ERISA Fiduciary Rule Update – DOL Nonenforcement of ESG Investments and Proxy Voting Rules

Multiemployer Pension Plans Receive COVID Bailout

Tenth Circuit Awards a Decedent’s Life Insurance Proceeds to his Ex-Wife

Modifications to Code Section 162(m)

American Rescue Plan Act of 2021 – Single Employer Pension Funding Provisions

ERISA Fiduciary Rule Update – DOL Nonenforcement of ESG Investments and Proxy Voting Rules

As we reported in our February 2021 Employee Benefits Newsletter, new rules developed under the Trump administration regarding the circumstances in which fiduciary investment advisers are allowed to receive compensation for advice to ERISA-covered benefit plans, plan participants, and IRAs; and to engage in principal transactions, took effect in February. There has been no indication that the new administration’s Department of Labor (“DOL”) will not fully enforce those rules. However, the DOL announced this month that it will not enforce two other fiduciary rules issued under the prior administration. Specifically, the DOL announced that until it published further guidance, the DOL will not enforce or otherwise pursue enforcement actions against any fiduciary based on a failure to comply with either –

• The final rules that restrict retirement plan fiduciaries from considering non-pecuniary environmental, social and governance (“ESG”) factors when selecting the investments to be offered to plan participants (see our article describing the ESG rules in our December 2020 Employee Benefits Newsletter), or
• The final rules making it clear that an ERISA fiduciary’s proxy vote or exercise of other shareholders rights should not consider environmental, social, and corporate governance or other similar considerations in a manner that would subordinate the pecuniary factors being considered (see our article describing the ESG rules in our February 2021 Employee Benefits Newsletter).

Having received feedback from various stakeholders, the Biden DOL has decided it will revisit those two rules, which potentially signals a greater willingness to recognize the importance of ESG factors when a fiduciary selects and manages plan investments. This nonenforcement policy, however, does not preclude the DOL from otherwise enforcing any statutory requirement under ERISA, including the fiduciary duties of prudence and loyalty.

Multiemployer Pension Plans Receive COVID Bailout

As you may be well aware, many multiemployer pension plans have faced significant funding issues in recent years. While the problems with these multiemployer funds were not caused by the COVID pandemic, the recently passed American Rescue Plan Act of 2021 (“Act”) does contain what may be best described as a bailout of some of the most troubled multiemployer pension plans. Under the Act, certain qualifying multiemployer plans (plans which are either insolvent, projected to become insolvent, approved by the Treasury to suspend benefits, or have a modified funding percentage of 40% or less and more retirees than active participants) may be eligible for assistance. Under this assistance, the United States government (taxpayers) will fully fund vested benefits, including reinstatement of benefits previously suspended by a plan, for a period of 30 years. The projections are that approximately 185 multiemployer plans will be eligible for this relief and that the potential cost to American taxpayers is approximately $86 billion. These payments to the plans do not require that the plan return any payments or take any actions that might be viewed as helping to deal with perceived abuses that may have occurred in these plans.

While this is a very expensive proposal, it is good news for the participants in the plans whose benefits were suspended or if the plan would have become insolvent in the future.

What does this mean for employers who are participating in these plans? Here the answers are a little less clear. The House version of the Act contained a provision that said the assets being provided to these plans were not to be included in the calculation of withdrawal liability. In other words, the bailout provided to these plans would not help employers who have been assessed or are facing withdrawal liability from the plans. However, the Senate version of the Act (the version signed by the President) did not contain this provision. Therefore, it will be up to the Pension Benefit Guaranty Corporation to provide guidance on whether this bailout money will help reduce withdrawal liability within the plans. Many employers will be anxiously awaiting guidance on this issue from the PBGC.

Tenth Circuit Awards a Decedent’s Life Insurance Proceeds to his Ex-Wife

In a win for the English language, the Tenth Circuit decided “all means all.” The facts of this case are relatively simple. The Plaintiff and her ex-husband decided to get a divorce and, while executing the standard separation form, checked two boxes. The first box said, “The parties agree to the following terms relating to all life insurance accounts.” The second box stated, “The [ex-husband] will carry life insurance on [the Plaintiff] as beneficiary until daughter A.S. is 18 years of age.” Accordingly, when the ex-husband died three years later and before their daughter turned 18 years old, the Plaintiff sought to collect under the ex-husband’s life insurance policy through his employer ExxonMobil.

The issue arose when ExxonMobil informed the Plaintiff that she was not a beneficiary under her ex-husband’s life insurance plan and that it determined her divorce decree did not meet the requirements to be a qualified domestic relations order (“QDRO”). In order for a domestic relations order to be qualified as a QDRO, it must clearly specify: 1) the name and the last known mailing address of the participant and each alternate payee; 2) the amount or percentage of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined; 3) the number of payments or period to which the order applies; and 4) each plan to which the order applies. 29 U.S.C. § 1056(d)(3)(C).

Following ExxonMobil’s determination, the Plaintiff brought an unsuccessful suit because the district court agreed that the decree was not a QDRO. The district court made this finding for two reasons. First, the court noted “no plan is identified or named in the separation agreement, and … it is not entirely clear whose life is to be insured and who the intended beneficiary is.” Second, the court said the decree did not clearly identify the amount of the benefit to be paid to the Plaintiff.

