Employee Benefits DevelopmentsĀ - October 2016

by Hodgson Russ LLP

Hodgson Russ LLP

The Employee Benefits practice group is pleased to present the Benefits Developments Newsletter for the month of October, 2016.

2017 Benefits Limits Announced

The Internal Revenue Service and Social Security Administration have announced the cost of living adjusted dollar limits applicable to benefit plans.  A listing of key limits is set out below:


2017 LIMIT

401(k)/403(b)/457 plan maximum elective deferral


401(k)/403(b)/457 Catch-up


Defined contribution maximum annual addition


Defined benefit maximum annual pension


Qualified plans maximum compensation limit


Highly Compensated Employee


IRA Limit


IRA Catch-up




SIMPLE Catch-up


Social Security Taxable Wage Base



Temporary Nondiscrimination Relief Extended for “Closed” Pension Plans

In Notice 2014-5 (see our April 2015 Employee Benefits Developments), the IRS provided temporary nondiscrimination relief for plan years beginning before 2016 by permitting certain employers that sponsor both a defined benefit pension plan closed (i.e., a defined benefit plan that provides ongoing accruals but that has been amended to limit those accruals to some or all of the employees who participated in the plan on a specified date) before December 13, 2013, and a defined contribution plan, to demonstrate the aggregated plans comply with the nondiscrimination requirements of Internal Revenue Code (Code) Section 401(a)(4) on the basis of equivalent benefits, even if the aggregated plans do not satisfy the current conditions for testing on that basis.  Notice 2015-28 (see our April 2015 Employee Benefits Developments) extended the temporary nondiscrimination relief provided in Notice 2014-5 for an additional year by applying that relief to plan years beginning before 2017 if the conditions of Notice 2014-5 are satisfied.

In recently published Notice 2016-57, the temporary nondiscrimination relief provided in Notice 2014-5 has been extended for an additional year by applying that relief to plan years beginning before 2018 if the conditions of Notice 2014-5 are satisfied.  This extension is provided in anticipation of the issuance of final amendments to the Code Section 401(a)(4) regulations.  Those final regulations (note that proposed regulations relating to nondiscrimination requirements for closed plans were published in January 2016 – see our February 2016 Employee Benefits Developments) are expected to be effective for plan years beginning on or after January 1, 2018, and are expected to permit plan sponsors to apply the provisions of the regulations that apply specifically to closed plans for certain earlier plan years.


IRS Regulations Permits Partial Lump Sum Distributions from Defined Benefit Plans

T.D 9783

In many defined benefit plans a participant faces a difficult economic decision with respect to their retirement benefit.  Defined benefit plans provide for an annuity stream of payments that will last for the participant life (and possibly joint lives with a spouse).  Some defined benefit plans offer the participant the option of electing a lump sum benefit.  This presents the participant with a difficult choice between these two options.  The participant who takes a lump sum benefit may outlive the retirement income paid by the lump sum amount.  Alternatively, an election of the annuity form of payment may not pay significant benefits if the participant (and spouse) die earlier than expected.  The Internal Revenue Service (IRS) thought that permitting an election of partial lump sum distribution and partial annuity distribution could help participants who face this decision.  The IRS has issued final regulations that make this easier for plans to offer this choice.  Plans who pay a lump sum must pay a benefit calculated in accordance with certain factors set out under Internal Revenue Code (the “Code”) Section 417(e).  Under prior regulations, it was unclear as to what was the proper method to comply with these requirements if only a portion of the benefit is being paid as a lump sum.  These final regulations permit for bifurcation of the benefit and that the factors under Code Section 417(e) would only be applicable to the portion that is being paid at the lump sum.  Additionally, for plans that have already offered a partial lump sum, special rules and relief from the anti-cutback requirements are provided if the plan is amended before December 31, 2017.  In light of these new final  regulations, plan sponsors may wish to exam whether a partial lump sum benefit feature may be a desirable feature to be added to a plan and to discuss with legal counsel and the plan’s actuary the requirements contained in the final regulations.  (T.D. 9783)


IRS Regulations Clarify Definitions Relating to Same-Sex Marriages

T.D 9785

The Internal Revenue Service issued final regulations clarifying that, for federal tax purposes, the terms “spouse,” “husband,” and “wife,” are applied to individuals lawfully married to one another regardless of their gender.  These final regulations do not change the current status of the law, rather they largely adopt the proposed regulations, recent sub-regulatory guidance, and reflect the holdings in the Supreme Court cases U.S. v. Windsor and Obergefell v. Hodges.  The final regulations clarify that the term “marriage” does not include registered domestic partnerships, civil unions, or other similar relationships not considered marriages under state law, and that the terms “spouse,” husband,” and “wife” do not include individuals who have entered into such relationships.  Although the final regulations obsoletes Revenue Ruling 2013-17, taxpayers may generally continue to rely on that guidance as it relates to the application to employee benefit plans and benefits provided under such plans. (T.D. 9785)


BP, RadioShack, IBM, and Whole Foods Beat Stock Drop Lawsuits in Post-Dudenhoeffer Era

In Fifth Third Bancorp v. Dudenhoeffer, the Supreme Court held that, where an employer’s stock is publicly traded, allegations that a fiduciary of a retirement plan holding the company’s stock as an investment should have recognized from publicly available information that the market was overvaluing or undervaluing the company’s stock are implausible, unless special circumstances exist.  The Supreme Court did not elaborate on what might constitute special circumstances.  The Supreme Court further held in Dudenhoeffer that, to state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the fiduciary could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the plan than to help it.  In Amgen Inc. v. Harris, the Supreme Court clarified that the complaint itself must plausibly allege that a prudent fiduciary in the same position could not have concluded that the alternative action would do more harm than good.

