledge). We will have to stay tuned to see how the new administration and Congress will change these areas, if at all.

Since 2015, employers have been subject to the Affordable Care Act (ACA) information reporting requirements and penalties. For the 2015 reporting year, the IRS extended the deadlines and gave employers a few extra months to provide these forms to their employees and to file them with the IRS. However, this transition relief was not extended to the 2017 deadlines for the 2016 reporting year. As a result, reporting deadlines for filings in 2017 are months earlier as compared to 2016.

Also ending in 2016 is the Section 4980H Transition Relief. This relief exempted medium-sized employers (those with 50 to 99 full-time employees or full-time employee equivalents) from penalties for the 2015 plan year if certain conditions were met. Large employers (those with 100 or more full-time employees including full-time employee equivalents) were also treated as offering coverage to all of their full-time employees for a month in which they offered coverage to just 70 percent of those employees for the 2015 plan year.

As this transition relief has ended for the 2016 plan year, medium and large employers can be subject to penalties if they do not offer coverage to at least 95 percent of their full-time employees under the ACA’s shared responsibility provisions.

UPDATE (Sept. 29, 2016):
On Sept. 23, 2016, the Department of Labor announced that the deadline for submitting comments would be extended by more than two months, to Dec. 5, 2016.

ORIGINAL POST:
The Department of Labor (DOL) — jointly with the IRS and the Pension Benefit Guaranty Corporation — has proposed major revisions to the Annual Returns/Reports under the Employee Retirement Income Security Act of 1974 (ERISA), more commonly known as Form 5500s. The proposed revisions will require plan sponsors to provide more information, some of which may open the door to litigation risks.

Generally, the changes are designed to update and modernize the information collected from employee benefit plans, improve the form’s utility as a compliance and enforcement tool and expand the “mineability” of data on the forms. Most changes will apply to plan years beginning Jan. 1, 2019, or later.

Employers and plan administrators will need to be proactive to ensure they can collect the necessary information by 2019, as benefit plans subject to ERISA will have to report a lot more types of information and in much greater detail than ever before. For example:

• Schedule E, dedicated to employee stock ownership plans (or ESOPs), is back (it was previously eliminated);
• Schedule G requires more detailed reporting of loans, financial transactions and prohibited transactions;
• Schedule H requests new and more detailed financial information about retirement plans and their investments;
• Entirely new Schedule J will collect detailed information about group health plans, such as the type of benefits, COBRA coverage, contributions, claims information and other topics; and
• Welfare plans with fewer than 100 participants that are unfunded, fully insured or a combination of both will no longer be exempt from general filing requirements.

The information collected could potentially be used against plans by the DOL, the IRS or plan participants. For example, information about the compensation of service providers (which has been attacked recently in excessive fee litigation involving 401(k) and 403(b) plans) will be more readily available to potential litigants, as will information on prohibited transactions and claim denial histories, which could be used to support claims of bias or procedural irregularities in benefit disputes.

Comments on the proposal are due by Oct. 4, 2016. They can be submitted online at www.regulations.gov (refer to “RIN 1210-AB63”), by email to e-ORI@dol.gov (include the RIN number in the subject line), or by mail or hand delivery to:

Office of Regulations and Interpretations
Employee Benefits Security Administration
Attn: RIN 1210-AB63
Annual Reporting and Disclosure, Room N-5655
U.S. Department of Labor
200 Constitution Avenue NW.
Washington, DC 20210

For the past few years, we have been reading about litigation against large employers and financial institutions regarding fees charged to participant accounts in 401(k) plans. These lawsuits generally allege a breach of fiduciary duty under ERISA by selecting poorly performing funds that carry higher expenses than similar investment alternatives.

This litigation has led to some significant settlements, including a $62 million settlement by Lockheed Martin Corp., a $57 million settlement by Boeing, and a $31 million settlement by Massachusetts Mutual Life Insurance Co. Up to this time, the profile of defendants has been large corporations sponsoring plans with significant assets and using major financial institutions as their financial providers. Two recent developments indicate that the landscape is changing.