On appeal, the Tenth Circuit ruled for the Plaintiff by finding that the decree met all the requirements to be a QDRO. With regard to the second element above, the court said it was clear that the Plaintiff was entitled to 100% of the benefits because no other beneficiary was listed in the second checked box. Moreover, regarding the fourth element, the court said the decree clearly specified that it applies to “all life insurance accounts” pursuant to the first checked box in the separation agreement. It was irrelevant that the decree did not name the ExxonMobil plan since “all means all.” As a result, the decree was found to be a QDRO and the Plaintiff was entitled to the life insurance proceeds. Festini-Steele v. ExxonMobil Corp. (10th Cir. 2021).

Modifications to Code Section 162(m)

Section 162(m) of the Internal Revenue Code limits the amount of compensation deductible by a public company to $1 million per taxable year per covered employee. The Tax Cuts and Jobs Act of 2017 (“TCJA”) made significant changes to Section 162(m), including modifying which employees are covered employees subject to the $1 million deduction limit. Post-TCJA, a public company’s covered employees for a taxable year generally include (i) an employee who is the CEO or CFO at any time during the taxable year, (ii) an employee who is among the three most highly compensated executive officers (other than an executive officer serving as CEO or CFO) serving at any time during the taxable year, and (iii) any employee who was a covered employee in any preceding taxable year beginning after December 31, 2016.

The American Rescue Plan Act of 2021 (“Act”) expands the number of employees treated as covered employees for purposes of the $1 million deduction limit under Section 162(m). For taxable years beginning after December 31, 2026, a covered employee will also include any employee who is among the five highest compensated employees for a taxable year other than an employee described in (i) or (ii) above. Importantly, the “once a covered employee always a covered employee” provision described in (iii) above will not apply to this new category of covered employee under the Act.

On its face, the Act does not appear to restrict covered employee status to executive officers who have policymaking roles with the company. Since covered employee status is based on the executive compensation disclosure rules under the Securities Exchange Act of 1934, public companies may need to examine their tracking systems to take into account non-executive officers.

American Rescue Plan Act of 2021 – Single Employer Pension Funding Provisions

The American Rescue Plan Act of 2021 (“Act”) provides funding relief for single employer pension plans in the form of interest rate stabilization and extending the period for amortizing funding shortfalls.

Extension of Amortization Period for Funding Shortfalls

The “shortfall amortization charge” oftentimes represents a significant portion of the annual minimum required contribution (“MRC”) that is required to be made to a single employer pension plan. The shortfall amortization charge is a function of the “shortfall amortization installments” and the “shortfall amortization base.” The shortfall amortization base for a plan year is generally equal to the plan’s funding shortfall, minus the present value of any outstanding amortization installments for prior plan years. Meanwhile, the shortfall amortization installments represent the amount necessary to amortize the shortfall amortization base for any plan year in level installments over seven years – in other words, the shortfall amortization base for the current plan year becomes a part of the MRC for that plan year and for each of succeeding six plan years.

The Act provides for significant changes to the development of the shortfall amortization charge. It provides for a fresh start, where shortfall amortization bases for plan years preceding the 2022 plan year (or, at the election of the plan sponsor, the 2019, 2020 or 2021 plan years) are reduced to zero. Thus, a plan’s actuary will determine an initial shortfall amortization base for the 2022 plan year (or such earlier year elected by the plan sponsor). The newly determined shortfall amortization base will then be amortized over 15 years, rather than over seven years as provided for under pre-Act law.

Accordingly, the changes made by the Act have the effect of lengthening the period for amortizing the shortfall amortization base and, therefore, resulting in lower MRC’s.

Interest Rate Stabilization

The MRC for a plan year is highly dependent on the interest rates used by the plan’s actuary. The lower the interest rate, the higher the MRC. Historically low interest rates in recent years have resulted in plan sponsors facing seemingly endless increases in their MRC’s.

In developing the interest rate, the plan’s actuary looks at average yields on high-quality corporate bonds over a 24-month period for three segments. The first segment rate applies to benefits reasonably determined to be payable during the next five years and is based on corporate bonds maturing during the five-year period. The second segment rate applies to benefits reasonably determined to be payable during the following 15 years and is based on corporate bonds maturing during this 15-year period. Lastly, the third segment rate applies to benefits reasonably determined to be payable following the end of the 15-year period and is based on corporate bonds maturing after the end of the 15-year period.

Pre-Act rules were intended to smooth interest rates by applying a corridor to average interest rates on high-quality corporate bond yields over a 25‑year period. These rules stabilized the segment rates by increasing or decreasing those rates to be within a corridor of the 25-year averages. Through the end of the 2020 plan year, the corridor was set at 10%, but was then set to widen by 5% per year until reaching 30% for the 2024 plan year. Because current interest rates are lower than 25-year average interest rates, the widening of the corridor would cause MRC’s to increase.

The Act modifies the interest rate stabilization rules in several respects. The corridor for the 2020 plan year and continuing through the 2025 plan year is set at 5%. Beginning for the 2026 plan year, the corridor will increase by 5% each plan year, until it reaches 30% for the 2030 plan year. In addition, the Act provides for an interest rate floor of 5% on the average 25-year rates.

The Act provisions are generally effective for the 2020 plan year, though a plan sponsor may elect not to apply the rules for any plan year preceding the 2022 plan year, either for all purposes or solely for purposes of the benefit restriction rules under Section 436 of the Internal Revenue Code.