August 7, 2014
- Fourth Circuit Rules Against Retirement Plan Sponsor in Reverse Stock Drop Case
- Employee Benefits Tax Incentives Top New List of Largest Federal Tax Expenditures
Fourth Circuit Rules Against Retirement Plan Sponsor in Reverse Stock Drop Case
In a split decision issued August 4 in the case of Tatum v. R.J. Reynolds, a three-judge panel of the U.S. Court of Appeals for the Fourth Circuit found that the plan sponsor failed to prove that its breach of fiduciary duty did not cause loss to the plan participants. The American Benefits Council and the U.S. Chamber of Commerce had joined together in an amicus (“friend of the court”) brief with the court in 2013.
In a traditional “stock drop” case, plaintiffs contend the plan sponsor breached their fiduciary duty by allowing the plan to offer a particular stock that has lost significant value. In Tatum v. R.J. Reynolds, the plaintiffs asserted a breach of fiduciary duty because of the elimination of the Nabisco single-stock investment option from the R.J. Reynolds (RJR) 401(k) plans shortly after RJR was spun off from Nabisco in 1999. After the fund’s removal, Nabisco received an unsolicited takeover bid and the resulting bidding war drove the price of Nabisco stock significantly higher. This is commonly referred to as a “reverse stock drop.”
After a decade of litigation, the U.S. District Court for the Middle District of North Carolina found that while RJR breached its fiduciary duty of procedural prudence when it removed the Nabisco stock option from the plan without a significant review and investigation, the removal was “objectively prudent,” with no evidence of being unreasonable or actually causing a loss to the plan. In appealing this decision to the Fourth Circuit, the plaintiffs (supported by an amicus brief from the Department of Labor) asserted that the district court applied an erroneous legal standard to determine whether the breach resulted in losses to the plan.
The Fourth Circuit’s majority opinion is sympathetic to the plaintiffs’ argument and remands the case back to the district court level “to review the evidence to determine whether RJR has met its burden of proving by a preponderance of the evidence that a prudent fiduciary would have made the same decision. … the district court must reach its conclusion after applying the standard … [of] whether ‘a hypothetical prudent fiduciary would have made the same decision anyway.’”
The Council, in its amicus brief, argues that such a test sets a dangerous precedent in future ERISA cases. In a strongly worded dissent, Fourth Circuit Judge J. Harvie Wilkinson III cited the Council’s brief when noting that “plaintiff would substitute for the fiduciary’s duty to make a prudent decision a duty to make the best possible decision, something ERISA has never required. … What sense, let alone justice, is there in penalizing a fiduciary merely for acting in accordance with a view that happens to be held by a bare minority? And how, absent an unhealthy dose of hindsight, could we ever know the precise breakdown of hypothetical fiduciaries with regard to a particular investment decision?”
Wilkinson goes on to conclude, as stated in our brief, “far from safeguarding the assets of ERISA-plan participants, the litigation spawned by the majority will simply drive up plan-administration and insurance costs. It will discourage plan fiduciaries from fully diversifying plan assets. It will contribute to a climate of second-guessing prudent decisions at the point of market shift. It will disserve those whom ERISA was intended to serve when fiduciaries are hauled into court for seeking, sensibly, to safeguard retirement savings.” Since Wilkinson wrote such a strong dissent, hopefully other circuit courts will be hesitant to follow suit.
The Council will continue to monitor further developments in this case. RJ Reynolds intends to petition for rehearing en banc (by the full Fourth Circuit Court of Appeals) and the Council will likely file an amicus brief in support of the defense. For more information on this issue or the Council’s amicus brief program, contact Jan Jacobson, senior counsel, retirement policy, or Lynn Dudley, senior vice president, retirement and international benefits policy, at (202) 289-6700.
Employee Benefits Tax Incentives Top New List of Largest Federal Tax Expenditures
Congress may eventually seek to curtail the current tax incentives for employer-sponsored benefit programs in light of recent data released by the Joint Committee on Taxation (JCT).
On August 5, the JCT– a bipartisan committee comprised of members of the tax writing committees of both houses of Congress – released a report to the congressional tax-writing committees showing that the top two federal tax expenditures for the next five years are the tax exclusion for the provision of employer-sponsored health insurance ($785.1 billion through 2018) and the collective tax deductibility and deferral on defined contribution plans ($399 billion) and defined benefit plans ($248.3), which add up to $647.3 billion.
These figures align closely with those of the White House’s Office of Management and Budget (OMB), which performs a similar estimate as part of the President’s budget proposal each year. This year, within the Administration’s 2015 Analytical Perspectives document (Page 216), OMB estimated that the health exclusion would cost more than $1.1 trillion and the combined retirement tax incentives would cost nearly $650 billion from 2015-2019.
(The JCT and OMB figures differ because of the different time frames and different assumptions used by each group.)
If lawmakers consider comprehensive tax reform– or any other large spending measure requiring federal revenue offsets – in the coming months and years, they may seek to limit tax incentives supporting employee benefits. For example, President Obama's Fiscal Year 2015 budget proposal recommended reductions in the value of itemized deductions and other tax preferences (including employer-sponsored health insurance and employee retirement contributions) to 28 percent, along with a cap on "an individual's total balance across tax preferred accounts to an amount sufficient to finance an annuity of not more than $210,000 per year in retirement" (commonly referred to as "the $3 million cap").
Likewise, in 2013 the nonpartisan Congressional Budget Office (CBO) circulated a list of "options for reducing the deficit" over 10 years, including a number of benefits-related options. More recently, the CBO prepared a presentation prepared by the Congressional Budget Office (CBO) for the Fifth Biennial Conference of the American Society of Health Economists on June 23 examined a number of approaches for limiting the health exclusion.