May 18, 2015
- DOL Provides Additional 15 Days to Comment on Fiduciary Definition Proposal
- Council Provides Comments to Treasury and IRS Regarding the 40 Percent Tax on Employee Health Benefits
- Supreme Court Expands View of ERISA Statute of Limitations for 401(k) Plan Fee Litigation
- Stock Drop Case Dismissed Under Post-Dudenhoffer Law
DOL Provides Additional 15 Days to Comment on Fiduciary Definition Proposal
In response to widespread calls for additional time to review and comment on proposed regulations defining the term “fiduciary” with respect to employee benefit plan investment advice – including a recent request by the Council – the U.S. Department of Labor (DOL) Employee Benefits Security Administration (EBSA) announced on May 18 that they are adding 15 days to the previous comment deadline.
The proposed regulations, issued on April 14 along with a fact sheet, a series of Frequently Asked Questions and a series of proposed prohibited transaction exemptions, broadly updates the definition of fiduciary investment advice by extending fiduciary status to a wider array of advice relationships than existing rules. (See the April 14 Benefits Byte for a brief summary of the proposal.)
The proposal initially established a comment period of 75 days (starting with the formal publication of the proposal on April 20), making the due date July 6. With the additional 15 days, the comment deadline will now be July 20.
As stated in a May 5 letter, the Council “appreciates the importance of this project and wants to ensure that our membership has adequate time to fully analyze the impact of the proposed guidance and provide the information and input the Department has asked for in the reproposal.” On May 12, 36 Republican senators followed suit, asking DOL to extend the comment deadline to a total of 120 days.
The Council is already undertaking a thorough review of the proposal itself, as well as the prohibited transaction exemptions and the economic analysis being used to support the issuance of new rules. A Benefits Briefing webinar is scheduled for June 11 at 2 p.m. ET to discuss the proposed rule and its impact on large and small employers, as well as the potential practical effects including potential litigation issues. Click here to register.
EBSA also announced that a public hearing will be held the week of August 10, after which the comment period will be reopened for approximately 30 to 45 days.
For more information on DOL’s fiduciary definition project, or to provide input for a Council comment letter, contact Lynn Dudley, senior vice president, global retirement and compensation policy, or Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.
Council Provides Comments to Treasury and IRS Regarding the 40 Percent Tax on Employee Health Benefits
In extensive comments to the U.S. Treasury Department and Internal Revenue Service (IRS) on May 15, the Council urged the Obama Administration to implement the 40 percent tax on health coverage “in a manner that is least disruptive to the long-term viability of employer-sponsored health benefits coverage.”
The tax, scheduled to be implemented in 2018, is a nondeductible 40 percent excise tax created under Internal Revenue Code (IRC) Section 4980I, as added by the Patient Protection and Affordable Care Act (PPACA). The tax will be imposed on “applicable employer-sponsored coverage” in excess of statutory thresholds (in 2018, $10,200 for self-only, $27,500 for family). A Benefits Blueprint reviewing the statutory requirements of the 40 percent tax and a companion document with answers to certain “Frequently Asked Questions” , are available on the Council website (see the March 30 Benefits Byte).
The Council is strongly advocating for repeal of the tax, expressing support for legislation such as the Middle Class Health Benefits Tax Repeal Act (H.R. 2050), sponsored by Representative Joe Courtney (D-CT), and the Ax the Tax on Middle Class Americans' Health Plans Act (H.R. 879), sponsored by Representative Frank Guinta (R-NH). As Council President James Klein noted in an April 28 news release, “research estimates that, in 2018, more than one-third of employer-sponsored plans will trigger the tax unless the value of those plans is significantly reduced. But the greater long-term concern is that because of the way the cost thresholds that trigger the tax are indexed, eventually even plans that only meet the minimum value required by the law will cross the thresholds.”
On February 23, the IRS published Notice 2015-16, requesting comment on possible approaches for regulations to implement the tax. The Council’s letter emphasizes that “employers should not – and cannot – be put in the untenable position of having to choose between offering qualifying coverage under Code Section 4980H (the employer shared responsibility requirement) or offering coverage that is not subject to the 40 percent tax under Code Section 4980I.” The notice states IRS’ intention to publish a second notice and review comments on both notices before publishing a proposed rule implementing the 40 percent tax.