BP, IBM, and Whole Foods Cases

BP, IBM and Whole Foods recently prevailed in lawsuits alleging breach of their fiduciary duty of prudence by continuing to allow purchases of overvalued company stock under retirement plans sponsored by the companies.  The plaintiffs in the lawsuits alleged that BP, IBM, and Whole Foods were in possession of inside information that the stock was overvalued, and that companies could have prevented the plans from paying too much for company stock by either (i) disclosing the nonpublic information, or (ii) freezing company stock purchases.  While either alternative would not have violated the securities laws, the courts noted that, because each alternative could easily result in the stock price dropping, a prudent fiduciary could conclude that such actions would do more harm than good.  Since the plaintiffs in each case failed to plausibly allege specific supporting facts that freezing contributions to the stock fund or disclosing nonpublic information would not have done more harm than good, the plaintiffs’ lawsuits were dismissed.

RadioShack Case

RadioShack also recently prevailed in a stock drop lawsuit against it.  The RadioShack lawsuit was different than the BP, IBM, and Whole Foods cases, in that plaintiffs alleged a breach of fiduciary duty based on both inside information and the existence of special circumstances.

Plaintiffs argued that the special circumstances included that (i) the derivative and equity markets predicted the company would default on its debt, (ii) the company was highly leveraged, and (iii) the plan fiduciaries failed to properly investigate the continued prudence of the company stock or employ a reasoned decision-making process in evaluating the stock.  The court rejected plaintiffs’ argument that special circumstances existed, suggesting that special circumstances may be akin to accounting irregularities, misappropriation of inside information, or another action that affects the market’s reliability of a stock’s market price. 

With respect to their inside information claim, the plaintiffs alleged that (i) defendants made false and misleading statements regarding the company’s prospects that should have been corrected as part of a subsequent disclosure, (ii) contributions to the company stock fund should have been frozen, or (iii) the company should have provided full disclosure of material nonpublic information.  The court first held that the alleged false and misleading statements identified by plaintiffs amounted to mere puffery that was immaterial and did not require a corrective disclosure.  The court then held that plaintiffs’ claim otherwise failed because their complaint did not plausibly allege that insider information was withheld from the public.  Even assuming material information was withheld from the public, the court held that plaintiffs’ complaint did not plausibly allege that freezing contributions to the stock fund or disclosing nonpublic information would not do more harm than good.  Accordingly, the court dismissed plaintiffs’ complaint.


Are “Forum Selection Clauses” Enforceable?

Under the Employee Retirement Income Security Act of 1974 (ERISA), an aggrieved participant or beneficiary may file suit against the plan and its fiduciaries (a) where the plan is administered, (b) where the breach took place, or (c) where the defendant resides or may be found.  When a company has employees, former employees, participants, or beneficiaries in multiple states, employer and fiduciaries are likely to find themselves facing suit in multiple forums that are neither familiar nor convenient.  In the ERISA context, a forum selection clause is a plan document/SPD provision that attempts to avoid suits in multiple or inconvenient jurisdictions by requiring that all legal actions involving the plan be commenced in the courts of a specified jurisdiction.  For example, a company that has its corporate headquarters in Western New York, and that administers its plan through employees or other parties who reside in the area, will likely want the plan document to require that all actions involving the plan be commenced in the courts located in the County of Erie, State of New York.  Such a clause, if enforceable, would prevent participants and beneficiaries from bringing suits in other jurisdictions, even when the other venue would be a proper venue under ERISA.

In a recent case, the U.S. Court of Appeals for the Eighth Circuit ruled against a participant who claimed that a forum selection clause in her employer’s ERISA plan contravened ERISA and, therefore, was unenforceable.  The plan provision at issue provided that “any action by any Plan Participant relating to or arising under this Plan shall be brought and resolved only in the U.S. District Court for the Eastern District of Missouri.”  The participant, a long-time resident of Arizona with no connection to Missouri, filed suit in the U.S. District Court for the District of Arizona when her disability benefits were terminated.  Arguing that the forum selection clause in the plan was binding, the defendants asked the court to transfer venue to the District Court in Missouri.  The Arizona court agreed and entered an order transferring the case to the Eastern District of Missouri even though the Missouri court was more than 1,000 miles away from where the participant lived.  Following the transfer, the participant asked the Missouri court to transfer the case back to Arizona.  The Missouri court denied her motion.  The U.S. Court of Appeals for the Eighth Circuit declined to reverse the order of the Missouri court.  In re: Lorna Clause (8th Cir., 2016).

