By: Cassandra Frias and Ada Dolph

Seyfarth Synopsis: After focusing most of its attention on retirement benefit plans, a recent complaint filed in the District of Connecticut shows that the plaintiffs’ bar is turning to health and welfare plans as targets for their new theories of breach of fiduciary duty under ERISA.

Plaintiff Aubrey Srednicki is enrolled in a group health plan provided by her employer and administered by Cigna Health and Life Insurance Company. She filed suit against Cigna Health and Life Insurance Company in the District of Connecticut on February 24, 2023.  In her Complaint, Srednicki alleges that a Cigna-affiliated medical provider overcharged her for services, allowing Cigna to take credit for a larger discount than was given, and to balance bill her significantly more than her copay would have been on the actual price of the services.  Notably, Srednicki seeks to represent a class of individuals much broader than those in her own benefit plan.  She seeks to certify a class of all individuals who were or are enrolled in an employee benefit plan insured or administered by Cigna, who had lab work done at one of two Cigna-affiliated laboratories, and whose cost share was more than the amount paid actually paid by Cigna for the lab work. 

Srednicki offered her own lab work as an example: she alleged that her doctor called LabCorp to inquire about the cost for a patient without insurance and was told that the lab work cost $449. Srednicki alleges, however, that the billed amount on her explanation of benefits (EOB) was $17,362.66. Of this amount, $14,572.66 was the purported discount arranged by Cigna. Of the difference, Cigna allegedly paid $471.02 and billed Srednicki for the $2,315.98. Having already fully paid LabCorp, Srednicki alleges that the $2,315.98 was a windfall for Cigna.

Srednicki’s brings claims under both ERISA 502(a)(1)(B) and 502(a)(3).  She seeks clarification of her benefit rights, a finding from the court that the putative class members were overcharged, an accounting of the overcharges, and the return of the amounts the members were overcharged.  Srednicki alleges that Cigna’s overcharging constituted a prohibited transaction and benefited a party in interest.  She also alleges that Cigna failed to monitor appointed fiduciaries, failed to apply plan terms to the calculation of benefits, failed to follow plan procedure, and violated the duty of prudence. 

In short, with increased focus on the fees and billing arrangements in the health and welfare benefit plan sphere, whether plan administrator or claims administrator, now is the time to examine your plan and shore up its compliance with ERISA. Please reach out either to the authors of this Blog Post or to your Seyfarth Employee Benefits attorney if you need additional information.

Seyfarth Synopsis: New IRS FAQs provide helpful clarifications on eligible medical expenses for HSAs, FSAs, MSAs, and HRAs (including the conditions for reimbursement of those gym memberships).

On March 17, the Internal Revenue Service (IRS) posted a new set of Frequently Asked Questions (FAQs) aimed at individual taxpayers, addressing whether certain medical expenses related to nutrition, wellness, and general health may be paid or reimbursed from health savings accounts (HSAs), health flexible spending arrangements (FSAs), Archer medical savings accounts (MSAs), and health reimbursement arrangements (HRAs) (collectively, “Accounts”).

Notably, the list of eligible expenses differs slightly from the medical expenses that are deductible by a taxpayer under Section 213(d) of the Internal Revenue Code (Code). Although Internal Revenue Service (IRS) Publication 502, Medical and Dental Expenses addresses the deductibility of various medical and dental expenses, it may not be relied upon for answers to all questions regarding eligible Account expenses. Therefore, these FAQs specifically addressing Account-eligible expenses are particularly helpful to individual taxpayers who are Account holders, and to the benefits practitioners who respond to their questions. (Additional information about these Accounts also may be found in IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.)

The FAQs reiterate the definition of medical expenses found in Publication 502 and in Code § 213(d):

“Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.”

In addition, “[medical] expenses must be primarily to alleviate or prevent a physical or mental disability or illness” rather than being “merely beneficial to general health.”

The FAQs then provide the following specific guidance on whether various expenses are eligible for payment or reimbursement from Accounts.

