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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

This post has been updated to reflect subsequent changes made by the IRS, as further described in this post.

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: Mayer Brown 2018 Annual Limitations Chart 2018 (updated to reflect changes described in this post).

Reflecting a slight uptick in inflation in the past year, several benefit plan limitation amounts will increase for 2018. Noteworthy changes for retirement plan participants include an increase in the elective deferral limitation for defined contribution plans from $18,000 to $18,500, which is the first such increase since 2015. The limit on compensation taken into account under qualified plans will rise from $270,000 to $275,000.

Health and welfare plan participants will also see some increases in the amounts contributable to health care flexible spending accounts and health savings accounts (although the latter increase comes at a price, namely, an increased minimum deductible for HSA-eligible high-deductible health plans). Small employers taking advantage of the fairly recent opportunity to provide Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) to eligible employees in 2018 can provide increased reimbursements of up to $10,250, up from $10,050, for family coverage. (QSEHRA maximums for self-only coverage will increase from $4,950 to $5,050.)