Employee Benefits Developments September 2021

Hodgson Russ LLP

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

District Court Upholds Plan Administrator’s Use of COVID Special Valuation Date

Retiree’s Case to Avoid Plan Recoupment of Pension Overpayment Dismissed

Certain Restitution Orders Override ERISA’s Anti-Alienation Provisions

IRS Issues Revenue Procedures Governing Amendments of 403(b) and 401(a) Plans

IRS Grants Waiver of 60-Day Rollover Period

Agencies Delay Health Plan Transparency/No Surprises Rules


District Court Upholds Plan Administrator’s Use of COVID Special Valuation Date

Behan Brothers, Inc. (the “Company”) sponsored the Behan Brothers, Inc. Retirement Plan (the “Plan”). The Plan was a profit sharing plan that provided for pooled investments, rather than allowing each participant to direct the investment of his or her own account. The Plan’s assets and participants’ accounts were generally valued once a year on December 31. The annual valuation typically took several months to complete. In response to significant market volatility in early 2020 due to the COVID pandemic, the Plan’s administrator elected to implement a special valuation date as of April 30, 2020. The Plan document allowed the Plan’s administrator to declare a special valuation date in extraordinary circumstances, such as where there is a significant change in economic conditions or the market value of the Plan’s assets. It also included Firestone language granting broad general discretionary authority to the administrator in administering the Plan and interpreting the Plan’s terms.

Three retired employees who retired in 2018 requested to receive a distribution from the Plan based on the December 31, 2019 valuation date. When the administrator subsequently elected to implement the April 30, 2020 special valuation date and to process the requested distributions using the special valuation date rather than December 31, 2019, the retired employees brought suit.

In denying the former employees’ claim for benefits, the district court held that the administrator’s decision to implement a special valuation date in response to the significant market volatility at the outset of the COVID pandemic was reasonable. Had the administrator continued to use the traditional December 31 valuation date, other participants’ would have borne the losses incurred by the former employees’ accounts from December 31, 2019 to April 30, 2020. For similar reasons, the district court also rejected the former employees’ breach of fiduciary duty claims.

Virtually every ERISA plan includes Firestone language providing that the administrator has broad discretionary authority in administering and interpreting the plan, the effect of which is that a court reviewing an administrator’s decision will apply a deferential arbitrary and capricious standard of review. However, sponsors of employee stock ownership plans, profit sharing or money purchase plans, which are not valued on a daily basis, should review their plan’s document for purposes of whether the plan allows the plan’s administrator to declare a special valuation date and, if so, in what circumstances. (Lipshires v. Behan Bros., Inc. Retirement Plan; D.C.R.I., 2021).


Retiree’s Case to Avoid Plan Recoupment of Pension Overpayment Dismissed

Alan Hesse commenced his monthly retirement benefit from the CNH Industrial U.S. Pension Plan (“Plan”) in 1999. As a result of an internal audit in 2020, the Plan concluded that it had overpaid Hesse by $15,640. The Plan administrator communicated with Hesse regarding the error and stated its intention to recoup the overpayment by reducing his monthly benefit by $63.32 per month.

After his appeal to the Plan administrator disputing the overpayment recovery was denied, Hesse filed a lawsuit in federal district court on the basis that the Plan should be estopped by the doctrine of laches from recouping the overpayment. Upon defendant’s filing a motion to dismiss, Hesse recharacterized his state law claims as claims for equitable relief under ERISA §502(a)(3)(B).

Absent from Hesse’s complaint was any allegation that the recoupment of the overpayment was either a violation of ERISA, or of the terms of the Plan. As one of these contentions is required to state a claim for equitable relief under ERISA §502(a)(3)(B), the court dismissed Hesse’s ERISA cause of action.

The court went on to hold that it was not in a position to formulate federal common law to grant equitable relief to Hesse. Prior Seventh Circuit precedent and the unbending terms of ERISA’s “comprehensive and reticulated” statutory scheme did not provide the court with an opportunity to extend any avenue of relief to Hesse that was unavailable under ERISA’s existing enforcement scheme.

With no basis to proceed under ERISA or federal common law, the court was forced to dismiss the remainder of the case for lack of subject matter jurisdiction. Finally, the court held that because Hesse could not have brought his claims as alleged in his complaint under ERISA, his state law claims were not preempted by ERISA based on U.S. Supreme Court precedent.

Tax qualified plans must be operated in accordance with their terms, and pension plan overpayments are evidence that a participant has received more than is provided for under the terms of a plan. Plan administrators in such situations can contact legal counsel about following the available avenues for correcting overpayments under the IRS’s Employee Plans Compliance Resolution System (“EPCRS”). (Hesse v. Case New Holland Indus., Inc.; E.D. Wis., 2021).


