In 2017, the principal focus in the administration of the Employee Retirement Income Security Act of 1974, as amended (ERISA), by the Department of Labor (DOL) appropriately remained one of the extraordinary developments under DOL’s new fiduciary definition and related exemptions (Fiduciary Rule). DOL’s regular program of issuing advance guidance and enforcing the statute continued in a more conventional manner as well, however, and produced a variety of results that merit attention. The regulatory guidance plans under ERISA and the Internal Revenue Code, as they relate to employee benefits and executive compensation, were also recently updated.
DOL Advisory Opinions, FABs and Exemptions
In 2017, DOL continued its trend of a curtailed program of interpretive ERISA guidance. These dynamics were driven in 2017 in part by the DOL’s Employee Benefits Security Administration (EBSA) focus on issues surrounding the Fiduciary Rule under ERISA § 3(21)(A)(ii) and in part by the change in the politically appointed leadership of EBSA occasioned by the change in Administration. Most of the guidance was issued in the first half of the year, with more limited action coming in the latter part of 2017.
- DOL issued two Advisory Opinions, after a two-year drought, and three Field Assistance Bulletins.
- DOL did not issue any technical releases or interpretive bulletins.
- DOL only issued seven individual exemptions from the ERISA prohibited transaction rules (as opposed to the 10 issued in 2016), including extending the Qualified Professional Asset Manager (QPAM) prohibited transaction exemption under PTE 84-24 for five organizations.
- DOL did not issue any new class exemptions.
It will be interesting to see how the new Administration’s announced cutback in regulatory guidance will affect EBSA programs in 2018. The delay in full applicability of the conditions under exemptions related to the Fiduciary Rule may either free up resources or preoccupy EBSA as it explores alternatives or works with the Securities and Exchange Commission.
DOL issued two Advisory Opinions, both focused on the application of Title I of ERISA: one on behalf of First District Association and the Dairy Consortium Health Plan, and one on behalf of the Health Transformation Alliance and its administrative services. In both opinions, DOL’s analysis focused on two questions: (1) whether the Plan/Program was an “employee welfare benefit plan” within the meaning of section 3(1) of ERISA; and (2) whether the Plan/Program was a multiple employer welfare arrangement (a MEWA) within the meaning of section 3(40) of ERISA.
- A group of dairy farm employers in Minnesota and Wisconsin affiliated with the First District Association (FDA) cooperative proposed to establish the Dairy Consortium for the purpose of establishing the Dairy Consortium Health Plan (the Plan) to provide group health benefits to their employees. DOL’s Advisory Opinion 2017-02AC, issued on May 16, 2017, concluded that because participating employer members (each of whom must have at least one employee) could exercise control over the Consortium and the Plan, they constituted a bona fide “group or association of employers” and, as such, the Plan was an “employee welfare benefit plan.” Additionally, DOL noted that the Plan would constitute a MEWA.
- The Health Transformation Alliance (HTA), an association of large employers, sponsors self-insured benefit plans through a program of administrative-services-only contracts with various insurance companies (the Program). DOL’s Advisory Opinion 2017-01A, issued on January 13, 2017, clarified that the Program was not an “employee welfare benefit plan” because Program participants were employers, not employees, and the Program did not provide covered benefits to employees or their dependents. Additionally, the Program would not constitute a MEWA because no component of the Program “offers or provides” any welfare benefits described in ERISA section 3(1) to the employees of its member-employers, underwrites or guarantees welfare benefits, provides welfare benefits through group insurance contracts covering more than one employer, pools welfare benefit risk among participating employers, or provides similar insurance or risk spreading functions. Eversheds Sutherland assisted with the request for this Advisory Opinion.
Field Assistance Bulletins
DOL issued three new Field Assistance Bulletins (FABs) in 2017, all three of which focused on the implementation of the Fiduciary Rule.
- FAB 2017-01, issued on March 10, 2017, concerned the proposed delay of the Fiduciary Rule and uncertainty surrounding the date that the Fiduciary Rule would go into effect. This FAB provided for a temporary enforcement policy that provided guidance in the event of a delay in implementation of the Fiduciary Rule.
- FAB 2017-02, issued on May 22, 2017, also provided a temporary enforcement policy for the Fiduciary Rule, and stated that as a result of the 60-day delay in the Fiduciary Rule and the phased implementation thereafter, DOL “would not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions.”
- FAB 2017-03, issued on August 30, 2017, stated that the arbitration provisions of the Best Interest Contract (BIC) Exemption and Principal Transaction Exemption were incompatible with the Federal Arbitration Act, and noted that DOL would not pursue claims against fiduciaries that failed to satisfy the BIC Exemption or Principal Transaction Exemption to the extent that the sole failure was a failure to comply with the arbitration limitation provisions.
Prohibited Transaction Exemptions
DOL is authorized to grant a conditional or unconditional exemption for an otherwise prohibited transaction if it determines that the exemption is (i) administratively feasible, (ii) in the interests of the plan and of its participants and beneficiaries, and (iii) protective of the rights of plan participants and beneficiaries. The DOL issued only seven individual prohibited transaction exemptions (PTEs) in 2017, down from the 10 issued in 2016, nine in 2015, and 20 in 2014.
The first PTE granted in 2017, PTE 2017-01, allowed the trustee and sole participant and beneficiary of the Rosetree & Company 401(k) Plan and Trust (the Rosetree Plan), Richard Rosenbaum, to guarantee loans made by third-party lenders to Kurston Realty, LLC, a real estate company that was wholly owned by the Rosetree Plan. The second PTE granted in 2017, PTE 2017-02, allowed the Aon Corporation to contribute to the Aon Pension Plan a 3.5% limited partnership interest in the Trident V, L.P. Fund.
