Employee Benefits Development - July 2019

Hodgson Russ LLP

The Employee Benefits Practice is pleased to present the Employee Benefits Developments Newsletter for the month of July 2019. 

Electronic Filing of Top-Hat Statements and Apprenticeship and Training Plan Notices Required Effective August 16, 2019

Existing Department of Labor (DOL) regulations exempt a welfare plan that provides only apprenticeship or training benefits from the reporting (e.g., Form 5500) and disclosure requirements of Title I of ERISA if the employer files a notice with the DOL, takes steps that are reasonably designed to ensure that the information required to be contained in the notice is disclosed to eligible employees, and makes the notice available to eligible employees upon request.

A similar DOL regulation exempts a pension plan that is established for a select group of management or highly compensated employees (frequently referred to as a top-hat plan) from the reporting and disclosure requirements of Title I of ERISA if a “top-hat” statement is filed with the DOL.

Employers currently have the option to file any apprenticeship and training plan notices and top-hat statements either electronically or by mail. Beginning August 16, 2019, electronic filing for any apprenticeship and training plan notice or top-hat statement will be required. With respect to an apprenticeship and training plan, the changes do not alter the requirements that the employer must take steps that are reasonably designed to ensure that the information required to be contained in the notice is disclosed to eligible employees and to also make the notice available upon request. See: Electronic Filing of Notices for Apprenticeship and Training Plans and Statements for Pension Plans for Certain Select Employees.

Plaintiffs Win Early Battle in New Wave of Pension Litigation Over Actuarial Equivalence

A number of prominent companies that sponsor defined benefit pension plans are having to defend lawsuits commenced in the past several months that allege that the actuarial assumptions used to determine optional forms of benefit or early retirement benefits are outdated. As a result of using outdated actuarial assumptions, plaintiffs in this recent wave of lawsuits allege that plan benefits are being paid that are not actuarially equivalent to the annual monthly benefit (typically expressed a single life annuity) payable at normal retirement age. Plaintiffs in these cases generally are looking to be paid the differential between the plan benefit determined using the plan’s stated actuarial assumptions (i.e., interest and mortality assumptions) which may not have been updated for several years, and the plan benefit determined using more current assumptions.

U.S. Bancorp is one of the employers with a defined benefit pension plan that is facing an actuarial equivalence lawsuit. Plaintiffs in the case allege the early commencement factors (ECFs) used by the plan to determine benefit amounts payable upon early retirement are not reasonable and do not produce a benefit that is actuarially equivalent to the benefit payable at age 65, which plaintiffs assert violates ERISA. Defendants in the case made a motion to dismiss the case. In a ruling that appears to be the first substantive decision made by a court handling these actuarial equivalence cases, the District Court of Minnesota denied the defendants’ motion to dismiss – that will allow the plaintiffs in the U.S. Bancorp case to move forward with their claims.

In its Memorandum and Order, the court reviewed a number of claims made by the plaintiffs in the complaint, as well as the defendants’ arguments in favor of dismissing the case. Ultimately, the court was not persuaded that the case against the defendants should be dismissed. With respect to the plaintiffs’ claim that early retirement distributions must be the actuarial equivalent of the accrued benefit at normal retirement age, the defendants argued the plaintiffs’ claim effectively arises under Treasury regulations that do not provide a private right of action. The court rejected that argument because the regulations merely provide guidance and do not form the statutory basis for the relief sought by plaintiffs.

The defendants also asserted the plaintiffs are attempting to argue that ERISA imposes some “reasonableness” requirements with respect to the assumptions used to determine actuarial equivalence and that no such requirement exists. The court disagreed with the implication of the defendants’ argument (i.e., that there are no underlying requirements for calculating and applying the ECFs), and pointed to case law that suggests there are standards for determining actuarial equivalence. The court pointed in particular to the valuation rules of Section 417(e) of the Internal Revenue Code. The court ruled that plaintiffs alleged a plausible claim that the ECFs do not meet those valuation standards and therefore failed to provide plan participants with an actuarially equivalent benefit.

The court also ruled that the plaintiffs had stated a plausible claim for improper forfeiture of an accrued benefit. Distributions of early retirement benefits that are less than the actuarial equivalent value of the accrued benefit at normal retirement can constitute an impermissible forfeiture of accrued benefits. The case will be allowed to proceed so that a determination can be made as to whether benefits paid to plan participants are actuarially insufficient.

