When is a fiduciary breach not a fiduciary breach?  When the complaining retiree-participants do not have standing because they have not missed receiving a defined benefit pension plan payment, according to Justice Kavanaugh writing for the majority opinion of the U.S. Supreme Court in James J. Thole et al. v. U.S. Bank NA et al., decided June 1, 2020.  In a 5-4 decision, the majority ruled that defined benefit participants, who were receiving their pensions and had not missed an installment, did not have constitutional standing to bring a lawsuit challenging the actions of the plan fiduciaries under ERISA when the plan was overfunded.  The High Court upheld the decision of the United States Court of Appeals for the Eighth Circuit.

The fiduciary action complained of was plan fiduciaries investing in U.S. Bank’s own mutual funds and paying themselves excessive management fees.  Additionally, it was alleged the fiduciaries manipulated accounting rules to boost income and inflate stock prices allowing the fiduciaries to exercise lucrative stock options.  The plaintiff’s alleged those actions breached the fiduciary duties of loyalty and prudence.  Additionally, the plan lost $1.1 billion from the investments in 2008 which plaintiffs alleged was $738 million higher than a properly managed plan would have lost.  These losses cause the plan to be severely underfunded.  The complaint sought a return to the plan of the losses and removal of the current fiduciaries.  However, before the case got to trial, U.S. Bank contributed another $311 million to the plan which made it overfunded.

The gist of the ruling was that because the plan is now overfunded, there is no threat that the plaintiffs won’t continue to receive their pension payments, whether they win or lose the lawsuit.  Kavanaugh found it “of decisive importance” that the plan involved was a defined benefit plan where the risk of investment is upon the employer and a participant’s benefit does not fluctuate with the good or bad investments of fiduciaries.  He noted that the plaintiffs did not allege that the mismanagement of the plan was so egregious that it substantially increased the risk that the plan and employer would fail. Additionally, he wrote that even if the plan were mismanaged into termination, the PBGC would take over the plan and the plaintiff’s level of benefits are fully guaranteed.

Kavanaugh wrote that defined benefit participants do not have an equitable interest in a defined benefit plan similar to that of a defined contribution plan or beneficiaries of a private trust.  Writing a scathing dissent, Justice Sotomayor took issue with this conclusion, reasoning that ERISA’s requirement that plan assets be held in a trust for the exclusive benefit of participants gives participants an equitable interest under traditional trust law, regardless of whether the plan is defined benefit or defined contribution.  Further she reasoned that a beneficiary has a concrete interest in a fiduciary’s loyalty and prudence regardless of whether the breach of these duties caused a personal financial injury to the beneficiary.  By holding the plaintiffs don’t have standing because the outcome of the suit would not change their pension benefit, the Court denies standing without examining all claims for relief.

She also maintained that even if the plaintiffs did not have personal standing they have standing to sue for restitution and disgorgement on behalf of the plan.  She said that even though ERISA and the plan document require fiduciary loyalty and prudence, the majority opinion suggests that participants should endure disloyalty, imprudence and mismanagement as long as the PBGC will guarantee the benefits.  However, ERISA was enacted with fiduciary duties to prevent plans from failing in the first place.

Sotomayor concludes that the majority opinion will encourage the very mischief that ERISA was enacted to prevent, “misuse and mismanagement of plan assets by plan administrators”.  “The Court’s reasoning allows fiduciaries to misuse pension funds so long as the employer has a strong enough balance sheet during (or, as alleged here, because of ) the misbehavior. Indeed, the Court holds that the Constitution forbids retirees to remedy or prevent fiduciary breaches in federal court until their retirement plan or employer is on the brink of financial ruin. . .Only by overruling, ignoring, or misstating centuries of law could the Court hold that the Constitution requires beneficiaries to watch idly as their supposed fiduciaries misappropriate their pension funds.”

