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.

CRDs

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.

Conclusion.

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.

 

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.