By: Mark Casciari and Ronald Kramer

Seyfarth Synopsis:  The courts have stated that their review of fiduciary decisions is both exacting and deferential.  A recent decision from the Court of Appeals for the Seventh Circuit offers help to ERISA benefit professionals who prefer to maximize judicial deference in favor of the fiduciaries.

One of the enduring paradoxes of ERISA litigation is the judicial standard of review of fiduciary decisions. The standard of review is important because an easier standard will uphold more fiduciary decisions in court and encourage more individuals to serve as fiduciaries.  No one who acts in good faith – as the vast majority of ERISA fiduciaries do – likes to make tough decisions and be sued or reversed.

On the one hand, the courts frame their review of fiduciary decisions in exacting terms.  For example, in Donovan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982), the Court of Appeals for the Second Circuit said that the ERISA fiduciary’s duty of loyalty to plan participants and beneficiaries is “the highest known to the law.”

But, in Bator v. District Council 4, Graphic Communications Conf., No. 18-cv-1770 (7th Cir. Aug. 27, 2020), the court proffered another viewpoint.  It considered whether ERISA fiduciaries violated their duties by undercutting the financial health of the pension plan they managed.  The plaintiffs alleged that the fiduciaries breached their duties by not enforcing the contribution terms of the Trust Indenture when they allowed one participating local union’s members at one company to contribute to the plan at lower rates than other members form the same local at another company.. Notably, the case did not involve a review of a claim for benefits, and the court’s decision did not turn on claim review.

The Bator court upheld the fiduciary decision by reasoning that the fiduciary interpretation of the governing plan document “falls comfortably within the range of reasonable interpretations” and “is compatible with the language and the structure” of that document.  The Court did so even though it recognized that the plaintiffs’ interpretation of the Trust Indenture was equally reasonable.

So, how can these very different standards of judicial review be reconciled?

Yes, reconciliation is possible.  ERISA’s core focus is the governing plan documents.  If, as in Bator, they provide the fiduciary with broad discretion to interpret their terms, and provide that the fiduciary decision shall be final and binding, the court should give the fiduciary the benefit of the doubt.

One final point is worth noting.  Plaintiffs often argue that equitable principles should govern judicial review of fiduciary decisions.  But, as Justice Thomas said recently in his concurrence in Thole v. U.S. Bank, 140 S.Ct. 1615 (2020) (Seyfarth analysis here), the common law of trusts is not the starting point for interpreting ERISA.  The starting point is the statute itself, and the statute commands that the courts honor ERISA plan terms, including terms that give interpretative discretion to fiduciaries.

Our take away is – there is no substitute for good drafting of ERISA plan terms.

Seyfarth Synopsis: On the heels of the Department of Labor’s June proposed regulation throwing cold water on plan fiduciaries’ selecting investments in the environment, social and governance (ESG) space, the agency has now offered their viewpoint on a fiduciary’s obligation — nay, ability — to vote proxies for its plan’s holdings. See here for our prior post on ESG investments.

Background

The DOL’s prior subregulatory guidance can be found in Interpretive Bulletin 2008-02 (published under the Bush administration), Interpretive Bulletin 2016-01 (published under the Obama administration), and Field Assistance Bulletin 2018-01 (published under the Trump administration). In April 2019, President Trump issued a directive to the DOL to study their guidance in this area. The Executive Order said the DOL should review their “existing guidance on the fiduciary responsibilities for proxy voting to determine whether any such guidance should be rescinded, replaced, or modified to ensure consistency with current law and policies that promote long-term growth and maximize return on ERISA plan assets.”  This item then appeared on the DOL’s Fall 2019 regulatory agenda, and culminated in the proposed regulations issued August 31, 2020.

Prior to this latest guidance, it had been generally accepted that a fiduciary’s responsibility to manage plan assets included exercising shareholder rights associated with the plan’s investments — e.g., proxy voting — unless it would result in the expenses of plan assets out of proportion to the matter at hand. It is common for the plan’s investment policy to address proxy voting. Often this responsibility is delegated to investment managers.

