IRS Provides Some Clarification on Partial Plan Termination Relief

The Consolidated Appropriations Act of 1921 ("CAA") provided several COVID-related relief provisions for employee benefit plans. One item included in the CAA was relief from the partial termination rules for qualified retirement plans. There had been a concern that workforce reductions in connection with the COVID pandemic would trigger partial terminations for qualified retirement plans, which would require full vesting for affected participants. The CAA included provisions that offered temporary relief for the period from March 13, 2020 through March 31, 2021, where the number of active plan participants on March 31, 2021 is not less than 80% of the number of active plan participants on March 13, 2020. In order to allow plan sponsors to better apply the relief granted by the CAA, the IRS has provided a piece of informal guidance as to how these rules will work.

First, the IRS has stated that relief is not limited to reductions in workforce related to the COVID pandemic. The measurement of an 80% reduction applies whether or not the reductions were related to the pandemic.

Second, the IRS has provided that if any part of the plan year falls within the period beginning on March 13, 2020 through March 31, 2021, then the relief applies to the entire plan year. For example, for calendar year plans, the relief would apply to the entire 2020 and 2021 plan years.

Third, the guidance indicates that a reasonable good faith interpretation of the term “active participant covered by the plan” may be used in determining whether or not a reduction occurred and is not less than 80% of the number of active plan participants on March 13, 2020 had occurred. In making this determination, the same good faith interpretation should be applied both at the beginning measurement date and on the ending measurement date.

While this answers some of the questions that will be faced when applying the CAA relief, additional questions may arise and we look forward to the IRS providing additional guidance to employers in the future.

Coronavirus-related relief for retirement plans and IRAs questions and answers https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers

IRS Issues 2021 Operational Compliance List for Qualified Retirement Plans

In conjunction with the elimination in 2017 of the determination letter program for individually designed plans, the IRS began publishing an Operational Compliance List (“OC List”) for qualified retirement plans. Because operational compliance with changes in the law affecting qualified retirement plans is often required before the deadline for amending plan documents, the OC List describes mandatory and discretionary changes in the qualification requirements for tax qualified and 403(b) retirement plans that are effective in each calendar year.

In addition to the OC List, the IRS issues annual Required Amendments Lists setting forth the statutory and administrative changes in qualification requirements that are first effective during the plan year. In combination, the OC List and the Required Amendments Lists provide plan administrators with a basic inventory of relevant changes in law or IRS guidance affecting their retirement plans.

The 2021 OC List includes the following new operational requirements for 2020, 2021 and 2022:

Effective in 2020:

• SECURE Act
  • Rule clarifications reflected in IRS Notice 2020-68, including rules for:
    • Qualified birth or adoption distributions.
    • Treating foster care difficulty-of-care payments as eligible Code Section 415 compensation.
    • Allowing anti-cutback relief for plan amendments to any retirement plan or annuity contract pursuant to amendments made by the SECURE Act.
    • Reducing the minimum age for allowable in-service distributions from qualified pension plans from 62 to 59½.
  • Rule clarifications reflected in IRS Notice 2020-86, including rules for:
    • The increase from a 10%- to a 15%-cap for the 401(k) plan automatic enrollment safe harbor after the initial period of automatic elective contributions.
    • Timely adoption of a safe harbor 401(k) plan with nonelective contributions.
• CARES Act
  • IRS Notice 2020-50: addressing implementation and administration of coronavirus-related distributions and COVID-related plan loan relief.
  • IRS Notice 2020-51: addressing implementation of 2020 required minimum distribution waivers, including sample plan amendment language.
• Consolidated Appropriations Act ("CAA")
  • Provides temporary partial plan termination relief.
  • Allows special disaster-related use of retirement funds for major disasters declared during the period beginning January 1, 2020 and ending February 25, 2021.
  • For certain employees in certain multiemployer plans covering workers in the building and construction industry, changes the minimum age for allowable in-service distributions to age 55 (rather than age 59½).
• IRS Notice 2020-42: provides temporary relief during calendar year 2020, from the physical presence requirement for spousal consents under qualified retirement plans.
• IRS Notice 2020-52: offers guidance for implementing mid-year suspensions or reductions of contributions to safe harbor 401(k) plans.

Effective in 2021:

• SECURE Act/IRS Notice 2020-38: provides guidance under which qualified cash or deferred arrangements ("CODAs") must allow long-term employees working at least 500 but less than 1,000 hours per year to become plan participants.
• IRS Notice 2021-03: extends through June 30, 2021 temporary relief from the physical presence requirement for spousal consents under qualified retirement plans.

Effective in 2022:

• Final Regulations provide updated life expectancy and distribution period tables used for purposes of determining minimum required distributions in calendar years beginning on or after January 1, 2022.

District Court Dismisses Cross-Plan Offsetting Claim

The United States District Court of the District of Minnesota held that participants did not have standing to sue a third party administrator ("TPA") over its practice of cross-plan offsetting. Cross-plan offsetting is a practice, used by some claims administrators, of using the assets of one health plan to recoup overpayments made to a healthcare provider by a different plan. Here, a class of plan participants alleged that this administrative practice violates the TPA’s duty of loyalty as well as ERISA's prohibitions on self-dealing, representing both sides in a transaction, and transacting with a party in interest. However, the court did not address the substance of these claims because it held that the participants lacked standing. To have standing a plaintiff must be able to clearly trace a redressable injury to a defendant’s conduct. The court reasoned that here, if the TPA breached these fiduciary duties, it would be an injury to the plan – not a traceable injury to the plan participants. While this case is a victory for the TPA, there remain a number of open issues related to this practice. Plan sponsors should review their services agreements and discuss with their TPAs whether they engage in the practice of cross-plan offsetting.

Scott v. UnitedHealth Group, (D. Minn.)