FAQ Number(s)Expense(s)Eligible Expense(s) for Account Purposes?
1, 2, 3dental, eye, and physical examsYes, because these exams “[provide] a diagnosis of whether a disease or illness is present.”
4, 5, 6programs to treat drug-related substance or alcohol use disorders and smoking cessation programsYes, because these programs each treat a disease (a substance, alcohol, or tobacco use disorder).
7therapyMaybe—if the therapy is treatment for a disease; “therapy to treat a diagnosed mental illness is [eligible], but an amount paid for marital counseling is not.”
8, 9nutritional counseling and weight-loss programsMaybe—only if the counseling or program is used “[to treat] a specific disease diagnosed by a physician [(e.g., obesity, diabetes, hypertension, or heart disease)].”
10gym membershipMaybe—“only if the membership was purchased for the sole purpose of affecting a structure or function of the body (such as a prescribed plan for physical therapy to treat an injury) or the sole purpose of treating a specified disease diagnosed by a physician (such as obesity, hypertension, or heart disease).”
11swimming or dancing lessons or other exercise for general health improvementNo, because these are “only for the improvement of general health,” and so are not eligible expenses “even if recommended by a doctor.”
12food or beverages purchased for health reasons (including weight loss)Maybe—only if all three of the following are true with respect to the food or beverage: (i) it “doesn’t satisfy normal nutritional needs,” (ii) it “alleviates or treats an illness,” and (iii) its need “is substantiated by a physician.”
If these three requirements are met, only “the amount by which the cost of the food or beverage exceeds the cost of a product that satisfies normal nutritional needs” is eligible.
13over-the-counter drugs and medicine (even if not prescribed) and menstrual care productsYes, these are eligible expenses for Account purposes (for expenses incurred after 2019, under changes made by the CARES Act).
14nutritional supplementsMaybe—“only if the supplements are recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a physician.”

What should you do with this new guidance? Because each of these FAQs is dated, we suspect (and hope) that this is a page that the IRS intends to maintain, and so we suggest a bookmark to this page for your reference and to watch for future developments. We also suggest including a link to these FAQs in your summary plan descriptions (SPDs) and other plan communications in which any of these Accounts are discussed. You might also confirm with your Account service providers that the information provided in these FAQs is consistent with their administration.

Seyfarth Synopsis: New IRS guidance suggest that many NFTs may be considered “collectibles,” causing concerns for IRAs and individually-directed accounts under a tax-qualified plan.

On March 21, 2023, the Internal Revenue Service (IRS) issued Notice 2023-27, announcing that the Treasury Department and the IRS intend to issue guidance with respect to the treatment of nonfungible tokens (NFTs) as collectibles for certain tax purposes. Pending the issuance of that guidance, the IRS will determine whether an NFT is a collectible by looking through the NFT to see if its associated right or asset is a collectible described in Section 408(m) of the Internal Revenue Code. Section 408(m) defines the term “collectible” as meaning “any work of art, any rug or antique, any metal or gem, any stamp or coin, any alcoholic beverage, or any other tangible personal property specified by the Secretary (of the Treasury)…”, with an exception for certain coins and bullion.

If NFTs (or their associated rights and assets) are deemed collectibles by the IRS under Section 408(m), it could have a material and negative impact on individual retirement accounts (IRAs) and individually-directed accounts under a tax-qualified plan, such as a 401(k) plan. This is because the acquisition of a collectible by an IRA or an individually-directed account under a tax-qualified plan will be treated as a taxable distribution equal to the cost of the collectible (or NFT, in this case). In addition, the sale or exchange of an NFT that is deemed a collectible and held for more than a year is subject to a maximum 28% capital gains tax rate, rather than a lower maximum long term capital gains tax rate. Further, because Section 408(m) refers to the acquisition of a collectible, it is unclear what the treatment will be of NFTs that were already acquired and are being held in a retirement account, but only deemed collectibles upon the effective date of final IRS guidance.

The Treasury Department and the IRS are requesting comments on any characteristic of NFTs that might impact the treatment of NFTs as Section 408(m) collectibles.

