Compliance September 24, 2019

Supreme Court Asked to Review Case About Annuity Contracts in Retirement Plans

The question before the court is: May an ERISA plan participant or beneficiary seek disgorgement of unreasonable profits derived from a plan contract from a non-fiduciary party in interest?

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The plaintiff in a case alleging Great-West engaged in prohibited transactions has petitioned the U.S. Supreme Court to review the case.

In the case, the plaintiff alleged that Great-West engaged in self-dealing transactions prohibited under Employee Retirement Income Security Act (ERISA) Section 406(b), and caused the plaintiff’s retirement plan to engage in prohibited transactions with a party in interest in violation of ERISA Section 406(a). According to his complaint, Great-West had breached its general duty of loyalty under ERISA Section 404 by setting the credited rate of its Key Guaranteed Portfolio Fund for its own benefit rather than for the plans’ and participants’ benefit; setting the credited rate artificially low and retaining the difference as profit; and charging excessive fees.

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The 10th U.S. Circuit Court of Appeals agreed with a District Court ruling that Great-West was not a fiduciary in this matter and that the plaintiff had not adduced sufficient evidence to impose liability on Great-West as a non-fiduciary party in interest.

In his petition to the Supreme Court, the plaintiff says Great-West’s conduct violates ERISA’s clear rules barring parties in interest from using plan assets (i.e., the fund contract) to benefit themselves. He points out that the U.S. Supreme court previously held in Harris Trust & Sav. Bank v. Salomon Smith Barney that where a party in interest violates those rules, plan participants can force them to disgorge their ill-gotten gains. Multiple courts of appeals have held the same.

The plaintiff says the 10th Circuit “flouted that rule, holding that disgorgement was unavailable because the plan asset at issue was the fund contract—not specific property over which petitioner could himself assert title.” So, the question presented to the high court is: May an ERISA plan participant or beneficiary seek disgorgement of unreasonable profits derived from a plan contract from a non-fiduciary party in interest?

According to the petition, the sole question before the lower courts was whether equitable relief was available in the form of disgorgement of Great-West’s unreasonable profits derived from its contracts with ERISA plans. The plaintiff argues that by answering “no,” the courts erroneously distinguished plan contracts from any other type of plan asset, the use of which could support disgorgement. “There is no basis in law or logic for the Tenth Circuit’s new “plan contract” exception. It strays from an on-point decision of this Court, splits from the decisions of other courts of appeals, and frustrates congressional intent,” the petition states.

Again the plaintiff notes that, in Harris Trust, the Supreme Court held that ERISA authorizes disgorgement from non-fiduciaries of profits they derive from wrongfully transferred trust property. The 10th Circuit recognized in its the decision that plan contracts are trust property. But instead of treating these contracts like any other plan asset, as other Circuits have in analogous cases, the 10th Circuit mistakenly believed it could not rely on such contracts to award disgorgement, the plaintiff argues.

“This defied not only judicial precedent, but also legislative intent. There is no reason to believe that Congress wanted to let those who engage in prohibited transactions keep their ill-gotten gains,” the petition says.

The plaintiff also argues that the appellate court’s distinction makes no sense, as most prohibited transactions occur via contract. “Unless profit derived from a contract suffices, there will be hair-splitting and uncertainty in the 10th Circuit over whether the profit was derived from a contract as opposed to some other type of plan asset. That will happen even where, as here, a prohibited transaction involving plan assets clearly took place,” the plaintiff contends. He also says litigants with viable prohibited transaction claims against non-fiduciaries will not know how to frame their requests for relief, and lower courts will not know how to adjudicate them. In addition, he says the remedial scheme that Congress crafted will suffer.

“The question presented thus satisfies the Court’s traditional criteria for plenary review. Review is warranted to restore uniformity to ERISA’s remedial scheme,” the petition states.
Opinions September 24, 2019

One Way to Support Older Workers Who Aren’t Ready to Retire

Tricia Blazier, with Allsup, discusses a way for employers to address older workers’ health benefits concerns.
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By 2024, 25% of the American workforce will be made up of workers over the age of 55, an all-time high, according to the Bureau of Labor Statistics. The 55-plus labor force has doubled since 1998 and is expected to continue to rise.

Over the last decade, older workers have become increasingly motivated to continue their careers past retirement age as wages have plateaued, life expectancy has increased and pensions have vanished. People are living longer, which means they’ll need more cash on hand, and today’s 65-year-old can be apprehensive about having too little money to comfortably retire—understandably so.

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Older workers’ decision to stay around the office has caused confusion for many employers. They aren’t sure when workers will retire and, if these people decide to keep working, how to best support them. Older workers tend to offer a high level of experience, advanced industry skill sets and extensive business networks; they are often more loyal and apt to stay at their organization longer than younger workers are.

Businesses have the opportunity to fill a support gap—viz., in helping with financial and health care choices—for those individuals in the throes of retirement planning—while still maintaining their day job. A recent report from Willis Towers Watson found that, over the next three years, three in four employers plan to make it a priority to supply employees with the tools they need to make smart benefit choices.

Employers should also make a point to educate employees on how to make smart financial decisions, which can incorporate instruction about Medicare as an important optional benefit for anyone 65 and older. Decisions about Medicare are increasingly becoming critical for American workers as they consider their financial, career and retirement objectives. For employers, the program, if properly provided, can help them reduce costs.

Substantial savings can be appealing to both individuals and employers. Medicare Part B premiums start at $135.50, and deductibles are substantially lower, most under $200 or costing nothing at all. Under employer plans, 66% of workers have a co-pay when they visit a primary care doctor, whereas under Medicare, out-of-pocket costs are reduced or nonexistent. Additionally, 80% of employers have only one plan, while Medicare has multiple options covering 93% of primary care physicians.

At the same time, a key cost for employers is the company health plan. The annual health care costs of someone 65 or older are twice as high as for an employee 45 to 54, and Prudential estimates that a one-year delay in retirement can increase business costs by 1.0% to 1.5% annually. For a large company with $100 million in annual workforce costs, that’s an extra $1 million to $1.5 million.

When more money must go to employee health care, less is available for other business expenditures, programs or incentives. However, there are plenty of ways to support older workers without breaking the bank. The first is getting a handle on the issue by assessing your company’s demographics. Having an idea of how many workers are close to retiring or approaching retirement age will allow employers to craft an effective strategy.

Health insurance costs are one of the biggest expenditures for employers—they spend nearly $7,000 on premiums for each employee receiving single coverage. In the case of one midsize employer, which identified about 125 individuals on its group health plan, it realized annual savings of about $1.1 million by transitioning to Medicare for health care coverage. However, employers cannot force employees to make this transition. It’s up to the person—i.e., with the exception of those in firms with fewer than 20 workers, who are legally required to sign up.

Many employees and human resource (HR) professionals automatically assume that employer health care plans are the best and only option. But Medicare is often a more affordable, and in some cases higher-quality, choice than one’s employer-provided plan. Perhaps one of the biggest cost savers and benefits supports that employers can offer their older workers is expert assistance with understanding their options and making the transition from their employer medical plan to Medicare.

Making a plan to accommodate employees who choose to delay retirement is vital to managing workforce costs and employee well-being, especially as health insurance and retirement finances can be difficult for employees to fully understand. Fortunately, deciding on the best health care options isn’t something that HR has to do on its own. By connecting older workers with a Medicare expert, it can point them toward a low-cost health plan that best suits their individual needs. Transitioning eligible workers to Medicare is a win-win solution for both sides.

Tricia Blazier is director of health care insurance services at Allsup, LLC.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services Inc. (ISS) or its affiliates.

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