2014 JCEB Q&As Offer Nonbinding DOL Responses on Employee Benefits Issues

Practical Law Legal Update 4-600-1845 (Approx. 7 pages)

2014 JCEB Q&As Offer Nonbinding DOL Responses on Employee Benefits Issues

by Practical Law Employee Benefits & Executive Compensation

Party in Interest Definition

The Employee Retirement Income Security Act of 1974 (ERISA) provides that a plan fiduciary cannot cause an employee benefit plan to engage in certain types of transactions with a party in interest. The definition of "party in interest" under ERISA Section 3(14) (29 U.S.C. § 1002(14)) includes a corporation of which 50% or more of the voting power of all classes of stock is owned by a fiduciary.

DOL representatives were asked whether a Cayman Islands exempted company where 100% of the voting power of all classes of stock is held by a fiduciary qualifies as a party in interest.

DOL representatives explained that a Cayman Islands exempted company is an entity incorporated in the Cayman Islands but does a bulk of its business outside the Cayman Islands and that under this scenario a Cayman Islands exempted company would qualify as a party in interest because ERISA Section 3(14) does not limit the definition to include only US corporations that issue stock.

Plan Asset Rules

Under the ERISA plan asset regulations, an entity, such as a private equity fund or a hedge fund, that is not itself a plan subject to ERISA is treated as holding assets of the investing employee benefit plans if it appears that its primary purpose is to invest retirement plan assets, as determined under the plan asset regulations (see Practice Note, ERISA Plan Asset Rules). In effect, ERISA looks through the entity, and the persons who manage the entity's assets are treated as directly managing the assets of the investing plans and are considered ERISA fiduciaries. There are certain exceptions to the look-through rule, including if the entity qualifies as a venture capital operating company (VCOC) or a real estate operating company (REOC) (see Practice Note, ERISA Plan Asset Rules: Venture Capital Operating Company (VCOC) and Real Estate Operating Company (REOC)).

DOL representatives were asked whether an operating company that is neither a VCOC or a REOC can be exempt from the plan asset regulations under (29 C.F.R. § 2510.3-101(c)(1)). An operating company is an entity that is primarily engaged, directly or through majority owned subsidiaries, in the production or sale of a product or service (other than the investment of capital).

According to DOL representatives, the operating company exception is not limited to VCOCs and REOCs. They explained that the term operating company means an entity that is primarily engaged, directly or through a majority owned subsidiary or subsidiaries, in the production or sale of a product or service other than the investment of capital and also includes entities that do not meet this definition but are a VCOC or REOC under the plan asset regulations.

Fund Benchmarking

Certain disclosures must be made to plan participants about plan fees and investments for participant directed investments (see 29 C.F.R. 2550.404a-5 and Practice Note, Fee and Investment Disclosure Requirements for Participant-Directed Plans). Among those requirements is a comparative chart that contains specific plan investment-related information and must include for the one, five and ten calendar year periods (or for the life of the investment, if shorter):

The average annual total return of the investment.
Benchmarks that describe the name and returns of a comparable broad-based securities market index, which is not administered by an affiliate of the investment issuer, its investment adviser or a principal underwriter, unless it is a widely used index.

DOL representatives were asked whether a plan administrator offering a family of target date funds as investment alternatives under a 401(k) plan intended to satisfy ERISA Section 404(c) could use a set of target date fund indices as a benchmark in providing the investment performance disclosures required under 29 C.F.R. 2550.404a-5(d) as a "broad-based securities market index." For purposes of the question, it can be assumed that:

For each target date fund offered by the plan, an index based on the performance for target date funds have the same target dates would be used.
The set of indices is not administered by an affiliate of the issuer of the target date funds used by the plan, or such issuer's investment adviser, or one of its principal underwriters.
For any given target date, the index is developed by a method which effectively averages either the performance, or the glide paths, of target date funds offered in the marketplace, so that there is likely to be some deviation between the glide path utilized by the target date fund offered by the plan and the glide path that is implicit in the index.

DOL representatives explained that, because the standard for benchmarks (29 C.F.R. § 2550.404a-5(d)(1)(iii)) is meant to be consistent with Securities and Exchange Commission (SEC) rules, they could not conclude whether the index described would be acceptable without further coordination with the SEC. However, the representatives indicated that a plan administrator could probably use the index described as a secondary benchmark, recognizing that because of the special characteristics of target date funds a comparison to traditional single asset-class benchmarks may be of little use.

