DOL Permits 401(k) Plans to Reschedule Annual Comparisons to Employees to Combine with Other Annual Disclosures

The Department of Labor has announced a temporary enforcement policy that allows 401(k)-type defined contribution plans to reset the timing for the annual distribution of the investment comparative chart that they are required to furnish to plan participants.  Under the enforcement policy contained in Field Assistance Bulletin 2013-02, plan administrators may reset the deadline one time, for either the 2013 or 2014 comparative chart, if the responsible fiduciary determines that doing so will benefit the plan's participants and beneficiaries, and provided that no more than eighteen (18) months may pass before participants receive their next comparative chart.  The DOL was responding to requests from plan administrators and service providers to provide plans more flexibility so that the annual deadline for furnishing comparative charts could be aligned in a cost-effective manner with the furnishing of other participant notices and disclosures. 

The DOL's participant-level fee disclosure regulation (published in 29 CFR section 2550.404a-5), which was implemented last year, requires that administrators of 401(k)-type plans disclose information about plan investment options, such as fee and performance information, to participants and beneficiaries at least annually.  Plans operating on a calendar year had to furnish their first chart no later than August 30, 2012, and their second chart is due no later than August 30, 2013.  Many other plan disclosures, however, such as pension benefit statements, are disclosed later in the calendar year.  Permitting a one-time "re-set" of the deadline will allow plan administrators to align the comparative chart with other participant disclosures. 

This enforcement policy does not alter a plan administrator's obligations under the regulation to timely update the investment information that is available at the plan's internet web address or to notify participants about changes to investment information, such as a new plan investment option.

The Employee Benefits Security Administration (EBSA) acknowledges in the Field Assistance Bulletin that it has not addressed concerns that the current timing requirement may result in a fixed annual deadline for comparative charts.  Accordingly, EBSA stated that it is considering whether to revise the regulation's timing requirement to provide reasonable flexibility to plan administrators on a permanent basis.

The Fid Guru's TakeThis FAB demonstrates that the EBSA under Assistant Secretary for Employee Benefits Security Phyllis C. Borzi is responsive and cares about the concerns of the employee benefits community.  Nevertheless, EBSA is still operating on the premise that disclosures make a difference.  As investment scandals like the recent Madoff ponzi scheme demonstrates, individual investors do not read most, if any, disclosures.  More disclosures will not solve the problem.  Indeed, the regulatory premise of requiring disclosures is likely naive -- many of these disclosures will not even be opened, regardless of when they are sent.

Reporting Penalties -- Notice Deficiency Must be Egregious

A recent growing trend in fiduciary liability claims is the demand for penalties for a Plan's purported failure to provide notices of benefit changes.  ERISA Section 204(h) requires the administrator of a defined benefit plan to provide advance notice of a plan amendment that reduces future benefit accruals, or reduces early retirement benefits on a prospective basis.  Failure to provide the Section 204(h) notices can result in the imposition of a $100 per participant penalty tax for each day until the failure is corrected.  In addition, an "egregious" failure to provide the notice can result in the amendment being nullified, so that the benefits eliminated by the amendment are restored. 

In Jensen v. Solvay Chemicals, Inc., No. 11-8092 (July 2, 2013), the Tenth Circuit Court of Appeals recently affirmed a district court's determination that employees were not entitled to any relief for their employer's violation of ERISA Section 204(h) notice requirements because the employees had failed to establish that the notice deficiency was "egregious."  The Court also held that the employees could not maintain a claim for promissory estoppel under ERISA Section 502(a)(3) because they could not demonstrate that they were influenced by the notice's deficiency.   Solvay dealt only with whether the failure was egregious, and not with the potential implication of the $100 per day penalty tax. 


