On March 1, the US Supreme Court affirmed a US Court of Appeals for the Second Circuit decision holding that ERISA preempts Vermont’s data reporting requirements as applied to self-insured group medical plans (and their plan administrators). The case is Gobeille v. Liberty Mutual Insurance Co. and Justice Kennedy wrote the majority opinion in this 6-2 decision. For more details about this decision, please see our LawFlash titled US Supreme Court Reaffirms ERISA Preemption Doctrine.”

Marla Kreindler, a partner in our Chicago office, has been reappointed to serve on the Operating Committee of the Defined Contribution Institutional Investment Association (DCIIA).

DCIIA is a nonprofit association dedicated to enhancing the retirement security of American workers. Their members include investment managers, consultants, law firms, record keepers, insurance companies, plan sponsors, and others committed to the best interests of plan participants. Marla has been counsel to DCIIA since its inception in 2010.

Bloomberg BNA has just released the 2015 Cumulative Supplement to the fourth edition of the book “ERISA Class Exemptions,” co-authored by Employee Benefits partner Michael B. Richman and retired partner Donald J. Myers. This book has become a standard reference source for lawyers who work with the fiduciary responsibility provisions of ERISA. The 2015 Cumulative Supplement includes the texts of the class exemptions that were newly proposed in conjunction with the Department of Labor’s proposed changes to the definition of an “investment advice” fiduciary under ERISA – the “Best Interest Contract” and “Principal Transactions” exemptions – as well as the related proposed amendments to existing class exemptions. In addition, it updates the summaries of regulatory guidance and case law relating to the existing class exemptions, including Department of Labor advisory opinions and individual exemptions.

For more information about the ERISA Class Exemptions book, please see http://www.bna.com/erisa-class-exemptions-p17179895504/

This post continues our two-part series discussing the Department of Labor’s (DOL’s) recent guidance on state retirement initiatives. The first part of this series, “The Proposed Rule—State-Sponsored IRAs,” discusses the DOL’s proposed rule that would create an ERISA “safe harbor” for state-sponsored IRAs. In Part II, we discuss the DOL’s Interpretive Bulletin (Interpretive Bulletin), which addresses other types of state retirement initiatives for workers in the private sector.

The Interpretive Bulletin sets out, in a summary format, the DOL’s views on state-offered 401(k) plans for private sector employees and other state initiatives. Beginning with the DOL’s strong support for ERISA-covered plans (for reasons including the availability of employer contributions, higher contribution limits, and the protection of ERISA accounts from creditors), the Interpretive Bulletin surveys a range of current and potential state-sponsored programs and offers the DOL’s views on how ERISA coverage may apply to each of these initiatives.

The Interpretive Bulletin reviews programs in

  • Washington State, where the state’s proposed retirement program is not considered to be an ERISA-covered plan, but instead by design establishes a marketplace for the offering of ERISA plans and IRAs;
  • the Commonwealth of Massachusetts, where a state law allowing nonprofit organizations to adopt a contributory retirement plan developed and administered by the state is shown as an example of how states may set up their own 401(k) prototype plans for private employers to adopt; and
  • the State of Maryland, where a Governor’s Task Force report considered the possibility of the state establishing and obtaining IRS tax qualification for a state multiple-employer plan (MEP).

On November 16, the US Department of Labor (DOL) announced both a notice of proposed rulemaking and an interpretative bulletin aimed at providing more clarity to states attempting to solve (in the words of Secretary of Labor Thomas Perez) “a potential financial crisis [and] a critical economic issue for the nation.” The crisis, as reflected in a Government Accountability Office (GAO) report from September of this year, is that about half of private sector workers in the United States don’t have access to a retirement plan at work. As Perez noted in a DOL blog post in July, only a tiny fraction of this group will use an Individual Retirement Plan (IRA) when a workplace retirement plan is not available.

According to the Georgetown University Center for Retirement Initiatives, several years ago, states began to recognize and respond to this retirement planning crisis by considering (and in some cases implementing) proposals for state-sponsored retirement plans. These initiatives are designed to reach at least some portion of private sector workers who are not participating in a retirement plan. However, ERISA (the federal pension plan law) looms in the background, which could threaten to preempt (i.e., invalidate) many of the state solutions. And so, the DOL—at the urging of President Obama—was charged earlier this year with developing regulatory support for states to continue their experimentation with state-sponsored retirement plan initiatives.

In response, the DOL’s proposed rule creates a new ERISA “safe harbor” for state-sponsored IRAs. That is, the proposed rule sets forth certain parameters under which states may sponsor IRAs without the DOL considering the programs to be employee pension benefit plans under ERISA. While the DOL has not promised that its proposed rule will ward off all claims of ERISA preemption, the intent is to build a case for deference in favor of the DOL’s rules should the principles be tested in the courts.

