Editor's Overview
Happy New Year! We begin the year as we have in the past – with a review of U.S. Supreme Court decisions issued during the prior year and an overview of anticipated decisions to come this year. While the Affordable Care Act continues to take center stage, the Supreme Court, as discussed below, has decided and has agreed to decide several other issues that are likely to have a significant impact on plan sponsors and fiduciaries.
As always, please be sure to review our Rulings, Filings, and Settlements of Interest, which covers a broad array of topics this month, including the Affordable Care Act, reformation and surcharge as equitable relief, statute of limitations, standing, beneficiary designations, standard of review, waiver, reimbursement and PBGC regulations on rollovers from defined contribution plans to pension plans.
A Look Back and Ahead at 2014 and 2015 SCOTUS Employee Benefits Decisions*
By Russell Hirschhorn and Lindsey Chopin
As the new year begins, we take time to reflect on the U.S Supreme Court's employee benefits decisions over the past year and the rulings from the Court that we anticipate in the coming year. During the past year, the Court again weighed in on the Affordable Care Act and also overturned the decades-old Moench presumption of prudence in employer stock fund cases. It further opined on discrete issues involving the effect of attorneys' fees motions on the finality of judgments and the Federal Insurance Contributions Act's (FICA's) applicability to severance benefits. Looking ahead into 2015, the Court has once again agreed to consider the issues affecting the fundamental structure of the Affordable Care Act, as well as another long-standing presumption involving retiree health benefits. It also has agreed to consider the application of ERISA's six-year statute of limitations to imprudent investment claims.
A Look Back at 2014 SCOTUS Decisions
Employer Stock Fund Cases
In June 2014, the Supreme Court undid two decades of case law embracing the so-called Moench presumption of prudence in ERISA stock-drop cases. Pursuant to that presumption, courts had routinely dismissed claims that a fiduciary breached ERISA's duty of prudence by investing in employer stock absent allegations in a complaint that a company's situation was dire, or that the company was on the brink of collapse. In Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014), the Court concluded by unanimous decision that the presumption of prudence could not be supported by the text of ERISA. The Court determined that the weeding out of meritless claims can be better accomplished through careful scrutiny of a complaint's allegations.
The Court then provided guidance as to how a district court should evaluate the adequacy of the allegations in a complaint. It stated that allegations that a fiduciary should have recognized from publicly available information that the market improperly valued the stock are "implausible as a general rule, at least in the absence of special circumstances" that would make reliance on the market's valuation imprudent. With respect to claims for breach of the duty of prudence on the basis of inside information, the Court stated that "a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it." The Court offered three additional points for the lower courts to consider in this regard. First, the duty of prudence does not require a fiduciary to break the law. Second, courts should consider whether a plan fiduciary's decision to purchase (or refrain from purchasing) additional stock or for failing to disclose information to the public could conflict with the federal securities laws or with the objectives of those laws. Third, courts should consider whether a prudent fiduciary could not have concluded that stopping purchases or publicly disclosing negative information would do more harm than good to the stock fund.
The Affordable Care Act's Contraceptive Mandate
The Supreme Court reviewed two of the numerous lawsuits challenging the Affordable Care Act's requirement that group health plans and insurers cover, without cost-sharing, contraceptives and/or abortifacients. In a 5-4 decision, the Court ruled that the government impermissibly required faith-based private, for-profit employers to pay for certain forms of birth control that those employers argued contradicted their religious beliefs, in violation of the Religious Freedom Restoration Act of 1993 (RFRA). (Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2014)).
The majority first held that private—as opposed to publicly traded—employers could be considered "persons" entitled to the protections of the RFRA. It then found that the law imposed a substantial burden on religious beliefs, requiring the owners of Hobby Lobby to engage in conduct that "seriously violates their [sincere] religious beliefs." The Court stated that, even assuming that the government does have a compelling interest to, among other things, promote "public health" and "gender equality" by providing contraceptive coverage for women, there were less restrictive alternatives.