Solvay converted its defined benefit plan into a cash balance plan and sent a notice to all participants. The lower court ruled that the company properly described all of the benefit changes, but the appellate court held that the company failed to properly describe the elimination of early retirement subsidies, and remanded the case for the lower court to determine whether and what relief was warranted for this single violation.  Following a bench trial, the district court concluded that no relief was warranted because the employees had not proved that the notice failure was "egregious" under ERISA.  ERISA Section 204(h)(6)(B)(i), 29 U.S.C. section 1054(h)(6)(B)(i), provides in part that a company's Section 204(h) notice failure is "egregious" if the failure was "within [its] control" and was "intentional," or if the failure was "within [its] control" and the company failed "to promptly provide the required notice or information after [it] discov[ed] an unintentional failure to meet the requirements of" Section 204(h). 

On appeal, the Tenth Circuit upheld the district court's conclusion that the company wanted to make all required disclosures and the omission about early retirement benefits "was accidental, no more than an oversight in the process of drafting a complex statutorily mandated notice." 

The employees alternatively filed an "Amara" claim under Section 502(a)(3) claim for promissory estoppel.  The court determined that the employees were not able to recover under a promissory estoppel theory because they were admittedly not influenced by the deficient notice in that they were well aware that they were losing certain benefits under the new plan.  In other words, the plaintiff participants could not recover because they did not detrimentally rely on the omission in the company's notice [i.e., no one retired early expecting benefits, only to discover that the plan had been changed].

Fid Guru's Take:  Solvay is useful precedent to combat the growing trend of plaintiff lawyers filing claims based on alleged disclosure violations.  This case demonstrates that inadvertent mistakes -- accidentally leaving out even some material information -- will not justify recovery under ERISA, at least not nullifying the benefit change.  The Court unfortunately did not address whether plaintiffs met the standard for $100/day penalties.  It would have been interesting whether participants can recover penalties even when a notice, albeit with a deficiency, was sent out.  In any event, this case demonstrates how important it is to ensure that your plan has fiduciary liability insurance coverage for reporting penalties under 502(c) and coverage for Amara-type equitable relief -- not all policies provide these coverages.   
Government Issues New Wellness Program Regulations:  Five Requirements for Health-Contingent Programs

The U.S. Departments of the Treasury, Labor, and Health and Human Services  issued final regulations this week amending the 2006 HIPAA nondiscrimination regulations to implement the employer wellness program provisions of the Affordable Care Act.  Wellness programs come in two types:  "participatory wellness programs" and "health-contingent wellness programs."  Under the final rules, participatory wellness programs comply with the HIPAA nondiscrimination requirements as long as the participant does not have to satisfy any additional standards and participation in the program is made available to all similarly situated individuals, regardless of health status.  By contrast, health-contingent wellness programs, which condition a reward on a participant's satisfaction of a standard related to a health factor, face new requirements.  The final rules apply to both grandfathered and non-grandfathered group health plans in both the insured and self-insured markets, and are effective for plan years beginning on or after January 1, 2014.

The final rules distinguish between two types of health-contingent wellness programs:  "activity-only" programs and "outcome-based" programs.  An activity-based wellness program provides a reward if an individual performs or completes an activity related to a health factor, but it does not require the individual to satisfy any specific health outcome.  Examples include waking or exercise programs in which a reward is provided just for participation, or rewards for taking a health risk assessment without requiring any further action.  An outcome-based wellness program requires an individual to either attain or maintain a specific health outcome in order to obtain a reward.  Examples are not smoking or achieving certain results in biometric screenings.

All health-contingent programs must meet five requirements under the final rules:

(1) Eligible employees must be given an opportunity to qualify for the reward at least once per year.

(2) Generally, the reward may not exceed 30% of the total cost of employee-only coverage (including both the employee and employer portion of the cost of coverage).  If dependents are permitted to participate, the reward can be calculated on the basis of 30% of the cost of coverage in which the employee and any dependents are enrolled.  In the case of a program designed to reduce or prevent tobacco use, the maximum reward amount is 50% of the total cost of coverage.  The reward limit is cumulative for all health-contingent wellness programs.

(3) The program must be reasonably designed to promote health or prevent disease.

