Business Law Today

April 2023

Recent Developments in ERISA 2023

Business Law Fundamentals Business Litigation Business Litigation & Dispute Resolution Business Regulation & Regulated Industries Employee Benefits & Executive Compensation Labor & Employment Law Recent Developments in Business and Corporate Litigation

§ 1.1. Do We Finally Have a Final Answer on ESG Investments and ERISA’s Fiduciary Duties?

At the end of November, the Department of Labor (DOL) issued final regulations on ERISA’s fiduciary duties when investing plan assets. According to the DOL, these final regulations retain the longstanding core principles that an ERISA fiduciary must focus on the relevant risk-return factors when evaluating plan investments, and the fiduciary duty to manage plan assets includes managing (and potentially exercising) the rights associated with ownership of such assets (e.g., proxy voting). As we’ve covered on our blog over the last several years, the DOL’s guidance concerning ERISA’s fiduciary duties and responsibilities when evaluating plan investments and the potential role of environmental, social and governance (ESG) factors in that analysis has changed significantly.

§ 1.1.1 Evolution of DOL Guidance on ESG

Over the years, the DOL has provided guidance concerning ERISA’s fiduciary duties and responsibilities when investing plan assets, including the role of factors that are arguably non-economic or “non-pecuniary” (e.g., ESG or sustainability factors) in those duties. The DOL’s guidance on this topic has evolved and varied over time as the economic environment and administrations have changed.

§ 1.1.2 2015

In Interpretive Bulletin 2015-01 (IB 2015-1), the DOL allowed that a fiduciary could make investment decisions considering non-pecuniary factors, such as ESG, as “tie breakers” — i.e., the expected risk-return characteristics of alternative proposed investments are the same. Further, the DOL acknowledged that when the fiduciary prudently determined that the investment is justifiable based solely on its economic considerations, then there is no need to evaluate collateral factors as tie breakers. In that bulletin, however, the DOL also acknowledged that in some cases ESG may have a direct relationship with the economic and financial value of the plan’s investment. In those instances, ESG factors are not merely collateral considerations or tie breakers, but rather are a proper component of the fiduciary’s analysis of the economic merits of competing investment choices.

§ 1.1.3 2018 through 2020

In Field Assistance Bulletin 2018-01 (FAB 2018-01), the DOL appeared to limit IB 2015-1 by warning fiduciaries against taking an expansive view on whether ESG factors are economically relevant to a prudent investment selection. That same administration in June 2020 followed up with proposed regulations addressing the topic. Those regulations indicated that ERISA fiduciaries should focus on “pecuniary” factors when evaluating an investment or investment strategy, and it cast doubt on whether ESG factors could meet that standard. The same DOL also then issued proposed rules in August 2020 regarding a fiduciary’s responsibility when exercising shareholder rights (including voting proxies) associated with the plan’s assets.

When both of those rules were finalized and published in November and December 2020, they indicated that plan fiduciaries must evaluate investments and investment strategies based solely on “pecuniary” factors; made it clear that the DOL was skeptical that ESG factors were pecuniary in nature; and severely restricted a fiduciary’s ability to vote proxies for the plan’s assets.

§ 1.1.4 2021 through 2022

The current administration announced in March 2021 that it would not enforce the 2020 regulations and subsequently issued proposed regulations revising those rules. Those proposed regulations continued to emphasize the importance of the risk-return analysis of a proposed investment, but they also made it clear that such an analysis could include evaluating the potential economic effects of climate change and other ESG factors on the proposed investment. Those proposed regulations were finalized in November 2022, which we discuss below.

§ 1.1.5 Longstanding Principles Affirmed

In the preamble to the final regulations, the DOL emphasized that the final rule does not change the following “longstanding principles”:

ERISA’s duties of prudence and loyalty require ERISA fiduciaries to focus on risk and return factors when investing plan assets; and
An ERISA fiduciary’s duty to manage plan assets includes exercising rights associated with those assets (e.g., proxy voting).

The regulation provides that an ERISA fiduciary will satisfy ERISA’s duties of loyalty and prudence when considering an investment or investment course: (a) if the fiduciary has given “appropriate consideration” to the facts that the fiduciary “knows or should know” are relevant to that particular investment or investment course, and (b) acts accordingly. For this purpose, “appropriate consideration” includes:

The fiduciary determines that the investment or investment course of action is reasonably designed to further the plan’s purpose when considering the potential risk and return compared to the potential risk and return of reasonably available alternatives; and
For plans that are not participant-directed plans (e.g., not 401(k) plans), the fiduciary considers the following factors: the diversification of the portfolio; the liquidity and current return of the portfolio relative to the plan’s anticipated cash flow requirements; and the projected return of the portfolio relative to the plan’s funding objectives.

In the preamble, the DOL indicates that the new language in the final rule establishes the following three principles:

A fiduciary’s decision must be based on the factors that the fiduciary “reasonably determines are relevant to a risk and return analysis, using appropriate investment horizons consistent with the plan’s investment objectives and taking into account the funding policy of the plan”.
The risk and return factors may include the economic effects of climate change and other ESG factors.
The weight given to any factor “should appropriately reflect and assessment of its impact on risk and return”.

The preamble also confirms that, under the final rule, an ERISA fiduciary is not required to consider ESG factors when making an investment decision. This is a change from the proposed regulations which (at the very least) suggested that an evaluation of ESG factors was required when evaluating an investment or investment course of action. The 2020 final rule included special documentation requirements when a fiduciary decided that alternative investments were economically indistinguishable and the fiduciary “breaks the tie” by relying on other factors. The new 2022 final rule eliminated those special requirements because the DOL concluded that they were unnecessary given that the existing ERISA fiduciary duties and responsibilities are commonly understood to include documenting investment decisions.

§ 1.1.6 Defined Contribution Plans

The final rule includes some minor changes to clarify how ERISA’s loyalty and prudence duties apply to participant-directed defined contribution plans (e.g., 401(k) plans). The DOL cautions in the preamble that these clarifications do not suggest that a lower standard applies when a fiduciary of a participant-directed defined contribution plan is making an investment decision. Also in the preamble, the DOL agreed with a commentor that the relevant analysis when constructing a menu of investment options for such a plan involves answering the following:

“First, how does a given fund fit within the menu of funds to enable plan participants to construct an overall portfolio suitable to their circumstances? Second, how does a given fund compare to a reasonable number of alternative funds to fill the given fund’s role in the overall menu?”

The DOL regulation also includes special guidance with respect to the duty of loyalty for such fiduciaries. Specifically, a fiduciary does not breach ERISA’s duty of loyalty solely because the fiduciary considers preferences expressed by participants in a manner consistent with the fiduciary’s duty of prudence. The DOL justified including this new provision by noting that accommodating participant stated preferences could increase participation and ultimately lead to greater retirement security. This does not mean, however, that a fiduciary may add (or continue to offer) an imprudent investment option in a participant-directed plan that participants prefer. According to the preamble, this new language does not reflect a change in the DOL’s position.

The final rule retains the rescission of the prior prohibition against a qualified default investment alternative (“QDIA”) or any component of the QDIA from having any “investment objectives, goals, or principal investment strategies that include, consider, or indicate the use of one or more non-pecuniary factors in its investment objectives”. According to the preamble, the DOL now believes that such a requirement would not protect plan participants and could only serve to harm participants. The DOL does caution that selecting (and retaining) a QDIA continues to be subject to the same fiduciary duties and responsibilities under the final rule as all other investments.

§ 1.1.7 Exercising Shareholder Rights

In the final regulation, the DOL recognizes that the “fiduciary act of managing plan assets includes the management of voting rights (as well as other shareholder rights) appurtenant to shares of stock.” It also emphasizes that the fiduciary duty to manage plan assets includes exercising the shareholder rights associated with those assets, and fiduciaries should exercise those rights to protect the plan’s interests. As a result, fiduciaries should weigh the cost and effort of voting proxies (or exercising other shareholder rights) against the significance of the issue to the plan. In addition, consistent with the proposal, the final regulation:

Eliminates several provisions that were previously couched as “safe harbors” because the DOL was concerned that fiduciaries would believe they had permission to abstain from voting proxies without properly considering the plan’s interests as a shareholder; and
Prohibits a fiduciary from following the recommendations of a proxy advisory firm or other service provider unless the fiduciary determines that the firm or other service provider’s proxy voting guidelines are consistent with ERISA’s fiduciary duties and responsibilities.

§ 1.1.8 Plans Covered by Final Regulation

It is important to remember that this regulation only applies to plans that are subject to ERISA’s fiduciary duties and responsibilities for investing plan assets. As a result, they do not apply to: plans excluded from ERISA (e.g., governmental plans, church plans that have not elected to be covered under ERISA); plans without assets (e.g., unfunded welfare plans); and plans that are not subject to ERISA’s fiduciary rules (e.g., supplemental executive retirement plans, “top hat” deferred compensation plans).

§ 1.1.9 Conclusion

With these final regulations: we are still left with the question of whether it is ill-advised for plan fiduciaries to engage in “ESG investing” especially for those investments based solely on ESG considerations. While the final rule acknowledges that ESG factors may be appropriate factors to consider in the risk and return analysis, with the continued proliferation of class-action litigation attacking plan fees and investment selections for participant-directed defined contribution plans, a properly structured fiduciary process (including appropriate documentation of that process) remains a must.

Linda Haynes and Diane Dygert

§ 1.2. PBGC Addresses Withdrawal Liability Assumptions for First Time in New Proposed Rule

On July 8, 2022, the Pension Benefit Guaranty Corporation (“PBGC”) published its final rule (“Final Rule’) on the Special Financial Assistance (“SFA”) Program established under the American Rescue Plan Act of 2021 (“ARPA”). The Final Rule contains a number of significant developments and amendments from the interim final rule (“IFR”), including for example, expanding investment options for SFA assets, providing for separate interest rate assumptions for SFA versus non-SFA assets, loosening restrictions for benefit increases, and adding a new condition for phased recognition of SFA assets in calculating withdrawal liability. The Final Rule becomes effective on August 8, 2022. There is a thirty (30) day public comment period solely on the new phase-in condition for withdrawal liability starting from the Final Rule publication date.

Under the SFA Program, a financially troubled multiemployer pension plan may receive a one-time lump sum payment intended to be sufficient to allow it to pay all benefits due from the date the SFA payment is received through the last day of the plan year ending in 2051. We previously wrote about the IFR and explained the various eligibility conditions for SFA and the calculations involved. (Click here for our earlier Legal Update titled PBGC Issues Much Anticipated Interim Final Rule On Special Financial Assistance Under American Rescue Plan Act).

The following is a high-level summary of the key changes and developments from the Final Rule.

§ 1.2.1 Separate Interest Rate Assumptions for SFA and Non-SFA Assets

Under the Final Rule, the SFA amount will now be calculated using two different interest rate assumptions: one for SFA assets and another for non-SFA assets. This is an important development because the interest rates are used to calculate the total SFA amount, and with this new approach, plans should receive more in financial aid in most instances. Previously under the IFR, plans were required to use the same interest rate assumption for both SFA and non-SFA assets. This did not take into account that the IFR also required SFA and non-SFA assets to be segregated, with SFA assets limited to more conservative investments. Thus, using the same interest rate assumption for both pools of assets was not an accurate way for plans to project actual expected investment returns. This also meant that the SFA could fall short of the amount the plan would need to pay all benefits due through the plan year ending 2051.

Recognizing this issue, the Final Rule now bifurcates the required interest rate assumptions as follows:

For Non-SFA assets, the interest rate is the lesser of: (i) the rate used by the plan for zone certification status before January 1, 2021; and (ii) the third segment funding rate plus 200 basis points; and
For SFA asserts, the interest rate is the lesser of: (i) the rate used by the plan for zone certification status before January 1, 2021; and (ii) the average of the three funding segment rates plus 67 basis points.

For plans whose applications are approved on or before August 8, 2022 (i.e., the Final Rule date), a supplemental application must be filed with the PBGC to take advantage of the two different interest rate assumptions. If an application is still pending as of August 8, 2022, then the plan will need to withdraw the application, revise and refile.

