Employee Benefits Law Report - Reporting on recent trends and developments affecting employee benefits

A recent case, Tussey v. ABB, Inc., has received much warranted and unwarranted attention in the Section 401(k) plan arena. In Part 1 of this legal update, we will explain the basics of what happened in this case. In Part 2, we will provide practical aspects of Tussey and deliver specific recommendations on how plan sponsors and fiduciaries can help minimize their potential fiduciary liability.

Part 1: Case Summary

By way of background, this case was one of 15 different cases filed in 2006 by a single law firm. These lawsuits were aimed at large employers alleging a breach of fiduciary duties under ERISA related to the fees paid for 401(k) plan services. The primary issue in Tussey was whether ABB, Inc., the plan’s employee benefits committee, and Fidelity Trust (the plan’s recordkeeper) violated their fiduciary duties to the plan. Tussey is noteworthy because it the first of these cases to award significant damages to the plaintiffs (but note that the damages were a fraction of those sought).

The district court certified the case as a class action in 2007. The district court refused to dismiss the case in 2008, while also ruling that the failure to disclose revenue sharing payments to plan participants is not a breach of fiduciary duty (because disclosure is not explicitly required by ERISA or the DOL). The case proceeded to a four-week bench trial. Finding in favor of the plaintiffs, the court awarded damages of nearly $37 million. While the court found a number of deficiencies in ABB, Inc.’s fee monitoring procedures and in the fee arrangement between ABB, Inc. and Fidelity, it is clear that ABB, Inc.’s primary lapse was in not following its detailed investment policy. The court issued the following significant holdings:

• ABB, Inc. failed to monitor recordkeeping costs by:
      -  Never calculating the amount paid via the revenue sharing arrangement.
      -  Ignoring third-party advice that revenue sharing exceeded market rates.
      -  Using the revenue sharing to decrease administrative costs, which ultimately benefited ABB, Inc.
• ABB, Inc. breached its fiduciary duty under ERISA by not considering its ability to leverage the plan’s size and not negotiating lower fees for plan participants as was required under investment policy.
• ABB, Inc. violated its fiduciary duty under ERISA by:
      -  Removing the Wellington Fund and replacing it with the Fidelity Freedom Funds.
      -  Failing to follow the plan’s investment policy, which described investment selection/de-selection processes.
      -  Decreasing ABB, Inc.’s out-of-pocket costs for recordkeeping fees (as opposed to getting lower costs for plan participants).
• ABB, Inc. and the benefits committee violated their fiduciary duties under ERISA by:
      -  Agreeing to pay Fidelity an amount that exceeded market costs for plan services.
      -  Having the 401(k) plan subsidize ABB, Inc.’s corporate services, such as payroll and recordkeeping costs for its health plan and pension plan.
      -  Ignoring reports indicating that ABB, Inc. overpaid for services and that payments subsidized services for ABB, Inc. corporate plans.
• The trustee and recordkeeper (Fidelity Trust) breached fiduciary duties by transferring float income earned on plan assets to plan investment options rather than distributing it to plan participants.

Part 2: Practical Aspects and Recommendations

As a preliminary note, we would recommend that plan sponsors and fiduciaries not overreact to this case. Some commentators are being rather alarmist in the wake of Tussey. They are claiming that the holdings in this case will leave plan sponsors and fiduciaries nowhere to hide, and that every 401(k) plan with mutual fund investments is filled with eventual plaintiffs who are planning lawsuits. We would caution that there are many published cases with similar fact patterns to Tussey that have not found any type of breach of fiduciary duties under ERISA. In addition, we would expect ABB, Inc. and Fidelity to appeal this case. So, some of the holdings in this case may ultimately be reversed.

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On Wednesday, March 28, the Supreme Court wrapped up three days of oral arguments related to the constitutionality of certain portions of the health care reform legislation. As noted in my immediately previous blog related to the arguments, the Court focused on two issues in this last day of argument including: (a) whether the entire health care reform legislation must be invalidated in the event that the individual mandate is struck down, and (b) whether the provision of the legislation that expands the Medicaid program, and thus increases the financial burdens imposed on the states under that program, is constitutional. These issues raise enormous concerns, although they may appear more than a bit anti-climatic after the day of argument focused on the constitutionality of the individual mandate (which of course is at the heart of the reform legislation).

On March 28, the Court first considered the issue of whether the entire health care reform legislation must be invalidated in the event that the individual mandate is struck down. The issue often is referred to as the severability issue (which to me always has conjured up an image of Marie Antoinette). While no lower court of appeals decision held that the entire legislation should be invalidated if the individual mandate was struck, the Court elected to consider the issue. Opponents of the legislation have argued that the entire legislation should be struck if the mandate is ruled to be unconstitutional. The Obama administration has argued that only certain provisions of the legislation (including certain guaranteed issue requirements and the prohibition against preexisting conditions — perhaps not coincidentally some of the most popular features in the legislation) would have to go.

