The Employee Benefits practice group is pleased to present the Benefits Developments Newsletter for the month of March 2018.
Proposed Rules Extend Short-Term, Limited-Duration Insurance
In response to last October’s Executive Order, the Internal Revenue Service, Department of Labor, and Department of Health and Human Services (Departments) jointly issued proposed rules for amending the definition of short-term, limited-duration insurance (STLDI). Under the proposed regulations, the maximum length of STLDI coverage would increase from a maximum period of three months to a maximum period of twelve months. STLDI is a type of health insurance coverage designed to fill temporary gaps in coverage that may occur when an individual transitions from one plan or coverage to another. Although STLDI coverage is not an excepted benefit, it is exempt from certain individual-market requirements, such as annual or lifetime limits on essential health benefits, or the prohibition on pre-existing condition exclusions. These new proposed regulations would undo the prior regulations from 2016 that limited the duration of STLDI coverage to no more than three months. Also under these new proposed regulations, issuers of STLDI insurance would need to include one of two notices on the insurance contract. The new notices would inform individuals purchasing the STLDI contract that the coverage is not required to comply with federal requirements under the Affordable Care Act and that the coverage does not qualify as “minimum essential coverage.” The Departments propose that this rule would become effective 60 days after the publication of the final rule.
DOL Fiduciary Rule Update: Enforcement of the Rule Is “On Hold” and Its Future Is Uncertain
The DOL’s new fiduciary rule continues its roller coaster ride toward possible but uncertain implementation. On March 15, the U.S. Court of Appeals for the Fifth Circuit (covering Texas, Mississippi and Louisiana) issued a ruling in which a 2-1 majority ruled that the Department of Labor’s fiduciary rule should be vacated and effectively nullified in toto (see U.S. Chamber of Commerce v. DOL (5th Cir 2018)). The Fifth Circuit’s decision came just days after a ruling by the U.S. Court of Appeals for the Tenth Circuit (covering Kansas, Oklahoma, Colorado, Wyoming, Utah, and New Mexico) that upheld certain aspects of the fiduciary rule (see Market Synergy Group, Inc. v. DOL (10th Cir. 2018)). And, in response to the Fifth Circuit’s decision to vacate the fiduciary rule, it was almost immediately announced that, pending further review, the DOL will not be enforcing the fiduciary rule on a nationwide basis. Despite the “hold” placed on enforcement by the DOL, the DOL did not move to formally withdraw the rule. And whether the DOL might pursue further review of the U.S. Chamber of Commerce decision, either by the Fifth Circuit or by the Supreme Court, is not yet clear. But most observers agree that the legal maneuvering surrounding the fiduciary rule is not nearly done and the Supreme Court, one way or another, may be asked to weigh in on the fiduciary rule.
The Fifth Circuit majority in U.S. Chamber of Commerce made two principal findings in its decision to vacate the fiduciary rule. First, the majority held that the fiduciary rule does not comport with the text of ERISA (and the underlying common law principles). The majority opined that the expanded scope of the fiduciary rule under the DOL regulations is valid only if it is authorized by ERISA. The majority found that ERISA’s definition of “fiduciary” is not sufficiently ambiguous to allow the DOL the latitude to expand the scope of the fiduciary rule through the promulgation of the new fiduciary regulations, particularly to those activities that are mere sales activities rather than fiduciary activities stemming from a relationship of trust and confidence. Second, even there is some ambiguity, the majority identified several bases for concluding the DOL’s interpretation of ERISA is not reasonable, and constitutes an arbitrary and capricious exercise of administrative power that is inconsistent the standards of the Administrative Procedures Act.
With circuit courts seemingly split on the validity of the fiduciary rule and the future of the rule likely to remain uncertain for some time to come, it would be premature for service providers to abandon efforts to comply with the fiduciary rule. And plan fiduciaries should bear in mind that neither the Fifth Circuit’s ruling in U.S. Chamber of Commerce nor the DOL’s current non-enforcement posture affects their fundamental ERISA duties to monitor the performance of the plan’s investment advisors.