Conclusion.  This case will likely chill participant suits alleging fiduciary duty breaches in defined benefit pension plans.  Even if the plan is underfunded, provided the employer can afford to contribute to the plan to cause the plan to be overfunded before trial, the fiduciaries will be able to have the suit dismissed.  More importantly, and disturbing, is the fact that the case appears to enable (if not encourage) defined benefit plan fiduciaries to ignore their duties of loyalty and prudence without concern for personal liability as long as the employer can cure any underfunding caused by the breaches.  However, the U.S. Department of Labor still has standing to bring a suit against such fiduciaries, but this decision removes the private cause of action by participants in this context that is an essential part of the ERISA scheme.



Executives often participate in various nonqualified deferred compensation plans designed to reward upper management.  These can be simple plan designs such as electively deferring a portion of their salary or bonus until a later year.  Or the plan can be more complicated such as awards of phantom stock or stock appreciation rights that will pay compensation to the Executive at a future date based on the value of the employer where the number of units awarded depend on the Executive meeting certain performance goals.  These deferred compensation arrangements generally must comply with Internal Revenue Code section 409A unless exempted.  Failing to comply causes the Executive to be subject to income tax on the deferred compensation as soon as the right to receive it is non-forfeitable.   Such taxable amount is also subject to an additional 20% federal tax and California imposes its own 5% additional tax.

Ceasing Deferrals.  An Executive experiencing financial difficulties as a result of the Covid-19 Pandemic (Pandemic), may desire to stop any elective deferrals of compensation into a deferred compensation plan in order to have more “take home” pay.  However, Code section 409A has strict rules regarding making deferrals and changing them.  First, an elective deferral must generally be made before the end of the year prior to the year in which the compensation is earned.  Additionally, unlike elective deferrals into a 401(k) plan which can be stopped at any time, a deferral of compensation into a plan subject to Code section 409A generally cannot be altered once made for the year.  Thus, had an Executive elected to defer 10% of 2020 salary in an election made prior to the end of 2019, the Executive cannot cancel such deferral in 2020 without violating Code section 409A.  The exception to this rule is if the plan permits deferral elections to be cancelled as the result of an unforeseeable emergency discussed further below.

Unforeseeable Emergency Distributions.  An Executive may also wish to access compensation previously deferred to relieve financial stress caused by the Pandemic or medical expenses resulting from COVID-19.  Code section 409A governs what events may give rise to a distribution under a deferred compensation arrangement.  These are: separation from service, death, disability, a specified date, a change in control, and an unforeseeable emergency.  The triggering events permitted by the plan must be set forth in the written plan document.  Code section 409A also contains a prohibition against accelerating payment of deferred compensation even if it means the Executive receives less than deferred by taking a “haircut” penalty.  This is prohibited due to several highly publicized corporate abuses involving haircuts before Code section 409A was enacted.

Circumstances caused by the Pandemic might be eligible as an unforeseeable emergency If that triggering event is permitted under the plan document.  If the deferred compensation plan does not already provide for such a triggering event, it may be amended to add it.  A distribution on account of an unforeseeable emergency is different than hardship distributions permitted in a 401(k) plan.  Additionally, the CARES Act permitted 401(k), and other types of qualified plans, to specifically permit distributions to participants affected by COVID-19.  However, deferred compensation plans for Executives are not permitted to allow COVID-19 specific distributions and unlike hardship distributions from 401(k) plans, there are no safe harbor rules that an employer may rely on, when determining whether an Executive  experienced an unforeseeable emergency.  Whether this has occurred is based on the facts and circumstances.

Code section 409A defines an unforeseeable emergency as extraordinary and unforeseeable circumstances beyond the control of the employee that causes the employee severe financial hardship that cannot be alleviated by (1) compensation or reimbursement received from insurance companies or otherwise, (2) liquidation of the employee’s assets, or (3) ceasing future deferrals of compensation.  Specific examples of unforeseeable emergencies include:

  1. The employee’s (or the employee’s spouse’s, beneficiary’s or dependent’s) illness or accident.
  2. Imminent foreclosure or eviction of the employee’s primary residence.
  3. The need to pay medical expenses (including nonrefundable deductibles) or prescription drug medications.
  4. Other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the employee which cannot be relieved through the employee’s other resources.