It appears the Court struggled with determining the right standard by which to decide the severability issue. Justices from both ideological wings expressed considerable reluctance for wading through the legislation to decide what should stay and what should go (of course stories about the length of the legislation now have reached almost legendary proportions). Several justices also warned of unintended and negative consequences if the legislation was allowed to survive but the individual mandate was struck. Not surprisingly given the prevailing political dysfunction here in Washington, those justices seemed uncomfortable with the notion that Congress could effectively deal with any such negative consequences. On that basis, perhaps striking down the entire legislation would be preferable. On the other hand, other justices signaled a belief that dealing with these potential negative consequences is a job for the Congress and not for the courts.

It seems no consensus emerged on the severability issue. This debate is expected to carry over to the conference among the justices to first discuss the case in its totality, which could occur as early as this Friday, and predicting an outcome (even assuming they have to consider this question) is difficult. Many, but not all, observers came away from Wednesday’s arguments with the sense that at least a bare majority of the justices appeared disinclined to invalidate the entire legislation if the Court should strike down the mandate. Under this view, that majority would at least include the four members of the liberal wing of the Court and Chief Justice Roberts, who noted during the argument that many of the provisions in the legislation are not related to the mandate.

The Court then moved on to the issue of the expansion of the Medicaid program under the legislation – the last issue on the agenda. The challenge brought by the states here is based on an argument that the funding available under the legislation to help defray the cost of the expansion in effect improperly coerces compliance by the states. Some of the justices on the conservative wing of the justices expressed sympathy for the view that the states do not have an effective choice but to go along with the expansion, but Chief Roberts may have indicated some unwillingness to reopen this issue by noting that the states have complied with Medicare for decades and only now have brought this challenge (indeed the arguments made by the states could apply to the Medicaid program in its entirely and not just to its expansion here). Observers of the arguments have noted that the Court did not seem to spend much time attempting to define with specificity the level of coercion that would be needed to justify a decision to invalidate the expansion, and that fact may be a hint that the Court does not anticipate doing that. (If you’re interested, you can listen to yesterday’s oral arguments or download the transcrip from The Supreme Court’s website.) 

The arguments now are over. The debate moves to a quiet deliberation phase within the chambers of the justices as they seek a ruling around which they can build a majority (although this case inevitably calls for a series of concurring and dissenting opinions) and then move to complete the opinion. Most observers expect the Court to issue its opinion in this case by the end of the current term in June. But all is not lost. The baseball season starts soon, and so we will have something to distract us as we wait for the opinion.

The Supreme Court on Tuesday, March 27 heard oral arguments on the most pivotal issue concerning the implementation of the health care reform legislation. The issue before the Court on Tuesday concerned the constitutionality of the individual mandate that is at the heart of the recent legislation (i.e., the obligation imposed on all covered individuals, effective in 2014, to either purchase health care coverage or pay a penalty for refusing to do so). This was the sole issue before the Court during two hours of oral arguments. Although other issues are being reviewed during three days of oral arguments, this clearly was the main event.

For weeks leading up to the oral arguments, leading legal pundits appeared in the media and on panel discussions offering a preview of what we should expect during these important arguments. To this author’s ear, the pundits left two major impressions. A large majority of them seemed to believe that it was unlikely that the Court would strike down the individual mandate. Of course, that prediction still may be correct. In addition, those same pundits cautioned about reading too much into the questions asked by the justices during the arguments. To this observer, that seemed like sage advice—until I noticed that several of those same pundits were out and about after the arguments commenting on the possible fate of the mandate largely based on what many perceive (with considerable justification I might add) as intensely probing and challenging questions posed by members of the so-called conservative wing of the Court. So what are we to believe?

It might help to first review what we know to be facts about the oral arguments before the Court on the individual mandate. First, we know that there were oral arguments before the Court on the individual mandate. I probably should stop there. However, there are a few other facts or strong probabilities that bear mention. Justice Thomas maintained his by now time-honored tradition of not asking any questions during the oral argument (those same pundits fairly unanimously predict Thomas will vote to strike down the individual mandate). One strong probability relates to the likely votes of the members of the so-called liberal wing of the Court (including Justices Breyer, Ginsburg, Sotomayor and Kagan). Going into the argument, it was universally assumed that this group of justices would support the constitutionality of the individual mandate. The tenor of their comments and questions during the argument only reinforce and actually strengthen that assumption. In fact, some of the commentators present for the argument actually thought some of those justices were more forceful in their support of the mandate than was the principal lawyer representing the position of the federal government at the argument in support of the individual mandate. Commentators have suggested that if people were out turning cartwheels after this day of argument, then they assuredly were opponents of the individual mandate (although truthfully I have yet to see anyone involved in the case actually turn a cartwheel under any circumstances!).