(4) For an activity based wellness program, the full reward must be available to all similarly situated individuals by offering a reasonable alternative standard for obtaining a reward if it is either unreasonably difficult due to a medical condition to satisfy or medically inadvisable to attempt to satisfy the otherwise applicable standard.  A wellness program can require verification from a physician that an individual's health factor makes it unreasonably difficult or medically inadvisable to attempt to satisfy the regular standard.

For an outcome-based wellness program, the full reward must be available to anyone who does not meet the standard based on the initial measurement, test, or screening.  The alternative standard cannot be a requirement to meet a different level of the same standard without additional time to comply, and the time commitment to comply with the alternative standard must be reasonable. 

(5) The availability of a reasonable alternative standard to qualify for the reward must be disclosed in all materials describing the terms of the wellness program.   For an outcome-based wellness program, a similar statement must be included in a notice that the individual did not satisfy the initial outcome-based standard.  Sample language is included in the final rule.

Takeaways from NCCMP

Euclid Specialty underwriters enjoyed attending the National Coordinating Committee for Multiemployer Plans (“NCCMP”) Annual Conference.  We thought it was the most informative NCCMP conference in recent years.  For those of you who could not attend, here are our thoughts on the major topics discussed at the conference.

1.  Multiemployer Funding Levels Are Improving.  In his annual report, Josh Shapiro, Deputy Executive Director for Research and Education for NCCMP, reported that multiemployer plans are “on the path to recovery.”  Although “it will take many years,” they are now in a “positive direction.”  He reported that many of their surveyed funds had utilized the 2010 statutory relief tools, including thirty-year amortization, 10-year smoothing of assets, and the 130% corridor.  Specifically, in 2011, multiemployers funds in the NCCMP survey were 84% funded on the PPA actuarial value basis and 75% on a market value basis (with no actuarial smoothing).  This compares to 2009 survey funding levels of 77% on an actuarial value basis and 65% on a market value basis.  In 2011, 59% of the funds were in the green zone, 17% in the yellow zone, and 24% in the red zone; this compares to 2008 survey results of 76% green zone, 15% yellow zone, and 9% red zone. 

Fiduciary Insurance Coverage for Plan Amendments and Other Non-Fiduciary Functions

Two recent cases underscore a recurring fiduciary liability insurance gap for trustees of multiemployer benefit plans:  they perform many functions in their capacities as trustees that, like plan amendments, are normally handled by a plan sponsor.  But these settlor functions may not be covered under standard fiduciary policies.  Indeed, the standard fiduciary liability insurance policy only covers fiduciary actions.  Trustees thus need insurance coverage for more than just claims relating to fiduciary activities.

Ensuring Continuity of Professional Liability Policies

Professional liability insurance programs are complex contracts that must be managed with the expertise of an experienced broker.  This is particularly true whenever a policyholder is considering switching carriers.  Policyholders may want to switch for a lower price, or to move to another carrier for affinity or other preferences.  But switching carriers without ensuring full continuity of coverage creates the risk that claims alleging negligence in prior years will not be covered.  Indeed, the risk of a claim increases every year an entity is in business, so coverage must be in place today for any negligence, error or omission which took place before the current policy period.

The DOL’s New Guidance on JATC Plan Expenses – The Modesty Policy

In 2011, the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) increased enforcement of apprenticeship and training plans.  Dozens of open investigations have caused considerable confusion as to what expenses are appropriate in these plans, particularly as investigators have appeared to act capriciously with inconsistent standards across the country.  The key question is whether plan assets can be used for payments (1) for meals, gifts, entertainment, or other expenses associated with graduation ceremonies and (2) to market, advertise or promote the apprenticeship or training program.  On April 2, 2012, the DOL issued the first Field Assistance Bulletin of the year (FAB No. 2012-01) to provide guidance and promote consistency among EBSA regional offices in their enforcement issues.  The DOL defines a policy of permitting only “modest” expenses that can be justified under the educational purpose of the plan.