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.

Administrators of tax-qualified retirement plans (or their delegated payor) are responsible for both withholding on distributions and for reporting the tax withheld. If taxes are under-withheld, the administrator/delegated payor may be subject to penalties.

Although the rules governing withholding on distributions to US citizens and resident aliens are clear and generally well-understood, administrators may not be aware of the rules applicable to distributions to individuals who are (at the time of distribution) non-resident aliens (NRAs). As a result, an administrator could end up under-withholding on NRA distributions, since NRAs are subject to a higher rate of withholding than US persons (unless a treaty exemption applies, as discussed below).

By way of background, NRAs might participate in a plan either because they spent all or part of their career with the plan sponsor working in the United States before returning to their home country, or because the sponsor’s plan allows NRAs to participate. In either case, the NRA withholding rules apply based on the status of the payee at the time of distribution—if the individual is an NRA at the time of distribution, the NRA withholding rules apply, even if the individual spent all or part of his/her related service working in the United States.

On August 17, the US Court of Appeals for the Fifth Circuit affirmed the dismissal of an action brought by a company’s pension plan participants against the company and the plan's fiduciaries. The dismissed action alleged that the company's decision to de-risk its pension plan by transferring approximately $7.4 billion in pension obligations to a third-party insurer through the purchase of a single-premium group annuity contract ran afoul of various ERISA rules and requirements.

Among other allegations, the company’s plan participants asserted that the plan, plan sponsor, and plan fiduciaries violated ERISA by (1) failing to obtain participants' consent to the annuitization transaction, (2) failing to disclose to participants (in the plan's summary plan description or otherwise) that the transaction might result in a “loss of benefits” (e.g., the loss of Pension Benefit Guaranty Corporation (PBGC) guarantees and other ERISA protections), and (3) using $1 billion of plan assets to pay the third-party insurer and other third-party providers for administrative costs associated with the annuity transaction.

The Fifth Circuit’s decision uniformly dismissed all of the participants’ claims, noting that (1) the related decision to settle pension obligations through an annuity purchase is a settlor decision that is immune from fiduciary obligations; (2) the plan was amended appropriately to allow for the annuity purchase; (3) the plan fiduciary timely communicated the annuity purchase-related changes to plan participants through a summary of material modifications; (4) ERISA does not provide an absolute entitlement to PBGC protections, and there was no loss of benefits associated with the annuity purchase; and (5) the type of expenses paid from the plan did not raise ERISA concerns, and the participants provided no information to support the conclusion that the amount of the expenses was unreasonable.

All in all, the court's decision should provide additional comfort to plan sponsors and plan fiduciaries (particularly in the Fifth Circuit) that pension de-risking initiatives implemented through an annuity purchase do not run afoul of ERISA.

Readers of a certain generation will remember the 1980s G.I. Joe cartoon that often ended with the tagline "Knowing is half the battle." On August 26, in Mirza v. Insurance Administrator of America, Inc., the US Court of Appeals for the Third Circuit made a similar pronouncement: when seeking to enforce an ERISA plan's imposed statute of limitations, the court stated that "notice of the statute of limitation is half the battle." On the heels of this decision, plan administrators are cautioned to make certain that their benefit denial letters clearly disclose any applicable statute of limitations in the plan that may shorten the period for filing suit.

Often described as a "statute of repose," a statute of limitation (SOL) imposes a deadline by which an individual must bring a claim. After that deadline, the claim is considered "time-barred," meaning that the claimant is SOL . . . that is, in this case, "simply out of luck." If a lawsuit is brought after the expiration of the SOL, the court is empowered to dismiss the case without ever considering the merits in the underlying dispute.

ERISA contains a six-year SOL for fiduciary breach claims but does not impose a limitations period for benefit claims. As a consequence, courts typically look to an applicable state SOL for breach of contract claims (by analogizing ERISA plans to contracts). However, as the Supreme Court recently affirmed, an ERISA plan can impose its own SOL, and that provision will be enforced, provided that the limitations period is "reasonable."

