For Your Benefits
August Edition 08/09/10 Marla B. Anderson, David P. Olson, Marian M. Zapata-Rossa
This edition contains the following articles:
Welcome to the August 2010 edition of the Quarles & Brady Employee Benefits and Executive Compensation Group's
For Your Benefits, a newsletter dedicated to keeping benefit plan managers and HR and compensation professionals informed of legal changes affecting benefit programs. This edition covers new DOL fee disclosure regulations, significant ERISA litigation developments and nondiscrimination rules for insured health plans.
The Employee Retirement Income Security Act ("ERISA") requires plan fiduciaries, when selecting and monitoring service providers and plan investments, to act prudently and solely in the interest of the plan's participants and beneficiaries. Responsible plan fiduciaries also must ensure that arrangements with their service providers are "reasonable" and that only "reasonable" compensation is paid for services. Fundamental to the ability of fiduciaries to discharge these obligations is obtaining information sufficient to enable them to make informed decisions about the services, costs and service providers.
On July 16, 2010, the Department of Labor ("DOL") published interim final regulations (the "Disclosure Rules") requiring that certain service providers to employee pension benefit plans disclose information to assist plan fiduciaries in assessing the reasonableness of contracts or arrangements, including the reasonableness of the service providers' compensation and potential conflicts of interest that may affect the service providers' performance. The interim final regulation applies to plan service providers that expect to receive at least $1,000 in compensation in connection with their services and that provide:
- Certain fiduciary or registered investment advisory services;
- Recordkeeping or brokerage services to a participant-directed individual account plan in connection with the investment options made available under the plan; or
- Certain other services for which indirect compensation is received.
The Disclosure Rules focus on service providers and compensation arrangements that are most likely to raise questions for plan fiduciaries with respect to the amount of compensation being received by a service provider for plan-related services and potential conflicts of interests that might compromise the quality of those services.
Information that must be disclosed includes a description of the services to be provided as well as all direct and indirect compensation to be received by the service provider, its affiliates or subcontractors. Direct compensation is compensation received directly from the plan. Indirect compensation generally is compensation received from any source other than the plan sponsor, the covered service provider, an affiliate or subcontractor. Because certain services and costs are so significant or present the potential for conflicts of interest, information concerning those services and costs must be disclosed without regard to whether services are furnished as part of a bundle or package. For example, service providers must disclose whether they are providing recordkeeping services and the compensation attributable to such services, even when no explicit charge for recordkeeping is identified as part of the service contract.
The Disclosure Rules become effective on July 16, 2011. At that time, disclosures will be required with respect to all pre-existing arrangements as well as any new contracts or arrangements entered into or amended or modified after that date. Failure to comply with these new rules can expose both the plan fiduciary and the service provider to liability.
Q&B Key: The Disclosure Rules are part of the DOL's three-prong approach to increase the transparency of plan-related fees and expenses. The first part dealt with reporting of plan fees on the Schedule C to the Form 5500 Annual Report/Return. The Disclosure Rules, which are the second part, are designed to require service providers to provide information to plan fiduciaries. The third and final part will be participant-level fee disclosure regulations expected to be published later this year. The Disclosure Rules represent a significant step toward ensuring that pension plan fiduciaries are provided the information they need to assess both the reasonableness of the compensation to be paid for plan services and potential conflicts of interest that may affect the performance of those services.
The U.S. Supreme Court recently settled the split among the appellate circuit courts over what standard a fee claimant must meet to receive an award of attorneys' fees under ERISA. In Hardt v. Reliance Standard Life Ins., the Court rejected the "prevailing party" standard previously recognized by the First, Seventh and Tenth Circuits, but disavowed by the Second, Fifth and Eleventh. The Court unanimously held that to receive an award of attorneys' fees under ERISA's fee-shifting statute, a fee claimant must instead merely "show some degree of success on the merits."