Given the magnitude of assets invested by ERISA-governed retirement plans ($2.1 trillion in 2017 according to the DOL), through the new proposed regulations the current administration continues to express its concern with shareholder activism by plan fiduciaries. Previous attempts to address that issue focused on an admonition by the DOL that fiduciaries must be able “to articulate a clear basis for concluding that the proxy vote, the investment policy, or the activity intended to monitor or influence the management of the corporation is more likely than not to enhance the economic value of the plan’s investment before expending plan assets.” IB 2008-02.

The proposed rule, issued on August 31, 2020, would revoke the DOL’s prior guidance and amend a regulation dated back to 1979. The proposal is very reminiscent of the DOL’s proposal concerning a fiduciary’s investment duties, which would amend the same regulations from 1979. The new proposal would create a bifurcated approach under which the fiduciary faces an affirmative obligation on one hand, and a prohibition on the other. Under the new guidance, when confronted with a proxy matter, the plan fiduciary must consider the cost involved with voting and whether the matter being voted on would have an economic impact on the plan’s investment. If it does, the fiduciary must vote the proxy. The new guidance provides that the plan fiduciary is actually barred from voting the proxy unless the plan fiduciary determines that the matter would have an economic impact on the plan.

The DOL justifies this position by stating that the new rule is actually protecting plan assets because it “would reduce plan expenses by giving fiduciaries clear directions to refrain from spending workers’ retirement savings to research and vote on matters that are not expected to have an economic impact on the plan.” Ironically, this split obligation/prohibition creates real problems for the plan fiduciary who analyze every proxy presented, or risk violating their fiduciary duties.

Proposed Rule

The proposed rule sets forth specific standards requiring fiduciaries to:

(A)       act solely in accordance with the economic interest of the plan considering only factors that they prudently determine will impact the economic value of the plan’s investment based on a determination of risk and return over an appropriate investment horizon consistent with the plan’s objectives and funding policy;

(B)       consider the likely impact on the plan’s investment performance based on such factors as the size of the plan’s holdings in the issuer relative to the total plan assets, the plan’s percentage ownership of the issuer, and the costs involved with voting;

(C)       not subordinate the financial interests of the participants to any non-pecuniary objective, or sacrifice investment return or take additional investment risk to promote goals unrelated to those financial interests;

(D)       investigate material facts that form the basis for any vote;

(E)       maintain records on proxy voting activities, including the basis for particular votes; and

(F)       exercise prudence and diligence in selecting and monitoring persons selected to advise on or assist with such voting rights.

The DOL states that where the authority to vote proxies has been delegated to an investment manager or other entity, in order to properly monitor such delegate to ensure these standards are satisfied the plan fiduciary must require documentation of “the rationale for proxy voting decisions … sufficient to demonstrate that the decision … was based on the expected economic benefit to the plan, and that the decision … was based solely on the interests of participants and beneficiaries in obtaining financial benefits under the plan.”

The rule then requires fiduciaries to vote the proxy where the matter could have an economic impact on the plan after considering the above standards. On the other hand, if the fiduciary concludes that the proxy matter would not have an economic impact on the plan, than the fiduciary must not vote the proxy at all.

In an acknowledgement it may be difficult to always know whether a proxy matter would affect the plan’s economic interest without conducting an expensive study, the DOL says that plan fiduciaries can develop proxy voting policies. The proxy voting policy could incorporate three permitted practices:

  1. A policy of ordinarily voting in accordance with management’s recommendation on matters that are “unlikely to have a significant impact.”
  2. A policy focused on voting only on certain types of proposals likely to have a significant impact on the plan’s investment, such as corporate transactions, share buy-back plans, issuance of additional dilutive shares, and contested elections for directors.
  3. A policy refraining from voting if the plan’s investment is below a quantitative threshold that makes it unlikely the outcome of a vote will have a material impact on the plan.

The DOL proposal specifically provides that a fiduciary is prohibited from following recommendations of a proxy advisory firm or other service provider without determining that the provider’s proxy voting guidelines are consistent with the plan’s economic interest.

Plan fiduciaries should note that if the obligation to vote proxies has been delegated to an investment manager, it is typical for the manager’s agreement to provide that it will vote proxies according to the manager’s underlying proxy voting guidelines, which may not align with the proposed fiduciary guidance. As a result, plan fiduciaries may have to revisit that delegation or the incorporated proxy voting policy to bring the practice into alignment with the new rules.