§ 1.2.2 Investment of SFA Assets

The Final Rule allows plans to invest up to 33% of SFA assets in return seeking investments (e.g., publicly traded common stock, equity funds that invest primarily in public shares, bonds, etc.), with the remaining 67% restricted to investment grade fixed income securities. Previously under the IFR, 100% of SFA assets were required to be invested in investment grade fixed income securities. This development adds an important element in the investment of SFA assets, and it could significantly increase the likelihood that plans will be able to avoid insolvency through 2051.

For plans receiving SFA amounts before August 8, 2022, the investment restrictions under the IFR will continue to apply unless a supplemental application is filed with the PBGC.

Seong Kim, Alan Cabral, Ryan Tzeng, and Ronald Kramer

§ 1.3. MPRA Plans

The Final Rule revises the methodology for determining the SFA amount for plans that suspended benefits under the Multiemployer Pension Reform Act of 2014 (“MPRA”).

Previously under the IFR, a single method was used to calculate SFA amounts for plans that suspended benefits under the MPRA (“MPRA plans”) and those that did not (“non- MPRA plans”). Under the MPRA, benefit suspensions were approved if plans could demonstrate that such suspensions would enable the plan to avoid insolvency indefinitely. To qualify for SFA, MPRA plans must permanently reinstate any suspended benefits. However, under the IFR, an MPRA plan would only receive amounts necessary to avoid insolvency through 2051. Thus, under the IFR, MPRA plans were faced with the dilemma of either keeping any benefit suspensions in place to avoid insolvency indefinitely, or receiving SFA, reinstating benefits, and risking insolvency in the future.

To help alleviate this issue, the Final Rule provides that the SFA amount for MPRA plans is the greater of the following:

The SFA amount calculated without regard to any benefit suspensions (i.e., a non-MPRA plan);
The lowest SFA amount that is sufficient to ensure the plan’s projections demonstrate increasing assets in 2051; and
The SFA amount equal to the present value of reinstating suspended benefits through 2051 (including make-up payments).

§ 1.3.1 Retroactive Benefit Increases

The Final Rule allows retroactive benefit increases beginning ten years after receiving SFA, provided the plan can demonstrate to the PBGC that it will continue to avoid insolvency. The IFR did not permit retroactive benefit increases at all during the SFA period (i.e., through 2051), and only permitted prospective benefit increases when certain conditions were satisfied.

§ 1.3.2 Merger Involving SFA Plans

The IFR contained a number of restrictions and conditions, including PBGC approval, that are applicable in the event of merger of a plan receiving SFA. The Final Rule, however, removes restrictions on prospective benefit increases, allocation of assets, and allocation of expenses. The PBGC explained that such conditions would “unduly impede beneficial mergers.” In addition, a merged plan may apply for a waiver of certain other restrictions.

§ 1.3.3 Transfer from SFA Plan to Health Plan

While the PBGC was initially hesitant to permit reallocation of contributions between SFA plans and other employee benefit plans, the Department of Labor suggested that there may be circumstances that would justify good faith reallocations of income or expenses between plans (e.g., health benefit cost increases due to legislative changes). Addressing this narrow circumstance, the Final Rule now permits an SFA plan to apply to the PBGC for permission to temporarily reallocate to a health plan up to 10% of the contribution rate negotiated on or before March 11, 2021. The SFA plan must demonstrate that the reallocation of contributions is necessary to address an increase in healthcare costs required by a change in Federal law, and that the reallocation does not increase the risk of insolvency for the SFA plan. Plans can begin applying five years after receiving SFA, and reallocation of contributions relating to any single change in Federal law can last for no more than five years, with a limit of ten years cumulatively for all reallocation requests.

§ 1.3.4 Withdrawal Liability

The Final Rule adds a “phase-in” feature intended to ensure that SFA funds are not used to subsidize employer withdrawals.

Under the IFR, all SFA funds must be included as plan assets in determining unfunded vested benefits. As a result, it is likely that withdrawal liability would be significantly reduced when calculated immediately after plans receive SFA funding. After the changes in the Final Rule, however, the reduction in withdrawal liability will be more gradual, as plans are required to “phase-in” the recognition of SFA assets.

The phase-in period begins the first plan year in which the plan receives SFA and extends through the end of the plan year in which the plan expects SFA to be exhausted. To determine the amount of SFA assets excluded each year, the plan multiplies the total amount of SFA by a fraction, the numerator of which is the number of years remaining in the phase-in period, and the denominator is the total number or years in the phase-in period. The phased recognition of SFA assets does not apply to plans that received SFA funds under the terms of the IFR unless a supplemental application is filed. If the plan files a supplemental application, the phased recognition applies to withdrawals occurring on or after the date the plan files the supplemental application.

Solely for this new condition for determining withdrawal liability, there is a thirty (30) day public comment period starting on July 8, 2022, the date of publication of the Final Rule in the Federal Register.

§ 1.3.5 SFA Measurement Date and Lock-In Applications

To provide filers with more flexibility, the Final Rule redefines the “SFA measurement date” as the last day of the third calendar month preceding the plan’s initial application date. Previously under the IFR, the SFA measurement date was defined as the last day of the calendar quarter preceding the plan’s initial application date. In addition, the Final Rule creates a mechanism to permit plans in priority groups 5, 6, and any additional priority groups established by the PBGC, to file a “lock-in application.” A lock-in application allows the plan to freeze its base data (i.e., SFA measurement date, census data, non-SFA interest rate assumption, and SFA interest rate assumption) when it is unable to file an application because the PBGC has temporarily closed the filing window. Eligible plans may file lock-in applications after March 11, 2023, and on or before December 31, 2025.

§ 1.3.6 Conclusion

As practitioners continue to digest the new Final Rule, there may be other issues that come up that are not addressed. As noted above, there will also be a thirty (30) day public comment period solely on the phase-in approach to calculating withdrawal liability, which may lead to additional changes. We will continue to monitor for further developments in that regard, and for any additional clarifying guidance from the PBGC. Stay tuned...

Ryan Tzeng, Joel Wilde, Alan Cabral, and Seong Kim

§ 1.4. Can 401(k) Fee Dispute Cases Survive Based on Bare Allegations Supported by Monday-Morning Quarterbacking?

2022 has seen an increase in putative class actions brought under the Employee Retirement Income Security Act (ERISA) (29 U.S.C. §§ 1109 and 1132) against plan fiduciaries. Plaintiffs typically allege that plan fiduciaries breached the duties that ERISA imposes of employee retirement plans, namely, that the fiduciaries breached their duties of loyalty and prudence by including subpar investment options in employee 401(k) plans. These suits are seemingly driven by Monday-morning quarterbacking, where disillusioned plan participants with the benefit of hindsight contend that investment decisions were imprudent. In fact, since 2019, over 200 lawsuits challenging retirement plan fees have been filed against employers in every industry. See Jacklyn Willie, Suits Over 401(k) Fees Nab $150 Million in Accords Big and Small, Bloomberg Law (Aug. 23, 2022), https://bit.ly/3Uel7y5.

A 401(k) fee case involving such a dispute, Matney v. Barrick Gold of N. Am., Inc., 2022 WL 1186532 (D.Ut. Apr. 21, 2022), and the corresponding appeal filed to the Tenth Circuit Court of Appeals, is garnering significant attention from the U.S. Chamber of Commerce and several other business groups. The Chamber of Commerce, the American Benefits Counsel, the ERISA Industry Committee, and the National Mining Association recently filed an amicus brief in November 2022 urging the Tenth Circuit Court of Appeals to affirm the district court’s decision to dismiss the ERISA lawsuit against Barrick Gold of North America, Inc.

§ 1.4.1 The Matney Decision

The plaintiffs in Matney alleged that the plan fiduciaries violated ERISA when it failed to monitor, investigate, and ensure plan participants paid reasonable investment management fees and recordkeeping fees during a period of time. The plaintiffs alleged that each plan participant’s retirement assets covered expenses incurred by the plan, including individual investment fund management fees and recordkeeping fees, which were allegedly excessive, costing the proposed class millions of dollars in direct losses and lost investment opportunities. In support of their claims, the plaintiffs provided example of fees (measured as expense ratios) charged by a select group of funds in the plan, compared to fees charged by other funds in the marketplace. Id. at *5.

In April 2022, U.S. District Judge Tena Campbell dismissed the suit, finding that the plaintiff participants had failed to state a claim. Judge Campbell found that the plaintiffs made “apples to oranges” comparisons that did not plausibly infer a flawed monitoring decision making process.” Id. at *10. The court ultimately found that ERISA does not require plan fiduciaries to offer a particular mix of investment options, whether that be ones that favor institutional over retail share classes, ones that favor collective investment trusts (CITs) to mutual funds, or ones that choose passively-managed over actively-managed investments. Id.

As to the plaintiff participants’ concerns over allegedly improper recordkeeping fee arrangement with Fidelity, Judge Campbell dismissed this claim as well, finding that the court could not infer that the process was flawed, or that a prudent fiduciary in the same circumstances would have acted differently.

Finally, Judge Campbell found that in the context of the participants’ allegations of violations of ERISA’s duty of loyalty, they did not allege facts creating a reasonable inference that the plan fiduciaries were disloyal to the plan participants. On the contrary, Judge Campbell concluded that their allegations of disloyalty were conclusions of law or altogether conclusory and unsupported statements. Id. at *14.

§ 1.4.2 The Matney Amicus

The Amicus Brief filed in support of the Defendants-Appellees noted that in many ERISA fee cases like the plaintiff participants in Matney, the complaint contains no allegations about the fiduciaries’ decision-making process, which is a key element in an ERISA fiduciary-breach claim. Instead, complaints including the one in Matney typically contain allegations with the benefit of 20/20 hindsight that plan fiduciaries failed to select the cheapest or best-performing funds, or the cheapest recordkeeping option, often using inapt comparisons to further the point. Then, the plaintiffs ask the court to make a logical leap from the circumstantial allegations that the plan’s fiduciaries must have failed to prudently manage and monitor the plan’s investment line-up.

The Amicus Brief further averred that allowing suits to proceed like the 401(k) fee dispute case in Matney risks having the effect of severely harming employees’ retirement savings. Indeed, failing to dismiss meritless cases at the pleading stage would invite costly discovery and pressure plan sponsors into a narrow range of options available to participants, like passively-managed, low-cost index funds.

§ 1.4.3 Conclusion

We are closely watching the pending Matney appeal in front of the Tenth Circuit. Following the United States Supreme Court’s decision in Hughes v. Northwestern Univ., 142 S.Ct. 737 (2022), we have been monitoring how courts have interpreted this ruling and its impact on the 401(k) excessive fee space. The Hughes case requires a context-specific inquiry to assess the fiduciaries’ duties to monitor all plan investments and remove any imprudent ones and ultimately reaffirmed the need for courts to evaluate the plausibility pleading requirement established by Rule 8(a), Twombly, and Iqbal. It remains to be seen how other Circuit Courts interpret Hughes and how they will respond to this recent flurry of 401(k) fee cases.

Kathleen Cahill Slaught and Ryan Tikker

§ 1.5. Are We There Yet? Emergency Declarations and COVID Relief Are Extended into 2023

HHS has announced that the COVID-19 Public Health Emergency (PHE) has been extended another 90 days, and will run until January 11, 2023.

In response to the COVID-19 pandemic, two separate emergency declarations have been in effect: (1) the COVID-19 PHE and (2) the COVID-19 National Emergency. These emergency declarations provide different types of COVID-related relief for participants and group health plans. While the COVID-19 pandemic is winding down, these emergency declarations and their related relief remain in effect.

§ 1.5.1 The COVID-19 Public Health Emergency

HHS first declared the COVID-19 PHE in January 2020. The COVID-19 PHE declarations last for 90 days unless an extension is granted. Since January 2020, the COVID-19 PHE has been renewed every 90 days.