The US Supreme Court issued its decision in Tibble v. Edison on May 18. The participants who brought the suit in Tibble alleged that the Edison fiduciaries breached their duties by offering as investment options classes of mutual funds with higher fees than other classes. For more details on the facts, please see our LawFlash. The issue that emerged as the case worked its way up to the Supreme Court, however, was a statute of limitations defense, because some of the mutual funds in question were initially selected by the Edison fiduciaries more than six years before the lawsuit was filed. The Edison fiduciaries argued before the US Court of Appeals for the Ninth Circuit that those claims were time-barred under ERISA’s six-year statute of limitations because the alleged breach (i.e., the selection of higher fee mutual funds) occurred outside the six-year period. The participants argued that keeping these funds constituted a continuing breach of fiduciary duty that extended well into the six-year statute of limitations. The Ninth Circuit agreed with the Edison fiduciaries and held that the claims with respect to that older group of funds were time-barred.

By the time the case got to the Supreme Court, however, the focus had shifted from the statute of limitations to the nature of the duty to monitor investment options on an ongoing basis. The discussion at oral arguments focused almost exclusively on the “contours” of the alleged breach of the duty to monitor, so it was perhaps not surprising when the Court vacated the Ninth Circuit’s judgment and remanded the case to the Ninth Circuit to consider “trust law principles” and the “nature of the fiduciary duty” at issue in this case.

To most plan fiduciaries, it is not surprising that there is a fiduciary duty to monitor investments on an ongoing basis. Indeed, we might expect that many readers of this blog spend a great deal of their time doing exactly that and supporting the fiduciary committees that have this responsibility. This may be why the Tibble opinion has been largely met with the formal equivalent of “duh” by many in the plan sponsor community.

A recent Seventh Circuit Court of Appeals case highlights a troubling trend of courts finding successor liability for multiemployer pension contributions and withdrawal liability following corporate asset sale transactions.

In 1990, the Seventh Circuit held in Upholsterers’ International Union Pension Fund v. Artistic Furniture of Pontiac that under ERISA, a purchaser of assets could be liable for delinquent pension contributions owed by the seller to a multiemployer pension fund, provided that there is sufficient evidence of continuity of operations and the purchaser knew of the liability of the seller.

Subsequently, in 2011, the Third Circuit in Einhorn v. M.L. Ruberton Construction Co. reversed a lower court ruling and held that a purchaser of assets of an employer obligated to contribute to a multiemployer benefit plan may, where there was a continuity of operations and the purchaser knew of delinquency, be held liable for the delinquent contributions.

Recently, in Tsareff v. Manweb Services, Inc., the Seventh Circuit has taken what some may consider a step too far in holding that an asset purchaser could be liable for a seller’s withdrawal liability triggered as a result of an asset sale, provided that the purchaser had known of the seller’s “contingent” withdrawal liability that would be triggered by the sale. The Seventh Circuit found that the buyer knew of the potential withdrawal liability because it engaged in due diligence and addressed withdrawal liability responsibility through an indemnification clause in the asset purchase agreement. The Seventh Circuit remanded the matter back to the district court to determine whether there was a sufficient continuity of operations after the sale for the buyer to be a “successor” and hence liable.

These days, it’s not uncommon for pension plans to be in some sort of frozen state. It is important for plan sponsors to remember that even though their pension plans may be totally frozen (with no one accruing benefits), partially frozen (closed to some or all new participants), or in some other “frozen status,” the plans are still subject to the PBGC reportable event rules under section 4043 of ERISA. Only once a pension plan is fully terminated and all assets are distributed do the reportable event rules no longer apply. Of course, the reportable event rules also apply to active pension plans. Failure to comply with the rules may result in steep penalties of up to $1,100 a day.