The proposal would require that plan fiduciaries review any proxy voting policies every two years, which the DOL notes is its understanding of the industry standard for reviewing investment policy statements. Interestingly, the DOL states — “To facilitate transparency, the Department also reminds fiduciaries that proxy voting guidelines must be made available to plan participants, either as a separate document or by including them in the plan’s existing investment policy statement.”

The DOL is looking for comments on its proposed rule, which are due 30 days after publication of rule in the Federal Register. If you wish to comment, please contact your favorite Seyfarth attorney.

Seyfarth Synopsis: As Seyfarth has blogged about on multiple occasions [here, here and here], the CARES Act provided relief for qualified plans as a result of COVID-19. With respect to qualified defined benefit pension plans, the CARES Act extended the deadline for making minimum required contributions until January 1, 2021, and permitted plans to use the prior year’s AFTAP for purposes of any funding-based benefit restrictions. With Notice 2020-61, the IRS has provided guidance on the mechanics of this contribution and benefit restriction relief. The IRS did not provide relief, however, for the fact that January 1, 2021, is a national holiday, meaning that the actual deadline for making any required contribution is December 31, 2020.

Under the funding rules for qualified defined benefit pension plans, plan sponsors generally must make any minimum required contributions 8 1/2 months after the plan year to which they relate. For calendar year plans, this means that the minimum required contribution is due by September 15th of the year following the applicable plan year. Plans with a funding shortfall for the prior plan year must also make quarterly minimum required contributions (for a calendar year plan, these contributions are due April 15th, July 15th, October 15th and the following January 15th).

The CARES Act delayed the timing of any minimum required contributions due in 2020 (both annual and quarterly contributions) until January 1, 2021, but required interest to be added to any delayed minimum required contribution. Note that because January 1, 2021, is a national holiday, the delayed contributions are actually due no later than December 31, 2020. The IRS provided no relief in Notice 2020-61 from this consequence. Congress is currently considering fixing this issue but has provided no relief yet.

IRS Notice 2020-61 addresses many other questions that plan sponsors and their advisers have raised, including how interest is calculated on the delayed contributions. Notably, the IRS confirmed that:

  • The extended contribution due date does not apply to multiemployer plans, money purchase pension plans or fully insured defined benefit pension plans.
  • Plan sponsors that contribute more than the minimum required contribution and do so by January 1, 2021 can apply such excess to 2020 contributions (due for 2019 funding requirements)
  • The actuary cannot reflect a contribution on the Schedule SB for the Form 5500 that is made after the actuary signs the form. Thus, if the plan sponsor delays contributions beyond when the plan’s actuary signs Schedule SB, the plan sponsor must file an amended Form 5500 with an amended schedule if the contributions will apply to the reporting year. The delayed reporting of these contributions may also require an amended plan audit and plans should consult with their auditors on how to reflect the delayed contributions for purposes of the annual audit. For calendar year plans with an October 15, 2020, Form 5500 deadline, this means that plans taking advantage of the contribution delay will need to file amended Form 5500 returns and the IRS has provided no relief from this administrative complexity.
  • Plans can elect to apply the prior year’s AFTAP funding percentage for purposes of determining whether funding-based benefit restrictions apply by following the same procedures used to apply funding balances, and the guidance provides details on the impact of such an election. This relief will be most impactful for plans that had plan years beginning in the spring of 2020 and experienced significant asset volatility related to COVID-19 at the start of the plan year.
  • The delayed contribution deadline also applies to elections to increase a prefunding balance or to use a prefunding balance or funding standard carryover balance to offset the minimum required contribution for that plan year.

As a final note of caution, the PBGC has not extended similar relief for when contributions are considered made for purposes of calculating any final PBGC premiums due in 2020.

The funding rules are complex and we have only provided a high level summary. If you have any questions, please contact your actuary or Seyfarth Employee Benefits attorney.

By: Jules Levenson and Mark Casciari

Seyfarth Synopsis: As the Supreme Court prepares to hear oral arguments on a key case that could have major ramifications on the scope of ERISA preemption, two recent case developments show just how important the high court’s decision will be.

Regular blog readers are familiar with Rutledge v. Pharmaceutical Care Management Association, (No. 18-540), in which the Supreme Court has agreed to hear Arkansas’s challenge to a decision by the Court of Appeals for the Eighth Circuit holding that ERISA preempts an Arkansas law regulating prescription drug reimbursement. Merits briefing is now complete and oral argument is set for October 6, 2020. Our prior posts on Rutledge appear here and here.

