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Kathleen Cahill Slaught (Chair)

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Contributors

§ 1.1  Want to Put More Away in Your 401(k)? Qualified Plan Limits Generally Remain Constant in 2021

Seyfarth Synopsis: Many of the limitations that apply to tax-qualified plans, including 401(k) and 403(b) plans, are subject to cost-of-living increases. The IRS just announced the 2021 limits. The annual employee salary deferral contribution limits are not changing, but there are a few adjustments for 2021 that employers maintaining tax-qualified retirement plans will need to make to the plans’ administrative/operational procedures.

In Notice 2020-79, the IRS recently announced the various limits that apply to tax-qualified retirement plans in 2021. Notably, the “regular” 401(k) contribution limit and the “catch-up” contribution limit are not changing, and will remain at $19,500 and $6,500, respectively, for 2021. Thus, if you are or will be age 50 by the end of 2021, you may be eligible to contribute up to $26,000 to your 401(k) plan in 2021. These same limitations apply if you work for a governmental or tax-exempt employer and participate in a 403(b) plan.

The annual plan limits that did increase for 2021 include:

• the maximum that may be contributed to a defined contribution plan (e.g., 401(k) or 403(b) plan) in 2021, inclusive of both employee and employer contributions, will increase by $1,000 to $58,000; and
• the maximum annual compensation that may be taken into account under a plan (the 401(a)(17) limit) will increase from $285,000 to $290,000.

The Notice includes numerous other retirement-related limitations for 2021, including a $6,000 limit on qualified IRA contributions (unchanged) and adjustments to the income phase-out for making qualified IRA contributions. Other dollar limits for 2021 that are not changing include the dollar limitation on the annual benefit under a defined benefit plan ($230,000), the dollar limit used to determine a highly compensated employee ($130,000), and the dollar limit used when defining a key employee in a top-heavy plan ($185,000).

Individuals should check their plan contribution elections and consult with their personal tax advisor before the end of 2020 to make sure that they take full advantage of the contribution limits in 2021. Although many limits are not changing, employers who sponsor a tax-qualified retirement plan should still consider any necessary adjustments to plan administrative procedures and participant notices to ensure proper administration of the plan in 2021.

Employers who sponsor defined benefit pension plans (e.g., cash balance plans) also should be sure to review the new limits in the IRS Notice and make any necessary adjustments to plan administrative/operational procedures.

Sarah Touzalin and Richard G. Schwartz

§ 1.2  The Supreme Court Wrestles (Again) With The Constitutionality Of The Affordable Care Act (ACA)

Earlier today, the Supreme Court heard oral arguments on the most recent challenge to the Affordable Care Act. The case has the potential to invalidate the entire law. While the Court’s decision isn’t expected soon, the oral arguments may provide some clues as to which way the Justices are leaning. We stress, however, that statements made during oral argument are not binding, and Justices remain free to rule as they deem appropriate.

On November 10, 2020, the Supreme Court heard oral argument on the constitutionality of the ACA. The case is captioned California v. Texas, No. 19-10011.

The case was brought by a group of state attorneys general in the wake of the 2017 Tax Cuts and Jobs Act, which reduced the individual tax for failure to maintain health insurance coverage to $0. The Trump Administration chose not to defend the law, but the lower courts granted leave to other states’ attorneys general and to the House of Representatives to defend the law. The arguments in the case addressed the following three issues:

1. Do the plaintiff states have standing to challenge the constitutionality of the individual mandate?
2. If so, did Congress’s actions in “zeroing out” the penalty for the mandate render the mandate an unconstitutional exercise of Congressional power?
3. If so, is the mandate severable from the remainder of the ACA, or should the entire law fall?

The Court had previously ruled in 2012 that the ACA’s individual mandate was constitutional, as it represented an exercise of the lawful power of Congress to tax, and provide citizens with a reasonable choice of purchasing approved health insurance or paying a tax as a penalty. In that ruling, however, five Justices found that Congress cannot rely on its Commerce Clause power to enact the ACA. In other words, the Court upheld the mandate only by finding that the mandate was a tax, not a penalty. So, the question before the Court at present is whether the mandate can truly be considered a tax if it generates no revenue.

The Court under Chief Justice Roberts has shown an aversion to wading into politically sensitive rulings, given the current politically polarized climate. And this case has a complicated political overlay. The Court’s ruling here takes on heightened significance in the wake of the recent election in which Republicans appear to have maintained control of the Senate, because that takes away the Democrats’ avenue to “cure” the challenged provision by simply implementing a tax above $0 to enforce the individual mandate.

There are two ways that the Court can avoid a finding of unconstitutionality.

First, there is the issue of Article III standing. As we have previously opined, https://www.beneficiallyyours.com/?s=california+texas, there is a substantial question whether there is a sufficient injury traceable to the actions of the defendants to justify a lawsuit on the merits. The November 10 oral argument focused on whether an injury could be said to have occurred because of increased reporting requirements, Medicaid payments by the state and the ACA restriction on what health policies an American can purchase in the marketplace. But a failure to purchase insurance does not directly cause injury—the tax penalty is $0. Justice Thomas described this issue in terms that we all can understand given our COVID times. He asked whether an American could sue in federal court to challenge a mask mandate that is not enforced. Justice Gorsuch and some of the more liberal Justices, however, expressed some concern that if the Court were to grant standing in this case, it would open the door to more challenges to federal law.

Look for the Court to limit any finding of standing to the peculiar facts of California v. Texas, given the concern about the federal judicial chaos that could result from a broader ruling on standing.

Second, there is the issue of severability. It is true that the individual mandate remains a part of the ACA, and it does state that all Americans “shall” purchase compliant insurance. It is also true that the constitutionality of that mandate is based on Congress’s taxing power that now is exercised at $0. It is true as well that a future Congress might increase the tax above $0, which might explain why the 2017 reduction to that level was not accompanied with a repeal of the individual mandate.

Justice Thomas pressed the attorney for the House of Representatives on how he could argue that the mandate is severable when, in 2012, he had argued that it was the “heart and soul” of the law. On the other hand, many Court observers honed in on statements from Chief Justice Roberts and Justice Kavanaugh, both of whom seemed to express reservation at “reading into” Congressional intent rather than simply looking to the actions taken by Congress in zeroing out the individual mandate (while leaving the rest of the law intact). Justice Alito offered a hypothetical involving a plane that is presumed to be incapable of flight without a crucial instrument, but that then continues flying without issue once that instrument is removed.

While it is impossible at oral argument to discern how nine Justices will rule, hints from the arguments suggest the Court may have the votes to find standing (in a limited way) and declare only the individual mandate (and not the remainder of the law) to be unconstitutional as long as it is enforced by a $0 tax. We anxiously await the decision of the Court, and its reasoning.

Mark Casciari and Benjamin J. Conley

§ 1.3  No, You Cannot Invest Your Retirement Plan to Save the Planet!

Seyfarth Synopsis: On October 30, 2020, the Department of Labor (“DOL”) released a final regulation amending the fiduciary regulations governing investment duties under the Employee Retirement Investment Security Act of 1974 (“ERISA”). This final regulation is clear that an ERISA fiduciary should not consider “non-pecuniary” factors such as environmental, social or corporate governance (“ESG”) or sustainability factors when considering an investment or investment strategy. Under the final rule, investment fiduciaries must evaluate investments and investment strategies solely based on pecuniary factors. The final regulation is generally effective 60 days after it is published in the Federal Register.

The DOL proposed this regulation on June 23, 2020, which is discussed in our July 1, 2020 post, Can You Invest Your Retirement Plan to Save the Planet? ERISA investment fiduciaries have been faced with the dilemma of whether social investing concepts have a role when investing ERISA plan assets. It appears that the DOL has answered this question. Specifically, social investing concepts only have a role if they potentially impact the risk of loss or opportunity for return of the proposed investment.

The DOL received numerous comment letters and objections critical to its proposed regulation, including claims that it was unnecessary rulemaking, reflected antiquated views, and provided too short a comment period. Despite the extensive comments it received, the final regulation is substantially the same as the proposed regulation. References to ESG were removed from the final regulation because the DOL did not want to narrow or limit the application of the final regulation. Under the final regulation, challenges remain for fiduciaries who consider non-pecuniary factors when making investment decisions.

The final regulation limited pecuniary factors to those factors that a fiduciary prudently determines are expected to have a material effect on the risk and/or return of an investment in light of the plan’s investment horizon, investment objectives and funding policy. While many investors may believe that a company that incorporates ESG principles to manage its risks and create opportunities offers an inherently less risky investment, the DOL does not appear to be willing to accept the argument that ESG in and of itself could be a pecuniary factor.

The final rule continues to provide for “tie breakers,” even though the preamble questions whether there could be a true tie-breaker situation. In such a situation, fiduciaries must document: why pecuniary factors were not sufficient to select the investment or investment course of action; how the selected investment compares to available alternatives; and how the non-pecuniary factors considered were consistent with the interest of the participants in their plan benefits. The DOL indicated in the preamble that whether an investment could increase plan contributions — e.g., investing the assets of a multiemployer plan in projects that will employ union members and increase contributions to the plan — was not a pecuniary interest. The same is true for adding an investment in response to interest expressed by plan participants.

For individual account plans that allow plan participants to choose from a range of investment alternatives, the regulation prohibits a fiduciary from considering or including an investment fund solely because the fund promotes, seeks or supports one of more non-pecuniary goals—e.g., an ESG focused fund. But, it does not prohibit including an ESG focused fund in the investment line-up. The final regulation, however, prohibits qualified default investment alternatives (QDIAs) with investment objectives or principal investment strategies that “include, consider, or indicate the use of one or more non-pecuniary factors.” This prohibition could be interpreted to cast a wide net.

The regulations would make it difficult or impossible for plan fiduciaries to consider non-pecuniary factors (e.g., religious tenets, ESG factors, etc.) when selecting investment options under an ERISA participant-directed defined contribution plan. A potential solution could be offering a brokerage window, which can provide access to individuals who wish to invest their accounts according to non-pecuniary factors such as religious tenets. Brokerage windows have their pros and cons. In addition, a fiduciary’s duties and responsibilities with respect to a brokerage window are not settled.

Historically, the DOL’s position on the role of ESG in ERISA plan investing has shifted with changes in administrations. With these final regulations, there is no doubt that the DOL has clearly shifted against marketplace trends. But, with a Biden administration coming onboard, calls for the SEC to address ESG disclosures and a Senate task force aimed at overhauling corporate governance, questions remain on whether the door on the role of ESG investing is closed. For information on ESG in the broader marketplace and what it means from a company perspective, see our alert series here, here, here and here.

If you are concerned about an existing non-pecuniary investment or investment strategy (e.g., an ESG or sustainability investment) or are interested in such an investment or strategy, be sure to contact your Seyfarth employee benefits attorney.

Linda Haynes and Candace Quinn

§ 1.4  Happy New Year! The IRS Grants Permission to Celebrate New Year’s Eve

Seyfarth Synopsis: The IRS has announced that the due date for contributions to a single-employer defined benefit pension plan due in 2020, previously extended to January 1, 2021, by the CARES Act, will be considered timely if made no later than January 4, 2021.

Under the funding rules for qualified defined benefit pension plans, plan sponsors generally must make any minimum required contributions no later than 8-1/2 months after the plan year to which they relate. For calendar year plans, this means that the minimum required contribution is due no later than September 15th of the year following the applicable plan year. Plans with a funding shortfall for the prior plan year also must make quarterly minimum required contributions (for a calendar year plan, these contributions are due April 15th, July 15th, October 15th and the following January 15th).

The CARES Act, enacted in late March 2020 in response to the COVID-19 pandemic, delayed the timing of any annual and quarterly minimum required contributions due in 2020 (i.e., attributable to the 2019 plan year for calendar year plans) until January 1, 2021. As a practical matter, because January 1, 2021, is a national holiday and banks will not transfer funds on that date, the delayed contributions were actually due no later than December 31, 2020. IRS Notice 2020-82, just issued on November 16th, effectively extends the deadline to the first business day after the new year, i.e., January 4th. The guidance is welcome news for plan sponsors who wish to make contributions in calendar year 2021 rather than 2020.

Subsequent to the issuance of the IRS Notice, the PBGC followed suit and revised its guidance to incorporate the extension for contributions due in 2020 to January 4, 2021 for PBGC purposes.

Christina Cerasale

§ 1.5  Final Rule regarding Transparency in Coverage for Health Care Services

Seyfarth Comments: The final Transparency in Coverage Rule was published jointly by the Departments of Health and Human Services, Treasury, and Labor on November 12, 2020. The Rule aims to increase transparency in cost-sharing for patients by requiring non-grandfathered group health plans and insurance issuers to publish certain healthcare price information estimates. The Rule takes effect January 11, 2021, with staggered effective dates for required disclosures through January 1, 2024.

The Transparency in Coverage Rule attempts to execute on the Trump Administration’s executive order on Improving Price and Quality Transparency in American Healthcare to Put Patients First, issued on June 24, 2019. The final Rule requires certain disclosures regarding prices and cost-sharing information for certain healthcare items and services provided by non-grandfathered group health plans and insurance issuers. The Rule generally applies to traditional health plan coverage, and does not apply to account-based group health plans (such as HRAs, including individual coverage HRAs, or health FSAs), excepted benefits, or short-term limited-duration insurance.

The Rule requires two categories of disclosures: disclosures to the public, and disclosures to plan participants.

Public Disclosures

For plan years beginning on or after January 1, 2022, group health plans and insurance issuers will be required to publicly disclose health care pricing information on an internet website, which must be updated monthly. In general, plans and issuers will have to disclose:

• In-network provider negotiated rates for covered items and services;
• Historical data showing billed and allowed amounts for covered items or services, including prescription drugs, furnished by out-of-network providers; and
• Negotiated rates and historical net prices for prescription drugs furnished by in-network providers.

Participant Disclosures

Under the participant disclosure requirements, group health plans and issuers must provide certain personalized cost-sharing information to participants and beneficiaries in advance and upon request. The disclosures must be available both using an internet-based self-service tool and on paper if requested. The required disclosures must include the following information:

• The estimated cost-sharing liability for a requested covered item or service;
• Accumulated amounts, including unreimbursed amounts the participant or beneficiary has paid toward meeting his or her individual deductible and/or out-of-pocket limit (and if enrolled in other than self-only coverage, amounts incurred toward meeting the other than self-only coverage deductible or out-of-pocket limit);
• In-network negotiated rates for covered items and services;
• Out-of-network allowed amounts, or any other rate that provides a more accurate estimate of what the plan or issuer will pay for the requested covered item or service;
• Lists of covered items and services that are part of a bundled payment arrangement;
• Notice of items and/or services subject to a “prerequisite,” which is defined as concurrent review, prior authorization, and step-therapy or fail-first protocols that must be satisfied before the plan or issuer will cover the item or service (not including medical necessity determinations or other medical management techniques); and
• A disclosure notice that includes: balance billing provisions, possible variations in actual charges, a disclosure that the estimated cost-sharing liability is not a guarantee, the application of copayment assistance and/or third-party payments, and any other information deemed appropriate. A model notice is available on the Department of Labor’s website: https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/laws/affordable-care-act/for-employers-and-advisers/transparency-in-coverage-draft-model-disclosure.pdf
• Due to the extensive nature of the required disclosures, the Departments include a staggered schedule for providing the required participant disclosures under the Rule. For plan years beginning on or after January 1, 2023, plans must make this information available for 500 items and services listed in the Rule, and for plan years beginning on or after January 1, 2024, plans must make the information available for all items and services.

Compliance

A group health plan may satisfy the disclosure requirements by entering into a written agreement with its third-party administrator (TPA), whereby the TPA will provide the information required by the Rule. Notably, if the TPA fails to provide the information required by the Rule, the plan remains responsible for noncompliance.

A plan or issuer will not fail to comply with the disclosure requirements if, while acting in good faith and with reasonable diligence: i) it makes an error or omission and corrects the information as soon as practicable; or ii) its internet website is temporarily inaccessible, provided it makes the information available as soon as practicable.

The extensive disclosures required by the Rule have been greeted with much criticism, in particular by the insurance industry. Litigation and other challenges to the Rule are anticipated. In particular, there are concerns that the Rule will impede the ability of service providers and drug companies to negotiate prices. Accordingly, the final Rule contains a severability clause so if a court holds any provision of the Rule to be unlawful, the remaining provisions will survive.

Seyfarth will continue to track further developments regarding the Rule. Also, be sure to sign up for our blog, Beneficially Yours, for further discussion of employee benefits topics and updates at https://www.beneficiallyyours.com/.

Joy Sellstrom

§ 1.6  SCOTUS Upholds Arkansas PBM Law Against ERISA Preemption Arguments

Seyfarth Synopsis: The Supreme Court unanimously upheld Act 900, an Arkansas law regulating Pharmacy Benefit Managers (PBMs).  The opinion could be used as a framework for states to attempt to indirectly regulate ERISA plans via statutes or regulations that affect plan costs.

Background

We previously addressed the Supreme Court’s consideration of Rutledge v. PCMA, which featured a pharmaceutical industry group’s challenge to Arkansas Act 900.  The Act (a) regulated the price PBMs paid for certain prescription drugs, (b) created an appeal process whereby pharmacies could challenge a PBM’s rate of reimbursement, and (c) permitted pharmacies to decline to sell drugs at reimbursement rates below acquisition cost.  As noted in our prior posts, PCMA (as supported by many amicus briefs from ERISA groups) argued that the law “relate[s] to an employee benefit plan” and, insofar as it applies to self-funded ERISA plans is preempted and thus impermissible.  These ERISA groups argued that piecemeal state regulation undermines a central purpose of ERISA:  to create one national private sector benefit plan jurisprudence, resulting in administrative savings and ultimately more plan benefits.

Holding

In an 8-0 Opinion (Justice Amy Coney Barrett not participating), the Court unanimously ruled in favor of Arkansas.  The Court found that, while the Act can be said to be connected to increased plan costs and operational inefficiencies, “ERISA does not pre-empt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.”  The Court added:  “[C]ost uniformity was almost certainly not an object of pre-emption.”  Finally, the Court said that ERISA plans are not essential to the Act’s operation, meaning that it has no exclusive reference to ERISA plans.

Justice Thomas alone concurred in the Opinion.  He continued his disagreement with the Court’s ERISA preemption “connection with or reference to” standard.  He would replace that standard with one that addresses whether any ERISA provision governs the same matter as the state law, and has a “meaningful,” presumably direct, relationship to the plan in light of ERISA’s text.

Implications for ERISA Plan Sponsors

The Court’s Opinion could be problematic for ERISA plan sponsors, who typically prefer a uniform administrative scheme across state lines.  Many PBM agreements contain provisions permitting PBMs to charge additional fees or limit the scope of their services where states impose more restrictive regulations or guidelines.  The Opinion will embolden states and localities to be more aggressive in their regulation of pharmacy benefits.  We should expect these jurisdictions to argue that, after Rutledge, there is no preemption because they are simply regulating plan costs.

In any event, Rutledge leaves open the possibility that preemption will apply if the cost regulation is “so acute that it will effectively dictate plan choices.”  And, state law that provides a cause of action or additional state remedies for claims allowed by ERISA, or directly amends ERISA plan terms or the ERISA scheme that governs plan administration, remain preempted.

Stay tuned to this blog for further updates on this important issue of benefit plan administration.

Mark Casciari, Benjamin J. Conley and Michael W. Stevens

§ 1.7  Changes to HIPAA Privacy Rules on the Horizon

Seyfarth Synopsis: The Department of Health and Human Services (HHS) has proposed changes to the required Privacy Notice under the HIPAA privacy regulations. If finalized, these would be the first significant changes to the HIPAA rules since the HITECH changes effective back in 2013.

The press release issued by HHS on December 10, 2020, states its intention to empower patients, improve coordinated care, and reduce regulatory burdens in the health care industry. HHS notes that the medical crises brought on by the opioid and COVID-19 epidemics have heightened the need to make these updates. While many of the changes directly affect health care providers and their patients, several provisions will also have an impact on employer-provided health plans. The Notice of Proposed Rulemaking is voluminous, but includes such things as an expansion of the definition of health care operations and the minimum necessary rule, changes to the required HIPAA Privacy Notice, shortened time frames to respond to individuals requests regarding their rights to their PHI, and disclosures of applicable fees for access to PHI. The Notice also provides long-awaited additional guidance on Electronic Health Records.

For more detailed information on the impact of these proposed changes on covered entity health plans, please see our Legal Update here. Also, click here for our Legal Update discussing these proposals and health care providers.

Diane Dygert

§ 1.8  HHS Proposes Changes to HIPAA Privacy Rules Affecting Group Health Plans

Seyfarth Synopsis: The Department of Health and Human Services (HHS) has issued a Notice of Proposed Rulemaking (NPRM) to modify the HIPAA Privacy Rule that protects the privacy and security of individuals’ protected health information (PHI) maintained or transmitted by or on behalf of HIPAA covered entities, such as employer-sponsored health plans. One of the stated purposes of the NPRM is to address some of the HIPAA Privacy Rule provisions that may limit care coordination and case management communications among individuals and healthcare providers.

Click here for our related blog post on this topic. While this Update will focus on the NPRM’s impact on health plans, click here for our separate Legal Update addressing some of the changes that apply to health care providers.

Under the NPRM, some of the changes that would affect employer-sponsored health plans include:

• Individual Care Coordination and Case Management. A health plan is permitted to use or disclose PHI for its own health care operations. (In addition, a health plan may disclose PHI to another covered entity for that entity’s health care operations in certain situations.) In order to encourage better, lower cost health care, the NPRM would revise the definition of “health care operations” to clarify that health plans can conduct care coordination and case management activities not only at the population level across multiple enrolled individuals, but also at the individual level. The NPRM also adds an exception to the minimum necessary rule for disclosures to, or requests by, a health plan for care coordination and case management activities that are at the individual level.
• Business Associate Disclosures of PHI. The NPRM would clarify that a business associate is required to disclose PHI to the covered entity so the covered entity can meet its access obligations. However, if a business associate agreement provides that the business associate will provide access to PHI in an electronic health record (EHR) directly to the individual or the individual’s designee, the business associate must then provide such direct access.
• Limited Disclosure When Individual is Not Present. The HIPAA Privacy Rule provides that if an individual is not present, or the opportunity to agree or object to the use or disclosure of PHI cannot be provided because of the individual’s incapacity or emergency circumstance, the health plan may disclose PHI that is directly relevant to the person’s involvement with the individual’s care or payment if the covered entity determines in its professional judgment that disclosure is in the best interest of the individual. The proposed rule would modify the standard under which that the determination is made, to be based on a good faith belief that the disclosure is in the best interests of the individual. This standard will allow health plan administrators to be better able to rely on this permitted disclosure circumstance by removing the inference that it only applied to providers when using a “professional” standard.
• Privacy Notice. The proposed rule would require changes to the notice of privacy practices. The NPRM requires a notice of privacy practices to include the following header:

“THIS NOTICE DESCRIBES:

– HOW MEDICAL INFORMATION ABOUT YOU MAY BE USED AND DISCLOSED

– YOUR RIGHTS WITH RESPECT TO YOUR MEDICAL INFORMATION

– HOW TO EXERCISE YOUR RIGHT TO GET COPIES OF YOUR RECORDS AT LIMITED COST OR, IN SOME CASES, FREE OF CHARGE

– HOW TO FILE A COMPLAINT CONCERNING A VIOLATION OF THE PRIVACY, OR SECURITY OF YOUR MEDICAL INFORMATION, OR OF YOUR RIGHTS CONCERNING YOUR INFORMATION, INCLUDING YOUR RIGHT TO INSPECT OR GET COPIES OF YOUR RECORDS UNDER HIPAA.

YOU HAVE A RIGHT TO A COPY OF THIS NOTICE (IN PAPER OR ELECTRONIC FORM) AND TO DISCUSS IT WITH [ENTER NAME OR TITLE AT [PHONE AND EMAIL] IF YOU HAVE ANY QUESTIONS.”

In addition, the notice would have to describe the right of access to inspect and obtain a copy of PHI at limited cost or, in some cases, free of charge.

• Faster Access to PHI. Under the NPRM, a health plan would have to act on a request for access to inspect or obtain a copy of PHI in a shorter timeframe, namely 15 days after receipt of the request. Other time frames would be shortened as well.
• Electronic Health Record (EHR). The NPRM adds (i) a definition of EHR, (ii) requirements applicable to EHRs, including the right of an individual to direct his or her health plan to submit a request to a health care provider for electronic copies of PHI in an EHR; and (iii) a documentation requirement for EHRs.
• Fee Disclosures. Finally, the NPRM would require health plans to post fee schedules on their website for common types of requests for copies of PHI and, upon request, provide individualized estimates of fees for copies.

Comments on the NPRM will be due on or before 60 days after the NPRM is published in the Federal Register, which means comments will likely be due in mid-February.

Joy Sellstrom

§ 1.9  I Am Not Throwing Away My [COVID] Shot!

COVID-19 vaccines are finally here! Employers have a lot to think about in how this new tool in the fight against COVID-19 applies in the workplace, and whether it should be a mandatory aspect of employment. Check out the labor and employment considerations about the extent to which an employer should implement a vaccine policy, here and here.

Employers offering vaccine programs can also implicate ERISA as well when paying for (or mandating) the vaccine distributed to those employees not already covered under the employer’s group health plan. Check out this Legal Update here for thoughts on the benefits considerations employers face with their COVID-19 vaccine programs.

Getting the vaccines is the first step, but employers have decisions to make about what to do next. Keep tuned to our blog for future updates.

Benjamin J. Conley, Diane Dygert and Jennifer Kraft

§ 1.10  Yes, I Know it’s a Pandemic, But What About ERISA?!?!?!?

Benefits Implications in Employer-Sponsored COVID Vaccine Programs

Synopsis: Now that we have two approved vaccines (and several more on the horizon) employers are starting to explore whether they should require their employees to get vaccinated in order to report to work. There has been a lot of discussion on this topic by our labor & employment brethren and we direct you to those articles here and here for information about the extent to which an employer should implement a vaccine policy. This update explores the significance of mandating a vaccine versus offering voluntary vaccine coverage, and how that distinction may implicate additional requirements under ERISA.

Background: Why ERISA May Apply to Vaccination Programs

When employers pay for the provision of medical care to their employees, they are offering group health plan coverage (insured or self-funded) and they create an ERISA-governed welfare benefit plan. Group health plans are also subject to other federal statutes such as the Internal Revenue Code, the Affordable Care Act and the recent CARES Act. [See our post here on the CARES Act and vaccine requirements.] This framework leads to two critical questions in analyzing a vaccination program under ERISA:

1. Is an Employer-Paid Vaccine Program “Medical Care”?
   The EEOC has recently opined that the vaccine itself is not a medical examination. Fair enough; we didn’t think so. But, the questions that inevitably accompany the administration of the vaccine — for example, questions about allergies or auto-immune disorders—would constitute a medical examination and, therefore, must be job related. This doesn’t directly impact the analysis of whether we are dealing with a health plan here, but does highlight the government’s view that there is some aspect of the delivery of medical care present.
2. If the Vaccine Program is for the Employer’s Benefit (i.e., mandatory) does ERISA still apply?
   Arguably though, a mandatory program, as opposed to a voluntary inoculation program, is not offered for the employee’s own health. Section 3(1) of ERISA defines the term “employee welfare benefit plan” as a plan maintained by an employer to the extent it “is established or is maintained for the purpose of” providing medical benefits or benefits in the event of sickness. If an employee is receiving a COVID-19 vaccine through a mandatory program, arguably, it is not “for the purpose of” providing a medical benefit. That is an incidental benefit. Instead the vaccine is being provided to ensure the health and safety of those around the employee — co-workers, clients, customers or vendors. Under this argument, employers providing the vaccine through a mandatory program would not need to do so through an ERISA benefit plan. The DOL adopted this view in a nearly 25-year-old advisory opinion, albeit on the topic of mandatory workplace drug testing programs.

Why This Matters: Significance of ACA Requirements

The above questions are significant because the Affordable Care Act requires that all group health plans comply with certain requirements, including offering no-cost preventive services (e.g., colonoscopies, mammograms, etc.). A stand-alone COVID vaccination program, if offered on a voluntary basis, would not comply with those mandates. Accepting that the regulatory agencies might afford enforcement discretion given the circumstances, the IRS/DOL and HHS did provide a potential roadmap to “cure” this (technical) noncompliance in guidance issued earlier this year involving COVID testing.

There, the agencies seemed to suggest that COVID testing would be considered a group health plan, subject to the ACA mandates. This should not matter for employees enrolled in the employer-sponsored medical plans, because those individuals already have access to such free preventive care (as the health plan is required to offer it). So under earlier agency guidance, the two benefits could be considered a compliant, bundled offering.

For all other employees though, the agencies offered another “fix”. This informal guidance indicated that if such testing were to be “offered under” another type of benefit that is exempt from these ACA requirements, it would also benefit from the exemption. The two examples offered included an Employer Assistance Program (EAP) or an onsite clinic. This should, for most employers, offer a relatively simple solution. First, we would expect that once vaccines are available, many employers will offer an onsite vaccination program. For those that do not, most employers offer some form of EAP to their entire workforce (without regard to whether such persons are enrolled in the employer’s health coverage).

While the agency guidance was in the context of testing (not vaccinations), we believe it would be reasonable to assume the same exemption applies. Further, we assume this “bundling” could be offered without extensive additional efforts. Assuming a summary plan description already exists for the EAP (or onsite clinic), this could be as simple as adding a few lines to such document noting that the COVID vaccination program is a component of the offering.

Parting Shots (Pun Intended)

While uncertainty remains about whether the government would consider a mandatory COVID-19 vaccine program to be an ERISA plan, it is clear that the CARES Act mandates all group health plans to provide coverage for the COVID-19 vaccine. So, employer health plans will need to start covering the vaccine. Providing a COVID-19 vaccine program as an extension of the employer’s EAP should be permitted assuming the agencies carry forward COVID testing guidance (and we believe they would as they have every incentive to do so). While it is unclear whether such an approach would be necessary only for voluntary programs, or for mandatory programs as well, this offers a simple solution for employers to provide this benefit to the greatest number of its employees, while still ensuring compliance with ERISA.

Keep your eye on this space for developing news about vaccine programs.

Benjamin J. Conley, Diane Dygert and Jennifer Kraft

§ 1.11  Paycheck Protection Program Update: Additional COVID Relief under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

On December 27, 2020, President Trump signed into law the $2.3 trillion coronavirus relief and government funding bill. In addition to other provisions, the law specifically adds $284 billion to the already successful Paycheck Protection Program (“PPP”) previously enacted under the CARES Act. PPP loans will be available both to first-time borrowers and some second-time borrowers, but different criteria apply to each group.

While the Small Business Administration (“SBA”), the federal agency principally responsible for administering the PPP, has yet to announce details and guidance specifically relating to this supplemental funding, the following key details of the program are described in the new law, itself:

• The following groups of first-time borrowers are eligible for PPP loans:
  • borrowers that had been eligible for PPP loans are expected to be eligible
  • not-for-profits (including churches and, for the first time, trade associations and other organizations exempt from tax under section 501(c)(6) of the Internal Revenue Code), subject to satisfaction of certain criteria (such as, employing no more than 300 employees, not being primarily engaged in political or lobbying activities)
  • businesses that previously elected to take the Employee Retention Tax Credit
  • news organizations (which were not previously eligible), subject to satisfaction of certain criteria (such as, employing no more than 500 employees per physical location or otherwise meeting the applicable SBA size standard, certifying that the proceeds of the PPP loan will be used for the business involved in production or distribution of locally focused or emergency information)
  • certain hotel and food service operators with fewer than 300 employees per location and that fall within NAICS code 72
• A borrower that received funding in the initial round is eligible to receive a second round of funding if it meets the following eligibility criteria: (i) has fewer than 300 employees, (ii) has used or will use the full amount of the first PPP loan, and (iii) has experienced a 25% decline in gross receipts in at least one 2020 quarter when compared to the same quarter in 2019. The maximum loan size for second time borrowers is limited to $2,000,000.
• Borrowers that returned PPP loans in the first round may reapply for a PPP loan in this second round.
• Funds have been earmarked for distribution to (i) live venues, independent movie theaters and cultural institutions, (ii) “very small businesses” through community-based lenders like Community Development Financial Institutions and Minority Depository Institutions, and (iii) low income and underserved communities.
• Emphasis will be placed on minority and women owned businesses.
• Proceeds from PPP loans will be forgiven if not less than 60% of the loan proceeds were used to pay qualifying expenses which (in addition to employee wages, mortgage interest, rent and utility costs previously approved under PPP1) now include expenditures for worker protection and facility modification to comply with COVID-19 health guidelines, certain qualifying supplier costs and specified software and cloud computing costs and accounting payments.
• Reversing the IRS, the new law makes it explicit that businesses that had their PPP loan forgiven can continue and deduct the business expenses that were paid with the loan proceeds (this applies both to new PPP loans and outstanding PPP loans).
• The law provides for a simplified forgiveness process on loans of up to $150,000.
• The amount forgiven does not have to be reduced by the amount of any Economic Injury Disaster Loan Advance (up to $10,000) received.

While most borrowers remain eligible to borrow up to a maximum of 2.5 times average monthly payroll costs, hotel and food service operators that fall within NAICS code 72 are now eligible to borrow up to 3.5 times monthly payroll costs.

