Background:  On August 20, 2019, a Ninth Circuit panel in Dorman v. Schwab, No. 18-15281, reversed the district court’s denial of Schwab’s motion

to compel arbitration and held that Schwab could force the plaintiff to individually arbitrate his fiduciary duty claims challenging the administration of Schwab’s 401(k) plan.  In 2017, plaintiff Michael Dorman filed a putative class action in federal court alleging that Schwab had breached its fiduciary duties under ERISA by adding allegedly poorly performing in-house investment funds to its 401(k) plan investment lineup.  In 2015 – two years before the lawsuit was filed – Schwab had amended its 401(k) plan document to include an arbitration clause stating that “[a]ny claim, dispute, or breach arising out of or in any way related to the Plan” had to be resolved by individual, rather than class or collective, arbitration.  Based on this 2015 plan amendment, Schwab filed a motion in the district court to compel individual arbitration.  The district court denied the motion because it concluded that the plan’s arbitration provision was unenforceable with respect to the plaintiff’s fiduciary duty claims.

Continue Reading Mandatory Arbitration: The Next Frontier for ERISA Retirement Plans?

The Affordable Care Act contains a provision–the so-called “Cadillac tax”–providing for a 40% exciClassic Cadillacse tax on high cost employer-sponsored health coverage.  The bar for “high cost” is fairly low, and the Cadillac tax is ultimately expected to apply to a significant number of employer-sponsored health plans.

Since the passage of the Affordable Care Act, many employers and insurers (who would be responsible for paying the tax) have actively opposed the implementation of the Cadillac tax provisions, with moderate success.  The Cadillac tax was originally slated to take effect in 2018, but its implementation has been delayed twice–most recently until 2022. 

Continue Reading Cadillac Tax Repeal on the Horizon?

Each new year brings new limitations, and the Internal Revenue Service has released its annual cost-of-living adjustments applicable to employee benefit plans. A year-to-year comparison of limitations applicable to plan sponsors can be found here: 2019 Annual Limitations Chart.

Reflecting a slight increase in inflation over the past year, several benefit plan limitations will increase for 2019. The IRS continued its trend from the prior year by increasing the elective deferral limitation for defined contribution plans from $18,500 to $19,000. Additionally, the limit on compensation taken into account under qualified plans will rise from $275,000 to $280,000.

Health and welfare plan participants will also benefit from various increases. The amounts participants are allowed to contribute to health care flexible spending accounts and health savings accounts will increase, while dependent care assistance will remain stagnant for another year.  Small employers taking advantage of the opportunity to provide Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) to eligible employees in 2019 can provide increased reimbursements of up to $10,450, from $10,250, for family coverage. (QSEHRA maximums for self-only coverage will increase from $5,050 to $5,150.) Plan participants will also have the opportunity to increase their contributions for qualified transportation expenses from $260 to $265 per month.

The Social Security Tax wage base will increase significantly as compared to prior years, from $128,400 to $132,900. However, FICA tax and Social Security tax percentages will remain the same.

Not so Benevolent GrandfatherLong-awaited guidance on Section 162(m) of the Internal Revenue Code (the “Code”), has finally arrived.  On August 21, 2018, the IRS issued Notice 2018-68, which provides guidance on certain changes made to Section 162(m) by the Tax Cuts and Jobs Act (the “Act”).  The guidance is limited to (a) the identification of covered employees and (b) the so-called “Grandfather Rule.”  The Notice does not address all of the issues raised by the Act’s changes to Section 162(m) and it makes clear that the Grandfather Rule will be narrowly interpreted.  The guidance is effective for tax years ending on or after September 10, 2018 and will be incorporated into future regulations.  The material provisions of the guidance are summarized below.

Continue Reading Guidance on Section 162(m) Modifications—A Not So Benevolent Grandfather and Details About Covered Employees are Uncovered

In a case of first impression, a federal district court in the Southern District of Texas has ruled that a former parent company’s stock was not an “employer security” under section 407(d)(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).[1] As a result, the ERISA exemption from the duty to diversify and the duty of prudence (to the extent the latter requires diversification) were not available where a plan held former parent company stock in a legacy single-stock fund. Although in this case plaintiff participants’ claims were ultimately dismissed, the decision should be on the radar of fiduciaries of plans holding significant amounts of former employer securities.

