The Employee Benefits Practice is pleased to present the Employee Benefits Developments Newsletter for the month of June 2021. Click on the links below for more information on each specific development or case.

COBRA Subsidy Termination Notices Are Due

IRS Updates EPCRS Correction Program

Causation under ERISA in a Cybersecurity World

PBGC Issues Guidance on Financial Assistance to Multiemployer Plans and Impact on Withdrawal Liability

Department of Labor Issues FAQs Clarifying New Lifetime Income Disclosure Requirements for Defined Contribution Retirement Plans

COBRA Subsidy Termination Notices Are Due

Employers that provided subsidized COBRA coverage to assistance eligible individuals (AEIs) through the American Rescue Plan Act (ARPA) may now need to prepare subsidy termination notices. Under ARPA, plan administrators must notify AEIs about the end of their premium assistance period. This “Notice of Expiration of Period of Premium Assistance” must be furnished to AEIs no later than 15 days and no earlier than 45 days before the end of the subsidy period. If an AEI remained eligible for a subsidy through September 30, 2021 (the end of the maximum COBRA subsidy period), the termination notices must be sent no later than September 15, 2021. Although the COBRA subsidy period is coming to an end, COBRA qualified beneficiaries may remain eligible to continue COBRA coverage at their own cost. Here is a link to the Department of Labor model notice: https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/laws/cobra/premium-subsidy/notice-of-premium-assistance-expiration-premium.pdf

IRS Updates EPCRS Correction Program

Many sponsors of tax qualified retirement plans have become familiar with the IRS’s Employee Plans Compliance Resolution System (EPCRS) which provides guidelines sponsors may use to correct plan failures that are needed to preserve a retirement plan’s tax advantaged status. Three correction programs are available under EPCRS:

• Self-Correction Program (SCP) that may be used to correct certain plan failures without obtaining IRS prior approval or paying any user fee.
• Voluntary Correction Program (VCP) that may be used to correct other failures for which SCP is not otherwise available. VCP requires an application to the IRS and payment of a user fee. If the application is approved, VCP results in a signed IRS compliance statement approving corrective action proposed or described in the VCP application.
• Audit CAP which can be used when retirement plan has significant problems that are discovered by the IRS on audit or during a determination letter application process. Sanctions under Audit CAP normally would be greater than the user fee paid under VCP.

The parameters of the EPCRS program are laid out in an IRS Revenue Procedure that is updated from time to time. The most recent EPCRS Revenue Procedure (Revenue Procedure 2021-30) was updated and published in July. The highlights of the EPCRS changes made by Revenue Procedure 2021-30 include:

• SCP Expansions
  • Beginning July 16, 2021, plans may use SCP to correct significant operational failures provided the correction is completed by the last day of the third plan year following the year in which the failure occurred. Previously, correction had to be made by the last day of the second plan year following the year in which the failure occurred.
  • Beginning July 16, 2021, plans will be permitted to correct certain operational failures by adopting a retroactive plan amendment, and do so without requiring that all participants in the plan benefit from the retroactive amendment.
• Expanded Overpayment Correction Principles and Options
  • The new principles reduce the need to seek repayment from participants or beneficiaries who received overpayments and, in some cases, do not require the plan sponsor to reimburse the plan for overpayments to participants. But, recovery from the employer or another party or reduction in subsequent payments owed overpayment recipients are still permitted.
    • For defined benefit pension plans, there may be no need to recover overpayments from the plan sponsor or the individual who received the overpayment if the plan satisfies certain funding requirements. Alternatively, in some cases, certain contribution credits may be applied to reduce the amount of the overpayment (determined without interest) that needs to be repaid to the plan. These credits arise from the increased minimum funding contributions due to the reduction in plan assets or increases in liability due to the error or certain additional contributions. For purposes of EPCRS, if the amount of the overpayments is reduced to zero after the contribution credits are applied, then no additional corrective action needs to be taken to recover the overpayment. If a net amount is owed to the plan, then the plan sponsor or another party must reimburse the plan for the net amount owed.
  • Where necessary, multiple methods for recovering overpayments might be available, including installment payments, adjusting future benefit payments, or a single sum payment.
  • The limits on de minimis or small overpayments that will not require correction is increased from $100 to $250.
• Anonymous VCP Submission Changes
  • Effective January 1, 2022, the IRS is eliminating the procedures that permit anonymous VCP submissions.
  • Instead, effective January 1, 2022, the IRS will permit plan sponsors or their representatives to make an anonymous written request for a pre-submission conference to discuss a potential VCP submission at no cost to the plan sponsor. But any subsequent VCP application may not be anonymous.
• Safe Harbor Correction of Automatic Enrollment Failures Extended
  • Certain safe harbor correction methods have been available for missed elective deferrals for eligible employees who are subject to an automatic contribution arrangement in a Section 401(k) or 403(b) plan. Those safe harbors were scheduled to expire for failures that began after December 31, 2020. Revenue Procedure 2021-30 extends those safe harbors correction methods by three years for failures that begin on or before December 31, 2023.