Bridget Hardt ("Hardt") was an executive assistant who developed carpal tunnel syndrome and later neuropathy. She filed a claim for long-term disability benefits with her employer's insurance carrier, Reliance Standard Life Insurance Company ("Reliance"). Her claim was denied. After exhausting her administrative remedies on appeal to no avail, Hardt sued Reliance in federal court. She alleged that Reliance violated ERISA by wrongfully denying her claim for long-term disability benefits. The District Court found compelling evidence in the record to conclude that Hardt was totally disabled as a result of suffering from neuropathy in addition to carpal tunnel syndrome. Because Reliance had failed to assess how the neuropathy impacted Hardt's condition, the District Court ordered that Reliance review its denial of her claim and adequately consider all of the evidence in compliance with ERISA guidelines. The court further ordered that if Reliance failed to complete its review within 30 days, the court would issue judgment in favor of Hardt.
Reliance did as instructed and concluded that Hardt was eligible for long-term disability benefits. Hardt then filed a motion for attorneys' fees and costs under ERISA's general fee-shifting statute, § 1132(g)(1). The statute provides that in connection with a claim for benefits under an ERISA, "the court in its discretion may allow a reasonable attorney's fee and costs of action to either party." The court awarded Hardt her attorneys' fees, ruling that she was the prevailing party and entitled to fees under the five-factor test applied by the Fourth Circuit. Reliance appealed. The Fourth Circuit vacated the award of attorneys' fees concluding that she was not a prevailing party because in light of the district court's ruling, she never received an enforceable judgment on the merits. Hardt appealed this decision to the Supreme Court.
On appeal, the Supreme Court held that the "prevailing party" standard does not apply to attorneys' fees awards under
§ 1132(g)(1). To begin with, the term "prevailing party" does not appear in the plain text of the statute. Moreover, such a limit on attorneys' fees does appear in the next section governing an award of attorneys' fees for delinquent employer contributions to a multi-employer plan. The Court further concluded that based on Supreme Court precedent, an award of attorneys' fees is only appropriate under § 1132(g)(1) if the fee claimant can demonstrate "some degree of success on the merits," and not merely "trivial success" or a "purely procedural victory."
Q&B Key: As the Supreme Court made clear in Hardt, this standard applies to most ERISA litigation, which is governed by the § 1132(g)(1) fee-shifting statute. This case illustrates the importance of thoroughly reviewing benefits claims subject to ERISA before issuing a decision as to eligibility. Having to later overturn those decisions can not only subject plans to payment of past due benefits, but also create circumstances that would entitle fee claimants to attorneys' fees and costs.
The nondiscrimination rules under Section 105(h) of the Internal Revenue Code have applied to self-insured health
plans for over 30 years. However, the recently enacted Patient Protection and Affordable Care Act 2010, as amended
by the Health Care and Education Reconciliation Act of 2010 (the "Health Care Reform Legislation"), now imposes nondiscrimination rules on fully-insured, non-grandfathered plans for plan years beginning on or after September 23, 2010 (January 1, 2011 for calendar year plans). Generally under the new nondiscrimination rules, a fully-insured health plan is not permitted to discriminate in favor of highly compensated individuals with respect to either eligibility or benefits provided under the plan.
Unlike the nondiscrimination rules for self-insured plans, a violation of the nondiscrimination rules for fully-insured plans will potentially have financial implications for the plan and plan sponsor, but not the highly paid individuals. Under the new provisions in the Health Care Reform Legislation, a violation of the nondiscrimination rules for fully-insured plans will result in an excise tax on the plan. The maximum excise tax will be determined in the same manner that the excise tax is determined for a violation of the current HIPAA requirements (generally equal to
$100 per day per participant).
Since the nondiscrimination rules have not historically applied to fully-insured plans, many employers may have existing discriminatory arrangements (i.e., executives pay significantly lower premiums than other employees, executives are permitted to either enter the health plan earlier than other employees or to be covered in the health plan for a significant period of time after they terminate employment). No additional guidance has been issued yet with respect to how these nondiscrimination rules will apply to fully-insured plans; however, the provisions in the Health Care Reform Legislation state that rules similar to the nondiscrimination rules that apply to self-insured plans will apply.
