American Benefits Council
Benefits Byte

2014-50

June 20, 2014

The Benefits Byte is the American Benefits Council’s regular e-mail and online newsletter for members only, providing timely reports on legislative, regulatory and judicial developments, along with updates on the Council’s activities in support of employer-sponsored benefit plans.

The Benefits Byte is published by the American Benefits Council, based on staff reports and edited by Jason Hammersla, Council director of communications. Contact information for Council staff related to specific topics can be found at the end of each story.

Click here to read past issues on the Benefits Byte Archive page.

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Administration Issues Final 90-Day Waiting Period 'Orientation Period' Rules

Late on June 20, the U.S. departments of Treasury, Labor and Health and Human Services released final regulations clarifying the maximum allowed length of “any reasonable and bona fide employment-based orientation period” consistent with the 90-day waiting period provision of the Patient Protection and Affordable Care Act (PPACA). The Council is reviewing the new rules and will provide additional analysis in the coming days.

PHSA Section 2708 provides that, in plan years beginning on or after January 1, 2014, a group health plan or group health insurance issuer shall not apply any waiting period for coverage that exceeds 90 days. As we reported in the February 20 Benefits Byte, when the departments issued final regulations specifically addressing the 90-day limitation, they also issued proposed rules providing that "satisfaction of a reasonable and bona fide employment-based orientation period of up to one month may be used as a condition of eligibility under the plan."

The Council filed an April 28 letter commenting on the proposed regulations and expressing support for this proposal, while encouraging the departments to retain both the one-month limitation and the flexibility in design of the orientation period in final rulemaking.

These final regulations apply to group health plans and group health insurance issuers for plan years beginning on or after January 1, 2015. Until then, the departments will consider compliance with the proposed regulations to be compliance with PHS Act Section 2708. For more information, contact Kathryn Wilber, senior counsel, health policy, at (202) 289-6700.



ERISA Advisory Council Hears Testimony on Benefits Issues, Including Witness from American Benefits Council on Outsourcing Benefit Plans

On June 17, 18 and 19, the ERISA Advisory Council (EAC) heard testimony on a number of vital benefits matters, including testimony provided on the Council's behalf on the subject of outsourcing employee benefit plan services.

The EAC is a group of benefits experts established by the U.S. Department of Labor (DOL) to identify emerging benefits issues and advise the Secretary of Labor on health and retirement policy.The chair of the EAC for the 2014 term will be Neal S. Schelberg, senior partner at Proskauer Rose LLP (a Council board member company), representing employers on the panel. The 2014 EAC roster also includes Council members Ralph C. Derbyshire, senior vice president and deputy general counsel for FMR (Fidelity Investments) LLC, representing investment management.; Josh Cohen, head of institutional defined contribution at Russell Investment Group, representing investment counseling; Christina R. Cutlip, managing director and head of plan sponsor services for TIAA-CREF, representing employers; Kevin T. Hanney, director of pension investments for United Technologies Corporation, representing employers; David C. Kaleda, a principal in the Fiduciary Responsibility group at Groom Law Group, Chartered, representing corporate trusts; and Mark Schmidke, shareholder at Ogletree, Deakins, Nash, Smoak & Stewart, representing insurance.

Outsourcing Employee Benefit Plan Services

On June 18, Allison Klausner, assistant general counsel – benefits for Honeywell International Inc. and a member of the American Benefits Council’s Executive Board, gave testimony on behalf of the American Benefits Council emphasizing the importance for employer plan sponsors to have flexibility in selecting outside vendors for administrative and recordkeeping services. Klausner argued that a "one-size-fits-all" regulatory approach would add additional layers of complexity to employer plan sponsorship.

“The Council would support DOL initiatives with regard to outsourcing work relating to the delivery of employee benefits, but only so long as it is not one that limits the freedoms of the plan sponsor to make corporate decisions that fit its corporate culture and the personality and needs of its workforce,” Klausner said. She also discussed the numerous advantages of plan outsourcing, noting that such services can help employers:

  • gain access to expertise and technology.
  • achieve economies of scale and reduce costs.
  • focus on their core business, rather than the business of managing its employee benefit plans.

“Any government initiative in this area should permit continued flexibility for American companies as they provide benefits to their workers and retirees in an effort to support their collective health and financial well-being,” Klausner said.