Applicability of FICA to Certain Severance Payments
The Supreme Court concluded, by unanimous decision, that certain severance payments paid to employees who were involuntarily terminated were taxable wages for purposes of FICA. United States v. Quality Stores, Inc.,134 S. Ct. 1395 (2014).The issue had become particularly relevant given the increase in workforce reductions over the past several years. The holding was a disappointment to employers, who had hoped that the Court would exempt severance payments from FICA and open the floodgates for refund claims, the backlog of which was estimated to be in excess of $1 billion. The decision does not directly impact the treatment of supplemental unemployment plans that, unlike the plans at issue in the case, are not paid in a lump sum and are tied to eligibility for state unemployment benefits. The IRS position on these plans has been that payments thereunder are not FICA "wages."
Effect of Attorneys' Fees Claim on Finality of Judgments on the Merits
The Supreme Court ruled in a unanimous opinion that an unresolved claim for attorneys' fees does not prevent a decision on the merits of an ERISA suit from becoming final for purposes of the deadline to file a notice of appeal to a federal appellate court. Ray Haluch Gravel Co. v. Vent. Pension Fund of Operation Eng'rs, 134 S. Ct. 773 (2014). In so ruling, the Court resolved a split among the circuit courts as to whether an appeal of a decision on the merits should proceed before there has been a final ruling on a corollary application for attorneys' fees, and whether the resolution of that issue should depend on whether the claim for attorneys' fees was based on contract or statute. The Court concluded that considerations of consistency and predictability required that the general rule—under which a decision on the merits is final for the purposes of appeal notwithstanding that fact that the issue of attorney's fees remains to be determined—apply regardless of whether the entitlement to fees is asserted under a statute or contract.
A Look Ahead at 2015 Expected SCOTUS Decisions
Affordable Care Act Subsidies
The Supreme Court will again consider an issue arising from the interpretation of the Affordable Care Act. The Court has agreed to consider whether subsidies to buy insurance on an exchange are available in both state and federal exchanges. Some courts have held that the absence of plain language in the Affordable Care Act authorizing subsidies to individuals covered on federal exchanges meant no subsidies were available. Conversely, in King v. Burwell, 759 F.3d 358 (4th Cir. 2014), and other cases, courts have held that while there is no statutory language that explicitly authorizes the subsidies, the "context" of the Act permitted subsidies in federal exchanges.
A decision that the IRS exceeded its authority by authorizing subsidies in federal exchanges would be disastrous for the Affordable Care Act and the millions of lower paid people who are currently receiving subsidies under federal exchanges. It also would mean that pay-or-play penalties, which are triggered only if subsidies are received by full-time employees, would not apply with respect to individuals residing in those 36 states with federal exchanges. Oral argument is scheduled for March 4, 2015.
Collectively Bargained Retiree Benefits and the Yard-Man Inference
For over thirty years, there has been a division among circuit courts on the standards governing claims arising from collective bargaining agreements. In Int'l Union, United Auto., Aerospace, & Agr. Implement Workers of Am. v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983), the Sixth Circuit departed from the views of other courts by holding that an intent to vest union retiree benefits could be inferred when an ERISA plan document or collective bargaining agreement is ambiguous. The availability of this inference—the so-called "Yard-Man inference"—has been perceived to have a profound impact on the outcome of retiree benefits claims.
The Supreme Court has agreed to review the Yard-Man inference in Tackett v. M&G Polymers USA, LLC, 733 F.3d 589 (6th Cir. 2013). In that case, retirees argued that changes to a plan that would require participants to make contributions violated ERISA because "the promise of a 'full Company contribution towards the cost of [health care] benefits' in the CBAs provided them with a vested right to receive health care benefits in retirement without making any contributions." Although certain side letters and the summary plan description contemplated a cap on employer contributions, the collective bargaining agreements that were distributed to the employees made no reference to the cap. On these facts, the Sixth Circuit ruled in favor of the retirees. Defendants sought review and the Court granted certiorari. Oral argument was held on November 10, 2014 and a decision is expected this year.
