The United States Supreme Court is busy with potential ERISA cases.  Having already accepted three ERISA cases for the current term (See, Supreme Court to Decide 3 Cases on Ability to Sue Under ERISA), on January 10, 2020, the high court agreed to hear a case involving preemption.

Rutledge v. Pharmaceutical Care Management Association.  The case surrounds an Arkansas statute regulating pharmacy benefit managers’ drug-reimbursement rates, which is similar to laws enacted by most states. The statute mandates that pharmacies be reimbursed for generic drugs at a price equal to or higher than the pharmacies’ cost for the drug based on the invoice from the wholesaler.  The US Court of Appeals for the Eighth Circuit, previously upheld a motion to dismiss by the Pharmaceutical Care Management Association finding the state statute was preempted by ERISA.  The Supreme Court asked the U.S. Solicitor General to weigh in on whether they should accept the case.  The Solicitor General filed a brief arguing they should and that they should overturn the decision.  Oral arguments are expected to be heard this Spring.

This case is important as the Justices will again examine the limits of ERISA’s preemption of state laws and the current Court’s thinking on the matter.  The decision is likely going to influence cases challenging state mandated payroll deduction IRA programs such as California’s CalSavers program being challenged as preempted by the Howard Jarvis Taxpayer’s Association.  (See, Friday the 13th Unlucky for CalSavers as U.S. Maintains Law is Preempted by ERISA.)

No Dudenhoeffer Clarification.  In other news, the high court has already made a decision on one of the ERISA cases it agreed to hear, IBM v. Jander.  Actually, it decided not to decide the case but sent it back to the United States Court of Appeals for the Second Circuit on the procedural grounds that arguments were being made for the first time at the high court but the Supreme Court is a court of review.  In so doing the Justices passed on the opportunity to clarify the standard for what plaintiffs must plead in their complaint for breach of the fiduciary duty of prudence when a plan is invested in employer stock announced in its 2014 Dudenhoeffer decision.  In Dudenhoeffer, the Supreme Court held that to state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must allege an alternative action plan fiduciaries could have taken that would be consistent with securities law and that a prudent fiduciary would not view as likely to cause harm to the plan.  Further, lower courts need to consider whether the complaint alleges that a prudent fiduciary could not have concluded that stopping purchases of the employer stock or publicly disclosing negative information would do more harm than good to the plan by causing a drop in the stock price.

In Jander, the issue is what a plaintiff must plead to allege an alternative action that a prudent fiduciary would not have viewed as causing more harm than good.  Whether Dudenhoeffer can be satisfied by general allegation that the harm of an inevitable disclosure of alleged fraud increases over time.  In 2019, the Second Circuit held that Jander plaintiffs properly alleged that no fiduciary could have concluded that an earlier disclosure that IBM’s microchip division was losing $700 million per year would have done more harm than good.  Therefore, IBM’s motion to dismiss was denied.

However,  IBM argued that ERISA imposes no duty on an ESOP fiduciary to act on inside information for the first time at the Supreme Court.  Likewise, the Securities Exchange Commission and Department of Labor argued that an ERISA duty to disclose inside information that is not required to be disclosed by securities laws would conflict with the insider trading and corporate disclosure rules of the federal securities laws.  The Second Circuit did not address these arguments because they were not made in the lower court.  Therefore, the High Court vacated the judgment of the Second Circuit and remanded the case back to that court to determine whether it will hear the merits of the arguments.

While the Supreme Court did not decide the issue yet, it is likely that Jander will wind up back at the high court or the issue will be decided in another case before long.

 

Award season has begun and Hollywood is all a buzz with who won Golden Globes and the anticipation for the Academy Awards next month.  One star-studded contender, The Irishman, has a chance to make history by being the first film predominantly viewed on the streaming service NetFlix, instead of cinemas, to win an Oscar.  The Irishman has a lot of Hollywood clout behind it being directed by Martin Scorsese and starring Robert De Niro, Al Pacino, and Joe Pesci.  It was also produced by De Niro and Scorsese.  The Irishman is based on the true story of Frank “the Irishman” Sherran, a mob hitman and high ranking Teamster Union official who, among other things, claimed to have had a pivotal role in the disappearance of former Teamster President Jimmy Hoffa.  The crux of the film is Frank’s relationship with the mob and Jimmy Hoffa from the mid-fifties to Hoffa’s disappearance in 1975.  However, as a self-professed ERISA geek, I nominate the film for best depiction of the need for ERISA.