PPP loans will be made available until March 31, 2021. Borrowers will be able to choose a covered period of eight to twenty-four weeks during which to spend PPP loan proceeds on qualified expenses.

In addition, the law provides $20 billion for new Economic Injury Disaster Loans for businesses in low income communities, $43.5 billion for SBA debt relief payments and increases the refundable employee retention credit from $5,000 per employee for all of 2020 to $7,000 per employee per calendar quarter through the second quarter of 2021 by changing the calculation from 50% of wages paid up to $10,000 per employee for all 2020 calendar quarters to 70% of wages paid up to $10,000 per employee for any quarter through the second quarter of 2021.

Regulations are directed to be issued within 10 days of passage of the law. Seyfarth is actively monitoring all aspects of federal COVID-19 business stimulus funding legislation. Additional updates will be provided as guidance becomes available and is published. Visit our Beyond COVID-19 Resource Center for more information.

Edward J. Karlin, Stanley S. Jutkowitz, and Suzanne L. Saxman

§ 1.12  Stimulus Redux: What It Means for Welfare Benefit Plans

Seyfarth Synopsis: On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 which includes several provisions affecting employer-sponsored benefit plans, and provides voluntary relief related to the COVID-19 public health emergency that employers may choose to offer. Given the length and complexity of the Act, this Legal Update summarizes some of the key provisions affecting health and welfare plans.

Flexible spending arrangements (FSAs)

The Act contains several provisions intended to provide flexibility for participants in flexible spending account programs.

• Mid-year election changes. For plan years ending in 2021, a plan may allow participants to change the amount of their contributions to health or dependent care FSAs prospectively, without regard to any change in status.
• Carryover of account balances. A plan may allow participants to carry over any unused amounts or contributions remaining in a health or dependent care FSA from the 2020 plan year to the 2021 plan year, or from the 2021 plan year to the 2022 plan year.
• Grace Period Extension. For plan years ending in 2020 or 2021, plans may extend their grace period to 12 months after the end of the plan year.
• Unused Health FSA Account Balances. A plan may allow an employee who terminates his or her participation in a health care FSA during the 2020 or 2021 calendar year to continue to receive reimbursements from unused account balances through the end of the plan in which such participation ended (including any applicable grace).
• Dependent Care FSA & Aging Out. To qualify as an employment-related expense which is reimbursable from a dependent care FSA, the expense must be for care for a “qualifying individual” – which means a dependent who has not attained age 13. For dependents who aged out of eligibility during the pandemic (specifically, during the last plan year with a regular enrollment period ending on or before January 31, 2020), plans may extend the maximum age from 13 to 14.

Plan sponsors that want to take advantage of any of these relief provisions must adopt a plan amendment by the end of the first calendar year beginning after the end of the plan year in which the change takes effect. (For example, if mid-year election changes are allowed in 2021, a calendar year plan must be amended by December 31, 2022.) In addition, the plan must be operated in accordance with the amendment terms as of the effective date of the amendment.

Surprise Billing

A section of the Act called the “No Surprises Act” protects plan participants from surprise medical bills for certain emergency and non-emergency services rendered by out-of-network providers.

Emergency Services. If a plan provides any benefits with respect to “emergency services”, then the plan must cover such emergency services without the need for any prior authorization, regardless of whether the provider is in-network or out-of-network. With respect to services provided by out-of-network providers:

• The cost-sharing amounts for such services cannot be greater than if the services were provided by an in-network provider, and are calculated as if the total amount charged was equal to the median of contracted rates;
• A plan must make an initial payment or issue a notice of denial of payment to the provider within 30 days after receiving the provider’s bill, and must pay a total amount equal to the amount by which the out-of-network rate exceeds the cost-sharing; and
• Any cost-sharing payments made by the participant or covered beneficiary must be counted toward the plan’s in-network deductible or out-of-pocket maximum.
• With respect to an item or service furnished by an out-of-network provider, the Act provides for a 30-day open negotiation period to agree on the out-of-network rate to be paid, and an independent dispute resolution (IDR) process to resolve disputes. The IDR process will be run by independent entities with no affiliation to the plan or provider.

Non-Emergency Services. If a plan provides any coverage of non-emergency services performed by out-of-network providers at an in-network facility, the plan must cover such services under requirements similar to the emergency services requirements described above. The participant shall only be required to pay the in-network cost for out-of-network care provided at in-network facilities, unless the out-of-network provider notifies the patient of its out-of-network status and estimated charges 72 hours prior to receiving the out-of-network services, and the patient consents. In this case the out-of-network provider may balance bill the patient.

Air Ambulances. If a plan would cover air ambulance services from an in-network provider, the plan must cover such services provided by an out-of-network provider, under the parameters set forth above for emergency services.

Mental Health and Substance Use Disorder Benefits

In an attempt to strengthen parity between medical benefits and mental health benefits, plans and insurers that provide both medical/surgical benefits and mental health or substance use disorder (“mental health”) benefits and that impose non-quantitative treatment limitations (NQTLs) on mental health or substance use disorder benefits are required to perform and document comparative analyses of the design and application of NQTLs. Beginning February 10, 2021, these analyses must be made available to the DOL, HHS or IRS upon request.

The Act also requires the agencies to issue a compliance program guidance document to help plans comply with the mental health benefit requirements and to finalize guidance and regulations relating to mental health parity no later than 18 months after enactment (i.e. by June 27, 2022).

Transparency Rules

Gag Clauses. The Act prohibits “gag clauses” regarding price or quality information. Plans may not enter into agreements with health care providers (or a network of providers), third-party administrators or other service providers that would restrict the plan from:

• providing provider-specific cost or quality of care information to referring providers, plan sponsors, participants, beneficiaries or individuals eligible to become participants or beneficiaries;
• electronically accessing de-identified claims information for each participant or beneficiary in the plan, upon request and consistent with the HIPAA privacy rules, GINA and the ADA; or
• sharing this information, or directing that such information be shared, with a business associate, consistent with the HIPAA privacy rules, GINA and the ADA.

The Act requires group health plans to submit an annual attestation to HHS that the plan is in compliance with these requirements.

Cost Sharing Disclosure. For plan years beginning January 1, 2022, plans must include the following information on any identification card issued to participants and beneficiaries:

• Any applicable deductibles and out-of-pocket maximum limits.
• A telephone number and website address through which participants can obtain plan-related information.

Good Faith Estimates. For plan years beginning January 1, 2022, plans that receive a health care provider’s good faith estimate of expected charges for providing a service to a participant must furnish the participant a notice – in most cases within one business day of receiving the provider’s notice – that contains specified coverage information. For example, the plan’s notice to a participant must state:

• Whether the provider is a participating provider with respect to the scheduled service and, if so, the contracted rate for the service based on relevant billing and diagnostic codes.
• A good faith estimate of how much the health plan will pay for the items and services included in the provider’s estimate.

Loss of Network Provider Status. For plan years beginning January 1, 2022, if a plan has a contractual relationship with a health care provider or facility and either the contract or benefits provided under the contract are terminated while the individual is a “continuing care patient”, the plan must notify each such patient of the termination and permit the patient to elect to continue receiving benefits from the provider. Continuing care patients include those who are: undergoing a course of treatment for a pregnancy or serious condition, scheduled to undergo non-elective surgery or receive postoperative care, or receiving treatment for a terminal illness.

Reporting on Pharmacy Benefits

By December 27, 2021, and annually thereafter, plans will be required to submit to the DOL, IRS and HHS a report with specific information on the benefits paid for prescription drugs provided to participants and beneficiaries, including:

• The dates of the plan year, number of participants and beneficiaries, and each state in which coverage is offered.
• The 50 brand prescription drugs most frequently dispensed and the total number of paid claims for each drug.
• The 50 most costly prescription drugs by total annual spending.
• The 50 prescription drugs with the greatest increase in plan expenditures over the preceding plan year.
• Average monthly premium paid by the employer and by participants and beneficiaries.
• Impact of rebates, fees and other remuneration paid by drug manufacturers on premiums and out-of-pocket costs.

Within 18 months after the first pharmacy drug reports are received, the agencies will post a report on the internet on prescription drug reimbursement under group health plans, with pricing and premium trends.

Student Loan Repayments

Although the Act did not extend further relief for the actual repayment of student loans, it did extend the ability for employers to provide tax-preferred payments to employees for student loans. [See link here for our earlier post about the CARES Act relief on this.] The Act extends the ability of employers to make these payments under IRC Section 127 of up to $5250 per employee for five more years through December 31, 2025.

Disclosure of Compensation for Service Providers

Effective in 2012, employee benefit plan fiduciaries were required to get fee disclosures from service providers pursuant to ERISA Section 408(b)(2). However, service providers for welfare plans were temporarily exempt from that requirement until further guidance was issued. The Act ends that reprieve and extends the fee disclosure rules to group health plans, which means that service providers will have to comply with the fee disclosure rules, effective December 27, 2021.

Deductible Medical Expenses

Expenses incurred for medical care are deductible on an individual’s income tax return to the extent they exceed 7.5% of adjusted gross income. That was scheduled to increase to 10% beginning in 2021. The Act makes the 7.5% threshold permanent.

Plans will likely need assistance from their TPAs and pharmacy benefit managers complying with the new reporting and disclosure requirements. Please feel free to reach out to your Seyfarth benefits attorney for help with appropriate amendments to plans and service agreements. Also watch for additional Legal Updates addressing specific employee benefit provisions of the Act and related guidance.

Diane V. Dygert and Joy Sellstrom

§ 1.13  Stimulus Redux: What It Means for Retirement Plans

Seyfarth Synopsis: On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (the “Act”), which includes several changes that impact tax-qualified retirement plans (both defined benefit and defined contribution plans, including certain multiemployer plans). This Legal Update summarizes the key changes impacting retirement plans. See our parallel Legal Update for a description of the health and welfare-related provisions of the Act.

Partial Plan Terminations

Typically, whether a partial termination has occurred (which would require a plan to fully vest affected participants) is based on applicable facts and circumstances, and there is a rebuttable presumption that a turnover rate of at least 20% creates a partial termination. Under the Act, however, a plan will not experience a partial termination under the Code during any plan year that occurs during the period that begins on March 13, 2020 and ends on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021 is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.

Observation. The Act’s bright line rule should be helpful to plan sponsors who experienced high turnover, furloughs and layoffs among its employee population in 2020 due to the COVID-19 pandemic.

Disaster Relief Provisions

The Act includes a number of disaster relief provisions that allow defined contribution plan participants who reside in a qualified disaster area and who have sustained an economic loss by reason of a qualified disaster to take a tax-favored withdrawal or distribution from a retirement plan, borrow more money from a plan or suspend loan repayments on new or existing plan loans. 

A “qualified disaster area” under the Act is generally any area where a major disaster was declared by the President during the period beginning on January 1, 2020, and ending on February 25, 2021, if the period during which such disaster occurred (the “incident period” as specified by FEMA), began on or after December 28, 2019, but on or before December 27, 2020 (i.e., the date of the enactment of the Act). Notably, the disaster relief under the Act does not apply where the President has declared a disaster only on account of the COVID-19 pandemic.

• Tax-Favored Disaster Withdrawals. A participant may take a tax-favored withdrawal from defined contribution plan (including an IRA) of up to $100,000, free from the 10% penalty that normally applies to early withdrawals. When determining whether the $100,000 limit has been exceeded, you take into account all plans maintained by the employer and members of its controlled group. For an individual affected by more than one qualified disaster, these limits apply separately to each qualified disaster.

A qualified disaster distribution must be made on or after the first day of the incident period of a qualified disaster and before June 25, 2021 (180 days after the date of the enactment of the Act). A participant who takes a tax-favored disaster withdrawal may elect to include the distribution in taxable income ratably over a three-year period and/or re-contribute the distribution to an eligible retirement plan within such three-year period. A participant who chooses to repay is treated as having received the distribution in an eligible rollover distribution, and then directly transferring it tax-free to the eligible retirement plan.

• Re-contribution of Certain Hardship Withdrawals. The Act allows a defined contribution plan participant who took hardship withdrawal that was intended to be used to purchase or construct a principal residence to re-contribute the distribution to an eligible retirement plan in the event that it could not be used for such purpose on account of the occurrence of a qualified disaster in the area where the home was located or was to be constructed.

In order to be eligible for this relief, the participant must have received the hardship withdrawal during the period beginning on the date that is 180 days before the first day of the incident period of the qualified disaster, and ending on the date that is 30 days after the last day of the incident period. A participant who meets the requirements for this relief must re-contribute the hardship withdrawal during the period that begins on or after the first day of the incident period of a qualified disaster and before June 25, 2021 (i.e., 180 days after the date of the enactment of the Act).

• Plan Loans: Increase in Limit and Extension of Period to Repay. Certain “qualified individuals” (defined below) may now borrow more from their defined contribution retirement plans, and have additional time to repay new or existing plan loans if the requirements below are satisfied.
  • Increase in Limit for New Loans. For a qualified individual, the limit on plan loans is increased to the lesser of $100,000, or 100% of the participant’s vested account balance, instead of the $50,000 and 50% vested account balance limits that normally apply under law. This applies for loans made from December 27, 2020 to June 25, 2021 (the 180-day period beginning on the date of the Act’s enactment).
  • Extension of Period to Repay for New and Existing Loans. The Act also provides some relief for new and existing loans, delaying repayments for plan loans outstanding on or after the first day of the incident period of the disaster by one year (or if later, June 25, 2021), provided the payment is otherwise due on or before and ending on the date which is 180 days after the last day of such incident period. This additional year is disregarded for purposes of applying the maximum 5-year term that applies to a general purpose loan, or the maximum term that applies to a home loan (pursuant to the terms of the plan and loan agreement). When payments recommence, they are reamortized to reflect the delay in repayment and any interest accrued during the suspension period.

A “qualified individual” is defined under the Act as an individual whose principal place of residence at any time during the incident period of a qualified disaster is located in the qualified disaster area, and such individual has sustained an economic loss by reason of the qualified disaster.

• Plan Amendment Deadline. Plan sponsors have at least until the last day of the first plan year beginning on or after January 1, 2022 (i.e., December 31, 2022 for calendar year plans) to amend their plans to provide for this disaster relief. Plan sponsors of governmental plans would have an extra two (2) years to amend their plans to provide for this relief (i.e., until December 31, 2024 for calendar year governmental plans). (These are the same amendment deadlines that apply under the CARES Act).
• Observations. The disaster relief provisions under the Act are reminiscent of distribution and loan relief issued for prior disasters, including the relief provided recently under the CARES Act, which made it easier for certain individuals to access retirement plan money in light of the coronavirus pandemic. Similar to the loan relief issued for past disasters, these provision appears to be optional. However, it would be helpful if we heard from Treasury and/or IRS with respect to whether these provisions are optional, and also with respect to the type of certification/documentation that may be necessary for plan administrators to obtain from participants requesting the disaster relief provided for under the Act.

Pension Plan Asset Transfers for Retiree Medical

Under Code Section 420, sponsors with overfunded pension plans may transfer excess pension assets to a Code Section 401(h) account in the pension plan to prefund retiree medical benefits. A “qualified future transfer” under Code Section 420 can prefund up to 10 years of future medical benefits, but these transfers must meet a number of requirements, e.g., the plan must be 120 percent funded at the outset and it must remain 120 percent funded throughout the transfer period. The Act allows employers to make a one-time election during 2020 and 2021 to end any existing transfer period for any taxable year beginning after the date of election. Assets previously transferred to a Code Section 401(h) account that were not used as of the election effective date are required to be transferred back to pension plan within a reasonable amount of time. Assets transferred back to plan are treated as a taxable employer reversion, unless the amount is transferred back to the applicable Code Section 401(h) account before the end of the five-year period beginning after the original transfer.

Observation. The market changes due to the COVID-19 pandemic may have caused plans that have been consistently over 120 percent funded to fall below 120 percent, and plan sponsors may face a requirement to address large market losses in order to get back to the 120 percent funding threshold. The Act may be welcome relief for pension plans that are using surplus assets to offset retiree welfare costs.

Money Purchase Pension Plan CARES Act Distributions

The Act amends the CARES Act to reflect that the in-service coronavirus distributions allowed under the CARES Act are also permitted to be made from money purchase pension plan assets. See our prior blog post and legal update for information on coronavirus distributions under the CARES Act.

Observation. Under the Act, this treatment is retroactive to the date of the passage of the CARES Act (i.e., March 27, 2020). However, because coronavirus distributions under the CARES Act must be made before December 31, 2020, this provision was likely enacted too late in the year to allow for many plans and participants to take advantage of the clarification. The Act did not extend the deadline for taking a coronavirus distribution beyond 2020.

In-Service Distributions from Certain Multiemployer Plans

The Act allows in-service distributions at age 55 from certain multiemployer plans in the construction industry for employees who were participants in the plans on or before April 30, 2013. (The general rule for pension plans is that in-service distributions are permitted at age 59-1/2.) In order for this provision to apply, the multiemployer plan trust must have (1) been in existence before January 1, 1970, and (2) received a favorable determination letter before December 31, 2011, at a time when the multiemployer plan provided that in-service distributions may be made to employees who have attained age 55.

The Act is lengthy and there is a lot to digest. We hope that Treasury and IRS will issue additional guidance pertaining to these provisions. For further information and updates, continue to follow our blog.

Christina M. Cerasale and Sarah J. Touzalin

§ 1.14  You May Even Get a Vaccine Before Needing to Go to the Notary; the IRS Has Extended Remote Witnessing of Participant Elections

Seyfarth Synopsis: The IRS has extended the remote notarization relief that gives plans and participants greater flexibility for participant elections, including spousal consents, that must be signed in person and witnessed by a notary or plan representative in order to be valid. The IRS has also requested comments on this relief, including comments as to whether this relief should be made permanent.

As described in our prior post, Notice 2020-4 provides relief from the rule in Treasury Regulation Section 1.401(a)-21(d)(6) that requires the signature of an individual making an election to be witnessed in the physical presence of a plan representative or a notary public. That relief was set to expire on December 31, 2020. In recognition of the continued public health emergency caused by the COVID-19 pandemic, the IRS has issued Notice 2021-3, which extends relief from this physical presence requirement through June 30, 2021.

This extended relief means that physical presence is not required for any participant election witnessed by:

1. A notary public in a state that permits remote notarization; or
2. A plan representative using live audio technology, provided the requirements detailed in our prior post are satisfied.

Notably, Notice 2021-3 also requests comments on this relief, including comments as to whether this relief should be made permanent, and what, if any, procedural safeguards are necessary in order to reduce the risk of fraud, spousal coercion, or other abuse in the absence of a physical presence requirement.

Plan administrators that have already taken advantage of this guidance can continue to benefit from the changes that were put in place through June 30, 2021. Meanwhile, plan administrators that have not yet adopted remote witnessing procedures may consider making these administrative changes in light of the continuing pandemic and indications from the IRS that this guidance may be made permanent.

Irine Sorser and Liz J. Deckman

§ 1.15  SBA Posts Interim Final Rules Implementing Changes to First Draw and Second Draw Loans under the Paycheck Protection Program

On January 6, 2020, the Small Business Administration (“SBA”) issued its much anticipated Interim Final Rules (“IFR”) under the $2.3 trillion coronavirus relief and government funding act, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Act”), which was signed into law on December 27, 2020. In addition to other provisions, the Act adds $284 billion to the Paycheck Protection Program (“PPP”), establishes changes to the existing PPP, and creates a second draw to the PPP.

This update summarizes the key details of the guidance issued by the SBA.

Changes to Existing PPP; First Draw PPP Loans

1. Eligibility

The Act and IFR expand the set of eligible borrowers under the PPP to include housing cooperatives (but not condominiums), certain 501(c)(6) trade organizations (discussed below), and nonprofit destination marketing organizations, that employ no more than 300 employees.

The Act and IFR also expand the set of eligible borrowers to print, and radio and television, broadcast organizations, both businesses and nonprofits, that employ no more than 500 employees per location (or, if applicable, the size standard established by SBA regulations).

Though the 501(c)(6) trade organizations included are 501(c)(6) organizations generally, professional sports teams or organizations that devote significant activities to lobbying (defined as (i) more than 15 percent of the total activities of the organization, or (ii) more than $1,000,000 during the tax year ended February 15, 2020) are not eligible. Public companies, other than news organizations, and companies that are permanently closed are not eligible for PPP loans under the Act.

Under the first draw PPP, the maximum amount a borrower can borrow is the lesser of (i) $10 million; and (ii) the amount yielded by a payroll-based formula, which is, in general, 2.5 times average monthly payroll costs in 2019 or 2020, less pro rata payroll costs in excess of $100,000.

2. Permitted Uses

The list of permitted expenditures of PPP funds is also expanded. In addition to the uses previously permitted, current and future PPP borrowers are permitted to use PPP funds for certain software, human resources, accounting, property damage repairs related to public disturbances occurring in 2020, and PPE used to comply with health and safety guidelines. Expenses for group life, disability, vision and dental insurance are also included. Note however, that the relative percentages of expenditures required for forgiveness have not been changed, so a borrower must spend at least 60% of loan proceeds on payroll costs to remain eligible for full forgiveness.

Importantly, under the Act and IFR, expenses paid for with PPP loan proceeds are tax deductible, which reversed the IRS position.

3. Loan Forgiveness

PPP loan forgiveness has also been changed in three important ways. First, Economic Injury Disaster Loans (EIDL) advances (which are up to $10,000) are no longer deducted from a borrower’s forgiveness amount.

Second, PPP borrowers can select a covered period that ends at any point between 8 weeks and 24 weeks after loan disbursement, without having to choose between 8 and 24 weeks (although earlier guidance indicated that subject to certain conditions a covered period of less than 24 was permissible).

Third, PPP borrowers with loan amounts up to $150,000 may submit a one-page forgiveness application, without additional documentation. However, borrowers must maintain all relevant documentation.

With the new legislation, Congress and the SBA have addressed many of the concerns of borrowers under the PPP.

Second Draw PPP Loans

The SBA is authorized to guarantee PPP loans under the second draw program established by Section 311 of the Economic Aid Act (the “Second Draw PPP Loans”) under generally the same terms and conditions available under the PPP.

1. Eligibility

(a) General Eligibility Requirements

The eligibility requirements for Second Draw PPP Loans are narrower than the eligibility requirements for First Draw PPP Loans. A borrower is eligible for a Second Draw PPP Loan only if: it has 300 or fewer employees; experienced a revenue reduction in 2020 relative to 2019; has received a First Draw PPP Loan, and has used, or will use, the full amount of the First Draw PPP Loan on or before the expected date on which the Second Draw PPP Loan is disbursed to the borrower, and the full amount of its First Draw PPP Loan was spent on eligible expenses; and it is not an ineligible entity.

The revenue reduction requirement may be satisfied by comparing the borrower’s quarterly gross receipts for any one quarter in 2020 with the receipts for the corresponding quarter of 2019. If a borrower was in operation in all four quarters of 2019, it is deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of 25% or greater in 2020 compared to 2019 and the borrower submits copies of its annual tax forms substantiating the revenue decline.

A borrower that did not experience a 25% annual decline in revenues, or that was not in operation in all four quarters of 2019, may still meet the revenue reduction requirement under the quarterly measurement.

(b) Business Concerns with More than One Physical Location

Unlike under the CARES Act, where any single business entity that is assigned a NAICS code beginning with 72 (including hotels and restaurants) and employs not more than 500 employees per physical location is eligible to receive a First Draw PPP Loan, in the case of Second Draw PPP Loans, the limit on employees per physical location is reduced to 300.

(c) Affiliation Rules

As a general matter, the same affiliation rules that apply to First Draw PPP Loans apply to Second Draw PPP Loans, with reduced size requirement. Business concerns with a NAICS code beginning with 72 will continue to qualify for the affiliation waiver for Second Draw PPP Loans if they employ 300 or fewer employees. Eligible news organizations with a NAICS code beginning with 511110 or 5151 (or majority-owned or controlled by a business concern with those NAICS codes) may qualify for the affiliation waiver for Second Draw PPP Loans only if they employ 300 or fewer employees per physical location.

(d) Excluded Entities

Generally, an entity that is ineligible to receive a First Draw PPP Loan under the CARES Act is also ineligible for a Second Draw PPP Loan. In addition, the Economic Aid Act also prohibits several categories of borrowers from receiving a Second Draw PPP Loan, including an entity primarily engaged in political activities or lobbying activities, certain entities organized under the laws of, or with other special ties to, the People’s Republic of China or the Special Administrative Region of Hong Kong, a person or entity that receives a grant for shuttered venue operators under section 324 of the Economic Aid Act, and a publicly traded company.

2. Other Key Terms

• SBA will guarantee 100% of Second Draw PPP Loans and the SBA may forgive up to the full principal loan amount.
• No collateral will be required.
• No personal guarantees will be required.
• The interest rate will be 1%, calculated on a non-compounding, non-adjustable basis.
• The maturity is five years.

3. Maximum Loan Amount

In general, the maximum loan amount for a Second Draw PPP Loan is equal to the lesser of 2.5 months of the borrower’s average monthly payroll costs or $2 million. The Economic Aid Act also provided tailored methodologies for certain categories of borrowers, e.g., for borrowers assigned a NAICS code beginning with 72 at the time of disbursement, the maximum loan amount is equal to 3.5 months of payroll costs rather than 2.5 months. In addition, businesses that are part of a single corporate group may not receive more than $4,000,000 of Second Draw PPP Loans in the aggregate. First Draw PPP Loans and Second Draw PPP Loans use the same approach to determining “payroll costs”.^[1]

4. Documentation Requirements

The PPP application form was revised on Friday, January 8, 2021. It is available here.

As a general matter, the documentation required to substantiate an applicant’s payroll cost calculations is generally the same as documentation required for First Draw PPP Loans. An applicant will not be required to submit additional documentation if such applicant (i) used calendar year 2019 figures to determine its First Draw PPP Loan amount, (ii) used calendar year 2019 figures to determine its Second Draw PPP Loan amount (instead of calendar year 2020), and (iii) submits its application for the Second Draw PPP Loan to the same lender as the lender that made the applicant’s First Draw PPP Loan. However, the lender may always request additional documentation, if the lender concludes that it would be useful in conducting the lender’s good-faith review of the borrower’s loan amount calculation.

For loans with a principal amount greater than $150,000, the applicant must also submit documentation adequate to establish that the applicant experienced a revenue reduction of 25% or greater in 2020 relative to 2019. Such documentation may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, quarterly financial statements or bank statements. For loans with a principal amount of $150,000 or less, such documentation is not required at the time the borrower submits its application for a loan, but must be submitted on or before the date the borrower applies for loan forgiveness.

5. Loan Forgiveness

Second Draw PPP Loans are eligible for loan forgiveness on the same terms and conditions as First Draw PPP Loans, except that Second Draw PPP Loan borrowers with a principal amount of $150,000 or less are required to provide documentation of revenue reduction if such documentation was not provided at the time of the loan application.

Seyfarth is actively monitoring all aspects of federal COVID-19 business stimulus funding legislation. Additional updates will be provided guidance becomes available is published. Visit our Beyond COVID-19 Resource Center for more information.

^[1] Subsection(B)(4)(g) of the Consolidated First Draw PPP IFR provides: “What qualifies as “payroll costs? Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care or group life, disability, vision, or dental insurance, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.” Subsection(B)(4)(h) of the Consolidated First Draw PPP IFR provides:

“h. Is there anything that is expressly excluded from the definition of payroll costs? Yes. The Act expressly excludes the following: i. Any compensation of an employee whose principal place of residence is outside of the United States; ii. The compensation of an individual employee in excess of $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred; iii. Federal employment taxes imposed or withheld during the applicable period, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and iv. Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116-127).”

Aselle Kurmanova, William B. Eck, Stanley S. Jutkowitz, Suzanne L. Saxman and Edward J. Karlin

§ 1.16  EEOC’s New ADA Regulations Could Complicate Employer Plans’ Efforts to Offer Incentives for Getting the COVID Vaccine as Part of a Wellness Program

As COVID-19 vaccines become more readily available in coming months, employers are exploring ways to maximize vaccination rates within their workforce.  Some employers are  considering making vaccination mandatory.  Be sure to read our alert for more relating to legal considerations involved with a mandatory vaccination program.  Other employers are considering simply encouraging employees to get vaccinated, offering a voluntary vaccination program, or even offering an incentive to employees who receive the vaccine as part of a workplace wellness program.  Employers should be aware of the existing (and recently proposed) Americans with Disabilities Act (ADA) guidelines that may impact the design of any such program.

Background – ADA Restrictions on Wellness Programs

As described in greater detail here, the ADA applies to employer-sponsored wellness programs that include a medical exam or disability-related inquiry.  The ADA generally permits employers to make medical examinations or inquiries in connection with a wellness program, but only if such program is “voluntary.”  Under EEOC guidelines, that means:

• The program is reasonably designed to promote health or prevent disease, is not overly burdensome, and is not a subterfuge for discrimination.
• The program is not a “gateway plan,” requiring employees to submit to a medical exam or inquiry in order to access an enhanced benefits package.
• The program offers a reasonable accommodation to persons for whom it is medically inadvisable to participate
• Participants are provided with a notice informing them of why their information is being requested, how it will be used, and how it will be protected.
• Incentives are limited.

The final requirement, relating to the level of permitted incentives, is in a state of flux.  Until 2016, there were no guidelines on how much of an incentive could be offered to encourage participation in a wellness program.  In 2016, however, the EEOC finalized regulations that would permit an incentive of up to 30% of the cost of self-only coverage under the employer’s health plan.  Those regulations were challenged by the AARP, however, and were ultimately struck down by the District Court who ordered the EEOC to reissue guidelines that engage in a more thorough process detailing how it determined that the incentive level met the ADA’s voluntary standard.

Last week, the EEOC issued a Notice of Proposed Rulemaking that would limit any incentives offered in a connection with a participation-only wellness program (i.e., one where participants are simply required to submit to a medical exam or inquiry but not required to achieve any particular outcome) to a “de minimis” threshold.  Examples of permissible incentives in the proposed regulations included a water bottle or a gift card of modest value.

Analysis of ADA’s Applicability to a Vaccination Program

The EEOC updated its Technical Assistance document on December 16, 2020, to provide that  the administration of a vaccine, in and of itself, does not constitute a medical examination.  That said, vaccine administration is almost always accompanied by medical questions to ascertain whether the person is susceptible to an allergic reaction, etc.  That type of inquiry could constitute a disability-related inquiry and therefore would be subject to restrictions under the ADA if the information is solicited by the employer or by an entity administering the vaccine to employees pursuant to a contract with the employer.

However, the ADA can be avoided altogether if the employee gets vaccinated by a third party provider who is not under a contract with the employer to administer the vaccine because the medical pre-screening questions are not attributed to the employer under this scenario.  Thus, an employer could structure its wellness program to provide a financial incentive to participants to receive a vaccine from a third-party vendor, not under contract with the employer (e.g., a local pharmacy chain), without running afoul of the ADA.  While the employer could require proof that the individual received a vaccination, that should not trigger ADA restrictions because, as noted above, vaccination status is not, in and of itself, a medical examination or inquiry under the ADA.

Duty to Accommodate

Current EEOC regulations on wellness programs require accommodation for disabilities absent undue hardship.  Although the proposed regulations on wellness programs do not address accommodations on the basis of religion, presumably the EEOC’s position on accommodation would be the same and the language from the current regulations regarding accommodation remains unchanged.  While current EEOC regulations do not specify what type of accommodation must be offered in a vaccination scenario, presumably the employer would have to come up with an accommodation that is an alternative requirement to getting the vaccine, such as wearing a mask, getting weekly COVID tests and social distancing, so the person with the disability-related or religious objection can earn the incentive.

Of course, the duty to accommodate would generally only be implicated in situations where an individual is actually unable to get the vaccine due to a disability (or potentially a bona fide religious objection) and reasonable accommodation need only be made absent undue hardship.  The viability of any such claim may be impacted by what the FDA says about any vaccine it approves in terms of any medical contraindication.

Level of Permitted Incentive

At present, it is unclear what level of incentive would be considered voluntary under ADA guidelines.  Prior regulations permitting incentives up to 30% of the cost of health coverage were invalidated by the courts.  The newly proposed regulations only permitting de minimis incentives are in proposed form, and the EEOC has stated that they are “simply proposals and they do not change the law or regulations.”  Further, there’s a possibility these regulations could be frozen by the incoming Biden Administration and/or revised before taking final form.  In any event, it’s unlikely the regulations would be finalized before more broad-based vaccine rollouts take place.   

Even so, there is some risk that a plaintiff could seize upon this proposed regulations to argue that any incentive that exceeds a de minimis threshold is involuntary.  To be clear, the current regulations are only in proposed form and, as noted, the EEOC has made clear it is not “law.”  Further, courts can defer to, but often do not follow EEOC regulations.  But, employers should keep this proposal in mind as they implement an incentive-based COVID vaccination program.

Karla Grossenbacher, Jennifer A. Kraft and Benjamin J. Conley

§ 1.17  EEOC Wellness Rules Proposed, Water Bottle Enthusiasts Rejoice

Synopsis:  For years, employers have struggled to understand what level of incentives in wellness programs might be considered “voluntary” under the Americans with Disabilities Act (ADA).  After earlier guidelines were challenged and ultimately thrown out by a federal court, the EEOC has finally issued its long-awaited, revised guidelines under the ADA and the Genetic Information Nondiscrimination Act (GINA).  As described in this alert, the newly proposed rules would generally limit incentives to “de minimis” levels for so-called “participation-only” wellness programs, while deferring to HIPAA’s guidelines for “health-contingent” wellness programs.