HHS recently extended the COVID-19 PHE an additional 90 days. This means that the COVID-19 PHE will run until January 11, 2023, unless another extension is granted.

Accordingly, the COVID-19 PHE will permit the following COVID-related relief to continue into 2023:

COVID-19 Testing: in-network and out-of-network COVID-19 testing are at no cost to participants.
COVID-19 Vaccines: in-network COVID-19 vaccines are at no cost indefinitely, but after the end of the COVID-19 PHE, plans may impose cost-sharing for non-network administration.
Expanded Telehealth Coverage: telehealth coverage is permitted to be offered to employees whether or not the employee is enrolled in the employer’s medical plan.
SBC Advanced Notice Requirements: the SBC advanced notice requirements for mid-year changes are relaxed when necessary to implement COVID-19 coverages/benefits.

The Biden Administration has advised that it will provide at least 60 days’ advanced notice prior to allowing the PHE to expire, so unless the Administration provides such notice before mid-November, it is reasonable to assume the PHE will be extended again.

§ 1.5.2 The COVID-19 National Emergency

Unlike the COVID-19 PHE, the COVID-19 National Emergency is declared by the President and the declarations last for one-year unless an extension is granted. On March 13, 2020, the COVID-19 National Emergency was announced, and it has been extended every year since. Currently, the COVID-19 National Emergency is set to expire on March 1, 2023.

The COVID-19 National Emergency gave rise to the “Outbreak Period” in which certain deadlines were extended to provide relief from COVID-19. The COVID-19 National Emergency will permit the Outbreak Period to continue into 2023, which will permit the following deadlines to be extended until the earlier of (a) one year after the deadline, or (b) 60 days after the end of the Outbreak Period:

COBRA election deadline
COBRA premium payment deadline
HIPAA special enrollment deadline
ERISA claims filing deadline
Fiduciary relief for delayed provision of notices

Keep in mind, the deadlines applicable to the Outbreak Period are determined on an individual by individual basis and cannot last more than one year from the date the individual or plan was first eligible for relief. For more information regarding the COVID-19 National Emergency and Outbreak Period, see our prior Legal Updates.

Please contact the employee benefits attorney at Seyfarth Shaw LLP with whom you usually work if you have any questions regarding the COVID-19 PHE or COVID-19 National Emergency.

Ben Conley and Mary Kennedy

§ 1.6. Are Birth Control and Plan B Next? Texas Judge Targets Preventative Care Mandate in the Name of Religious Liberty

To promote healthier lifestyles in an effort to ultimately reduce the cost of health care in the United States, the Affordable Care Act (ACA) requires private health plans to provide first dollar coverage for evidence-based preventive care. As a result, such things as immunizations and cancer screenings must be covered without the requirement to pay a co pay or meet a deductible. A recent decision by a federal district court in Texas allows employer plan sponsors to exclude coverage for certain preventive treatments to which they objected.

One of the results of this ACA preventive care requirement was to empower the Federal Government to deem certain medical treatments as being effective preventive care and thus necessary for coverage by group health plans. In Braidwood Management Inc v Becerra, 4:20-cv-00283 (N.D. TX), a Court found that an employer who objected to a certain preventive treatment on religious grounds could be exempted from offering that otherwise mandated treatment.

Specifically, in this matter the Court held that the professed Christian beliefs of a for-profit employer exempted it from providing PrEP, a medication that lowers the risk of HIV transmission by over 99%, despite coverage of PrEP being mandated as an effective preventive treatment under the Affordable Care Act. In reaching this holding, the Court noted that the employer objected to covering PrEP as:

[H]e believes that (1) the Bible is “the authoritative and inerrant word of God,” (2) the “Bible condemns sexual activity outside marriage between one man and one woman, including homosexual conduct,” (3) providing coverage of PrEP drugs “facilitates and encourages homosexual behavior, intravenous drug use, and sexual activity outside of marriage between one man and one woman,” and (4) providing coverage of PrEP drugs in Braidwood’s self-insured plan would make him complicit in those behaviors.

The Government argued that the employer put forth no evidence that PrEP increased any of the activities to which it objected. The Court found that argument irrelevant, since the employer believed that PrEP had this impact. The Court also acknowledged that despite this religious objection, the Government had a compelling interest in mandating that benefit plans offer PrEP. However, the Court nevertheless found this compelling interest insufficient to trump the employer’s religious beliefs because the government did not prove how exempting religious for-profit employers from the mandate would impact the compelling interest of slowing/stopping HIV transmission. The Court further noted that the Government could simply solve the issue by paying for PrEP for individuals covered by a health program that did not cover PrEP.

This ruling is significant in that it shows the increasing tension in jurisprudence between public health of employees and society-at-large on the one hand and the religious rights of private employers on the other. Importantly, this line of case law could also raise tension under Title VII as Courts thread the permissibility of an employer’s religious belief to oppose homosexual behavior and its legal mandate not to discriminate against homosexual employees.

The impact of this ruling is not limited to PrEP. Rather, this ruling provides fertile ammunition for employers to argue that their religious beliefs justify their exemption from a whole host of otherwise required medical treatments, including birth control and Plan-B. Stay tuned as we continue to track legislation and court rulings that impact access to health care coverage.

Sam Schwartz-Fenwick

§ 1.7. Agency FAQs Reveal Employers Continue to Struggle with No Surprises Act & Transparency in Coverage Implementation

With staggered effective dates continuing over the course of the next several years, the No Surprises Act (NSA) and Transparency in Coverage requirements impose a number of additional compliance obligations on group health plan sponsors. The DOL, HHS and the Treasury recently issued joint guidance in the form of Frequently Asked Questions (FAQs) attempting to clarify a number of these obligations.

§ 1.7.1 Guidelines for Transparency in Coverage Machine-Readable Files Notice

As described in earlier legal updates, the agency Transparency in Coverage guidelines contain a host of new requirements, including the requirement that plans make machine-readable files publicly available on the plan’s website no later than 7/1/2022. The agencies had previously indicated that if an employer-sponsored plan maintained no such website, the employer would be required to post the files (or a link to the files) on their public-facing website. Needless to say, this caused great consternation among large employers that carefully curate their public-facing website, so the new FAQs elaborate on and relax this requirement.

Under the new guidance, an employer can satisfy the posting requirement through a link posted on the plan’s third-party administrator (TPA) or insurance carrier’s public website alone. To rely on a TPA/carrier posting, the plan/employer must enter into a written agreement with the TPA/carrier under which the vendor assumes this obligation. (But the guidance reiterates that if the vendor fails to properly post the machine-readable files on its website, the plan will remain liable for violating the disclosure requirements.)
Employers who posted a link to the machine-readable files on their own public website may choose to remove it once they have a written agreement in place.

§ 1.7.2 Guidelines for Disclosure of NSA Notice

The NSA requires entities governed by the NSA (including health plans, insurance carriers and providers) to notify affected individuals of their rights with respect to balance billing. The DOL offered a model notice to satisfy this requirement. Because the regulations were broadly applicable to a diverse array of entities, there was some uncertainty surrounding how they applied in the context of group health plans. The FAQs attempted to clarify this uncertainty as follows:

The FAQs specify the three ways in which plans and issuers must satisfy the notice obligation:
- Make the notice publicly available. It remains unclear what this means in the context of an employer-sponsored group health plan. Presumably the website posting referenced below should satisfy this obligation, but further guidance would be welcome.
- Post the notice on the public website of the plan. Here, the agencies clarify that a plan with no public website (i.e., most employer-sponsored health plans) can satisfy this obligation by entering into a written agreement with the plan’s insurance carrier or TPA under which the TPA/carrier posts the information on a public website where information is normally made available to participants. The FAQs reiterate that the plan ultimately remains liable for any failure on the part of its TPA/carrier.
- Include information regarding protections against balance billing on any Explanation of Benefits (EOB) subject to the new requirements.
As noted above, the DOL has provided a model notice and has updated its model since initial issuance. The FAQs would permit plans to use either version for plan years beginning before January 1, 2023, but thereafter plans must use the revised notice.
The FAQs also clarified that for plans not subject to state balance billing obligations (which would include most self-funded plans), any information in the notice applicable to state guidelines can be removed.

§ 1.7.3 Confirms Applicability to Plans with No Network and Plans Only Offering In-Network Coverage

Because the NSA generally affords protections with respect to non-network services, there was some uncertainty surrounding whether and to what extent those protections would apply for plans with no network (e.g., reference-based pricing plans) or plans that only extend in-network coverage. The FAQs included several clarifications on these points.

Because the NSA requires that certain non-network claims be processed as if they were performed in-network, there had been some uncertainty regarding whether and to what extent these rules apply to (a) plans with no network, or (b) plans with no non-network coverage. The FAQs confirm that the provisions do apply to these types of plans, at least with respect to emergency services and air ambulance services.
In contrast, the provisions that prohibit balance billing and/or limit cost sharing for non-emergency services apply only to services provided by a nonparticipating provider with respect to a visit to a participating health care facility. Therefore, the prohibitions on balance billing and/or provisions that limit cost sharing for nonemergency services provided by nonparticipating providers with respect to a visit to certain participating facilities would never be triggered if a plan does not have a network of participating facilities.
If a plan has no network, the payment amount should be calculated using the NSA’s existing hierarchy (All-Payer Model Agreement, state law, or qualifying payment amount (QPA) using an eligible database).
The FAQs reiterate earlier guidance that requires plans with no network to impose reasonable guardrails to ensure that the plan does not subvert the Affordable Care Act’s limits on out-of-pocket maximums.
The FAQs clarify that if a plan limits network coverage to emergency air ambulance services, then it must only provide non-network coverage for emergency (not nonemergency) air ambulance services.
The FAQs also clarify that the air ambulance provisions apply to pick-ups outside of the U.S. and provide guidance on how to determine the QPA in that context.

§ 1.7.4 Confirms Applicability to Behavioral Health Crisis Facility

The FAQs confirm that the NSA protections can apply in the context of a behavioral health crisis facility if the services otherwise meet the definition of “emergency services” and are provided in connection with a visit to a facility that meets the definition of an “emergency department of a hospital” or “independent freestanding emergency department”.

§ 1.7.5 Clarifications Regarding Calculation of Qualifying Payment Amount

While the NSA attempted to establish a framework for plans to calculate the QPA in most instances (with a fallback allowing plans to rely on an eligible database if data was unavailable), there remain some circumstances where such calculation is not adequately addressed. The FAQs provide certain clarifications for these situations, including the following.

Plans must calculate a median rate based on each provider specialty if the plan’s payment rates vary based on specialty.
If plans offer multiple benefit options across different TPAs, the FAQs clarify that the plan must only determine the QPA for an NSA-protected service based on the rate for the TPA administering the benefit option in which the participant has enrolled (i.e., no coordination across TPAs is required).
The FAQs reiterate that the EOB relating to an NSA claim must include all required information under the NSA rather than directing the participant or provider to a website where that information is available.

Joy Sellstrom and Ben Conley

§ 1.8. Equal Access to Travel Benefits

As more employers announce that they cover travel benefits under their medical plans that will allow participants to be reimbursed for certain travel expenses necessary in order to access otherwise covered medical benefits, proponents on the pro-choice and anti-abortion platforms seek ways to support or block those benefits.

In the weeks since the Dobbs decision was released, the ripple effects of the decision continue to arise in unexpected ways. Litigants are challenging as discriminatory under Title VII, employer travel benefits that enable employees to travel in order terminate pregnancies in states where it remains legal. Specifically, litigants have begun to assert that providing travel benefits for the purpose of terminating a pregnancy is unlawful if the employer does not also allow travel benefits for pregnant women who intend to carry their pregnancy to term.