During the question-and-answer portion of Klausner’s testimony, EAC members asked about the processes in place to monitor the outsourced plan functions. Klausner described the structure in place at Honeywell, Inc. and explained how service providers were held accountable through a number of measures, but noted that practices may vary widely among employers.

EAC members also requested examples of best procurement processes in selecting and providing outsourced benefit plans. The Council welcomes input from members on their experience selecting outside vendors, which we can pass along to the EAC. Klausner responded that she could affirm Honeywell’s willingness, but that a discussion within the Council would have to take place to determine the possibility. Regarding Honeywell's processes, Klausner again stated that the "best practice" for one employer may not work for another, and in fact could be very disruptive, again emphasizing the need for flexibility.

Also testifying before the EAC on this topic was Margaret Raymond, [title] with T. Rowe Price Associates, Inc. and also a Council Policy Board member. Raymond discussed the role of outsourcing recordkeeping in regards to defined contribution plans and urged the EAC to approach any regulation with caution so as not to inadvertently discourage innovation, particularly in defined contribution plans. During the question-and-answer period, the EAC asked Raymond to discuss the difference between outsourcing and fiduciary transfer, the frequency of early termination of outsourcing agreements and the guidelines for communications between vendors and participants.

Earlier in the day, Phyllis Borzi, Assistant Secretary of Labor of the Employee Benefits Security Administration (EBSA), testified along with Judy Mares, Deputy Assistant Secretary for Policy of EBSA, Tim Hauser, Deputy Assistant Secretary for Program Operations of EBSA, and Joe Canary, Director of the Office of Regulations and Interpretations of EBSA. Borzi spoke very briefly on the status of regulatory projects, indicating they had not made much progress on the various projects since last time she spoke to the EAC in March (see the May 29 Benefits Byte for a full examination of the status of these projects). She specifically mentioned receiving 44 comments on the 408(b)(2) proposed regulatory amendment (requiring a guide for fee disclosure from service providers to plan fiduciaries). She also noted that EBSA had reopened the comment period for it regulatory project on target date fund disclosure to work in tandem with the Securities and Exchange Commission, which had also recently reopened their comment period to seek comment on adding risk assessment to the disclosures.

Canary discussed a multi-agency project to revise the Form 5500 (used by plans to provide annual reports to the government) and indicated they hope to publish a proposal next year. He indicated they would likely expand reporting on asset classifications, investment portfolios and hard to value assets with data minable reporting of the performance of individual assets.

Hauser discussed EBSA’s litigation activity involving Employee Stock Ownership Plans (ESOPs) and Mares indicated the Secretary of Labor has been doing “listening sessions” around the country, especially with the long-term unemployed. She said people from these meetings have asked EBSA to fix the problem that former employees cannot take out a loan and must pay back pre-existing loans within a certain time period after termination of employment.

Issues and Considerations around Facilitating Lifetime Plan Participation

On June 17, the EAC discussed issues and considerations around facilitating lifetime plan participation, specifically relating to the recent movement of participant assets out of defined contribution and defined benefit plans into retirement accounts not covered by ERISA (such as IRAs or other savings accounts) or as plan distributions.

The committee heard testimony from numerous witnesses including J. Mark Iwry, senior adviser to the Secretary of the Treasury and deputy assistant Treasury secretary (tax policy) for retirement and health policy. Iwry described a “convergence of interest” on the topic of lifetime plan participation and offered Treasury’s help on an ongoing basis. He noted that there are problems with the distribution phase for defined contribution plans and suggested that this could possibly be addressed by changing the typical view of employee termination is as a distribution phase. He informally submitted that future contributions to employee plans could be made “less leaky” by permitting distributions only in the event of retirement, hardship, unemployment, or for loans, and not for terminations.

The following Council member companies also testified before the panel:

