In 2020, the Department of Labor (DOL), in its guidance issued under the Employee Retirement Income Security Act of 1974, as amended (ERISA), remained principally focused on the development of its Fiduciary Rule 3.0 and associated Prohibited Transaction Exemption 2020-02, plus its financial factors and proxy voting regulations. Otherwise, DOL provided limited ERISA guidance in 2020. In particular, the volume of 2020 subregulatory guidance was generally scaled down, even as compared to the spare guidance issued in 2019.
- DOL issued one Advisory Opinion (the same as in 2019) and one Information Letter.
- DOL issued two individual exemptions (including an Expro authorization) from the ERISA prohibited transaction rules, down from eight in 2019. DOL issued one new class exemption.
- DOL did not issue any field assistance bulletins or technical releases in 2020.
ESsentials: This further decline in output may have reflected, in some combination, (i) normal regulatory practice in a Presidential election year, (ii) the Trump Administration’s continuing deregulatory bent including executive orders constraining subregulatory guidance, (iii) effects of the pandemic, (iv) the allocation of resources to Fiduciary Rule 3.0 and the other regulation projects, and (v) the inability of DOL and applicants to reach agreement on requests for guidance. For example, the advisory opinions issued in recent years tend to serve a specific DOL agenda beyond responding to guidance requests from the regulated community.
In 2018, LP Management Services, LLC (LPMS) requested an advisory opinion on whether LPMS’s proposed health plan constituted an ERISA employee welfare benefit plan, and if so, whether it would be a single-employer group health plan. After its request for an opinion went unanswered for almost a year, LPMS filed a complaint for declaratory and injunctive relief against DOL in the United States District Court for the Northern District of Texas.
LPMS is the general partner to a Texas limited partnership, which has thousands of limited partners. The limited partnership specializes in the production and sale of data that it collects from its limited partners through software installed on their electronic devices. At the time the request was submitted, the limited partnership sought to establish a health plan sponsored by LPMS and under which both its common-law employees (a small number, and perhaps only one) and its limited partners would be eligible to participate. The proposal contended that the limited partners were employees or working owners for ERISA purposes because they regularly voted on how their data was sold and used by the limited partnership, committed time to revenue-generating activity on behalf of the limited partnership and received guaranteed payments in the form of income distributions.
DOL issued its Advisory Opinion in 2020, finding that the plan was not governed by ERISA for three reasons. First, the so-called services provided by the limited partners to the limited partnership did not constitute a traditional employment or services-based relationship. Second, the limited partners did not have a meaningful ownership interest in the limited partnership. And, third, even if the limited partners were eligible to participate, the presence of one common-law employee was not sufficient to extend ERISA coverage to all of the limited partners.
In Data Marketing Partnership v. Scalia, 2020 WL 5759966 (N.D. Tex. Sep. 28, 2020), the district court disagreed with DOL and found that the plan constituted a single-employer ERISA plan. It set aside DOL’s opinion as arbitrary and capricious under the Administrative Procedure Act. DOL appealed the decision to the United States Fifth Circuit for the Court of Appeals in November of 2020.
On June 3, 2020, DOL issued an Information Letter concluding that a plan fiduciary could provide for a professionally managed fund that contains a private equity component as a designated investment alternative in a defined contribution plan consistent with its responsibilities under ERISA. DOL outlined specific factors that a fiduciary might weigh when considering a fund that includes private equity. But DOL was clear that the Information Letter does not address private equity investments as a direct investment by participants on a standalone basis. For more information on the Information Letter, please see our legal alert.
Prohibited Transaction Exemptions
DOL is authorized to grant a conditional or unconditional exemption for an otherwise prohibited transaction if it determines that the exemption is: (1) administratively feasible; (2) in the interests of the plan and of its participants and beneficiaries; and (3) protective of the rights of plan participants and beneficiaries.
DOL issued one individual prohibited transaction exemption (PTE) in 2020, an output that is significantly less than in recent years—seven in 2019, nine in 2018, seven in 2017, and ten in 2016. For more information on the PTE process, please see our ERISA individual prohibited transaction exemption guide which comprehensively documents and indexes individual exemptions issued from 1996-2020.
The category of the issued PTE this year follows a familiar fact pattern. PTE 2020-01 permits a firm to continue to rely on PTE 84-14 notwithstanding criminal convictions of affiliates unrelated to QPAM activities.
In 2020 DOL also authorized a prohibited transaction under its Expedited Exemption Procedure (Expro), after issuing only one in 2019 as well. It finalized an authorization, permitting the purchase by a plan sponsor/union local of an office building for the purpose of leasing office space to the plan and other related plans following the completion of the sale.
ESsentials: Expro applications must be based on (1) two Expro authorizations in the last 5 years or (2) a PTE in the last 10 years and an Expro authorization in the last 5 years. As the number of exemptions continues to decline, and coupled with the manner in which DOL is exercising its discretion to allow applicants to proceed under Expro, it seems probable that Expro will remain of limited utility.
As noted above, DOL issued class exemption PTE 2020-02 in connection with Fiduciary Rule 3.0.