Certain Restitution Orders Override ERISA’s Anti-Alienation Provisions

Over a ten year period, Jon Frank embezzled over $19,000,000 from his former employer. Frank pleaded guilty to one count of wire fraud. The District Court ordered Frank to serve time in prison and also to pay restitution in an amount of slightly over $19,000,000. The government had collected over $7,000,000 from Frank. The government then sought to garnish Frank’s 401(k) retirement account under the provisions of the Mandatory Victims Restitution Act of 1996 (“MVRA”). The MVRA grants the government broad authority to seek funds in order to provide restitution to victims of certain criminal acts.

The issue that arose was whether ERISA’s strong anti-alienation provision, sometimes known as the “spendthrift clause,” prevents the government from seeking access to Frank’s 401(k) account balance.

The Fourth Circuit faced this issue on appeal. The first issue the Court decided was whether the broad language in the MVRA granting the right to garnish funds overrides the anti-alienation provision under ERISA. The Fourth Circuit, following similar reasoning of cases decided in the Fifth and Seventh Circuits, found that the ‘notwithstanding clause’ of the MVRA served to override the anti-alienation provision of ERISA.

Once finding that the government could garnish the 401(k) account, the Court faced other issues. The Court found that the government stands in the shoes of the participant and the government may only receive those funds which the participant could receive. Therefore, the Court found that the government’s garnishment may only occur at the time that the plan participant had a right to receive those funds. In addition, the question arose regarding the effect of the requirement, under tax law, of 20% mandatory withholding and Frank also raised a question of the 10% additional income tax applicable to distributions under age 59½. The Fourth Circuit handed the case back to the District Court to decide these issues under the terms of the relevant plan documents. It may well be the case that the 20% withholding requirement is not specified in the plan document. However, it appears that the mandatory 20% income tax withholding should limit the government’s right to restitution of those amounts and the withholding would have to be paid to the IRS. With respect to the 10% additional tax, that issue is less clear as it does not involve a withholding obligation, it only involves Frank’s tax obligation. Additionally, the amount garnished by the government would appear to be exempt from the additional 10% income tax under IRC § 72(t)(2)(A)(vii). Note, the Fourth Circuit did not remand to the district court whether amounts should be set aside to allow Frank to pay the regular income tax on the amounts garnished from his 401(k) account. (United States v. Frank, 4th Cir., 2021).


IRS Issues Revenue Procedures Governing Amendments of 403(b) and 401(a) Plans

The Internal Revenue Service recently issued a pair of Revenue Procedures dealing with amendments for 403(b) tax sheltered annuity and 401(a) qualified retirement plans.

Rev. Proc. 2021-37 ushers in a few developments for 403(b) plans. First, the Cycle 2 submission period for providers to submit applications for opinion letters will begin on May 2, 2022 and run through May 1, 2023. At some point prior to May 2, 2022, the IRS will issue a cumulative list which will identify the changes 403(b) plans will have to address. This Revenue Procedure also clarifies that the remedial amendment period for form defects first occurring after the expiration of the initial remedial amendment period ends the later of (i) the end of the cycle that includes the date on which the remedial amendment period would have ended if the plan were an individually designed plan, or (ii) the end of the first cycle in which an application for an opinion letter that considers the form defected may be submitted.

In addition, Rev. Proc. 2021-37 states that the interim amendment deadline for non-governmental 403(b) plans is the end of the second calendar year after the calendar year in which the change in the 403(b) plan requirement is effective. For governmental 403(b) plans, the deadline is the later of (i) the end of the second calendar year following the calendar year in which the change in the 403(b) plan requirement is effective, or (ii) 90 days after the close of the third legislative session of the legislative body with the authority to amend the plan that begins on or after the amendment is effective.

Similarly, Rev. Proc. 2021-38 modifies the interim amendment for pre-approved 401(a) qualified retirement plans to match the deadline for non-governmental 403(b) plans. Now, an interim amendment is considered timely for a 401(a) pre-approved plan if it is adopted by the end of the second calendar year following the calendar year in which the change in qualification requirements if effective. This replaces the old deadline which was contingent on the employer’s tax-filing deadline.