There is a long history of employees using Title VII as a tool to ensure equal benefit treatment in situations where only certain classes of employees are eligible for a benefit. The nuance in the recent challenges is that employees during pregnancy do not typically need to travel for a benefits purpose (e.g., to receive adequate prenatal care). Further, to date these claims do not appear to be an allegation that only certain pregnant employees have access to a travel benefit to terminate a pregnancy. This makes the success of this type of claim far from certain. However, even if these cases are dismissed for failure to state a cognizable claim, this type of action remains significant in showing the new types of litigation claims that employers will need to contend with post-Dobbs. It is expected that other cases may be filed under Title VII asserting claims of religious discrimination. For instance, an employee may claim that their religious rights are being infringed on if they are tasked with approving abortion related travel benefits and abortion violates their religious beliefs.

To navigate this increasingly divisive environment, it remains a best practice to clearly communicate the scope of any post- Dobbs policy and to work with counsel to ensure that the policy is properly tailored to best mitigate litigation risk in a rapidly changing legal climate. Please stay tuned as we continue to provide updates on litigation and statutory trends post-Dobbs.

Sam Schwartz-Fenwick and Ada Dolph

§ 1.9. Sixth Circuit Affirms Dismissal of 401(K) Breach of Fiduciary Duty Case, Supports Selection of Actively-Managed Funds

In a published opinion on June 21, 2022, Smith v. CommonSpirit Health, 37 F.4th 1160 (6th 2022) a three-judge panel affirmed a Kentucky district court’s dismissal of a putative class action against a plan administrator and plan sponsor. The plaintiff, Yousaun Smith, claimed breaches of fiduciary duty in violation of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1132(a)(2). Smith worked for Catholic Health Initiatives, now known as CommonSpirit Health, and participated in the CommonSpirit defined-contribution 401(k) plan.

Smith claimed that CommonSpirit breached its duty of prudence by offering several actively managed investment funds when index funds available on the market offered higher returns and lower fees. Particularly, he pointed to three-year and five-year periods in which three actively managed funds trailed related index funds in their rates of returns.

The panel also considered the contention that actively managed funds were per se imprudent for inclusion because they might underperform more conservative investment options over a set period of time.

“[T]here is nothing wrong with permitting employees to choose them in hopes of realizing above-average returns over the course of the long lifespan of a retirement account - sometimes through high-growth investment strategies, sometimes through highly defensive investment strategies. . . It is possible indeed that denying employees the option of actively managed funds, especially for those eager to undertake more or less risk, would itself be imprudent.” Instead, the Sixth Circuit found that offering actively managed funds in addition to passively managed funds was merely a reasonable response to customer behavior. Id. at 1166.

The Sixth Circuit also considered whether CommonSpirit violated its fiduciary duty by imprudently offering specific actively managed funds. ERISA and Supreme Court precedent require that plan fiduciaries ensure that all fund options remain prudent options.

The panel, however, found that Smith did not plausibly plead that CommonSpirit violated this obligation either. Smith pointed to the performance of the Fidelity Freedom Funds versus the Fidelity Freedom Index Funds, over a five-year period, noting that the actively-managed freedom funds trailed the index funds by as much as 0.63 percentage points per year. The Sixth Circuit wrote that it was still prudent to offer an actively managed fund that costs more but may generate greater returns over the long haul. It also rejected that a participant could simply point to a fund with better performance to create a showing of imprudence. That alone is not itself sufficient. Instead, the panel wrote that these claims, “require evidence that an investment was imprudent from the moment the administrator selected it, that the investment became imprudent over time, or that the investment was otherwise clearly unsuitable for the goals of the fund based on ongoing performance.” Id. at 1166.

The Sixth Circuit also noted that its decision paralleled the Eighth Circuit’s in a similar claim, where the Eighth Circuit rejected an employees’ claim that plan administrators breached a fiduciary duty by offering actively managed stock and real estate funds in addition to passively managed ones, where it concluded that it was “not imprudent for a fiduciary to provide both investment options.” Davis v. Washington Univ. in St. Louis, 960 F.3d 478, 485 (8th Cir. 2020). In fact, the two general investment options “have different aims, different risks, and different potential awards that cater to different investors. Comparing apples to oranges is not a way to show that one is better or worse than the other.” Id.

This supports that a plaintiff participant cannot merely point to another index investment that has performed better in a five-year snapshot of a fund to plausibly plead an imprudent decision. Necessarily, this construction could mean that every actively managed fund with below-average results over the most-recent five-year period could create a plausible ERISA violation. This rings true when one considers that the lifespan of these funds may be a 50-year period. We will continue to watch the challenge of these 401(k) disputes and how courts handle similar cases at the motion to dismiss level. These matters have become increasingly more common over the past year.

Kathleen Cahill Slaught and Ryan Tikker

§ 1.10. Novel Retirement Plan Correction Opportunity Offered by the IRS

On June 3, 2022, the IRS announced the launch of a “pre-examination” compliance program. Under the new program, the IRS sends letters to plan sponsors about an upcoming examination of their retirement plan or plans. The letter gives the plan sponsor 90 days to voluntarily review its retirement plan(s) for plan document and operational compliance, and self-report any errors and/or corresponding corrections back to the IRS no later than the end of the 90 day period. Following the IRS’s review of the plan sponsor’s response, the IRS can issue a closing letter or may choose to conduct a limited or full scope audit. Like all pilot programs, the IRS will evaluate the program’s effectiveness and determine whether it will be a permanent fixture of its compliance strategy. So is this new pre-examination compliance program a good thing or a bad thing for plan sponsors? Will the IRS use this to expand its audit abilities by having plan sponsors do its work for them, or will the program end up reducing the odds of a plan being subject to a full scope audit that could drag on for months or longer?

§ 1.10.1 Background

If you listen carefully, you may occasionally hear employee benefits practitioners applaud the IRS’ Employee Plans Compliance Resolution System (aka EPCRS), described in Revenue Procedure 2021-30, as being one of the most successful compliance programs in IRS history. This may be so. The program is designed to allow plan sponsors the opportunity to make reasonable corrections of retirement plan tax errors without penalty (and in many cases without even identifying the plan sponsor), other than the imposition of a user fee if a filing is made with the IRS. Moreover, since the form of its initial pilot program in the early 1990s, EPCRS has periodically and consistently evolved to further address difficulties facing plan sponsors intending to be compliant, but who are occasionally set-back by the complexities of the retirement plan regimes.

§ 1.10.2 New IRS Pilot Program

The latest compliance-related enterprise is a new pilot program, announced last month, which concerns compliance errors discovered upon IRS examinations of retirement plans (i.e., plan audits). When such errors are discovered by the IRS upon audit, EPCRS is often no longer available and the consequences can be particularly costly. Inevitably, it would be significantly less expensive for a plan sponsor who self-identifies errors and utilizes EPCRS before being notified of the examination. But that doesn’t always happen.

The essence of the new pilot program is to give plan sponsors a “90-day warning” to self-identify and report any errors that would have been precluded from EPCRS, had the errors been identified by the IRS on exam.

If a plan sponsor fails to respond within the 90-day window, the IRS will schedule an exam.

Errors that the plan sponsor identifies, may be either self-corrected if otherwise eligible under EPCRS. If not eligible for self-correction under EPCRS, the plan sponsor can enter into a closing agreement with the IRS to make the appropriate corrections at the cost of the voluntary compliance program (aka VCP) fee—which is likely to be a small fraction of the cost that would be facing the plan sponsor if the error(s) were discovered by the IRS upon examination.

After reviewing the plan sponsor’s response, the IRS may just enter into a closing agreement bringing the matter to an end, but reserves the right to conduct a limited or full scope exam, presumably if the response is not up to snuff.

We’re told from our industry sources that the IRS has unofficially stated that the pilot program presently is limited only to 100 defined contribution plans that have been identified for potential errors relating to compliance with the requirements of Internal Revenue Code section 415 (the annual contribution limit applicable to tax-favored retirement plans). If the pilot program is successful, the IRS intends to apply it more broadly.

§ 1.10.3 Benefits Counsel’s Perspective

Through a non-cynical lens, an expanded version of this program can be a win-win for plan sponsors and the IRS. Plan sponsors get a valuable heads up that an exam is coming and a “second chance” to correct errors. On the other hand, the IRS presumably can more efficiently allocate its resources.

Naturally, if you receive one of these letters, our advice is to conduct a robust review of the issues identified in the letter and prepare an appropriate response with the help of your Seyfarth Shaw employee benefits counsel.

We encourage you to contact us immediately if you receive one of these notices from the IRS.

Benjamin Spater

§ 1.11. PBGC Finally Publishes Final Rule on Special Financial Assistance Program

The following is a high-level summary of the key changes and developments from the Final Rule.

§ 1.11.1 Separate Interest Rate Assumptions for SFA and Non-SFA Assets

Recognizing this issue, the Final Rule now bifurcates the required interest rate assumptions as follows:

For Non-SFA assets, the interest rate is the lesser of: (i) the rate used by the plan for zone certification status before January 1, 2021; and (ii) the third segment funding rate plus 200 basis points; and
For SFA assets, the interest rate is the lesser of: (i) the rate used by the plan for zone certification status before January 1, 2021; and (ii) the average of the three funding segment rates plus 67 basis points.

§ 1.11.2 Investment of SFA Assets

For plans receiving SFA amounts before August 8, 2022, the investment restrictions under the IFR will continue to apply unless a supplemental application is filed with the PBGC.

§ 1.11.3 MPRA Plans

The Final Rule revises the methodology for determining the SFA amount for plans that suspended benefits under the Multiemployer Pension Reform Act of 2014 (“MPRA”).

To help alleviate this issue, the Final Rule provides that the SFA amount for MPRA plans is the greater of the following:

The SFA amount calculated without regard to any benefit suspensions (i.e., a non- MPRA plan);
The lowest SFA amount that is sufficient to ensure the plan’s projections demonstrate increasing assets in 2051; and
The SFA amount equal to the present value of reinstating suspended benefits through 2051 (including make-up payments).

§ 1.11.4 Retroactive Benefit Increases

§ 1.11.5 Merger Involving SFA Plans

§ 1.11.6 Transfer From SFA Plan To Health Plan

§ 1.11.7 Withdrawal Liability

The Final Rule adds a “phase-in” feature intended to ensure that SFA funds are not used to subsidize employer withdrawals.

§ 1.11.8 SFA Measurement Date and Lock-In Applications

In addition, the Final Rule creates a mechanism to permit plans in priority groups 5, 6, and any additional priority groups established by the PBGC, to file a “lock-in application.” A lock-in application allows the plan to freeze its base data (i.e., SFA measurement date, census data, non-SFA interest rate assumption, and SFA interest rate assumption) when it is unable to file an application because the PBGC has temporarily closed the filing window. Eligible plans may file lock-in applications after March 11, 2023, and on or before December 31, 2025.

§ 1.11.9 Conclusion

Ryan Tzeng, Joel Wilde, Alan Cabral, and Seong Kim

§ 1.12. Federal Government Response to Dobbs Begins to Take Shape

As we have been covering, the Supreme Court has overturned Roe v. Wade in their Dobbs v. Jackson Women’s Health Organization, leaving it to states to regulate access to abortion in their territory. The Biden Administration’s response to the overturning of Roe V. Wade in Dobbs v. Jackson Women’s Health Organization is taking shape and it has directed the Federal governmental agencies to look at what they can and should do to protect women’s health and privacy. Over the last few weeks, those agencies have been weighing in.

Initially, during the week of June 27th, we saw the following agency activity:

Tri-Agency Guidance re Contraceptive Coverage: On June 27th, the agencies responsible for enforcing the provisions of the Affordable Care Act (ACA) — the Departments of Health and Human Services, Labor, and Treasury - issued a letter directed to health plans and insurers “reminding” them that group health plans must cover, without cost-sharing, birth control and contraceptive counseling for plan participants. They note that they are concerned about a lack of compliance with this mandate, and that they will be actively enforcing it.