While the majority of courts have upheld the enforceability of forum selection clauses, federal district courts in Maine and Illinois recently arrived at a different conclusion, striking down the clauses at issue.  We should also note that the U.S. Department of Labor has consistently taken the position that ERISA flatly prohibits forum selection clauses like the one at issue in In re: Lorna.  We are sure that the enforceability of forum selection clauses will continue to be the subject of litigation, so the matter is far from resolved.  Until the final word is written, most ERISA plans should contain forum selection clauses.  Employers and fiduciaries should address this issue with employee benefits counsel.


Trustee Held Liable for Failure to Pursue Contributions Not Paid by Employer – Trust Terms Not a Defense

Longo v. Trojan Horse Ltd. (E.D. N.C. 2016)

A North Carolina district court recently ruled that a 401(k) plan’s trustee, Ascensus Trust Company, was jointly and severally liable with the employer-plan sponsor for nearly $3 million in unpaid contributions to the plan.  In that case, the applicable trust agreement expressly required Ascensus to properly manage funds upon receipt, but also stated that Ascensus had no duty or responsibility for collecting or determining the accuracy or sufficiency of contributions.  The court concluded that, notwithstanding specific trust or plan terms, under the Employee Retirement Income Security Act of 1974 (“ERISA”), Ascensus had an obligation to ensure contributions were made to the trust so that the plan’s objectives could be met.  While the court did not specifically state what steps Ascensus should have taken, it focused on the fact that there was no evidence Ascensus did anything to investigate or analyze contributions it received.  The trust agreement’s narrow delineation of Ascensus’ obligations was not a valid excuse for Ascensus to “bury its head in the sand and conduct no investigation and therefore take no action.”  The court found that Ascensus’ inaction amounted to nonfeasance, which is a breach of fiduciary duty.  The court also noted that co-fiduciary liability is not contingent upon knowledge of what another fiduciary (here, the employer-plan sponsor) is doing, but only that its failure to meet its fiduciary duties enabled another fiduciary to commit a breach.  Accordingly, the court found Ascensus was liable along with the employer-plan sponsor for the unpaid contributions.  Longo v. Trojan Horse Ltd. (E.D. N.C. 2016)


Court Upholds Denial of Retirement Plan Benefits to Children of Deceased Employee

O’Shea v. UPS Retirement Plan (1st Cir., 2016)

The U.S. Court of Appeals for the First Circuit recently upheld a lower court decision that the denial of benefits by a company retirement plan to the children of an employee who died one week before his retirement benefits were scheduled to begin was reasonable.  The employee in this case was diagnosed with cancer in 2008.  He became eligible for retirement in 2009, and decided to retire at the end of the year.  He was advised by a company human resources supervisor that he could “maximize his time on payroll” by taking his accrued paid time off after his last day of work and delaying his official retirement date. The employee took the supervisor’s advice, commenced taking his leave in January, 2010, and submitted his official retirement date as February 28, 2010.  He selected as his payment option under the retirement plan a single life annuity with a 10-year guarantee, and named his four children as his beneficiaries.  Under this annuity choice, the employee would receive a monthly benefit for his lifetime, with a guarantee of monthly payments for 10 years. 

The retirement benefits application stated that if the employee were to die within the 10-year guarantee period, his beneficiaries would continue to receive the same monthly payments for the remainder of the guarantee period.  Although the benefits application did not explicitly state (and the supervisor did not explain) that the employee must survive until the annuity starting date of March 1, 2010, to receive the 10 years of guaranteed payments, the application did refer to payment according to “the terms of the Plan.”  The only plan provision that explicitly provides for a retirement benefit if a participant dies prior to the annuity starting date states that a “preretirement survivor annuity” would then be paid to the participant’s spouse or domestic partner. 

Unfortunately, the employee died eight days before his annuity starting date.  About a month later, the plan administrator informed the intended beneficiaries that they were not entitled to the 10 years’ of payments they were expecting, because only a spouse or domestic partner is able to recover benefits under the plan when a participant dies before benefits commence.  After exhausting the appeals process under the plan, the beneficiaries filed suit, seeking recovery of the ten years of annuity payments allegedly “guaranteed” to them under the plan. The district court found in favor of the retirement plan, concluding that the plan administrator’s construction of the plan terms was correct.  The court also found that any potential claim based on alleged misrepresentations of a benefit guaranty would have been released under the terms of a release of claims signed by the employee shortly before his death in return for a payment of $98,800.

Describing the case as “highly sympathetic,” the First Circuit nevertheless agreed on appeal that the company’s interpretation of the plan terms is “more than reasonable,” and that, because the employee did not live past the annuity starting date, he did not meet a mandatory precondition that would entitle his beneficiaries to the 10-year guaranteed benefits payments.  The court also agreed that any equitable claims based on allegations that the employee was “misled” about the terms of the plan are barred, because they existed at the time he signed the release of claims. O’Shea v. UPS Retirement Plan (1st Cir., 2016)


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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