Finally, the plaintiffs’ complaint included a claim that the employer breached its fiduciary duty because the employer failed to monitor the benefits committee it appointed, which effectively allowed the committee to approve benefit payments that violated ERISA’s actuarial equivalence requirement. The defendants sought to have that claim dismissed on the basis of an insufficient pleading, and the court ruled that the facts alleged by the plaintiffs are sufficient to support the failure-to-monitor claim.

The decision not to grant early dismissal in the U.S. Bancorp case is no doubt of great interest (and perhaps some early disappointment) to the other prominent companies, including Pepsi, MetLife and Anheuser-Busch, who already are facing similar lawsuits. But the developments in this and other cases should be noted by all sponsors of defined benefit plans because early successes by plaintiffs in these cases might inspire plaintiffs’ attorneys to commence other similar lawsuits. Sponsors of defined benefit pension plans will want to monitor developments in this area and may wish to begin reviewing their plans’ definitions of actuarial equivalence for potential vulnerabilities. Smith v. U.S. Bancorp (D. Minn. 2019)

Employer Unable to Offset Voluntary Payments against Withdrawal Liability through Court Action

Dominick’s Finer Foods was a contributing employer to the UFCW Unions and Employers Midwest Pension Fund. Pursuant to collective bargaining agreements in effect from 2008 to 2012, Dominick’s agreed to make additional voluntary payments to the Fund. These voluntary payments were to be used to improve the funding status of the Fund and not counted as contributions or otherwise used in withdrawal liability calculations. The Fund agreed that if the voluntary payments exceed the amount that Dominick’s would have to contribute to the Fund pursuant to a rehabilitation plan schedule, the Fund trustees would provide an equitable credit to Dominick’s in the form of a reduced rate of contribution payments. In 2014, Dominic’s withdrew from the Fund and the Fund assessed withdrawal liability. Because these voluntary payments could no longer be applied as offsets to contributions, Dominick’s asked the Fund to offset its withdrawal liability by approximately $9.0 million of the voluntary payments that had not previously been offset against Dominick’s contribution to the Fund.

Dominick’s filed a lawsuit to compel the Fund to credit or refund the voluntary payments. The Fund made a motion to dismiss and claimed that Dominick’s failed to state a claim under Section 502(a)(10) of ERISA because Dominick’s is not within the scope of persons empowered to bring a civil action. The court agreed that Dominick’s could not bring an action under this provision of ERISA because it had withdrawn from the Fund and no longer had an obligation to contribute to the Plan and does not satisfy that Section’s stated definition of persons empowered to bring a civil action.

Dominick’s also argued that it was entitled to have these voluntary payments offset pursuant to state law. The court held that such an action was preempted by ERISA. The court found no problem with the fact that ERISA did not give Dominick’s standing pursuant to ERISA while also finding that ERISA preempted its state law cause of action.

It is unclear whether Dominick’s is totally excluded from receiving an offset as this claim may be part of the withdrawal liability arbitration matter that is continuing between the parties. Dominick’s Finer Foods, LLC v. UFCW Unions Emps. Midwest Pension Fund (N.D. Ill., 2019)

Incorrect Benefit Estimate not a Breach of Fiduciary Duty

A Bank of America employee sued a Bank of America Pension Plan for breach of fiduciary duty because a benefit estimate was incorrect. The estimate included years of service for which the employee had previously received a distribution of that related benefit. In other words, the estimate overstated the amount of benefits available to the employee. The employee claimed that this error was a breach of fiduciary duty.

The District Court for the Northern District of California disagreed, finding that preparation of an estimate of future benefits was not a fiduciary task. The court pointed to cases in the 9th Circuit and in the 1st Circuit which reached similar conclusions. The employee also argued that the Fiduciary Committee for the Plan failed to monitor the administrators of the Plan and therefore that failure rose to the level of a breach of fiduciary duty. The court also rejected this argument, finding that a single failure to produce an accurate benefit statement did not rise to the level of a breach of fiduciary duty for failure to monitor.

While the employee failed to win in this matter, plan administrators should make sure that all benefit estimates are prepared accurately, in order to avoid litigation relating to these types of claims. Wilson v. Bank of Am. Pension Plan for Legacy Cos. (N.D. Cal., 2019)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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