Clearly the Pandemic is an event out of the control of an Executive.  However, to permit a distribution, the deferred compensation must be needed because the Executive has no other resources to use such as savings or ceasing elective deferrals into the deferred compensation plan or a 401(k) plan.  Therefore, it will likely be difficult for an Executive to meet this burden, and get a distribution, especially if there is money available under a 401(k) plan or the emergency can be met by ceasing deferrals to the 401(k) plan and the deferred compensation plan.

Plan Termination.  Another way that Executives could receive their deferred compensation early without a triggering event would be for the employer to terminate and liquidate the plan (and all like it).  However, this would not likely help an Executive that is feeling financial stress due to the Pandemic because of the requirements of the termination.  First, the employer cannot terminate the plan proximate to the employer experiencing a financial downturn.  Thus, this option is likely not available if the employer is suffering economically as a result of the Pandemic.  Second, once terminated, the plan may not make liquidating distributions to participants for 12 months but must make all distributions within 24 months of the termination date.  Additionally, the employer cannot adopt a replacement plan for 3 years.

Conclusion.  Code section 409A limits the ability of Executives to use deferred compensation plans to alleviate financial hardships derived from the Pandemic.  Given the potential tax consequences, Executives and employer-administrators should be very careful about requests to access deferred compensation due to the Pandemic.

Rank and file employees who may have lost their job or had hours reduced probably don’t care about the effects of the economic downturn resulting from the COVID-19 Pandemic (Pandemic) on executives and key management employees.  However, business owners who have provided such employees with employment agreements, deferred and/or incentive compensation, and perhaps equity or phantom equity compensation do have an interest in the effects of the Pandemic on these employees. This article is Part 1 of a series of blog articles that will address implications the Pandemic may have on executives and key employees in private companies (Executives).  In Part 1 we discuss how employment agreements of Executives will play an important role in any attempt to reduce their compensation and/or adjust incentive compensation.

Reducing Executive Pay.  Employers are reducing their workforce and reducing working hours for employees due to both government orders and the economic fallout from the Pandemic.  Many Executives have employment agreements with their employer.  These often set forth the Executive’s base salary and various forms of bonus or incentive compensation.  While the agreement may provide that the employment is “at will” and it may be terminated by either party with or without cause, it also often provides for severance pay if the agreement is terminated by the employer without cause.  Also, many agreements provide the Executive can receive the severance pay if the Executive terminates the agreement for “good reason”.  Good reason is usually defined to include an employer initiated material change in the circumstances of the Executive’s employment including changes in duties, pay, or place of performance.

Therefore, if the employment agreement permits the employer to reduce the Executive’s salary and other compensation, doing such may give the Executive good reason to terminate the agreement triggering a severance pay obligation.

Some employment agreements may not be “at will” but have a term and cannot be terminated early without cause such as committing a crime or fraud. Typically, doing so requires payment of the Executive’s compensation to the end of  the term even if no longer performing services.

For these reasons, any employment agreements should be reviewed before any attempt to reduce compensation thereunder.  They will likely require the Executive’s agreement to a change.  Many Executives are voluntarily agreeing to a reduction in compensation during these extraordinary times as a sign of good faith.  In either case, the terms of the reduced pay should be negotiated and an amendment to the employment agreement setting forth the terms should be drafted and executed.  This amendment should also provide a mechanism for compensation to return to normal, as well.  It should also be remembered that if the amendment provides that some or all of the reduction in compensation will be paid to the Executive at a future time when the Pandemic is over, that this may be a deferred compensation arrangement that is subject to Internal Revenue Code section 409A, if the compensation is paid in a subsequent year.

Changing Incentive Compensation.  Executives often have certain incentive pay arrangements such as bonuses based on the performance of the business.  A simple example would be that the Executive will earn a bonus equal to 10% of all sales revenue over 105% of the previous year’s sales.  The Pandemic’s effect on the business may be such that it is impossible for the Executive to earn this bonus.   Nonetheless, the Executive may be working even harder just to keep the business afloat during these difficult times.

The employer could simply take the position that if the sales didn’t increase no bonus is due.  Or the employer could take the opportunity to work with the Executive to amend the incentive compensation formula to a more realistic goal or simply substitute a simpler cash bonus instead.