Brief Background on Federal Laws Governing Wellness Programs

Employers generally offer wellness programs to promote health and disease prevention within their workforce.  Despite these noble intentions, a variety of federal laws govern such programs with the intent of balancing workforce health against the risks of employment discrimination on the basis of adverse health conditions or genetic information.  While not an exclusive list, employer wellness programs are generally governed by some or all of the following federal laws (depending on the design of the program):

Health Insurance Portability and Accountability Act (HIPAA)

HIPAA generally breaks wellness plans/programs into two categories:

1. Participation-Only Wellness Programs. These include wellness programs that do not require participants to achieve a specific health outcome, but instead simply require them to take a certain action (e.g., obtain a flu shot, submit to a biometric screening, take a health risk assessment).  HIPAA does not impose any requirements upon these types of programs, other than require that they be made available to similarly situated participants.  These types of programs are regulated by, and the target of, new guidelines under the ADA, as described below.
2. Health Contingent Wellness Programs. Health contingent wellness programs are those that require participants to attain a certain outcome or meet a health standard (e.g., run a 5k, maintain a certain cholesterol level, cease smoking, maintain a certain Body Mass Index (BMI)).  These types of programs are required to comply with five standards under HIPAA:

• • The program must be reasonably designed to promote health or prevent disease.
  • Any reward offered cannot exceed 30% of the cost of coverage elected by the participant (increase to 50% for programs involving a tobacco cessation component).
  • The full reward must be available to all similarly situated individuals unless the program offers a reasonable alternative for obtaining the reward. (Note that different requirements apply for activity-only and outcome-based programs.)
  • Participants must be notified of the availability of the reasonable alternative.
  • Participants must be given the opportunity no less frequently than annually to attain the reward.

Americans with Disability Act

The ADA applies to employer-sponsored wellness programs that include a medical exam or disability-related inquiry.  Examples of the types of programs that might be subject to the ADA include health risk assessments that involve medical questions or biometric screenings.  Smoking cessation programs are not necessarily subject to the ADA unless smoking status is determined based on a biometric screening (medical exam) instead of a self-certification.

The ADA generally permits employers to make medical examinations or inquiries in connection with a wellness program, but only if such program is “voluntary.”  For years, employers have struggled in determining what constitutes a “voluntary” program for these purposes.  In 2016, the EEOC finally issued regulations establishing certain parameters to assist employers in determining whether a program would be considered voluntary.  Generally, those standards included the following:

• The program is reasonably designed to promote health or prevent disease, is not overly burdensome, and is not a subterfuge for discrimination.
• The program is not a “gateway plan,” requiring employees to submit to a medical exam or inquiry in order to access an enhanced benefits package.
• Incentives to participate do not exceed 30% of the cost of self-only
• The program offers a reasonable accommodation for persons for whom it is medically inadvisable to participate.
• Participants are provided with a notice informing them of why their information is being requested, how it will be used, and how it will be protected.

Shortly after the rules were issued, the AARP challenged the EEOC’s interpretation of the voluntariness standard, arguing that they exceeded their regulatory authority in permitting incentives of up to 30% of the cost of coverage.  The District Court agreed, and it struck down that portion of the rule effective as of January 1, 2019 (the rest of the rule remained in force).

The newly proposed rule (described below) is intended to address the Court’s directive that the EEOC reissue guidelines that engage in a more thorough process detailing how it determined that the incentive level met the ADA’s voluntary standard.

Genetic Information Nondiscrimination Act

GINA is generally intended to prevent employers from discriminating against employees on the basis of genetic information.  The law broadly restricts employers from incentivizing employees to provide genetic information or to provide medical information about family members.

In 2016, the EEOC issued guidelines that established parameters for how employers may collect genetic information or information about family members without running afoul of GINA guidelines.  Under those rules:

• Individuals must provide a knowing, voluntary, written authorization prior to disclosing such information.
• Employers may not offer an incentive that exceeds 30% of the cost of self-only coverage in soliciting genetic information from the spouse of an employee.
• Employers could not offer any inducement for genetic information about an employee’s child.

In the same legal challenge described above, the District Court struck down the EEOC’s 30% threshold as applied to GINA (the rest of the rule remained in force).  The rule described below attempts to issue new guidelines in accordance with the Court’s directive.

Highlights of the New ADA Rule

The EEOC’s proposed rule takes a similar approach to the earlier HIPAA rule, splitting wellness programs into two categories and applying different rules to each:

3. Participation-Only Wellness Programs. The proposed rule targets participation-only wellness programs, limiting incentives offered in connection with such a program to a “de minimis” standard.  Any incentive offered that exceeds that threshold would be considered involuntary, in violation of the ADA.  The rule offers the following examples:

• Permissible Incentives: water bottles or gift cards of modest value
• Impermissible Incentives: a paid annual gym membership or free airline tickets

The EEOC’s proposed rule requests comments on whether additional examples would be helpful.

4. Health Contingent Wellness Programs. The EEOC’s proposed rule would offer a “safe harbor” for any health contingent wellness program offered as part of a group health plan.  Under the safe harbor, the program would be deemed to be in compliance with the ADA if it complies with the HIPAA rules described above.

Notably, the rules also appear to eliminate the previously-required ADA notice described above.  The EEOC explained that because incentives will no longer be able to exceed a de minimis threshold, no such notice would be required to ensure voluntariness.

Highlights of the New GINA Rule

Under the proposed rule, employers can offer incentives to encourage employees or their spouses to provide genetic information, but those incentives must be no more than de minimis.  In a departure from the earlier rule, employers may offer incentives to encourage provision of genetic information of dependent children as well (as long as those incentives are no more than de minimis).

Timing/Effective Date of EEOC Rules

The new EEOC guidelines are in proposed form, and the EEOC is soliciting comments for 60 days following the date the rules are published in the Federal Register.  The EEOC will review any comments received before issuing a final rule.  Until the rules are final, the EEOC has stated that they are “simply proposals and they do not change the law or regulations.”  It would be important to caveat these comments though as follows:

• Regulatory Freeze. As is common in new administrations, the Biden Administration has announced it intends to implement a broad-based regulatory freeze on all pending rules upon entering office. Presumably this rule will be included, although it is unclear whether the rule will ultimately be adopted by the new administration.
• Interim Interpretation of ADA’s Voluntariness Standard. Even in the absence of this rule, the ADA remains an active law, including its undefined requirement that wellness programs must be voluntary. Participants in a wellness program could challenge any form of incentive on the basis that it renders the program involuntary (and there are pending lawsuits in which plaintiffs allege a seemingly reasonable incentive renders the program involuntary).  There is some risk that a plaintiff could seize upon this proposed rule to argue that any incentive that exceeds a de minimis threshold is involuntary.  To be clear, the current rule is only in proposed form and, as noted, the EEOC has made clear it is not “law.”  But, employers should keep this proposal in mind as they implement new or review current wellness plans.

Considerations for Employers in Designing Wellness Programs

If finalized, this rule could lead to some employers to either scale back their participation-only wellness programs or to gravitate toward health-contingent wellness programs.  Under these rules (and the HIPAA guidelines), employers would have far greater flexibility to incentivize behavior under health-contingent programs.

Similarly, the regulatory agencies have indicated in prior, non-binding guidance that a participation-only wellness program might be considered a health contingent wellness program if it only targets participants based on health status (e.g., if only diabetics have to take a biometric screening).  Employers might consider offering more targeted programs based on health status in the hopes of avoiding the more restrictive ADA “de minimis” standard.  Under this approach, the wellness program would need to comply with the other HIPAA requirements as discussed above.

Finally, we understand that many employers are considering whether and to what extent to incorporate a mandatory or incentivized COVID vaccination program into their current wellness design.  These rules have the potential to impact any such design.  Click here for more on vaccine-related wellness considerations.

Benjamin J. Conley, Jennifer Kraft, Diane Dygert and Joy Sellstrom

§ 1.18  PBGC Simplifies Calculation Of Liability For Withdrawal From Multiemployer Pension Plans

Seyfarth Synopsis:  The Pension Benefit Guaranty Corporation (PBGC) recently issued a final rule intended to simplify the calculation of withdrawal liability for multiemployer plans that have adopted benefit reductions, benefit suspensions, surcharges, and contribution increases.

Under ERISA, multiemployer pension plans assess withdrawal liability on employers that withdraw from the plans.  Withdrawal liability represents a withdrawing employer’s proportionate share of a plan’s unfunded vested benefits. The calculations of withdrawal liability can be highly complex.

Congress approved changes under the Pension Protection Act in 2006 and the Multiemployer Pension Reform Act in 2014 that permitted financially troubled plans to reduce certain benefits, impose benefit suspensions, assess surcharges, and impose contribution increases as part of a “funding improvement plan” or “rehabilitation plan.” Under the law, these changes are generally disregarded for purposes of calculating withdrawal liability.  The PBGC’s final rule provides simplified methods that plans may use in excluding those changes from the withdrawal liability determination.

The final rule will apply to employer withdrawals from multiemployer pension plans that take place in plan years beginning on or after February 8, 2021.  The PBGC expects the final rule will benefit multiemployer pension plans that adopt the simplified methodology by reducing the cost associated with the withdrawal liability calculation.  Notably, however, it does not appear that the final rule will result in any significant changes to the amounts of withdrawal liability assessed on employers that withdraw from multiemployer pension plans.  The rule only simplifies the way that those amounts are calculated.

Even though the PBGC issued this rule to “simplify” the calculation of withdrawal liability for certain plans, this area of law itself remains very complex.  Employers that are considering withdrawal from a multiemployer pension plan, are engaging in reorganizations or transactions that might trigger a withdrawal, or that have been assessed withdrawal liability, should be sure to consult with counsel.

Additionally, the PBGC’s rule may be just the beginning of a busy year of legal developments affecting multiemployer pension plans.  With the number of severely underfunded plans continuing to increase and a new administration about to begin, Congress is likely to soon consider new legislation to address the risk of insolvencies in multiemployer pension plans.  Stay tuned for further developments.

James M. Hlawek

§ 1.19  Recent Supreme Court Trump Decisions and ERISA Jurisprudence

Seyfarth Synopsis: The Supreme Court has shown a recent reluctance, as a general matter, to expand the scope of its review.  That reluctance should apply as well to cases that seek to extend the scope and enforcement of ERISA.

Is there a connection between — the Supreme Court’s December 2020 decisions dismissing Presidential election lawsuits and the Presidential policy of excluding from census apportionment immigrants not considered to be in lawful status, on the one hand, and ERISA jurisprudence, on the other hand?

These recent Supreme Court decisions reveal a strong majority of Justices who believe federal court jurisdiction is limited, and dramatically so.  Texas v. Pennsylvania, challenged, among other things, the lack of compliance with state legislative election law.  Seven of the nine justices ruled that “Texas has not demonstrated a judicially cognizable interest in the manner in which another State conducts its elections.”  In the immigration census decision, Trump v. New York, six justices ruled the case non-justiciable.  They relied on two related doctrines — standing and ripeness.  On standing, the majority said that a case must demonstrate “an injury that is concrete, particularized, and imminent rather than conjectural or hypothetical.”  On ripeness, they said that any case must not be dependent on “contingent future events that may not occur as anticipated, or indeed may not occur at all.”  To be sure, these cases may yet wind their way back to the Court for a review on the merits, but the route will be a bumpy one.

This judicial reluctance to rock the boat applies to ERISA jurisprudence as well.  In Rutledge v. Pharmaceutical Care Management Association (No. 18-540), the Supreme Court refused to strike down an Arkansas PBM law on ERISA preemption grounds. The decision was unanimous.  See SCOTUS Upholds Arkansas PBM Law Against ERISA Preemption Arguments | Beneficially Yours.

Commentators have noted that Justice Roberts, in particular, employs a strong philosophy of judicial deference or restraint.  His view is that the people should take their complaints to the ballot box, not the courthouse.  Enough of his fellow conservatives on the Court are often persuaded to agree, notwithstanding calls for a more aggressive Court.

So, as a general matter, private lawsuits that are commenced to “make new law” may increasingly be commenced in state court.  ERISA lawsuits are not so easily accommodated via state litigation, however.  All ERISA claims, other than claims for benefits, must be commenced in federal court.  29 U.S.C. 1132(e)(1).  As we have noted previously, when commenting on the Spokeo and Thole standing decisions, a number of technical ERISA violations, including some fiduciary breach claims, may be beyond the reach of private plaintiffs.  See Spokeo and the Future of ERISA Litigation | Beneficially Yours;  The Supreme Court Further Narrows Federal Court Jurisdiction Over an ERISA Complaint, Relying on Article III of the Constitution | Beneficially Yours. And ERISA limits remedies, see Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985), and that can make it tough to allege concrete injuries for technical violations.

It remains to be seen, of course, how aggressive the Department of Labor will be in enforcing ERISA violations under President Biden.  But private ERISA plaintiffs trying to extend the scope and enforcement of ERISA will have a tougher time making their case to the Supreme Court.

Mark Casciari and Rebecca Bryant

§ 1.20  Hold Up! Maybe You Can Invest Your Retirement Plan to Save the Planet!

Seyfarth Synopsis: DOL final regulation on fiduciary implications of investing in ESG under review by the Biden administration.

You may recall our prior blog posts and Legal Update discussing the back-and-forth over the years surrounding the wisdom, or even ability, for plan fiduciaries to invest plan assets in funds with a strategy focused on factors such as environmental, social or corporate governance, sustainability or religion — the so-called ESG factors. See our blog posts here and here, and our Update here.

When we left you last, in November 2020, the DOL had finalized its regulation that basically came down on the side that ESG factors are non-pecuniary and it would be inappropriate for fiduciaries to make investment decisions based on non-pecuniary factors. This was in the face of voluminous criticism received from the investing community.

Well, this regulation is listed here among those that the Biden administration wants reviewed in accordance with the Executive Order “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis.” In addition, the White House issued a memo to all agency heads to “consider” postponing for 60-days rules that have published rules but have not yet taken effect.

So, stay tuned!

Diane Dygert

§ 1.21  IRS Announces 2021 Limits for Certain Health and Fringe Benefit Options

Seyfarth Synopsis:  The IRS has announced the adjustments to key limits for certain health and welfare benefit programs, including HDHP deductibles, HSA and FSA contributions, and other fringe benefit options for 2021.

The IRS issued new limits on health and fringe benefit options under Rev. Proc. 2020-32, Rev. Proc. 2020-45, and Notice 2020-84, which announce the 2021 limits for certain benefit programs, including dollar limits for contributions to health savings plans (“HSAs”) under high deductible health plans (“HDHPs”), flexible spending accounts (“FSAs”) under Section 125 cafeteria plans, qualified transport fringe benefit programs, Qualified Small Employer Health Reimbursement Accounts (“QSEHRAs”), and the new PCORI fee.

While some of the limits have not changed, there are a few notable increases. A summary of the key limits for employers to note for 2021 are included in the table below:

Benefit Programs and Limits:

Health Savings Accounts (HSAs)
– Maximum HSA contribution:

Self-only: 2020 Limit: $3,550; 2021 Limit: $3,600

Family: 2020 Limit: $7,100; 2021 Limit: $7,200

– HDHP annual deductible minimum:

Self-only: 2020 Limit: $1,400; 2021 Limit: $1,400

Family: 2020 Limit: $2,800; 2021 Limit: $2,800

– Maximum Out-of-pocket:

Self-only: 2020 Limit: $6,900; 2021 Limit: $7,000

Family: 2020 Limit: $13,800; 2021 Limit: $14,000

– Health FSA Maximum Contribution

2020 Limit: $2,750; 2021 Limit: $2,750

– Maximum Carryover of unused amounts

2020 Limit: $550; 2021 Limit: $550

– Qualified Transportation Fringe

Parking (monthly): 2020 Limit: $270; 2021 Limit: $270

Transit passes and Vanpools (monthly): 2020 Limit: $270; 2021 Limit: $270

-Adoption Assistance

Employer Provided Maximum: 2020 Limit: $14,300; 2021 Limit: $14,400

Individual Maximum:  2020 Limit: $14,300; 2021 Limit: $14,400

– Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

Self-Only Maximum: 2020 Limit: $5,250; 2021 Limit: $5,300

Family Maximum:  2020 Limit: $10,600; 2021 Limit: $10,700

– PCORI Fee*

2020 Limit: $2.54; 2021 Limit: $2.66

* For plan years ending on or after October 1, 2020 and before October 1, 2021.

Rev. Proc. 2020-45 provides other limits that may impact benefit offerings, including the 2021 premium tax credits and small business health care tax credit. The revised limits provided in Rev. Proc. 2020-32 and Rev. Proc. 2020-45 took effect as of January 1, 2021.

Also, look to and sign up for our blog Beneficially Yours for further discussion of employee benefits topics and updates at https://www.beneficiallyyours.com/

Joy Sellstrom

§ 1.22  How to SECURE Your Safe Harbor Plan

Seyfarth Synopsis: The IRS issued Notice 2020-86, which provides guidance on the rules that apply to safe harbor plans that were changed by the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”). The guidance covers the increase in automatic contributions permitted under a qualified automatic contribution arrangement (or “QACA”) safe harbor plan, safe harbor notice requirement changes, and issues related to the retroactive adoption of safe harbor status.

The SECURE Act included a number of changes to the rules that apply to safe harbor plans. As described in our prior Legal Update available here, the SECURE Act (1) increased the 10% cap on automatic contributions under a QACA to 15%, (2) eliminated the requirement that a non-elective safe harbor plan notify participants of the plan’s safe harbor status before the beginning of the plan year, and (3) established new rules that permit the adoption of a non-elective safe harbor plan design at any time during a plan year (or even the following plan year) if certain requirements are met.

Notice 2020-86 answers a number of open questions relating to these changes to the safe harbor rules.

• Increase in 10% Cap to 15% for Automatic Contributions. While plan sponsors are not required to increase the cap on automatic deferrals under a QACA from 10% to 15%, some plans incorporate the maximum cap on automatic deferrals by reference to the Code. For those plans, if the plan sponsor does not want the 15% increased cap to apply, the plan must be amended (generally by December 31, 2022). The Notice makes clear that a failure to timely amend in that situation may result in a plan operational error.
• Safe Harbor Notice Requirements. The guidance clarifies that a notice may still be required for certain plans, even if the plan is designed to provide non-elective contributions to satisfy the safe harbor requirements.
  • The safe harbor notice requirement continues to apply to traditional safe harbor plans that provide safe harbor non-elective contributions if the plan also provides non-safe harbor matching contributions that are designed so that they are not required to satisfy the ACP test.
  • The safe harbor notice requirements continues to apply to plans that have an eligible contribution arrangement (or “EACA”) (i.e., those plans that provide for the permissive withdrawal of automatic contributions within 90 days) with a non-elective contribution that satisfies either the traditional or QACA safe harbor requirements.

The Notice also addresses how a plan sponsor would provide notice to preserve the right to reduce or suspend safe harbor non-elective contributions mid-year if a safe harbor notice is no longer required. Generally, under IRS rules, a plan sponsor may reduce or suspend safe harbor contributions mid-year if it includes a statement in the safe harbor notice that the contributions could be suspended midyear. (If this statement is not included in the safe harbor notice, then the plan sponsor must be able to show that it is operating at an economic loss to suspend the contributions.) The guidance states that including this suspension statement in any type of notice is acceptable, and that for the 2021 plan year, a notice with the suspension statement may be provided as late as January 31, 2021 for a calendar year plan.

• Retroactive Safe Harbor Status. The Notice also includes several helpful questions and answers addressing the retroactive adoption of safe harbor non-elective contributions:
  • Plan sponsors may re-adopt a non-elective safe harbor formula for the entirety of the plan year after reducing or suspending non-elective safe harbor contributions mid-year. In this case, the plan is not required to satisfy the ADP or ACP test for the plan year.
  • Safe harbor non-elective contributions must be made by the extended tax return due date in order to be deductible for the prior year. So, even though plan sponsors may now amend a plan after the end of the plan year to provide for 4% non-elective safe harbor contributions, these contributions will not be deductible for such prior plan year if made after the plan sponsor’s tax return due date. (Instead, they would be deductible for the taxable year in which they were contributed to the plan.)

The Notice indicates that the IRS does not intend this guidance to be the final word and that the IRS hopes to issue regulations related to the safe harbor changes found in the SECURE Act. We will be ready if and when those regulations are issued.

Christina Cerasale and Sarah Touzalin

§ 1.23  Fate of EEOC Wellness Regulations Remains Unknown

Seyfarth Synopsis: Unpublished U.S. Equal Employment Opportunity Commission (EEOC) proposed regulations regarding incentives offered under wellness programs are set to be withdrawn and reviewed after the Biden White House issues a regulatory freeze.

On January 7, 2021, the EEOC forwarded to the Office of Federal Register its proposed rules under the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA) related to wellness programs for publication. The proposed regulations had already been cleared for publication by the Office of Management and Budget (“OMB”). The EEOC also published an unofficial version of the regulations on its website at that time. Seyfarth’s Legal Updates on aspects of the proposed rules, including COVID vaccine implications, can be found here and here.

Before the proposed rules actually were published, however, the Biden White House issued a regulatory freeze. Under the regulatory freeze, it appears that these proposed regulations will be withdrawn from the Office of the Federal Register and set aside for review. The review and approval must be completed by a department or agency head appointed or designated by President Biden (or an approved delegate), unless the OMB director allows publication of the proposed regulations due to some sort of emergency exception.

Whether publication of the EEOC proposed rules will continue to be delayed or whether the rules in their current form will be published at all remains unclear. We look forward to further clarity once the Biden administration informs the public of its intentions for wellness programs generally, and of the fate of the proposed regulations. As explained in our Legal Update, the incentive provisions were removed from the regulations, effective January 1, 2019. Until regulations addressing incentives are published in the Federal Register, employers have little guidance as to the extent to which the new EEOC will allow wellness incentives under the ADA.

Christina Cerasale and Joy Sellstrom

§ 1.24  To Vote or Not to Vote? That Is (Still) the Question

Seyfarth Synopsis: In mid-December 2020, after a truncated comment period and without public hearings, the US Department of Labor (DOL) finalized its proposed regulations on a fiduciary’s responsibilities when exercising shareholder rights like proxy voting (summarized here). They were published in the Federal Register on December 16, 2020 (click here) and were designated as effective on January 15, 2021. However, given the new Administration, the future of that final rule is unclear.

As part of the DOL’s one-two punch to plan fiduciaries’ obligations regarding investment selection and management, the agency quickly finalized its proposed regulation on exercising shareholder rights. (See our other blogs here and here regarding the DOL regulations on ESG investing.) The DOL recognizes that the “fiduciary act of managing plan assets includes the management of voting rights (as well as other shareholder rights) appurtenant to shares of stock.” As we noted in our prior post, the DOL’s view on fiduciaries conducting proxy voting ties the obligation to their concern that voting proxies may relate to non-pecuniary interests. In that case, the DOL’s position in the proposed rule was that plan fiduciaries should actually refrain from voting the proxy.

After receiving a great deal of reaction (including written comments and submissions) from a variety of stakeholders, the DOL made significant changes to the proposed rule. Instead of requiring or prohibiting the voting of certain proxies, the DOL has adopted a principles-based approach under which fiduciaries must adopt a process for exercising shareholder rights that emphasizes their existing ERISA duties of prudence, acting solely in the interest of the plan participants and beneficiaries, and acting exclusively for the purpose of providing benefits to such plan participants and beneficiaries and defraying administrative costs.

The DOL also adjusted some of the other language in the proposed rule that was more prescriptive. This includes modifying the requirement to “investigate” facts surrounding an investment decision to one that requires an “evaluation” of the facts. Also, the obligation that fiduciaries require specific documentation of the rationale for proxy voting decisions from an investment manager who was delegated the proxy voting function has been removed in favor of a more general monitoring approach.

The fate of this final rule is unclear under the new Administration. This is in contrast to the final rule addressing investment selection and management, which was specifically identified in President Biden’s Executive Order “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis.” (See our blog here discussing that Executive Order and those DOL regulations.)

So, yet another reason to stay tuned!

Diane Dygert and Linda Haynes

§ 1.25  The Biden Administration Removes Limits on Agency “Guidance” – And Creates A New Agenda Enforcement Tool

Synopsis: On January 20, 2021, the Biden Administration revoked the Trump Administration Executive Order (EO) which had restricted agency Guidance. On January 27, 2021, the Department of Labor (DOL) rescinded the “PRO Good Guidance” rule that it had issued pursuant to the Trump EO – a rule that limited the force of informal guidance in DOL enforcement actions. This rescission may undercut the persuasive effect of an employer interpretation of federal statutes at the agency level, because more Guidance limits the ability for employer interpretations and increases agency enforcement power.

In September of 2020, we published a blog post describing how the Trump Administration reigned in the role of informal federal Department of Labor opinions, generally called “Guidance,” in the agency’s enforcement actions against employers. See our blog post here. The upshot was that there would be less Guidance, and thus more employer freedom to interpret federal statutes.

Now, the Biden Administration has weighed in by rescinding the Trump Administration’s Guidance rule. In a final rule, effective on January 27, 2021, the Department of Labor posits that Trump’s internal rule on guidance “deprives the Department and subordinate agencies of necessary flexibility” and “unduly restricts the Department’s ability to provide timely guidance on which the public can confidently rely.” The Biden Executive Order that led to this agency action, in turn, states that the Administration intends “to use available tools to confront urgent challenges,” including the pandemic, economic recovery, racial justice and climate change. The Order added that the Administration is relying on “robust agency action” to achieve its goals.

You can compare the Trump rule at Fed. Reg. vol. 85, no. 168 (8/28/20) with the Biden rule at Fed. Reg. vol. 86, no. 16 (1/21/21) to drill down on the different treatment of agency Guidance.

We draw these conclusions from the latest Department action on Guidance:

• Employers should expect more Guidance.
• Employers should expect the Department of Labor (and likely other federal agencies) to insist on compliance with each and every issuance of Guidance, thus shrinking the universe of employer statutory interpretations that don’t conflict with Guidance.
• More Guidance may mean more clarity in agency enforcement standards, depending on the drafting quality of the Guidance.
• Whether any particular Guidance is legally binding will still depend on court rulings, as it may be inconsistent with governing statutes or the Constitution .

Please reach out to your Seyfarth attorney if you would like to discuss the impact the Biden Administration rescission may have on your employee benefit plans.

Mark Casciari and Joy Sellstrom

§ 1.26  Missing Participant Guidance Trifecta

On January 12, 2021, the Department of Labor (DOL) issued a 3-part set of missing participant guidance for employer-sponsored retirement plans, addressing a variety of issues:

• Best practices for reducing missing participant populations;
• Explanation of the DOL’s goals and process in missing participant audits under the Terminated Vested Participant Project; and
• Authority for fiduciaries of terminating defined contribution plans to use the PBGC Missing Participant Program.

Uniting participants with their retirement benefits has been a priority for the DOL for a number of years, as well as for plan sponsors and fiduciaries who want to see their employees benefit from their hard earned retirement dollars.  In that regard, while additional guidance is always welcome, as discussed below, several of the DOL’s best practices could be viewed as impractical at best, or at worst, unworkable by plan fiduciaries.

Best Practices for Reducing Missing Retirement Plan Participants

Under ERISA, a plan fiduciary has a legal duty to act prudently and to administer an ERISA-governed retirement plan in accordance with its terms.  The DOL (mostly via plan audits) has long been on a mission to alert and remind plan fiduciaries of their obligations under ERISA to locate and distribute retirement benefits to “missing” participants and beneficiaries.

Missing participants and beneficiaries are commonly identified in connection with:

• becoming entitled to a distribution as the result of a plan termination;
• becoming eligible for a mandatory distribution upon termination of employment under the plan’s small benefit cash out rules;
• reaching their required beginning date for minimum distributions (or earlier required distributions, if applicable);
• becoming entitled to a plan benefit upon someone’s death;
• becoming entitled to a benefit under the terms of a qualified domestic relations order; and
• by not cashing a plan check (or by having undeliverable mail).

Prior to this most recent guidance, the most extensive, albeit informal, guidance issued by the DOL in this area focused on missing participants and beneficiaries under a terminated defined contribution plan.  See DOL Field Assistance Bulletin (FAB) 2014-1.  Not surprisingly, plan fiduciaries (as well as DOL investigators) have applied the principals espoused in FAB 2014-1, by analogy, to active plans.

The DOL’s most recent foray into the issues of missing participants and beneficiaries was published on January 12, 2021, as an informal “best practices” memo (the “Memo”).  In its own words, the Memo “outlines best practices that the fiduciaries of defined benefit and defined contribution plans, such as 401(k) plans, can follow to ensure that plan participants and beneficiaries receive promised benefits when they reach retirement age.”

The Memo begins by listing a number of “red flags” fiduciaries should be aware of that may indicate a systemic issue is either around the corner or exists currently, and in either case, should be addressed promptly.  These red flags include (among others) missing, inaccurate, or incomplete contact information in the plan’s system, and the absence of procedures for handling uncashed checks.

The memo then describes the DOL’s vision of best practices in the form of the following four categories of action items, along with the DOL’s relatively extensive bullet point “recommendations” for satisfying a fiduciary’s duty under each category:

1. Maintaining accurate census information for the plan’s participant population.
2. Implementing effective communication strategies.
3. Conducting missing participant searches.
4. Documenting procedures and actions.

While many of the suggestions are seemingly prudent and sensible, others may not be feasible for some plans or may be cost prohibitive.  Additionally, each plan’s circumstances may differ based on a number of factors such as plan size and type (e.g., defined benefit or defined contribution).  Correctly, the DOL agrees with this sentiment, stating “[n]ot every practice …is necessarily appropriate for every plan.”  We suggest, nonetheless, that all plan fiduciaries review their policies and procedures for locating missing participants, at least to be prepared for questions that may arise if their plan is examined by the DOL.  This latest guidance can be found here: Missing Participants – Best Practices for Pension Plans (dol.gov)

DOL’s Goals and Process in Missing Participant Audits

The second part of the DOL’s January 12, 2021 guidance on missing participants, Compliance Assistance Release 2021-01 (Release), describes the DOL’s approach on auditing defined benefit plans under its Terminated Vested Participants Project (TVPP).  The DOL’s purpose is to unite participants and beneficiaries with their benefits and help them avoid significant and unnecessary RMD-related excise taxes.  The goals of the TVPP are to ensure plans:

• maintain adequate records to identify their participants, the amount they are due under the plan, and when their benefits can start,
• inform participants of their rights and responsibilities (e.g., steps required to avoid required minimum distribution excise taxes), and
• implement appropriate search procedures where participant and beneficiary information is incorrect or incomplete.

To that end, the Release explains how the DOL identifies plans that have difficulty tracking terminated vested participants and timely distributing benefits, red flags that can suggest a problem, and its approach to closing out cases.  In particular, the DOL identified (i) plans that report a large number of terminated vested participants entitled to future benefits, (ii) bankruptcy, and (iii) corporate merger and acquisition activities, as instances where plans could face problems with loss of participant data.

Investigation Process

The DOL generally sends two letters when opening an investigation:  one opening the case and one requesting more targeted information and documentation.  During the investigation, the DOL generally looks for evidence of:

• systemic errors in plan recordkeeping and administration associated with failure of a participant or beneficiary to enter pay status before death or RMD beginning dates,
• inadequate procedures for identifying and locating missing participants and beneficiaries,
• inadequate communications (see Further on Communications, below) with terminated vested participants nearing normal retirement age (and beneficiaries of terminated vested participants) informing them of their right to commence benefits, and
• inadequate procedures for addressing uncashed distribution checks.

Red flags suggesting possible problems include: census data with missing or incomplete participant data, more than a “small” number of terminated vested participants who are eligible to claim benefits but have not done so, continuing to mail to bad addresses without taking steps to find the correct address, failing to use resources like the USPS Address Correction Service and/or the National Change of Address database to find replacement addresses, and not taking advantage of recordkeeper services for finding missing participants.  The DOL also said fiduciaries should monitor the performance of retained third party search firms and ensure they are complying with any contractual commitments regarding missing persons.

Further on Communications

The DOL commented on conditions that can reduce a notice’s effectiveness.  For example, benefit notices that do not clearly explain the participant’s right to pension benefits, e.g., his/her vested status, right to benefits, and/or the consequence of excise taxes, can contribute to a terminated vested participant problem.  Failure to write in “plain English” and sending to populations not fluent in English without providing language assistance, or communicating the availability of assistance, also can make communications less effective than intended.  Participants may have benefits under prior plans or worked for a company under a different name due to mergers or acquisitions, and the DOL is concerned that participants might not recognize the connection to their benefits if a successor plan’s correspondence does not include the name of the prior employer or plan.

Working with the Fiduciary and Closing the Case

The DOL seemed to express a collaborative approach, reiterating its goal of helping the plan find missing participants.  It noted it will give reasonable time to respond to information requests, engage in meaningful discussions with plan fiduciaries, and grant time extensions where appropriate.  Further, the DOL indicated that if the plan provides appropriate remedies for affected individuals and corrects flaws in its recordkeeping, communication, search and other relevant policies, the DOL will generally list those corrective steps without citing the individual plan fiduciaries for specific violations of ERISA when closing out a case.