The Employee Retirement Income Security Act (ERISA) was signed into law on Labor Day of 1974.  A major reason for the enactment of ERISA was the mismanagement of employee benefit plans.  ERISA is a reform statute that, among other things, requires those handling retirement plan funds to be fiduciaries and act in the best interest of plan participants.  It also makes them personally liable for losses to the plan if they breach their fiduciary duties.  Additionally. certain transactions with respect to plan funds that might benefit a fiduciary personally such as self-dealing transactions are prohibited.

An underlying thread in The Irishman is the mob’s influence over the Teamster Union’s pension fund and how the Trustees of the plan authorized milli

ons of dollars of loans from the plan to various mob controlled businesses and real estate ventures, and whether such loans would ever be paid back.  In the movie it is clear that the mob felt no obligation to repay them. Some believe that similar loans from the Teamster’s Central States Pension Fund, for which Jimmy Hoffa went to prison, is why that plan continues to be in the precarious position it is in today, expected to run out of money in 2025.  If nothing changes it is expected to bankrupt the Pension Benefit Guaranty Corporation.

ERISA gave employee participants as well as the United States Department of Labor the right to enforce fiduciary duties through the courts.  So, perhaps, those loans would not be made today.

So when you are watching all the award shows and hearing about The Irishman and its place in movie history, also remember the story’s role in ERISA history.

 

Who says Congress is too busy with impeachment to legislate. Last week, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted as part of the 2020 Appropriations Legislation that had to be enacted to prevent a government shut down. The President signed the legislation on December 20, 2019. SECURE contains a number of welcomed changes to retirement plan laws. SECURE had previously passed the House by a vote of 417-3 last Summer but then died in the Senate until attached to the must-pass spending bill. The Act contains provisions making it easier for employers to adopt plans and allowing people to keep funds in plans longer, but also has provisions requiring certain part-time employees be allowed to participate in 401(k) plans. Many of these changes are effective next year. Others aren’t effective until plan years beginning after 2020. A prohibition against plans using credit cards to make loans to participants is effective immediately.

Happy New Year! The changes by SECURE that are effective after December 31, 2019 include the following:

Extension of Plan Adoption Date. Beginning next year an employer can adopt a plan by its tax return due date for that year and have it be effective retroactive to the beginning of the plan year. Previously the written plan had to be adopted by the end of the tax year for which it was effective. This change allows employers to close their year and determine if they have the financial resources to adopt the plan.

Increased Tax Credits for Adopting a Plan. For small employers adopting new plans after 2019, the possible tax credit for 50% of the start up costs for the first 3 plan years is increased tenfold from $500 per year to $5,000 annually. Additionally, if a small employer adopts a new plan with automatic enrollment or adds the feature to an existing plan there is another $500 credit available for up to 3 years.

Increase in Age for Required Distributions. SECURE increases the age at which individuals must begin taking distributions from employer plans or IRAs from 70 ½ to age 72.

Elimination of Age Restriction on IRA Contributions. The Act also repeals the prohibition from contributing to a traditional IRA after age 70 ½. By doing so it puts traditional IRAs on the same footing as Roth IRAs that did not have such a restriction.

Penalty-Free Withdrawal for Birth or Adoption. Beginning in 2020, retirement plans can allow for penalty free withdrawals of up to $5,000 for the expenses of giving birth to a child or adopting a child.

Elimination of Beneficiary Stretch. Under current law, upon the death of a participant or IRA owner, a non-spouse beneficiary may elect to stretch the distributions over his or her life expectancy. Beginning next year the entire account balance will have to be distributed within 10 years of the date of death. There is an exception to this rule for surviving spouses, minor children, disabled or chronically ill beneficiaries, and beneficiaries that are not more than 10 years younger than the decedent.