Statute of Limitations for ERISA Fiduciary Breach Claims
The Supreme Court agreed to review Tibble v. Edison International, 729 F.3d 1110 (9th Cir. 2013), in order to opine on whether ERISA's six-year statute of limitations period for breach of fiduciary duty claims can be extended under a continuing violation theory, based on a fiduciary's continuing obligation to monitor investments. The plaintiffs in Tibble, who are beneficiaries of defendants' 401(k) plan, claimed that defendants breached ERISA's fiduciary duty of prudence by selecting higher-cost retail class mutual funds as opposed to lower-cost institution-class mutual funds. Some of the challenged investments were made more than six years prior to plaintiffs' lawsuit. Plaintiffs, with the support of the U.S. Department of Labor, contended that the limitations period nevertheless did not run because there was a continuing violation that continued into the limitations period.
The Ninth Circuit rejected this argument. It held that "the act of designating an investment for inclusion starts the six-year period under ERISA section 413(1)(A) for claims asserting imprudence in the design of the plan menu," and that the period continues to run until a change in circumstances engenders a new breach. Here, because there was no such change in circumstances, a new breach never occurred to restart the limitation period. Plaintiffs' claims thus expired six years after the initial decision to include the retail class mutual funds as plan investments. Plaintiffs sought review and the Court granted certiorari. Oral argument is scheduled for February 24, 2015.
The View From Proskauer
As before, the most watched ruling in the benefits arena will be the one addressing the Affordable Care Act. This will be the second time in three years that the Court has agreed to consider an issue that could impact the overall viability of the statute. The ERISA bar, however, also will be closely watching for decisions concerning the "Yard-Man" inference and statute of limitations, as they may significantly impact some key areas of ERISA litigation. The most impactful decision of the prior term may be the Supreme Court's ruling in Dudenhoeffer on the standards for employer stock-drop suits. While it is too soon to understand the full impact of the Court's ruling, it is clear that the ruling has reinvigorated the plaintiffs' bar, which might have lost the incentive to pursue stock-drop suits if the presumption of prudence had been upheld.
Rulings, Filings, and Settlements of Interest
HIPAA Certificates Are No Longer Required As of January 1, 2015
By Roberta Chevlowe and Thelma Ofori
- Effective January 1, 2015, group health plans and insurers are no longer required to issue a certificate of creditable coverage ("HIPAA Certificate") to individuals who lost group health plan coverage. (See final regulations here). As a reminder, HIPAA Certificates were used by individuals to prove that they had continuous health coverage under a prior health plan in order to offset a preexisting condition exclusion period under a new health plan. In light of the fact that the Affordable Care Act outlawed preexisting condition exclusions, there no longer is a need for such certificates.
Second Circuit: Class-Wide Reformation Is Appropriate Equitable Relief
By Aaron Feuer
- In the latest chapter of the Amara saga, the Second Circuit recently affirmed the district court's class-wide order to reform CIGNA's cash balance plan, as a means to remedy what the district court previously found to be CIGNA's breach of its statutory notice obligations.
Background
When CIGNA converted its pension plan from a traditional defined benefit plan to a cash balance plan, participants experienced a period of "wear-away" during which participants were not accruing additional benefits because the value of the benefit earned prior to the conversion exceeded the initial value of the cash balance benefit. In an earlier decision, the district court found that CIGNA's section 204(h) notice and summary plan descriptions (as well as related communications) issued in relation to the conversion misled participants by explicitly promising that their starting balances in the cash balance account would be "equal" to the benefits previously earned under the prior plan formula, when in fact they were not. On the basis of these findings, the district court ordered class-wide plan reformation to remove the effect of wear-away. The case made its way to the U.S. Supreme Court in 2011. The Supreme Court concluded that the district court had improperly ruled in favor of the plan participants under ERISA section 502(a)(1)(B), the provision governing claims for benefits, but instructed that similar relief might be available under ERISA section 502(a)(3), the provision that authorizes courts to award appropriate equitable relief to remedy violations of ERISA or the plan. Following remand, the district court denied CIGNA's motion to decertify the class and again ordered class-wide reformation relief, but this time under ERISA section 502(a)(3). In so ruling, the district also denied the plaintiffs' request to order reformation returning the plan to the pre-amendment traditional defined benefit plan, instead of just removing wear-away's impact.