Conclusion.  While the economic downturn resulting from the Pandemic has serious effects on businesses that may cause them to consider adjusting Executive compensation and perks, the Executive likely has legal rights which should be considered.  For this reason, employment agreements and incentive compensation documents should be reviewed with legal counsel to minimize the risk of unintended adverse consequences.  Stay tuned for Part 2 dealing with the effects of the Pandemic on deferred compensation arrangements of Executives.

The California Secure Choice Retirement Savings Investment Board has filed a Notice of Proposed Emergency Regulation Action with the Office of Administrative Law (OAL) to adopt emergency regulations to amend the current CalSavers regulation to extend the June 30, 2020 registration deadline for Eligible Employers with more than 100 employees to September 30, 2020.  Currently, employers with more than 100 employees that don’t otherwise offer a retirement plan must register with CalSavers, the state’s payroll deduction IRA program, by June 30, 2020 and automatically enroll employees  or face penalties.

Under its Finding of Emergency, the Board stated that the extension is necessary to provide California employers additional time to respond to the COVID-19 pandemic and prepare for their registration deadline.  The Board believed that keeping the June 30 deadline would unduly burden employers experiencing hardship due to the COVID-19 pandemic.

Once the proposed amendment is submitted to the OAL, there will be an opportunity for public comment.  The Notice, Proposed Regulation, and finding of Emergency can all be found on the state Treasurer’s website at https://www.treasurer.ca.gov/calsavers/regulations/index.asp.

On April 1, 2020, the Howard Jarvis Taxpayers Association filed a Notice Of Appeal with the United States District Court for the Eastern District of California, indicating that it is appealing the court’s March 10, 2020 dismissal of the Association’s lawsuit alleging that CalSavers, California’s mandated payroll deduction IRA program, was preempted by ERISA.  See CalSavers Not Preempted By ERISA! The appeal is to the United States Court of Appeals for the Ninth Circuit.

The decision last month was the second time the Eastern District had dismissed the case.  The Association originally filed suit in 2018 and the court dismissed it with leave to amend in March of last year.  See CalSavers Saved From ERISA Preemption By District Court.  The Association filed an amended complaint in April of 2019 and the United States Justice Department filed a statement of interest in September, agreeing with the Association that CalSavers was preempted. See HJTA Files Amended Complaint Challenging CalSavers Program and Friday the 13th Unlucky for CalSavers as U.S. Maintains Law is Preempted by ERISA.

The Notice of Appeal does not indicate the basis for the appeal.  One would expect the Justice Department to remain interested in the appeal.


On March 27, the House of Representatives passed, and within hours President Trump signed, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a 2 trillion dollar stimulus and relief statute with several measures to help individuals and businesses cope with the economic issues resulting from the COVID-19 Pandemic.  The Senate had passed the bill on March 25.  The Act includes two major changes to the rules surrounding participants accessing funds under certain retirement plans and IRAs as a result of the Pandemic.   These are: the ability of “eligible employees”: to withdraw funds from the plan during 2020 on an advantageous basis as an eligible Coronavirus-Related Distribution (CRD); and the ability to borrow more money from the plan on more favorable terms, if the plan permits participant loans.  These two provisions are discussed below.


The CARES Act permits eligible retirement plans to allow CRDs of up to $100,000 from the date of enactment to the end of 2020 to an eligible individual.  An eligible individual is one: 1) Who is diagnosed with the SARS-CoV-2 virus or coronavirus disease 2019 (COVID-19) because of testing positive for the virus or disease; 2) Whose spouse or dependent is so diagnosed; or 3) Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors determined by the Secretary Treasury.  The Plan Administrator can rely on an employee’s certification that the employee satisfies the requirements to be an eligible individual.

CRD withdrawals are not subject to the 10% penalty for early withdrawal, or 20% federal income tax withholding.  Also, while subject to income tax, the taxes are spread over 3 years unless the participant elects to pay sooner.  Most importantly, the withdrawals can be re-paid to the plan over 3 years from the date of distribution.  Repayments can even be made to another employer’s plan that permits roll overs should the employee change jobs.