Please reach out either to the authors of this Blog Post or to your Seyfarth Trusts and Estates or Employee Benefits attorney if you need additional information.

Seyfarth Synopsis: New SEC rules aiming to curb insider trading by directors and officers of public companies took effect on February 27, 2023.

On December 14, 2022, the Securities and Exchange Commission (“SEC”) adopted by unanimous vote: (1) final amendments to Rule 10b5-1 (17 CFR § 240.10b5-1) under the Exchange Act of 1934 (the “Exchange Act”) for insider trading plans and (2) new disclosure requirements intended to remove many of the loopholes that allowed corporate insiders to take undue advantage of these trading plans. The adopting release is available here and publication in the Federal Register is available here.

The final rules became effective 60 days after the date the rules were published in the Federal Register, i.e., December 29, 2022. That means the changes to Rule 10b5-1 became effective on February 27, 2023. After that, all Rule 10b5-1 trading plans adopted or modified should comply with the new requirements or the person adopting the plan will not be able to rely on the affirmative defense to Rule 10b-5.

Many observers have pointed out that for the last two decades, officers and directors at U.S. public companies seeking to trade illicitly on inside information had a giant loophole for avoiding SEC restrictions on insider trading. The loophole arose as an unintended consequence of the SEC’s adoption in 2000 of Rule 10b5-1, which created an affirmative defense to Rule 10b-5 for trades made pursuant to a compliant trading plan, but which academic research has shown created a gap in enforcement. By using such plans, SEC enforcement actions were infrequent because the SEC’s chances of success against someone who used such a plan were unlikely.

“Before the change occurred, you could have an executive utilize a $100 million 10b5-1 plan, and there would be no trace in public disclosures that they were utilizing such a plan,” said Daniel Taylor, an accounting professor at the University of Pennsylvania and the co-author of a 2021 study on 10b5-1 abuses that was cited in the SEC’s final rule.

It was reported that some insiders were selling shares less than a month after adopting their plans, sometimes even the same day, or adopting and initiating trading plans right before earnings announcements. Another trick had been to adopt multiple 10b5-1 plans and later selectively cancel the ones that wouldn’t work to the insider’s benefit. Potential abuses of 10b5-1 plans were the subject of a Wall Street Journal article in June 2022 that also was cited in the SEC’s final rule.

The changes to the rule update the conditions that must be met under a 10b5-1 trading plan to trigger the affirmative defense to Rule 10b-5 liability for insider trading.

Cooling Off Period

The amendments adopt cooling-off periods for persons other than issuers before trading can commence under a Rule 10b5-1 plan. Specifically, trading cannot begin under a plan adopted by a director or officer until the later of (a) 90 days after the adoption of the trading plan or (ii) two business day after the disclosure of the company’s financial results in a Form 10-Q or 10-K for the fiscal quarter in which the plan was adopted. The cooling off period is capped at 120 days. For insiders other than officers and directors, the colling off period is 30 days.

Director and Officer Certification

The amendments further provide that directors and officers must include representations in their plans certifying at the time of the adoption of a new or modified Rule 10b5-1 plan that: (1) they are not aware of any material nonpublic information about the issuer or its securities; and (2) they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5.

Insiders that report on Forms 4 or 5 will be required to indicate by checkbox that a reported transaction was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) and to disclose the date of adoption of the trading plan. Finally, bona fide gifts of securities that were previously permitted to be reported on Form 5 will be required to be reported on Form 4.

Restrictions on Overlapping and Single Trade Plans

The amendments restrict the use of multiple overlapping trading plans and limit the ability to rely on the affirmative defense for a single-trade plan to one single-trade plan per twelve-month period for all persons other than issuers.

Quarterly Disclosure of Insider Trading Policies

The amendments will require more comprehensive disclosure about issuers’ policies and procedures related to insider trading, including quarterly disclosure by issuers regarding the use of Rule 10b5-1 plans and certain other trading arrangements by its directors and officers for the trading of its securities.

Annual Disclosure of Insider Trading Policies and Procedures

The final rules require disclosure of issuers’ policies and practices around the timing of option grants and the release of material nonpublic information.