Plan Administrator of Life Insurance Program was Entitled to Abuse of Discretion Standard of Review Despite Absence of Word "Discretion" in Plan Documents

The Second Circuit court of appeals affirmed a federal district court’s dismissal of a claim brought by the spouse of a deceased participant seeking accidental death benefits under the employer’s life insurance program, for which Aetna was the insurer. The primary issue presented by plaintiff on appeal was whether the delegation of discretionary authority by the employer to Aetna was sufficient for the court to apply the favorable “abuse of discretion” standard.

Plaintiff’s husband died of a pulmonary embolism caused by cabin pressure, while traveling on business for Stanley Black and Decker (“SB&D”). The spouse sought enhanced benefits for accidental death, arguing that the death was an “accident” under the business travel provisions of the Aetna policy. The district court upheld Aetna’s determination that the participant’s death was not an accident, applying an abuse of discretion standard of review.

Under ERISA, de novo review is the default standard applied by federal courts in reviewing adverse claims decisions. However, if the benefit plan document gives the administrator “discretionary authority to determine eligibility benefits or to construe the terms of the plan,” the U.S. Supreme Court case Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989) provides that the administrator is entitled to review of its decision under an arbitrary and capricious standard. The arbitrary and capricious standard allows a plan administrator’s reasonable interpretation and decision to control, despite the fact that an alternative conflicting result might also be reasonable.

The Second Circuit panel held that Aetna was granted discretionary authority by SB&D for the following reasons:

1. The plan document need not actually use the word “discretion,” so long as the benefit plan gives authority to determine eligibility for benefits. SB&D’s plan stated that Aetna had authority to “determine[ ] eligibility for and the amount of any benefits” and to “evaluat[e] all benefit claims and appeals under the Plan.”
2. The plan established a subjective standard by which Aetna would make eligibility determinations, stating that Aetna would decide claims in accordance with “reasonable” claims procedures. Because Aetna was permitted to apply its subjective judgment, the court held Aetna was delegated discretionary authority over claims.
3. Aetna created the procedures to implement its review of eligibility determinations, thereby indicating it held discretionary authority.
4. Second Circuit precedents have held similar language sufficient to indicate a delegation of discretionary authority.

The appellate court not only disagreed with plaintiff regarding the applicable standard of review, but held it would have denied her claims even if the de novo standard had been applicable. The panel further rejected plaintiff’s argument that it should have held a de novo standard applied based on Aetna’s failure to disclose certain procedural documents, because plaintiff failed to timely raise the issue. Finally, the court rebuffed plaintiff’s argument that it should have applied lesser deference based on an alleged “structural” conflict, as plaintiff failed to identify and demonstrate that the conflict actually affected Aetna’s decision.

The case is a strong reminder that appropriate delegation of discretionary authority is a vital defense in lawsuits challenging claims determinations. Plan administrators should review their often multi-layered policies, plan documents and participant disclosures to ensure the applicable documents contain a clear delegation of discretionary authority entitled to an arbitrary and capricious standard of review.

Tyll v. Stanley Black and Decker Life Ins. Program, 2021 WL 1748474 (2d Cir. 2021)

Ninth Circuit Upholds California Mandatory Auto-IRA Law

State-facilitated retirement savings programs notched a big victory in the Ninth Circuit recently. Until May 6^th, no circuit court had applied ERISA’s preemption rules to one of the growing number of state-facilitated retirement savings programs. Many states – such as California and Illinois – have these types of programs in place which are designed to increase retirement savings for people employed by employers who do not offer retirement savings plans. There was some debate as to whether these programs were preempted by ERISA’s broad language, but the Ninth Circuit found that preemption is not an issue.

This lawsuit arose out of California’s implementation of the CalSavers program in 2017. CalSavers is a state-run IRA savings program for employees of certain employers. In general, non-governmental employers with five or more employees must participate in CalSavers unless the employer offers a qualified retirement plan. Nonetheless, an employer’s participation in the program is fairly limited. Employers have three general obligations: 1) register for the program, 2) provide the program with certain information about their employees, and 3) set up a payroll deposit arrangement through which employee contributions can be remitted.

The plaintiffs in the case alleged that ERISA preempted the CalSavers program. ERISA “preempts ‘any and all State laws insofar as they may now or hereafter relate to any employee benefit plan’ that ERISA covers.” Read literally, ERISA’s language could preempt just about any state law that even mentions employee benefits plans. To avoid such widespread preemption, courts have created two categories of state laws that are preempted: 1) state laws which have a “reference to” ERISA plans, and 2) state laws that have an “impermissible connection with ERISA, meaning a state law that governs… a central matter of plan administration or interferes with nationally uniform plan administration.”

The Ninth Circuit found that CalSavers does not fit into either category. First, the court stated that CalSavers is not even an “employee benefit plan” nor does it force any employer to create one. Using statutory definitions found in ERISA, the court noted that an “employee pension benefit plan” – the type of plan relevant to this case – must be established or maintained by an employer. Under CalSavers, however, the employer does not establish or maintain the plan. An employer’s three obligations are mentioned above and they do not rise to the level of establishment or maintenance.

The court continued by noting CalSavers does not act on ERISA plans at all, since employers who offer qualified retirement plans are exempt from the program. Nor does the program interfere with the purposes of ERISA because an employer’s retirement plan is still subject to just one law: ERISA. It is the state-facilitated program that is subject to CalSavers and that is not an employer’s plan.

It is unclear if this ruling will prompt more states to enact these types of programs. It is also possible that this ruling could spur more cities to get in on the action. New York City joined Seattle recently as the only cities to have these types of programs in the works.

Howard Jarvis Taxpayers Ass'n v. California Secure Choice Ret. Sav. Program, 997 F.3d 848 (9th Cir. 2021)