Compliance March 23, 2016

Lehman Again Granted Victory in Stock Drop Suit

Reviewing the case in light of new pleading standards set by the Supreme Court decision in Fifth Third, a court again found participants in a Lehman Brothers retirement plan did not prove a fiduciary breach.
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A federal appellate court has again affirmed a decision that participants in Lehman Brothers’ retirement plan did not plausibly argue that the company breached its fiduciary duty by keeping company stock in the plan when it was not prudent to do so.

In 2013, the 2nd U.S. Circuit Court of Appeals upheld an earlier ruling by the U.S. District Court for the Southern District of New York to dismiss the case of Rinehart v. Akers. That ruling was based on the presumption of prudence established in a 1995 decision in Moench v. Robertson. However, following the U.S. Supreme Court’s decision in Fifth Third v. Dudenhoeffer, invalidating the presumption of prudence, the Supreme Court sent the case back to the 2nd Circuit, which then sent the case back to the district court.

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In 2015, the district court again found the plaintiffs failed to allege sufficiently that the Lehman Brothers’ plan committee violated their Employee Retirement Income Security Act (ERISA) duties. The 2nd Circuit affirmed the district court’s decision.

The appellate court noted that while the Supreme Court made clear in Fifth Third that there should be no special presumption of prudence for employee stock ownership plan (ESOP) fiduciaries, “allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or under-valuing stock are implausible as a general rule, at least in the absence of special circumstances.” In addition, for claims alleging a fiduciary breach based on non-public information, the high court held that plaintiffs must plausibly allege an alternative action fiduciaries could have taken and would not have viewed as more harmful to the plan than helpful.

NEXT: Arguments rejected

The plaintiffs in Rinehart argued their case included “special circumstances,” pointing to Securities and Exchange Commission (SEC) orders issued in July 2008 prohibiting the short-selling of securities of certain financial institutions, including Lehman. The 2nd Circuit rejected this argument, saying the orders speak only conditionally about potential market effects resulting from short-sales and do not purport to describe then-existing market conditions. It agreed with the district court that the only plausible inference supported by the plaintiffs’ complaint is that the market processed any risks identified in the SEC’s orders as it would have any public information.

The appellate court also rejected the plaintiffs’ argument that had the retirement plan committee conducted an appropriate independent investigation into the riskiness of Lehman stock, it would have uncovered non-public information revealing the imprudence of investing in the stock. The court said the case includes no specific allegations about what lines of inquiry would have revealed this information, or who would have disclosed it.

In addition, the 2nd Circuit agreed with the district court that the complaint does not plausibly plead facts that show a prudent fiduciary would not have viewed disclosure of non-public information or ceasing to buy Lehman stock as more likely to harm the plan than help it, as dictated by the Fifth Third decision.

The latest opinion in Rinehart v. Akers is here.

Benefits March 23, 2016

Small Employer Health Tax Credit Not Working

A GAO report says claims of the small employer health tax credit have continued to be lower than thought eligible, limiting the effect of the credit on expanding health insurance coverage through small employers.
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The Small Employer Health Insurance Tax Credit was established as part of the Patient Protection and Affordable Care Act (ACA) to encourage eligible small employers—businesses or tax-exempt entities—to provide health insurance for employees.

A Government Accountability Office (GAO) report suggests the tax credit is not working as intended. According to the report, claims of the small employer health tax credit have continued to be lower than thought eligible by government agency and small business group estimates, limiting the effect of the credit on expanding health insurance coverage through small employers.

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In 2014, about 181,000 employers claimed the credit, down somewhat from 2010. These numbers are relatively low compared to the number of employers eligible for the credit. In 2012, GAO reported that selected estimates of the number of employers eligible ranged from about 1.4 million to 4 million. In 2010, claims totaled $468 million compared to initial estimates of $2 billion by the Congressional Budget Office and the Joint Committee on Taxation. Actual claims for the credit in 2013 and 2014 increased slightly to about $511 million and $541 million, respectively.

The small employer health tax credit has not been widely claimed for a variety of reasons. As GAO reported in May 2012, the maximum amount of the credit does not appear to be a large enough incentive for employers to offer or maintain insurance. Also, few small employers qualify for the maximum credit amount. For those employers who do claim the credit, the credit amount “phases out” to zero as employers employ up to 25 full time equivalent (FTE) employees at higher wages. The amount of the credit is also limited if premiums paid by an employer are more than the average premiums for the small group market in the employer’s state. Furthermore, the credit can only be claimed for two consecutive years after 2013.

NEXT: Improvements can be made

GAO also found that the cost and complexity involved in claiming the tax credit was significant, deterring small employers from claiming it. Many small businesses have also reported that they were unaware of the credit. The Internal Revenue Service (IRS) has been taking steps since April 2010 to raise awareness about the credit and reduce the burden on taxpayers by offering tools to help taxpayers determine eligibility for the credit.

While the GAO did not make recommendations in its testimony statement, in 2014, the Congressional Research Service (CRS) reported that the Obama Administration and some lawmakers have proposed to amend the small business tax credit to encourage and expand its use to more businesses. President Obama’s FY2014 budget proposed expanding and simplifying the credit. The budget recommended increasing the eligibility cut-off from 25 to 50 workers, changing the phase-out formula so more firms will qualify for at least part of the credit, and simplifying the calculation of the credit (by removing a requirement that an eligible employer pay a uniform percentage of the premium for each employee and also eliminating a cap on the credit based on the average health insurance premium in the employer’s state).

In addition, in the 113th Congress, the Small Business Health Care Tax Credit Improvement Act of 2013 (H.R. 3046) proposed to amend the tax credit to increase the maximum number of FTEs from 25 to 50, modify the phase-out of the credit, and repeal the limitation based on state health insurance premium averages. Another piece of legislation, the Small Business Tax Credits Improvement Act (S. 1325) also proposed to increase the maximum number of FTEs to 50, and increase the maximum wages cap to $37,500, among other provisions to increase the number of firms that could be eligible for the credit and the possible benefits awarded.

The full GAO testimony statement may be downloaded from here.

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