EPCRS has been a valuable tool for plan sponsors and plan providers for addressing plan failures that inevitably arise in the maintenance and operation of qualified retirement plans. The changes made by the latest EPCRS guidelines provide helpful changes that continue to expand a plan’s correction options.

Causation under ERISA in a Cybersecurity World

The causation standard under Section 409(a) of ERISA is an issue that could lead to more litigation as cyberattacks on employee benefit plans increase. ERISA Section 409(a) provides that a plan fiduciary who breaches his/her fiduciary duties is personally liable for losses to the plan resulting from his/her breach. While determining when a loss results from a breach is often not that difficult for many ERISA claims, as more lawsuits involve lost assets due to cyberattacks, this has the potential to change.

For example, in an ERISA action claiming excessive fees were paid by the plan, it is not hard to draw the line of causation directly from the fiduciary’s insufficient administration process to the loss sustained by the plan (i.e. paying excessive fees). With a claim stemming from cybersecurity, however, it is harder to draw this direct line. If a cybercriminal gets ahold of an individual’s online retirement account password through no fault of a fiduciary, the individual has no 409(a) claim. But what if multi-factor authentication would have prevented this unauthorized distribution and the plan didn’t have it in place? In light of the Department of Labor’s guidance earlier this year directed at retirement plans, does failing to incorporate a recommended security feature provide sufficient connection for a 409(a) claim?

As it stands now, it is unclear what level of causation is required to have a viable 409(a) claim. This is potentially due to the fact that causation often isn’t a large focus of dispute during ERISA claims. The Eleventh Circuit holds that proximate cause is the standard. This would require a showing that the harm alleged has a sufficiently close connection to the conduct (or lack thereof) at issue. In contrast, the Second Circuit has merely noted that “some causal link” between the breach and the loss is required. This vague language leaves much to be desired because, in some sense, everything has some causal connection. Of course the Second Circuit won’t adopt this broad of a standard, but until they elaborate more, everyone is left in the dark.

To my knowledge, no court has looked at the causation component of an ERISA 409(a) claim stemming from a cyberattack. Outside of the ERISA context, however, courts have looked at similar questions. Back in 2014, hackers were able to retrieve sensitive personal information from over twenty-million former and present government employees by breaching multiple U.S. Office of Personnel Management databases. In a lawsuit stemming from that hack, one circuit court found that proximate cause was sufficiently alleged when a complaint contended that the defendant’s failure to establish industry-standard information security safeguards was the proximate cause of the stolen personal information. While this case did not deal with benefit plans, it shows that at least one court is willing to look at industry practices in the causation analysis at the pleading stage which could be relevant to an ERISA claim.

PBGC Issues Guidance on Financial Assistance to Multiemployer Plans and Impact on Withdrawal Liability

The American Rescue Plan Act of 2021 (ARP) provided for financial assistance to financially troubled multiemployer pension plans. The financial assistance provides eligible multiemployer pension plans with the amount needed to pay all benefits due through the plan year ending in 2051 above the plan’s available financial resources. The PBGC expects the program may provide $94.0 billion in benefit payments to more than 200 multiemployer plans. The PBGC also estimated that more than 100 plans that would have become insolvent during the next 15 years will avoid insolvency because of this financial assistance.

