Compliance February 25, 2015

Justices Consider ‘Duty to Monitor’ in Fee Case Arguments

The U.S. Supreme Court heard oral arguments in a case said to be the first excessive 401(k) fee litigation to reach the nation’s highest court.
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A review of argument transcripts in Tibble v. Edison shows U.S. Supreme Court justices had an extensive amount of questions for both the appellants and appellees—many of which strayed far beyond the narrow review to which the Supreme Court initially said it would limit itself.  

The excessive fee litigation case levied by employees of utility company Edison International alleges the company breached its fiduciary duty by offering retail-class mutual funds as retirement plan investments when lower-cost institutional funds were available. Justices probed attorneys for both sides with a wide variety of questions—some highly technical and others more basic—about their views of the Employee Retirement Income Security Act (ERISA) and how its requirements and relevant case law should be interpreted. Besides hearing arguments from attorneys from both sides, the court also heard input from Nichole Saharsky, assistant to the U.S. Solicitor General, supporting the participant-appellants.  

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Earlier case filings show the Supreme Court justices planned to limit their review of Tibble to the following question: “Whether a claim that ERISA plan fiduciaries breached their duty of prudence by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institution-class mutual funds were available, is barred by 29 U. S. C. §1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed.”

As part of that question, the Supreme Court said it would also have to decide whether the so-called “Firestone deference” (as established in the high court’s 1989 decision in Firestone Tire & Rubber Co. v. Bruch) applies to fiduciary breach actions under 29 U.S.C. §1132(a)(2), where the fiduciary allegedly violated the terms of the governing plan document in a manner that favors the financial interests of the plan sponsor at the expense of plan participants.

However, as noted by Michael Graham, a partner and co-chair of the ERISA Litigation Affinity Group at international law firm McDermott Will & Emery, the justices’ questioning did not in fact appear to be limited to this narrow issue. He tells PLANSPONSOR that the narrow issue initially certified for review by the Supreme Court “basically got ignored during today’s arguments.”

“I think this one is a really hard one to read, in terms of likely outcomes, from just looking at the transcript,” Graham says. “There is one branch of questioning that emerged from the justices, which was concerned with making a clear determination on the duty to monitor standard. This is an issue that goes far beyond the limitations period question the court said it would review. They basically went straight to the elephant in the room and asked, is there a duty to monitor, and what is it?”

Graham says some industry practitioners and legal experts will ask whether the Supreme Court should be in the business of making this type of a determination—especially given its usual aversion for trying issues of fact. He notes that several justices asked different versions of this question themselves during the course of arguments.

“It’s an interesting case because both sides, in their briefs, essentially agree that there is such a duty to monitor—the disagreement is just a matter of when that duty arises and what are the standards according to which it should be applied,” Graham explains. “The court is not usually one to take up factual disputes, but it was getting pretty deep into the weeds and facts of the case during its questioning, rather than sticking to the broad legal strokes they deal with most often.”

Given the varying signals from the Supreme Court, Graham says there is still a multitude of ways the final decision could go—some that would be more overarching on the duty to monitor, and some that would allow the court to avoid the issue and remand the matter to the lower courts to build up more case law.

One ERISA specialist who attended the arguments in Washington, D.C., tells PLANSPONSOR the justices “absolutely went far afield and expressed no little interest in the ongoing obligation a fiduciary has to monitor plan investments.”

“Their interest in this point became clear throughout the hearing, but I think most telling was when the lawyer for the Solicitor General, Ms. Saharsky, began her arguments,” says Jamie Fleckner, partner in Goodwin Procter’s litigation department and chair of its ERISA litigation practice. “Right at the start she noted there had already been a lot of discussion on the duty to monitor, but that the actual issue the Supreme Court had certified was more about the application of the statute of limitations under ERISA.”

The justices seemed to shrug off this comment from Saharsky, Fleckner says, and continued to spend most of the time asking questions related to the fiduciary duty to monitor. Like Graham, Fleckner says he was not left with a clear sense of how widely or narrowly the justices could come down in Tibble v. Edison—or even which side is likelier to prevail. He notes that the justices also spent significant time discussing the long and winding procedural history that brought the case to the Supreme Court in the first place.

“Looking into this line of questioning, there are a number of ways they could go based on the procedural matters,” Fleckner suggests. “In other words, they could issue an opinion that would be based on either a question of procedure or some other court rule, which would not make a strong determination on the duty to monitor or the timeliness questions.

“It absolutely could still result in a decision that has very little application to the industry, if for example the court believes that one or the other of the parties had, for example, waved an argument, meaning they hadn’t properly preserved it under court rules,” Fleckner continues. “And if the decision focuses on that type of a question, then it will be more meaningful for trial lawyers in a variety of cases—but it would have little specific meaning to fiduciaries operating a retirement plan.”

While he hesitated to read too deeply into the fact, Fleckner noted that some of the politically-distant justices (for example, Justices Sotomayor and Scalia), expressed similar skepticism about whether the court was in an appropriate positon to define something like ERISA’s duty to monitor—especially whether such matters are better determined through case law and the trial courts.