The Supreme Court’s decision in Rutledge will have resounding implications on ERISA plans. fiduciaries and administrators. Not only are state laws regulating pharmaceutical benefits (the subject matter of Rutledge) widespread, states have also taken to regulating a host of other benefit matters, presenting high hurdles for multi-state employers, fiduciaries and administrators seeking to establish uniform nationwide procedures.

So the precise location of where the Supreme Court draws the line on preemption will likely cause ripple effects well beyond pharmaceutical benefits. And the Court’s line-drawing reasoning is important given that the statute preempts all state laws “relating” to employee benefit plans regulated by ERISA.

Two recent case developments underscore Rutledge’s importance, both in the pharmaceutical benefits realm and beyond.

First, this month, the Eighth Circuit held that a North Dakota law regulating pharmaceutical benefits is preempted by ERISA because the law’s “provisions apply to plans subject to ERISA regulation and therefore the law cannot function irrespective of any ERISA plan.” Pharm. Care Mgmt. Ass’n v. Tufte, No. 18-2926, 2020 WL 4554980, at *1 (8th Cir. Aug. 7, 2020) (internal quotation marks omitted). The Court relied on its prior decisions (including Rutledge) striking down similar laws.

Additionally, in another case (just filed this month in the U.S. District Court for the District of New Jersey), an employer trade association is alleging that New Jersey’s WARN Act expansion requiring mandatory severance payments for certain employees is preempted by ERISA. The ERISA Industry Comm. v. Angelo, No. 20-cv-10094 (D.N.J. Aug. 6, 2020). The plaintiff contends that the severance obligation requires the creation of a benefit plan that has ongoing administrative obligations and requires the use of discretion in determining benefit eligibility. The plaintiff alleges that this sort of plan would be governed by ERISA and therefore that the New Jersey law impermissibly “relates” to an ERISA plan. The plaintiff also alleges that the New Jersey law creates the sort of state-by-state regulatory patchwork that ERISA was designed to avoid.

Stay tuned to see how Rutledge is orally argued and decided.

Seyfarth Synopsis: The IRS published guidance in its Employee Plans newsletter on August 24, 2020, allowing incomplete determination letter applications to be filed by August 31, 2020, with an opportunity to supplement the filing through the end of the year.

Last year, the IRS opened the determination letter process for a limited time period for individually-designed hybrid plans. See our prior Legal Update here. Determination letter applications under this limited opportunity must be filed by August 31, 2020. With the arrival of the pandemic in early 2020, the IRS had extended many tax-related deadlines impacting employee benefit plans, but made no announcement that offered any relief from this looming hybrid filing deadline. As August 31st became ever closer with no end in sight to the issues caused by the pandemic, many sponsors and practitioners had called on the IRS to extend this filing deadline, indicating difficulty in getting plan documents and other plan items compiled by the deadline.

In response, on August 24, 2020, IRS Employee Plans published guidance in its Employee Plans newsletter related to this deadline. While the deadline for the filing was not extended and remains next Monday, August 31, 2020, applicants are permitted to submit “incomplete” filings by August 31, 2020, and supplement the applications through the end of 2020. Nonetheless, even an “incomplete filing” sent by August 31, 2020 must include the following documents:

  • Form 5300, Application for Determination of Employee Benefit Plan;
  • Form 8717, User Fee for Employee Plan Determination Letter Request, with appropriate user fee; and
  • Form 8821, Tax Information Authorization, or Form 2848, Power of Attorney, if applicable.

If an applicant is going to take advantage of this relief, the cover letter to the filing materials should include an address or fax number to which the IRS will send an Application Identification Sheet for additional documents and information. The Application Identification Sheet should be sent with any supplemental materials submitted later in 2020. Applicants should send in the remaining required documents for the determination letter filing by the end of 2020. The guidance specifically states that the EP Determinations will not review these hybrid plan determination letter applications for completeness until at least January 1, 2021.

This publication did not give any relief for obtaining signatures on the applicable filing forms or for providing notices to interested parties. Thus, use of the guidance could be limited if applicants are having issues with items other than obtaining necessary plan documentation.