HHS Guidance re HIPAA Privacy: Shortly after, HHS issued guidance regarding the privacy protections offered by HIPAA relating to reproductive health care services covered under a health plan, including abortion services. This guidance reminds covered entities that HIPAA permits, but may not require, disclosure of PHI when such disclosure is required by law, for law enforcement purposes, or to avert a serious threat to health or safety. The guidance described the following disclosure scenarios, without an individual authorization, as breaching HIPAA’s privacy obligations:

“Required by Law:” An individual goes to a hospital emergency department while experiencing complications related to a miscarriage during the tenth week of pregnancy. A hospital workforce member suspects the individual of having taken medication to end their pregnancy. State or other law prohibits abortion after six weeks of pregnancy but does not require the hospital to report individuals to law enforcement. Where state law does not expressly require such reporting, HIPAA would not permit a disclosure to law enforcement under the “required by law” provision.

“For Law Enforcement Purposes:” A law enforcement official goes to a reproductive health care clinic and requests records of abortions performed at the clinic. If the request is not accompanied by a court order or other mandate enforceable in a court of law, HIPAA would not permit the clinic to disclose PHI in response to the request.

“To Avert a Serious Threat to Health or Safety:” A pregnant individual in a state that bans abortion informs their health care provider that they intend to seek an abortion in another state where abortion is legal. The provider wants to report the statement to law enforcement to attempt to prevent the abortion from taking place. However, HIPAA would not permit this as a disclosure to avert a serious threat to health or safety because a statement indicating an individual’s intent to get a legal abortion, or any other care tied to pregnancy, does not qualify as a serious an imminent threat to the health and safety of a person or the public, and it generally would be inconsistent with professional ethical standards.

On Friday, July 9th, the Biden administration issued an “Executive Order on Protecting Access to Reproductive Healthcare Services.” The Executive Order creates the Interagency Task Force on Reproductive Healthcare Access and instructs different agencies in broad brushstrokes in at least three areas:

Access to Services: The Secretary and Health and Human Services is to identify possible ways to:
- protect and expand access to abortion care, including medication abortion, and other reproductive health services such as family planning services;
- increase education about available reproductive health care services and contraception;
- ensure all patients receive protections for emergency care afforded by law.

The Secretary of Health and Human Services is directed to report back to the President in 30 days on this point.

Legal Assistance: The Attorney General and Counsel to the President will encourage lawyers to represent patients, providers and third parties lawfully seeking reproductive health services.
Physical Protection: The Attorney General and Department of Homeland Security will consider ways to ensure safety of patients, providers, third parties, and clinics, pharmacies and other entities providing reproductive health services.
Privacy and Data Protection: Agencies also will consider ways to: address privacy threats, e.g., the sale of sensitive health-related data and digital surveillance, protect consumers’ privacy when seeking information about reproductive health care services, and strengthen protections under HIPAA with regard to reproductive healthcare services and patient-provider confidentiality laws.

It did not take long for the agencies to respond:

On Monday, July 11th, in a letter to health care providers, HHS Secretary Xavier Becerra said that the federal Emergency Medical Treatment and Active Labor Act requires health care providers to stabilize a patient in an emergency health situation. Given the Supremacy Clause of the Constitution, that statute takes precedence over conflicting state law. As a result, that stabilization treatment could include abortion services if needed to protect the woman’s life.
Also on Monday, the Federal Trade Commission announced that it is taking action to ensure that sensitive medical data, including location tracking data on electronic applications, is not illegally shared. The FTC gave several examples of existing enforcement activity and noted it will aggressively pursue other violations.

We are certain to see more responses to the Executive Order and will update this space. Should you have any questions, please contact your Seyfarth attorney. We will continue to monitor and provide updates as developments unfold.

Emily Miller, Ben Conley, and Sam Schwartz-Fenwick

§ 1.13. Taking Surprise Out of the No Surprises Act

The cost of health care is on the rise, and patients across the United States are more frequently experiencing a bit of shock when their medical bills arrive in their mailbox. Even before the COVID-19 pandemic, rising health care costs were top of mind for many, including lawmakers.

Many states have passed restrictions or prohibitions on surprise billing, which often occurs when patients receive emergency or out-of-network care and the providers bill the difference between their billed charges and the amount paid by the patient’s health plan. This is also referred to as balance billing and the costs are usually both significant and unexpected. It often occurs in emergency care but can occur in nonemergency situations—for example, when an individual is unknowingly treated by an out-of-network provider at an in-network facility.

As other price transparency rules and legislation relating to welfare plans started flooding in during recent years, Congress passed legislation addressing the balance-billing issue at the federal level. On December 27, 2020, the No Surprises Act (NSA) was signed into law as part of the Consolidated Appropriations Act of 2021 (CAA). It is one of the many recent targeted efforts to increase price transparency in the health care world and reduce sticker shock when individuals are paying for care.

The law went into effect January 1, 2022, and aims to reduce surprise billing experienced by patients when they unwillingly or unintentionally receive services from an out-of-network provider. Since the initial passage of NSA, regulations and guidance have been released attempting to clarify the rules for plans, issuers and providers, and a number of court cases have been filed.

With the vast array of recent legislation impacting health and welfare plans, many employers are struggling to navigate the complex requirements being imposed as well as the practical implications of NSA. This article will review some of the key provisions of the law related to surprise billing, cost sharing and dispute resolution between providers and plans, and it will provide a list of action steps for health plan sponsors.

§ 1.13.1 What Types of Health Plans Are Subject to NSA?

Generally, NSA applies to insured and self-insured group health plans that provide coverage for emergency services, including both nongrandfathered and grandfathered plans under the Patient Protection and Affordable Care Act (ACA). However, group health plans constituting “excepted benefit” plans, health reimbursement arrangements, account-based group health plans and short-term limited duration insurance plans are not required to comply. NSA also applies to providers and health plan issuers.

§ 1.13.2 Emergency Care and Out-of-Network Air Ambulance Services

Under NSA, health plans must cover “emergency services” (including post-emergency stabilization services and out-of-network air ambulance services) without prior authorization, regardless of network status, without limiting the definition of emergency medical condition to those based only on diagnosis codes and regardless of any other plan provision (other than those related to an exclusion, coordination of benefits or permissible waiting period). Out-of-network emergency care requirements and limits cannot be more restrictive than those applicable to in-network care.

In addition, certain cost-sharing requirements are imposed on out-of-network emergency care. These provisions require health plans to pay claims at certain minimum levels of coverage and provide patient cost sharing equal to in-network levels. The cost-sharing requirements are discussed in greater detail below.

§ 1.13.3 Nonemergency Care from Out-of-Network Providers at In-Network Facilities

The emergency care rules described above also apply if a patient receives covered benefits under a plan from an out-of-network provider at an in-network facility, unless certain notice and consent requirements are satisfied by the provider. Where a patient receives nonemergency care and/or poststabilization services, balance billing may generally occur after notice and consent are provided and obtained by the provider. However, even if a provider issues notice and obtains consent, balance billing is still prohibited for certain types of nonemergency services, such as ancillary services relating to emergency care, diagnostic services and services provided by out-of-network providers when no in-network providers are available to provide care at the facility.

It is important to note that emergency care and air ambulance services cannot be balance billed even if the provider gives notice and obtains consent. Rather, balance billing may occur after notice and consent only for certain types of nonemergency care and poststabilization.

§ 1.13.4 Cost-Sharing Requirements

Although ACA already provides financial protection against excessive cost sharing by requiring minimum levels of coverage for emergencies and other situations, NSA expands the scope of these protections and also adds a prohibition against balance billing. Under NSA, cost sharing for emergency care and out-of-network services provided at in-network facilities must be the same as in-network cost sharing (based on the “recognized amount”) and must count toward in network deductibles and out-of-pocket maximums. The recognized amount is the lesser of billed charges or (1) the All-Payer Model Agreement of the Social Security Act (SSA), (2) applicable state law where the SSA All-Payer Model Agreement does not apply or (3) the qualifying payment amount (QPA) (the lesser of the median contract rate for the plan in the applicable geographic region or the provider’s billed charge).

For purposes of self-funded group health plans, the QPA is likely the applicable standard unless the plan has decided to opt in to applicable state law. For fully insured plans, the applicable standard is likely state law. If the QPA is the recognized amount for a certain claim, the plan must provide a disclosure to the provider indicating the QPA, information on the independent dispute resolution (IDR) process, contact information for the plan and a statement certifying that the QPA was calculated in accordance with NSA.

§ 1.13.5 Payment Disputes and the Independent Dispute Resolution Process

NSA lays out specific procedures for providers to follow in objecting to payment amounts and outlines mandatory procedures for negotiating and settling payment disputes with health plans. A binding IDR process is available to plans and providers for determining an out-of-network rate for services covered by NSA once the parties have openly negotiated with each other for 30 days.

The plan or provider must affirmatively initiate the IDR process. If the process is utilized by the parties to determine a payment rate, the IDR entity will consider the QPA, services provided, historical contracts, the training and experience of the provider, and the market share of the plan and provider. The parties may jointly select a certified IDR entity within three business days after the initiation of the IDR process; if an IDR entity is not selected on a timely basis, an IDR entity will be selected for the parties and assigned no later than six business days after the IDR process has been initiated. The DOL, HHS and IRS maintain a list of certified IDR entities online and, in April 2022, released the Federal Independent Dispute Resolution (IDR) Process Guidance for Disputing Parties for certified IDR entities to follow in administering the IDR process.’ Several lawsuits have been filed by providers over the payment dispute process, and one court has vacated part of a prior interim federal rule requiring IDR entities to give deference to the QPA (removing the presumption in favor of the QPA during an arbitration).

Although the IDR process does not replace the ACA external review requirements (which are used to resolve disputes between plans and individuals over adverse benefit determinations), it is possible for a dispute to go through both the IDR process and the external review process. For example, a claim initially denied but later required to be covered as a result of the external review process might subsequently go through the IDR process in order to determine the payment amount.

§ 1.13.6 Publicly Available Notice

NSA requires plans and providers to post a publicly available notice regarding the various balance-billing protections under the law. The notice should be posted on a public website of the plan and included on each explanation of benefits for an item or service to which the NSA requirements apply. A model notice has been made available by the agencies.

§ 1.13.7 Enforcement of NSA

In order to enforce the rules under NSA, agencies can rely on enforcement mechanisms under the Employee Retirement Income Security Act of 1974 (ERISA), the Internal Revenue Code and the Public Health Service Act. In addition, the agencies may increase enforcement mechanisms available to them through future rulemaking.

§ 1.13.8 Future Guidance Expected

Additional guidance is expected from the agencies relating to NSA and implementation of its new rules. Employers and plan sponsors should keep a close eye on the headlines and court decisions in order to ensure continued compliance. In addition, employers should not forget about other ongoing price transparency efforts including, but not limited to, additional price transparency requirements within CAA (such as an advance explanation of benefits and a price comparison tool) and the transparency in coverage regulations requiring health plans to disclose in-network provider negotiated rates, historical out-of-network allowed amounts for providers, and in-network negotiated rates and historical net prices for covered prescription drugs.

§ 1.13.9 Recommended Action Steps for Health Plan Sponsors

Health plan sponsors should consider the following steps to work toward compliance with NSA.

Review and update the definition of emergency services under the plan to ensure the scope of the definition complies with NSA. Emergency care now encompasses a much broader scope of services—including some services not typically thought of as emergency.
Review and update cost-sharing provisions under the plan, taking into consideration the requirement that cost sharing for emergency care and out-of-network services at in-network facilities must be the same as in-network cost sharing.
Review processes for calculating in-network accumulators (e.g., deductibles and out-of-pocket maximums) in light of the requirement that cost sharing for emergency care and out-of-network services at in-network facilities must count toward in-network deductibles and out-of-pocket maximums.
Analyze and update standards reviewing emergency care claims so as not to run afoul of the requirement that claims not be denied automatically based solely on diagnosis codes.
If the plan is a self-funded group health plan, decide whether to opt in to state law or rely on the QPA for purposes of setting the “recognized amount’ If the QPA will be utilized, determine what the median contract rate will be based on.
Draft a publicly available notice (keeping in mind that the agencies have developed a model notice) discussing the protections under NSA, and determine how the public notice will be made available for the plan. Consider whether it should be included in the plan’s summary plan description(s) (SPD(s)) or other plan-related materials (e.g., explanation of benefits, open enrollment materials, etc.).
Connect with third-party administrators and insurance carriers regarding delegation of and responsibility for handling payment disputes and the IDR process. This may include reviewing and negotiating service agreements with plan service providers to determine whether and how they will implement compliance with the IDR requirements on behalf of the plan.
Consult with legal counsel to determine whether the plan and/or SPD should be updated to reflect or describe the payment dispute and IDR process.
Monitor guidance issued by the agencies and court rulings relating to NSA and other ongoing price transparency efforts.
Periodically and consistently review and update provider network directories so that plan participants are aware of which providers are considered in network. Carriers should make these changes, but plan sponsors should monitor carriers and update contracts to ensure directories are kept up to date.
Review and update ongoing fiduciary compliance efforts relating to the plan, including establishing a fiduciary committee, adopting or revising policies and procedures for the fiduciary committee, and monitoring plan service providers.