The Second Circuit's Decision
In affirming the district court rulings, the Second Circuit first ruled that class-wide treatment of the claims was appropriate under Rule 23(b)(2) of the Federal Rules of Civil Procedure. Although Rule 23(b)(2) is limited to claims for declaratory or injunctive relief, and reformation is not itself injunctive relief, the Court determined that, in this instance, reformation served as the vehicle for obtaining an injunction requiring CIGNA to enforce the plan as reformed and that any monetary award was incidental to the injunction. In so ruling, the Court also rejected CIGNA's argument that class certification was inappropriate because some participants were better off under the cash balance plan. The Court found that the relief had been crafted so that terminated participants did not have to pay back any received benefits and that there was no evidence that any current participant had been harmed by the conversion.
Second, the Court rejected CIGNA's contention that class-wide reformation was inappropriate because the challenged communications were made by the plan administrator, rather than the plan sponsor. The Court determined that this distinction should not prevent the imposition of reformation relief where, as here, CIGNA served as both plan sponsor and plan administrator and had been found to have engaged in fraudulent conduct.
Third, the Court rejected CIGNA's contention that the named plaintiffs had failed to prove that all of the plan participants had misunderstood the plan terms, absent which reformation relief was not appropriate. The Court held that on the basis of generalized evidence, including the company-wide communications of an "equal value" benefit and the evidence indicating that the vast majority of plan participants read and relied on these communications, the Court could infer that the entire class of participants had been misled by CIGNA and thus misunderstood the plan terms and their effect.
Lastly, the Court rejected plaintiffs' argument that the district court erred in only reforming the plan to remove wear-away and refusing plaintiffs' request to reform the plan so as to return it to the pre-amendment traditional defined benefit plan. The Court found that the district court's reasoning—even though provided when relief was originally granted pursuant to ERISA section 502(a)(1)(B)—was sufficient, since it showed that the relief granted better comported with participants' expectations and involved fewer administrative difficulties than plaintiffs' requested relief.
The case is Amara v. CIGNA Corp., No. 13-447-CV, 2014 WL 7272283 (2d Cir. Dec. 23, 2014).
Ninth Circuit Breathes Life Into Participant's Claim for Surcharge
By Aaron Feuer
- A panel of the Ninth Circuit withdrew its earlier opinion and has now joined other circuits in finding that the equitable remedy of surcharge is available for participants seeking recovery of personal losses as opposed to losses suffered by the plan. Gabriel v. Alaska Elec. Pension Fund, 2014 WL 7139686 (9th Cir. Dec. 16, 2014). Surcharge relief is one of three forms of equitable relief identified by the Supreme Court in its landmark Amara decision (along with equitable estoppel and reformation), which is available where a fiduciary breach causes a loss. In this case, the Court remanded to the trial court to determine whether the participant is entitled to surcharge for his claim that the plan breached its fiduciary duty by failing to inform him he was ineligible for a pension benefit because he had not satisfied the plan's service requirements, thus causing him not to engage in additional service in order to qualify. The panel's prior opinion had provoked considerable attention as discussed here.