Temporary Enforcement Policy for Use of PBGC Missing Participant Program by Terminating Defined Contribution Plans

In conjunction with the above guidance, the DOL also issued Field Assistance Bulletin (FAB) 2021-01, which announces a temporary enforcement policy on terminating defined contribution plans’ use of the Pension Benefit Guaranty Corporation’s (PBGC) Missing Participants Program (Program).  The policy applies to both plan fiduciaries of terminating defined contribution plans and qualified termination administrators (QTA) of abandoned individual account plans.

As background, the DOL currently provides a fiduciary safe harbor under DOL Reg. § 2550.404a-3 for use in making distributions from terminated defined contribution plans and abandoned plans to missing and nonresponsive participants and beneficiaries.  The safe harbor generally requires that distributions be rolled over to an IRA, although in limited circumstances fiduciaries may make distributions to certain bank accounts or to a state unclaimed property fund. If the conditions of the safe harbor are met, the plan fiduciary or QTA will be deemed to have satisfied ERISA’s requirements with respect to the distribution of benefits.

In December 2017, the PBGC issued final regulations expanding the Program to defined contribution plans that are terminated on or after January 1, 2018.  Under the expanded Program, terminating defined contribution plans may either (i) transfer missing or nonresponsive participant benefits to the PBGC, in which case the PBGC will make payments to missing participants once they are located; or (ii) submit missing or nonresponsive participant information to the PBGC (but not transfer the account), in which case the PBGC will communicate such information to the participants once they are located.  The Program requires fiduciaries to conduct a diligent search to locate missing participants before reporting them as missing.

Under FAB 2021-01, the DOL announced that, pending further guidance, it will not pursue fiduciary breach claims against plan fiduciaries of terminating defined contribution plans or QTAs of abandoned plans in connection with the transfer of a missing or non-responsive participant’s or beneficiary’s account balance to the Program rather than using one of the available options under the DOL’s fiduciary safe harbor regulation described above (i.e., an IRA).  To qualify for this relief, the plan fiduciary or QTA must comply with the guidance in FAB 2021-01 and have acted in accordance with a good faith, reasonable interpretation of ERISA.  The DOL also indicated the fee charged by the PBGC for certain accounts transferred to the Program could be paid for from the transferred account, as long as the plan’s terms do not prohibit such payment.

The DOL noted, however, that the temporary enforcement policy does not preclude the DOL from pursuing ERISA violations for a failure to diligently search for participants and beneficiaries prior to transferring their accounts to the PBGC or for a failure to maintain plan and employer records.  Additionally, the temporary enforcement policy does not legally protect plan fiduciaries or QTAs from civil claims made by plan participants or their beneficiaries.  Nonetheless, the DOL’s announcement is welcome news for fiduciaries and QTAs who opt to take advantage of the Program.  A copy of FAB 2021-01 is available here.

The recent DOL guidance provides a lot of information for plan sponsors and fiduciaries to consider.  Please contact your Seyfarth Employee Benefits Attorney with any questions you may have about this guidance and its application to your plan.

Kelly Joan Pointer, Benjamin F. Spater and Kaley M. Ventura

§ 1.27  How to Sign Your Life Away… Electronically

Seyfarth Synopsis: Electronic signatures may be the wave of the future for the IRS, and are more necessary now as a result of the remote work environment. The IRS issued some recent guidance, allowing two authorization forms (Forms 2848 and 8821) to be signed electronically. While this guidance is a welcome step in the direction of electronic signature acceptance, the guidance is very limited, and its use may not be as practical as we would have hoped. Many IRS filings related to benefit plans, e.g., determination letter filings and Voluntary Compliance Program filings, require signatures on forms not covered by the guidance. Thus, benefit plan sponsor and administrators will need more comprehensive relief from the IRS before being able to use electronic signatures broadly for common IRS filings for benefit plans.

In the remote working environment of the COVID-19 pandemic, coordinating “wet” ink signatures on IRS forms has presented challenges for clients and their tax professionals alike. In the benefit plan space, the Form 2848, Power of Attorney and Declaration of Representative, is required to authorize the IRS to discuss matters such as a determination letter application or Voluntary Compliance Program submission with the plan sponsor’s representative, including their outside legal counsel. The Form 2848 must be signed by both the plan sponsor and its outside representative – a feat that has become harder to coordinate as many of us continue to work remotely from home, and some have questioned whether the IRS would accept an electronic signature on this Form.

New guidance provides clarity on the circumstances in which the IRS will accept electronic signatures on a Form 2848. In News Release IR-2021-20, the IRS announced an online tool for submitting the authorization forms without a handwritten signature. The IRS guidance notes that using the online tool with a Secure Access account is the only method to submit electronic signatures on the Form 2848; a Form 2848 that is mailed or faxed to the IRS still requires “wet” signatures.

That said, plan sponsors, plan administrators, and their representatives will still need to coordinate handwritten signatures on other documents for matters before the IRS. For example, the Form 5300, Application for Determination for Employee Benefit Plan, in the case of a determination letter application, and the penalty of perjury statement, in the case of a VCP, are not covered by the new guidance and still appear to require handwritten signatures.

Additionally, use of the online tool presents its own challenges for plan sponsors and their attorneys alike. To take advantage of the tool, the plan sponsor’s attorney must first create a Secure Access account and provide the IRS with certain personal information (such as the attorney’s individual tax filing status and a financial account number linked to their name). Similarly, the attorney may be required by the IRS to verify personal identification (for example, by requesting a driver’s license) of the individual signing for the plan sponsor before submitting the Form 2848.

Observation: The Secure Access account can be used by individual taxpayers for their own personal income tax purposes, which would explain the requirements to provide a tax filing status and financial account information. These requirements make less sense when the Secure Access account is being used by an attorney to upload forms for a client.

Irine Sorser and Christina Cerasale

§ 1.28  Extended Loan Rollover Timeline: More Flexibility for Participants and More Complexity for Plan Administrators

Seyfarth Synopsis: The IRS released final regulations, under T.D. 9937, that generally adopt the proposed rules relating to qualified plan loan offsets issued last year, with one modification relating to the applicability date. Plan administrators should be prepared to evaluate whether their systems can properly track qualified plan loan offsets, which must now be specifically identified in any Form 1099-R that is distributed to an employee.

Background

Many defined contribution plans require an outstanding loan balance to be immediately repaid by a participant in certain events, such as termination of the plan, a request for a distribution, or a participant’s termination of employment. A failure to timely repay the balance results in a loan default. Once in default following one of these events, a participant’s account balance is offset (or reduced) by the amount of his or her outstanding loan balance in satisfaction of that remaining loan balance. This offset amount is treated as an actual distribution from the plan — rather than a “deemed distribution” — and is subject to traditional distribution taxation rules.

Participants can avoid these taxation rules by rolling over the offset amount to an eligible retirement plan, which includes another employer-sponsored defined contribution plan or an IRA, when permissible. Historically, the standard 60-day rollover period applied to a plan loan offset. However, effective January 1, 2018, the tax code was amended by the Tax Cuts and Jobs Act of 2017 to provide an extended rollover period for a type of plan loan offset called a “qualified plan loan offset” or “QPLO.” A QPLO is a plan loan offset that occurs under a defined contribution plan solely due to either:

• Termination of a qualified defined contribution plan, or
• Termination of employment, coupled with an offset that occurs within 12 months after the employee’s termination date.

Under the extended rollover period, a participant may rollover all or a portion of the QPLO any time up until the participant’s federal income tax filing due date, including extensions, for the year that the QPLO was distributed. A plan loan offset amount that is not a QPLO, but is an otherwise eligible rollover distribution, may still be rolled over by a participant or surviving spouse; however, the standard 60-day rollover period applies.

For example, assume a participant terminates employment with an outstanding loan balance of $10,000, and a 401(k) account balance of $50,000. If the participant elects to take a distribution of her account balance immediately following her termination date, she would receive a cash payment of her net account balance, or $40,000, which is her account balance, reduced by the outstanding loan balance. Although the plan issued a check for only $40,000, the plan will report an actual distribution of $50,000 on the participant’s Form 1099-R. In order to avoid having to pay taxes and potential early withdrawal penalties, the participant may roll over the $40,000 amount within 60 days of its distribution under the general rollover rules. Additionally, in order to avoid taxation of and potential penalties on the $10,000 qualified plan loan offset, the participant would be responsible for funding and rolling over that additional $10,000 amount before her tax filing due date, with extensions, for the year of the distribution.

The IRS issued proposed regulations in August 2020 that addressed the extended rollover period associated with QPLOs and solicited comments.

The Final Regulations

The final regulations mostly mirror the proposed, with a key modification related to their applicability date. Specifically, the final regulations apply to distributions made on or after January 1, 2021. The IRS indicated that this revision gives plan sponsors time to review plan administration and update their systems to track plan loan offsets, termination dates, and the participant’s one-year anniversary date of termination. This is especially important because QPLO distributions must be separately identified on the Form 1099-R beginning with the 2021 tax year (i.e., Forms 1099-R filed in January 2022).

For reporting purposes, Forms 1099-R are required to distinguish between the QPLOs and other plan loan offsets. A plan loan offset other than a QPLO is reported on Box 7 of Form 1099-R as an actual distribution, rather than a deemed distribution. If the plan loan offset is a QPLO, however, then Box 7 is marked with Code “M.”

Considerations for Plan Administrators

• Communicate the appropriate rollover deadline to participants depending on the type of offset (i.e., a standard plan loan offset subject to the 60-day rollover requirement versus a QPLO subject to the extended rollover deadline).
• Confirm whether current administration can identify a standard plan loan offset versus a QPLO to ensure that Box 7 of the Form 1099-R is appropriately coded.
• Update plan loan procedures and other materials, summary plan descriptions, and relevant plan documentation as may be necessary.

You can read the full regulations here, which were published in the Federal Register on January 6, 2021.

Jon Karelitz and Lauren Salas

§ 1.29  Waistbands Aren’t the Only Thing Requiring Flexibility During the Pandemic

The Consolidated Appropriations Act of 2021 (“CAA”) offers significant relief for employers sponsoring flexible spending accounts. After much clamoring from the employer community, the IRS finally issued clarifying guidance in the form of Notice 2021-15 (the “Notice”). Check out our full Legal Update for details.

Benjamin J. Conley, Jennifer Kraft, Joy Sellstrom and Diane Dygert

§ 1.30  One-Year Expiration of Outbreak Period: Pandemic Rages On, But It’s (Probably) Time to Pay Your COBRA Premiums

Seyfarth Synopsis: As you’ll recall, last Spring, the DOL and IRS issued guidelines providing relief from certain deadlines for employee benefit plans, retroactive to March 1, 2020 (i.e., the beginning of the COVID-19 national emergency declared by the President). The relief was issued pursuant to authority granted to the agencies under ERISA Section 518 and Code Section 7508(A) and extended through the end of the “Outbreak Period.” Click here, here and here to review our prior articles on the Outbreak Period. We wanted to provide a quick update on what we’re hearing out of Washington D.C. relating to the timing and process for the expiration of the “Outbreak Period.”

In general, the extended deadline relief applied to the following deadlines applicable to participants and plan administrators:

• The COBRA election deadline;
• The COBRA premium payment deadline;
• The HIPAA special enrollment deadline;
• The deadline for filing a claim or appeal for benefits or a request for an external review of an adverse benefits determination; and
• The deadline for plan administrators to provide the COBRA election notice.

Under the guidance, any such deadline occurring on or after March 1, 2020, would be tolled for the entirety of the national emergency, plus 60 days (the “Outbreak Period”). That said, when the guidance was published it was widely believed that the national emergency period would be lifted at some point in 2020. In fact, the authority granted to the DOL and IRS under ERISA Section 518 and Code Section 7508(A) only allows such relief to extend for a one-year period.

Given this framework, our understanding is that the relief afforded under these rules will expire effective February 28, 2021 – and this expiration would be a “hard stop,” meaning there will not be a 60 day “wind down” period as anticipated in the original guidance. (But keep in mind that the deadlines were simply tolled during this period, so any remaining time a participant or plan administrator had to complete the action when the suspension took effect on March 1, 2020, will still be available after February 28, 2021.)

We reached out to various Washington D.C. policy groups to get insight into whether the agencies agree with this interpretation, and whether and to what extent they believe they have the authority to further extend the Outbreak Period, absent Congressional action granting them such authority. Here are a few key takeaways from that discussion:

• Both agencies are aware of the issue and are considering whether to issue clarifying guidance.
  • The DOL seems more open to seeking avenues to further extend the Outbreak Period. The ideas they are contemplating include treating this as an “evergreen period,” with a new one year period commencing after the conclusion of the prior one year period, or perhaps even applying the one-year window on an individual-by-individual basis (which would be an administrative mess).
  • The IRS is less keen on issuing any sort of extension. They are sensitive to the fact that the IRS more broadly relies on the authority under Code Section 7508(A) to extend a number of other non-benefits-related deadlines. So, they are concerned about the precedent this might set if they extend further in this context.
• Regardless of the above, both agencies seemed to tacitly confirm that, absent any further action, February 28, 2021 will be the end date for the deadline relief.

Looming in the background of all of this is the proposed COVID relief bill which would include a prospective COBRA subsidy of 85% of the cost of coverage, including the right for persons to elect COBRA prospectively to run for the remainder of their COBRA window, even if the election period has expired. So, seemingly the urgent need for an extension of the Outbreak Period is lessened (assuming the COBRA subsidy makes it into the final bill).

Given the balance of likelihoods, employers should consider communicating this upcoming expiration of the Outbreak Period (e.g., through a Summary of Material Modification or other participant communication), at the very least to COBRA participants but potentially to the broader population given the implications for HIPAA special enrollments and claim filing deadlines. (That is, unless the employer had previously communicated a February 28, 2021 end date.) It will also be important to coordinate with COBRA and claims administration vendors to ensure there is alignment/uniformity in approach.

In any case, we’re monitoring and will keep you posted on developments.

Benjamin J. Conley and Kaley Ventura

§ 1.31  Waistbands Aren’t the Only Thing Requiring Flexibility During the Pandemic: IRS Clarifies Guidance on Latest FSA Provisions and Offers Additional Relief

Seyfarth Synopsis:  The Consolidated Appropriations Act of 2021 (“CAA”) offers significant relief for employers sponsoring flexible spending accounts (for a more detailed description of those changes, check out our alert).  After much clamoring from the employer community, the IRS finally issued clarifying guidance in the form of Notice 2021-15 (the “Notice”).  Notably, the guidance included new, additional relief that extends certain flexibility from earlier notices (Notices 2020-29 and 2020-33) into the 2021 calendar year.

Clarifying Guidance

Full Carryover/Grace Period Permitted for HCFSA or DCFSA for 2020 and 2021 Plan Years

Typically, carryovers of unused balances were not permitted for dependent care FSAs (DCFSAs) at all, and health care FSA (HCFSA) carryovers were limited to $550 (as adjusted for inflation in accordance with IRS Notice 2020-33). Employers sponsoring an HCFSA or DCFSA could implement a grace period, not to exceed 2.5 months after the close of the plan year, during which participants could continue to incur expenses to spend down their remaining FSA balances.

The CAA permits a full carryover of any unused balance under either an HCFSA or DCFSA for plan years ending in 2020 and 2021.  In the alternative, it allows employers to offer a grace period of up to 12 months following the close of the 2020 and/or 2021 plan years.

The Notice includes the following clarifications to these provisions:

• The carryover or grace period can apply to an HCFSA, a DCFSA or a limited purpose HCFSA (i.e., an HSA-compatible FSA that can be used for dental or vision expenses and/or post-deductible medical expenses).
• The provision does not permit cross-pollination of HCFSA and DCFSA balances. Remaining health care dollars can only be use for the next year’s HCFSA and remaining dependent care dollars can only be used for the next year’s DCFSA.
• The carryover option is available for plans that already had a carryover, plans that previously had a grace period, and plans that had neither a grace period nor a carryover. The same flexibility applies for implementing a grace period.
• If a plan had an extended grace period for the 2019 plan year (pursuant to the relief provided in IRS Notice 2020-29), then any amounts remaining as of the end of that grace period as of December 31, 2020 (or, such earlier date within the 2020 calendar year, as elected) would be eligible for carryover into 2021. On the other hand, 2019 balances remaining solely because of the DOL’s pandemic relief extending claims deadlines during the “Outbreak Period” would not be eligible for carryover.
• As is normally the case for carryovers, an employer may require that employees make a minimum deferral election to access prior year funds available for carryover. To the extent the employer requires such a minimum, if an employee initially declined to enroll but later elects to enroll (either due to a mid-year election change event or because the employer has offered election change flexibility), the employer may permit the employee to access such carryover amounts and use those amounts for expenses incurred between January 1, 2021 and the date of the employee’s mid-year election to participate.
• Employers can limit the carryover or grace period to an amount less than the full balance, and may limit the carryover or grace period to a window less than the full plan year.
• For participants who may be switching from a non-HDHP with a general purpose HCFSA to an HDHP, the carryover or grace period would generally impact HSA eligibility. To mitigate this impact, employers may either:
  • allow participants to opt-out of the carryover or grace period;
  • allow participants to elect to convert the carryover or grace period balance to a limited purpose HCFSA; or
  • automatically convert the carryover or grace period balance to a limited purpose HCFSA.

This is notable in that existing IRS guidance did not seem to allow for such a participant-by-participant grace period opt-out/conversion feature (it was only expressly allowed for carryovers).

• Amounts available during the extended grace period or carryover are disregarded for nondiscrimination testing.
• Employers can adopt a carryover for the HCFSA and a grace period for the DCFSA (or vice versa).
• Any amounts carried over under the CAA (pursuant to a carryover or grace period) are disregarded for purposes of DCFSA W-2 reporting.
• While balances available at the end of a grace period are typically forfeited, the Notice clarifies that the forfeiture requirement does not apply here because the full-year grace period would extend through the next plan year rather than ending at the end of the plan year. As such, if a plan adopts a grace period (rather than a carryover), 2020 balances can be available through the 2021 and 2022 plan years.
  • This means the main practical difference between adopting a grace period or a carryover under the CAA relief is the availability of a spend down beyond the year of termination for a terminated employee. As described in the next section, this continued participation is only available under a plan with a grace period, not a carryover. Given this subtle difference, the IRS would require that an employer specify whether it has adopted a grace period or a carryover in its plan amendment.

Continuation of Participation in HCFSA by Terminated Participants

Typically, employers could permit former DCFSA participants to continue to spend down balances on post-termination qualifying expenses for the remainder of the year, but HCFSA participants could only continue participation post-termination if they were eligible for and elected COBRA.

The CAA permits employers to allow former HCFSA participants who terminate during 2020 or 2021 to continue participating post-termination, through the end of the plan year in which they terminated (plus any grace period).

The Notice includes the following clarifications to this provision:

• Employers may limit the length of the post-termination participation period, if desired.
• Employers may limit the post-termination balance to the participant’s year-to-date contributions at the time of termination (rather than the full year election amount, as would typically be required under the uniform availability rules that apply to HCFSAs).
• This provision may only extend coverage beyond the end of the plan year in which the termination occurred if the plan has a grace period. It is not available for carryover balances into the plan year following termination.
• Notably, this provision does not eliminate the requirement to send a COBRA notice where applicable.

Special Relief under DCFSA For Aged-Out Dependents

Typically, DCFSAs can reimburse expenses incurred for qualifying child care for children up to age 13.

The CAA allows plans to temporarily raise the eligible age limit to 14, but only for amounts contributed during the plan year with an enrollment period ending on or before January 31, 2020 (for calendar year plans, the 2020 plan year).

The Notice includes the following clarifications to this provision:

• Employees can seek reimbursement for expenses incurred in the 2020 or in the 2021 plan year for aged out dependents (those between 13 and 14), if the employer adopts a carryover or grace period provision carrying forward unused 2020 DCFSA election amounts.

Relaxed Election Change Guidelines for FSAs

Typically, FSA elections are irrevocable during the plan year, unless the employee experiences a mid-year status change event and timely notifies the plan administrator of the event.

The CAA permits employers to allow mid-year election changes for FSAs without regard to whether such employee incurred a qualifying life event, for plan years ending in 2021.

The Notice includes the following clarifications to this provision:

• The CAA permits employers to allow an employee who previously declined to enroll in the HCFSA or DCFSA to make a new election to enroll. (Some had speculated this provision only allowed election changes for persons who had an existing election in place.)
• Employers may limit the time period for making such an election (e.g., an employer could establish a two week window in March to permit election changes).
• If an employee revokes an election mid-year, the employer can decide whether to continue to allow the employee to spend down accumulated amounts on future expenses or to limit the employee to reimbursement of expenses incurred prior to the revocation.
• While FSA election changes may only be prospective, the IRS would permit employers to allow employees to use such prospectively elected FSA deferrals for expenses incurred after January 1, 2021, but before the date of such election change.
• If an employer elects to limit reimbursements from a general purpose HCFSA following revocation to expenses incurred prior to revocation, then the employee will not be treated as being enrolled in disqualifying coverage for HSA purposes starting with the month following such revocation.

New Guidance

Extension of Relaxed Election Change Rules to non-FSA Elections

While the CAA only relaxes election change guidelines for FSAs, the Notice extends such relief to all Section 125 elections, subject to similar parameters as outlined in IRS Notice 2020-29 (more on those limits, here).

The Notice provides employers with flexibility in choosing to implement (and/or limiting implementation of) this CAA provision and lists various types of “guardrails” an employer might put in place, including limiting elections to increases/enrollment, limiting the timeframe for elections, and limiting the number of election changes an employee could make during the plan year.

Amendment Relief for Pre-tax OTC/Menstrual Product Reimbursements

As described in greater detail here, the CARES Act permits plans to expand reimbursement under certain pre-tax vehicles (HCFSAs, HSA, MSAs, HRAs) to include over-the-counter drugs and menstrual products.  The provision was effective retroactive to January 1, 2020, but unlike with other laws impacting Section 125 plans, the CARES Act included no relief from the general rule that amendments may only be made prospectively.

The Notice solves this dilemma by permitting employers to amend their Section 125 plan to expand permitted reimbursements at any time, with a retroactive effect to January 1, 2020. 

We will continue to monitor and alert you of any new or additional regulatory developments clarifying provisions of the CAA.  In the interim, please contact the authors of this Alert or the benefits lawyer you work with for additional information.

Benjamin J. Conley, Jennifer Kraft, Joy Sellstrom, and Diane Dygert

§ 1.32  DOL Issues Clarification of Outbreak Period — Sort of

At the 11th hour, on February 26, 2021, the Department of Labor (DOL) issued EBSA Disaster Relief Notice 2021-01 (the “Notice”) to provide guidance on the duration of the COVID-related relief previously provided by the DOL in Notice 2020-01 and by the DOL and IRS in a separate joint notice (the 2020 Notices).  Under the 2020 Notices, various timeframes under ERISA and the Internal Revenue Code were to be disregarded, including for purposes of filing claims for benefits, electing and paying for COBRA continuation coverage, and requesting special enrollments. See our previous alert here.

The relief provided in the 2020 Notices began March 1, 2020 and continued until 60 days after the announced end of the COVID National Emergency or such other date announced by the relevant agencies (the “Outbreak Period”).  However, by statute, the disregarded period for individual actions was limited to one year from the date the individual action would otherwise have been required or permitted.  One year from March 1, 2020 is February 28, 2021. Employers, vendors and other stakeholders have been unclear as to how to apply the limit as the February 28th date approached, as we commented on in our recent blog post here.

End of Suspension Period

Notice 2021-01 states that the timeframes that are subject to the relief under the 2020 Notices will have the applicable periods disregarded until the earlier of:

• One year from the date the individual or plan was first eligible for relief; or
• 60 days after the announced end of the COVID National Emergency.*

In other words, the relief will be applied on an individual-by-individual basis, which is likely to present a host of administrative difficulties for employers.  An example in the 2020 Notices provides that if a qualified beneficiary would have been required to make a COBRA election by March 1, 2021, the election requirement is delayed until the earlier of one year from that date (i.e., March 1, 2022) or the end of the Outbreak Period.

Individual Accommodation and Notice

In addition to providing that the relief is to be applied on an individual-by-individual basis, the Notice implies that after the relief is no longer available due to the statutory one-year limit, plan administrators should individually notify participants of the end of a relief period and ensure that participants who are losing coverage under an employer-provided plan are aware of other coverage options such as the Health Insurance Marketplace. The Notice states that the guiding principle for administering employee benefit plans is to act reasonably, prudently, and in the interest of the workers and families who rely on their health, retirement and other employee benefit plans for their physical and economic well-being. Accordingly, plan fiduciaries should make reasonable accommodations to prevent the loss or undue delay in payment of benefits in such cases and should take steps to minimize the possibility of individuals losing benefits because of a failure to comply with pre-established time frames.

“For example, where a plan administrator or plan fiduciary knows, or should reasonably know, that the end of the relief period for an individual action is exposing a participant or beneficiary to a risk of losing protections, benefits, or rights under the plan, the administrator or fiduciary should consider affirmatively sending a notice regarding the end of the relief period. Moreover, plan disclosures issued prior to or during the pandemic may need to be re-issued or amended if such disclosures failed to provide accurate information regarding the time in which participants of beneficiaries were required to take action….”

Given the DOL’s statements, plan administrators should consider communicating the relief provided by this Notice to participants and beneficiaries. In addition, employers should ensure that their vendors will apply the time frames on an individual-by-individual basis.

Please contact the attorney at Seyfarth Shaw LLP with whom you usually work if you would like assistance in applying the relief or preparing a Summary of Material Modification (SMM) or other communication.

*President Biden announced in a letter to Congress on February 24, 2021 that the national emergency declared in Proclamation 9994 will continue in effect beyond March 1, 2021.

Joy Sellstrom, Danita N. Merlau, Kaley M. Ventura and Diane V. Dygert

§ 1.33  Parliamentarian to Decide Fate of Multiemployer Pension Reform in the COVID Relief Act

Seyfarth Synopsis:  If the Senate Parliamentarian blesses it, the $1.9 trillion American Rescue Plan (a.k.a. the latest COVID-19 relief bill) may include multiemployer pension relief that would provide underfunded multiemployer pension plans with sufficient monies from the Treasury Department to pay for all accrued benefits owed to retirees, without reduction, through the plan year ending in 2051.  Notably, any multiemployer pensions plans eligible for this relief would not have to repay those monies.

Embedded in the $1.9 trillion “American Rescue Plan” is yet another attempt at multiemployer pension plan reform, entitled the “Butch Lewis Emergency Pension Plan Relief Act of 2021” (“Butch Lewis”).  The Senate Parliamentarian is to decide whether Butch Lewis has the necessary budget impact to remain part of what is to be a budget reconciliation bill that will need only majority approval in the Senate.  That decision should come very soon.

Butch Lewis is a continuation of various prior legislative efforts aimed at addressing the multiemployer pension plan crisis, including earlier versions of the Butch Lewis Act of 2019, the Emergency Pension Plan Relief Act of 2020, and other pending pension reform legislation.  Gone are attempts to share any economic pain among the stakeholders, or to provide any mechanism for the repayment of financial assistance given to underfunded multiemployer pension plans.  Instead, if it remains in the American Rescue Plan, Butch Lewis as drafted will make any underfunded multiemployer plan eligible for “special financial assistance” that is not subject to any financial repayment obligations, provided it meets one of the following criteria:

1. The multiemployer pension plan is in critical and declining status in any plan year beginning in 2020 through 2022;
2. The multiemployer pension plan suspended benefits in accordance with the process set forth in the Multiemployer Pension Reform Act of 2014 (“MPRA”);
3. The multiemployer pension plan is certified by the plan actuary to be in critical status in any plan year beginning in 2020 through 2022, has a “modified funded percentage” (defined as the percentage equal to a fraction, the numerator of which is current value of plan assets and the denominator of which is current liabilities) of less than 40%, and has a ratio of active to inactive participants which is less than 2 to 3; or
4. The multiemployer pension plan became “insolvent” after December 16, 2014, as defined under Internal Revenue Code Section 418E, and has remained so insolvent and has not been terminated as of the date of enactment of Butch Lewis.

Multiemployer pension plans seeking special financial assistance must apply no later than December 31, 2025, with revised applications submitted no later than December 31, 2026.  Butch Lewis allows the PBGC to limit applications during the first 2 years following enactment to certain plans, such as those that are insolvent or are likely to be insolvent within 5 years.

The amount of financial assistance provided to eligible multiemployer pension plans is equal to the amount required to pay all accrued benefits, without reduction, due from the date of payment of the special financial assistance through the last day of the plan year ending in 2051.  In short,  eligible multiemployer pension plans should have sufficient funds to pay benefits for the next 30 years, provided investment performance over that period is line with projected investment returns and other actuarial assumptions.

Butch Lewis does have provisions to attempt to limit plans from mismanaging the monies they receive.  The special financial assistance and any earnings on such assistance must be segregated from other plan assets, and can only be invested in investment-grade bonds or other investments as permitted by the PBGC.  The PBGC also is authorized to impose by regulation conditions on plans receiving special financial assistance relating to increases in future accrual rates and any retroactive benefit improvements; allocation of plan assets; reductions in employer contribution rates; diversion of contributions to, and allocation of expenses to, other benefit plans; and withdrawal liability.

Any multiemployer pension plan that receives special financial assistance shall be deemed to be in critical status until the last plan year ending in 2051, and it also must reinstate any previously suspended benefits under the MPRA, and provide payments equal to the amount of benefits previously suspended (either as a lump sum or in equal monthly installments).  Multiemployer pension plan accepting special financial assistance under Butch Lewis will not be eligible to apply for a new suspension of benefits under the MPRA.

The funds used to pay for the special financial assistance would come directly from the Treasury Department.  The payment to the multiemployer pension plan would be a single, lump-sum payment. There is currently no provision for a tax on participating employers, or any reduction in participating employee benefits.  The proposed law does provide, however, for an increase in premium rates for multiemployer plans from the currently indexed annual per participant rate (which is $31 per participant for plan years beginning in 2021) to $52 per participant for plan years beginning after December 31, 2030, with indexing for inflation tied to the Social Security Act’s national wage index.

Any participating employer that withdraws within 15 calendar years from the effective date of when a plan receives special financial assistance will not see any reduction in its withdrawal liability assessment due to the special financial assistance.  Withdrawal liability will be calculated without taking into account special financial assistance received until the plan year beginning 15 calendar years after the effective date of the special financial assistance.  As currently drafted, Butch Lewis would not otherwise change how withdrawal liability is calculated, including application of the withdrawal liability payment schedule, the 20-year cap on payments, or the mass withdrawal liability rules.

In short, Butch Lewis as currently drafted basically would result in the federal government picking up the tab for certain seriously underfunded multiemployer pension plans for the next 30 years, without imposing any costs directly on such plans or their participating employers, unions, participants or retirees.  As such, it could be a huge relief for such underfunded plans and their participating employers and participants if Butch Lewis is passed.  Stay tuned.

Ronald Kramer, Seong Kim, and James Hlawek

§ 1.34  Pension and Executive Compensation Provisions in the American Rescue Plan Act

Seyfarth Synopsis: On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 (“ARPA”), the $1.9 trillion COVID-19 relief bill.  ARPA includes various forms of multiemployer and single employer pension plan relief, as well as certain executive compensation changes under Section 162(m) of the Internal Revenue Code (“Code”), which are discussed further below. Please see our companion Client Alert on the other employee benefit items of interest in ARPA here.

Multiemployer Pension Plan Relief

ARPA retains the key provisions of the Butch Lewis Emergency Pension Relief Act of 2021 (the “Butch Lewis Act of 2021”), providing relief to financially troubled multiemployer pension plans. The Butch Lewis Act of 2021 was a continuation of multiple prior legislative efforts aimed at addressing the multiemployer pension plan crisis, including its earlier iterations (the Butch Lewis Act of 2017, the Butch Lewis Act of 2019), the Emergency Pension Plan Relief Act of 2020, the Chris Allen Multiemployer Pension Recapitalization and Reform Act, and other legislative proposals. Most notably, ARPA includes the provision of the Butch Lewis Act of 2021 for direct financial assistance without a repayment obligation. ARPA also gives multiemployer plans the opportunity to extend zone status, extend funding improvement and rehabilitation plans, and provides amortization relief .

1. Special Financial Assistance

ARPA creates a “special financial assistance fund” under the Treasury Department from which the Pension Benefit Guaranty Corporation (“PBGC”) will be able to make grants to financially troubled multiemployer pension plans.  As noted above, any multiemployer pension plan receiving relief would not have to repay those funds.  To be eligible for financial relief, a multiemployer pension plan would need to satisfy one of the following criteria:

1. The multiemployer pension plan is in critical and declining status in any plan year beginning in 2020 through 2022;
2. The multiemployer pension plan suspended benefits in accordance with the process set forth in the Multiemployer Pension Reform Act of 2014 (“MPRA”);
3. The multiemployer pension plan is certified by the plan actuary to be in critical status in any plan year beginning in 2020 through 2022, has a “modified funded percentage” (defined as the percentage equal to a fraction, the numerator of which is current value of plan assets and the denominator of which is current liabilities) of less than 40%, and has a ratio of active to inactive participants which is less than 2 to 3; or
4. The multiemployer pension plan became “insolvent” after December 16, 2014, as defined under Code Section 418E, and has remained so insolvent and has not been terminated as of the date of enactment of ARPA.