As background, in 2012, Phillips 66 Company, Inc. (“Phillips 66”) spun off from ConocoPhillips Corporation (“ConocoPhillips”) and sponsored a new defined contribution plan with an employee stock ownership plan (“ESOP”) component, as had ConocoPhillips. In addition to newly issued Phillips 66 stock, however, Phillips 66’s new plan also held more than 25% of its assets in a frozen ConocoPhillips stock fund that was transferred from the old plan in connection with the Phillips 66 spinoff.

When the value of ConocoPhillips stock held by the Phillips 66 plan dropped, participants sued the plan’s investment committee and its members, along with the plan’s financial administrator, alleging imprudence and failure to diversify plan assets in violation of ERISA. In reply, defendants argued that ConocoPhillips stock was not subject to the duty to diversify, as those shares were “employer securities” when issued; ConocoPhillips was previously the employer of the participants. Therefore, defendants argued, ConocoPhillips stock remained exempt from the duty to diversify despite Phillips 66’s spin-off from the ConocoPhillips controlled group.

The court rejected this aspect of defendants’ argument, holding that stock does not indefinitely retain its character as “employer securities” for purposes of ERISA’s diversification and prudence requirements. Ultimately ruling in favor of defendants, the court held that ERISA’s diversification and prudence requirements were not violated because the plan’s investment lineup overall was diversified, public information on the risks of ConocoPhillips stock was reflected in its market price, and because the claims about procedural imprudence lacked factual support in the complaint’s allegations. The Schweitzer court also emphasized that participants were free to shift their ConocoPhillips holdings to other investment options under the plan.

Continue Reading Court Holds That Shares of Former Parent Company Are No Longer “Employer Securities” After Spinoff

FICA’s special timing rule for account balance plans is oft-misunderstood – and misapplied – which can lead to unfavorable consequences for employers and employees alike.  Partner Debbie Hoffman and senior associate Stephanie Vasconcellos recently revisited the rule, conducting an in-depth analysis for Bloomberg BNA’s Tax Management Compensation Planning Journal.  Access the full article at www.bna.com or by clicking here.

Reproduced with permission from Tax Management Compensation Planning Journal, Vol. 46, 8, p. 135, 08/03/2018.  Copyright © 2018 by The Bureau of National Affairs, Inc. (800-372-1033), www.bna.com.

On April 23, 2018, the U.S. Department of Labor (“DOL”) issued Field Assistance Bulletin No. 2018-01 (the “FAB”), which revisits two important topics relating to ERISA plan investments: (1) whether and to what extent a fiduciary can consider environmental, social and governance (“ESG”) factors when deciding between different investment options and (2) the exercise of shareholder rights.

The FAB clarifies that while ESG factors can present economic risks or opportunities that can be appropriately considered as part of an economic analysis, prior guidance should not be read to suggest that an investment’s promotion of ESG factors or positive market trends means that the investment is automatically a prudent investment choice. Rather, fiduciaries must always focus on the economic interests of plan beneficiaries and must be careful not to put too much weight into ESG factors. Continue Reading DOL Issues Guidance on the Use of Environmental, Social and Governance Factors in Evaluating Plan Investment Options and the Exercise of Shareholder Rights

In welcome news, the IRS reversed its course on the maximum annual health savings account contribution for a family with high deductible health coverage. As you may recall, the IRSHSA Increase initially set the maximum 2018 HSA contribution for family coverage at $6,900. In March 2018, the IRS lowered that maximum to $6,850. Via Rev. Proc. 2018-27, the IRS announced its decision that—notwithstanding its March guidance—it would allow taxpayers to treat $6,900 (not $6,850) as the maximum family HSA contribution for 2018.

The IRS also provided relief for those taxpayers who had already contributed between $6,850 and $6,900 to an HSA for 2018, and then received a distribution of that excess amount plus earnings based on the IRS’s March guidance. Forms of relief include timely repaying the distribution to the HSA, retaining the distribution as an excess contribution, or, if attributable to employer contributions, using it to pay qualified medical expenses.

We have updated our previous limitations post to reflect these changes, and will continue to do so should further changes arise for 2018.