Although the Council does not believe the burdens and costs of the tax can be fully alleviated by regulatory action, our letter urges Treasury and IRS to implement final rules that (1) are easy for employers and other coverage providers to administer, including appropriate safe harbors, (2) support programs designed to improve employees’ health and/or reduce overall health costs (such as wellness arrangements and on-site clinics) and (3) provide information on applicable dollar limits and valuation rules well in advance of 2018.
Additionally, the letter notes that PPACA was intended to build upon the employer sponsored system and the 40 percent tax threatens the long-term viability of that system. “The 40 percent tax will very negatively impact American workers and their families, ultimately leaving them with fewer choices and higher out of pocket costs,” the letter states.
Specifically, the Council’s letter makes the following recommendations:
- Certain coverages should be excluded from the definition of “applicable employer-sponsored coverage, such as:
o self-funded and insured dental and vision coverage.
o HSAs that are not group health plans.
o HRAs that only reimburse premiums for “applicable employer-sponsored plans.”
o limited purpose FSAs or HRAs.
o employer activities aimed at improving an employee’s well-being and/or health outcomes, (including employee assistance programs, wellness programs and on-site medical clinics).
o employer-sponsored Medicare Advantage Plans and Employer Group Waiver Programs.
- Employers should be permitted to determine the amount of any “excess benefit” based upon the coverage offered to an employee rather than the coverage in which the employee is enrolled.
- Employers need flexibility in determining the cost of coverage and should be permitted to utilize current COBRA practices for valuation purposes. The letter states “the Council is very concerned that the contemplated approach [outlined in Notice 2015-16] could magnify the effects of adverse selection and result in negative consequences for employees in the form of increased rates and, eventually, reduced coverage options – which would negatively impact both the healthy and less healthy employees.”
- Amounts “attributable to” the 40 percent tax should exclude all amounts charged to recoup the amount of the tax and to cover any resulting taxes or fees relating to the tax or additional amounts collected.
- Employers need timely information regarding the dollar limits that will apply in 2018 and later years and urges Treasury/IRS to issue safe harbor estimates for use by employers and to clarify how adjustments to the limits work together.
- Principles of tax equity and administration support development of safe harbor valuation methodologies in valuing coverage. The letter notes “the Council is very supportive of a safe harbor methodology whereby a plan does not trigger the 40 percent tax if its actuarial value (AV) is less than 90 percent.”
- Treasury/IRS should provide guidance confirming that employers have broad discretion in treating retirees that have attained age 65 and those that have not attained age 65 as similarly situated employees.
- The annual dollar adjustment for high-risk professionals and electrical and telecommunication workers should be construed to reduce administrative burdens and the extent of potential disruptions in benefits and/or benefit reductions by reason of the 40 percent tax.
Attached as an appendix to the letter is an analysis undertaken for the Council by Ernst and Young LLP, demonstrating when certain plans required by PPACA will hit the 40 percent tax thresholds. Because PPACA generally requires issuers operating in the Small Business Health Options Program (SHOP) to offer silver and gold level coverage, the analysis estimates when such plans will trigger the tax. The analysis projects that gold level plans offered on the SHOP in half of eight relatively high-cost local areas will be subject to the 40 percent tax immediately when it goes into effect in 2018. By 2025, six out of eight areas are above the threshold and by 2030 all areas are above the threshold. This analysis validates the vital need for a safe harbor that would ensure plans with an actuarial value of 90 percent or below – including these gold (and silver) plans which are required to be offered on the SHOP – will not trigger the 40 percent tax.
The Council’s comment letter also incorporates data from our recent survey of our members on the potential implications of the tax. We thank the 93 member organizations that were able to participate in the survey, which proved very helpful as we developed our comments.
There is not yet a timeline for issuance of further guidance on the 40 percent tax. Working with the Administration to lessen the impact of the excise tax on employers, as we urge Congress to repeal the provision altogether, remains a top priority for the Council. For more information, contact Katy Spangler, senior vice president, health policy, or Kathryn Wilber, senior counsel, health policy, at (202) 289-6700.
Supreme Court Expands View of ERISA Statute of Limitations for 401(k) Plan Fee Litigation
In a unanimous opinion on May 18, the U.S. Supreme Court ruled that 401(k) participants can hold plan fiduciaries liable for including high-cost investments in the plan even when those investments were initially chosen outside ERISA's six-year statute of limitations. The opinion indicated that plan fiduciaries have “a continuing duty – separate and apart from the duty to exercise prudence in selecting investments at the outset – to monitor, and remove imprudent, trust investments.” The court remanded the case, Tibble v. Edison, back to the Ninth Circuit U.S. Court of Appeals.
