Practical Law's Employee Benefits & Executive Compensation (EBEC) service is privileged to work with an Advisory Board that includes some of the most respected EBEC practitioners in the field. Advisory Board members help to shape the EBEC service in a variety of ways, including:

We reached out to Advisory Board members Christina Broxterman, Susan Dixon, Andrew Oringer, and Howard Pianko and asked them to identify:

For biographical information about the Advisory Board members who participated in this Q&A, see Box, About the Advisory Board Members Who Participated in This Q&A.

The rise and fall of the amended fiduciary rule under ERISA Section 3(21)(A)(ii) has presented two of the arguably mo‎st significant ERISA-related developments since ERISA's enactment. The amended fiduciary rule was so significant that it was impacting the way financial institutions structured and conducted their business, even beyond their relationships with retirement accounts. It was possibly one of the two or three most important regulatory initiatives of the Obama administration.

Given how important the amended rule was, the vacating of the rule by the courts may, in its own right, have been one of the all-time most significant ERISA developments - two for the price of one. It turned out, unexpectedly to some, that the effect of Donald Trump's election on this critical regulation was not to undo the fiduciary rule administratively, but rather not to have the stamina to pursue the vacating of the amended rule at the Supreme Court.

The void has been filled to some extent by the SEC, and the impact of the amended rule lives on in Regulation BI, which both draws from and learns from the Department of Labor's (DOL's) failed effort. Thus, the impact is not only continuing, but expansively reaches general securities law, giving ERISA lawyers an unusual perspective outside of the ERISA area. In addition, various states have now undertaken financial-type fiduciary regulation, and, as to ERISA itself, it is expected that the DOL will come out with new authority to harmonize the ERISA rules with new Regulation BI. Remember the Curse of Confucius – may you live in interesting times.

On the executive compensation side, the repeal of the Section 162(m) exception for qualified performance-based compensation was a headline item. In the blink of an eye, an entire sub-specialty disappeared. If only the IRS and Treasury had turned their sights on Section 409A.

For my clients, the issue having the greatest impact is definitely the employer shared responsibility payments under the Affordable Care Act's (ACA's) employer mandate. We are constantly responding to proposed penalties from the IRS.

Recall that the ACA created penalties against "applicable large employers" (ALEs) (generally, employers with 50 or more full-time employees (FTEs)) for:

(Together, these penalties are known as "employer shared responsibility payments" (ESRPs).)

The IRS began sending proposed ESRPs for the 2015 tax year in the fall of 2017, and is now in the middle of sending 2016 proposals. We have had clients with proposed ESRPs of over $16,000,000 and some as small as $270.

The proposed ESRPs are based on the information input by ALEs on Forms 1094-C and 1095-C, which are ACA reporting forms used to submit employee health coverage information to the IRS. We have found that due to confusion regarding compliance when the employer mandate first became effective (generally, the 2015 tax year), many ALEs simply filled out the forms incorrectly. We have been able to reduce the penalties by revisiting the underlying data and providing correct information to the IRS.

The IRS has established a special unit (called the 4980H Response Unit) to deal with enforcement of the employer mandate, and in our experience they have been very helpful in uploading new data and reducing or waiving the penalty when an ALE can show that:

Plan governance in the context of defined contribution (Section 401(k) and Section 403(b)) plans has had the biggest impact in my practice over the past 12 months. Driven by the steady flow of class action litigation in this area, including the relatively recent cases filed with respect to 403(b) plans maintained by tax exempt universities and other institutions, plan sponsors are reaching out for fiduciary training and for ERISA procedural process-related review and counsel. The work has gone beyond the fundamentals of checking for a committee charter or an investment policy statement. Now the questions dig deeper into matters stemming from the movement away from revenue sharing to transparency regarding who is paying for recordkeeping and other expenses, including periodic review of the reasonableness of the fees (or undergoing an RFP process). These questions are also arising as plans go through the process of changing their recordkeeper and, in the course of this transition, addressing ERISA fiduciary duty considerations.

While this issue is not new, Section 280G's shareholder approval exception for privately held corporations has had a significant impact on many of my clients in the past 12 months. Under this exception, private companies can avoid the substantial penalties of the "golden parachute" rules if shareholder approval is obtained and certain disclosure requirements are met. The disclosure requirements typically make executives uneasy, as the rules require the disclosure of pertinent information, including detailed compensation information, to all voting stockholders, including current and former employees who have exercised stock options (who, but for this requirement, would not be privy to this information).

Keeping the Section 280G disclosure requirements in mind, when we initially set up equity plans, we prefer non-voting stock so that employee stockholders are not able to see all of the amounts payable to the executives when the company is sold. However, some companies are uncomfortable treating equity plan participants as "second class citizens." While this has not had an economic impact on our clients (as we have been able to obtain the Section 280G vote), it has created considerable anxiety during the deal process.

While most of our clients have been able to secure waivers of the ESRP penalties because they incorrectly reported data to the IRS when they originally filed Forms 1094-C and 1095-C, others are facing assessments because they do not have data to support compliance with 4980H. For those clients, we have filed appeals with the IRS Office of Appeals (Appeals), challenging the assessment of the employer mandate penalties.

One of our arguments in the Appeals is that our clients were not afforded due process in the assessment of the penalties because they never received the certification required under the ACA that enables them to respond to potential ERSP liability. (While the IRS letters notifying employers of the proposed ESRP purport to satisfy the ACA's certification rules, they omit important information and were sent to employers over two years following the year of the tax liability). To be successful with Appeals, we will need to show that there is a hazard of litigation that merits reduction in the penalty. This may be challenging as we are not aware of pending lawsuits challenging the ESRP penalties (other than the broader challenge to the ACA pending in the Fifth Circuit Court of Appeals), which is the type of information Appeals will take into account to determine whether hazards of litigation exist.

