Happy Holidays!  You may have a pep in your step with the news that the FDA has approved the Pfizer vaccine to combat COVID-19.  This is certainly a reason for optimism.  However, 2021 promises to be quite PEPPY for another reason.  Pooled Employer Plans (or PEPs) can begin operating in 2021.  PEPs are Multiple Employer Plans (or MEPs) that were authorized as part of the SECURE Act enacted in 2019.  See 2020 Appropriations Bill.  They are individual account retirement plans adopted and maintained by more than one employer where the employers need not be related by geography or industry.

For years industry experts have believed that open MEPs could encourage more employers to adopt retirement plans by permitting smaller employers to join together to get economies of scale in the administrative costs of operating retirement plans.  A major drawback to such plans was that unless the MEP was “closed” such that it could only be adopted by employers in a common industry or geographic area, it wasn’t treated as a single plan for 5500 return purposes.  In addition, even in a closed MEP, the qualification failure of a single employer, could disqualify the plan for all employers under the “one bad apple” rule.  The one bad apple rule doesn’t apply to PEPs.

A PEP must be sponsored by a Pooled Plan Provider (or PPP) that agrees to be the named fiduciary of the plan responsible for all administration and Tax and Labor law compliance, and registers with the Treasury and Labor Departments as a PPP.  On November 12, the Department of Labor finalized regulations on PPP registration.

PPPs are required to register with the Department of Labor at least 30 days before beginning operations by electronically filing new EBSA Form PR.  However there is an exception for the period Nov. 25, 2020 to Jan. 31, 2021.  During this period, the 30-day requirement is waived and the registration must be made no later than the day operation of the PEP begins.  Registering with the Department of Labor also satisfies the requirement to register with the Treasury Department.  The final regulations also clarify that operation of the PEP begins when the first employer executes or adopts an agreement specifying that the plan is a PEP, or, if earlier, when the PEP’s trustee first holds any asset in trust.

The Department of Labor estimates that 3,200 PPPs will initially register.  PEPs may become popular with smaller employers, particularly in states like California that have state mandated payroll deduction IRA programs for employers that don’t otherwise offer a retirement plan.  See CalSavers Not Preempted By ERISA.  A PEP may offer a lower cost and better benefit option than the state IRA program.  Time will tell whether PEPs are popular and successfully encourage more employers to adopt retirement plans but if the Department of Labor’s estimates are correct there should be plenty of PEPs to choose from in the new year.

The Republican Senate has confirmed President Trump’s nomination of Amy Coney Barrett to the United States Supreme Court.  The confirmation is record breaking in a couple of ways.  First, it was the fastest confirmation of a Supreme Court Justice in history.  Second, it was the most partisan vote to confirm a Supreme Court Justice as no Senate Democrats voted to confirm.  It was also the first such hearing or confirmation to take place while citizens were voting in a Presidential election.  Democratic Senators protested the appropriateness of the hearings up to the deciding vote, maintaining that the next President should be the one to fill the vacancy on the high court left by the death of Justice Ruth Bader Ginsburg.

Many believe that this confirmation of another conservative to the high court means the Affordable Care Act (ACA) will be declared unconstitutional in the case of Calfornia v. Texas which will be heard on November 10.  See Death of RBG Could be Death of ACA.  In a case brought by Republican Attorneys General and supported by the Trump administration, a Texas District Court held that now that the penalty tax for failing to have health coverage under the individual mandate has been reduced to zero and the Supreme Court upheld the ACA as constitutional under Congress’ taxing power, the individual mandate is unconstitutional.  The court then also held that the individual mandate was so integral to the ACA that the entire statute must also be unconstitutional because no provisions could be severable from the mandate.   The United States Court of Appeals for the Fifth Circuit upheld the district court on the individual mandate but remanded the case to the lower court to go through the Act with a “finer tooth comb” to see if any part of it could be saved.  However, Democratic Attorneys General then appealed the case to the High Court.

Of course, severability is the big issue.  The Court could agree that the individual mandate is now unconstitutional but that the rest of the ACA is severable, and therefore, still law.  During her confirmation hearing Judge Barrett intimated that she might rule that the individual mandate is severable because the ACA “is obviously a very long statute” and answered “That is true” to Senator Graham’s question, “If you can preserve a statute, you try to, to the extent possible?”  She also stated that while she has been critical of prior decisions upholding the ACA, she does not believe that she has ever written on how she feels about severability.