We are left with many uncertainties in the wake of the oral argument related to the individual mandate. The fate of that mandate (and to some extent the overall effectiveness of the entire legislation, assuming it is not itself struck down) directly depends on how those uncertainties play out over the next few months as the justices deliberate on the case. As has been true with many cases over recent years, Justice Kennedy is a key player in this drama. The same may be true with Chief Justice Roberts. No doubt causing a chill down the spines of proponents of the law, early in the argument Justice Kennedy reflected at least some doubt when he questioned whether the mandate might be “a step beyond what our cases allow.” However, when later questioning the principal lawyer for the states challenging the mandate, Justice Kennedy seemed to concede that a comprehensive solution to the country’s health care problems might be necessary. Some interpret comments made by Chief Justice Roberts, who also noted the uniqueness of health care, as suggesting he also is wrestling with these opposing concerns. While surprises always are possible, questions raised by Justices Scalia and Alito suggest they are not burdened by these uncertainties and that they likely will vote to strike the mandate. If, as most assume, the four liberal members of the Court vote in favor of the mandate, then either Kennedy or Roberts, or both, will have to vote in favor of the mandate for it to survive. To me, there is insufficient information generally available to make even an educated guess one way or the other.

The Court addresses two issues concerning the health care reform legislation on Wednesday, the last day of scheduled arguments on the health care legislation, including (a) whether the entire health care reform legislation must be invalidated in the event that the individual mandate is struck down and (b) whether the provision of the legislation that expands the Medicaid program, and thus increases the financial burdens imposed on the states under that program, is constitutional. After that, we all shift into waiting mode as the Court is expected to render its decision by the end of its current term in June.  ( (If you’re interested, you can listen to Tuesday’s Oral Arguments or view the transcript on the Supreme Court’s website.)

The health care reform legislation finally is having its day (well, actually several days) in court — in the United States Supreme Court no less. Other than for those fixated on the upcoming Final Four (unfortunately, the author’s team already has been eliminated and thus I am free to write this) or on the triumphant return of Tiger Wood to the pinnacle of golf, it has been quite difficult to miss all the media attention aimed at this week’s arguments before the Supreme Court concerning the health care reform legislation passed by Congress in 2009. The Court has scheduled six hours to hear arguments on legal issues related to the legislation. There are four issues before the court, including: (1) whether the minimum coverage requirement (i.e., the individual mandate) is constitutional; (2) whether the remaining portions of the legislation are severable from the individual mandate, assuming that mandate is invalidated; (3) whether the additional financial burden placed on the states due to the expansion in the Medicaid program violates the states’ rights under the Tenth Amendment, and (4) whether the case is ripe for adjudication under the federal Anti-Injunction Act. The oral arguments have been scheduled over three days, from Monday, March 26 through Wednesday, March 28.

First up on Monday was the question related to the Anti-Injunction Act, which essentially asks whether a challenge to the imposition of a penalty on individuals who refuse to purchase health care coverage is ripe for adjudication at a time when that penalty is not yet effective. The individual mandate to purchase health care coverage first becomes effective in 2014, and penalties related to a refusal to purchase generally would not be collected by the government until 2015. Thus, it may be that an action to challenge the legislation could not be brought until at least 2015. In essence, the idea behind the Anti-Injunction Act (which was enacted way back in 1867) is to prohibit challenges to the imposition of taxes until such taxes are imposed and paid. In turn, the issue becomes whether the penalties for non-coverage imposed under the health care reform legislation are in nature taxes and so covered by the Anti-Injunction Act. Some observers believe that the Court, not unmindful of the attendant political pressure, might find this approach attractive (in sports parlance, this could be classified as a punt). However, a number of experienced legal observers of the Court seem doubtful that the justices will go this route. As an interesting but apparently not dispositive aside, the major litigants in this case (i.e., both the federal government and the states that originally brought the action) agree that the Anti-Injunction Act does not apply in this case.

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The Patient Protection and Affordable Care Act (“PPACA”) contained a provision that established the Early Retiree Reinsurance Program (“ERRP”), the goal of which was to encourage plan sponsors to retain health care coverage for retirees through at least 2013. The ERRP was designed to provide reimbursement to eligible sponsors of employment-based plans for a portion of the costs of providing health coverage to early retirees (and eligible spouses, surviving spouses and dependents of such retirees) during the period beginning on the date on which the program is established and ending on January 1, 2014. Under PPACA, $5 billion was appropriated for the ERRP.

On March 13, 2012, the Centers for Medicare & Medicaid Services (“CMS”) issued a notice that establishes a timeframe under which plan sponsors participating in the ERRP are expected to use ERRP reimbursement proceeds. The notice provides that sponsors are expected to use these funds as soon as possible, but not later than December 31, 2014. This notice closely follows the release of informal guidance CMS in February, in which the CMS specified the December 31, 2014 deadline. The CMS noted in February that $4.73 billion in reimbursement payments had been made through January 19, 2012 and that this amount, when added to pending reimbursement requests, exceeds the $5 billion that had been appropriated. CMS also noted in February that reimbursement requests that exceed that $5 billion limit will be held in the order of receipt pending the availability of funds. Plan sponsors with reimbursement requests on hold already should have received email messages notifying them that their reimbursement requests have been placed on hold pending the availability of funds. CMS will pay reimbursement requests in the order received until available funds are exhausted.

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