Seyfarth Synopsis: On Tuesday, August 18, 2020, the Department of Labor’s Employee Benefits Security Administration (EBSA) released an interim final rule related to a new disclosure that will need to be provided as a part of defined contribution plan benefit statements. The new disclosure will show the participant’s plan benefit as a monthly amount calculated as if the total plan account balance was used to provide certain lifetime income streams. The interim final rule and accompanying fact sheet describe how to calculate the amounts to be provided under this new disclosure, along with model language to be given to participants to explain the calculations and explain the fact that the calculations are merely estimates and not guarantees.

Benefits under defined contribution plans are normally expressed as a lump-sum account balance. While the DOL in 2013 issued an advance notice of proposed rulemaking that considered requiring account balance plans to include lifetime income illustrations on benefit statements, the DOL never actually proposed such a rule. However, the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”), enacted at the end of 2019, amended ERISA to require plan administrators of defined contribution plans to include a “lifetime income disclosure” on at least one benefit statement each year. This disclosure requires information showing a participant’s plan benefit in the form of single life and joint and survivor income streams. Congress’s goal was to help participants better understand how their lump-sum plan savings could convert into a lifetime monthly income stream. The DOL’s interim final rule contains assumptions that must be used for calculating the monthly amounts to be disclosed and explanatory model language.

Under the new rule, plan administrators will show monthly income estimates under two scenarios: first, as a single life income stream (such as with a single life annuity); and second, as an income stream that includes a survivor benefit (such as with a joint and survivor annuity). The rule includes several prescribed assumptions to be used to convert the lump-sum account balance into the lifetime income streams. Specifically, for purposes of the calculation, payments are assumed to begin on the last day of the benefit statement period and the participant is assumed to be age 67 on the date payments begin, unless the participant is actually older than age 67. Additionally, for calculating the income stream with a survivor benefit, the participant’s assumed spouse is assumed to be the same age as the participant and the survivor benefit is calculated as 100% of the participant’s benefit (i.e., a 100% QJSA). The interest rate to be used for the calculation is the 10-year constant maturity Treasury rate, and the mortality table to be used is the table described in section 417(e)(3) of the Internal Revenue Code (i.e., the table used for calculating the minimum present value of an accrued benefit under a defined benefit plan). The new disclosure must include an explanation of what these lifetime income illustrations mean and what assumptions were used. The interim final rule includes model language for these explanations.

The interim final rule provides some flexibility for calculating the amounts for the new disclosure for plans that offer distribution annuities through an insurance company. In that situation, the amounts required to be disclosed may be calculated using the terms of the insurance contract, and the rule provides special model explanatory language to be used under this alternate disclosure method. The interim final rule also provides special disclosure rules for a plan that allows a participant to purchase, or make continuing contributions towards the purchase of, a deferred annuity from an insurance company.

The new disclosure must be provided to plan participants at least annually.

To assuage plan fiduciaries’ concerns regarding the potential for liability caused by these disclosures, the interim final rule provides that plan administrators, fiduciaries, and sponsors will not be liable under Title I of ERISA solely for providing the information on the lifetime income amounts if the assumptions described in the interim final rule are used to calculate such amounts and either the language used in the disclosure matches the model language provided in the interim final rule, or is substantially similar in all material respects to that model language.

The interim final rule will be effective 12 months after publication in the Federal Register, but the EBSA intends to issue a superseding final rule within 12 months. Thus, while sponsors and fiduciaries should start preparing for this new disclosure requirement, final determinations should wait for the EBSA to issue its final rule. If you have any questions about these new rules, please feel free to reach out to an Employee Benefits attorney at Seyfarth.

Businesses are dealing with the effects of the pandemic on retirement plans and pensions, executive compensation, and health and welfare benefits. Workforce management issues resulting in reduction in hours, furloughs, and severance situations have required unique approaches to termination, conversion or bridging of benefits.

Our Employee Benefits & Executive Compensation attorneys have been monitoring, advising and reporting on these issues throughout the pandemic. We are eager to share our COVID-19 Employee Benefits Toolkit, a resource for legal, HR and employee benefit managers to access the latest developments with comprehensive coverage of the benefits and compensation issues that plan sponsors need to know. The Toolkit is a collection of our Legal Updates, blog posts, and other resources organized in a user-friendly format. We hope you find it to be useful.