Importantly, President Trump has said during the Presidential campaign and debates that he will “protect pre-existing conditions”.  However, if the entire ACA is declared unconstitutional by the Supreme Court, the protection for pre-existing conditions in the ACA disappears.  Legislation would be required to reinstate such protections.

The only way the Supreme Court can preserve the protection of pre-existing conditions in California v. Texas, is to uphold the entire ACA by finding the zeroed out individual mandate tax still constitutional or upon striking down the individual mandate, finding it severable from the rest of the ACA.

Wouldn’t it be a treat if that is how Trump keeps his campaign promise.


Our country lost a great lawyer, jurist, advocate, patriot, citizen, and icon on Friday.  And oh yeah, she happened to be a woman.  Of course, I’m talking about Supreme Court Justice Ruth Bader Ginsburg, the notorious RBG.  She will be missed on a court that is becoming more and more conservative and political.

The debate has already begun as to whether President Trump will be able to get his nominee appointed before the election or before Joe Biden takes office in January, should he win.  This issue is very important to the fate of the Affordable Care Act (ACA) as the high Court will hear the California v. Texas case and decide whether the ACA is void in the 2020 term that begins in October..

That case is an appeal of a Texas district court decision holding that because the individual mandate was upheld as constitutional under the taxing power of Congress in 2012, in National Federation of Independent Businesses, and the 2017 Tax Act reduced the tax for violating the individual mandate to zero, the mandate is no longer constitutional.  Additionally, since the individual mandate was such an integral part of the Act, the district court held the entire ACA must fall.  The United States Court of Appeals for the Fifth Circuit upheld the district court on the individual mandate but remanded the case to the lower court to go through the Act with a “finer tooth comb” to see if any part of it could be saved.  However, understanding the importance, several democratic state Attorneys General appealed the case to the Supreme Court and even asked for the Court to expedite the decision as to whether to hear it, so it could be heard last term.  The Court denied the request to expedite but agreed to hear the case in the 2020 term.  See Supremes: You Can’t Hurry Love or Constitutionality of ACA.

Arguments are scheduled for November 10 and a decision may not be made before the end of the year.  The current 8 Justice make up of the Court means that if a ninth Justice is not installed before the case is decided, the vote of the Justices could end in a tie.  This would mean the decision of the Fifth Circuit would stand.  That would mean the district court would have to decide whether any part of the Act could be saved and it is unlikely it would so find.  However, the Justices could agree to delay the case until there is a ninth Justice installed.

RBG knew the importance of her role as a liberal on the Court as she continued working while fighting cancer.  Last term she participated in the hearing of the Little Sisters case by phone from the hospital.  In that case, the majority upheld the Trump Administration’s expansive exemptions from the contraceptive mandate under the ACA for public companies objecting on religious beliefs and any employer objecting on strongly held moral grounds.  The contraceptive mandate requires health policies to cover contraceptive care for women with no co-pays.  RBG wrote a scathing dissent stating that the majority has placed religious rights over the rights of women.  The consequence of the exemption was that hundreds of thousands of women will lose coverage for contraceptive care resulting in the kind of sexual discrimination in health care that the contraceptive mandate was enacted to prevent. While her view did not prevail, she continued to speak truth to power and champion women’s rights.




On August 10, 2020, a California Superior Court Judge granted a preliminary injunction against rideshare companies Uber and Lyft requiring them to stop classifying their drivers as independent contractors violating AB5.  The injunction was stayed for 10 days to give the companies time to appeal.  AB5 codified the California Supreme Court’s Dynamex decision and became effective this past January. Boom Goes the Dynamex!.

The motion for a preliminary injunction was filed by California Attorney General Xavier Becerra, along with city attorneys from Los Angeles, San Diego and San Francisco. as part of a lawsuit filed in May.  The suit complains that Uber and Lyft gain an unfair competitive advantage by misclassifying workers as independent contractors and are depriving drivers of the right to minimum wage, overtime, access to paid sick leave, disability insurance and unemployment insurance.  Reclassifying such drivers as employees would likely cause Uber and Lyft to incur great additional expense as the drivers would become eligible for any employee benefits they offer to employees such as retirement and health plans.  If the company’s don’t offer a retirement plan, it would then have to enroll them into CalSavers.