The PBGC issued this interim final rule without a notice or comment period. Therefore, the rule takes immediate effect. However, the PBGC invited comments and may revise the rule in light of the comments received. Much of the regulation deals with operational rules for multiemployer pension plans that receive financial assistance. However, the regulation also specifies rules regarding the calculation of withdrawal liability for plans receiving this assistance.

ARP itself, as enacted, did not contain rules governing how this assistance was to be factored in for withdrawal liability purposes. ARP did indicate that the PBGC should issue regulations.

The PBGC regulation indicates that the financial assistance is to be included as an asset of the plan when withdrawal liability is computed. While initially this might seem that it would lower withdrawal liabilities for employers, another provision may eliminate that prospect. The PBGC regulation also provides that in calculating withdrawal liability, a plan receiving this assistance must use the actuarial factors that would be applicable in a mass withdrawal. Under these rules, the interest rates and other actuarial assumptions attempt to be similar to what market annuity purchase rates are. This interest rate would be much lower than many plans currently utilize. In fact, the current interest rate of just above 2% would be lower than the rate used by plans that use the plan’s funding interest rate assumption or even a blending method (such as the Segal Blend) for determining interest rates. Additionally, any settlement of a withdrawal lability of an amount greater than $50 million requires PBGC approval.

The reason for not providing withdrawal lability relief to employers is to not encourage employers to leave the plan which could result in mass withdrawals or otherwise weaken the financial stability of these troubled plans.

Finally, in a rather surprising development, the PBGC indicates that it may be providing guidance on actuarial factors and interest rates to be used in general when calculating withdrawal liability for plans not receiving assistance. This guidance may resolve many of the disputes currently ongoing between employers who have withdrawn from a plan and multiemployer pension funds. Whether this guidance will be helpful to employers is unknown. PBGC Interim Final Rule, Special Financial Assistance by PBGC, https://www.govinfo.gov/content/pkg/FR-2021-07-12/pdf/2021-14696.pdf.

Department of Labor Issues FAQs Clarifying New Lifetime Income Disclosure Requirements for Defined Contribution Retirement Plans

On July 26, 2021, the U.S. Department of Labor issued Temporary Implementation FAQs regarding the new lifetime income illustration (“LII”) requirements for defined contribution retirement plans under Section 203 of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”). The DOL previously published an Interim Final Rule (“IFR”) containing a detailed explanation of how plan administrators must implement the LII requirements, including mandatory assumptions for LII calculations and model language. (see our article here).

The FAQs do not amplify the IFR in terms of the substance of the LII requirements, under which all defined contribution retirement plans subject to ERISA must provide annually two illustrations showing the participant’s account balance projected as a single life annuity and a 100% joint and survivor annuity. Rather, the FAQs respond to IFR commenters’ concerns regarding the timeframe for implementation.

First, the FAQs clarify that because the IFR becomes effective September 18, 2021, there are two compliance deadlines for retirement plans to satisfy the annual LII requirement:

• Participant-directed individual account plans that furnish quarterly statements have until the second calendar quarter of 2022 to incorporate the LII.
• For non-participant-directed individual account plans, the LII must be included on the first statement for the plan year ending on or after September 19, 2021. Typically, annual plan year statements for calendar year 2021 would be furnished no later than the last date for filing the plan’s annual return, October 15, 2022.

Of course, plan administrators may choose to implement the annual LII statements at an earlier time that conforms best to the plan’s current benefit statement distribution cycle.

Next, the FAQs state that plan administrators may continue to issue LII’s based on the DOL’s 2013 Advance Notice of Proposed Rulemaking, but such illustrations will not conform to the IFR assumptions and model language requirements. Therefore, plan administrators that provide illustrations other than in a manner set forth in the IFR will not have protection against ERISA fiduciary claims that may be brought against them based on the non-conforming lifetime income illustration disclosures.

Finally, the DOL confirms its intention to issue final regulations “as soon as practicable,” and in any event before the effective date of September 18, 2021. The DOL indicated that transition guidance might be forthcoming if the final rule contains material changes from the IFR.

https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/temporary-implementing-faqs-lifetime-income-interim-final-rule.pdf