Over the past year or so, the Department of Labor (DOL) has made a number of announcements expressing concerns about the quality of plan auditors and audits. In particular, in May 2015, the DOL released a report titled “Assessing the Quality of Employee Benefit Plan Audits” that found a very high (39%) deficiency rate for benefit plan audits. The report makes a number of recommendations, including increasing DOL outreach and enforcement related to audit standards. It appears that, as part of this continuing outreach, the DOL has started sending letters to plan administrators of “funded” ERISA employee benefit plans that provide tips for selecting plan auditors.

The US Treasury Department and Internal Revenue Service (IRS) issued final hybrid plan regulations (or “new regulations”) on November 13, 2015 to address the conflict that plans face when transitioning impermissible interest crediting rates to those that are permitted by existing final hybrid plan regulations—a move that, on its face, would violate the anticutback restrictions of ERISA and the Internal Revenue Code (Code).

The Code and final regulations issued in 2014 prohibit an interest crediting rate greater than a market rate of return and provide an exclusive description of interest crediting rates that satisfy this requirement. Plans with interest crediting rates that may exceed these permissible rates must be amended to reduce their current rates, which would ordinarily violate anticutback restrictions. The final hybrid plan regulations provide relief from this conundrum.

The new regulations do not change or expand permissible interest crediting rates. The prescribed transitional corrections are specifically tailored to a particular compliance failure of a plan's current interest crediting rate. Generally two or more alternatives are offered for each category of compliance failure, and the new regulations expressly allow rounding of annual and less frequently determined interest rates, within prescribed parameters.

On September 11, 2015, the Pension Benefit Guarantee Corporation (PBGC) issued final reportable events regulations that are intended to reduce the burden of reporting for plan sponsors that present the least risk of not being able to fund their plans in the future. The PBGC estimates that the new rules will exempt approximately 94% of plans and plan sponsors from many reporting requirements.

By way of background, under the Employee Retirement Income Security Act of 1974, as amended (ERISA), sponsors of defined benefit pension plans are required to notify the PBGC of certain so-called “reportable events” that may signal financial issues with the plan or a contributing employer that could potentially put the pension plan at risk of a need for PBGC intervention. These “reportable events” include plan sponsor events such as bankruptcy, corporate transactions, extraordinary dividends, and loan defaults, as well as plan events such as missed contributions, insufficient funds, and large pay-outs.

Earlier this month, in Resilient Floor Covering Pension Tr. Fund Bd. of Trs. v. Michael's Floor Covering, Inc. (9/11/15), the US Court of Appeals for the Ninth Circuit, for the first time, found successor liability as a means to hold companies responsible for multiemployer pension plan withdrawal liability. Although the Ninth Circuit has previously applied successor liability in other labor and employment contexts, including in situations where multiemployer plans seek delinquent multiemployer pension plan contributions from companies under a successor liability theory, this is the first time the appeals court has explicitly applied successor liability in the context of multiemployer pension plan withdrawal liability.

In Michael’s Floor Covering, the court found that, in general, a successor employer may be subject to multiemployer pension plan withdrawal liability and, in particular, a construction industry successor employer can be subject to such liability, “so long as the successor took over the business with notice of the liability.” For purposes of imposing such withdrawal liability, the court held that “the most important factor in assessing whether an employer is a successor [] is whether there is substantial continuity in the business operations between the predecessor and the successor, as determined in large part by whether the new employer has taken over the economically critical bulk of the prior employer’s customer base.” The court's ruling also sets out the list of factors courts should consider when deciding whether a company is a successor that can be held liable for multiemployer withdrawal liability.

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It's not hard to find stories in the business and popular press these days about the impending "retirement crisis" in the United States created by the demise of the defined benefit plan, the increased reliance by employees on 401(k) plans as their primary source of retirement income (other than Social Security), and the inadequate level of retirement readiness of most Americans.

The last point is generally viewed as the result of certain shortcomings among American workers participating in 401(k) plans: they wait too long to start saving; they don't save enough when they start (and often leave matching employer contributions on the table); they don't invest their savings effectively; and when they change jobs, they take their money and spend it rather than keeping it in a tax-favored retirement savings account (the so-called "leakage" problem, which we will discuss in a future post).

While perfect solutions to these problems have yet to be developed, one approach on the savings and investment front that has gained traction in the last ten years—particularly following the Pension Protection Act of 2006 (PPA '06)—is the "lead the horses to water" approach. That is, automatically enrolling employees in a defined contribution plan and then defaulting those who do not otherwise make an affirmative investment election into an appropriate investment fund, subject to opt-out. This approach relies on the incredibly strong power of inertia to keep employees in these choices, and data has shown that employees largely stay in the investment fund into which they were defaulted.