Uber and Lyft appealed the granting of the preliminary injunction in the court that issued it but that appeal was rejected on August 14.  Both companies then filed for an emergency stay at the appeals court and threatened to cease all operations in California if the stay was not granted.  On August 20, the appeals court granted the emergency stay of the preliminary injunction until the court hears the appeal of the grant of the injunction, provided the companies file, by September 4, a preliminary plan for complying with AB5, should they lose the appeal and Proposition 22 (Prop 22) does not pass in November.  Arguments in the case are set for mid-October.

Uber and Lyft (along with DoorDash and Postmates) were successful in getting Prop 22 on the November ballot.  Prop 22 is a referendum to keep rideshare and delivery drivers as independent contractors.  That proposition would create a third classification of workers and change the California Labor laws to grant drivers certain protections, including a wage of 120% of minimum wage, thirty cents per mile reimbursement for expenses, a healthcare stipend, and certain automobile and accident insurance.

So Prop 22 and AB5 may converge this Fall as It is possible that the appeals court could uphold the injunction, requiring the rideshare drivers to be treated as employees in October, only to have Prop 22 pass in November, reclassifying them back to independent contractors.


Another one of my favorite guitarists is Eric Clapton who released an album titled “August” in 1986.  Recent guidance from the IRS providing certain relief for retirement plans as a result of the COVID-19 Pandemic brings this album to mind as it emphasizes action by the end of August.  Last month the IRS issued two important notices providing additional relief regarding allowing participants to repay 2020 required minimum distributions (RMDs) that were received prior to enactment of the CARES Act, and helping employers with safe harbor 401(k) or 403(b) plans to reduce or suspend employer contributions mid-year.  Both notices provide that August 31 is an important deadline for the relief.  These notices are discussed in this article.

2020 RMDs-Notice 2020-51.  RMDs are distributions that individuals are required to take because they have reached a certain age.  The age was 70 1/2 until enactment of the SECURE Act in late 2019, raising the age to 72 for individuals turning age 70 1/2 after 2019.  On June 23, 2020, the IRS issued Notice 2020-51 dealing with RMDs that have been received in 2020 despite the fact that the CARES Act eliminated RMDs for 2020.  The CARES Act was enacted on March 27, 2020 and provided that due to the economic downturn caused by the COVID-19 Pandemic that Participants did not have to take RMDs from defined contribution plans or IRAs for the 2020 calendar year.  However, since the first quarter of 2020 was almost over when the CARES Act was enacted some participants had already received some or all of their RMD for 2020.  In general RMDs do not qualify for tax free rollover treatment.  The CARES Act permitted distributions in  2020 that would be RMDs but for the CARES Act to be rolled over within 60 days.  However, people who had taken distributions in January couldn’t meet the 60-day after receipt rollover requirement.  In April, the IRS extended the rollover window to July 15 for any RMD received on or after February 1. Unfortunately, this still left those who received an RMD prior to February with no recourse.

In Notice 2020-51 the IRS remedies this by providing that any distribution received in 2020 that would be an RMD but for the CARES Act can be rolled over by the later of August 31, 2020 or 60 days after the date of distribution. It additionally permits nonspousal beneficiaries that inherit accounts to roll over 2020 RMDs.  It also provides that such rollovers are not counted as a rollover for the purpose of the “one rollover per year” rule for IRAs.

The Notice also contains Q&As and a sample plan amendment providing participants a choice whether to receive RMDs in 2020 and employers options with respect to a default if the participant does not make an election as well as options with respect to direct rollovers.  Adoption of the sample amendment preserves the employer’s reliance on a favorable opinion, advisory or determination letter from the IRS.

Mid-Year Reductions/Suspensions-Notice 2020-52.  Perhaps more impactful than the notice on RMDs was the next notice the IRS issued on June 29, 2020, permitting certain safe harbor plans to be amended to reduce or suspend safe harbor contributions after the start of the plan year.