An eligible retirement plan is defined as any qualified retirement plan maintained by the employer (which includes pension plans), section 403(a) and 403(b) plans, and section 457(b) plans of governmental employers and IRAs.

Enhanced Loan Provisions

The CARES Act allows eligible plans to make participant loans to any eligible individual (as defined for CRDs above) in a maximum amount of the lesser of $100,000 or the present value of the participant’s vested benefit under the plan.  This is double the maximum for normal participant loans.  An eligible plan for these loans is any qualified plan, or a 403(a) or 403(b) plan, but not 457 plans.

In addition, for any participant loan of an eligible individual that is outstanding as of the date of enactment of the Act (March 27, 2020), the loan repayments to be made through December 31, 2020 are delayed for one year.  The subsequent remaining loan repayments are re-amortized to account for the delay and interest earned during the delay.

Amendments Needed.

A plan would have to be amended to permit such CRDs or loans. However, the CARES Act permits employers to implement the CRDs and loans in operation and wait to amend the plan until the last day of the first plan year beginning on or after January 1, 2022, or a later date if prescribed by the Secretary of the Treasury.


These provisions are a welcome addition to help employees have access to their retirement savings, if necessary, to tide them over during the COVID-19 Pandemic.  They have many advantages over the traditional hardship withdrawals that could be taken if the plan permits.  The principal advantage is that they avoid the leakage in retirement savings of traditional withdrawals  because, unlike traditional withdrawals, they can be re-contributed to the plan.  Hopefully, the Pandemic will be over in a few months and the economy will return to normal allowing those employees taking advantage of these new CARES Act provisions to repay the money to the plan to be used for retirement.





If you’ve been wondering why I haven’t posted about the effects of COVID-19 on employee benefits it’s because I’ve been practicing social network distancing.  Just kidding. While we await Congress to pass and the President to sign the 2 trillion dollar stimulus package known as the CARES Act, I thought I would point out how 401(k) or 403(b) plans that permit hardship withdrawals under the federal disaster safe harbor can now permit such withdrawals for employees suffering a financial hardship as a result of COVID-19.

While the President declared the COVID-19 Pandemic a national emergency on March 13, it is not a declared national disaster yet.  However, the President declared California, Washington, and New York as major disaster areas on March 22.  Subsequently, the states of Iowa, Louisiana, Texas, Florida, North Carolina and New Jersey have been declared disaster areas and more states are likely to be so declared.  These declarations qualify residents of these states and employees of employers in those states to qualify for a hardship distribution for losses as a result of the virus, if the plan has adopted the federal disaster safe harbor.

If a plan uses the facts and circumstances test instead of the safe harbor, withdrawals for substantiated financial hardships resulting from COVID-19 are subject to the plan administrators approval, but should be approved.

However, such hardship withdrawals cause leakage in retirement savings as they cannot be re-contributed to the plan.  Additionally, the withdrawals are subject to income tax and the 10% early withdrawal penalty if the participant is under age 59 1/2.  The CARES Act proposal permits plans to allow for COVID-19 related distributions of up to $100,000.  Such withdrawals are not subject to the 10% penalty and the income tax consequences can be spread over 3 years.  Most importantly, the withdrawals can be re-paid to the plan over 3 years and can even be made to another employer’s plan that permits roll overs should the employee change jobs.  A plan would have to be amended to permit such distributions.  Given the advantages of the CARES Act, it may be well worth it to wait for it to become law which should be any day now.

Stay well.

On March 10, 2020, the United States District Court for the Eastern District of California once again dismissed the lawsuit by the Howard Jarvis Taxpayers Association (HJTA), challenging CalSavers as being preempted by ERISA.  CalSavers is California’s mandated auto-enrollment payroll deduction IRA program that requires employers of a certain size, that don’t provide their employees with a retirement plan, to automatically withhold contributions from such employee’s pay and pay them into IRAs managed by CalSavers.  Employees can opt out.