The claims had previously been dismissed by both the U.S. District Court for the Central District of California and the Ninth Circuit on the grounds that the statute of limitations had expired. The plaintiffs then appealed to the Supreme Court, arguing that the decision to offer the funds could have been reconsidered during the six-year window, making it a “continuing violation.”
The Council filed an amicus (“friend of the court”) brief on January 26 in conjunction with the National Association of Manufacturers, the U.S. Chamber of Commerce, the ERISA Industry Committee and the Business Roundtable. The Council’s amicus brief had urged the court to dismiss the case as outside the statute of limitations window and described how the “continuing violation” theory would subject fiduciaries to perpetual exposure to litigation and potential liability for investment selection and other acts completed long before suit was actually filed (see the January 26 Benefits Byte). Although the Council and other amici acknowledged an ongoing duty to monitor investments, we argued that the petitioners’ theory improperly conflated the separate duties of selection and monitoring.
At that time, the U.S. Department of Labor (DOL) submitted an amicus brief in support of the plaintiffs, asserting that the ongoing duty to monitor includes a duty “to review plan investments and divest investments that are imprudent.”
The Supreme Court’s opinion, written by Justice Stephen G. Breyer, stated that “[a] plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones.” The court ruled that “so long as the alleged breach of the continuing duty occurred within six years of suit, the claim is timely.” However, the Supreme Court specifically said it was expressing no view on the scope of the fiduciary duty, e.g., whether and what kind of review of the contested funds is required.
For more information, contact Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.
Stock Drop Case Dismissed Under Post-Dudenhoffer Law
On May 13, the U.S. District Court for the Southern District of New York dismissed a class action lawsuit against Citigroup Inc., arguing that the defendant, as fiduciary of a defined contribution plan, acted imprudently by continuing to offer the corporation's common stock as an investment option for plan participants prior to a decline in the company stock price which caused losses to employee investors.
Such cases are commonly referred to as “stock drop” cases. In recent years, ERISA “stock drop” lawsuits have become commonplace and now often occur in tandem with securities fraud lawsuits and can follow even a modest decline in an employer's stock price.
The district court concluded that the case, In Re: Citigroup ERISA Litigation, was filed outside the three-year statute of limitations applicable to claims of fiduciary breach under ERISA, but also considered that the plaintiffs did not meet the new pleading standards outlined by the Supreme Court in the case of Fifth Third Bancorp v. Dudenhoeffer. The court ruled that the plaintiffs’ claims didn't qualify as the “special circumstances” that would render the defendants imprudent for relying on the stock's market value and also did not allege the existence of any material, nonpublic information affecting stock price.
This new case was filed shortly after the dismissal of a similar case against Citigroup was upheld in October 2011 by the U.S. Court of Appeals for the Second Circuit. In that earlier case, In Re: Citigroup ERISA Litigation, the Second Circuit ruled that Citigroup plan fiduciaries were protected by the now-defunct presumption of prudence, which previously protected fiduciaries of employer stock plans from liability for declining stock prices. The Council, along with the ERISA Industry Committee, had filed an amicus (“friend of the court”) brief with the court at that time, urging the appeals court to uphold the district court decision on the basis of the “Moench Presumption.” Under this presumption, which had been adopted by a number of Circuit courts, fiduciaries of plans that invest in employer stock are entitled to a presumption that their decision to invest, or continue to invest, in employer stock is prudent unless plaintiffs can show the fiduciaries abused their discretion (see the October 19, 2011, Benefits Byte).
This presumption of prudence was invalidated by the U.S. Supreme Court’s June 2014 decision in the Dudenhoeffer case. The Supreme Court ruled that (i) ESOP fiduciaries are not entitled to any special presumption of prudence and are subject to the same duty of prudence that applies to ERISA fiduciaries in general, except that they need not diversify the fund’s assets and (ii) U.S. Court of Appeals for the Sixth Circuit, which had originally ruled in favor of the plan, should reconsider its criteria for whether a complaint meets the “pleading” standard for a breach of fiduciary duty. The Council also filed an amicus (“friend of the court”) brief on behalf of the stock fund in the Dudenhoeffer case (see the June 25, 2014, Benefits Byte).
For more information on this issue or the Council's amicus brief program, contact Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.