  • Marla Kreindler, a partner with Morgan, Lewis & Bockius LLP, compared the legal structures of ERISA plans and IRAs and outlined difficulties terminating employees face when making rollover decisions. She urged the DOL to provide regulatory support and guidance to facilitate automation through advisory or interpretive guidance, to develop model transfer forms, processes and loan documents as well as participant- focused disclosures. She suggested that the DOL facilitate a dialogue with sponsors about lifetime income products.
  • Sarah Holden, senior director, retirement & investor research at Investment Company Institute (ICI), presented research regarding rollover activity and the reasons people rollover employer-sponsored plan money into IRAs, showing that one-half of the assets in traditional IRAs are from rollovers. Elena Barone Chism, associate counsel with ICI, testified that participants are generally well serviced by the current disclosure rules, but said that that DOL could further increase the availability of education available to participants by making current materials more prominent and accessible. In addition, she suggested that DOL could extend Interpretive Bulletin 96-1 to make it clear that plan sponsors and service provides may convey the general advantages and disadvantages of various distribution options without triggering fiduciary liability.
  • Rob Austin, director of retirement research at Aon Hewitt, offered recommendations for actions employers can take to help plan participants better understand the benefits of remaining in the plan. He also recommended that DOL provide guidance to plan sponsors about the right questions to ask providers to ensure conflict-free information and business models and educate plan sponsors on the benefits and advantages of retaining assets within the employer-sponsored system. In addition, he urged DOL to provide clarity and support of fiduciary protections and/or safe harbors for lifetime income solutions.

PBM Compensation and Fee Disclosure

On June 19, the EAC discussedpharmacy benefit manager (PBM) compensation and fee disclosure, with particular attention to whether the arrangements between PBMs and benefit plans should be subject to the rules of ERISA Section 408(b)(2) and, if so, what form that disclosure should take.

The EAC heard testimony from academic experts from the Wharton School, University of Pennsylvania and Emory University Law School, who argued that any efforts DOL to subject PBMs to additional disclosure would hurt plan sponsors’ ability to achieve the best prices for prescription drug benefits. They also indicated that disclosure could result in anti-competitive behavior, such as collusion. William Kilberg, partner at Gibson Dunn, & Crutcher and counsel to the Pharmaceutical Care Management Association (PCMA), echoed this assertion and pointed out that rebates and discounts were not “compensation for services” and thus not subject to 408(b)(2) disclosure.

Other witnesses, however, including a former senior Federal Trade Commission attorney, expressed concern about PBMs’ lack of transparency. Randy DeFrehn, Executive Director of the National Coordinating Committee for Multiemployer Plans (NCCMP), noted that plans have difficulty auditing whether PBMs are meeting their contractual requirements with the plan because of PBM concerns over releasing proprietary information.

 

The EAC is expected to hold additional hearings August 19-21. For more information on the EAC’s activities and opportunities to testify, contact Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.



Council Voices Support for Retirement Plan Administrator in Third Circuit Case

In an amicus (“friend of the court”) brief, filed on June 18 in the case of Cottillion v. United Refining Company, the Council (along with the ERISA Industry Committee and the U.S. Chamber of Commerce) urged the Third Circuit Court of Appeals to rule that a benefit plan administrator’s current interpretation of plan language is entitled to legal deference, despite any possible previous interpretive error.

This argument was affirmed by the U.S. Supreme Court in an April 2010 ruling in the case of Conkright v. Frommert. In that decision, the court held that the district court has an obligation to defer to an ERISA plan administrator's reasonable interpretation of the terms of the plan if the plan administrator arrived at the interpretation outside the context of an administrative claim for benefits. The decision favorably refers to the Council's amicus brief (filed in September 2009, with the ERISA Industry Committee), which supported the plan administrator's interpretation.

Cottillion v. United Refining Company, on appeal from the U.S. District Court for the Western District of Pennsylvania, involves the attempted recovery of pension plan distributions that had been erroneously paid through a misinterpretation of plan documents that was subsequently corrected. When the plan attempted to recover the overpayments to maintain qualified status after a Voluntary Correction Program (VCP) filing with the IRS, the plaintiffs sued, alleging that the defendant violated ERISA's anti-cutback provisions by attempting to retroactively reduce the amount of accrued early retirement benefits. The district court found in favor of the plaintiffs, including remedy awards.

The Council’s brief asserts that the precedent established by the U.S. Supreme Court in Conkright v. Frommert regarding the deference owed to plan administrators, even after an initial mistaken interpretation of a plan. “The [district court] decision flouts clear Supreme Court precedent [and] is even more problematic because it holds that an administrator’s reinterpretation of a plan (rather than the formal action of the sponsor) can actually amend the terms of a plan, locking in prior, mistaken interpretations forever.” The Council therefore urges the appeals court to vacate the district court’s decision.

The court is expected to hear oral arguments in the case in late 2014 or early 2015. 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, global retirement and compensation policy. Both can be reached at (202) 289-6700.



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The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.

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