Under this program, multiemployer pension plans seeking special financial assistance must apply no later than December 31, 2025, with revised applications submitted no later than December 31, 2026.  ARPA also allows the PBGC to limit applications during the first two years following enactment to certain plans, such as those that are insolvent or are likely to be insolvent within five years.

The amount of financial assistance provided to eligible multiemployer pension plans is equal to the amount required to pay all benefits, without reduction, due from the date of payment of the special financial assistance through the last day of the plan year ending in 2051.  The payment to the multiemployer pension plan would be a single, lump-sum payment.  Interestingly, there is no noted cap on the amount of financial assistance available per plan or the order which the PBGC will prioritize applications for financial assistance.  The PBGC is expected to issue further guidance shortly.

ARPA places certain restrictions on plans receiving special financial assistance. The money received (and earnings on such amounts) must  be segregated from other plan assets, and may only be invested in investment-grade bonds or other investments as permitted by the PBGC.  The PBGC is authorized to impose additional conditions on plans receiving special financial assistance.  These restrictions relate to (1) increases in future accrual rates and any retroactive benefit improvements; (2) allocation of plan assets; (3) reductions in employer contribution rates; (4) diversion of contributions to, and allocation of expenses to, other benefit plans; and (5) withdrawal liability.

Any multiemployer pension plan that receives special financial assistance will be deemed to be in critical status until the last plan year ending in 2051, and must also reinstate any previously suspended benefits under the MPRA (either as a lump sum or in equal monthly installments paid over five years).  Multiemployer pension plans accepting special financial assistance will not be eligible to apply for a new suspension of benefits under the MPRA.

ARPA also provides for an increase in PBGC premium rates for multiemployer plans from the currently indexed annual per participant rate (which is $31 per participant for plan years beginning in 2021) to $52 per participant for plan years beginning after December 31, 2030, with indexing for inflation tied to the Social Security Act’s national wage index.

Earlier versions of the Butch Lewis Act of 2021 included provisions stating that any participating employer that withdraws within 15 calendar years from the effective date of when a plan receives special financial assistance would not see any reduction in its withdrawal liability assessment due to the special financial assistance.  The relief bill as passed, however, no longer appears to include this carve out for withdrawal liability.  As passed, ARPA would not otherwise change how withdrawal liability is calculated, including application of the withdrawal liability payment schedule, the 20-year cap on payments, or the mass withdrawal liability rules. As noted above, however, ARPA gives the PBGC authority to impose additional conditions with respect to withdrawal liability.

2. Temporary Funding Status Relief.

Under ARPA, eligible multiemployer pension plans may elect to retain for plan year 2020 or 2021 (known as the “designated plan year”) the zone status that applied for the previous year.  In addition, any multiemployer plans that were in endangered or critical status in the year prior to their designated plan year would not be required to update their funding improvement plan, rehabilitation plan, or corresponding schedules, until the year following the designated year.

If a multiemployer plan is not considered to be in endangered or critical status as a result of an election, no further notification is required regarding its endangered or critical status, but such plan must provide notice to its participants, beneficiaries, the PBGC, and the DOL of its election under ARPA.

3. Funding Improvement Plan and Rehabilitation Plan Relief.

ARPA allows multiemployer pension plans that are already in endangered or critical status to extend any applicable funding improvement plan or rehabilitation plan for five years.  This relief applies to plan years beginning on or after December 31, 2019.

4. Amortization Relief.

Similar to relief provided in 2008 and 2009, ARPA allows multiemployer pension plans to amortize investment losses for plan years ending on or after February 29, 2020 over a 30-year period (instead of 15 or less). In addition to investment losses, the extended amortization period also applies to “other losses” related to COVID-19, including experience losses related to reductions in contributions, reductions in employment, and deviations from anticipated retirement rates.  

Single Employer Pension Plan Relief

ARPA has two sections that grant some funding relief to single-employer defined benefit pension plans. First, ARPA extends the amortization period for certain funding shortfalls under the minimum funding requirements and resets certain prior shortfall amounts to zero. Single-employer pension plans are subject to minimum funding requirements under the Code and ERISA. One of the items included in the required minimum funding calculation is a shortfall amortization charge, which allows plans to spread the charge for funding shortfalls over a certain number of years.  Before ARPA’s adoption, the amortization period used to determine this charge was generally 7 years.  ARPA has extended this period to 15 years.  ARPA also sets all prior shortfall amounts to zero for plan years beginning after December 31, 2021 (or an earlier year as elected by the plan sponsor), so any shortfall amount will be recalculated and spread over a longer time period.

Additionally, ARPA extends the funding stabilization changes that were enacted by Congress over the past 10 years, beginning with the MAP-21 changes in 2012, that were scheduled to start phasing out in 2021.  Under these funding stabilization rules, the interest rates used for determining the present value of plan liabilities are subject to maximum and minimum percentages and the difference between the maximum and minimum percentages gradually increases (i.e., phases out) over time.  ARPA shrinks the difference between the two percentages and extends the period before the range begins to phase out, which further stabilizes the funding calculations. ARPA also creates a 5% floor for the 25-year average of the interest rate that is subject to the minimum and maximum percentages. If  an increase to the otherwise effective interest rate occurs due to the floor, this would decrease the present value of plan liabilities. These changes are effective for plan years beginning after December 31, 2019, but a plan sponsor may elect to wait to apply the changes for all purposes, or just for purposes of determining the application of the benefit restrictions under Code Section 436 until the 2021 or 2022 plan year.

162(m) Changes

The earlier version of the bill that passed the House contained a section freezing the cost of living adjustments for Code Section 415 and 401(a)(17) (i.e., the limits on “Annual Additions” and annual “Compensation” that may be considered under a qualified retirement plan) for calendar years beginning after 2030.  However, this section was removed from the bill in the Senate and replaced with an expansion of the $1 million deduction limitation on compensation under Code Section 162(m), described further below.

Code Section 162(m) prohibits publicly held corporations from deducting wages or other compensation in excess of $1 million paid annually to certain covered employees.  Currently, the limitation applies to anyone who has served as CEO, CFO or one of the next three highest compensated officers during any tax year beginning after December 31, 2016.  ARPA expands the application of the $1 million deductibility cap to include the next five highest compensated employees, in addition to the CEO, CFO and the three other highest compensated officers.  Unlike other covered employees, ARPA does not require that these additional five employees be permanently treated as covered employees; rather, this group of five additional covered employees would be re-determined based on compensation levels each year.  This change will take effect for tax years beginning after December 31, 2026.

Seong Kim, Christina M. Cerasale, Kaley M. Ventura and Alan B. Cabral

§ 1.35  Freedom Ain’t Free. COBRA, On the Other Hand…
American Rescue Plan Act Provides 100% COBRA Subsidy

Seyfarth Synopsis:  The latest COVID relief bill, the American Rescue Plan Act (ARPA), provides for a 100% COBRA premium subsidy from April 1, 2021 through September 30, 2021.  ARPA, which was signed into law by President Biden on March 11, 2021, also significantly expands a tax break for dependent care expenses.  This Alert provides an overview of these key welfare benefit provisions and how they may impact plan sponsors.  Please see our companion Client Alert on the other employee benefit items of interest in ARPA here.

COBRA Subsidy

Most notably, ARPA offers a 100% subsidy to COBRA qualifying beneficiaries for the period commencing April 1, 2021 continuing through September 30, 2021 (the “Subsidy Period”).  The subsidy is available to those who become COBRA eligible during the Subsidy Period as well as those currently enrolled and those who are within their COBRA continuation window but who failed to elect or previously dropped coverage.

The COBRA subsidy in many ways mirrors the subsidy offered during the American Recovery and Reinvestment Act of 2009 (ARRA), so while ARPA is light on details, we can look to IRS/DOL guidance under ARRA for clues as to how the agencies may implement these provisions.  Key highlights from the bill include the following:

• Who is Eligible? The COBRA subsidy is available to any person who experienced a qualifying event due to termination of employment or reduction in hours (other than a voluntary separation), who is still within their COBRA continuation window (generally 18 months following loss of coverage), even if that person did not timely elect COBRA. In certain circumstances eligibility can end before the conclusion of the Subsidy Period, as noted below.
• Calculating the Subsidy. During the Subsidy Period, qualifying individuals are treated as having paid the full amount of COBRA premiums owed (typically, 102% of the cost of coverage.
• Extended Election Period. ARPA gives a qualified beneficiary who (a) is eligible for COBRA but did not elect COBRA as of April 1, 2021, or (b) elected and discontinued COBRA coverage before April 1, 2021 another chance to elect COBRA during the period beginning April l, 2021 and ending 60 days after notice of the extended election period is received.
• Employer Notice Obligations.
  • General Notice. With respect to any person who becomes entitled to elect COBRA during the Subsidy Period, employers must include information in the COBRA election notice regarding the availability of the premium subsidy and (if applicable) the option to enroll in different coverage.
  • Notice of Extended Election Period. With respect to the individuals described above who are entitled to an extended election period, by May 31, 2021, employers must notify those persons of the new 60-day opportunity to elect COBRA prospectively for the Subsidy Period. ARPA directs the DOL to put out model notices within 30 days of enactment, but it notes that the obligation can be satisfied by modifying existing notices or adding an insert.
  • Notice of Expiration of Subsidy Period. ARPA also requires notice when premium assistance is expiring, with the notice to be sent no more than 45 days from expiration, and no less than 15 days from expiration. ARPA directs the DOL to issue a model notice within 45 days of passage of the Act.
• New Open-ish Enrollment Window. ARPA allows plans to offer a 90 day “open enrollment” window in which a COBRA-covered (or eligible) individual could (a) enroll in coverage, or (b) switch to another employer benefit plan option other than the one in which the person is currently enrolled (or was enrolled in at the time of the qualifying event). This opportunity would be at the plan administrator’s discretion and must be limited to coverage that is the same cost or less expensive than the option in which the person was enrolled in as of the qualifying event date (and is not an excepted benefit, a qualified small employer health reimbursement arrangement (QSEHRA) or a health flexible spending account).
• Early Loss of Eligibility. Any person who has become eligible for other group health coverage or Medicare will no longer be eligible. ARPA places an obligation on the participant to notify the plan administrator of such loss of eligibility and imposes penalties on the participant for failure to do so.  (Under ARRA, if a person had an election window for other group coverage before the commencement of the subsidy period but that election window had lapsed, the individual would be considered subsidy eligible until the next enrollment window for the other coverage. We would expect the agencies to adopt similar guidelines here.)
• Tax Credit for Employer/Carrier. Employers (for self-funded plans and fully-insured plans subject to federal COBRA), who cover subsidy-eligible persons are reimbursed for the foregone COBRA premium via an advanced tax credit equal to the value of the subsidy. While the tax credit is capped at the total payroll taxes owed by the employer (or insurer), it is a refundable tax credit with respect to any excess.  Additional guidance is expected on how the credit is claimed in other scenarios (e.g., multiemployer plans).
• No Tax on Participant. The COBRA subsidy is not treated as income for purposes of the plan participant.
• Interaction with Outbreak Period. As described in our Alert, the DOL and IRS previously provided relief by suspending the time period for an individual to elect COBRA until 60 days after the end of the National Emergency, or if earlier, one year after the individual became eligible for the relief (the Outbreak Period). It is unclear how this relief will be coordinated with the new enrollment and notice rules in ARPA, and whether a single notice could be used to satisfy notice all COBRA-related notice obligations.

Expanded Dependent Care Exclusion for 2021

Current tax rules permit an exclusion from income for up to $5,000 (married filing jointly) or $2,500 (single or married filing separately) for employer-provided dependent care benefits or pre-tax salary deferrals through a Section 125/129 plan.

ARPA more than doubles this limit for the 2021 tax year, allowing an exclusion of up to $10,500 (married filing jointly) or $5,250 (single or married filing separately).

Employers may amend their Section 125/129 plan at any point before the end of the 2021 plan year to adopt this provision.  Employers who choose to expand such tax deferral limits should be cognizant of the potential impact on nondiscrimination testing, which is notoriously challenging for certain employers to pass even at existing levels.

*          *          *

We will continue to track the regulatory agencies’ implementation of these provisions and keep you apprised of any further developments.  

Benjamin J. Conley and Joy Sellstrom

§ 1.36  Baby Steps: Departments Issue Third Set of COVID FAQs

Seyfarth Synopsis:  On February 26, 2021, the Departments of Labor, Health and Human Services, and the Treasury (collectively, the Departments) jointly issued FAQS ABOUT FAMILIES FIRST CORONAVIRUS RESPONSE ACT AND CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT IMPLEMENTATION PART 44 regarding implementation of the Families First Coronavirus Response Act (FFCRA), the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and other health coverage issues related to COVID-19.  These FAQs continue building the knowledge bank from prior FAQs, such as the ones issued in June 2020 (here).

Are things beginning to settle after the storm?  As plans get accustomed to our “new normal,” including covering COVID testing and vaccinations, the Departments further refine and clarify guidance on what precisely does (and does not) need to be covered, which helps employers in establishing a roadmap to make vaccines widely available to their employees inside the bounds of group health plan requirements.

COVID-19 Testing

Under the FFCRA and CARES Act, group health plans are required to cover diagnostic testing and related items and services without cost-sharing requirements[1] and providers of diagnostic tests for COVID-19 must publish the cash price of a COVID-19 diagnostic test on the provider’s public internet website.  The FAQs address more specific fact patterns related to testing.  For example, the FAQs explain that:

• The Departments previously said a plan cannot limit the number of tests that it will cover for an individual. (See Q/A-6 of FAQ 43). This is true, per these latest FAQs, even if the individual is asymptomatic and has no recent exposure. No criteria or screening can be imposed on the coverage of tests.  And as long as the test is issued by a licensed health care provider, the location of the test does not matter (e.g., drive-through tests are covered).  (See Q/A-3).[2]  In addition, point-of-care (i.e., rapid) tests must be covered on the same basis as other tests. (See Q/A-4).
• The Departments previously distinguished testing for diagnostic purposes from testing for surveillance or employment purposes, stating that testing for diagnostic purposes (sought by the individual) has to be covered, but testing for general public surveillance or employment purposes (such as pursuant to a “return to work” program) does not. One way to distinguish is that a public surveillance or employment purpose is not primarily for individualized diagnosis and treatment. These latest FAQs clarify that plans and issuers can make that distinction, and encourage them to communicate the difference in circumstances where testing is (or is not) covered.  (See Q/A-2.)

COVID-19 Vaccines

Most group health plans are required to cover preventive services without cost-sharing requirements.  This now includes any “qualifying coronavirus preventive service”, which is an item, service, or immunization that is intended to prevent or mitigate COVID-19 and that is, with respect to the individual involved—

• An evidence-based item or service that has in effect a rating of “A” or “B” in the current recommendations of the United States Preventive Services Task Force (USPSTF); or
• A vaccine that has in effect a recommendation from the Advisory Committee on Immunization Practices (ACIP) of the Centers for Disease Control and Prevention (CDC).

Plans must provide coverage without cost-sharing for the cost and administration of all COVID-19 vaccines that receive a recommendation – starting no later than 15 business days after the date the USPSTF or ACIP makes the recommendation regarding a qualifying coronavirus preventive service. (See Q/A-7 & Q/A-8).  As of the date of the FAQs, February 26, 2021, the ACIP had approved Pfizer BioNTech and Moderna COVID-19 vaccines.  Subsequently, on February 28, 2021 the ACIP recommended the Johnson and Johnson COVID-19 vaccine.  Even if a participant is not in a category of individuals prioritized for vaccination at the time he/she receives it, the plan must cover it.  (See Q/A-10).

SBC Notice Requirements

Normally, if a plan makes a material modification in any of the terms of the plan or coverage that would affect the content of the Summary of Benefits and Coverage (SBC), the plan must provide notice of the modification to enrollees not later than 60 days prior to the date on which the modification becomes effective.  Although the Departments will not take enforcement action against a plan that does not provide at least 60 days’ advance notice of a material modification regarding the addition of qualifying coronavirus preventive services, plans should notify participants about coverage of qualifying coronavirus preventive services as soon as reasonably practicable.  (See Q/A-11).

Ways for Employers to Issue COVID Vaccines

Many employers have asked how they can sponsor programs to facilitate vaccination of their employees who are not enrolled in the employer’s major medical plan.  The answer as of now appears to be offering the vaccine through an Employer Assistance Program (EAP) or through an onsite clinic.

Our December 2020 alert discussed employer sponsored vaccine programs (here) and the technical concern that such programs create a group health plan which then, in turn, is subject to the Affordable Care Act, COBRA, and other laws applicable to group health plans.  Certain “excepted benefits,” however, are exempt from many such requirements.  The Departments previously said that COVID testing under an EAP or onsite clinic would ameliorate the concern about operating a group health plan out of compliance with the ACA.  As anticipated in our alert, the Departments confirm in these FAQs that an EAP can offer COVID vaccines (and their administration) and still remain an excepted benefit.[3]  The same goes for on-site medical clinics.  (See Q/A-12 and 13).

Also see our alert about offering incentives for vaccinations, here.

*          *          *

We hope you find this helpful, and welcome you to contact your Seyfarth Employee Benefits lawyer with any questions about these FAQs or any other related guidance.

[1]   See Issue 42 of the joint FAQs, here, and our blog post here.

[2]  State and local public health authorities can limit eligibility for tests if necessary to manage testing supplies, for example, but once the test is issued (at least for individual, diagnostic purposes), it has to be covered.  (See Q/A-1).

[3] The EAP would need to still comply with other applicable requirements, however.

Kelly Joan Pointer and Joy Sellstrom

§ 1.37  Yes, Your Health FSA Can Cover Your Surgical Mask Purchase!

Seyfarth Synopsis: Avid readers of Beneficially Yours may recall that just over a year ago we asked the pressing question of whether surgical mask purchases could be covered under a health care FSA, among other “novel” coronavirus questions — see what we did there? [Click here for our previous post.] The IRS has confirmed our ground-breaking declaration that masks purchased to prevent contracting the coronavirus could be reimbursable under your health care FSA.

The IRS has finally weighed in — Announcement 2021-7 — allowing personal protective equipment (PPE) to be treated as qualifying medical expenses under Internal Revenue Code Section 213. PPE includes such items as masks, hand sanitizers and sanitizing wipes for the primary purpose of preventing the spread of the virus that causes COVID-19. So, if these items are not otherwise covered by insurance or deducted on an individual’s tax return, they can be reimbursed under the individual’s health care flexible spending account (FSA), health care reimbursement account (HRA), health care savings account (HSA), or Archer medical savings account (MSA).

To the extent these health care arrangements have been permitting these reimbursements already, this announcement provides welcome confirmation. Other plan sponsors may want to use this opportunity to review the rules for their FSAs and HRAs to determine if they should be expanded to specifically allow for reimbursements for these PPE purposes. The IRS states that FSAs and HRAs may be amended for any period beginning on or after January 1, 2020, as long as the plan has been operated consistently and the amendment is in place before the end of the calendar year following the end of the year for which the change is effective. For example, by December 31, 2021 for a change effective January 1, 2020. No retroactive amendment may be adopted later than December 31, 2022.

Diane Dygert

§ 1.38  A Ninth Circuit Panel Finds No ERISA Preemption Of Seattle Health Care Ordinance

Seyfarth Synopsis:  A recent panel decision from the Ninth Circuit rejects an ERISA preemption argument that a Seattle ordinance regulating private sector health care should be nullified in order to safeguard the ERISA administrative scheme.

On March 17, 2021, a three judge panel of the Court of Appeals for the Ninth Circuit found that ERISA did not preempt a provision in the Seattle Municipal Code that mandates hotel employers and ancillary hotel businesses to provide money directly to designated employees, or to include those employees in the employer’s health benefits plan.  If the employer provides self-insured health benefits, that plan ordinarily would be protected from state laws intruding on its administration, under the broad ERISA preemption clause that nullifies state and local laws that “relate to” ERISA plans.

This case is captioned — The ERISA Industry Committee v. City of Seattle, No. 20-35472.

The three panel judges reasoned that the Seattle ordinance was not preempted by relying on the  Ninth Circuit decision in Golden Gate Rest. Ass’n v. City & Cnty. of San Francisco, 546 F.3d 639 (2008).  The panel said that the Seattle ordinance does not “relate to” any ERISA plan, in accord with Golden Gate, because the employer may fully discharge its expenditure obligations by making the required level of employee health care expenditures to a third party, here the employees directly.  The decision was unsigned (per curiam).

There are a number of interesting aspects to the Seattle decision.

First, the panel labeled the decision as an unpublished Memorandum.  Circuit Rule 36-3(a) states that unpublished Memoranda are not precedent.  The panel thus limited the impact of its decision, which is unfortunate given a conflict in the circuits (noted below).

Second, the Ninth Circuit panel made no mention of the conflict between Golden Gate and Retail Indus. v. Fielder, 475 F.3d 180 (4th Cir. 2007).  In Fielder, the Court of Appeals for the Fourth Circuit ruled that a Maryland law that required large employers to spend at least 8% of their total payrolls on employee health insurance costs or pay the shortfall to the state was preempted by ERISA.  The court reasoned that the Maryland law was preempted because it “effectively” required employers in Maryland to restructure their ERISA plans, and thus conflicted with ERISA’s goal of permitting uniform nationwide administration of those plans.

Third, the Ninth Circuit panel applied a presumption “against” ERISA preemption.  By contrast, a recent (unanimous) ERISA preemption decision of the Supreme Court, Rutledge v. Pharmaceutical Care Management Assn., discussed in a previous blog post blog post, makes no reference to any such presumption.

Fourth, the Ninth Circuit panel seems to apply field preemption concepts set forth in Justice Thomas’s concurring opinion in Rutledge.  That test can be explained by asking whether a provision in ERISA governs the same matter as the state law, and thus could replace it.  ERISA, of course, does not regulate direct payments to employees. This construct of preemption appears to narrow the ERISA preemption standard now applied by a solid majority of the Supreme Court.

We live in an age of state experimentation with matters arguably regulated by ERISA.  Expect to see more such experimentation and more litigation to defend the federal scheme in ERISA.

Mark Casciari and Kathleen Cahill Slaught

§ 1.39  ARPA COBRA Subsidy: DOL Releases Model Notices, Punts (to IRS?) on Most Open Issues

Seyfarth Synopsis: As discussed in our March 11, 2021 Alert, Congress has made another avenue of health coverage more accessible by fully subsidizing the cost of COBRA coverage from April 1 – September 30, 2021 for individuals who lost their health coverage due to an involuntarily termination or a reduction in hours under the American Rescue Plan Act of 2021 (ARPA).  On April 7, 2021, the Department of Labor (DOL) published FAQs to further explain this COBRA subsidy and provided models of the required related notices.

Notable Points from the FAQs

• Eligibility Based on Reduction in Hours. The FAQs take an expansive view on when a reduction in hours constitutes a qualifying event (clarifying that “involuntary” does not modify the reduction in hours trigger), stating that the following situations are covered: “reduced hours due to change in a business’s hours of operations, a change from full-time to part-time status, taking of a temporary leave of absence, or an individual’s participation in a lawful labor strike, as long as the individual remains an employee at the time that hours are reduced.”  Terminations of employment only render an employee eligible for the subsidy though if involuntary.  (The guidance did not define what constitutes an involuntary termination, but clarified that exclusions for gross misconduct will still apply.)
• Interaction with DOL Outbreak Period. The election extension provided under the DOL’s Outbreak Period guidance (generally tolling the COBRA election period window for up to a year) does not apply to the newly created, 60-day election window under the ARPA.  In other words, subsidy-eligible individuals who fail to elect COBRA within 60 days of the date they receive the notice will not be eligible for a subsidy.  (They may still qualify for COBRA under the DOL’s Outbreak Period rules, but it will be at their own cost.)

Similarly, the DOL relief extending notice deadlines does not apply to the ARPA-required notices (the general election notice or the notice of pending subsidy expiration, discussed below).

• Impact of Employer COBRA Subsidy. The FAQs do not address one of the key questions many employers have been asking:  If the employer subsidizes COBRA via a severance arrangement, will that reduce the amount of tax credit the employer may claim?  The guidance merely states the following:   “An employer or plan to whom COBRA premiums are payable is entitled to a tax credit for the amount of the premium assistance.”
• Deadline for Distributing New Election Notice. The FAQs specify that the deadline for plans to distribute the new ARPA general election notice is May 31, 2021.  Any coverage elected pursuant to that general notice would be effective retroactive to the first period of coverage beginning on or after April 1, 2021.  Or, the employee can elect to enroll only prospectively following receipt of the notice (but that delayed enrollment does not extend the subsidy window).  An individual may want to delay enrollment if he or she was enrolled in Marketplace coverage and receiving a tax credit (as the subsidized COBRA could render that person ineligible for the tax credit).
• Timing of Participant Coverage Election. If an individual believes he or she qualifies for the COBRA subsidy, that person can reach out to the COBRA administrator or plan administrator in advance of receiving the election notice and request the right to enroll.  If the person is correct that he or she qualifies, the plan cannot require the person to pay a premium (even if it intends to reimburse them later after the election notice goes out).  Presumably the person would ultimately need to later return the election notice however (which certifies to the employer the individual’s eligibility for the subsidy).
• Plan Cannot Require Payment of Admin Fee. The FAQs make clear that the assistance-eligible individual cannot be charged anything for COBRA (the plan cannot charge the admin fee to the participant).  
• Marketplace Special Enrollment at Subsidy Expiration. The FAQs indicate a subsidy expiration “may” constitute a Marketplace special enrollment event.  It is unclear whether this suggests that offering such a special enrollment is at the discretion of the Marketplace/carrier, or if it is required.

New Model Notices

ARPA requires employers to notify qualified beneficiaries regarding the availability of this COBRA subsidy and their related rights.  The DOL provided the following model notices as described more fully below:

• Notice: General Notice.

Deadline: 60 days after the qualifying event (normal COBRA procedure).

Description: This notice is for plans subject to Federal COBRA to send to individuals experiencing any qualifying event between April 1, 2021-September 30, 2021 (including voluntary terminations).  It is essentially the DOL’s standard COBRA general notice with ARPA information woven throughout.  So, while this notice may be provided separately or with the standard COBRA general notice, it makes sense to use the ARPA general notice during the relevant period rather than providing participants two sets of notices.

• Notice: Alternative Notice

Deadline: Normal state mandated deadlines.

Description: This notice is an option for plans subject to state mini-COBRA laws (not Federal COBRA).  They may send to individuals experiencing any qualifying event between April 1, 2021-September 30, 2021 (including voluntary terminations).

• Notice: Notice of Extended Election Period.

Deadline:  May 31, 2021.

Description:  This is the notice directed at people who had COBRA qualifying events in the past.  It is for individuals who lost Federal COBRA coverage due to involuntary termination of employment or reduction in hours occurring generally between October 1, 2019 and March 31, 2021.* So by May 31, 2021, employers must notify such individuals that they have a special 60-day opportunity to elect COBRA prospectively between April 1, 2021 through September 30, 2021.  The COBRA coverage period cannot exceed the coverage period they otherwise would have been entitled to in connection with the original qualifying event.

• Notice: Request for Treatment as an Assistance Eligible Individual

Deadline: Same as deadline for the notice listed above.

Description: This should be attached to the three notices listed above.  It is the form for individuals to complete to request premium assistance.

• Notice: Notice of Expiration of Subsidy Period.

Deadline: 15-45 days before subsidy ends.

Description: ARPA also requires notice when premium assistance is expiring, with the notice to be sent no more than 45 days from expiration, and no less than 15 days from expiration.  It must be sent to anyone whose subsidized Federal or State mini-COBRA ends between April 1, 2021 and September 30, 2021, and is still entitled to more COBRA coverage after the subsidy ends.

The FAQs provide that employers may be subject to an excise tax of $100 per qualified beneficiary per day, not to exceed $200 per family per day, for failure to timely provided the above notices.

Please contact your Seyfarth Benefits Attorney with any questions.

*This is general guidance only.  The specific dates may vary from plan to plan.

Kelly Joan Pointer, Danita N. Merlau and Benjamin J. Conley

§ 1.40  Positive Employer Risk Management: Ninth Circuit Approves ERISA Plan Forum Selection Clause

Seyfarth Synopsis: In a decision with major significance for ERISA plans, the Court of Appeals for the Ninth Circuit has upheld the validity of forum selection clauses in those plans.

ERISA is replete with details. Among them is the proper forum for litigation under the statute. ERISA lists multiple potential venues.  The question then becomes whether an ERISA plan can mandate that litigation must be commenced in one of those venues. Pondering this question is not merely an academic exercise as ERISA jurisprudence is not uniform, raising the risk of inconsistent interpretations by different courts. Additionally, certain courts see more ERISA litigation than others, allowing greater familiarity with the statute.

In the case of In re Becker, No. 20-72805, – F.3d – (9th Cir. April 1, 2021), the Ninth Circuit considered whether the district court properly transferred a 401(k) plan lawsuit from the Northern District of California to the District of Minnesota (where the plan sponsor resides and the plan is administered) pursuant to the plan’s forum-selection clause.

ERISA provides that lawsuits “‘may be brought’ where: (1) the plan is administered; (2) the breach took place; or (3) a defendant resides or may be found.” The Court held that the statute’s use of “may” indicates that any of these options is acceptable. (Indeed, the Court said, even an arbitration forum is permitted). Accordingly, it held that a plan clause mandating where a lawsuit may be commenced is permitted by the statute if the selected forum is one of those listed in the statute.

The Court noted that a forum selection clause can support the important ERISA goal of uniform plan administration by having the same court interpreting the plan.  Plan sponsors can readily appreciate this point as they prefer to select individuals to serve as plan fiduciaries who can be expected to review many claims in a consistent fashion.

The Ninth Circuit decision comports with all other Courts of Appeal decisions that have considered the ERISA plan forum selection issue and should make ERISA litigation more predictable, while frustrating any potential forum shopping by plaintiffs.

Jules Levenson and Mark Casciari

§ 1.41  Do You Have Employees in Washington State? Take Note: New Long-Term Care Payroll Tax Goes Into Effect January 1, 2022

Seyfarth Synopsis: In an effort to plan for the projected long-term care needs of its residents, State of Washington passed the Long-Term Services and Supports Trust Act (SHB 1323) requiring each worker in Washington to contribute $0.58 per $100 (0.58%) of wages to a trust set aside to pay long-term care benefits for its residents. The law was enacted in 2019 and becomes effective in 2022. Benefits under the Act are first payable in 2025. Washingtonians may opt out, but must have qualifying long-term care coverage in place by November 1, 2021.

Overview:

• Starting January 1, 2022, employers must remit on a quarterly basis a payroll tax of 0.58% (adjusted based on Washington’s CPI) of Washington employees’ wages to the trust. There is no cap on wages for this purpose.
• There is a one-time opt-out window from October 1, 2021 to December 31, 2022 for individuals who have qualifying long-term care coverage from any source (e.g., their employer, spouse’s employer, an individual policy) by November 1, 2021. There are special effective dates for union employees.
• To be considered qualifying long-term coverage, the coverage must meet the requirements listed here: RCW 48.83.020: Definitions. (wa.gov).
• The right to opt-out belongs to the individual (not the employer). To opt out, the individual will apply to the State. If approved, the State will send an opt-out approval letter to the individual. The individual will then provide a copy of the letter to current and future employers. Other specifics on the opt-out procedure are still in the works.
• Long-term care benefits are only available to Washington residents who have paid premiums for either: (i) a total of 10 years with no more than a five-year interruption; or (ii) three of the six years before the date of application for benefits. Additionally, the resident must have worked at least 500 hours during each of the 10 or three year measurement period, as applicable.
• The maximum benefit payable is $100/day up to a maximum lifetime benefit of $36,500.

Options for Employers:

• Do not offer long-term care insurance to Washington-based employees and simply collect and remit the payroll tax (other than for those employees with an opt-out approval letter),
• Review long-term care coverage already in effect to determine if it is considered qualifying coverage under the Act, or
• Quickly procure new long-term care coverage that meets the Act’s definition of qualifying coverage.

Regardless of the option selected, employers may wish to inform their Washington employees of the upcoming payroll tax and their ability to opt out.

Please contact your Seyfarth attorney with any questions.

Liz Deckman and Kelly Pointer

§ 1.42  Protecting Your Nest Egg From Cyber-Criminals

Seyfarth Synopsis:  Retirement plans hold millions (sometimes, hundreds of millions) of dollars in assets, and participants’ personal information is increasingly maintained and accessible online.  With such large amounts of money accessible electronically, retirement plans can be a prime target for cyber-criminals. In response to this growing issue, on April 14, 2021, the Department of Labor (“DOL”) issued a three-part set of informal guidance with best practices and suggestions from different perspectives for addressing cybersecurity in the retirement plan world.  Acknowledging that businesses largely rely on third parties, namely, the plan’s recordkeeper, to secure and protect participant data, the guidance describes what cybersecurity protection to look for when selecting service providers.  The guidance also provides tips for recordkeepers and other service providers responsible for maintaining plan data, and ideas for plan participants on safeguarding their data and plan accounts online.

The three guidance documents are titled: Tips for Hiring a Service Provider with Strong Security Practices, Cybersecurity Program Best Practices and Online Security Tips.