Caroline Pieper

§ 1.14. Ninth Circuit Discusses Use of Occupational Data in Long-Term Disability ERISA Benefits Denial

In an unpublished decision, a three-judge panel of the Ninth Circuit in Kay v. Hartford Life and Accident Ins. Co., 2022 WL 4363444 (9th Cir. 2022) reversed Judge Michael Anello’s decision out of the Southern District of California to deny Plaintiff Anne Kay’s claim for benefits under the Employee Retirement Income Security Act (ERISA).

Kay had stopped working in August 2015 due to escalating back pain. She applied for and received disability benefits under her employer’s long-term disability plan, administered by Hartford Life and Accident Insurance Company. Hartford terminated her benefits in July 2016 and upheld its termination in an administrative appeal, finding that she was not disabled from performing her occupation as it is recognized in the general workplace.

The Ninth Circuit found that the district court abused its discretion by denying Kay’s motion to augment the record. Id. at *1. In an ERISA case, a court may exercise its discretion to consider evidence outside of the administrative record only when circumstances clearly establish that additional evidence is necessary to conduct an adequate de novo review of the benefit decision. The Ninth Circuit wrote that because ERISA guarantees plan participants a statutory right to a “full and fair review” of a disability claim, additional evidence is necessary when an administrator tacks on a new reason for denying benefits in a final decision, thereby precluding the plan participant from responding to that rationale for denial at the administrative level.

In denying Kay’s claim for LTD benefits, Hartford offered a new rationale based on new supporting evidence. As a clinical specialist, Kay was required to travel up to 80% of the time, to work over 40 hours per week, and to move equipment that weighed upwards of 270 pounds. Hartford’s initial determination was based on a finding that she was not disabled from these duties. In Hartford’s denial of her appeal, the administrator concluded that the travel and lift requirements were not essential to her occupation in the “general workplace.” To support this rationale, Hartford produced a new occupational report defining the essential duties of Kay’s role as a hybrid of two definitions from the Department of Labor’s Dictionary of Occupational Titles, and a medical report from a physician concluding that Kay was not disabled from performing those duties. Id.

The district court denied Kay’s motion to augment the administrative record with evidence intended to refute Hartford’s new rationale. The Ninth Circuit found that in so doing, the district court effectively insulated the Hartford’s decision from a “full and fair review.”

The Ninth Circuit also found that it was also an error for Hartford and the District Court to define Kay’s position to omit the 80% travel and 270-pound lifting requirements. Id. at *2. The Hartford plan definition of occupation included the employee’s vocation “as it is recognized in the general workplace.” Id.

The Ninth Circuit recognized that while the DOT are an appropriate source for insurers applying a “general workplace” or “national economy” standard to consider an employee’s occupational duties, a proper administrative review requires that the insurer analyze, in a reasoned and deliberative fashion, what the claimant actually does before it determines what the essential duties of a claimant’s occupation are. Id.

In this case, the Ninth Circuit found that the record reflected that Hartford’s occupational specialist defined Kay’s occupation by matching DOT titles to generic job descriptions from Indeed.com and failed to select DOT titles that approximated her actual job responsibilities, including her position’s extensive travel and lifting requirements. Id.

While Hartford’s policy definition explicitly did not define occupation as including the specific job Kay was performing, the Ninth Circuit found that the occupational review needed to better match with her actual job duties. Failing to do so would not be a reasoned and deliberate analysis, as is required by Ninth Circuit precedent. As for the impact of this decision, questions remain as to how closely a theoretical job in the “general workplace” or “national economy” standard will need to match with an employee’s actual job duties. Plan administrators should review the participant’s actual job duties when evaluating the essential duties of the job and be sure to document all references for the administrative record.

Kathleen Cahill Slaught and Ryan Tikker

§ 1.15. Employers May Have to Pay More in 2022 under New ACA Limits

The IRS has announced adjustments decreasing the affordability threshold for plan years beginning in 2023, which may cause employers to have to pay more for ACA compliant coverage in 2023.

The IRS recently released adjustments decreasing the affordability threshold for plan years beginning in 2023 in Revenue Procedure 2022-34.

Under the Affordable Care Act (ACA), applicable large employers (ALEs) that do not offer affordable minimum essential coverage to at least 95% of their full-time employees (and their dependents) under an eligible employer-sponsored health plan may be subject to an employer shared responsibility penalty. Generally speaking, coverage is affordable if the employee-required contribution for self-only coverage is no more than 9.5% (as adjusted each year) of the employee’s household income. The adjusted percentage for 2022 is 9.61%. For more information regarding the 2022 affordability threshold, see our prior Blog Post here.

§ 1.15.1 Adjusted Percentage for 2023

Under Revenue Procedure 2022-34, the adjusted percentage for 2023 will be 9.12%. This is a decrease of 0.49% from the 2022 affordability threshold of 9.61%, and is the lowest affordability threshold to date by far.

§ 1.15.2 Federal Poverty Line (FPL) Safe Harbor

Making calculations based on each employee’s household income would be administratively burdensome. Accordingly, there are three safe harbors for determining affordability based on a criterion other than an employee’s household income; namely an employee’s Form W-2 wages, an employee’s rate of pay, or the FPL. If one or more of the safe harbor methods can be satisfied, an offer of coverage is deemed affordable. The FPL safe harbor is the easiest to apply, since an employer has to do just one calculation and can ignore employees’ actual wages, and is intended to provide employers with a predetermined maximum required employee contribution that will in all cases result in coverage being deemed affordable. Under the FPL safe harbor, employer-provided coverage offered to an employee is affordable if the employee’s monthly cost for self-only coverage does not exceed the adjusted percentage (9.12% for 2023) of the federal poverty line for a single individual, divided by 12. The federal poverty guidelines in effect 6 months before the beginning of the plan year may be used for an employer to establish contribution amounts before the plan’s open enrollment period.

For plan years beginning in 2023, a plan will meet the ACA affordability requirement under the FPL safe harbor if an employee’s required contribution for self-only coverage does not exceed $103.28 per month.

Given the large decrease in the adjusted percentage, employer-sponsored health coverage that was considered to be affordable prior to 2023 may no longer be considered affordable in 2023. Therefore, employers may have to pay more for ACA compliant employer-sponsored health coverage in 2023. If you have any concerns about the affordability of your health care coverage offerings, please reach out to one of our Employee Benefits attorneys directly.

Joy Sellstrom and Mary Kennedy

§ 1.16. Leaked Opinion Becomes Reality—Roe v. Wade Is Overturned

Culminating a flurry of late June opinions released by SCOTUS this week, the court today in Dobbs v. Jackson Women’s Health Organization has taken the extraordinary step of ending decades of precedent surrounding the protections for abortion-related services under the U.S. Constitution. The opinion has been widely anticipated since a draft opinion was leaked, and overturns the prior SCOTUS opinions in Roe v. Wade (1973) as well as Planned Parenthood v. Casey (1992).

The result is that states will be allowed to regulate abortion access within their borders. As we have previously covered, employers with facilities and employees in states which restrict access to abortion, prenatal, contraceptive and other similar services will be faced with a decision on how to ensure equal access for health plan services to their workforce.

Diane Dygert

§ 1.17. H.R. 7780 - Mental Health Matters Act Passes House

H.R. 7780, or the Mental Health Matters Act, passed the House by a 220-205 vote in September 2022. The bill has been received by the Senate and has been referred to the Committee on Health, Education, Labor, and Pensions. The Act claims that it would improve access to behavioral health services for children, students, and workers, respond to the growing behavioral health needs of communities across the country by investing in access to behavioral health services, equipping schools to better respond to the needs of its students, and improve access to behavioral health benefits in job-based health coverage.

The Act would authorize the Secretary of Labor to impose civil monetary penalties for violations of the Employee Retirement Income Security Act (ERISA) that were added by the Mental Health Parity and Addiction Equity Act. It also would authorize $275 million over ten years to the Department of Labor for enforcement of the Mental Health Parity Act and requirements of ERISA that relate to mental health and substance abuse disorder benefits.

It would also deem forced arbitration clauses, class action waivers, and representation waivers unenforceable for ERISA Section 502 claims and common law claims relating to a plan or benefits under a plan, when brought by or on behalf of a plan participant or beneficiary.

This bill garnered a reaction from the ERISA Industry Committee (ERIC), which is a national nonprofit organization exclusively representing the largest employers in the United States in their capacity as sponsors of employee benefit plans for their nationwide workforces. ERIC noted its opposition to the bill, citing that it would significantly increase costs and reduce access to benefits. In particular, ERIC noted that the bill proposes doubling the budget for the Employee Benefits Security Administration to fund litigation against plan sponsors. ERIC cautioned that the bill as currently written would also eliminate discretionary clauses (with respect to single-employer plans), which grant a plan administrator the authority to interpret the plan document and resolve disputes pursuant to the extensive DOL regulations.

In contrast, the White House urged passage of the legislation, citing that it will expand access to mental health and substance use services for youth, and help prevent Americans from being improperly denied mental health and substance use benefits by ensuring a fair standard of review by the courts and banning forced arbitration agreements.

It remains to be seen whether the Senate will pass the Mental Health Matters Act as written, or with watered-down provisions.

We will continue to watch the progression of the Mental Health Matters Act and its handling in the Senate. Passage of the Act as written would call for widespread changes to ERISA litigation generally, particularly whether its language regarding the elimination of discretionary clauses, arbitration clauses and class action waivers.

Kathleen Cahill Slaught and Ryan Tikker

§ 1.18. Between a Rock and a Hard Place… ESG Investments in 401(K) Plan Line-Ups

The ever-evolving landscape of environmental, social and governance (ESG) factors and 401(k) plan investment options may have just become even more complicated.

§ 1.18.1 Yet Another Twist

As we’ve covered on our blog over the last few years, the DOL’s guidance on whether environmental, social and governance (ESG) investments are an appropriate investment for ERISA plans has changed significantly. The Securities and Exchange Commission (“SEC”) has added a new potential twist that could place fiduciaries of retirement plans, like 401(k) plans, and the Board of Directors of companies that sponsor such plans in a very difficult position. Specifically, the SEC recently released correspondence related to its denial of the request from two different companies to exclude from its proxy materials a shareholder’s proposal concerning the investment options under the company’s retirement plan.

§ 1.18.2 The Shareholder’s Proposal

Shareholders in a public company have the right to bring certain matters to a vote in order to require the company to take an action that it otherwise might not take. Such shareholder proposals are typically voted on by shareholders using a “proxy voting” process, where a shareholder submits a proposal to the company for inclusion in the company’s proxy statement. If the proposal is included, shareholders can effectively vote for or against the proposal at a shareholder meeting. This proxy voting process is regulated by the SEC, and a company seeking to exclude a shareholder proposal from its proxy statement can request a “no action” letter from the SEC staff addressing whether the proposal can be excluded.