Contributions to 401(k) plans must not discriminate in favor of highly compensated employees (HCEs).  A plan must meet certain nondiscrimination tests that compare the average percentage of deferrals of nonhighly compensated employees to that of HCEs known as the Actual Deferral Percentage (ADP) test.  Additionally, if the plan provides for employer matching contributions those contributions must also be tested in a similar manner under the Actual Contribution Percentage (ACP) test.  A 403(b) plan that provides employer matching contributions is also subject to the ACP test.

A safe harbor plan is a plan that is designed to provide all nonhighly compensated employees with a minimum required employer contribution sufficient to avoid having to be tested under the ADP or ACP tests.  The two general safe harbor formulas are an employer nonelective contribution for all nonhighly compensated employees of 3% of compensation or an employer matching contribution that matches the first 3% at 100% and the next 2% at 50% (for a total match of 4% on a 5% deferral).

In order to be a safe harbor plan, there are limits on changing the employer contribution formula  during the plan year.  Under regulations, amendments to the formula may be made only under two circumstances: 1) if the employer is operating at an economic loss for the plan year; or 2) if the safe harbor notice provided employees for the plan year states that the safe harbor contributions may be reduced or suspended during the plan year.  If either requirement is met and the employer wishes to reduce or suspend the contributions, it must provide a supplemental notice of the reduction/suspension to employees at least 30 days in advance of the change becoming effective.  This supplemental notice gives employees enough time to decide whether to change their elective deferral.

Employers could not foresee the COVID-19 Pandemic or its economic impact on the nation.  Many employers are facing unexpected financial issues trying to stay in business.  Saving money by reducing or suspending contributions to 401(k) plans could help in this regard.  However,  employers may not have had the forethought to include the statement about reducing or suspending safe harbor contributions in their notice to participants.  Likewise, they may not yet know whether they will operate at a loss for the plan year.

In Notice 2020-52, the IRS provided temporary relief from some of the amendment and notice restrictions for safe harbor plans.  First, the Notice clarifies that any contributions for HCEs are not considered safe harbor contributions.  Therefore, mid-year changes to reduce or suspend safe harbor contributions to HCEs does not impact safe harbor status.  Second, the Notice allows an amendment to reduce or suspend all safe harbor contributions mid-year even if the economic loss or notice requirements in the regulations are not met, provided the amendment is adopted by August 31, 2020.  If the amendment is adopted, the plan becomes subject to ADP/ACP testing for the plan year.

If the safe harbor contributions being suspended or reduced are nonelective employer contributions (as opposed to matching contributions), the 30-day requirement for supplemental notice will be considered met if the notice is provided no later than August 31, 2020 and the amendment is adopted no later than the effective date of the suspension or reduction.  However, if matching contributions are being reduced or suspended there is no relief from the 30-day requirement because the employee’s need time to decide whether to change their elective contributions.  Therefore, the supplemental notice must be provided at least 30 days before the effective date of the amendment.

Conclusion.  August 31 is an important date for the relief provided in these two IRS notices.  Employers need to decide how to handle 2020 RMDs and communicate the new rules to participants including notifying those who have already received them about their ability to roll those distributions back into the plan or IRA or another plan or IRA.  Employers wishing to reduce or suspend safe harbor contributions must also prepare now to meet the notice and amendment requirements.  August is just around the corner and the relief available in the IRS notices require action by employers.  It is not enough to know the information, “it’s in the way that you use it.”


One of my all time favorite guitarists is Stevie Ray Vaughn, who died way too young.  Stevie sang a song titled “Look at Little Sister”  which I am reminded of every time I hear about the Little Sisters of the Poor litigation involving the Affordable Care Act (ACA).  And I’ve been reminded a lot since 2017 as the Little Sisters have been before the U.S. Supreme Court twice in that time.  The issue has involved the ACA’s mandate that health plans provide coverage for contraceptives, sterilization, and certain birth control, including the morning after pill, at no additional cost.

The Little Sisters of the Poor Saints Peter and Paul Home (Little Sisters), a nonprofit Catholic order of nuns, that operate homes for the elderly poor nationwide, first objected to the coverage on religious grounds in 2013.  They complained that while certain religious organizations such as churches were exempt from the mandate, the exemption didn’t apply to them as a religious nonprofit organization and even having to file an exemption certificate declaring that the requirement was against their strongly held religious beliefs and was an unconstitutional infringement by making them complicit in providing the birth control.  After defeats in the lower courts, their case reached SCOTUS in 2016 and the Supremes overturned the lower court decisions and instructed the lower courts to provide the government an opportunity to come up with a compromise to provide birth control services to the women who want them while respecting the religious beliefs of organizations like the Little Sisters.  