In addition to the two PTEs described above, at the end of December DOL granted exemptions under the prohibited transaction rules to JPMorgan Chase Co., Citigroup, Inc., Deutsche Bank AG, UBS Assets Management, and Barclays Capital, Inc. These five organizations required this relief to continue acting as qualified professional asset managers (QPAMs) under PTE 84-24 notwithstanding the disqualifying criminal convictions of overseas affiliates entirely unrelated to QPAM activities. DOL has granted more than 30 similar exemptions in the past, most recently in 2016 to Royal Bank of Canada Trust Company, Northern Trust Fiduciary Services, and Deutsche Bank. Over time, DOL’s focus on these exemptions has shifted from insulating the QPAM from bad actions by foreign affiliates, to protecting ERISA plans from the QPAM. The 2017 exemptions last from three to five years and are subject to significant conditions.
Civil and Criminal Enforcement
DOL recently published its Fiscal Year 2017 “Fact Sheet” documenting the ERISA criminal and civil enforcement activities of EBSA. Total monetary recoveries increased for the third year in a row, due to historically high recoveries from EBSA’s civil enforcement actions. Although civil enforcement recoveries reached a historic high—the third largest in over a decade—the trend of increased criminal investigations and decreased civil investigations continued in FY 2017.
Criminal Investigations Remain High
In FY 2017, DOL, working in conjunction with the Department of Justice, closed 307 total criminal investigations, approximately 17% more investigations than the rolling 15-year average. Despite a minor decline from FY 2016, FY 2017 saw a continuation of heightened criminal investigation efforts, effectuating DOL’s 2009 announcement that it would emphasize enforcement of the criminal provisions applicable to ERISA plans.
The rate of criminal investigations closed with guilty pleas or convictions increased slightly over FY 2016. In FY 2017, there were 79 such investigations closed—up from FY 2016’s total of 75—representing a nominal increase in the rate of results when compared to the decreased total number of investigations closed, which is within the average annual fluctuation over the last 15 fiscal years.
Civil Investigations Continue to Decrease
In FY 2017, the total number of civil investigations closed, as well as civil investigations closed with results, decreased for a third consecutive year. DOL closed a total of 1,707 civil investigations—the lowest number since FY 2001—and of those, 1,114 civil investigations were closed with “results.”
The percentage of civil investigations closed with results in relation to the total number of civil investigations closed evidences the continued decline of civil enforcement investigation activity since FY 2014.
Monetary Results Increased
The total monetary results for all EBSA enforcement and compliance activities continued to increase since FY 2014’s historic low.
In FY 2017, EBSA reported total monetary recoveries of $1.1 billion, an increase of $322.5 million over FY 2016. That represents approximately a 46% increase—well above the average annual fluctuation of approximately 12%. However, that is still significantly lower than the rolling 15-year average for total monetary recoveries of $1.3 billion.
Sustained Impact of the Informal Complaint Resolution System
Recoveries from the Informal Complaint Resolution System increased over FY 2016—reaching the second highest level since FY 2001. Recoveries from Prohibited Transactions Corrected and Plan Assets Protected similarly increased over FY 2016. While a significant increase in Prohibited Transactions Corrected and Plan Assets Protected of approximately $130.1 million was reported, that figure is still dramatically lower than the rolling 15-year average for such recoveries.
In terms of total monetary results, recoveries from the Informal Complaint Resolution System represented 37% of the total recoveries for FY 2017, which was a significant drop from 51% in FY 2016. While this is a relatively high result when compared to the 15-year average, it represents a decreased share of total recoveries for the third year in a row. Conversely, recoveries from Prohibited Transactions Corrected and Plan Assets Protected increased to 32% of the total monetary recoveries for FY 2017. Despite being a significant increase over FY 2016, the dollar amount of such recoveries is nonetheless well below the average for the past 15 years when accounting for the anomaly in FY 2009. Notwithstanding the historically inverse relationship between the informal complaint resolution system and the investigation of prohibited transactions, the trend of recoveries from the informal complaint resolution system gradually replacing those from the prohibited transaction investigations appears to be reversing itself—or at least moving towards more proportionate levels of the total monetary recoveries.
2017-2018 Regulatory Agendas for Employee Benefits
With DOL recently publishing its Fall 2017 Semi-Annual Regulatory Agenda and the Internal Revenue Service (IRS) issuing the second quarter update to the 2017-2018 Priority Guidance Plan, both principal regulators of US employee benefits have now published updates to their guidance plans for the coming months.
- On October 20, 2017, the US Department of the Treasury and the IRS released their 2017-2018 Priority Guidance Plan, often informally referred to as the IRS Business Plan, which lists those issues that will be the subject of formal guidance from July 2017 through June 2018. The Business Plan was updated on February 7, 2018, in part to incorporate new guidance projects under the new tax legislation. The IRS Business Plan includes four new initiatives since the 2016-2017 Business Plan, 17 pending items addressing retirement benefits, and 15 pending items addressing executive compensation, health care and other benefits. The items are listed in the chart below in the reverse order of when they first appeared on the agenda.
- DOL recently published its Fall 2017 Semi-Annual Regulatory Agenda, stating the agency’s current and long-term regulatory activities. The DOL’s agenda and related materials include 11 pending projects related to employee benefits, which are listed in the chart below in order of the projected timetable for next steps. (In the ordinary course, the projected dates shown on the agenda may prove to be ambitious, to the extent the new Administration continues to pursue them.)
Projects added to the agendas as published in the fourth quarter of 2017 or second quarter of 2018 are shown in bold. There are four new IRS initiatives, and three new DOL initiatives.