Miscellaneous 401(k) Provisions. Several provisions affect 401(k) plans. These include: eliminating the annual safe harbor notice for non-elective safe harbor plans; allowing traditional 401(k) plans to be amended mid-year to become non-elective safe harbor plans; and the cap on QACA contributions being raised from 10% to 15%.

Wait ’til Next Year!  The provisions effective in 2021 include the following:

401(k) Plans to Allow Long-Term Part-Timers to Contribute. For plan years beginning after 2020, 401(k) plans will have to allow any employees who have been credited with at least 500 hours of service for 3 consecutive years to make employee contributions to the plan. Such employees are not required to be eligible for matching or other employer contributions.

PEPs Permitted. SECURE creates a new kind of multiple employer plan (MEP) designed to make it easier for small employers to adopt qualified plans, called a Pooled Employer Plan (PEP). Unlike current MEPs, that require each participating employer file its own Form 5500 return, a PEP need only file one return which means it only needs one financial audit. Additionally, the Act repeals the “one bad apple rule” for PEPs. This means that a qualification failure of one adopting employer will not disqualify the entire PEP.

Conclusion.  SECURE is the biggest retirement plan reform legislation since the Pension Protection Act of 2006 and will require guidance from the IRS and DOL to help employers comply. Of course, plans will have to be amended to comply with the new rules. Most plans will have until the end of their 2022 plan year to be amended for the law changes provided they are operated in accordance with the new law when effective. Government plans and collectively bargained plans will have until the end of their 2024 plan year.

Just before Thanksgiving the United States Supreme Court decided not to hear the appeal of the plaintiff in Teets v. Great-West Life & Annuity Ins. Co., (U.S., No. 19-382, certiorari denied 11/25/190).  The issue in the case was whether Great-West entered into a prohibited transaction when contracting with plans to permit participants to invest their accounts in Great-West’s guaranteed rate fund that provided a guaranteed rate of return for assets invested.  Great-West had the discretion  to set the guaranteed rate of return under the contracts quarterly, and the plaintiff alleged it made millions on the spread between the guaranteed rate and Great-West’s actual investment returns in its general account.  The plaintiff, who invested in the fund through his employer’s plan, sought disgorgement of the profits on behalf of a class representing 270,000 participants in 13,000 plans.

Originally, the plaintiff also maintained that Great-West was a fiduciary for having discretion over the investments in the fund and thus, its compensation.  Both parties moved for summary judgment.  The District  Court granted summary judgment for Great-West and the U.S. Court of Appeals for the Tenth Circuit affirmed the decision.  Both courts found that Great-West was not acting as a fiduciary when setting the guaranteed rate quarterly.  The plaintiff did not request the Supreme Court to hear this issue.  With the high court passing on the prohibited transaction issue, the decision of the Tenth Circuit affirming summary judgment in favor of Great-West stands.

The Tenth Circuit ruled that the plaintiff failed to show that the relief it sought was equitable relief allowed under ERISA.  Plaintiff failed to show that Great-West possessed particular property that rightfully belonged to him or in which he could assert title or right to possession and unless the profits he sought to disgorge were generated from property  over which he could assert title or right to possession, an order to disgorge them is a legal remedy unavailable under ERISA.  Therefore, disgorgement of profits as equitable relief was unavailable to the plaintiff-class.

 

The now conservative majority U.S. Supreme Court will hear three ERISA cases this term and decide issues involving the right to sue under ERISA.  The Intel case deals with the statute of limitations for bringing a breach of fiduciary duty claim under ERISA.  The Thole case involves whether participants in a fully funded defined benefit plan can sue for breach of fiduciary duty when there was no apparent effect on their benefits.  And the Jander case will expand upon the Dudenhoeffer ruling as to what plaintiffs need to plead in a stock drop case to avoid the case being dismissed.

Intel Corp. v. Sulyma.  This case involves the one statute of limitations set forth in the ERISA statute which is for breach of fiduciary duty.  Section 413 of ERISA provides that the deadline for filing a lawsuit is generally six years after the breach occurred.  However, if the plaintiff had “actual knowledge” of the breach the limitations period is only three years from obtaining such knowledge.  In this case, Intel Corp. argued that the shorter period applies because the breach of duty conduct complained of was contained in disclosure documents sent to participants and posted on its Web site.  Therefore, the plaintiffs should be considered to have actual knowledge.  Late last year, the Ninth Circuit disagreed with Intel and held that to a plaintiff who received the disclosure but did not read it or cannot remember reading it, does not have actual knowledge and the longer statute applied.  In a 2010 decision, Brown v. Owens Corning Investment Review Committee, the Sixth Circuit had held that failing to read the disclosure will not shield the plaintiff from having actual knowledge.  The Supreme Court will resolve the conflict among these circuits.  Oral arguments in the case will be heard on December 4, 2019.