In October of 2017, the Trump Administration issued a broader exemption from the rule to include nonprofit organizations and for profit companies that objected on religious grounds and also expanded it to include objections on moral grounds.  Several State Attorneys General, including California and Pennsylvania, then sued maintaining that the new broader exemption must fail as the Trump Administration violated the Administrative Procedures Act (APA) in how it issued the expanded exemption without proper opportunity for public comment and that it lacked authority under the ACA or any other legislation to enact the exemption.  In 2018, the Administration reissued the exemption and published it for public comment.  The States again challenged, and a Pennsylvania District Court issued a nationwide injunction against implementation of the new exemption in January of last year.

The Administration and Little Sisters appealed the issuing of the injunction.  In July, the United States Court of Appeals for the Third Circuit upheld the Pennsylvania District Court’s granting of the injunction.  In October, the Administration and Little Sisters asked the Supreme Court to take the case and the Court agreed to look at Little Sisters again.

Oral arguments in the case were heard via conference call due to the Covid-19 Pandemic, with Justice Ruth Bader Ginsburg attending the call from a hospital bed.  On July 8, the high Court held, 7-2, that the exemption would stand, lifting the injunction.  The decision is a bit surprising considering that this alleged conservative Court has turned out not to be so conservative (or Administration friendly) in two monumental decisions from earlier this term.  On June 15, in Bostock v. Clayton County, Georgia, the Court held that gay, lesbian, and transgender individuals are protected under the Civil Rights Act’s prohibition of discrimination on the basis of sex and on June 18 the Court ruled that the Administration’s attempt to revoke the Deferred Action for Childhood Arrivals (DACA) program’s immigration relief for so-called Dreamers was arbitrary and capricious and unenforceable in Department of Homeland Security v. Regents of the University of California. 

Justice Thomas wrote the majority opinion and held that the ACA granted broad discretion to the Health Resources and Services Administration (HRSA) when it states that health plans must provide women with “preventive care and screenings . . . as provided for in comprehensive guidelines supported by HRSA.”  The discretion to define what must be covered also provides the discretion to identify and create exemptions.  Thomas then made quick work of the alleged procedural defects finding there was no prejudicial error or requirement of “open mindedness” in the APA.  Therefore, the exemptions were properly promulgated.

Justice Ginsburg wrote a scathing dissent stating that a government estimate that between 70,500 and 126,400 women would immediately lose access to free contraception as a result of the ruling.  She expressed concerns over the erosion of women rights in favor of religious right stating,

“Today, for the first time, the Court casts totally aside countervailing rights and interests in its zeal to secure religious rights to the nth degree. . . This court leaves women workers to fend for themselves, to seek contraceptive coverage from sources other than their employer’s insurer, and, absent another available source of funding, to pay for contraceptive services out of their own pockets.

In her concurring opinion, Justice Kagan indicated the matter may not be completely decided yet as the states also challenged the exemption as being “arbitrary and capricious” but the lower courts did not decide that issue.  She stated, “This issue is now ready for resolution unaffected by today’s decision” and lower courts could still consider arguments that the administration didn’t engage in “reasoned decisionmaking,” when implementing the exemption, as required under federal law.  An agency can fail to apply reasoned decisionmaking by: not having a satisfactory explanation for its action; failing to draw a rationale connection between the problem it seeks to solve and the chosen solution; or when its thought process shows a clear error in judgment.  She stated,  “Assessed against that standard of reasonableness, the exemptions HRSA and the Departments issued give every appearance of coming up short.”

Thus, at least according to Justice Kagan, we may be looking at Little Sisters again! Hey, Hey, Hey!