“Tips When Hiring a Service Provider With Strong Security Practices” (for Plan Fiduciaries)

Plan administrators have a fiduciary duty under ERISA to act prudently when selecting and monitoring plan service providers. This DOL two-page guidance document provides tips for fiduciaries when hiring a service provider, and provisions to include in the contract with the service provider.

The tips to consider when evaluating a service provider include:

• Consider the service provider’s cybersecurity standards, practices, policies and results, and compare these to standards adopted by other service providers in the industry.
• Look for a service provider that follows a “recognized standard” for information security and that uses a third-party auditor to review and validate its cybersecurity practices.
• Ask the service provider how it validates its cybersecurity practices and levels of security standards it has met and implemented.
• Evaluate the service provider’s track record. How has it handled past security breaches?
• Consider whether the service provider carries any insurance policies that would cover losses caused by cybersecurity and identity theft breaches (for both internal and external threats).

Observation.  These tips could be helpful, and highlight what many plan administrators already consider when evaluating and hiring service providers.  However, as we have seen, adhering to these tips and suggestions may reduce the likelihood or severity of data breaches, but they are not a guarantee against cybersecurity issues.

“Cybersecurity Program Best Practices” (for Service Providers)

The DOL also issued a number of best practices for use by plan recordkeepers and other service providers that are responsible for plan data.  The best practices include having a formal, well documented cybersecurity program, conducting annual risk assessments and third party audits of security controls, conducting periodic cybersecurity awareness training and appropriately responding to any past cybersecurity incidents. The DOL has indicated that these items should be reviewed and considered by the plan fiduciaries when evaluating whether to hire a service provider.

Observation.  When reviewing a service provider’s cybersecurity program and internal controls, plan administrators may want to consider involving individuals from the IT department or an outside security consultant to ensure that explanations provided by the vendor align with these best practices.

“Online Security Tips” (for Participants)

The DOL guidance illustrates that it is not solely up to plan fiduciaries and plan service providers to take the necessary steps to secure plan data.  Plan participants also play a vital role in reducing the risk of fraud and retirement plan account losses resulting from cyber-attacks.  The third part of the DOL guidance provides online security tips for participants, including the use of unique passwords, two-factor authorization, regularly monitoring plan accounts, being cautious of phishing attacks and making sure that antivirus software is current. The guidance does not currently suggest that plan fiduciaries or service providers should periodically provide online security tips to participants.

Observation.  Plan administrators and recordkeepers may want to consider reviewing and updating summary plan descriptions, enrollment materials and other annual participant-facing notices to incorporate some of these security tips so that participants are on notice of the steps that they can take to reduce the risk of fraud and retirement account losses resulting from a the unauthorized access of their retirement account.

Next Steps

This informal guidance illustrates that protecting against data breaches is complicated and not an all-or-nothing proposition.  A plan administrator could follow every tip outlined by the DOL when selecting a service provider, but if the participant compromises his or her own account password, the administrator’s efforts are moot.  Thus, service providers, plan fiduciaries and participants should all take steps to protect against cybersecurity breaches.

Please contact your Seyfarth Employee Benefits Attorney with any questions you may have about this guidance and its application to your plan.

Christine M. Cerasale, Sara J. Touzalin and Kelly Joan Pointer

§ 1.43  Federal Court Allows Discovery in ERISA Case Based on “Information and Belief” Allegations That Plaintiff Merely Believed to Be True

Seyfarth Synopsis:  A federal district court denied a motion to dismiss an ERISA complaint that was based in large part on secondhand “information and belief” allegations about the defendants’ business operations.  The decision serves as a warning to defendants that they may be forced into costly discovery based on allegations that a plaintiff merely believes to be true.   

We have commented on a Supreme Court decision making it more difficult for ERISA plaintiffs to withstand motions to dismiss in federal court and to proceed with expensive discovery.  See The Supreme Court Further Narrows Federal Court Jurisdiction Over an ERISA Complaint, Relying on Article III of the Constitution | Beneficially Yours.  A recent district court decision on a routine motion to dismiss, however, underscores that defendants continue to face challenges in obtaining dismissals of ERISA claims in federal court and avoiding discovery.

In Teamsters Local Union No. 727 Health and Welfare Fund v. De La Torre Funeral Home & Cremation Services, Inc., No. 19-cv-6082, 2021 U.S. Dist. Lexis 42046 (N.D. Ill. Mar. 5, 2021), the court refused to dismiss an ERISA and LMRA complaint seeking to hold defendants, who did not sign a collective bargaining agreement, liable for a settlement agreement related to delinquent contributions to various health, welfare, and pension funds.  The plaintiff brought the allegations under alter ego, joint employer, and successor liability theories.  The complaint was based in large part on “information and belief” allegations about the defendants’ business operations.  The court noted that the allegations relied on secondhand information that plaintiff merely believed to be true, and that the allegations regarded matters particularly within the knowledge of the defendants.  The court denied the defendants’ motion to dismiss, finding that such allegations were sufficient to allow the plaintiff’s claim to proceed.

This decision is important because of the substantial consequence of losing a motion to dismiss.  Losing a motion to dismiss is a ticket to the often distasteful world of discovery.  As the Supreme Court noted in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), discovery, at least in the class action context, is so expensive that it often leads to settlement regardless of the merits of the case.  This is all the more true today given the enormous increase in electronic data a party maintains, especially after a pandemic that has created much more video and other electronic data that may be subject to discovery.

So, while the Supreme Court has made it more difficult under some circumstances for ERISA plaintiffs to withstand motions to dismiss, district courts may still favor discovery over dismissal.  Individual district courts may decide to encourage settlement and preclude appellate review by allowing claims to continue, even when the allegations are based on information that a plaintiff merely believes to be true.

Motion to dismiss litigation in ERISA cases will continue to command the attention of federal courts.  At issue is whether the plaintiff can allege enough to access substantial discovery rights.

Mark Casciari and James Hlawek

§ 1.44  Don’t Look Now, But Is That a New SECURE Act on the Horizon?

Seyfarth Synopsis: The SECURE Act, passed at the end of 2019, significantly altered the retirement landscape. Now, proposed legislation, “SECURE Act 2.0,” sets out to make even more changes. As before, several of the proposed provisions will require employers to closely consider the new rules. For newly established plans, there will be requirements that did not exist before. For a reminder on how the SECURE Act 1.0 changed the retirement landscape in 2020 click here and here.

Last week, on May 5, the House Ways and Means Committee sent the Securing a Strong Retirement Act of 2021, “SECURE Act 2.0,” to the House for consideration. Here are some of the more significant changes that the bill as currently drafted would bring to the retirement landscape:

• Raises the minimum distribution age. After being based on attainment of age 70½ for decades, the Act would raise the required minimum distribution (“RMD”) age once again over several years. The SECURE Act 1.0 raised the RMD to age 72. If passed, SECURE Act 2.0 would continue the raise in the RMD age to 73 in 2022, 74 in 2029, and 75 in 2032.
• Increases and “Roth-ifies” catch-up contributions. The limit on 401(k) catch-up contributions for 2021 is $6,500, indexed annually for inflation. The proposed provisions would keep the catch-up age at 50 but increase the limit by an additional $10,000 per year for employees at ages 62, 63, and 64. The Act also provides that effective in 2022, catch-up contributions to 401(k) plans must be made on an after-tax, Roth basis.
• Also allows Roth-ification of matching contributions. Plan sponsors may, but are not required, to permit employees to elect that some or all of their matching contributions to be treated as Roth contributions for 401(k) plans.
• Student loan matching. The Act would allow, but not require, employers to contribute to an employee’s 401(k) or 403(b) plan account by matching a portion of their student loan payments.
• Expanding automatic enrollment for new plans. Defined contribution plans established after 2021 will be required to enroll new employees at a pretax contribution level of 3% of pay. This level will increase annually by 1% up to at least 10% (but no more than 15%). There are exceptions for small businesses with 10 or fewer employees, new businesses, church plans and governmental plans.
• Expedited part-time workers. One of the more significant changes under SECURE Act 1.0 was the expansion of eligibility for “long-term, part-time workers” to contribute to their employers’ 401(k) plan. SECURE Act 2.0 would expedite plan participation by these workers by shortening their eligibility waiting period from 3 years to 2 years, meaning employees could contribute if they have worked at least 500 hours per year with the employer for at least 2 consecutive years and are at least age 21 by the end of that 2 year period. If passed, the first group of affected workers would become eligible on January 1, 2023, not 2024 as is the case under current law.

As noted, this bill has not been signed into law. Although there is bipartisan support, it is likely that the provisions will be modified as the bill makes its way through Congress. Presently, this proposal is expected to be taken up by the Senate after its August recess. To stay up to date, be on the lookout for additional Beneficially Yours blog posts and Seyfarth Legal Updates.

Liz Deckman & Sarah Magill

§ 1.45  The Big Apple Joins a Small Crowd, With Possible Headaches for Local Employers

Seyfarth Synopsis: New York City has joined the growing list of jurisdictions to establish a mandatory auto-IRA retirement savings program for private sector employers who do not offer employees access to a retirement plan. By doing so, it becomes part of the trend to provide the opportunity for employees who do not have access to an employer-sponsored plan to save for their retirement during their working years through a payroll-deduction process.

Three states — California, Oregon and Illinois — have established, and operate, such programs at the state level, whereby covered employers are required to auto-enroll employees in IRA retirement savings accounts. The California program, CalSavers, recently prevailed in the U.S. Court of Appeals for the Ninth Circuit against a challenge that the program was pre-empted by ERISA. The primary bases for this decision are that the program is not run by a private employer and that employers maintaining ERISA retirement plans are exempted from coverage by the program (hence no interference with an ERISA plan).

Several other states have begun to implement similar programs, in some cases mandatory and in others (like New York State) voluntary. All the programs appear to have in common that they create an administrative board to operate the program, and then leave such board to work out the details of implementation.

The New York City legislation follows the same pattern — one piece of legislation establishes the program and another establishes a “retirement savings board” to implement and oversee the program. The program applies to private sector employers located in the City employing at least five employees and that do not currently offer a retirement plan such as a 401(k) plan or a pension plan. The default employee contribution rate, which will apply to employees who are age 21 or older and working at least 20 hours a week, is set at 5%, although an employee can choose a higher rate (up to the IRA annual maximum) or a lower rate (including none).

Although the City’s legislation takes effect 90 days after enactment (i.e., in August 2021), the program will not go into effect until implemented by the retirement savings board, which is contemplated to take as long as two years. Further, the program will not go into effect if the City’s corporation counsel determines that there is a substantial likelihood that the program will conflict with, or be preempted by, ERISA. Such determination should take the Ninth Circuit decision into consideration, given the strong resemblance between the City’s program and the CalSavers program.

Like several other states, New York State has authorized an auto-IRA program (the New York State Secure Choice Savings Program), but the New York State program differs from most other such programs by using Roth (after-tax) IRAs, which have a limit on the contributor’s income, although such limit is unlikely to be exceeded by the employees targeted by the program. Further, the New York State program is voluntary — no employer is required to make it available to employees.

No conflict should arise between the City’s program and the New York State Secure Choice Savings Program, because the current state program is voluntary. However, there are current proposals to make the New York State program mandatory, in which case a conflict could arise. Even under the current New York State program, it is unclear whether the City would accept Roth IRA contributions as meeting the City’s mandate, leaving aside questions regarding the contribution rate and which employers and employees are covered.

A more formidable operational difficulty for City employers is that Connecticut and New Jersey have authorized, but not yet implemented, mandatory auto-IRA programs for employers located in those states, although Connecticut is reported to be launching a pilot program in July, 2021. Although all these programs exempt employers that maintain an ERISA retirement plan, there may be employers located within the metropolitan New York City area whose employees will be subject to differing mandates depending on whether employed in New Jersey, Connecticut or the City itself, all of which will require compliance by that employer but with possibly differing rules.

At the moment there is nothing a New York City employer needs to do. We are monitoring developments related to this new program, including the corporate counsel’s determination as to whether or not there is a substantial likelihood that the New York City program will be preempted by ERISA, and will report back.

If you have any questions, please contact your Seyfarth attorney for additional information.

Richard Loebl

§ 1.46  IRS Releases Extensive Guidance on ARPA COBRA Subsidy

Seyfarth Synopsis: On March 11, 2021, President Biden signed into law the American Rescue Plan Act (“ARPA”), which requires plan sponsors to provide free COBRA coverage from April 1, 2021 through September 30, 2021, to individuals who lose coverage due to an involuntary termination of employment or reduction of hours. This is also referred to as the “100% COBRA Subsidy” or “COBRA premium assistance.” On April 7, 2021, the Department of Labor (“DOL”) published additional guidance on the COBRA Subsidy requirements in the form of Frequently Asked Questions (“FAQs”) and model notices. The updated DOL guidance, while helpful, still left many questions unanswered. On May 18, 2021, the Internal Revenue Service (“IRS”) issued additional guidance in IRS Notice 2021-31 (the “Notice”) to provide further clarification for employers, plan administrators, and health insurers regarding the COBRA Subsidy.

We have summarized the key points from IRS Notice 2021-31 below.

Who is an Assistance Eligible Individual (“AEI”)?

The ARPA  provides for a temporary 100% reduction in COBRA premiums for individuals who: (1) lose healthcare coverage due to an involuntary termination or a reduction in hours; (2) are eligible for COBRA continuation coverage for some or all of the period from April 1, 2021, through September 30, 2021 (the “Subsidy Window”); and (3) elect COBRA continuation coverage. These individuals are referred to Assistance Eligible Individuals (“AEIs”). AEIs also include qualified beneficiaries who are the spouse or dependent child of the employee. A qualified beneficiary is considered an AEI if he or she was covered under the group health plan on the day before the reduction in hours or involuntary termination that caused the loss of coverage.

• Ineligibility. Eligibility for other group health coverage renders an individual ineligible for the 100% Cobra Subsidy, even if that other coverage does not provide “minimum value” or “affordable” coverage as defined under the Affordable Care Act.
• An individual may become an AEI more than once. If an individual elects free COBRA and then later becomes eligible for (and enrolled in) another group health plan during the Subsidy Window, he or she will no longer qualify as an AEI. If the individual then loses coverage under the other group health plan (within the Subsidy Window), he or she can regain their status as an AEI.
• Self-certification or attestation. An employer may, but is not required to, have individuals self-certify or attest to the fact that they are eligible for free COBRA and/or that they are not eligible for other group health plan coverage or Medicare. While this is not a legal requirement, employers that plan to claim the available tax credit to offset the costs of the COBRA Subsidy will need to retain records substantiating individuals’ eligibility. In addition, an employer may have knowledge of an individual’s initial eligibility for COBRA, but they may not necessarily have knowledge of their ongoing eligibility. For these reasons, obtaining an attestation and/or self-certification of eligibility may be desirable. An employer may also rely on other evidence to substantiate eligibility, such as employment records concerning a reduction in hours or involuntary termination of employment.
• Eligibility for other coverage. Eligibility for other coverage will only disqualify an individual from the COBRA Subsidy if they have an active, open enrollment period during the Subsidy Window. So, for example, if an individual had an opportunity to enroll in their spouse’s plan during a 30-day window in January 2021, but did not enroll, that person can still qualify for the COBRA Subsidy. But, the IRS guidance notes that, due to the DOL’s Covid-19 “Outbreak Period” relief, most plans are required to extend HIPAA special enrollment windows for up to a year. To the extent an individual’s extended special enrollment window runs into the Subsidy Window, that will disqualify them from receiving COBRA premium assistance.
• Enrollment in another plan. If an individual enrolls in coverage under another group health plan, they may still qualify for the COBRA Subsidy, provided the individual is no longer covered by the other group health plan coverage as of April 1, 2021.
• Enrollment in Medicare. The Notice clarifies that if an individual is enrolled in Medicare before becoming eligible for COBRA due to a reduction in hours or involuntary termination of employment, they may remain on Medicare but they would not qualify for the COBRA Subsidy. This is because they were enrolled in Medicare first (before COBRA).
• Other qualifying events. Qualifying events other than a reduction in hours or an involuntary termination of employment, are not qualifying events for COBRA premium assistance purposes. Further, if the qualifying event was something other than an involuntary termination of employment or a reduction in hours (such as divorce or a dependent aging out), the individual would not qualify for the COBRA Subsidy even if the person later experiences a reduction in hours or an involuntary termination of employment.
• Second qualifying event. If the original qualifying event was an involuntary termination of employment or a reduction in hours, and the employee remains covered beyond 18 months due to a disability extension or a second qualifying event (e.g., divorce or a dependent aging out), the employee could qualify for the COBRA Subsidy during the extended (i.e., post-18 month) period, if that extended period overlaps with the Subsidy Window. Contrary to earlier DOL guidance which indicated employers may only need to look back to qualifying events occurring on or after October 2019 to determine who may be an AEI, this guidance could require employers to look back much earlier (potentially as far back as April of 2018).
• Retiree health coverage. Retiree health coverage only impacts an individual’s eligibility for the COBRA Subsidy if it is provided under a different plan than the plan in which the individual was enrolled when he or she experienced a qualifying event. So, for instance, if a plan permitted persons who terminated at age 55 to elect COBRA or to remain covered under the active plan for a period of time, a person who chose to remain on active coverage could still elect COBRA and qualify for the COBRA Subsidy.
• New dependents. COBRA premium assistance is limited to AEIs that were enrolled as of the coverage termination date, as well as, a child who is born or adopted by the covered employee during the COBRA continuation coverage period.
• Unpaid premiums. An individual’s eligibility for COBRA premium assistance is not affected by late or unpaid premiums for retroactive COBRA continuation coverage (pre-April 1, 2021).

Reduction in hours

The Notice confirms that a reduction in hours constitutes a qualifying event for purposes of the subsidy, regardless of whether the reduction in hours was involuntary or voluntary. This includes furloughs and work stoppages resulting from a lawful strike initiated by employees (or their representatives) or a lockout initiated by the employer. 

What is an “involuntary” termination?

The Notice confirms that the determination of whether a termination is “involuntary” is based on facts and circumstances surrounding the event.  The following are examples of events that may qualify as involuntary terminations:

• Voluntary termination for good reason. Where the termination is due to employer action that results in a material negative change in the employment relationship analogous to a constructive discharge. This includes terminations designated as voluntary or as a resignation if the employee is willing and able to continue working.
• Termination while absent due to illness or disability. Only if there was an expectation that the employee would return to work following the illness or disability.
• Retirement. Only if the employee would have been terminated, absent the retirement, and the employee had knowledge of the impending involuntary termination.
• Resignation. If due to a material change in geographic location of employment.
• Voluntary separation programs. The Notice provides that involuntary terminations include employee participation in a voluntary severance program that constitutes a window arrangement, where the employee was facing an impending termination. This leaves open the question of whether participation in a VSP would qualify where there is no stated (or unstated) risk of impending termination. Similarly, it does not address whether a VSP qualifies if not structured as a “window program.” Notably, in 2009 the IRS indicated that any form of “buy-out” program could qualify if there was a suggestion that some employees may be terminated after the program concluded. Other FAQs within the notice make clear that circumstantial evidence can always lead to the conclusion that a termination labeled “voluntary” could still be considered involuntary, but employers would have certainly welcomed more direct guidance addressing these types of programs.
• Resignation for safety. If due to concerns about workplace safety, but only if the employee can demonstrate the employer’s actions or inactions resulted in a material negative change in the employment relationship analogous to a constructive discharge.
• Involuntary reduction in hours. An employee-initiated termination of employment in response to an involuntary material reduction in hours is treated as a termination for good reason.
• Non-renewal of employment contract. If the employee was willing and able to continue the employment relationship and execute another contract. This does not qualify, however, if the parties never intended a renewal to be executed.

The following examples do not constitute involuntary terminations:

• Termination due to gross misconduct. Presumably, this event is carved out because COBRA is not required for terminations resulting from gross misconduct. Many employers still extend COBRA when there is not overwhelming support for concluding the behavior was gross misconduct. Employers could likely apply the same rationale in treating such individuals as AEIs, if COBRA was extended. Family members employees terminated for gross misconduct are also ineligible for the COBRA subsidy.
• Terminations for personal reasons. Examples include health conditions of employee or family member, childcare issues, or other similar issues.
• Death of the employee. If the individual died following a reduction in hours or involuntary termination, the dependents would remain eligible for COBRA continuation coverage.

What coverage is eligible for COBRA premium assistance?

Dental, vision, and HRAs qualify for premium assistance. Retiree coverage also qualifies, but only if it is offered under the same group health plan as the coverage made available to active employees. The notice does not explicitly discuss other COBRA-eligible benefits such as EAPs or onsite clinics, but we presume that to the extent an employer has determined those benefits are subject to COBRA, they should also qualify for the subsidy.

If an AEI enrolls in other, more expensive coverage than the coverage in which the individual was enrolled as of the qualifying event date, the individual loses eligibility for the subsidy entirely, unless the coverage in which the individual was enrolled in is no longer available. If the plan in which the individual was enrolled is no longer available, the individual must be offered the most similar plan available. In that case, the individual will be eligible for the subsidy even if the plan of benefits is more expensive.

For example, an AEI was enrolled in a plan with an $800 per month COBRA premium. The employer also offers coverages that are $700, $750, or $1,000 per month. The individual can enroll in the $700 or $750 per month options with premium assistance. The AEI will not be eligible for premium assistance if he or she enrolls in the $1,000 per month option.

When does the COBRA Subsidy period begin and end?

The COBRA Subsidy period begins with the first period of coverage a premium is charged beginning on or after April 1, 2021. AEIs must be allowed to elect coverage prospectively or retroactively to April 1, 2021, provided the qualifying event date was on or before that date.

The subsidy period ends at the earliest of: (1) the first day the AEI becomes eligible for other group health plan coverage or Medicare; (2) the day the individual ceases to be eligible for COBRA continuation coverage; or (3) the end of the last period of coverage beginning on or before September 30, 2021.

ARPA extended election period

A qualified beneficiary who does not have COBRA continuation coverage in effect on April 1, 2021, but who would have been an AEI if the election were in effect, may elect COBRA continuation coverage under the ARPA extended election period. This includes an individual who has an open COBRA election period as of April 1, 2021. So, for example, if an employee elected COBRA as of the qualifying event date but the spouse did not, the spouse would be entitled to an extended election right to take advantage of the ARPA subsidy.

Additionally, an individual who, as of his or her original qualifying event date, only elected certain of the coverages in which that person was enrolled (i.e., dental-only or vision-only) can still elect the remaining coverages under the extended election period.

How does this interact with the Outbreak Period Guidance?

Within 60 days from receiving the election notice, an AEI  may elect subsidized COBRA. If the AEI elects subsidized COBRA, within the same 60 day period, the AEI must also elect or decline COBRA continuation coverage retroactive to the loss of coverage. If the qualified beneficiary elects retroactive COBRA continuation coverage, the qualified beneficiary may be required to pay COBRA premiums for periods of coverage beginning before April 1, 2021.

If an election is not made during the 60 day period, a qualified beneficiary will lose the right to elect retroactive coverage. They will also forgo the 100% COBRA subsidy. It is unclear from the Notice whether the qualified beneficiary would still be permitted to elect coverage prospective at a later date (during the Outbreak Period).

The DOL’s Outbreak Period relief extends the period of time that individuals have to make COBRA elections and premium payments for up to a full year (or, if sooner, through the end of the Public Health Emergency plus 60 days).

Calculating the premium tax credit and employer subsidies

Employers can only claim the tax credit in the amount equal to the amount the employee would have been required to pay in the absence of the ARPA subsidy. So, if the employer typically charges less than 102% of the premium, or has offered the employee a premium subsidy pursuant to a severance agreement, the amount the employer could claim would be reduced accordingly. But, if an employer increases the employee’s premium obligation from the previous, reduced amount, the employer can claim the increased tax credit. Separately, if an employer does not subsidize COBRA directly, but provides the employee a taxable lump sum payment intended for COBRA, the employer can still claim the full amount of the tax credit.

If additional non-AEIs are covered (e.g., because a non-AEI spouse is added during open enrollment) causing the total COBRA premium to increase, the incremental cost is not considered to be COBRA premium assistance for purposes of the tax credit. If there is no additional cost for adding non-AEIs, then the employer can claim the full cost as a tax credit.

Claiming the premium tax credit

Employers are entitled to the tax credit as of the date on which the employer receives the AEI’s election of COBRA continuation coverage. Employers are permitted to reduce payroll tax deposits and claim a refund of amounts, up to the amount of the anticipated credit. If applicable, an employer can file IRS Form 7200 to request an advance of the anticipated premium assistance credit that exceeds the federal employment tax deposits available for reduction on a quarterly basis.

To claim the premium assistance credit, the employer reports the credit and the number of individuals receiving COBRA premium assistance on IRS Form 941 for the applicable quarter. If an employee fails to notify the employer that he or she became eligible for other coverage, the employer can still claim the tax credit, unless the employer knew the individual was ineligible for the subsidy. The credit is included in the employer’s gross income, but the employer cannot “double dip” and also claim the credit as qualified wages under the CARES Act, or as qualified health plan expenses under the FFCRA. Employers are entitled to the credit regardless of whether it uses a third-party payer to report and pay employment taxes. 

If an employer originally collected, but then reimburses an AEI for premiums that should have been covered under the ARPA, the employer is entitled to the credit on the date in which they reimburse the AEI. ARPA requires the employer to reimburse the employee within 60 days of the date the premium was paid (or presumably later if the employer didn’t receive the individual’s attestation until a later date).

Additional issues

The Notice states that the Treasury Department and the IRS are aware of additional issues related to the COBRA premium assistance provisions, which are still under consideration. There is a possibility of additional guidance in the future.

We will continue to track the regulatory agencies’ implementation of these provisions and keep you apprised of any further developments. 

Benjamin J. Conley, Seong Kim, Sarah N. Magill and Joy Sellstrom

§ 1.47  Ninth Circuit Rules – State Pension Mandate Not Preempted Even Though An Employer Chooses Not To Establish ERISA Plan

Seyfarth Synopsis:  The Court of Appeals for the Ninth Circuit has once again upheld against an ERISA preemption challenge, a State private sector benefits mandate, notwithstanding that ERISA provides that the decision to establish an ERISA plan rests solely with the employer.

The Supreme Court has often stated that ERISA is not a pension mandate statute; rather it simply encourages private sector employers to establish ERISA pension plans.  See Gobeille v. Liberty Mutual Ins. Co., 136 S.Ct. 936 (2016) (“ERISA does not guarantee substantive benefits.”)

(The federal no-mandate rule is different in the health plan context, primarily due to the Affordable Care Act.)

ERISA accomplishes its purpose to encourage, and not to mandate, plans through streamlined rules of administration, limited court remedies and a broad preemption clause.  That clause preempts all state and local laws that merely relate to an ERISA plan as a “don’t worry about state law” reward for choosing to establish an ERISA plan.  The statutory scheme is that the final word on whether to establish an ERISA pension plan remains within the complete discretion of the employer.

We have reported previously on the Supreme Court’s latest preemption decision finding no preemption — SCOTUS Upholds Arkansas PBM Law Against ERISA Preemption Arguments | Beneficially Yours. We also have reported on a recent Ninth Circuit decision with the same holding — A Ninth Circuit Panel Finds No ERISA Preemption Of Seattle Health Care Ordinance | Beneficially Yours.

Now, in Howard Jarvis Taxpayers Assoc. v. CalSavers Program, the Ninth Circuit has again found no preemption.  The issue was whether a California law, like those of six other States (and Seattle and New York City), see generally The Big Apple Joins a Small Crowd, With Possible Headaches for Local Employers | Beneficially Yours, mandates private sector employers, which choose not to establish an ERISA plan, to contribute employee wages to the state to provide pension benefits.  The court found no preemption because the contributed money becomes a state, not an ERISA, plan benefit.  It is of no moment, the court said, that the employer’s contribution becomes a pension benefit, because the state’s contributory scheme imposes minimal administrative duties on the employer. The court added that the proliferation of state benefits mandates presents serious policy issues that Congress may want to address down the road.  It is unclear whether the CalSavers preemption decision will be litigated further.

It also is unclear whether the CalSavers decision will encourage private sector employers now without ERISA plans to establish (or refrain from establishing) plans.

One current example of this preemption dilemma arises in Washington State, which recently passed the Long-Term Services and Supports Trust Act.  The Act imposes a payroll tax on each employee in Washington of .58% of wages.  These amounts are collected by the employer and sent to a trust established by the State to pay long-term care (LTC) benefits for its residents. Employees who have qualifying private LTC insurance (including coverage from an ERISA long term care plan) can be exempt from the payroll tax.  Employees still must satisfy certain eligibility requirements.  Employers with unhappy workers who must pay the tax, but never become eligible for benefits, may now feel State pressure to establish an ERISA plan, when they otherwise would not.  Or they may feel pressure not to establish an ERISA plan, relying on the State to provide benefits instead.  And, of course, the Act may be challenged on preemption grounds.

Expect more State benefit mandates and perhaps more litigation throughout the country on whether these laws are preempted by ERISA.

Liz Deckman and Mark Casciari

§ 1.48  Did You Get Your Vaccine Yet… Your Employer May Offer You an Incentive

Seyfarth Synopsis: The EEOC has released anticipated guidance (found here) related to the COVID-19 pandemic and what employers can and cannot do (“Updated Guidance”). The Updated Guidance provides guidance on 4 main topics: (1) employer mandated vaccination policies; (2) reasonable accommodations; (3) employee vaccination and confidentiality; and (4) vaccine incentives. This legal update focuses on permissible incentives provided by employers which encourage employees to be vaccinated. For a discussion of the other topics, see our Employment Law Lookout found here.

We previously noted that the EEOC’s existing guidance under the Americans with Disabilities Act (ADA) makes it unclear whether and what level of an incentive an employer may offer to encourage employees to get the COVID-19 vaccine. Offering an incentive in exchange for a vaccination could create a wellness program that contains disability-related inquiries. Although the Updated Guidance does not answer what level of incentive would be permissible, it provides helpful guidance for employers who want to establish an incentive program.

Incentives Permitted Under the ADA

Although the ADA prohibits employers from making disability-related inquiries to employees, there is an exception for inquiries made in connection with a voluntary employee health program (such as a wellness program offering vaccines). It is currently unclear what level of incentive would cause a program to be involuntary. (Regulations proposed in January 2021 permitting only de minimis incentives — such as water bottles — have been withdrawn by the current administration).

Where a vaccine is administered by a third party (e.g. pharmacy, personal health care provider or clinic), the Updated Guidance clarifies that requesting documentation or confirmation that an employee received a COVID vaccination is not a disability-related inquiry covered by the ADA. Therefore, an employer may offer any size incentive to an employee to provide confirmation of vaccination administered outside of the work environment.

If the vaccine is administered by the employer or its agent (e.g. a provider hired by the employer), however, employees would have to answer disability-related screening questions from the employer or the agent prior to receiving the vaccine. Therefore, the ADA would apply and restrict the incentives that could be offered. A “very large incentive” could make employees feel pressured to disclose protected medical information and the program may not be voluntary.

Incentives Permitted Under GINA

The Genetic Information Nondiscrimination Act (GINA) restricts employers from requesting genetic information from employees, including information about the manifestation of disease or disorder in a family member (i.e. family medical history). The Updated Guidance explains when employer provided incentives for COVID vaccinations could violate GINA.

Employees

The Updated Guidance provides that GINA is not violated when an employer offers an incentive to employees to provide proof of vaccination from a third party, because the fact that the employee received a vaccination is not genetic information. GINA is also not violated when an employer offers an incentive to employees if the vaccine is administered by the employer or its agent, because the vaccines currently available (Pfizer, Moderna and Johnson and Johnson) do not require pre-vaccination screening questions that inquire about genetic information. (See above for a discussion regarding the ADA.)

Family Members

The Updated Guidance provides that GINA would allow an employer to offer an incentive to employees to provide documentation or other confirmation from a third party that their family members have been vaccinated.

GINA would be violated, however, if an employer offers an incentive to employees in return for a family member getting vaccinated by the employer or its agent, because this would require asking the family member medical questions. Asking these medical questions would lead to the employer’s receipt of genetic information in the form of family medical history of the employee.

Notably, an employer can offer vaccinations to an employee’s family members without offering an incentive, as long as the employer takes steps to comply with GINA. This means that the employer must; (1) ensure that all medical information obtained during the screening process is used only for providing the vaccination; (2) the information is kept confidential; and (3) the information is not provided to any managers, supervisors, or others who make employment decisions for the employees. In addition, employers need to obtain prior, knowing, voluntary, and written authorization from the family member before the family member is asked any questions about his or her medical conditions.

To stay up to date with future guidance, be on the lookout for additional Beneficially Yours blog posts and Seyfarth Legal Updates.

Diane V. Dygert, Joy Sellstrom, and Sarah N. Magill

§ 1.49  Rule 10b5-1: Fix the Cracks But Save the Baby

On June 7, 2021, U.S. Securities and Exchange Commission Chair Gary Gensler announced at the CFO Network Summit that he has asked his staff to make recommendations for the Commission’s consideration on how it might “freshen up” Rule 10b5-1, which provides officers and directors with a way to limit risks associated with the purchase or sale of their company’s securities. Chair Gensler critiqued what he identified as “real cracks” in the present insider trading regime, including the absence of : (1) mandatory cooling off period requirements before an insider can make their first trade; (2) limitations on insiders’ ability to cancel plans when they do have material nonpublic information; (3) disclosure requirements regarding trading plans; and (4) limitations on the number of trading plans a company can issue. Chair Gensler appears to be advocating for tightening of the rules in these respects, rather than abolishment of important Rule 10b5-1 trading plans.