Thole v. U.S. Bank.  In this case a purported class of participants sued for mismanagement of the assets of a defined benefit plan that caused the plan to be underfunded.  However, the employer, who bears the investment risk in a defined benefit plan, subsequently contributed more to the plan, to make it fully funded, and then moved to dismiss the suit claiming the participants had no damages.  The Eighth Circuit agreed with the employer in a decision that disagrees with decisions of other Circuit Courts.  Therefore, the Supreme Court will resolve this conflict among the Circuits, as well.  Oral arguments have not yet been scheduled.

IBM v. Jander.   This case involves what plaintiffs must plead in their complaint for breach of the fiduciary duty of prudence when a plan is invested in employer stock.  In its 2014  Dudenhoeffer decision the Supreme Court held that plan fiduciaries need not disclose inside information to plan participants about employer stock if the disclosure is likely to do more harm than good.  Earlier this year, the Second Circuit held that Jander plaintiffs properly alleged that no fiduciary could have concluded that an earlier disclosure that IBM’s microchip division was losing $700 million per year would have done more harm than good.  Therefore, IBM’s motion to dismiss was denied.

Oral argument in this case is set for November 6, 2019.  It is hoped that the Supreme Court’s decision will provide clearer standards on what must be pled in these cases.  The plaintiff’s bar hopes the decision will make it harder for such cases to be dismissed.  However, with the conservative makeup of the current Court the decision may make it easier for employers to defend these suits.

ERISA litigation continues to grow.  The high Court’s decisions in these three cases could have a chilling effect on such litigation by shortening the time for bringing cases, deciding when defined benefit plan participants may bring an action; and making the pleading standards in stock drop cases even more difficult to meet.  These cases will also be a good litmus test on just how conservative the new Court will be.

The Justice Department has submitted a Statement of Interest in the litigation, Howard Jarvis Taxpayers Association et al v. CA Secure Choice Retirement Savings Program, challenging California’s CalSavers mandated payroll deduction IRA program, as preempted by ERISA.  The Department previously asked the District court to refrain from ruling on the pending motion to dismiss until it decided whether to participate.  See U.S. Asks California Court to Delay CalSavers Decision Again.  The Department filed the Statement on September 13, 2019, for the purpose of advancing a correct and uniform interpretation of the extent of ERISA’s preemption and to promote the voluntary establishment of employer-sponsored retirement plans.  The Department stated that the United States has a heightened interest in the court finding that the California Secure Choice Act, which authorized the CalSavers program, is preempted by ERISA because it is among the first of similar state laws being challenged.

In the Statement, the Department maintains that CalSavers is preempted by ERISA because ERISA plans are necessary to its framework and it forces employers to either maintain an ERISA plan or to participate in CalSavers.  Additionally, the Department maintains that the CalSavers program itself creates an administrative scheme that employer’s must follow if not maintaining an ERISA plan.  Therefore, the CalSavers program as maintained by any one employer is an ERISA-covered plan.  From the statute’s terms a reasonable person can determine the intended benefits, beneficiaries, source of funding, and procedures for receiving benefits.  Therefore, CalSavers is a plan, fund, or program under Supreme Court and Ninth Circuit precedent, the Department maintains.  Additionally, by requiring employers in the program to determine whether an employee is eligible, set up payroll deduction arrangements, ensure employees are enrolled, deduct contributions through payroll, and forward them to CalSavers, the statute mandates employers maintain an ongoing administrative program required for an ERISA plan under the Supreme Court’s Fort Halifax, 482 U.S. 1 (1987), decision.