This is the third and final installment of the effects of Covid-19 Pandemic (Pandemic) on executive compensation of private companies.  Part 1 discussed the issues of reducing compensation of Executives.  See Part 1.   Part 2 discussed issues with deferred compensation plans of Executives.  See Part 2.  This Part 3 deals with limits on compensation for businesses that avail themselves of certain relief provided under the Coronavirus Aid Relief and Economic Security (CARES) Act.  The CARES Act was signed into law by President Trump on March 27, and provided $2 trillion in emergency aid to businesses, families and individuals affected by the Pandemic. The Paycheck Protection Program (PPP) has received the most press as it is a program to provide forgiveable loans for small businesses, with less than 500 employees, to keep their employees on payroll.  While the PPP has some restrictions on compensation, the Coronavirus Economic Stabilization Act (CESA) provisions of the CARES Act impose stricter limits on businesses that obtain relief under the Main Street Lending Program.  Both limits are discussed below.

PPP Limits.  Employers that receive PPP forgivable loans are limited in their use of such funds in order for such loans to be forgiven. For example, the combined total of salary and other wages that may be paid to any one employee is capped at $100,000 on an annualized basis. Employee benefits such as paid leave, separation pay, health and other insurance premiums, and retirement contributions are not included in calculating the limit.

Additionally, the PPP’s loan forgiveness is tied to: using the loan for forgivable costs (payroll, mortgage interest, rent, utilities) in proper ratios; maintaining employees by retention or timely re-hire; and ensuring the wages of no employees who earned less than $100,000 in 2019 are reduced by more than 25%.  If this occurs, the amount of the loan that will be forgiven is reduced.  Importantly, hourly paid employees are not considered to have wages reduced if they are paid less on account of hours being reduced.  Because there is no forgiveness penalty for reducing the compensation of highly compensated employees, the PPP actually creates an incentive for employers to reduce Executive salaries over those of employees that made under $100,000 in 2019.  However, employers must take into consideration any contractual rights an Executive may have.  See Part 1.

Also, it should be noted that changes made by the Paycheck Protection Program Flexibility Act of 2020, enacted on June 5, 2020, makes it easier for employers to avoid any reduction in forgiveness by tripling the period for the borrower to incur forgivable costs from eight weeks to twenty-four.

CESA limits.  Under the CESA provisions of the CARES Act, certain specialized industries (such as airlines and businesses critical to maintaining national security) as well as other businesses with between 500 and 10,000 employees can receive a loan or loan guarantee under the Main Street Lending Program. The minimum loan is $1 million and they are not forgiveable as under the PPP.  Any business receiving such a loan is subject to limits on compensation. The restrictions apply during the period beginning on the date the loan agreement is executed and ending one year after the loan or loan guarantee is no longer outstanding (Restriction Period).

The restrictions prevent officers or employees whose 2019 total compensation exceeded $425,000 from earning any more than earned in 2019 during any 12 consecutive months in the Restriction Period. Those with total compensation in excess of $3,000,000 in 2019 actually can’t earn as much as in 2019. Their excess over $3,000,000 is restricted to 50% of the amount earned in excess of $3,000,000 in 2019.  Additionally, no officer or employee may receive severance pay or other benefits upon termination of employment which exceeds twice the total compensation received in 2019. Borrowers under the Main Street Loan Program must attest that they will follow the compensation restrictions in order to receive their loan and the restrictions are contained in loan covenants.

Presumably, if an Executive is scheduled to receive 2020 compensation that would violate the restrictions, the employer will obtain a waiver of the excess compensation or other agreement to the restrictions from the Executive as part of the application process.

There are a number of questions regarding these restrictions that must still be answered by guidance. These include: are the restrictions imposed on a controlled group basis? What are the consequences for exceeding the limits? How is total compensation measured? Can compensation be deferred until after the Restriction Period? How to apply the restrictions to pre-existing employment agreements? Do the restrictions apply to new hires who weren’t employed in 2019? Hopefully, we will get guidance from the Treasury Department and Federal Reserve Board soon that will answer these questions.

Conclusion.  Businesses availing themselves of the relief afforded under the PPP or CESA provisions of the CARES Act must be cognizant of the effect on all compensation, including that of Executives.  Employers should also have a strategy to ensure compliance.

These three articles have demonstrated that there are a number of factors to consider when desiring to change the compensation of Executives as a result of the Pandemic.  As the personnel chiefly responsible for keeping an employer in business during these trying economic times, Executives remain highly valuable to their employers.  However, they should also be fully aware that changes may be necessary to ensure survival of the business.  Employers and Executives should consult with legal counsel regarding any proposed changes in response to the Pandemic.



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.