HJTA originally filed suit in May of 2018, alleging that the program was preempted by ERISA.  However, the court granted CalSavers’ motion to dismiss in March of last year but gave HJTA leave to amend the complaint.  HJTA filed an amended complaint in April of 2019 and CalSavers again moved to dismiss.  The District Court again dismissed the case despite the fact that the United States Department of Labor filed a statement of interest last September, siding with HJTA that the law was preempted by ERISA.  The court found that CalSavers  is not an employee benefit plan under ERISA because it is not maintained by an employer and it does not “relate to” an employee benefit plan because it does not impose any additional reporting, administration, or burdens on employers that maintain ERISA plans.

This case is not only a victory for CalSavers but also other states with similar programs.

On February 26, 2020, the United States Supreme Court unanimously held that a participant could not be considered to have “actual knowledge” of the employer’s conduct alleged to be a breach of fiduciary duty when such conduct was disclosed in email and Web site disclosures when the participant can’t remember actually receiving or reading the disclosures in Intel Corporation Investment Policy Committee v. Sulyma.  As a result, ERISA’s six-year statute of limitations applied to the participant’s law suit, rather than the shorter three-year statute when the participant has actual knowledge of the conduct giving rise to the breach. The high Court affirmed the decision of the Ninth Circuit that overturned the lower court’s granting of Intel’s motion for summary judgment as beyond the three-year statute.

The district court had ruled that the participant had constructive knowledge of the conduct and the shorter statute applied making the participant’s lawsuit untimely. The high Court looked to the plain meaning of “actual knowledge” in the statute. It stated that although ERISA doesn’t define “actual knowledge”, its meaning is plain and dictionary definitions confirm to have actual knowledge of information one must, in fact, be aware of it. The Court found that while constructive knowledge may be imputed in other circumstances, the addition of the word “actual” in the statute signals that Congress meant knowledge must be more than hypothetical.

The Court acknowledged Intel’s argument that this interpretation makes it easier for participants to bring fiduciary breach claims against employers, even though they were transparent in their disclosures, because they only have to allege that they didn’t read the information. However, the Court responded that it is up to Congress to change the wording of the statute to provide better protection for employers not the Court. The Court also noted that their decision does not affect the way employers can prove that the participant has actual knowledge.

In the 1960’s, the Supremes sang, “You can’t hurry love.”  Apparently, the U.S. Supreme Court now feels the same way about the constitutionality of  the Affordable Care Act (ACA), also known as Obamacare.  On January 21, 2020, the High Court decided not to hurry the decision of whether to hear a case appealing a decision from Texas that the ACA is unconstitutional.   The Court did not decide not to hear the case, only that it would not expedite the decision whether to hear it during its current term.  The High Court will not decide whether to take the case for months and, if it takes it, won’t hear it until the Fall.  This  means the case will likely not be decided before the November Presidential election.

Twenty Democratic states led by California Attorney General Xavier Becerra as well as the House of Representatives petitioned the high court to review the decision by the United States Court of Appeals for the Fifth Circuit holding that the Affordable Care Act’s individual mandate is unconstitutional now that the tax on individuals for failing to have health insurance coverage has been reduced to zero by the 2017 Tax Act.  The Fifth Circuit agreed with the Texas District Court on the individual mandate but would not go as far as the lower court and hold that the entire ACA is also unconstitutional because the individual mandate is such an integral part of the statute.  Instead, the Fifth Circuit sent the case back to the District Court to go through the ACA again with a “finer toothed comb” to determine whether there isn’t any part of the ACA that can stand without the mandate.  Becerra and the Democrats saw no reason for the High Court not to review the case now due to the tremendous implications for our economy.  In the Democrats view sending the case back to the District Court would cause delay for years and the High Court would still have to decide the matter.  The Democrats also asked the Justices to expedite the application so that the case could be heard this term.   On the other hand, the Trump Administration argued there was no need for expedited consideration.

While it only takes 4 justices to decide to review the case and keep it from going back to the District Court, it would have taken 5 of the 9 justices to expedite the case.  Therefore, despite it not being expedited, it is quite possible that the Court will take the case next term.  The ACA remains effective while the litigation is pending.  The case is titled both as California v. Texas and House of Representatives v. Texas at the Supreme Court.