Click here to access the COVID-19 Employee Benefits Toolkit:

By: Emily Miller, Ben Conley, and Sam Schwartz-Fenwick

Seyfarth Synopsis: A Federal Court has temporarily enjoined the Trump administration from putting into effect its recent rule that strips the Affordable Care Act of its gender identity protections.

The section of the final rule on Section 1557 of the Affordable Care Act that stripped the regulations of their gender identity protections was slated to take effect yesterday. But it did not.

Rather, on Monday, a federal judge in the Eastern District of New York issued a stay that blocked that portion of the U.S. Department of Health and Human Services’ final rule from taking effect.  The Court only addressed the final rule’s interpretation of “discrimination on the basis of sex” in its stay and did not address the other changes ushered in under the Department’s final rule.  Those other changes took effect yesterday.

Section 1557 of the ACA prohibits health programs and activities that receive federal financial assistance from discriminating on the basis of race, color, national origin, disability, age, or sex. Section 1557 takes its prohibition against discrimination on the basis of sex from its reference to Title IX of the Education Amendments of 1972 (Title IX). Since its inception, Section 1557 has prohibited discrimination on the basis of gender identity in healthcare through its prohibition against discrimination on the basis of sex.

On Friday, June 12, 2020, the Department issued its final rule on Section 1557 – explicitly removing protection from discrimination on the basis of gender identity from its prohibition against discrimination on the basis of sex. This meant that, once the final rule took effect, covered entities could discriminate against transgender patients without violating Section 1557.

On Monday, June 15, 2020, in Bostock v. Clayton County, the Supreme Court held that Title VII’s prohibition against discrimination on the basis of sex captures within it a prohibition against discrimination on the bases of sexual orientation and gender identity. Specifically, the Court held that “it is impossible to discriminate against a person for being homosexual or transgender without discriminating against that individual based on sex.”

And so, as we wrote in June, we found ourselves in an accordion-like quagmire where “on the basis of sex” included gender identity under Title VII and but was still interpreted by at least one executive branch agency to exclude gender identity under Section 1557 vis-à-vis Title IX.

Monday’s injunction signals that a resolution to this quagmire may be on the horizon.

In his ruling, Judge Frederic Block found the Department knew that the then-forthcoming decision in Bostock could have “ramifications” for its final rule given that both Title VII and Title IX prohibit discrimination “on the basis of sex” but “was apparently confident that the Supreme Court would endorse the Administration’s interpretation of sex discrimination…” The Court wryly noted that the Department’s “confidence was misplaced” and held that once the Supreme Court issued Bostock, the Department had to consider its implications for its final rule.  As Judge Block stated: “Instead it did nothing….  Since [the Department] has been unwilling to take that path voluntarily, the Court now imposes it.” The final rule cannot take effect until a court decides what the decision in Bostock means for Section 1557.

And so, the portion of the final rule that would have allowed for discrimination on the basis of gender identity in health programs and activities did not take effect yesterday, and transgender patients remain protected while the litigation challenging the final rule continues. We will continue to follow this case with interest.

Seyfarth Synopsis: As Seyfarth has blogged about on multiple occasions [here and here], the CARES Act provides participants in tax-qualified retirement plans the opportunity to request distributions on a tax-favored basis by self-certifying that they have been adversely impacted by COVID-19. Seyfarth has also blogged about the IRS’s recent guidance on these distributions under Notice 2020-50 [here]. In the final substantive section of Notice 2020-50, the IRS issued relief for non-qualified deferred compensation plans as well. Specifically, if a participant self-certifies and receives a CARES Act distribution from a tax-qualified retirement plan, the participant may also cancel the participant’s deferral elections under any non-qualified deferred compensation plan. This opportunity raises interesting questions for plan sponsors and participants.

Historically, if a participant elected a hardship distribution under a 401(k) plan, the participant generally was prohibited from making any deferrals for at least six months under the 401(k) plan or all other plans maintained by the employer, including any non-qualified deferred compensation plans. To align with this requirement, Code Section 409A permits the cancellation of non-qualified plan deferral elections following a 401(k) plan hardship distribution. The Bipartisan Budget Act of 2018 removed the requirement for a participant to suspend 401(k) plan deferrals following receipt of a hardship distribution, but (intentionally or not) it did not amend Code Section 409A to remove the opportunity to cancel nonqualified plan deferral elections following a 401(k) plan hardship distribution. As a result, non-qualified plans can still permit the cancellation of deferral elections following a 401(k) plan hardship distribution.