In the past month, major universities sponsoring 403(b) plans have been targeted in a series of lawsuits. 403(b) plans are essentially the 401(k) equivalent for governmental and tax-exempt entities. The Wall Street Journal has estimated the 403(b) market at $900 billion. 403(b) plans typically charge higher fees than 401(k) plans. Additionally, the 403(b) marketplace is managed by a few major providers, the largest of which are TIAA-CREF, Fidelity Investments and MetLife.  Targets of the recent lawsuits include Duke, Cornell, Northwestern, Harvard, Columbia and the University of Southern California.

The other, more troubling development for plan sponsors is the spread of 401(k) litigation to the small employer market. Smaller employers have believed that they are unlikely to be sued, but that changed when the sponsor of a $9 million 401(k) plan was sued in Minnesota in May 2016. The 114-participant plan invested in mutual funds offered by Voya Financial Advisors (formerly ING). The suit alleged the sponsor selected funds that charged excessive fees and failed to monitor the investments.

Although the lawsuit was subsequently withdrawn without explanation, more litigation in this area can be expected as plaintiffs’ attorneys become more familiar with ERISA and the theories behind this area of litigation. In a future blog post, we will discuss best practices to reduce the risk of becoming a defendant in 401(k) fee litigation.         

An employee stock ownership plan, or ESOP, is a type of defined contribution retirement plan in which employees’ accounts are invested primarily in stock of the sponsoring employer. In other words, the ESOP literally owns the corporation — whether partly or fully — allowing the employees to benefit from its success.

ESOPs are unique retirement vehicles. They can serve several purposes in addition to providing retirement benefits, such as:

1. Creating a marketplace for the stock of a closely held corporation;
2. Realizing certain tax advantages, such as allowing the owner of a C-corporation to defer tax on the proceeds from the sale of his or her stock to the ESOP (through 26 U.S.C. § 1042), or allowing S-corporations to avoid federal (and sometimes state) income tax on their share of a company’s profits;
3. Improving employee productivity and corporate culture; and
4. Allowing a business owner to gradually sell a company without having to close the business or terminate its employees.

According to the National Center for Employee Ownership, there are nearly 6,800 ESOPs nationwide, with about 13.9 million participants holding assets of more than $1.2 trillion. This includes 401(k) plans in which the employer’s matching contribution is provided through company stock (sometimes called a KSOP).

ESOPs are not right for every company, however. Factors that should be considered are the size of the company, the type of corporation, the potential tax advantages, the owner’s motivations and expectations, the availability of replacement management if and when the owner departs, and the ability to foster a positive corporate culture around employee ownership. In addition, both the creation and ongoing administration of an ESOP are subject to substantial regulation.

If your company is considering an ESOP, it is important to have experienced legal counsel to guide you through the process. For more information on ESOPs, contact the attorneys in our Employee Benefits group. 

The Department of Labor, the Internal Revenue Service and the U.S. Department of Health and Human Services have released final versions of the Summary of Benefits and Coverage (SBC) template and Uniform Glossary documents required under the Affordable Care Act.

The IRS also has released updates to Forms 1094-C and 1095-C. The updated SBC template and IRS forms all will need to be used in 2017.

Plans will be required to use the new final SBC forms during the first open enrollment period on or after April 1, 2017 — or, if the plan does not use open enrollment, the first day of the plan year that begins on or after this date.

The IRS changes to Forms 1094-C and 1095-C are in draft form. A finalized version will be available before applicable large employers are required to provide the Form 1095-C to each employee on Jan. 31, 2017. So far, the IRS has proposed only minor changes to the forms, including removing the transitional relief that was available on Line 22B of Form 1094-C and simplifying and clarifying the instructions to Form 1095-C.

Employers will need to ensure that they, their insurers or their third-party administrators use the updated SBC template and IRS forms in 2017. The updated SBC template is available at the CMS website, and the IRS’s website contains the draft forms here and here.