Tabular Disclosure of Certain Equity Awards

The rules will require that issuers report on a new table any option awards beginning four business days before the filing of a periodic report or the filing or furnishing of a current report on Form 8-K that discloses material nonpublic information, including earnings information, other than a Form 8-K that discloses a material new option award grant under Item 5.02(e), and ending one business day after a triggering event.

Transition Periods for New Rules

For most U.S.-listed companies, the new disclosure requirements will become effective April 1, 2023. Section 16 reporting persons will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023. Issuers will be required to comply with the new disclosure requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F (foreign private issuers) and in any proxy or information statements in the first filing that covers the first full fiscal period that begins on or after April 1, 2023. However, the final amendments defer by six months the date of compliance with the additional disclosure requirements for smaller reporting companies.

Please reach out either to the authors of this Legal Update {Blog Post} or to your Seyfarth Employee Benefits attorney if you need additional information.

By: Ian Morrison & Jules Levenson

Seyfarth Synopsis: The 7th Circuit recently held that insurers and administrators must provide claimants an opportunity to respond to new information relied on for adverse benefit determinations, even if the claim predated the enactment of the relevant regulation.

In Zall v. Standard Ins. Co., 58 F.4th 284 (7th Cir. 2023), the Seventh Circuit Court of Appeals considered whether amendments to DOL claims procedure regulations that went into effect in 2018 applied to a claim for LTD benefits first filed in 2013. The Court of Appeals answered yes and reversed the insurer’s win in the district court because it had failed to provide the claimant with a copy of a medical evaluation with enough time for the claimant to respond before the insurer issued its final decision on the claim.

Zall, a former dentist, filed a claim for LTD benefits in 2013. After initially denying the claim, Standard granted it on appeal. In 2015, Standard began to review the claim to determine if a 24-month limitation for applied, but it did not make a determination and kept paying benefits until 2018. In 2018, it requested and reviewed updated medical records and determined that the 24-month limit applied. It stopped paying benefits in 2019. Zall appealed and Standard obtained a medical review but did not provide a copy to Zall before rendering its appeal decision in which it affirmed the denial (and only informed him that the review existed 9 days before that determination).

Zall sued, claiming that he was denied a full and fair review based on Standard’s failure to comply with the 2018 claims procedure regulations.  He lost in the district court, which found the new regulations only applied to claims first filed after April 1, 2018.

The Seventh Circuit reversed, holding that the plain language of the effective date provision of the 2018 regulations (29 C.F.R. Sec. 2560.503.1(p), which provides that the regulations generally apply to claims filed on or after January 1, 2002) dictated their application to all claims pending when the new regulations went into effect. Notably, the clarity of the regulatory language led the Court of Appeals to reject the argument that DOL rulemaking materials showed the regulations were not intended to apply to claims filed before April 1, 2018. The Court likewise held that there was no problem of retroactivity, as the new regulation had no impact on substantive rights, but instead addressed only the procedures for vindicating those rights (and that procedural changes generally do not present concerns about retroactivity). The Court distinguished other Circuit decisions reaching seemingly contrary results, stating that those cases involved pre-2018 conduct and did potentially present a retroactivity problem.

The Court of Appeals further determined that the plaintiff was prejudiced by the procedural violation (as he lost the opportunity to rebut the new negative medical review) and that he did not waive reliance on the violation, as it occurred only days before the adverse decision. The Court of Appeals thus remanded the matter to the administrative process to permit a full and fair review of the claim in compliance with the 2018 regulations.

The precise issue directly raised in Zall is of limited duration and scope, as it is only relevant to benefit claims filed between 2002 and 2018 that are still pending after 2018 and in which insurers and administrators are operating under the old regulations. For entities that have chosen to utilize a single process for all claims (both pre- and post-2018), the decision will likely have few immediate impacts. Perhaps the bigger importance going forward, though, is that the logic of Zall appears to authorize a broad swath of retroactive regulations, so long as they are procedural in nature. Insurers and administrators should be sure to track ongoing regulatory developments to ensure an appropriate response to any changes, taking into account the Seventh Circuit’s position in Zall.