Here, the relevant shareholder’s proposal was for the Board to prepare a report reviewing the company’s retirement plan investment options and the Board’s assessment of how those options align with the company’s climate action goals. In its request, the shareholder asserted that:

every investment option in the company’s retirement plan (including the default investment option(s)) contains “major oil and gas, fossil-fired utilities, coal, pipelines, oil field services, or companies in the agribusiness sector with deforestation risk”; and
the retirement plan does not offer any equity funds that are “low carbon” and only includes a very limited number of funds that screened for “environmental/social impact.”

The shareholder also noted that the retirement plan investment options contradicted the company’s stated climate reduction commitment, which the shareholder asserted raises reputational risks for the company and could make it difficult to retain employees. Two companies sought to exclude this proposal from their proxy statements and requested a “no action” letter from the SEC staff permitting them to do so. These requests were denied.

§ 1.18.3 Evolution of SEC’s Position on Shareholder Proposals

The SEC’s refusal to exclude the proposal is part of a decades-long evolution of the SEC’s position on how to implement SEC Rule 14a-8 (the “Shareholder Proposal Rule”). Under the Shareholder Proposal Rule, a company may exclude shareholder proposals under certain circumstances, including where the proposal involves the company’s “ordinary business operations.” Before doing so companies generally request that the SEC staff issue a “no action” letter indicating the staff’s agreement that a shareholder proposal can be excluded. In a recent speech, the Director of the SEC’s Division of Corporate Finance laid out the history from the 1960s to today of how stakeholders sought to influence social policy through shareholder proposals and the SEC’s recognition that a proposal involving “substantial public policy” might go beyond “ordinary business” and might not be excluded.

Most recently, on November 3, 2021, the SEC staff published Staff Legal Bulletin 14L (CF), providing a broader interpretation of the Shareholder Proposal Rule than had been seen under the Trump-era SEC, and highlighting that proposals involving human capital and climate would be less likely to be excluded. Specifically, the SEC stated the “staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.” This statement is significant as it reflects the continued march toward taking into account all stakeholders, a fundamental principle of ESG.

While Bulletin 14L advances the ESG focus of the Biden Administration, it received mixed reviews from the SEC Commissioners, with the SEC Chair praising it, while Commissioners Hester Pierce and Elad Roisman released a sharply critical statement. Thus, while the SEC staff has indicated it will take a broad approach to shareholder proposals, the open disagreement amongst Commissioners reflects that the SEC’s internal debate over the Shareholder Proposal Rule is far from over.

§ 1.18.4 What’s a Plan Fiduciary to Do?

In its request to exclude the shareholder’s proposal, the company raised two ERISA-related concerns. First, the company noted that the Board did not have responsibility for, or other control of, the company’s retirement plan. Second, the company asserted that applicable law (i.e., ERISA) mandates that a responsible fiduciary select retirement plan investment options solely in the interest of plan participants. In response, the shareholder asserted that the proposal was limited to a report and that it did not request or require any changes to the company’s retirement plan investment options. Further, the shareholder asserted that the proposal was consistent with the Biden administration’s initiatives for fiduciaries to consider climate impact when evaluating the investment options under a retirement plan.

So, what happens if the requested report concludes that the retirement plan’s investment options do not align with the company’s climate action goals, with the Board’s related assessment reaching the same conclusion? Does it put the company at risk for potentially having its retirement plan investment options misaligned with its overall ESG strategy? For many companies, the Board is not the ERISA fiduciary responsible for making decisions related to the retirement plan’s investments. So, the Board, itself, likely would not be in a position to actually change any investments as a result of such assessment.

The question then is what, if anything, should ERISA plan fiduciaries do with such a report?

Would some plan participants allege that the ERISA fiduciaries breached their fiduciary duties if they don’t change investment options as a result of such a report?
Would other plan participants allege a breach of fiduciary duty if the fiduciaries do change the investment options as a result of such a report?

ERISA requires plan fiduciaries to act in the sole interest of plan participants, even under the guidance cited by the shareholder here (and described here), and analyze the risk-return of a particular investment. So, plan fiduciaries could face allegations of breach of fiduciary duties if they simply change investments as a result of such a report without careful analysis.

The SEC’s ruling may be just another chapter in this story. If a company’s shareholders approve one of these proposals, it will be interesting to see the ultimate outcome. Yet another reason to stay tuned to the ever-evolving landscape of environmental, social and governance (ESG) factors, and ERISA’s fiduciary duties and responsibilities when evaluating a retirement plan’s investments.

Linda Haynes and Matthew Catalano

§ 1.19. Class Action Lawsuit Filed Against Washington State’s Long-Term Cares Act — Dismissed!

A federal judge has dismissed a class action lawsuit that challenged the Washington Long-Term Cares Act (“Cares Act”), ruling that because the Cares Act is not established or maintained by an employer and/or employee organization, it is not an employee benefit plan and therefore not governed or preempted by ERISA. The Court also held that the premiums assessed by the Cares Act constitute a state tax. As such, only state courts, not U.S. federal courts, have jurisdiction to rule on the Cares Act.

§ 1.19.1 Background

As we discussed in our prior blog post and legal update, the Washington Cares Act passed in 2019 and was set to begin collecting payroll taxes from Washington employees in January 2022 to help pay for the long-term care (“LTC”) expenses of the State’s residents. However, Governor Inslee announced in December 2021 that the State would pause collection of the tax from employers until lawmakers reassessed revisions to the program.

§ 1.19.2 Latest Developments

On April 25, 2022, Judge Zilly of the U.S. District Court for the Western District of Washington dismissed a class action lawsuit that challenged the Cares Act, holding that the Court does not have jurisdiction for two reasons: (1) the Cares Act is not governed or preempted by the federal Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and thus ERISA does not confer jurisdiction on the federal courts; and (2) the Cares Act’s premium constitutes a tax, and the Tax Injunction Act drastically limits federal district court jurisdiction to interfere with local concerns as to the collection of taxes. As a result, the Court dismissed the action as any legal challenges to the Cares Act must be brought in state court.

§ 1.19.3 Not Pre-Empted by ERISA

In its opinion, the Court noted that ERISA applies to employee benefit plans that are established or maintained by an employer and/or employee organization. The Court determined that the Cares Act was a creation of the Washington legislature, which is neither an employer or an employee organization as defined by ERISA; therefore, the Cares Act is not an ERISA-covered employee benefit plan. In so doing, the Court rejected plaintiffs’ assertion that the State acted as an employer when it passed the Cares Act. This was because the Cares Act assesses a premium on all covered employees in the State, not just those employed by the State. Consequently, the Court determined that the State acted as a sovereign when it adopted the Cares Act, unlike when it adopts employee health or pension benefit plans that extend or accrue benefits only to individuals while they are employed by the State.

§ 1.19.4 Cares Act’s Premiums Constitute a Tax

The State’s motion to dismiss the lawsuit argued that the Cares Act’s premiums were a tax imposed on employees’ wages and thus, the federal court lacks jurisdiction as state tax challenges must be brought in state courts. To determine whether the Cares Act’s premiums are a tax or insurance premium, the court reviewed three factors set forth in prior case law:

The entity imposing the premium assessment was the State legislature (not an administrative agency), making it more likely to be a tax;
The parties required to pay the premium assessment include a large group of people, and the broader the group affected, the more likely it is to be a tax; and
The ultimate use of the premium assessment is to directly benefit all members of the public who paid premiums for the requisite period and meet the criteria for receiving LTC services. Therefore, the Cares Act provides a general benefit to the public, making it more likely to be a tax, even if the amounts collected under it are segregated in special funds.

The Court agreed with the defendants that the Cares Act is analogous to the unemployment insurance scheme, payments which are undisputedly taxes. Therefore, the federal Court lacked jurisdiction pursuant to the Tax Injunction Act, under which state courts have exclusive jurisdiction over challenges to state taxes.

§ 1.19.5 Takeaways for Employers

The ruling in Pacific Bells LLC et al. V. Inslee et al. demonstrates that despite the challenges to the Cares Act in federal court, further challenges may very well be made in state court. During oral arguments, plaintiffs sought a ruling from the Court that the Cares Act premiums constitute an income tax that is barred by the Washington State Constitution. The Court noted that such arguments should be litigated within the State’s administrative and/or judicial system.

Liz Deckman

§ 1.20. SECURE 2.0: Here We Go Again

The SECURE Act, passed just before the onset of the COVID-19 pandemic at the end of 2019, significantly altered the retirement plan landscape. In 2021, another bill, Securing a Strong Retirement Act of 2021, was considered but never passed. The bill was revised and reconsidered in 2022, renamed the Securing a Strong Retirement Act of 2022 (“SECURE 2.0”), recently passed the House on March 29, 2022, and has been referred to the Senate. SECURE 2.0 builds on the SECURE Act and, if enacted, will require another close review of current retirement plan provisions and administration.

Is SECURE 2.0, as passed by the House, better than the original SECURE Act? Below are some of its provisions so plan sponsors and administrators can decide for themselves.

Required Minimum Distributions. The original SECURE Act raised the RMD age from 70-1/2 to age 72 beginning in 2020. Under SECURE 2.0, the RMD age would increase to age 73 in 2023, age 74 in 2030, and age 75 in 2033. Also, excise taxes for certain RMD failures would be reduced.
Mandatory Cashout Limit. The mandatory cashout limit, when distributions can be made without a participant’s consent, would increase to $7,000 from $5,000 in 2023.
Automatic Enrollment and Escalation in New 401(k) and 403(b) Plans. Newly established 401(k) and 403(b) plans would be required to automatically enroll eligible employees at 3% with automatic increases on and after January 1, 2024. Plans in existence prior to the enactment of SECURE 2.0, along with other limited exceptions, would be exempt from this rule.
Catch-Up Contributions. Beginning in 2024, participants at ages 62, 63, and 64, would be able to contribute up to $10,000 (indexed for cost-of-living) as catch-up contributions, an increase from the current limit of $6,500. Additionally, beginning in 2023, all catch-up contributions (other than those made to SEPs or SIMPLE IRAs) must be Roth contributions.
Employer Matching Contributions on Student Loan Repayments. Beginning in 2023, 401(k), 403(b), and governmental 457(b) plans would be permitted to match a participant’s student loan payments similar to plan elective deferrals.
Long-Term/Part-Time Workers. The original SECURE Act amended the Code to provide that part-time employees who work at least 500 hours each year for three consecutive years must be eligible to make salary deferrals into a 401(k) plan. SECURE 2.0 would amend ERISA to include both 401(k) and 403(b) plans, and change the eligibility requirement to 500 hours in two years. The first group of part-time workers could become eligible for a plan in 2023, not 2024 as is the case under the original SECURE Act.
Roth Matching Contributions. For 401(k), 403(b), and governmental 457(b) plans, plan sponsors could permit employees to elect that matching contributions be treated as Roth contributions.
Hardship. For hardship withdrawals, plans would be permitted to rely on an employee’s self-certification that the employee has incurred a hardship. Additionally, SECURE Act 2.0 would harmonize the rules for hardship distributions under 403(b) plans with the 401(k) plan rules (e.g., making account earnings under a 403(b) plan available for hardship distributions).
403(b) Investment in Collective Investment Trusts. Investment in Collective Investment Trusts (CITs) is currently permitted in various plans, including 401(k) plans, and is often used as a lower cost investment option for participants. 403(b) plans have historically been prohibited from investing in CITs, but SECURE 2.0 would specifically allow it beginning in 2023.

Other interesting proposals in SECURE 2.0 include permitting employers to offer small financial incentives to encourage participation in 401(k) plans, and penalty-free withdrawals of plan account balances (of up to $10,000) to victims of domestic abuse. Also, while the proposal eliminates the requirement to provide certain annual notices to employees who have not enrolled in an individual account plan as long as they receive an annual reminder notice of plan eligibility, it also adds a requirement to provide paper statements to 401(k) plan participants at least once a year and at least once every three years to pension plan participants. Finally, the proposal notably does not include any provisions about the much talked about elimination of Roth conversions.

As noted, this bill has only been passed by the House. Although there was significant bipartisan support in the House, it is likely that the provisions will be modified as the bill makes its way through the Senate.