District Courts Continue to Reject the Ninth Circuit's Limitation on Surcharge
By Aaron Feuer
- We previously reported (here) that the Ninth Circuit stands alone in expressly limiting the availability of surcharge to cases involving loss to, or unjust enrichment at the expense of, the plan (as opposed to being available to a participant claiming personal loss flowing from a fiduciary breach). See Gabriel v. Alaska Electrical Pension Fund, 755 F.3d 647 (9th Cir. 2014). We also reported (here) that a district court declined to apply the Ninth Circuit's narrow reading of surcharge because there is a pending petition for rehearing en banc in Gabriel and, in that court's view, the Gabriel decision was not binding. Two more district courts have reached the same conclusion and, on that basis, denied motions to dismiss the complaints. In Zisk v. Gannett Co. Income Prot. Plan,No. 2014 WL 5794652 (N.D. Cal. Nov. 6, 2014), Zisk developed cancer and then applied for and began receiving benefits from Gannet's Income Protection Plan. The claims administrator subsequently terminated his benefits because Zisk failed to provide updated medical records. Zisk claimed in the lawsuit that the plan fiduciaries breached their fiduciary duty by failing to conduct an adequate investigation into his medical condition prior to terminating his benefits and by providing misleading information regarding the status of that investigation. In Witt v. United Behavioral Health, 14-cv-02346-JCS (N.D. Cal. Nov. 20, 2014), plaintiffs alleged that UBH breached its fiduciary duty by wrongfully denying their claims and improperly limiting the scope of their insurance coverage for mental health and substance abuse-related residential treatment. Plaintiffs claimed, among other things, that they were entitled to surcharge since the breach harmed them and UBH's corporate affiliates were unjustly enriched by not having to pay claims. Both cases thus appear to be headed for discovery notwithstanding the fact that the relief sought is not for the plan.
Second Circuit Holds ERISA Disclosure Claims Are Time-Barred
By Aaron Feuer
- The Second Circuit recently held (in a summary order) that plan participants' claims alleging violations of ERISA's disclosure rules in connection with a cash balance conversion were barred by the statute of limitations. In so ruling, the Court explained that because the participants' claims that defendants breached their fiduciary duties by mischaracterizing the new plan's performance were brought fourteen years after the alleged breaches occurred and the participants failed to plausibly allege any fraud or concealment, the claims were barred by ERISA Section 413's statute of limitations governing fiduciary breach claims. Similarly, the Court concluded that the participants' Section 204(h) claim was time barred, regardless of whether it was governed by section 413 or the state limitations period for breach of contract period claims, since the claim accrued, at the latest, when the plan issued the summary plan description in 2000. The case is Pirro v. Nat'l Grid, 2014 WL 5438107 (2d Cir. Oct. 28, 2014).
Defined Benefit Plan Participants Have Standing to Pursue Fiduciary Breach Claims
By Joseph Clark
- A federal district court in Minnesota found that participants in a defined benefit pension plan had standing to assert claims that defendants breached their fiduciary duties by, among other things, shifting to an equities-only investment strategy that resulted in the plan becoming significantly underfunded and thereby increasing the risk of default. In so ruling, the court determined that even though U.S. Bancorp was capable of meeting its minimum funding obligations, plaintiffs plausibly alleged that plan assets became insufficient to meet its liabilities, and this increased risk of default represented a personal injury sufficient to establish standing. The court nevertheless concluded that plaintiffs' claim was barred by ERISA section 413's six-year statute of limitations because defendants adopted the equities-only strategy more than six years before plaintiffs filed suit, and plaintiffs did not challenge any specific equity purchases that took place during the limitations period. The case is Adedipe v. U.S. Bank, N.A., 2014 WL 6633083 (D. Minn. Nov. 21, 2014).