Supreme Court Reaffirms Position in Retiree Medical Case
The US Supreme Court has reversed another Sixth Circuit case relating to the vesting of retiree medical benefits for collectively bargained employees. The case involved a collective bargaining agreement that provided group health plan benefits to employees who were eligible to receive a pension benefit. The collective bargaining agreement contained a clause which provided that all terms and conditions expire when the collective bargaining agreement expires. In 2004, at the expiration of the contract, the company terminated the retirees’ medical benefits. The retirees sued claiming their retiree medical benefits were vested. The position of the retirees was upheld by the District Court and the Sixth Circuit Court of Appeals.
The US Supreme Court overturned the lower court decisions finding that those decisions did not comply with the Court’s previous decision in 2015 in M&G Polymers USA LLC vs. Tackett (http://www.hodgsonruss.com/newsroom-publications-employee-benefits-developments-january-2015.html ). In that case, the Supreme Court rejected the so-called “Yard-Man” inference that had been developed by the Sixth Circuit. The Supreme Court in the Tackett case found that Courts must interpret collective bargaining agreements according to ordinary principles of contract law. In the Sixth Circuit decision, the Court of Appeals held that the agreements durational clause was inconclusive as to retiree health benefits. The Sixth Circuit held that the provisions rendered the agreement ambiguous and considered extrinsic evidence to whether there was a vested retiree medical benefit.
The Supreme Court reversed the Sixth Circuit holding that the collective bargaining agreement only could be held to be ambiguous if it was read in a way to include certain inferences that the Supreme Court had rejected in Tackett. The Supreme Court held that the collective bargaining agreement had a duration clause that applied to all benefits, including retiree medical benefits and that if retiree medical benefits were intended to be vested, the collective bargaining agreement could have said so directly.
In subsequent Sixth Circuit case, the Sixth Circuit issued a new opinion reversing a preliminary injunction and the Sixth Circuit clearly recognized that the Supreme Court decision was a powerful indication that the general durational clause in a collective bargaining agreement should dictate when benefits expire unless an alternative end date is provided.
These cases show an increasing trend for employers to prevail in claims related to vesting of retiree medical benefits under collective bargaining agreements. CNH Indus. N.V. v. Reese, (S. Ct., 2018) and Cooper v. Honeywell Int'l, Inc., (6th Cir., 2018).
403(b) Document Compliance and the Commencement of the Three Year Remedial Amendment Period
Unlike profit sharing and 401(k) retirement plans, 403(b) retirement plans only became subject to IRS regulations requiring written plan documents in 2007. Compliance with the written document requirement was made difficult by the fact that the Code does not contain specifics about what terms must be included in a 403(b) plan document. For this reason, 403(b) plan documents have been drafted in “good faith” reliance on IRS model language and sample plan provisions issued from time to time.
Over the past year, the IRS has made significant changes to the way retirement plan sponsors ensure their 403(b) documents comply with the Code. On January 13, 2017, the IRS confirmed that it would not issue determination letters for 403(b) plans. The IRS opened a three year remedial amendment period (RAP) that gives 403(b) plan sponsors until March 31, 2020 to adopt necessary amendments and to correct document defects, retroactive to January 1, 2010. This essentially means that 403(b) plan sponsors can retroactively self-correct any defects in their 403(b) document, and conform the document to plan operations.
To do so, 403(b) plan sponsors must take one of two courses – restate the 403(b) plan onto a pre-approved plan document, or restate the 403(b) plan document as an individually designed plan. If adopting a pre-approved plan, the plan sponsor will have reliance upon an IRS opinion letter stating that the form of the plan meets the applicable Code requirements for favorable tax treatment.
The RAP is not available unless the plan was adopted on or before December 31, 2009 (or the effective date of the plan, if later). Plans that do not satisfy this timing requirement must correct the 403(b) plan document and operational errors under the IRS’ Voluntary Correction Program (VCP). Successful correction under VCP means the 403(b) plan will be treated as though the document changes were timely adopted.
While three years may seem like a long time, all amendments to the Plan dating back to January 1, 2010 must be included in the restated 403(b) plan document, along with the effective dates. Starting this process in the near future will ensure that all the document corrections are captured, and that any deviations from the Plan’s operations are identified and corrected.