With Notice 2020-50, the IRS has blessed the cancellation of non-qualified plan deferrals following a CARES Act 401(k) plan distribution. Specifically, the Notice piggybacks on the Code Section 409A cancellation rule described above by providing that a CARES Act distribution is treated as a 401(k) plan hardship distribution for purposes of such rule.

As noted above, CARES Act distributions may be based solely on self-certification by the participant. Effectively then, a participant could elect a $1 CARES Act distribution by self-certifying that COVID-19 adversely impacted the participant and in doing so, cancel potentially significant remaining non-qualified plan deferrals. While the relief afforded by Notice 2020-50 should protect non-qualified plan sponsors that authorize the cancellation of non-qualified deferrals following a CARES Act distribution, participants should be cautious before taking advantage of this relief. For example, if the IRS later disagrees with a participant’s self-certification during an individual audit, the IRS could determine that the cancellation of the nonqualified plan deferral election was a Code Section 409A violation and subject the entire plan benefit to immediate taxes, plus a 20% excise tax and premium interest (i.e., not just against the amount of the cancelled deferrals but against the entire nonqualified plan account balance). (Presumably, the impact on the qualified plan tax treatment of a non-compliant self-certification may be remedied through a repayment of the CARES Act distribution or through a 10% excise tax on the amount of the CARES Act distribution.)

After taking into consideration the above noted caution, the non-qualified plan may still permit the cancellation if allowed under its written terms (or even be required to cancel the deferrals). So, as always, please check your plan terms before moving forward with a cancellation of non-qualified plan deferrals based on a CARES Act distribution. Finally, and with stakes this high, plan sponsors should make certain that the non-qualified deferred compensation plan includes 409A tax and penalty indemnification language, and may wish to seek an additional acknowledgement or indemnity from a participant covering any potential adverse Code Section 409A tax consequences before permitting the cancellation.

By: Rebecca K. Bryant, Sam M. Schwartz-Fenwick, and Ian H. Morrison

Seyfarth Synopsis: A recent 10th Circuit decision holding that in order for the abuse of discretion standard to apply in litigation the claims administrator must provide participants with actual notice of discretionary authority or notice of a document affecting standard of review is required, signals a departure from the existing ERISA legal landscape.  

In ERISA benefit claim litigation, where there is a sufficient delegation of discretionary authority to an administrator in the governing plan document, a court reviewing an administrator’s decision will generally employ the highly deferential abuse of discretion standard of judicial review rather than the de novo standard of review.

In a recent mental health treatment case, the Tenth Circuit added additional requirements before a court will apply the abuse of discretion standard to analyze a benefit claim determination. Lyn M.; David M., as Legal Guardians of L.M., a minor v. Premera Blue Cross, No. 18-4098, __ F.3d  __. The court ruled that despite a grant of discretion to the administrator in the governing plan document, the deferential standard of review could not apply in litigation as there was no evidence demonstrating plan participants knew that the employer’s plan document containing the discretionary authority clause existed. Rather, the participants had received only an SPD, which was silent as to discretionary authority. The Court determined that proper notice requires the plan administrator to either (1) actually disclose its discretionary authority or (2) explicitly disclose the existence of the plan document containing information about the discretionary authority. The court found that the fact that the governing plan document was available to participants on request was insufficient this new disclosure requirement.

In a biting dissent, Judge Allison H. Eid reasoned that the SPD sufficiently alerted participants that other plan documents existed and were available. Judge Eid criticized the majority for imposing a duty on plan administrators, found nowhere in ERISA or case law, “to specifically inform members that documents exist that could affect judicial review.”  The dissent correctly noted that while SPDs must be provided and include certain mandatory information regarding benefit eligibility and claim procedures, there is no duty under ERISA to specifically notify participants of documents that may affect the judicial standard of review should their claims be decided in court.

This decision is a significant departure from the standard principle that the standard of review employed by a reviewing court does not turn on whether the document containing that standard was provided to participants during the claim review process. Only time will tell if other courts will adopt the Tenth Circuit’s position. For now, benefit plans operating in the Tenth Circuit should evaluate their claim procedures in light of this decision.