Tenth Circuit Finds Plan Administrator Has No Duty to Inquire into Authenticity of Participant's Beneficiary Designation
By Lindsey Chopin
- Plaintiff Kristopher Towles, the son of a deceased participant of a life insurance plan, challenged the plan's decision to pay the life insurance proceeds to the deceased's husband, contending that the beneficiary form replacing him with the deceased husband had been forged. After five attempts to state a claim, the district court dismissed the complaint for failure to plead a viable claim. The Tenth Circuit affirmed and further noted that Kristopher's allegations that the forms were forged failed to state a claim under ERISA because a plan administrator has no duty to inquire into the authenticity of the forms if it had "no reason to suspect that anything was amiss." The case is Yarbary v. Martin, Pringle, Oliver, Wallace & Bauer, LLP, No. 14-3101, 2014 WL 6679881 (10th Cir. Nov. 24, 2014).
Procedural Errors Don't Alter Standard of Review In ERISA Claim for Benefits
By Madeline Chimento Rea
- The Ninth Circuit recently held that where an ERISA plan provides the plan administrator discretionary authority to determine benefit claims, procedural violations that occur during the course of the administrative claims process "do not alter the standard of review unless those violations are so flagrant as to alter the substantive relationship between the employer and employee, thereby causing the beneficiary substantive harm." Here, Plaintiff John Nasi alleged that the district court erroneously reviewed the administrator's denial of benefits under an abuse of discretion standard. According to Nasi, the district court should have reviewed the claim de novo because the plan committed procedural violations by not timely resolving his claim. Affirming summary judgment in favor of the plan, the Ninth Circuit concluded that the delay was not a flagrant procedural violation, particularly when taking into account that Nasi's untimeliness in producing documents and releasing records caused much of the delay. The case is Viad Corp. Supplemental Pension Plan v. Nasi, No. 2014 WL 6984443 (9th Cir. Dec. 11, 2014).
401(k) Plan Participant Waived ERISA Stock-Drop Claim
By Joseph Clark
- The D.C. Circuit affirmed the decision of a district court that Plaintiff Patrick Russell, a 401(k) plan participant, had knowingly waived his right to assert an ERISA stock-drop claim based on, among other things, the alleged imprudence of maintaining an employer stock fund as an investment option. Russell argued that the district court erred by not providing him with a "reasonable opportunity" to conduct discovery and present evidence on the issue of whether he knowingly and voluntarily consented to the severance agreement. The circuit court disagreed, concluding that all of the factors that go into evaluating whether a release was knowing and voluntary (e.g., the clarity of the agreement, the consideration given for the agreement, the plaintiff's education and business experience, and whether plaintiff consulted with an attorney) were evident from the face of the severance agreement or within Russell's own knowledge.
The case is Russell v. Harman Int'l Indus., 2014 U.S. App. LEXIS 23359 (D.C. Cir. Dec. 12, 2014).
Second Circuit Rejects Plan's Claim For Reimbursement From Another Plan
By Aaron Feuer
- Where an ERISA plan specifically sets forth in the plan document its rights to reimbursement/subrogation vis-à-vis a plan participant then there is no requirement that recovery be conditioned on the plan being able to trace the recovered monies to the original benefit payment. Under such circumstances, the plan is considered to have an equitable lien by agreement. The Second Circuit recently had occasion, however, to consider whether an equitable lien could attach against another plan that provided overlapping medical coverage to a participant. The Court held that it did not. In so ruling, the Court concluded that the plan's claims did not seek appropriate equitable relief because there was no agreement between the parties that identified a particular share of a specific fund to which the plan was entitled. Recognizing that its holding could deprive an ERISA plan of any remedy in cases of this nature and could potentially create an incentive for similarly-situated ERISA plans to refuse coverage, the Court stated that it was bound to apply the law as interpreted by the U.S. Supreme Court and that it hoped Congress would "revisit this tangled web sooner rather than later." The case is Cent. States, Se. & Sw. Areas Health & Welfare Fund v. Gerber Life Ins. Co., 2014 WL 2853587 (2d Cir. Nov. 14, 2014).