Overview of Rule 10b5-1

While Exchange Act Section 10(b) and Rule 10b-5 generally prohibit the purchase or sale of securities “on the basis of” material nonpublic information, Rule 10b5-1, adopted in 2002, establishes an affirmative defense for insider trading allowing insiders to purchase or sell securities pursuant to pre-formulated trading plans. A purchase or sale is not considered to be made “on the basis of” material nonpublic information if the person making the purchase or sale demonstrates that before becoming aware of the information, the person had:

1. Entered into a binding contract to purchase or sell the security,
2. Instructed another person to purchase or sell the security for the instructing person’s account, or
3. Adopted a written plan for trading securities;

and the contract, instruction or plan meets certain elements set forth in the rule. See 17 CFR § 240.10b5-1.

10b5-1 Plans as Applied

By executing pre‐planned transactions under a Rule 10b5‐1 plan entered in good faith, an individual is insulated from liability, even if actual trades made pursuant to the plan are executed at a time when the individual may be aware of material, non‐public information that would otherwise subject that person to liability under Section 10(b) or Rule 10b5‐1. When properly created and implemented, Rule 10b5-1 trading plans permit company insiders to sell their shares without litigation risk or exposure. Specifically, through the Rule, insiders can effectively refute any inference of scienter by demonstrating that the trades were pre-scheduled and therefore not likely to indicate misuse of material inside information.

In addition to insulating officers and directors from liability for insider-trading claims, such plans also can protect against unfounded allegations of scienter premised on insider sales (i.e., securities fraud and breach of fiduciary duty claims). Insider sales can sometimes be used by plaintiffs as part of their attempt to show a strong inference of knowledge of fraudulent activity. For example, plaintiffs typically allege that the sale of company stock by insiders shortly prior to public knowledge of alleged fraud is indicative of scienter. However, where such sales are effectuated pursuant to trading plans that were implemented prior to the alleged fraud, the inference of knowledge of fraud from those sales is in many cases mitigated.

Notably, however, Rule 10b5-1, may not protect officers and directors where there is evidence that the trading officer or director had knowledge of material, nonpublic information at the time the plan was enacted.

Observations and Considerations

Officers and directors are expected by many companies to invest in the company at some level. In most cases such ownership has the beneficial effect of aligning the interest of directors and officers with those of shareholders whose only connection to the company is ownership of the shares. While current trends in many public companies are questioning of the maximization of shareholder value being the sole proper goal of officers and directors, (see, e.g., Directors Roundtable publications) it is certainly one of the goals that directors and officers must consider. 10(b)-5-1 is well designed to help officers and directors avoid the risks of being sued criminally or in widespread and sometimes baseless civil actions when impact purchases and sales are for financial planning purposes rather than to take advantage of material inside information. By allowing directors and officers to adopt a financial plan which is developed based on their own financial needs, 10(b)5-1 allows for directors and officers to avoid in some cases potential liability when they are simply following a financial plan unrelated to material inside information.

Based on the comments from Chair Gensler, it is likely that we will see some additional restrictions on Rule 10b5-1 plans in the future, including mandatory cooling off periods between the adoption of a plan and when it goes into effect, limitations on cancellation, modifications and overall number of plans, as well as mandatory disclosure. However, Rule 10b5-1 trading plans remain an important risk mitigation tool for officers and directors and we hope and expect that Chair Gensler is very thoughtful in proposing restrictions on their use.

Assuming Mr. Gensler’s proposed changes when described in more detail are limited to eliminating misuse of such plans they are to be applauded. What remains to be done is to see that the changes do not accidently throw out valuable aspects of these plans. In other words, the baby with the bath water. 10(b)-5-1, properly used, is very beneficial in several respects, including in encouraging able directors to serve in that capacity.

Gregory A. Markel, Daphne Morduchowitz and Renée B. Appel

§ 1.50  Audio Recordings Are Up for the Taking!

Seyfarth Synopsis: The DOL has waded into a long-simmering debate about whether audio recordings of phone calls between a plan participant and the plan’s administrator or insurer should be provided to the participant when challenging a benefit determination under the plan, and they have come down squarely on the side of the participant.

A recent DOL information letter lays out the Department’s view that audio recordings are considered relevant documents that plan administrators, insurers, and third party administrators must provide to a claimant upon request, regardless of how the recording is used in the course of plan administration or a benefit determination.

The DOL’s position was expressed in response to a claimant’s request for an advisory opinion after a claims administrator denied the claimant’s request for audio recordings of a phone call  associated with an adverse benefits determination. The DOL felt that this issue was best addressed through an information letter (as opposed to an advisory opinion) as it invoked established principles under ERISA, which would apply more broadly than to the discreet facts of the claimant’s situation.

In the claimant’s situation, the administrator made a transcript of the call available as an alternative to the audio recording.  It asserted that it was not obligated to provide the actual recordings because they were “not created, maintained, or relied upon for claim administration purposes” and were instead made “for quality assurance purposes.”

In addressing the matter, the DOL turned to its long-standing claims regulations under ERISA Section 503.  These regulations require that a claimant be provided with copies of all documents, records and other information “relevant” to the claim for benefits. The DOL was not persuaded by the claims administrator’s arguments that the phone recordings were not relevant, and it cited to two parts of 29 CFR 2560.503-1(m)(8) in its assertion that audio recordings are indeed relevant records that should be provided to claimants.

• First, in response to the plan administrator’s argument that the recordings were “not relied upon for claim administration purposes,” the DOL cites 29 CFR 2560.503-1(m)(8)(ii). This section notes that a record is considered relevant if it “was submitted, considered, or generated in the course of making the benefit determination, without regard to whether such document, record, or other information was relied upon in making the benefit determination.” (emphasis added). With this, the DOL is not concerned with whether the recording was used in the course of the benefit determination. Rather, if a recording was generated in the course of a benefit determination, then it is considered relevant and should be produced by the applicable plan administrator, insurer, or third party administrator.
• Second, in response to the plan administrator’s argument that the recordings were made for quality assurance purposes, the DOL cites 29 CFR 2560.503-1(m)(8)(iii). This section notes that a record is considered relevant if it “demonstrates compliance with the administrative processes and safeguards required pursuant to” the plan’s claims procedures. Relevance is further established if the record can be used as an administrative safeguard that verifies consistent decision making under a plan. The plan administrator’s quality assurance argument ironically works against the administrator because an audio recording made for the purposes of quality assurance and plan consistency falls squarely into the definition of section (m)(8)(iii) and, therefore, renders the recording relevant. As such, an administrator’s attempt to argue withholding on the basis of quality assurance will be futile and the recording should be produced to the claimant.

Further, the DOL shot down any argument that relevant records include only paper or other written materials, saying that the preamble to their recent amendments to the regulations makes it clear that audio recordings can be part of the administrative record.

Overall, the information letter shines a spotlight on the common practice of insurers and third party administrators to deny access to audio recordings, often even to representatives of the plan administrator. Looking forward, plan administrators should work with their vendors and review the terms of their service agreements to ensure that any requests for relevant documents, records, or information are reviewed under this broad definition and appropriately provided to the claimant upon request. Not doing so risks non-compliance with the DOL regulations and potentially the imposition of substantial penalties if challenged in court.

Diane Dygert and Lauren Salas

§ 1.51  SCOTUS Doesn’t Want to Tell Us How They Really Feel About The ACA – Dismissal of ACA Lawsuit Based Only on Standing Grounds

Seyfarth Synopsis:  In Texas v. California, the Supreme Court rejected another challenge to the Affordable Care Act (“Obamacare” or “ACA”). The Court never reached the merits of the challenge, relying instead on its now robust Article III standing doctrine. The plaintiffs failed to allege injury traceable to the allegedly unlawful conduct and likely to be redressed by their requested relief.

On June 17, in Texas v. California, the Supreme Court dismissed the declaratory judgment challenge to the ACA’s constitutionality brought by Texas and 17 other states (and two individuals), finding that the plaintiffs lacked Article III standing. Our earlier blog post on this case after oral argument explained that the plaintiffs alleged that the ACA’s “individual mandate” was unconstitutional in the wake of Congress reducing the penalty for failure to maintain health insurance coverage to $0.

The Court side-stepped all issues on the merits, and ruled 7-2 that the plaintiffs did not have standing because they failed to show “a concrete, particularized injury fairly traceable to the defendants’ conduct in enforcing the specific statutory provision they attack as unconstitutional.” The majority said that the plaintiffs suffered no indirect injury, as alleged, because they failed to demonstrate that a lack of penalty would cause more people to enroll in the state-run Marketplaces, driving up the cost of running the programs. Similarly, the majority found no direct injury resulting from the administrative reporting requirements of the mandate. The majority found that those administrative requirements arise from other provisions of the ACA, and not from the mandate itself.

Justices Alito and Gorsuch dissented, opining that the states not only have standing, but that the individual mandate is now unconstitutional and must fall (as well as any provision inextricably linked to the individual mandate).

This is the third significant challenge to the ACA over the last decade.

Moreover, the latest ACA decision has implications beyond just that statute. A solid majority of the Court has emboldened its already tough standing requirements that precondition any merits consideration in federal court. Our prior blogs here and here, have explained that the Court is intent on narrowing the door to the courthouse for many cases, including ERISA cases. This is significant because ERISA fiduciary breach cases, in particular, can be brought only in federal court. As such, we expect to see more ERISA defense arguments based on Article III standing deficiencies. And it certainly will not be enough for plaintiffs to mount a challenge under the Declaratory Judgment Act as a way to avoid the very stringent Article III injury in fact requirement.

Benjamin J. Conley and Mark Casciari

§ 1.52  Lights, Camera, Action! Another Extension to the Relief For Remote Plan Elections: Is Permanent Relief On Its Way?

Seyfarth Synopsis: The IRS has extended its relief from the physical presence requirement related to certain plan elections through June 30, 2022.

Certain elections for distributions from plans require spousal consent provided in the presence of a notary or plan representative. Although states were relaxing their notarization requirements due to the COVID-19 pandemic, many plan administrators were reluctant to accept remote notarizations for plan elections because a “physical presence” requirement remained in the IRS guidance.

In June 2020, the IRS gave temporary relief from the physical presence requirement in the Treasury Regulations related to plan elections. The relief allowed for elections to be witnessed by a notary public of a state that permits remote electronic notarization using live audio-video technology. It also allowed remote witnessing by plan representatives using live audio-video technology if certain requirements were met. See our prior blog post on this relief here.

In January 2021, the IRS further extended this temporary relief through June 30, 2021. The IRS has now extended the relief for another 12 months through June 30, 2022. The guidance also requests specific comments on whether the relief should be permanent. Among other items, the IRS asked for comment about any costs or burdens associated with the physical presence requirement and whether the removal of the physical presence requirement could cause increased fraud, spousal coercion or abuse.

This guidance will provide plan sponsors and plans continued flexibility as plan participants continue to work remotely to some degree, and particularly with respect to former employees, and we expect that plan administrators would welcome the opportunity to continue to use remote authorizations. In fact, given the widespread acceptance of remote work technologies, including video meetings apps, it makes sense that the IRS is considering making the relief permanent. Seyfarth will continue to monitor how the physical presence requirements for plan elections are evolving.

Christina Cerasale

§ 1.53  Agencies Add Lengthy “No Surprises Act” Regulations to your Summer Reading List: Overview of Impact on Employer-Sponsored Plans

Seyfarth Synopsis: The No Surprises Act (the “Act”) was part of the Consolidated Appropriations Act of 2021 signed into law last December 2020. The Act was aimed at protecting insured individuals from getting a bill from a health care provider for the balance of amounts not covered by their health plan. The first set of interim final regulations (IFRs) under this new Act were released last week by the Departments of Treasury, Labor, and Health and Human Services. This alert provides an overview of the impact on employer-sponsored plans.  For our broader overview of the regulations, see our July 9 Legal Update.

While most people do expect to pay some portion of the cost of their medical services after their plan pays, the “surprise” comes when these non-covered balances are exceedingly large. This is often the case when the health care provider is not “in-network” under the health care plan and is therefore free to charge whatever rate it wants for the service provided. Even when individuals make efforts to ensure their health care is provided by an in-network doctor or hospital, out-of-network services can sneak into the overall care and treatment program without their knowledge or consent. Surprise!

Prior to the No Surprises Act, the Affordable Care Act provided some level of financial protection for participants who incurred emergency services by setting a minimum level of reimbursement for health plans. These new IFRs, however, will effectively replace those rules, as of January 1, 2022. Notably, the ACA’s rules only apply with respect to so-called “non-grandfathered plans” (i.e., those that had been modified from a cost-sharing perspective since 2010 when the ACA passed into law). These new rules apply to all group health plans, without regard to grandfathered status.

The IFR tries to implement the protections for covered individuals for balance billing surprises by putting various requirements on both health care providers as well as health plans, including insurers and self-funded employer-sponsored plans.

Briefly, the rule accomplishes this goal through the following steps:

1. Identifies three settings in which the law has determined participants should not be held accountable for balance billing. These settings include: non-network emergency services, services performed by a non-network provider in a network facility, and non-network air ambulance services.
2. Requires plans to pay for services in those settings at certain minimum rates and to allow participants to pay at cost-sharing levels akin to what would be paid in-network.
3. Requires providers to object and/or negotiate an agreed-upon payment amount with the plan within 30 days.
4. If no agreement is reached, the rule requires plans and providers to submit to a binding independent dispute resolution where a third-party determines the appropriate payment rate.

This alert provides additional details on each of these steps, including:

Coverage Rules

• Health plans must cover emergency services without any prior authorization and regardless of whether the facility is in-network.

Observation: Most employer-provided health plans already meet this requirement, as the ACA mandated this coverage for all non-grandfathered plans. Although, the definition of emergency services has been broadly interpreted under these rules and should be reviewed in conjunction with your claims administrator.

• Health plans must cover certain out-of-network services, performed as part of an in-network visit, even if generally excluded.

Observation: So, a plan that generally excludes all coverage for services performed by out-of-network providers, such as an HMO or EPO, may have to adjudicate related claims for out-of-network provider services where they are performed as part of a participant’s visit to an in-network facility.

Cost-Sharing Rules

• Health plans must limit required participant cost sharing for out-of-network services in these settings to no more than the level required for the same in-network services.

Observation: This may require plans to modify their network cost-share to match. For example, both in- and out-of-network cost sharing would be set at 80%-20%, as opposed to setting out-of-network at a lower level, such as 70%-30%.

• Health plans must count any participant cost share—whether incurred in- or out-of-network—toward in-network accumulators (deductibles and out-of-pocket maximums).

Observation: This may require a change to how some plans currently tally the participant-paid portion of their health services.

• Getting to the crux of the matter for employer health plans—to the extent that a plan typically reprices non-network claims, the plan must calculate the payment to out-of-network providers (and the resulting cost-share required of participants) as if the total amount that was charged was equal to the “recognized amount.” This recognized amount is lesser of the All-Payer Model Agreement of the Social Security Act (APMA), state law where the APMA does not apply, or the “qualifying payment amount” (QPA) where state law does not apply.

Observation: The QPA will generally be the applicable standard for employer group health plans, except where the plan is fully insured. In that case, the relevant state law (if any) would apply.  Self-insured plans are permitted (but not required) to opt-in to governing state laws, but to the extent such a plan opts in, the plan will be required to notify participants of the law’s applicability.

• The QPA is the lesser of the provider’s billed charge or the plan’s median contracted rate for the same or similar service in the geographic region where the service is performed. The IFRs start out by looking at the contracted rates in place under a plan as of January 1, 2019.

Observation: The QPA (or state law) will replace the traditional usual, customary and reasonable standard (UCR) or Medicare rate that many plans used, as well as other external measures (e.g., Fair Health) that many providers have pushed (at least in the context of services covered by the No Surprises Act). The agencies are particularly looking for comments on how to determine the QPA.

• Any “clean claim” for a service covered by the IFR must be processed by the health plan within 30 days.

Observation: Typically, ERISA requires that a plan issue a notification of an adverse benefit determination on a post-service claim within 30 days, so this largely aligns with how these types of claims would typically be processed.

Prohibition on Balance Billing

• The IFRs limit the amount required to be paid to an out-of-network provider by the plan to the amount agreed to by the employer’s plan (where state law is not applicable) or, if there is no agreement, to an amount determined by an “IDR entity.” The IDR is directed to consider the QPA when making its determination. The IFR defers on the details of the IDR entity process for future regulatory guidance.

Observation: As this rule is slightly different from the cost-sharing rule above, the payment to the provider might result in a different amount from the recognized amount less the cost-share portion.

• The rules require providers to obtain consent from patients to waive balance billing protections, if they want to have the right to balance bill for certain post-stabilization services or non-emergency services by an out-of-network provider at a network facility.

Observation: While this requirement generally applies to health care providers and not the health plans, it is important to know that participants must receive this notice and provide their consent in order for the out-of-network provider to try to impose any obligation on the participant for the balance after the plan has paid.

Notice Requirements

• Both plans and providers must post a publicly available notice about the protections for balance billing, and plans must include relevant language on each EOB for a covered service. The agencies issued a model disclosure notice that may be used.

Observation: Employer plans should work with their administrator to ensure the required information is available on the website and added to each EOB.  Further, plan administrator may want to include this information in the plan’s SPD.

The regulations are generally effective for group health plans for plan years beginning on or after January 1, 2022. That means any planning for required changes to plans should start now.  Be sure to reach out to your Seyfarth Employee Benefits lawyer for information and assistance as you work through these new rules.

Benjamin J. Conley and Diane V. Dygert

§ 1.54  PBGC Issues Much Anticipated Interim Final Rule on Special Financial Assistance Under American Rescue Plan Act

Seyfarth Synopsis:  On July 9, 2021, the PBGC issued its interim final rule on ARPA’s Special Financial Assistance Program for financially troubled multiemployer pension plans.  The new regulations provide guidance on the application process for Special Financial Assistance and the related restrictions and requirements, including the priority in which applications will be reviewed.  The guidance also sets forth special rules regarding employer withdrawals and withdrawal liability settlements for plans receiving Special Financial Assistance.  Please see our companion Legal Update on the Pension and Executive Compensation Provisions in the American Rescue Plan Act here.

On July 9, 2021, the Pension Benefit Guaranty Corporation (“PBGC”) issued extensive guidance in an interim final rule interim final rule  (the “Interim Final Rule,” “Rule,” or “regulation”) to implement the American Recue Plan Act’s Special Financial Assistance (“SFA”) Program for financially troubled multiemployer defined benefit pension plans.  Under the SFA Program, an eligible plan will receive the funds required for the plan to pay all benefits due from the date of the SFA payment and ending on the last day of the plan year ending in 2051.  An eligible plan will receive – in a single lump sum payment – the funds required to pay all benefits due (Click here for our Legal Update on the Pension and Executive Compensation Provisions in the American Rescue Plan Act).

The Interim Final Rule, set forth in new Section 4262 of the PBGC’s regulation, provides guidance to plan sponsors on the SFA application process, including what plans need to file to demonstrate eligibility for relief; calculating the amount of SFA; assumption requirements;  the PBGC’s review of SFA applications; and other restrictions and conditions.  The Interim Final Rule also sets forth the order of priority in which applications will be reviewed and provides much anticipated clarification on the calculation of withdrawal liability and the assumptions to be used for SFA.

There is a thirty (30) day public comment period starting from the date of publication of the rule in the Federal Register on July 12, 2021.

The following is a high level summary of the key provisions from the Interim Final Rule.  Seyfarth will hold a webinar on Friday, July 30, 2021, at 1:00 central to review the regulation in more detail, as well as the considerations for plan sponsors and contributing employers.  Stay tuned for more details about the webinar.

1. Eligible Multiemployer Pension Plans

A multiemployer pension plan is eligible for SFA relief if they fall into any one of the following four categories:

1. The multiemployer pension plan is in critical and declining status in any plan year beginning in 2020 through 2022;
2. The multiemployer pension plan suspended benefits in accordance with the Multiemployer Pension Reform Act of 2014 (“MPRA”);
3. The multiemployer pension plan: (i) is certified by the plan actuary to be in critical status in any plan year beginning in 2020 through 2022; (ii) has a “modified funded percentage” (defined as the percentage equal to a fraction, the numerator of which is current value of plan assets and withdrawal liability due, and the denominator of which is current liabilities) of less than 40%; and (iii) has a ratio of active to inactive participants which is less than 2 to 3; or
4. The multiemployer pension plan became “insolvent,” as defined under Code Section 418E, after December 16, 2014, and has remained so insolvent and has not been terminated as of March 11, 2021.

Elected Critical Status Plans, Plans Terminated by Mass Withdrawal Prior to January 1, 2020

The regulation clarifies that a multiemployer pension plan that has elected to be in critical status under ERISA Section 305, but has not yet been certified as being in critical status, is not eligible for SFA.  Similarly, a multiemployer pension plan that is terminated by mass withdrawal that took place prior to January 1, 2020 is not eligible for SFA relief.

Clarification on Determining Eligibility for Critical Status Plans

To ensure uniformity in applications, the data reported on the Form 5500 is to be used for purposes of determining a plan’s eligibility for SFA as a critical status plan under category “3” above.  For purposes of determining the number active to inactive participants, plans should use line 6a on the 2020 Form 5500 (for total number of active participants), and the sum of lines 6b, 6c, and 6e (for total number of inactive participants based on retired or separated participants receiving benefits, retired or separated participants entitled to future benefits, and decease participants whose beneficiaries are receiving or entitled to benefits).

The regulation also provides that the three conditions necessary for a critical status plan to be eligible for SFA in category 3 above do not need to be satisfied for the same plan year, in recognition that the filing deadlines for the certification of plan’s status (known as the “zone certifications”) and the Form 5500 are not the same.  The deadline for filing the certification of plan status can be more than a year before the deadline to filing the Form 5500 for the same plan year in question, and the data used for both purposes maybe from different plan years.

Assumptions For Determining Eligibility

The treatment of assumptions under the Rule differs based on the date of the applicable zone certification for the plan.  If a plan sponsor applies for SFA and asserts eligibility based on a certification of critical status or critical and declining status issued prior to January 1, 2021, the PBGC is required to accept the assumptions that are incorporated into the certification, unless they are clearly erroneous.

If a plan sponsor applies for SFA and asserts eligibility based on a zone certification of critical status that was not completed prior to January 1, 2021, the plan sponsor must determine whether the multiemployer pension plan is still in critical or critical and declining status using the assumptions from the plan’s most recently completed certification prior to January 1, 2021, unless those assumptions are unreasonable (excluding the plan’s interest rate).  If a plan sponsor determines one or more of those assumptions are no longer reasonable, they may propose changes to them in its application for SFA.  The sponsor must disclose the proposed change, explain why the assumptions are no longer reasonable, and demonstrate that the proposed changes are reasonable.

2. Amount of Special Financial Assistance

Under ARPA, the amount of SFA relief for eligible multiemployer plans is the “amount required for the plan to pay all benefits due during the period beginning on the date of payment of the special financial assistance payment…and ending on the last day of the plan year ending in 2051….”  The PBGC clarifies that the plain meaning of the statutory language means the SFA is the amount by which “a plan’s resources fall short of its obligations, taking all plan resources and obligations into account.”  The relevant amounts are determined as of the “SFA measurement date,” which is the last day of the calendar quarter immediately preceding the date the plan’s application was filed.  The amount of SFA, however, is subject to further adjustment for interest, outstanding PBGC loans, and the date that funds are paid to the plan.

Resources and Obligations

The value of a multiemployer pension plan’s obligations is the sum of the present value of specified benefits payments and administrative expenses to be paid by the plan through the “SFA Coverage Period” (the period beginning on the plan’s SFA measurement date and ending on the last day of the last plan year ending in 2051).  The amount of benefit payments is determined as of the SFA measurement date, and is calculated by including any reinstated benefits that were previously suspended under the MPRA.

A multiemployer pension plan’s resources include the total fair market value of assets as of the SFA measurement date, plus the present value of future contributions, investment returns, withdrawal liability payments, and other expected payments into the plan during the SFA Coverage Period.  It does not include any financial assistance loans received from the PBGC under ERISA Section 4261 or the amount of SFA.

3. Calculating SFA

The projection of the plan’s resources and obligations must be made on a deterministic basis and using a single set of assumptions as set forth in Section 4262.4(d) of the new regulation.  That means projections must be made based on participant data as of the first day of the plan year in which the plan’s initial application is filed for SFA.  If the initial application date is less than 270 days after the beginning of the current plan year, and the current year’s actuarial valuation is not yet complete, the projections may be based instead on participant census data from the first day of the plan year preceding the plan year that the initial application is filed.

The amount of SFA must generally be calculated in accordance with generally accepted actuarial principals and certain prescribed assumptions as set forth below.

Interest Rate Assumption

For purposes of determining the amount of SFA, the assumed interest rate is the lesser of: (1) the long-term interest rate used for funding standard account purposes as projected in the most recent certification of plan status completed before January 1, 2021; and (2) the “third segment rate” specified in ERISA Section 303(h) plus 200 basis points, for the month the plan’s application is filed or one of the three preceding months, as selected by the plan.

Other Assumptions

For any other assumptions than the interest rate, the plan is to look to those used in its most recently completed certification of plan status before January 1, 2021, unless they are unreasonable.  If a multiemployer plan determines that any such assumptions are unreasonable, it may include a proposed change in its SFA application, except with respect to the interest rate assumption.  The PBGC will accept a plan’s proposed changes to these assumptions unless it determines that the assumption is “individually unreasonable,” or that the proposed changes in assumptions are “unreasonable in the aggregate.”

4. Multiple Applications

The PBGC explains that the wording of ARPA suggests plans may have multiple filing dates by providing for separate deadlines for initial applications and revised applications.  The PBGC also notes there is no limit to the number of times a multiemployer pension plan may revise its application for SFA, as long as the last revised application is filed by the statutory deadline of December 31, 2026.  To prevent plan sponsors from submitting multiple applications to change the interest rate, however, the PBGC dictates in the Rule that the assumed interest rate will always be the rate from the plan’s initial application.

5. Certain Events Disregarded For Calculation Of SFA

Recognizing that a plan could implement certain changes that could entitle the plan to more SFA than was intended under the ARPA, certain events that occur between July 9, 2021 and the SFA measurement date (the last day of the quarter preceding the plan’s application) are disregarded in calculating the amount of SFA for a multiemployer pension plan.  The following events are disregarded:

1. Transfers of assets or liabilities, including spin-offs.
2. Benefit Increases. The execution of a plan amendment increasing accrued or projected benefits, other than a restoration of benefits previously reduced under the MPRA.
3. Contribution Reductions. The execution of “a document reducing a plan’s contribution rate (including any reduction in benefit accruals adopted simultaneously or arising from a pre-exiting linkage between benefit accruals and contributions),” but only if the plan does not demonstrate that risk of loss for participants and beneficiaries is reduced by execution of the document (disregarding any SPA). The plan sponsor must make such demonstration in accordance with the instructions on the PBGC’s website at gov.  The “document” referred to in this rule can be either a collective bargaining agreement not rejected by the plan, or a document reallocating contribution rates.

If a multiemployer pension plan experiences a merger between July 9, 2021, and the measurement date, the total amount of SFA available is limited to the sum that each individual plan would have been eligible for had the merger not occurred.  The PBGC further concludes that it is reasonable and within its regulatory authority to disregard changes made to a multiemployer pension plan after July 9, 2021, if the effect was to artificially inflate the amount of SFA.  In that regard, the PBGC explained it was authorized to impose reasonable conditions to ensure that the amount of SFA provided to plans is not “inflated by way of contrived events.”

6. Information To Be Filed With SFA Application

Initial Application

The following information is required to be submitted with a multiemployer pension plan’s SFA application in order for it to be considered complete:

1. Basic plan information specified in Section 4262.7 of the new regulation, including the name of the plan, EIN and plan number, identification of the individual filing the application and his or her role, contact information for the plan sponsor and authorized representative(s), the amount of SFA requested, identification of the applicable eligibility criteria, priority group identification, plan documents, actuarial valuation reports from the 2018 plan year to the year the application is filed, most recent rehabilitation or funding improvement plan and all amendments, Form 5500 filings, actuarial certifications and financial information, and withdrawal liability policies and procedures;
2. Actuarial and financial information specified in Section 4262.8, including projected benefit payments as reported on Form 5500 and Schedule MB for 2018 to the year the application is filed, identification of the 15 largest employers (for plans with more than 10,000 participants), historical financial information, information used to determine the amount of SFA including, among other things, interest rate, fair market value of plan assets, projected amount of contributions and withdrawal liability payments, projected administrative expenses, and explanations for any proposed changes to assumptions from certification prior to January 1, 2021, and information regarding certain events;
3. Copy of an executed plan amendment confirming the plan was amended to add the following provision: “Beginning with the SFA measurement date selected by the plan in the plan’s application for special financial assistance, the plan shall be administered in accordance with the restrictions and conditions specified in section 4262 of ERISA and 29 CFR part 4262. This amendment is contingent upon approval by PBGC of the plan’s application for special financial assistance;”
4. Copy of a proposed plan amendment to reinstate any benefits previously suspended under the MPRA;
5. A complete checklist and certain other information as described on the PBGC’s website at gov.

Trustee Signature

The application for SFA must be signed and dated by an authorized trustee who is a current member of the plan’s board of trustees, or another authorized representative.  The following statement must also be included in the application and signed by the authorized trustee:

“Under penalties of perjury under the laws of the United States of America, I declare that I have examined this application, including accompanying documents, and, to the best of my knowledge and belief, the application contains all the relevant facts relating to the application, and such facts are true, correct, and complete.”

Actuarial Certification

All required calculations for the SFA application must be accompanied by a certification by the plan’s enrolled actuary.

Duty to Supplement and Clarify

The PBGC may require additional information from the plan sponsor to substantiate or clarify information provided in the application.  Plan sponsors are required to promptly comply with such requests.

The regulation specify that plan sponsors have a duty to promptly notify the PBGC if at any time when the application is pending they become aware that any material fact or representation is no longer accurate, or that any material fact or representation was omitted from the application.

Disclosure of Information

Unless it is considered confidential under the Privacy Act, all information submitted as part of an SFA application may be made publicly available, and the PBGC offers no assurances that any information or documentation submitted with an application will remain confidential.

7. Applications For Plans With Partitions

ARPA requires the PBGC to provide an alternative application for use by multiemployer pension plans that have been approved for a partition by the PBGC before March 11, 2021.  This alternative process is provided in Section 4262.9 of the new regulation.  A plan sponsor of a partitioned plan must file a single application with information about the original plan and successor plan.  The filing of an application for partitioned plans falls under “priority group 2.”

8. Processing, Priority Groups, And Filing Deadlines

All initial applications for SFA must be filed by December 31, 2025.  Any revised application must be filed by December 31, 2026.  Applications must be filed electronically.

The PBGC will limit the number of applications accepted in a manner so that each application can be processed within 120 days.  The PBGC will approve or deny the application within 120 days. The PBGC may consider an application incomplete if it does not have all of the required information.  A plan sponsor may withdraw their application or revise it.

Priority Groups

Until March 11, 2023, certain plans will be given priority to file an application if they are in one of the following groups:

Priority Group 1.  The plan is insolvent or projected to become insolvent by March 11, 2022.  A plan in priority group 1 may file SFA applications beginning on July 9, 2021.

Priority Group 2. The plan suspended benefits under the MPRA as of March 11, 2021, or the plan is expected to be insolvent within 1 year of the date the plan’s application was filed (as indicated above, plans that have undergone partition also fall in priority group 2).  A plan in priority group 2 may file SFA applications beginning on January 1, 2022, or such earlier date specified on the PBGC’s website.

Priority Group 3. The plan is in critical and declining status and had 350,000 or more participants.  A plan in priority group 3 may file SFA applications beginning on April 1, 2022, or such earlier date specified on the PBGC’s website.

Priority Group 4. The plan is projected to become insolvent by March 11, 2023.  A plan in priority group 4 may file SFA applications beginning on July 1, 2022, or such earlier date specified on the PBGC’s website.

Priority Group 5. The plan is projected to become insolvent by March 11, 2026.  The PBGC will specify the date a plan in this group can file an application on its website at least 21 days in advance of such date, and such date will not be later than February 11, 2023.

Priority Group 6. The plan is projected by the PBGC to have a present value of financial assistance payments under ERISA Section 4261 that exceeds $1,000,000,000 if special assistance is not provided.  The PBGC will specify the date a plan in this group can file an application on its website at least 21 days in advance of such date, and such date will not be later than February 11, 2023.

Additional Priority Groups.  The PBGC may add additional priority groups and deadlines to apply, which will be posted on its website.

Beginning with when the PBGC starts accepting applications for priority group 2, an application for emergency filing may be accepted if: (1) the plan is insolvent or expected to become insolvent within 1 year of filing the application or suspended benefits under the MPRA as of March 11, 2021; and (2) the plan notifies the PBGC before submitting the application that it qualifies as an emergency in accordance with the instructions on the PBGC website.