The Department also rejects CalSaver’s position that even if the IRAs under the program are ERISA plans, they are exempt under the 1975 Safe Harbor, maintaining that the program is not “completely voluntary.”  The Department noted that other cases involving such wording have held that automatic enrollment, even with an opt out is not completely voluntary.

The Department also maintains that the statute is preempted by ERISA for having an impermissible connection with ERISA-covered plans because it governs a central matter of plan administration and requires employers who do not have ERISA plans to maintain an ERISA-covered plan and the statute controls the benefits, design, and administration of the mandated plan.  Therefore, the statute interferes with the nationally uniform plan administration at the heart of ERISA preemption and potentially subjects multi-state employers to numerous disparate state retirement plan laws.  Finally, the Department maintains that because the statute forces employers to either adopt an ERISA plan or provide an equivalent through CalSavers, which is ERISA-covered, it is preempted as conflicting with ERISA which merely encourages employer’s to voluntarily adopt retirement plans.

It remains to be seen, what effect, the Department’s position will have on the District Court’s ruling.

As previously reported, the U.S. Department of Justice asked the United States District Court for the Eastern District of California not to decide whether to dismiss the lawsuit by the Howard Jarvis Taxpayers Association maintaining that the CalSavers retirement program is preempted by ERISA until the Department decides whether to participate in the lawsuit on behalf of the United States.  In its August 2, 2019 filing the Department indicated that it would give the court an update on the status of its process of deciding by August 30, 2019.  On August 30, 2019, the Department again asked the court to defer ruling on the pending motion to dismiss to give it additional time to conclude the process of deciding whether to participate.  The Department stated it would provide another update to the court on September 13, 2019.  CalSavers filed a response to the Department’s original notice asking the court not to defer its ruling, which apparently has been ignored as the court failed to rule.  Given the importance of the preemption issue it would be good to hear the Department’s point of view.

Just a brief post to let you know that I will be presenting a webinar for the Western Pension and Benefits Council Governing Board titled Voluntary Closing Agreements–The Non-EPCRS Correction Program on August 21 at 10 am PST.  I will discuss fixing plan issues that do not qualify for correction under the Employee Plans Correction Resolution System (EPCRS) through the Employee Plans Voluntary Closing Agreement Program, including the advantages and disadvantages of closing agreements.  I will also present some case studies of issues that have been resolved through the program.

Attendees will learn:

  • What is a closing agreement?
  • What is the EP Voluntary Closing Agreement Program?
  • What can be corrected under the program?
  • What is the procedure for applying under the program?

Click here to Register:

 

The issue of whether CalSavers is preempted by ERISA is being tracked by the Justice Department as it decides whether to participate in the litigation challenging the program.

CalSavers, California’s mandated payroll deduction program for certain California employees who do not have access to retirement plans at work became effective July 1, 2019.  However, still pending is a lawsuit by the Howard Jarvis Taxpayers Association to invalidate the law as preempted by ERISA.  See CalSavers Moves to Dismiss Amended Complaint Challenging Program under ERISA.  A motion to dismiss the amended complaint is awaiting a hearing.  However, interestingly, on August 2, 2019, the United States Department of Justice filed a Notice Concerning Potential Participation requesting that the court defer ruling on the motion in order to permit the United States an opportunity to determine whether it will participate in the litigation.  The Justice Department states in the motion that the United States may have an interest in providing its views with respect to the ERISA preemption issue and is actively considering whether to participate.  Federal law permits the Attorney General of the United States to send any officer of the Justice Department to attend to the interests of the United States in a suit pending in court.  The process for deciding to participate takes several weeks, the motion states the United States will update the court on the status of its consideration by the end of August.

Of course, the motion does not indicate whether the United States has a position on whether the law is preempted by ERISA.

 

This post takes a deeper dive into the expansion of the self-correction program under EPCRS by reproducing my article from this month’s Compensation Planning Journal.  The article discusses the increase in user fees under the Voluntary Correction Program which caused the industry to push back on the cost and request expanded self-correction to ease the cost of correction.  It also discusses issues with the concept of self-correction and some proposed resolutions.  I hope you enjoy it.

https://www.murphyaustin.com/images/pdfs/articles/Expanded_IRS_Self_Correction_Program_Helps_Avoid_Increased_User_Fees_by_Scott_Galbreath.pdf