“You may be seeing the beginnings of a view here that says the Supreme Court shouldn’t be in the business of settling some of these issues, which really seem more to do with the facts of the case at hand,” Fleckner notes. 

In all, Fleckner and Graham agree that the arguments left a wide range of potential outcomes on the table—some of which would be more meaningful for retirement industry practitioners than others. 

The full argument transcripts can be downloaded here.

Opinions February 24, 2015

Second Opinions – Applying the Employer Mandate Look-Back Rules

Experts from Groom Law Group answer questions about new IRS guidance about applying the Patient Protection and Affordable Care Act (ACA) employer mandate look-back rules.
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Last fall, the Internal Revenue Service (IRS) released guidance (Notice 2014-49) that addresses several issues not addressed in the final employer mandate regulations regarding the application of the look-back rules in situations in which the measurement method or period changes.

The final employer mandate regulations describe two measurement methods that applicable large employers (ALEs) can use to determine whether an individual is a full-time employee: (1) the look-back measurement method; or (2) the monthly measurement method.

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Under the final regulations, an employer generally must apply the same measurement method and, if using the look-back method, the same measurement period, to all employees in the same category (e.g., salary vs. hourly). The final regulations include rules on an employee transferring from a category for which one measurement method applies to a category under which the other method applies, but do not address the rules that apply if an employer changes the measurement method or period for a category of employees. 

The Notice describes proposed approaches for applying the look-back rules when an employee transfers from one position to another with an employer and when an employer changes measurement methods or periods for a category of employees. It also requests comments on the potential application of these approaches in the case of corporate transactions such as mergers and acquisitions.  Below we address frequently asked questions related to the Notice. 

How do the look-back rules apply to employees who transfer positions or between employers? 

The Notice addresses situations in which an employee experiences a change in measurement method or period as a result of a transfer between ALE members or between employee categories. Following the transfer, the employer must take into account the hours of service earned in the first position either by counting the hours using the counting method applied to the employee in the first position or recalculating the hours of service earned in the first position using the hours of service counting method applied to the employee in the second position. 

The Notice proposes an approach to apply the look-back measurement method after the change. In general, the application of the look-back rules vary depending upon whether the employee was in a stability period or administrative period applicable to the first position as of the date of the transfer. If the employee was in a stability or administrative period as of the transfer date, the employee’s full-time or part-time status for the first position remains in effect until the end of that stability period. Then, at the end of the applicable stability period, the employee assumes the full-time or part-time status that employee would have had under the look-back method applicable to the second position (and including hours from the first position). 

For employees not in a stability or administrative period as of the transfer date, the employee’s full-time or part-time status is determined solely under the look-back method applicable to the second position as of the date of transfer, including all hours of service in the first position. Otherwise, the general look-back rules, including the rules that apply to new, full-time employees, continue to apply.

 

How do the look-back rules apply if the employer changes the measurement method or measurement period for a category of employees? 

The Notice includes rules that apply when an employer makes changes in the measurement method, or the duration or start date of the measurement period, that applies to a category of employees. In general, the Notice applies the rules in the final regulations that apply to an employee transferring from a category for which one measurement method applies to a category under which the other method applies to all employees impacted by the employer’s change in methods for a “transition period” after the effective date of the change. In general, the rules in the final regulations apply as if on the date of the change each of those employees had transferred from a position to which the original measurement method or period applied to a position to which the revised measurement method or period applied.

What rules apply in the case of mergers and acquisitions? 

The final regulations provided only limited guidance about the application of the rules in the case of mergers and acquisitions and indicated that the IRS would issue further guidance. The Notice requests comments about the potential application of the approach proposed in the Notice in the context of corporate transactions such as mergers and acquisitions. 

The Notice states that until further guidance is issued and at least through the end of 2016, employers involved in corporate transactions in which employers use different measurement methods may rely on the approaches described in the Notice (i.e., for employee transfers) in determining an employee’s status as a full-time employee. As an example, the IRS describes a situation where one corporation (seller) merges into another corporation (buyer) and both corporations use the look-back method, but with different measurement periods. The corporations may apply the approach set forth in the Notice by treating the seller’s employees as having transferred on the date of the merger from one position (at seller) to another position (at buyer) with a different measurement period.

The Notice also includes a proposed approach under which an ALE member may apply to its newly acquired employees as a result of a transaction the measurement method that applied to the acquired employees immediately before the corporate transaction during a transition period. The IRS notes that this proposed approach for corporate transactions is not necessarily the only permissible approach and requests comments on other possible approaches.

 

You can find a handy list of Key Provisions of the Patient Protection and Affordable Care Act and their effective dates at http://www.groom.com/HCR-Chart.html   

Contributors:   

Christy Tinnes is a principal in the Health & Welfare Group of Groom Law Group in Washington, D.C. She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare. She represents employers designing health plans as well as insurers designing new products. Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.   

Brigen Winters is a principal at Groom Law Group, Chartered, where he co-chairs the firm's Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.  

 

PLEASE NOTE:  This feature is intended to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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