Q&B Key: At this time, we would recommend that employers with non-grandfathered fully-insured arrangements review their plans and employment agreements to determine whether any potential discriminatory practices exist and consult with their advisors to determine whether changes should be made at this time.
- In an informal survey of larger employers, we found that a number of employers will not be "grandfathering" their health plans in order to delay compliance with the new health reform requirements. Some employers cited the restrictions necessary to maintain grandfathered status as a reason for their decision or plan design changes that were already underway when the grandfathering regulations were published earlier this summer. Some employers concluded that their plans are already in substantial compliance with the health reform requirements so that full compliance will not be unduly burdensome.
- A recent case, Tibble v. Edison International, highlights the need for plan fiduciaries to prudently select the investment alternatives made available to plan participants. In Tibble, the court ruled on the issue of retail versus institutional funds, and found that there was a violation of ERISA's duty of prudence when the plan fiduciaries selected retail mutual funds rather than identically invested institutional funds as available plan investments. Institutional share classes are available to institutional investors, such as 401(k) plans, and may require a certain minimum investment. Institutional share classes often charge lower fees (i.e., a lower expense ratio) because the amount of assets invested is far greater than the typical individual investor. The court concluded that if the defendants thoroughly investigated different share classes of the mutual funds offered by the plan, they would have learned that both retail and institutional share classes were available, that the only difference between the retail share classes and the institutional share classes was that the retail share classes charged higher fees. The Tibble case provides an important reminder that plan fiduciaries must thoroughly investigate plan investment alternatives in order to satisfy their fiduciary obligations.
- The Sixth Circuit recently joined the Second, Third, Fifth, Seventh and Ninth circuits in holding a plan participant may be entitled to benefits that are better than those provided for in the plan under an equitable estoppel theory even if the terms of the plan are clear and unambiguous. In Bloemker v. Laborers' Local 265 Pension Fund, a pension plan participant elected to retirement and receive an early retirement benefit based on an estimate that erroneously described a monthly benefit that was considerably larger than that provided for under the plan. The court held that the participant was entitled to rely on the estimate and receive the larger benefit because it was based on a written estimate that the plan administrator provided to him, the estimate contained a certification that the participant was entitled to the benefit described therein, and the plan provisions were too complicated for the participant to calculate his own benefit. In the plan overpayment situation, plan sponsors must address the possibility of a plaintiff's recovery under an equitable estoppel theory as well as IRS guidance that says that the only benefits that can be paid from plan assets are those benefits described in the written plan document. Thus, it appears that in a situation involving an incorrect estimate, the plan sponsor would have to pay the excess benefit out of its general assets rather than from the plan.
If you have any questions regarding benefit plan matters, please contact one of the of the following members
of the Employee Benefits and Executive Compensation Law Group or your Quarles & Brady attorney: Paul Jacobson at (414) 277-5631 / [email protected], Robert Rothacker at (414) 277-5643 / [email protected], David Olson at (414) 277-5671 / [email protected], Amy Ciepluch at (414) 277-5585 / [email protected], Sarah Linsley at (312) 715-5075 / [email protected], Marla Anderson at (414) 277-5453 / [email protected] or Kerri Hutchison at (414) 277-5287 / [email protected].
If you have questions regarding ERISA litigation matters, please contact one of the following members of the ERISA Litigation Group or your Quarles & Brady attorney: Charles Harper at (312) 715-5076 / [email protected],
Gary Clark at (312) 715-5040 / [email protected], Fred Gants at (608) 283-2618 / [email protected], Valerie Bailey-Rihn at (608) 283-2407 / [email protected], Autumn Kruse at (414) 277-5567 / [email protected], Jeffrey Morris at (414) 277-5659 / [email protected], Paul Bauer at (414) 277-5139 or [email protected], Otto Immel at (239) 659-5041 / [email protected], Marian Zapata-Rossa at (602) 229-5447 / [email protected] or Paul Parrish at (813) 387-0267 / [email protected].
See the June 2010 issue of For Your Benefits for a discussion about the recent guidance regarding which health plans qualify as grandfathered health plans.