IRS Grants Waiver of 60-Day Rollover Period

When an eligible qualified plan or IRA distribution is made and the recipient wishes to roll the distribution into another eligible retirement plan, it is widely understood that the recipient generally must complete the rollover within 60 days of receiving the distribution if the rollover is not otherwise accomplished under the direct rollover rules. For rollovers that are subject to the 60-day rollover period, it is worthwhile keeping in mind that there are available exceptions to the 60-day rollover period. In some circumstances, there are procedures under which a taxpayer who receives an eligible distribution from a qualified plan or IRA may be able to make a written self-certification to a plan administrator or IRA custodian that the taxpayer’s rollover contribution qualifies for a waiver of the 60-day rule. In other instances, a recipient may opt to request a ruling from the IRS waiving the 60-day rollover rule – those waivers can be granted where the failure to waive the rule would be against equity or good conscience, including casualty, disaster or other events beyond the reasonable control of the taxpayer.

A recently published IRS private letter ruling is an example of a situation where the IRS has been willing to grant a waiver of the 60-day rule. In Private Letter Ruling 202134019, the IRS granted a waiver of the 60-day rule. In that case, the taxpayer received a distribution of shares of company Y stock from IRA 1 due to the resignation of the IRA 1 custodian. The taxpayer arranged to have custodian P of IRA 2 hold the assets of IRA 1, including the company Y shares. IRA 2, however, did not receive the company Y shares within the 60-day rollover period. The taxpayer asserted she was unable to accomplish a rollover of the shares within the 60-day rollover period because she relied on company Y’s chief financial officer, who agreed to handle the transfer of shares and who failed to ensure that company Y shares of stock were received by IRA 2 within that 60-day period. After the 60-day period expired, custodian P advised the taxpayer in writing that it had tried contacting company Y’s chief financial officer on several occasions to inform him that IRA 2 did not receive the company Y shares of stock. Based on those facts, the IRS granted a waiver of the 60-day rollover rule with respect to the rollover of the distributed shares of company Y stock. The taxpayer was given 60 days from the issuance of the ruling to complete the rollover of the company Y shares.


Agencies Delay Health Plan Transparency/No Surprises Rules

The Departments of Labor, Health and Human Services, and the Treasury (collectively, the “Agencies”) issued Frequently Asked Questions (FAQs) regarding implementation of certain provisions of the Consolidated Appropriations Act (CAA). In the final days or 2020, the CAA was signed into law providing a number of obligations on health plans and their service providers relating to transparency. The recent guidance has extended the deadline for the enforcement of several of these rules. Among the provisions affected by this new guidance is:

  • Transparency in Coverage Machine-Readable Files.

The Transparency in Coverage Final Rules require group health plans to disclose information regarding in-network provider rates for covered services, out-of-network allowed amounts and billed charges for covered services, and negotiated rates and historical net prices for covered prescription drugs in three separate machine-readable files. The machine-readable file requirements were to be applicable for plan years beginning on or after January 1, 2022. However under this new guidance, the Agencies will defer enforcement of these rules applicable until July 1, 2022. Enforcement of regulations related to the publishing machine-readable files for prescription drug pricing will be deferred pending further rulemaking.

  • Price Comparison Tools

Under the CAA, group health plans are required to offer price comparison guidance by telephone and make available a “price comparison tool” that allows a participant to compare the amount of cost-sharing that the participant would pay for a specific item or service. This requirement is applicable with respect to plan years beginning on or after January 1, 2022. Under the new guidance, the deadline for the CAA price comparison tool has been delayed until plan years beginning on or after January 1, 2023.

  • Advanced Explanation of Benefits

The CAA requires plans to send a participant an Advanced Explanation of Benefits notification in clear and understandable language. These provisions were to apply with respect to plan years beginning on or after January 1, 2022. Under the new guidance, the Agencies will defer enforcement until regulations to fully implement the requirements are adopted and applicable.

  • Provider Directory

The CAA established provider directory standards. These provisions generally require plans to verify the accuracy of provider directory information and to establish a procedure for responding to participant requests about a provider’s network participation status. If a participant is provided inaccurate information by the plan under the required provider directory, the plan cannot impose a cost-sharing amount that is greater than the cost-sharing amount that would be imposed for items and services furnished by a participating provider or participating facility. Although these provisions are applicable with respect to plan years beginning on or after January 1, 2022, additional rulemaking will not be issued until after the effective date. Until additional guidance issued, plans are expected to implement these rules using a good faith, reasonable interpretation of the statute.

The CAA imposed a number of rules that will significantly change the way that group health plans are administered. These FAQs provide interim guidance and may change the timeline that plan sponsors may have developed for addressing the implementation of these new rules.

FAQs About Affordable Care Act and Consolidated Appropriations Act, 2021 Implementation Part 49 (Aug. 20, 2021)

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.

© Hodgson Russ LLP | Attorney Advertising

Written by:

Hodgson Russ LLP

Hodgson Russ LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.