The Employee Benefits practice is pleased to present the Benefits Developments Newsletter for the month of April 2018. Click through the links below for more information on each specific development or case.
Budget Act Makes Hardship Withdrawal Changes
The Bipartisan Budget Act of 2018 (the “Budget Act”) was enacted to extend funding for the federal government through March 23, 2018. The Budget Act includes changes to the hardship withdrawal rules for 401(k) plans, including changes that were originally considered for inclusion in (but ultimately dropped from) the Tax Cuts and Jobs Act enacted in late 2017.
Effective for plan years that begin after 2018, a 401(k) plan will be able to –
Drop the requirement that participant elective deferrals and after-tax contributions be suspended for a period of at least six months following a hardship withdrawal. The Act directs the Treasury Department, within one year from the Budget Act’s enactment date, to issue updated regulations removing the six-month restriction on elective deferrals and after-tax contributions.
Grant hardship withdrawals of the earnings on elective deferrals (and not just the elective deferrals themselves), as well as hardship withdrawals of qualified non-elective contributions (QNECs), qualified matching contributions (QMACs) and safe harbor 401(k) contributions, including earnings.
Drop the requirement that a participant first obtain any available plan loans from the plans sponsored by the employer before taking a hardship withdrawal.
To implement any of the hardship withdrawal changes, an amendment to the plan document may be needed.
Fifth Circuit Joins Other Federal Circuit Courts in Applying De Novo Standard of Review to Claim Denials Based on Legal Interpretation and Facts
When minor, Ariana M.’s, claim for partial hospitalization benefits to treat her eating disorder was denied, she sued, claiming that the health insurer, Humana, was not entitled to deference regarding the factual determination that her treatment was no longer medically necessary. The federal district court reviewing the health plan’s administrative denial of Ariana’s claim gave deference to Humana’s factual determination that she was medically stable, and no longer required such intensive treatment. The full Fifth Circuit panel reversed the lower court’s grant of summary judgment to Humana and overruled 27 years of precedent under Pierre v. Conn. Gen. Life Ins. Co., 932 F.2d 1552 (5th Cir 1991), which applied a favorable abuse of discretion standard of review to a plan administrator’s factual determinations. The Fifth Circuit now joins all other federal circuit courts in holding that the standard of review of a plan administrator’s decision does not depend on whether the denial is based on grounds of legal interpretation or fact.
Under the U.S. Supreme Court’s decision in Firestone Tire & Rubber Co. v. Bruch, a court reviewing the plan administrator’s denial of a claim is limited to determining whether an abuse of discretion has occurred when plan contains a valid clause delegating discretionary authority to the plan administrator. In cases where no valid delegation of discretion is made in the plan document, circuit courts outside of the 5th Circuit have applied a uniform de novo standard of review for both legal and factual claim determinations. The de novo standard allows the court reviewing the claim to consider afresh the bases for a claim denial. In contrast, Pierre bifurcated the standard of review, applying a de novo standard to matters of plan interpretation, and an abuse of discretion standard to factual determinations. Under Pierre, the de novo standard of review never applied to a plan administrator’s factual determinations, even in situations where the ERISA plan did not have a clause delegating discretionary authority.
Quoting the rock band Three Dog Night’s 1969 hit, “One,” the Fifth Circuit panel expressed that it no longer wished to be the sole circuit applying a bifurcated legal standard for ERISA plan claims: “Although sometimes there is virtue in being a lonely voice in the wilderness, in this instance we conclude that one really is the loneliest number.”
The en banc Fifth Circuit panel remanded the determination of whether Ariana’s treatment was medically necessary to the lower court to apply the de novo standard to the factual determination made by Humana. Ariana M. v. Humana Health Plan of Texas, Inc., 884 F.3d 246 (5th Cir. 2018).
Administrator’s Delay Costs it Deferential Standard of Review
The District Court for the Southern District of Florida ruled that an administrator’s delay in rendering a decision on a denied benefit appeal caused it to lose deferential treatment from the reviewing court. In this case, a plan participant waited 231 days without receiving a decision on his appeal of a denied claim for long-term disability benefits before filing his lawsuit. Employee Retirement Income Security Act (ERISA) claims procedure regulations generally require an administrator to make a determination within a 45-day period, with the possibility of one 45-day extension. As a general rule, an Employee Retirement Income Security Act (ERISA) claimant must exhaust available administrative remedies before bringing a claim in federal court. However, when a plan fails to establish or follow reasonable claims procedures consistent with the requirements of ERISA, a claimant need not exhaust because his claims will be deemed exhausted. Here the court noted that the lengthy delay was largely the administrator’s fault and that, as a result, the participant was deemed to have exhausted the plan’s administrative remedies. Following the Department of Labor’s interpretation of the regulation and case law from other circuits, the court determined that the administrator’s failure to abide by ERISA’s procedural requirements would cause the benefit denial to be reviewed by the court under a less deferential “de novo” standard. Under this standard, a reviewing court may analyze the facts of the case to reach its own decision without giving deference to a plan administrator’s decision. Under a “de novo” standard, a court is more likely to reverse a plan’s decision to deny a benefit claim. This case serves as a reminder for plan administrators to be familiar with and timely adjudicate claims in accordance with their claims procedures. Johnston v. Aetna Life Ins. Co., (S.D. Fla. 2018).
Stable Value Fund Withstands ERISA Challenge
Participants in a 401(k) plan challenged whether the stable value fund offered as an investment option represented a breach of fiduciary duty. The participants claimed that the manager of the fund was too conservative in the choice of investment options utilized within the stable value fund. The participants alleged that from 2010 through 2013 between 27% and 55% of the stable value fund assets were invested in highly liquid, short-term cash equivalent investments. Further, the participants alleged that the percentage invested in very conservative investments was at or above the highest levels held by other stable value fund and other stable value funds had limited these type of investments on average to 5% to 10% of their holdings. As a result the participants claimed that this portion of the fund had very small investment returns ranging from 0.28% to 0.17%.
The District Court for the District of Rhode Island granted the Defendant’s motion to dismiss this case and the First Circuit Court of Appeals upheld the dismissal. The First Circuit Court held that the Plaintiff’s claims were based on a type of “hindsight” analysis of past performance and held that those allegations are not sufficient to support a claim that plan fiduciaries were imprudent in making conservative investment decisions.
The decision in this case is similar to a decision reached earlier this year by the First Circuit Court of Appeals. In that case Plaintiffs alleged that the stable value fund’s relatively low returns compared to other stable value funds was the result of disloyalty and imprudence under ERISA. In that case the Court held that plans may offer stable value funds and which could be intentionally and openly designed to be conservative. The Court stated that there’s no authority holding that a plan fiduciary’s choice of a benchmark, where the benchmark is fully disclosed to participants, can be imprudent by virtue of being too conservative. Barchock v. CVS Health Corp., (1st Cir. 2018), Ellis v. Fid. Mgmt. Tr. Co., (1st Cir. 2018).