Eleventh Circuit Enforces Subrogation Clause
By Lindsey Chopin
- The Eleventh Circuit recently concluded that Robert Montanile, a welfare plan participant, could not avoid reimbursing the National Elevator Industry Health Benefit Plan for benefits it paid on his behalf after he recovered from a third party tortfeasor. In so ruling, the Court rejected Montanile's arguments that the plan's reimbursement provision was not enforceable because it was not contained in the plan document and that reimbursement was not an appropriate remedy because the funds had been spent or dissipated. The Court ruled first that, in light of the fact that there was no plan document separate and apart from the summary plan description, the subrogation/reimbursement provision was an enforceable term of the SPD, and the Supreme Court's statement in CIGNA Corp. v. Amara, 131 S.Ct. 1866 (2011) that the terms of an SPD are not part of the plan document thus had no application here. Second, applying existing precedent in the Circuit, the Court held that where, as here, a plan unambiguously gives itself a first-priority claim to third party payments an equitable lien attaches immediately upon the receipt of specifically identifiable funds, rendering it irrelevant that the funds were subsequently spent or dissipated. The case is Board of Trustees of the National Elevator Industry Health Benefit Plan v. Montanile,2014 WL 6657049 (11th Cir. Nov. 24, 2014).
PBGC Issues Final Regulations Regarding Rollovers from Defined Contribution Plans to Pension Plans
By Justin Alex
- The PBGC has recently initiated efforts to enhance retirement security for Americans by promoting lifetime income options (i.e., annuitized benefits). As part of these efforts, as well as those of the IRS and U.S. Department of Labor, the PBGC issued final regulations regarding the treatment of rollovers from defined contribution plans to defined benefit plans for purposes of the PBGC's statutory guarantees under Title IV of ERISA. The PBGC regulations are intended "to encourage people to get lifetime income by removing barriers to moving their benefits from defined contribution plans to defined benefit plans." The guidance also "removes the fear that the amounts rolled over would suffer under guarantee limits should [the] PBGC step in and pay benefits."
Under the final regulations, certain amounts rolled over from defined contribution plans will not be subject to PBGC's maximum insurance benefit levels or to the PBGC's five-year phase-in limitation for the guarantee of benefit increases. The PBGC also would treat these amounts as covered in priority category two (PC2) under the PBGC's asset allocation rules. This status means that the benefits would have a higher claim on plan assets than most benefits owed under a terminated pension plan. However, unlike other PC2 benefits, the PBGC generally will not pay out any benefits attributable to a rollover as a lump sum and, for purposes of pre-retirement death benefits, the PBGC will include those benefits in the value of the plan's qualified preretirement survivor annuity for the surviving spouse of a deceased participant.
Significantly, this special treatment will only apply to rollovers that are treated as mandatory employee contributions for purposes of Section 411 of the federal tax code. Code section 411(c) generally provides that the accrued benefit derived from mandatory employee contributions to a pension plan is equal to the employee's contributions accumulated to normal retirement age using certain specified rates and converted to an actuarially equivalent annuity commencing at normal retirement age using an interest rate under Code section 417(e)(3) as of the determination date.
IRS Revenue Ruling 2012-4 treats rollover amounts from defined contribution plans to defined benefit plans as mandatory employee contributions for purposes of Section 411(c). However, the Revenue Ruling provides that if a plan provides an annuity with respect to a rollover in excess of the amount determined under the rules of Section 411(c) (such as by using more favorable actuarial conversion rates), the excess portion of the benefit would be subject to the requirements applicable to benefits attributable to employer contributions. As a result, benefits attributable to these excess rollover amounts would not be treated as mandatory employee contributions by the PBGC.
Rollovers from defined contribution plans to defined benefits plans have been a plan design option for many years. However, plan participants may have been wary of using these rollovers – particularly in light of recent pension plan failures. As employers continue to consider ways to control retirement costs while still providing meaningful retirement benefits for employees, the PBGC's new regulations should help make rollovers from defined contribution plans to pension plans more palatable for both employers and employees. The new regulations will become effective on December 26, 2014.
* Originally published in Bloomberg, BNA. Reprinted with permission.