408(b)(2) Fee Disclosures

DOL representatives were asked whether a plan administrator could list a range of fees when disclosing service provider compensation in an ERISA Section 408(b)(2) (29 U.S.C. § 1108(b)(2)) disclosure (see Practice Note, Service Provider Disclosure Requirements for Pension Plans).

According to DOL representatives, a range of fees should never be used if the service provider knows the actual amount of fees that will be charged. They explained that if the actual fees are known, disclosing a range of fees would likely be considered misleading.

DOL representatives further explained that a range is appropriate when there is some uncertainty about the actual fees that will be incurred. In this situation, a range of fees may be provided if:

The range is a reasonable assessment of the fees that the customer is likely to incur under the specific contract.
The disclosure never includes improbable highs and lows, or gives highs and lows undue weight.

Participant Threats in ERISA Claims Context

A question in the disability claims context involved a claimant who:

Was asked to provide additional medical records in support of his claim.
Later left an angry voicemail with the nurse practitioner handling his claim in which he threatened to come to the office where the nurse practitioner worked and "kill everybody".

In response, the nurse practitioner's supervisor contacted the police regarding the threat, but the claim was otherwise processed without consequences stemming from the threat. The DOL representatives were asked whether the call to the police, which could have resulted in adverse consequences to the claimant, was a violation of ERISA's protections against interference with the claimant's exercise of protected rights under ERISA Sections 510 or 511 (29 U.S.C. §§ 1140; 29 U.S.C. § 1141; see also Practice Note, ERISA Litigation: Interference with Protected Rights (ERISA Section 510)).

The DOL representatives indicated that the steps taken in response to the threats did not violate ERISA Section 510, provided that:

Reporting of the event was consistent with the employer's general workplace policies.
The claimant was provided a full and fair review, as required under the DOL claims procedures.
The claim was handled consistent with the plan's claims procedures.

According to the DOL representatives, death threats are not protected under ERISA Section 510 and calling the police in this situation would not violate ERISA Section 511 (which provides for criminal penalties but does not afford claimants a private right of action).

Reporting Incentive Compensation on Form 5500 Schedule A

DOL representatives were asked whether certain incentive compensation paid by an insurance company to its employees constituted "commissions and fees" for purposes of Form 5500 Schedule A. The insurance company issued group annuity, life insurance or disability income contracts. Specifically, the DOL representatives were asked whether the following forms of incentive compensation should be included as commissions and fees:

Annual salaries.
Monetary and non-monetary incentive compensation based on:
- aggregate team sales performance not directly tied to the sale of a contract to a particular ERISA plan client;
- individual sales performance exceeding preset goals that are not tied directly to selling a contract to a particular ERISA plan client; and
- overall corporate performance.

The DOL representatives replied that:

Annual salaries do not need to be reported.
Generally, employee incentive compensation based on team or individual sales performance, when based on a book of business that includes ERISA-covered plans, should be reported.
Incentive compensation paid to the insurer's salaried staff and based on overall corporate performance might not need to be reported, depending on the facts and circumstances.

The representatives noted that insurers must provide plan administrators with a proportionate allocation, using a reasonable method, of commissions and fees attributed to each contract or policy reported.

Practical Impact

The DOL representatives declined to answer several questions in the claims procedure context, including a question addressing the DOL's authority to establish a rule for when benefit claims accrue (see Legal Update, Supreme Court Upholds Limitations Period in ERISA Disability Plan). The representatives stated that these issues will be considered as part of the DOL's project to update the DOL claims procedure regulations (which is a project on the agency's regulatory agenda) (see Practice Notes, Internal Claims and Appeals Under the ACA and External Review Under the ACA).

Moreover, the DOL representatives indicated that several questions were addressed in a separate session on health reform, including:

Retroactive application of the Supreme Court's Windsor decision (see Legal Update, Supreme Court: DOMA Section 3 Is Unconstitutional and Proposition 8 Proponents Lack Standing).
Disability determination language in the government's model COBRA notices (see Practice Note, COBRA Overview).
National medical child support notices.
Automatic enrollment under the Affordable Care Act (ACA) (see Practice Note, Automatic Enrollment Under the ACA).

2014 JCEB Q&As Offer Nonbinding DOL Responses on Employee Benefits Issues | Practical Law