April 11, 2023 Update: On April 10, 2023, President Biden signed legislation which ended the national emergency (NE) immediately. The public health emergency (PHE) is still expected to end on May 11, 2023. The Outbreak Period discussed below will still end on July 10, 2023 (i.e. 60 days after the date previously announced by the DOL, Treasury, and IRS in FAQs, Part 58).

Seyfarth Synopsis: The Biden Administration has announced that the COVID-19 Public Health Emergency (PHE) and COVID-19 National Emergency (NE) will expire May 11, 2023.

In response to the COVID-19 pandemic, two separate emergency declarations have been in effect: (1) the PHE; and (2) the NE. For more information regarding the Emergency Declarations, COVID Relief, and previous deadline extensions, see our prior Legal Updates here, here, and here.

Prior to January 30, 2023, the PHE and NE were set to expire on April 11, 2023 and March 1, 2023, respectively. On January 30, 2023, the Biden Administration announced in a statement of administrative policy that, in light with the Administration’s previous commitment to give at least 60 days’ notice prior to the termination of the PHE, the Administration is extending both the PHE and NE to May 11, 2023, and will not be extended further after this date. The end of the emergency declarations will affect employer sponsors of group health plans in several ways, discussed below.

The COVID-19 Public Health Emergency

There are several requirements and forms of relief that were implemented during the PHE that apply to employer sponsored group health plans which will have to be addressed:

  • COVID-19 Testing: in-network and out-of-network COVID-19 testing are at no cost to participants until May 11, 2023. Plans will not be required to cover COVID-19 testing with no cost-sharing after May 11, 2023.
  • COVID-19 Vaccines: in-network COVID-19 vaccines have been required by the CARES Act at no cost during the PHE. Although the CARES Act requirement ends when the PHE ends, the United States Preventive Services Task Force has recommended COVID-19 Vaccines, meaning that plans must continue to cover COVID-19 Vaccines at no cost as preventive care under the Affordable Care Act (ACA).
  • Expanded Telehealth Coverage: telehealth coverage will be permitted to be offered to employees whether or not the employee is enrolled in the employer’s medical plan until the end of the plan year that begins on or before May 11, 2023. So, December 31, 2023 for calendar year plans.
  • SBC Advanced Notice Requirements: the SBC advanced notice requirements for mid-year changes will no longer be relaxed for plans implementing COVID-19 coverages/benefits after May 11, 2023.

Considering the changes in COVID-related relief once the PHE ends, plans should consider if any plan amendments will need to be enacted to reflect post-PHE period approaches and whether a summary of material modifications (SMM) or other participant communication will be required.

The COVID-19 National Emergency

Under guidance issued in 2020, various timeframes under ERISA and the Internal Revenue Code, including deadlines for filing claims for benefits, electing and paying for COBRA continuation coverage, and requesting special enrollments, were tolled or suspended until the earlier of: (a) one year from the date the individual or plan was first eligible for relief; or (b) 60 days after the announced end of the NE (“Outbreak Period”). With the announced end of the NE, the timeframes for calculating the following deadlines will begin to run again 60 days after May 11, 2023 (i.e. as of July 10, 2023):

  • COBRA deadlines
  • HIPAA special enrollment deadlines
  • ERISA claims, appeals and external review deadlines
  • Plan-related notices

Keep in mind, the deadlines applicable to the Outbreak Period are determined on an individual by individual basis and cannot last more than one year from the date the individual or plan was first eligible for relief.

For example, if a participant incurs a claim on January 1, 2023 and has one year to file the claim, the one year deadline would be suspended until the earlier of: (a) one year from the date the individual was first eligible for relief (i.e. January 1, 2024); or (b) 60 days after the announced end of the NE (i.e. July 10, 2023). Thus, the one year period to file a claim would begin to run on July 10, 2023.