Right now it is the grey area regarding who is the client when a plan sponsor is going through the process of deciding on a de-risking strategy for its defined benefit plan. This process typically originates when the sponsor’s financial or other executives address the volatility of plan costs and impact on profits and losses. Assuming a decision is made to adopt a de-risking strategy, that strategy needs to be implemented.

The question that arises is the point at which ERISA fiduciary duty rules (and also the ability to assert attorney client privilege) apply (as opposed to discussions or decisions by the plan sponsor that are not subject to ERISA). One interesting approach to providing clarity is for separate counsel to be retained to act on behalf of the plan so that there is a line defining when "sponsor" decisions are being made and when ERISA fiduciary actions are involved.

Cryptocurrency is all the rage, and digital assets have been noticed by those investing retirement assets. The issues surrounding the ability of a plan or IRA to invest in cryptocurrency are numerous and intricate, but may well be addressable. Who says that ERISA isn't modern and hip?

Section 409A presents interesting problems, mainly getting from a client's compensatory objective to an arrangement that complies with the rules. This is especially difficult when an employee wants to "vest" in a cash-based incentive plan that is designed around the sale of a particular asset, division, or, in the private equity world, a portfolio company. Also, many people are still not aware of the expansive nature of these rules. In the past 12 months, I have received comments such as "I thought that only applied to public companies," "I thought that only applied to incentive stock options," and "How can an annual bonus or severance be considered deferred compensation?" And then I must share the bad news.

Because out-of-network providers and third-party administrators (TPAs) of self-insured health plans do not have agreements on reimbursements (as is the case with in-network providers), the payment process often does not go as smoothly. Some TPAs have a process called cross-plan offsetting, which involves situations where a TPA inadvertently overpays an out-of-network provider and is unable to recoup the overpayment, even if the provider is providing services to a participant in another benefit plan.

In an Eighth Circuit Court of Appeals case decided earlier this year, Peterson v. UnitedHealth Group, Inc., 913 F.3d 769 (8th Cir. 2019), the court considered a challenge to the cross-plan offsetting practice. The court concluded that the practice was not provided for in the plan and therefore ruled in favor of the provider. Interestingly, the DOL filed an amicus brief in the case:

However, in Peterson, the court did not rule on the ERISA issue because it concluded that UnitedHealth's interpretation of the plan to permit cross-plan offsetting was unreasonable (although, as one of its factors in finding unreasonableness, the court stated that cross-plan offsetting was "questionable at the very least" under ERISA). Since the Peterson case, TPAs are sending requests to employers to update their TPA agreements to allow for cross-plan offsetting, forcing our clients with self-insured plans to decide whether the practice is acceptable.

As it relates to executive employment agreements, a significant issue involves non-competition and non-solicitation covenants, which are becoming more difficult to enforce. For example, recent legislation in Massachusetts bans non-competition covenants in many situations. As many people know, California generally bans non-competition and customer non-solicitation covenants, other than in the sale context. And many courts have imposed the so called "janitor rule" which generally means that the non-compete is unenforceable if the covenant prevents a former employee from working for a competitor in any capacity (rather than limiting the non-compete to a job related to the employee's work for the former employer). Company clients often offer severance and equity, subject, in part, to compliance with a non-competition covenant. If the non-competition covenants are unenforceable on a more universal basis, it may lead to a change in the economics of post-termination compensation and equity repurchase rights.

I think that there is a good chance that non-partisan legislation will be enacted by Congress aimed at improving the ability of defined contribution plans to provide a viable stream of retirement income. One area at which this legislation will be aimed is better facilitating the ability of these plans to provide lifetime income. For example, legislation could address the current concern that the purchase of annuity policies within defined contribution plans constitutes a fiduciary action subjecting the decision maker to fiduciary liability under ERISA if the insurer goes bankrupt.

Other examples are proposals to:

Another area will be to expand the number of employees (typically working for small businesses) who are covered by defined contribution plans; for example, by participating together under a multiple employer plan structure. These changes, if enacted, will result in the need to communicate with clients and advise as to the legislation's impact on existing plans.

When a district court in Texas was asked after the enactment of tax reform in 2017 whether Obamacare – maybe the number one initiative of the Obama administration – is unconstitutional, many rolled their eyes. Hadn't the Supreme Court just decided that the law is a valid exercise of Congress's taxing power? But the claim was creative, homing in on tax reform's zeroing out of the revenue inflow under the law (Obamacare's "shared responsibility payment"), and making the argument that, without a meaningful revenue provision, the taxing power no longer supports the law. Not enough people noticed when the attorney general dashed off a note agreeing at least in part with the plaintiffs. And then the court issued two opinions agreeing with the plaintiffs, and holding Obamacare to be entirely invalid in light of the 2017 tax legislation. The decision has in turn been followed by a court filing in which the Trump administration agrees with the district court that Obamacare is effectively unconstitutional in its entirety. The arguments on both sides are facially enticing, and it is not clear where it all leads. But one would dismiss the case as a dalliance or an outlier at one's own risk, and oral arguments will occur this summer in the appeal of the district court's decision to the Fifth Circuit. As to whether Congress will let all this fester and play chicken with the risk that the law will go poof, we'll just have to see.