Although there may be a few reportable events that are not likely to occur if a pension plan is frozen, most reportable events can occur regardless of a pension plan’s status. These reportable events include, among others,

The US Supreme Court’s recent decision recognizing a constitutionally protected right for same-sex couples to marry, Obergefell et al. v. Hodges, was an important step forward for lesbian, gay, bisexual, and transgender (LGBT) rights, but it did not address other types of potential discrimination against LGBT individuals. Specifically, in the absence of a federal law that expressly protects employees from discrimination based on sexual orientation, and in the absence in many places in the United States of any similar state laws or municipal ordinances, employees who marry their same-sex partners arguably can still be subjected to workplace discrimination without remedy, thus burdening their newly protected right to marry. A proposed federal law that would bar sexual orientation discrimination in the workplace, the Employee Non-Discrimination Act (ENDA), is languishing in Congress, and its passage is uncertain.

As many expected it would, the Obama administration has stepped into this regulatory vacuum. On July 15, in Complainant v. Anthony Foxx, Secretary, Department of Transportation (Federal Aviation Administration), the Equal Employment Opportunity Commission (EEOC) reversed a prior decision based on timeliness, and determined that an air traffic controller’s allegations of discrimination based on sexual orientation against his employer, the Federal Aviation Administration, stated a valid claim of discrimination based on sex under Title VII of the Civil Rights Act of 1964, as amended. This decision builds on a prior decision from 2012 in which the EEOC determined that transgender employees were protected from discrimination under Title VII. In Foxx, the EEOC analyzed Title VII and relevant case law and concluded that discrimination against an employee based on the gender of his or her spouse or partner is discrimination based on sex, which is prohibited by Title VII: “[W]e conclude that sexual orientation is inherently a ‘sex-based consideration,’ and an allegation of discrimination based on sexual orientation is necessarily an allegation of sex discrimination under Title VII. A complainant alleging that an agency took his or her sexual orientation into account in an employment action necessarily alleges that the agency took his or her sex into account.”

Good housekeeping is an essential part of good plan governance. If a plan sponsor’s documents and governance structure were in a metaphorical closet, a closer peek inside might reveal that what plan sponsors are (or are not) doing could be putting their companies at risk.

The standards of fiduciary conduct for retirement and welfare plans are generally set forth in the Employee Retirement Income Security Act of 1974, as amended (ERISA). ERISA distinguishes between a plan’s fiduciary functions, which are subject to ERISA, and settlor functions, which are not. Fiduciary functions include exercising discretionary authority with respect to a plan’s management or administration, whereas settlor functions relate to a plan’s design, amendment, and termination. Although a person is allowed to wear “two hats” with respect to a plan (serving in both a settlor and fiduciary capacity), ERISA requires that these overlapping roles be kept separate and distinct.

On July 9, the Internal Revenue Service (IRS) issued Notice 2015-49, which prohibits sponsors of qualified defined benefit pension plans from adopting lump sum windows for retirees in pay status.

As part of pension plan “de-risking” efforts initiated in recent years, some plan sponsors have implemented lump sum windows programs that provided retirees in pay status with the opportunity to receive the present value of their remaining monthly benefit payments in a single, lump sum payment. Practitioners had concerns about whether such programs were permissible and satisfied the required minimum distribution rules set forth in Internal Revenue Code section 401(a)(9) (which limits changes in the form and timing of periodic retirement benefits after payment has started), but the Internal Revenue Service issued a series of private letter rulings (highlighted by rulings issued to Ford and GM in 2012) indicating that the programs were permissible if implemented correctly. These IRS rulings drew heavy criticism in some quarters, with some policymakers expressing concerns about allowing retirees in pay status to accelerate a stream of monthly retirement benefits payments into a single lump sum payment. In mid-2014, with no explanation, the IRS abruptly stopped issuing private letter rulings on these issues and even returned some ruling applications that had been submitted but not yet reviewed.

The IRS broke its silence on these issues with the issuance of IRS Notice 2015-49 that prospectively bars lump sum window programs for retirees in pay status. However, the IRS indicated that certain lump sum window programs for retirees implemented, authorized, and/or communicated before July 9, 2015 will continue to be permitted.

For more information about IRS Notice 2015-49, see our LawFlash on this topic.