Prior to the end of the PHE and NE, plans should consider sending notices to participants communicating to them the end of these emergency declarations and the effect on certain deadlines. Additionally, COBRA election notices should be reviewed to remove any language in which the tolling periods from the Outbreak Period were included.

If you have any questions regarding the end of the PHE or NE, please contact the employee benefits attorney at Seyfarth Shaw LLP you usually work with.

The Internal Revenue Code provides significant tax benefits for both employers and employees participating in a 401(k) or 403(b) plan. In exchange for these tax benefits, the plan must satisfy a litany of requirements, notably that a plan be administered in accordance with its plan document. Failure to do so could result in the plan’s loss of its tax-qualified status, which would result in adverse tax consequences for the employer and plan’s participants. A common failure is not following the participant’s contribution election, or perhaps failing to auto-enroll a participant otherwise eligible to be. So how do employee contribution failures occur, and how are they typically corrected? How do the IRS correction procedures treat automatic deferral plans? Grab your cup of coffee and tune in to hear Richard and Sarah chat with Seyfarth colleague Sarah Magill about these pressing questions and more!

Click here to listen to the full episode.

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Seyfarth has announced that it has added a veteran employee benefits and executive compensation lawyer to its San Francisco office. Marc Fosse, who headed Trucker Huss’ Executive Compensation practice, joins as a partner in the Employee Benefits & Executive Compensation Department. Fosse will co-chair the Executive & Equity Compensation practice at Seyfarth.

Fosse concentrates his practice on tax, securities, corporate and accounting issues associated with executive and equity compensation arrangements. He advises in the design, implementation, and operation of domestic and international executive nonqualified and supplemental deferred compensation plans, as well as equity-based and other long-term incentive compensation arrangements. His client base includes publicly traded, private, non-profit and government organizations.

“Executive compensation is a complex and an increasingly critical matter for clients of all sizes in all sectors that requires a high level of legal understanding and pragmatic considerations,” said Diane Dygert, chair of Seyfarth’s Employee Benefits & Executive Compensation Department. “Both Seyfarth and our clients will benefit greatly from Marc Fosse’s leadership skills as well as his ability find practical solutions for clients on matters relating to all elements involved in employee benefits.”

Fosse collaborates with clients to draft and negotiate executive employment, retention, change in control and severance agreements and programs. He commonly advises clients on how to handle employee benefit matters in corporate mergers, acquisitions, divestitures, initial public offerings, and other corporate transactions.

He frequently appears in legal trade publications as a quoted source. Fosse regularly presents to professional audiences and publishes on issues related to employee benefits. Fosse earned a J.D. from University of Wyoming, College of Law, a Taxation LL.M an with Employee Benefits Certificate from Georgetown University Law Center and a B.A. from Brigham Young University.

Seyfarth Synopsis: Under a Tri-Agency Proposed Rule, health plans could be required to report information relating to air ambulance services by March 31, 2023. As this proposed deadline approaches, plan sponsors should reach out to their third party administrators to determine what assistance, if any, will be provided relating to these reporting requirements.

Just as health plans wrap up their 2020 and 2021 prescription drug reports, attention must now shift to the impending air ambulance reporting requirements under the No Surprises Act (“NSA”). The NSA requires health plans and health insurance issuers to disclose certain data to the Department of Health and Human Services (HHS) regarding the use of air ambulance services. In 2021, the Departments of Treasury, Health and Human Services, and Labor issued a Proposed Rule requiring health plans and issuers to report data relating to air ambulance services for the 2022 plan year by March 31, 2023. Although the Proposed Rule has not yet been finalized, plan sponsors should start preparing for the reporting requirements and understanding their obligations under the NSA.

In order to satisfy reporting requirements under the Proposed Rule, plan sponsors will need to submit data for each air ambulance claim received or paid for during the applicable reporting period, including:

  • Plan name;
  • Plan market type (e.g., large or small, fully insured or self-funded);
  • Date of service;
  • Billing National Provider Identifier (NPI);
  • Current Procedural Terminology code (CPT);
  • Transport information;
  • Whether the air ambulance provider was contracted with the plan; and
  • Information on claim adjudication and claim payment.