HSA

On March 5, 2018, the IRS announced adjustments – effective immediately – to various annual limitations already in place for 2018.  One such adjustment is to the maximum annual health savings account contribution for a family with high deductible health coverage.  Previously set at $6,900 for 2018, the IRS has lowered the limit to $6,850, based on a change to the calculation of cost-of-living adjustments under the Tax Cuts and Jobs Act.  (The maximum annual health savings account contribution limit for single coverage was not affected.)  Employers sponsoring high deductible health plans will want to consider how to communicate this late-breaking change, and its impact, to their health plan participants.  For example, individuals making contributions to their health savings accounts each payroll period may want to adjust their elections so as not to exceed the limit for 2018.  Those who have already contributed the full $6,900 should consider seeking a distribution of the excess $50 contribution prior to the end of 2018 in order to avoid adverse tax consequences.

In the same guidance, the IRS also lowered the maximum per child adoption assistance credit for 2018 from $13,840 to $13,810.  We have updated our previous limitations post to reflect these changes, and will continue to do so should further changes arise for 2018.

Just then, Goldilocks woke up and saw the three bears.  She screamed, “Help!”  And she jumped up and ran out of the room.  Goldilocks ran down the stairs, opened the door, and ran away into the forest.  And she never returned to the home of the three bears.

 

In a previous post, we compared lawsuits against stable value funds for being too risky or too conservative to Goldilocks’ problem of having the porridge be just right—not too hot or too cold.

For stable value funds, it turns out, the porridge cannot be too cold. At least that was the opinion of the First Circuit, which became the first appellate court to rule on stable value funds. The opinion, issued on February 21, 2018, upheld the dismissal of a claim on summary judgment that Fidelity’s stable value fund was too conservative. Ellis v. Fidelity Management Trust Company, No. 17-1693 (1st Cir. 2018).

 

In Ellis, members of Barnes & Noble’s 401(k) plan sued Fidelity for offering a stable value fund called the Managed Income Portfolio (MIP). In the MIP, Fidelity allocated “investments away from higher-return, but higher-risk sectors,” partly in response to the 2008 financial crisis and partly to secure wrap insurance as insurers exited the market. The MIP exceeded its conservative benchmark, but produced lower returns than competitors’ stable value funds. Plaintiffs claimed this violated Fidelity’s duty of loyalty and prudence to plan participants.

 

As for disloyalty, the court “balk[ed] at the notion that a fiduciary violates ERISA’s duty of loyalty simply by picking ‘too conservative’ a benchmark for a stable value fund.” The court found it hard to comprehend how a fund defined by its conservativeness could violate the law by being too conservative. The very nature of the fund “warns the investor not to expect robust returns, and aligns expectations and results in a manner that is unlikely to harm or disappoint any investor who selects the fund.”

 

The court admonished the plaintiffs for ignoring “basic and obvious market incentives.” Plaintiffs’ loyalty theory largely centered on the assertion that Fidelity prioritized its interest in securing wrap insurance over the beneficiaries’ interest in higher returns. But by publishing a more conservative benchmark than its peers, Fidelity risked market share as there were “innumerable options available.” In a line helpful in more than just stable value fund cases, the court noted it is not disloyal for a fiduciary to take an action “aimed at furthering an objective [the fiduciary] shared with the beneficiaries,” such as a lower-risk investment option.

 

As for imprudence, the court found the same problems with plaintiffs’ disloyalty claims. The court stated plaintiffs “offer[ed] no authority, and we are aware of none, holding that a plan fiduciary’s choice of benchmark, where such a benchmark is fully disclosed to participants, can be imprudent by virtue of being too conservative.” As a practical matter, it would be hard or impossible to articulate a standard by which to determine if a benchmark is too conservative.

 

What the court did in Ellis essentially gutted the logical core of any argument that a stable value fund is too conservative. Those arguments, the court underscored, impermissibly rely on hindsight. Arguments a fund is “too conservative” arise only when the market performs well and therefore riskier options outperform their more conservative peers. Yet in response to plaintiffs’ best piece of evidence, a colorful email by a Fidelity employee criticizing the MIP’s lower returns as compared to its peers, the court mused “one can only imagine the mirror image e-mails of regret Fidelity’s competitors would have written had the markets collapsed instead of rebounding.”

 

It is not hard to imagine Ellis will lead to fairytale endings for other defendants. In Goldilocks, the girl never returned to the home of the three bears again. While companies cannot be as certain that stable value fund lawsuits will never return, Ellis gives defendants a strong ally in chasing away such cases.