Liz Deckman, Sarah Magill and Christina Cerasale

§ 1.21. No More Surprises, but Much Uncertainty over Non-Network Bills

Last summer and fall, the Departments of Treasury, Labor, and Health and Human Services issued Interim Final Rules (IFRs), implementing the sweeping changes that applied to out-of-network health care providers and health plans under the No Surprises Act. While much of the IFR content was welcome relief for health plans and participants, not all providers were content with the new rules, leading to the filing of several lawsuits. One such lawsuit was recently decided by the federal court in the Eastern District of Texas, which has struck down portions of the IFRs related to determining disputed payment levels.

If a health plan and an out-of-network provider cannot agree on a payment amount, the No Surprises Act requires that the appropriate amount be determined by an independent arbitrator, referred to as an “IDR entity.” When choosing between the provider’s requested payment rate and the plan’s offer, the IDR entity is directed to consider the plan’s “qualifying payment amount” or “QPA.” As we described in our Legal Update, the QPA is the lesser of the provider’s billed charge or the plan’s median contracted rate for the same or similar service in the geographic region where the service is performed. The IDR entity is to consider the QPA, the training and experience of the provider, the market share of the plan and provider, any contract history, and the services provided. The Court said that the IFRs require the IDR entity to presume the plan’s QPA is correct, and consider other factors listed in the Act only if credible and demonstrate the appropriate rate is materially different from the QPA, which imposes a heightened burden to overcome the QPA presumption.

The Court found that the agencies did not follow proper notice and comment, and failed to follow the text of the No Surprises Act itself when it set forth its guidance as to how IDR entities were to give deference to the QPA when arriving at a provider’s payment amount. As a result, the Court vacated the portion of the IFRs at issue. The Court’s decision indicated that the No Surprises Act contained sufficient detail on the IDR process to allow arbitrations to proceed in the absence of the regulatory presumption in favor of the QPA as the appropriate payment level.

§ 1.21.1 What’s Next?

While the administration may appeal the ruling, the decision has nationwide impact immediately. Similar cases filed in other Federal districts may be put on hold pending any appeal, or revision of the IFRs in final rules.

§ 1.21.2 Implications for Plan Sponsors

Most plan sponsors have delegated the IDR process to their third-party administrators (or insurance carriers, in the case of fully-insured plans), so it is likely that no immediate action is required for most plans. Plan sponsors should be aware, however, that in the absence of the regulatory presumption in favor of the QPA, there is a greater risk that an arbitrator would side with the provider rather than the plan, resulting in potentially greater payment obligations from the plan sponsor.

Mark Casciari and Ronald Kramer

§ 1.22. Ninth Circuit Clarifies De Novo Review Standard and Newly Raised Arguments in ERISA Litigation

Recently, the Ninth Circuit addressed and further clarified the requirement of a “full and fair review” in the context of a long-term disability benefit case under the Employee Retirement Income Security Act (ERISA). In matters that go to litigation, the Ninth Circuit held that a district court may not rely on rationales that the plan administrator did not raise as grounds for denying a claim for benefits. By failing to make arguments during the administrative process, but raising them for the first time at litigation, this can be found to be a violation of the “full and fair review” afforded by ERISA.

In Collier v. Lincoln Life Assurance Co. of Boston, 53 F.4th 1180 (9th Cir. 2022) the Ninth Circuit considered an appeal under ERISA of a plan administrator Lincoln Life Assurance Company of Boston’s denial of her claim for long-term disability benefits. The participant Collier pursued an internal appeal after Lincoln denied her claim for LTD benefits. Lincoln again denied her claim. On de novo review, Judge James Selna of the Central District of California affirmed the administrator’s denial of her claim, finding that Collier was not credible and that she had failed to supply objective medical evidence to support her claim. The district court concluded that because a court must evaluate the persuasiveness of conflicting testimony and decide which is more likely true on de novo review, credibility determinations are inherently part of its review.

Apparently not so. The participant appealed, and the Ninth Circuit reversed, finding that the district court adopted new rationales that the plan administrator did not rely upon during the administrative process. The Ninth Circuit expressly held a district court clearly erred by adopting a newly presented rationale when applying de novo review.

The Ninth Circuit clarified that when a district court reviews de novo a plan administrator’s denial of benefits, it examines the administrative record without deference to the administrator’s conclusions to determine whether the administrator erred in denying benefits. It wrote that the district court’s task is to determine whether the plan administrator’s decision is supported by the record, not to engage in a new determination of whether the claimant is entitled to benefits. Id. at 1182.

The plaintiff Collier worked as an insurance sales agent when she experienced persistent pain in her neck, shoulders, upper extremities, and lower back, which she contended limited her ability to type and sit for long periods of time. She underwent surgery on her right shoulder and later returned to work, where she claimed that she continued to experience persistent pain. After applying for workers compensation, which recommended her employer institute ergonomic accommodations for Collier to allow her to work with less pain, Collier eventually stopped working, citing her reported pain as the cause.

After engaging in the administrative appeal process with Lincoln, she filed suit in the Central District of California. For the first time in its trial briefs, Lincoln argued that the participant was not credible. It further argued that her doctor’s conclusions were not supported by objective evidence, as they relied upon her subjective account of pain. Finally, Lincoln argued that her restriction could be accommodated with ergonomic equipment, such as voice-activated software. Id. at 1184.

As this was an ERISA action for LTD benefits, the administrative record was the only documentary evidence admitted by the district court. Judge Selna issued a findings of fact and conclusions of law affirming Lincoln’s denial of LTD benefits. Reviewing the decision de novo, Judge Selna concluded that Collier failed to demonstrate she was disabled under the terms of the plan. The court adopted Lincoln’s reasoning in determining she was not disabled, namely relying upon a finding that Collier’s pain complaints were not credible and that she failed to support her disability with objective medical evidence.

In reversing the decision by the district court, the Ninth Circuit wrote that a plan administrator “undermines ERISA and its implementing regulations when it presents a new rationale to the district court that was not presented to the claimant as a specific reason for denying benefits during the administrator process.” The Ninth noted it has “expressed disapproval of post hoc arguments advanced by a plan administrator for the first time in litigation.” Id. at 1186.

While the Ninth Circuit has held that a plan administrator may not hold in reserve a new rationale to present in litigation, it has not clarified whether the district court clearly errs by adopting a newly presented rationale when applying de novo review. It explicitly does so now, finding that a “district court cannot adopt post-hoc rationalizations that were not presented to the claimant, including credibility-based rationalizations, during the administrative process.” Id. at 1188.

The Collier ruling places strict mandates on plan administrators to specifically and expansively delineate the bases for denials at the administrative stage. Simply stating that a claimant does not meet a policy definition, such as the disability standard under the applicable plan, is now not enough.

Kathleen Cahill Slaught and Ryan Tikker

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Kathleen Cahill Slaught

Seyfarth Shaw LLP

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§ 1.1. Do We Finally Have a Final Answer on ESG Investments and ERISA’s Fiduciary Duties?

§ 1.1.1 Evolution of DOL Guidance on ESG

§ 1.1.2 2015

§ 1.1.3 2018 through 2020

§ 1.1.4 2021 through 2022

§ 1.1.5 Longstanding Principles Affirmed

§ 1.1.6 Defined Contribution Plans

§ 1.1.7 Exercising Shareholder Rights

§ 1.1.8 Plans Covered by Final Regulation

§ 1.1.9 Conclusion

§ 1.2. PBGC Addresses Withdrawal Liability Assumptions for First Time in New Proposed Rule

§ 1.2.1 Separate Interest Rate Assumptions for SFA and Non-SFA Assets

§ 1.2.2 Investment of SFA Assets

§ 1.3. MPRA Plans

§ 1.3.1 Retroactive Benefit Increases

§ 1.3.2 Merger Involving SFA Plans

§ 1.3.3 Transfer from SFA Plan to Health Plan

§ 1.3.4 Withdrawal Liability

§ 1.3.5 SFA Measurement Date and Lock-In Applications

§ 1.3.6 Conclusion

§ 1.4. Can 401(k) Fee Dispute Cases Survive Based on Bare Allegations Supported by Monday-Morning Quarterbacking?

§ 1.4.1 The Matney Decision

§ 1.4.2 The Matney Amicus

§ 1.4.3 Conclusion

§ 1.5. Are We There Yet? Emergency Declarations and COVID Relief Are Extended into 2023

§ 1.5.1 The COVID-19 Public Health Emergency

§ 1.5.2 The COVID-19 National Emergency

§ 1.6. Are Birth Control and Plan B Next? Texas Judge Targets Preventative Care Mandate in the Name of Religious Liberty

§ 1.7. Agency FAQs Reveal Employers Continue to Struggle with No Surprises Act & Transparency in Coverage Implementation

§ 1.7.1 Guidelines for Transparency in Coverage Machine-Readable Files Notice

§ 1.7.2 Guidelines for Disclosure of NSA Notice

§ 1.7.3 Confirms Applicability to Plans with No Network and Plans Only Offering In-Network Coverage

§ 1.7.4 Confirms Applicability to Behavioral Health Crisis Facility

§ 1.7.5 Clarifications Regarding Calculation of Qualifying Payment Amount

§ 1.8. Equal Access to Travel Benefits

§ 1.9. Sixth Circuit Affirms Dismissal of 401(K) Breach of Fiduciary Duty Case, Supports Selection of Actively-Managed Funds

§ 1.10. Novel Retirement Plan Correction Opportunity Offered by the IRS

§ 1.10.1 Background

§ 1.10.2 New IRS Pilot Program

§ 1.10.3 Benefits Counsel’s Perspective

§ 1.11. PBGC Finally Publishes Final Rule on Special Financial Assistance Program

§ 1.11.1 Separate Interest Rate Assumptions for SFA and Non-SFA Assets

§ 1.11.2 Investment of SFA Assets

§ 1.11.3 MPRA Plans

§ 1.11.4 Retroactive Benefit Increases

§ 1.11.5 Merger Involving SFA Plans

§ 1.11.6 Transfer From SFA Plan To Health Plan

§ 1.11.7 Withdrawal Liability

§ 1.11.8 SFA Measurement Date and Lock-In Applications

§ 1.11.9 Conclusion

§ 1.12. Federal Government Response to Dobbs Begins to Take Shape

§ 1.13. Taking Surprise Out of the No Surprises Act

§ 1.13.1 What Types of Health Plans Are Subject to NSA?

§ 1.13.2 Emergency Care and Out-of-Network Air Ambulance Services

§ 1.13.3 Nonemergency Care from Out-of-Network Providers at In-Network Facilities

§ 1.13.4 Cost-Sharing Requirements

§ 1.13.5 Payment Disputes and the Independent Dispute Resolution Process

§ 1.13.6 Publicly Available Notice

§ 1.13.7 Enforcement of NSA

§ 1.13.8 Future Guidance Expected

§ 1.13.9 Recommended Action Steps for Health Plan Sponsors

§ 1.14. Ninth Circuit Discusses Use of Occupational Data in Long-Term Disability ERISA Benefits Denial

§ 1.15. Employers May Have to Pay More in 2022 under New ACA Limits

§ 1.15.1 Adjusted Percentage for 2023

§ 1.15.2 Federal Poverty Line (FPL) Safe Harbor

§ 1.16. Leaked Opinion Becomes Reality—Roe v. Wade Is Overturned

§ 1.17. H.R. 7780 - Mental Health Matters Act Passes House

§ 1.18. Between a Rock and a Hard Place… ESG Investments in 401(K) Plan Line-Ups

§ 1.18.1 Yet Another Twist

§ 1.18.2 The Shareholder’s Proposal

§ 1.18.3 Evolution of SEC’s Position on Shareholder Proposals

§ 1.18.4 What’s a Plan Fiduciary to Do?

§ 1.19. Class Action Lawsuit Filed Against Washington State’s Long-Term Cares Act — Dismissed!

§ 1.19.1 Background

§ 1.19.2 Latest Developments

§ 1.19.3 Not Pre-Empted by ERISA

§ 1.19.4 Cares Act’s Premiums Constitute a Tax