Similar to the prescription drug reporting requirements, many plan sponsors might expect their third party administrators or insurance carriers to either complete these filings or assist them with the reporting requirements. However, while the insurer will be responsible for reporting on behalf of fully-insured plans, plan sponsors of self-funded plans will retain responsibility for the reports. We encourage plan sponsors of self-funded plans to reach out to their third party administrators now in order to determine whether the TPA will file the air ambulance reporting on behalf of their plans, or just assist (e.g., provide necessary information) the sponsor in filing the report. Plan sponsors should consider a written agreement if the third party administrator will be submitting the reports on the plan’s behalf. If not, plan sponsors should begin gathering the necessary data from their third party administrators and understanding what assistance, if any, their brokers, consultants, or other vendors might provide with respect to the reporting obligations.

Please reach out to the author or to your Seyfarth Employee Benefits attorney if you have any questions about the upcoming air ambulance reporting requirements under the Proposed Rule.

By: Tom Horan and Sam Schwartz-Fenwick

Seyfarth Synopsis: A recent district court decision highlights the continued uncertainties about what it means to include an arbitration clause in an ERISA plan. While courts generally agree that such clauses are, in theory, enforceable, the extent to which courts will enforce a specific clause remains uncertain given divergent outcomes of decisions regarding motions to compel arbitration.

In Burnett v. Prudent Fiduciary Services LLC, et al., the Plaintiffs (current employees of Western Global Airlines who participated in the Company’s employee stock ownership plan (“ESOP”)) broadly allege that Defendants caused the ESOP to pay too much for shares of company stock. Plaintiffs assert claims under ERISA, purporting to do so individually, on behalf of a putative class of participants, and as representatives of the ESOP. Plaintiffs seek a number of remedies, including restoration of money to the ESOP as a whole, and removal of the Defendants as fiduciaries.

On January 25, 2023, a Magistrate Judge in the District of Delaware recommended that Defendants’ Motion to Compel Arbitration be denied. Although the Court found that “ERISA claims are arbitrable,” and said that it was not “declining to send this case to arbitration because of something unique about ERISA,” it ultimately found that arbitration could not be compelled because the ESOP’s arbitration provision operated to prospectively waive substantive rights provided for under ERISA. Specifically, the Court found the provision invalid as its language prohibiting ESOP participants from (1) bringing claims “in a representative capacity,” or (2) “seek[ing] or receiv[ing] any remedy which has the purpose or effect of providing additional benefits or monetary or other relief” to anyone other than the plaintiff, prevented participants from seeking substantive statutory remedies provided by ERISA.

The opinion, and the litigation that lead to it, presents a microcosm of the current state of the law with respect to arbitration clauses in ERISA plans. At a foundational level, courts—including the Courts of Appeals for the Second, Third, Fifth, Sixth, Seventh, Eighth, and Ninth Circuits—have consistently acknowledged that, generally speaking, arbitration clauses are enforceable as to ERISA claims. However, what that means in practice is often subject to extensive litigation (and related expense), with significant uncertainty and some growing inconsistency in the ultimate result of efforts to compel cases to arbitration. Indeed, on January 9, 2023, the Supreme Court declined to hear a case in which the petitioner argued that the differing rulings over enforcement of arbitration clauses in ERISA plans has created a circuit split on the issue.

Much of this uncertainty stems from the language of ERISA itself, and its empowerment of participants (and other identified individuals) to bring suit on behalf of the plan. As a result of this language, some courts have held that, to be enforceable, there must be evidence that the plan (and not, for example, the individual employee who filed suit) consented to arbitrate claims. And, as in Burnett, some courts have also held that the empowerment to sue on behalf of the plan carries with it the ability to seek plan-wide relief, such that provisions that limit claims to seeking only individual remedies are invalid (potentially limiting the benefit of enforceable class action waivers). Other courts have reached opposite results. All this serves to underlay that—for plan sponsors—there is much to consider when deciding whether to include an arbitration clause in a plan document, and—if one is included—what it should say.