9. Restrictions on SFA Use and Investment

A multiemployer pension plan that receives SFA must separately account for such amounts and it must be segregated from other assets.  SFA funds, and any earnings thereon, can only be used to make benefit payments and pay administrative expenses.  SFA funds must also be invested in fixed income securities and investment-grade bonds or other investments as permitted by Section 4262.14 of the PBGC regulation. Plans will be required to keep at least one year’s worth of benefit payments and administrative expenses invested in accordance with these rules, even if it runs out of SFA funds.

The PBGC acknowledged concerns that its restrictions on investing SFA could have adverse impacts on overall plan financial health, especially given historically low interest rates on fixed income securities.  The PBGC considers the investment restrictions set forth in the new regulation to be a starting point, and is seeking public input on refining its rules in this area, with several specific questions posed by the PBGC for public comment.

10. Conditions for Receipt of SFA

A multiemployer pension plan that receives SFA must be administered in accordance with PBGC guidelines.  Those conditions include prohibiting benefit increases during the SFA period if it is attributable to service accrued prior to the amendment  (other than restoring benefits suspended under the MPRA), and only allowing prospective benefit increases where the plan’s actuary certifies that employer contribution increases are sufficient to pay for the benefit and those increases were not included in the determination of SFA.

During the SFA period, the contributions that a multiemployer pension plan receives per contribution base unit (e.g., per hour worked) cannot be less than those set forth in the collective bargaining agreement(s) or plan documents in effect on March 11, 2021, unless the plan sponsor determines the change lessens the risk of loss to participants.  If the reduction affects annual contributions over $10 million and over 10% of all employer contributions, the change is subject to PBGC approval.

The regulation also prohibits a decrease in the proportion of income received or an increase in the proportion of expenses allocated to a plan that receives SFA, subject to certain exceptions.  Plans receiving SFA are also prohibited from engaging in a transfer of assets or liabilities (including a spinoff) or merger except with PBGC approval.

The PBGC is soliciting public comment on whether there are other circumstances relating to the conditions for receipt of SFA where the PBGC should consider providing approval for exceptions.

11. Withdrawal Liability Conditions for Receipt of SFA

As anticipated, the PBGC did impose certain conditions on withdrawal liability for plans that receive SFA.  The PBGC, however, considered and apparently rejected mandating that, during the SFA Coverage Period, SFA assets would be disregarded in the determination of unfunded vested benefits for the assessment of withdrawal liability.  Instead, it adopted two other conditions: a restriction on withdrawal liability interest assumptions, and a requirement for PBGC approval of certain withdrawal liability settlements.

Withdrawal Liability Interest Assumptions

The interest assumptions used to determine unfunded vested benefits and calculate withdrawal liability must be the PBGC’s mass withdrawal interest assumptions that approximate the market price that insurance companies charge to assume a similar pension-benefit-like liability.  Plans receiving SFA must use those interest assumptions for withdrawal liability calculations until the later of 10 years after the end of the plan year in which the plan receives payment of SFA or the last day of the plan year in which the plan no longer holds SFA or any earnings thereon in a segregated account.  Given plan termination interest rates are generally much lower than rates most plans use to calculate withdrawal liability, this will likely increase a withdrawing employer’s liability—although whether that increase will necessarily offset the impact of SFA may depend upon the particular circumstances of the withdrawing employer and the plan.

The PBGC determined that without the interest assumption change “the receipt of SFA could substantially reduce withdrawal liability owed by a withdrawing employer,” and “could cause more withdrawals in the near future than if the plan did not receive SFA.”  Payment of SFA “was not intended to reduce withdrawal liability or to make it easier for employers to withdraw.”

PBGC Approval of Certain Withdrawal Liability Settlements

Any settlement of withdrawal liability during the SFA Coverage Period is subject to PBGC approval if the present value of the liability settled is greater than $50 million.  The PBGC will only approve such a settlement if it determines that: (1) it is in the best interests of the participants in the plan; and (2) it does not create an unreasonable risk of loss to PBGC.  The information the PBGC will require in order to review a proposed settlement includes: the proposed settlement agreement; the facts leading to the settlement; the withdrawn employer’s most recent 3 years of audited financials and a 5-year cash flow projection; a copy of the plan’s most recent actuarial evaluation; and a statement certifying the trustees have determined that the proposed settlement is in the best interest of the plan, its participants and beneficiaries.

12. Promise of Additional PBGC Regulations as to Assumptions for All Plans

Last but not least, in its explanation of the final interim rule the PBGC noted that it plans to use its authority under Section 4213(a) of ERISA to propose a separate rule of general applicability setting forth actuarial assumptions which “may” be used to determine an employer’s withdrawal liability.  Presumably, this general rule would be applicable to all plans, not simply those that receive SFA.  This could have a significant impact on how withdrawal liability is calculated in the future.

CONCLUSION

It will take some time for plans and participating employers to digest the interim final rule and what it means for their particular situation.  As noted there will be a thirty-day public comment period, which may lead to additional changes.  The PBGC is not done with its rulemaking, both as to SFA recipients or, apparently, plans generally.  Stay tuned, and mark your calendars for the webinar on July 30th.

There are a number of issues that have not been addressed in this regulation, and we will be issuing a further memorandum soon outlining some of the important open questions.

Seong Kim, Ronald Kramer and Alan Cabral

§ 1.55  Who Is Liable for Withdrawal Liability? — The Seventh Circuit Explains an Expansive Definition

Seyfarth Synopsis: In a recent decision highlighting the potential for far-reaching responsibility for withdrawal liability payments, the Court of Appeals for the Seventh Circuit affirmed a judgment against two individuals contending that their ownership interest in the contributing company’s principal place of business was a purely passive investment.

In February 2018, a trucking company ceased all operations and withdrew from the Local 705 Teamsters Multi-Employer Pension Fund.  The fund sent the company, and the individuals who owned its principal place of business, a demand for payment of withdrawal liability.

The company and the individuals did not request review of the demand.  The fund then commenced litigation to collect on its demand.

The Seventh Circuit affirmed a judgment in favor of the fund and against the contributing company and individuals.  The decision is reported as Local 705 International Brotherhood of Teamsters Pension Fund v. Pitello, 2021 WL 2818326 (7th Cir. July 7, 2021).

The court explained that withdrawal liability extends to all “trades or businesses” under common control with the withdrawing employer, on a joint and several liability basis.  The court said that joint and several liability does not extend, however, to parties with purely “passive or personal investments.”

The individuals argued that their ownership of the at-issue property should not be deemed a trade or business because they: (1) never received any rent or tax benefits as a result of the company’s use of the property, (2) purchased the property 18 years earlier and held it purely as an investment, (3) did not lease it to anyone after the company ceased operations, and (4) never employed anyone to manage the property.

The court found that another company the individuals owned did charge rent for the property after the contributing company ceased operations.  The court thus reasoned that “whatever value the[y] received through their rent-free arrangement with [the company] had been lost,” and the decision to generate replacement rental income thereafter made clear that their ownership of the property was a business venture.

Moving forward, this decision should serve as a reminder that courts are willing to entertain expansive definitions of who may be jointly and severally liable for withdrawal liability. See our articles that address the complexity of judicial review on the scope of liability.  No Partnership, No Common Control, No Withdrawal Liability: Private Equity Funds Not Liable for Portfolio Company’s Multiemployer Plan Withdrawal Liability | Beneficially Yours and The Ninth Circuit Hammers Out A New Successorship Liability Test Under The MPPAA | Beneficially Yours. All companies and individuals in this space also should become familiar with the PBGC’s interim final rule on the Special Financial Assistance provisions of the American Rescue Plan Act, which sets forth rules on employer withdrawals and withdrawal liability settlements.  See PBGC Issues Much Anticipated Interim Final Rule on Special Financial Assistance Under American Rescue Plan Act | Beneficially Yours.

Mark Casciari, Tom Horan and James Nasiri

§ 1.56  Paycheck Protection Program: Loan Forgiveness Deadlines Approaching

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The Paycheck Protection Program (PPP) loan forgiveness deadlines are quickly approaching. In order to avoid making unnecessary PPP loan payments, borrowers must submit loan forgiveness applications to their lenders within 10 months from the end of their respective covered periods. This means that borrowers receiving PPP loans in the initial tranche in early- to mid-April 2020 will have due dates beginning in July 2021. If a loan forgiveness application is received by the due date, payments are deferred until a decision on the forgiveness application is made by the lender and the Small Business Administration (SBA).

In December 2020, the SBA began requiring borrowers of more than $2 million to submit a loan necessity questionnaire in connection with the application for loan forgiveness. Many borrowers found these questionnaires to be intimidating, burdensome, and intrusive.

Significantly, the SBA has officially eliminated the loan necessity forms and review for PPP loans of $2 million or greater in a notice sent out on July 9, 2021. In this notice, the SBA said it would no longer request either version of the loan necessity questionnaire (SBA form 3509 for for-profit borrowers and SBA Form 3510 for not-for-profit borrowers). Also, loan necessity questionnaires previously requested are no longer required to be submitted. For PPP loans with an open request for additional documentation related to the loan necessity questionnaire, the SBA advised lenders to close the request and submit the loan back to the SBA.

Thus, to apply for loan forgiveness, the SBA Form 3508, SBA Form 3508EZ, or SBA Form 3508S (or a lender equivalent) must be completed and submitted to the lender, together with supporting documentation. Although the SBA eliminated the loan necessity questionnaire, it did not eliminate the need for borrowers requesting forgiveness of a PPP loan to document the use of loan proceeds.

For payroll, documentation should be provided for payroll periods that overlapped with the covered period. This would include bank statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees. It could also include payroll tax reported, or that will be reported, to the IRS (typically Form 941) and state quarterly employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant states.

Wages may not be taken into account when calculating eligible payroll costs for loan forgiveness to the extent they are qualified wages paid during April 1, 2020, through December 31, 2021, that are taken into account for purposes of claiming the Employee Retention Credit under Section 2301 of the CARES Act.

Documentation of forgivable non-payroll costs should also be included. For example, lender amortization schedules and receipts verifying payments, or lender account statements, can document business mortgage interest payments. Similarly, copies of leases and receipts or cancelled checks can verify rent expenses. Similar documentation can confirm utility payments, eligible operations expenditures, eligible supplier costs, and eligible worker protection measures.

The loan forgiveness application and supporting documentation must be submitted to the PPP lender, usually via an online portal. It is critical for borrowers to follow up with their lender promptly regarding requests for additional documentation, and to communicate with their lender throughout the loan forgiveness process.

The SBA still has the right to undertake a review of the PPP loan and the forgiveness decision by the lender. If it does so, the lender will provide the borrower notification of the SBA review, and any subsequent SBA review decision. Borrowers have the right to appeal certain SBA review decisions.

In summary, the PPP loan forgiveness deadlines are quickly approaching, but the process has recently been made simpler by elimination of the loan necessity questionnaire previously in place for PPP loans of $2 million or greater. Despite elimination of the necessity questionnaire, the SBA has not eliminated its review of loan necessity.

PPP borrowers are urged to submit their loan forgiveness application and supporting documentation within 10 months of the last day of the covered period in order to obtain deferral of PPP loan payments and ultimately loan forgiveness.

William B. Eck, Stanley S. Jutkowitz and Suzanne L. Saxman

§ 1.57  IRS Issues Highly Anticipated Update to Qualified Plan Correction Procedures

On July 16, 2021, the IRS issued Revenue Procedure 2021-30, updating its Employee Plans Compliance Resolution System (“EPCRS”), which permits retirement plan sponsors and administrators to correct compliance failures that may adversely impact the tax-qualified status of their defined contribution (including 403(b)) and defined benefit plans. Rev. Proc. 2021-30 includes numerous highly anticipated (and mostly welcome) updates to the IRS correction procedures, including two new correction methods for defined benefit plan overpayments, an increase in certain de minimis correction thresholds, elimination of the ability to make an anonymous submission under the program, and the expansion of the Self-Correction Program (“SCP”) with respect to the use of retroactive plan amendments. Unless otherwise noted below, the changes to EPCRS are effective July 16, 2021.

Correction of Plan Overpayments

Undoubtedly, the most significant changes to EPCRS relate to the correction of plan overpayments. Several years ago, the IRS updated EPCRS to set forth the methods that could be used by a plan sponsor to correct a plan overpayment. Generally, these options included the return of overpayment method, a “make-whole” contribution by the plan sponsor for the amount of the overpayment (adjusted for earnings) or, in some cases, a retroactive plan amendment. For several years, the IRS has been considering additional changes relating to the recoupment of overpayments. The hope has been that any update would address when it may not be necessary to recoup an overpayment from a participant. Happily, the Revenue Procedure has been revised and reformatted to include helpful clarifications relating to the long-standing return of overpayment method, as well as two new correction methods that plan sponsors may use to correct defined benefit plan overpayments.

Return of Overpayment Method (Applicable to DC and DB Plans)

Under Revenue Procedure 2019-19, the prior iteration of EPCRS, plan sponsors may generally correct overpayments from defined contribution plans (including 403(b) plans) and defined benefit plans by using the return of overpayment correction method. Under this method, the plan sponsor takes reasonable steps to have the amount of the overpayment, adjusted for earnings at the plan’s earnings rate, returned to the plan by the participant. If the amount returned to the plan is less than the overpayment, adjusted for earnings, then the plan sponsor must contribute the difference to the plan unless the overpayment only occurred because the distribution was made in the absence of a distributable event and the amount of the distribution was otherwise consistent with the plan’s terms. The plan sponsor must also notify the participant that the amount of the overpayment was not eligible for tax-free rollover.

Rev. Proc. 2021-30 expands upon the return of overpayment correction method, providing that plan sponsors may give the recipient of an overpayment a choice of how they would like to repay. Specifically in the context of defined benefit plans, plan sponsors may allow overpayment recipients to repay as follows:

• As a single, lump sum payment,
• Through an installment agreement (provided the overpayment recipient is not a “disqualified person” or an owner-employee), OR-
• By having future periodic benefit payments reduced by an amount necessary to recoup the amount of the overpayment, if applicable. Note that under this option a spouse’s survivor benefit may not be reduced to recoup the overpayment, even if the overpayment amount has not been fully recouped during the participant’s lifetime.

Note, if the amount repaid to the plan by the overpayment recipient as a lump sum payment or through an installment agreement is less than the amount of the overpayment adjusted for earnings, the plan sponsor must contribute the difference to the plan. This “make-whole” rule, however, does not apply if future periodic benefit payments are reduced to recoup the amount of the overpayment, even if the participant dies, for example, before the entire amount of the overpayment has been recouped.

Revenue Procedure 2021-30 does allow plan sponsors of defined contribution plans to give overpayment recipients a choice as to the method of repayment, but does not point directly to the specific repayment methods permitted for defined benefit plans. We would expect the IRS to interpret this ability to choose in the defined contribution space to include similar methods as described for defined benefit plans, as appropriate.

For both defined benefit and defined contribution plans, the new Revenue Procedure retains language indicating that other appropriate correction methods (presumably those not detailed therein) may be used to correct an overpayment.

New Correction Methods for Overpayments (Applicable to DB Plans)

Revenue Procedure 2021-30 adds two new correction methods that employers may use when correcting overpayments from a defined benefit plan: (1) the funding exception correction method and (2) the contribution credit correction method. As described in more detail below, these new correction methods reduce the amounts necessary for plan sponsors to recoup from participants or to contribute to the plan to make the plan “whole” when overpayment errors occur.

Note, these two new correction methods may not be used if the overpayment is associated with a failure to satisfy a statutory limit, such as Code Sections 401(a)(17), 415(b) and 436, and may also not be used to correct an overpayment made to a disqualified person or an owner-employee.

The Funding Exception Correction Method

As its name suggests, this new correction method is generally tied to a defined benefit plan’s adjusted funding target attainment percentage, or “AFTAP.” Specifically, no corrective payment to the plan (by either the recipient of the overpayment or the plan sponsor) is necessary if, in the case of a plan subject to Code Section 436, the plan’s certified or presumed AFTAP applicable at the time of correction is equal to at least 100% (or, in the case of a multiemployer plan, the plan’s most recent annual funding certification indicates that the plan is not in critical, critical and declining, or endangered status, determined at the date of correction). If these requirements are met, then for purposes of EPCRS:

• No further corrective payments from any party are required,
• Reductions to future benefit payments to the recipient of an overpayment (or the spouse or beneficiary of an overpayment recipient) to recoup the amount of an overpayment are not permitted, and
• Corrective payments from the recipient of an overpayment (or the spouse or beneficiary of an overpayment recipient) are not permitted.

Future benefit payments must be reduced, however, to the correct benefit payment amount, if applicable.

“Contribution Credit” Correction Method

This new correction method limits the amount of an overpayment that is required to be repaid to a plan. Under this method, the amount of an overpayment that must be repaid to the plan is equal to the amount of the overpayment reduced (but not below zero) by a “contribution credit” that is equal to the following:

• The cumulative increase in the plan’s minimum funding requirements attributable to the overpayments (including the increase attributable to the overstatement of liabilities, whether funded through cash contributions or through the use of a funding standard carryover balance, prefunding balance, or funding standard account credit balance), beginning with (1) the plan year for which the overpayments are taken into account for funding purposes, through (2) the end of the plan year preceding the plan year for which the corrected benefit payment amount is taken into account for funding purposes; AND
• Certain additional contributions in excess of minimum funding requirements paid to the plan after the first of the overpayments was made.

If, after applying the contribution credit, the amount of the overpayment is reduced to zero, then (1) no further corrective payments from any party are required, (2) no further reductions to future benefit payments to the recipient of an overpayment (or their spouse or beneficiary) are permitted, and (3) no corrective payments from the recipient of an overpayment (or their spouse or beneficiary) are permitted.

If a net amount of an overpayment remains after applying the contribution credit, the plan sponsor must make a contribution to the plan of the remaining amount or take action to recoup the remaining amount from the overpayment recipient. The amount may be recouped from the overpayment recipient using a method described above (i.e., single sum payment, installments, reduction of future benefit payments), but additional special rules apply when recouping a net overpayment after applying the contribution credit. Also, when requesting a repayment of that net overpayment from a recipient, the plan sponsor must provide the recipient of the overpayment with a special written notice that includes information about the overpayment and about the three repayment options available to the recipient. If the recipient does not choose a repayment option within a reasonable period of time (deemed to be at least 30 days), then the notice must explain that the default repayment option will be the adjustment of future payments, provided the recipient is entitled to future payments under the plan, or a single sum payment if not entitled to future payments. Note, this notice requirement does not appear to apply when providing a recipient with options for repayment under the general repayment of overpayment correction method described above.

In order to be eligible to use the contribution credit correction method, the plan may not have a funding deficiency or an unpaid minimum required contribution as of the end of the last plan year before the plan year for which the plan sponsor takes into account the corrected benefit payment amount for funding purposes (taking into account contributions made after the end of the plan year that are credited to that plan year).

Additional Correction Principles for Overpayments

Revenue Procedure 2021-30 provides that when correcting overpayments, the following correction rules/principles apply (some of these are not new):

• If periodic payments are involved, any future benefit payments must be reduced to the correct benefit payment amount (i.e., plan sponsors must “stop the bleeding”).
• Generally, the plan sponsor must notify the recipient of the overpayment (in writing) that the amount of the overpayment is not an eligible rollover distribution (i.e., is not eligible for tax-free rollover), even if the recipient of the overpayment is not required to repay the amount of the overpayment under the applicable correction methods described above.
• In many circumstances, with a few exceptions, if the overpayment is not repaid, the plan sponsor must make the plan whole. For example, if a net overpayment amount remains after the contribution credit from (2) above is applied and the participant does not repay the overpayment amount, the plan sponsor must reimburse the plan for the remaining amount of the overpayment (adjusted for earnings).

Other Meaningful Updates to EPCRS

Increase in De Minimis Threshold

A welcome change in Rev. Proc. 2021-30 is an increase to the de minimis threshold that applies to plan overpayments and excess amounts (e.g., excess employee or employer contributions) from $100 to $250. For example, if the total amount of a plan overpayment is $250 or less (after adjustment for earnings), the plan sponsor is not required to seek return of the overpayment from the participant, or notify the participant that the overpayment was not eligible for tax-free rollover. Note, however, plan sponsors must still notify participants that overpayment amounts resulting from exceeding a statutory limit are not eligible for favorable tax treatment.

Replacement of Anonymous VCP Submissions with New Procedures

Effective January 1, 2022, the anonymous VCP submission procedures are eliminated, and replaced with new pre-submission procedures. Under the new pre-submission procedures, beginning January 1, 2022, plan sponsors may request (at no fee) an anonymous, pre-submission meeting with the IRS regarding issues for correction under VCP when their requested correction methods are not any of the safe harbor correction methods described in the EPCRS guidance.

Correction of Operational Issues via Plan Amendment

Revenue Procedure 2021-30 further expands the correction of operational errors by plan amendment under the IRS’ Self-Correction Program (“SCP”). Previously, the IRS had expanded the SCP to allow for the correction of certain operational failures via a retroactive plan amendment under the following conditions:

• The corrective amendment must result in an increase of a participant’s benefit, right or feature;
• The increase in benefit, right or feature is provided to all employees eligible to participate in the plan;
• The increase in benefit, right or feature (a) was permitted under IRS rules and (b) satisfied certain applicable correction principles under Revenue Procedure 2019-19.

With respect to the second requirement above, the IRS’ prior informal position was that all employees eligible to participate in the plan really meant every single employee eligible to participate, making this a difficult requirement to meet. In many cases, an error only occurs with respect to a subset of participants in a plan and not all employees eligible to participate (e.g., erroneous exclusion of overtime wages from the definition of compensation only affects non-exempt employees eligible for overtime). In Rev. Proc. 2021-30, the IRS completely eliminated the requirement that the increase in benefit, right or feature must be provided to all eligible employees, thus making it easier to retroactively amend a plan under SCP without having to file an application under VCP in these circumstances.

Extension of SCP Correction Period for Significant Failures

Historically, plans have had until the last day of second plan year following the plan year for which a significant operational or plan document failure occurred to self-correct under the SCP. Rev. Proc. 2021-30 extends this correction period by an additional year, until the last day of the third plan year following the plan year for which the failure occurred. The change to this SCP correction period also results in an extension of the deadline for self-correcting certain elective deferral failures (under the special safe harbor correction method) lasting more than three months but not longer than the SCP correction period for significant failures.

Extension of Sunset Safe Harbor Correction Method

Revenue Procedure 2015-28 added a safe harbor correction for certain automatic contributions failures that generally were corrected by the end of the 9½ month period after the end of the plan year when the failure first occurred. Under the safe harbor correction, a plan sponsor was not required to make-up missed employee contributions (pre-tax or Roth) if the plan had an automatic enrollment feature and certain other requirements, including a 45-day notice, were met. Unfortunately, under Rev. Proc. 2015-28 and subsequent EPCRS Revenue Procedures (including Rev. Proc. 2019-19), this special correction option was available only for failures that began on or before December 31, 2020. Revenue Procedure 2021-30 extends this correction method by an additional three years, so this safe harbor may continue to be used for failures that begin on or before December 31, 2023. This extension is retroactively effective back to January 1, 2021.

Revenue Procedure 2021-30 is lengthy, and this is a only summary of many of the new provisions. For further information and updates, check back here and follow our blog, or contact your Seyfarth employee benefits attorney.

Sarah J. Touzalin and Christine M. Cerasale

§ 1.58  Write Well – ERISA Plan Terms Control Against Defendants Too

Seyfarth Synopsis: The Court of Appeals for the Ninth Circuit recently rejected the application of the doctrine of equitable estoppel to prevent a plan trustee from enforcing the clear terms of the plan.  So, it bears repeating that drafters of ERISA plans are well advised to draft as clearly and carefully as possible.

In Wong v. Flynn-Kerper, 999 F.3d 1205 (9th Cir. 2021), an ESOP trustee sued to enforce the terms of the Plan. The operative Plan terms mandated that the Plan not pay more than fair market value for company stock, as determined at the time of the transaction by an independent appraiser. The Plan sought revision of a transaction where the Plan had promised to pay for stock, by alleging that the stock was overvalued.  The Plan claimed that the independent appraiser was unaware that the Plan sponsor was carrying substantial uncollectable debt and facing mounting attorney’s fees and administrative penalties.

The defendant holder of the promissory note attempted to invoke the doctrine of equitable estoppel to dismiss the claim, relying on a side agreement between the defendant and the trustee that affirmed an obligation to pay for the stock even if overvalued. The defendant thus argued that the Plan was equitably estopped from reducing the value of the note. The district court agreed and granted the defendant’s motion to dismiss.  The Ninth Circuit reversed, holding that the doctrine of equitable estoppel could not be invoked against an ERISA plan trustee to contradict the terms of the plan. Allowing the terms of the side agreement to prevail, the court stated, would plainly violate those Plan terms mandating that the Plan not pay more than fair market value. The Ninth Circuit thus joined the Fourth Circuit in barring the defensive use of equitable estoppel to contradict an ERISA plan’s express terms. See Ret. Comm. of DAK Ams. LLC v. Brewer, 867 F.3d 471 (4th Cir. 2017).

We note as well that the Ninth Circuit did not apply a wholesale ban on the application of equitable estoppel in ERISA actions.  Rather, the court said that equitable estoppel could apply if,  in addition to meeting the traditional elements of equitable estoppel, a party established (1) extraordinary circumstances, (2) that the provisions of the plan are ambiguous, and (3) that the representations made about the plan were an interpretation, and not a modification, of the plan.

Takeaway — We have previously discussed the importance of careful drafting of ERISA plans. See here and here. That admonition bears repeating. As the Supreme Court has stated:  “The plan, in short, is at the center of ERISA.” See US Airways, Inc. v. McCutchen, 569 U. S. 88 (2013). And even the Ninth Circuit agrees in Wong v. Flynn-Kerper.

Mark Casciari and Michael Cederoth

§ 1.59  Cross-Border Transactions: Key Items to Review When Performing Human Resource and Employment Due Diligence

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In the world of cross-border mergers and acquisitions, complex human resource and employment considerations arise during the transaction’s due diligence process. Depending on the transaction’s structure, these issues can be diverse and range in topics from immigration requirements to employee benefit matters to employee representative consultation obligations.

From the purchaser’s perspective, proper human resource and employment due diligence can help structure a transaction’s terms and limit any unwanted surprises after the deal is signed or closes. Conversely, failure to spot key human resource and employment diligence issues can cause business interruptions and liabilities and negatively impact employee morale.

In this short article, we outline some essential human resource and employment items for cross-border transaction due diligence. This is not intended to be an exhaustive list of due diligence matters and, as with any piece of this kind, should not be relied upon as legal advice.

Employee Consultation Obligations and Collective Bargaining Agreements

In many countries, a target company’s employees may be represented by a union, works council, or other employee representative body and covered by a collective bargaining agreement.

Closely analyze employee representative arrangements to assess if there are notification or consultation obligations that must occur before the transaction is signed and/or the deal is closed. It may take anywhere from a few weeks to a few months to satisfy the applicable requirement, so it’s important to build sufficient time into the deal timeline to account for the necessary processes. In some cases, employee representatives may also have co-determination rights, which require the applicable employee representative to consent to the transaction before it proceeds.

Failure to properly observe applicable notification, consultation, or co-determination rights can result in criminal liability. It can also result in litigation and materially delay the transaction’s consummation.

Change in Control and Severance Provisions

To determine whether any meaningful payouts or entitlements will be triggered by the transaction, review key employees’ agreements.

In particular, perform diligence on any agreements containing transaction bonuses, severance provisions, equity acceleration clauses, or so-called “change in control” terms. Assessing this before signing the transaction will help the purchaser determine if new employment agreements should be provided in connection with the transaction (or as a condition of the transaction) to supersede existing entitlements.

If the transaction will trigger such payments or entitlements, this may also result in material tax issues. As a result, tax diligence should also be performed as part of this review.

Pension Schemes

Review employee retirement and pension schemes, and pay particularly close attention to the types of pension plans the target company has in place in any asset purchase transaction or transaction where employees are changing employers outside the US. If the target company participates in or has participated in a defined benefit pension scheme outside the US (as opposed to a defined contribution pension scheme), there may be significant liabilities. In such case, perform robust due diligence before the transaction’s signing to ensure all legal requirements are followed, the transaction agreement adequately protects the purchaser from the target company’s existing liabilities, and the purchaser understands its pension obligations if it moves forward with the transaction.

Independent Contractor Status

Many companies engage individuals as independent contractors, but treat them like employees in practice. Most countries require a company to reclassify an individual as an employee if the individual is being incorrectly categorized as an independent contractor. If the misclassified individual who provides services to the company is not employed by another entity that is properly treating the individual like an employee (e.g. withholding taxes and remitting social security contributions, accounting for overtime, etc.), liabilities for the company can be significant. This is especially true if the company’s relationship with the individual has gone on for a significant period of time at a high pay rate.

Review a global census of the target company’s independent contractor engagements to assess if independent contractor misclassification might be a material issue. If it is, conduct additional diligence to determine if the purchaser should seek a specific compliance representation with a corresponding indemnity in the transaction agreement.

Immigration Issues

Companies that have multinational workforces often employ individuals with visa requirements or other immigration needs. When a change in ownership of the company or corporate structure that sponsors the applicable employee visa or work permit occurs, the change typically requires a filing or notification with the local immigration authority. Failure to adhere to applicable immigration filing and notification requirements can result in stiff fines, the suspension of the sponsored employee’s ability to work, and the inability to sponsor employees in the future.

Assess whether the transaction triggers a change of corporate ownership or employer that will require updates to any employee’s visa or work permit. If updates are required (including obtaining a new visa or work permit), bake sufficient time and terms into the transaction to account for them (e.g., filings and approvals from the local immigration offices). Such authorizations can take several months depending on the country and type of change. Review any immigration restrictions or waiting times that may also be in place due to COVID-19.

If the target company is a company with a moderate US headcount, conduct diligence on the target company’s I-9 compliance. Failure to comply can result in material fines and other criminal penalties.  Performing diligence on this issue will also help the purchaser assess whether it should redo target company employee I-9s within the prescribed post-closing time period to mitigate any legacy liability.

Unique State or Local Requirements

Depending on the transaction type and jurisdictions involved, conduct targeted local due diligence. For example, California has several notable state and local laws on employee privacy, restrictive covenants, paid sick leave, vacation payout, and employee classification that do not apply to many other US states.  If the transaction has a material nexus to California, perform diligence into the target company’s compliance with California specific employment laws. Similarly, depending on the nature of the target company’s business and the transaction’s nexus to the EU, performing due diligence on employee staff leasing, GDPR compliance, and pay equity obligations may be worthwhile.

Conclusion

While there are many other important diligence items that should be reviewed as part of standard human resource and employment due diligence on a cross-border transaction, do not overlook the foregoing items. As a best practice, ensure the purchaser’s deal team has a thorough checklist of all due diligence items it wants to cover as part of the transaction’s due diligence process. As due diligence progresses, hone in on key issues based on the information gleaned from the target company’s diligence responses.  Submit supplemental diligence requests to flesh out any material open issues.

Marjorie, Jeremy, and Dan are all part of Seyfarth’s leading International Employment team who help leading employers navigate global workforce issues. To find out more about cross-border transaction human resource and employment issues, and how they might affect your business, please reach out to them or anyone else on our specialist team.

Marjorie Culver, Jeremy Corapi and Dan Waldman

§ 1.60  Never Fear: More COBRA Subsidy Guidance Is Here

On July 26, 2021, the U.S. Internal Revenue Service (“IRS”) issued Notice 2021-46, providing additional guidance on the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) and premium assistance and tax credit provisions of the American Rescue Plan Act of 2021 (“ARPA”). As described in our Legal Update, ARPA requires employers to cover 100% of the cost of continuing group health coverage under COBRA from April 1, 2021 through September 30, 2021 for assistance eligible individuals (i.e., individuals who lose coverage due to an involuntary termination of employment or reduction of hours ). On May 18, 2021, the IRS issued guidance in IRS Notice 2021-31 as we described in our prior blog post to provide clarification for employers, plan administrators, and health insurers regarding this subsidy. Notice 2021-46 expands on that guidance.

The key points from IRS Notice 2021-46 are summarized below.

How Does the Subsidy Apply to Assistance Eligible Individuals Who Are Entitled to Extended Coverage Periods?

Notice 2021-46 clarifies that assistance eligible individuals may be entitled to the COBRA subsidy for extended coverage periods (e.g., disability extensions, second qualifying events or an extension under State mini-COBRA laws), even if the assistance eligible individual didn’t elect extended coverage before April 1, 2021.

The Notice provides an example of an individual who is involuntarily terminated and elects COBRA continuation coverage effective October 1, 2019. The individual’s 18-month COBRA continuation period would have lapsed March 31, 2021. However, on March 1, 2020, a disability determination letter was issued by the Social Security Administration providing that the individual was disabled as of November 1, 2019. This disability determination entitles the individual to the 29-month extended COBRA continuation coverage, but the individual failed to notify the plan of the disability determination by April 30, 2020, which is 60 days after the date of the issuance of the disability determination letter (as would normally be required to qualify for the COBRA disability extension period). However, under the EBSA Disaster Relief Notices 2020-01 and 2021-01, the individual has one year and 60 days from the issuance of the disability determination letter to notify the plan of the disability to extend COBRA continuation coverage. On April 10, 2021, the individual notifies the plan of the disability and elects ongoing COBRA coverage from April 1, 2021. Assuming the individual is not eligible for other disqualifying group health plan coverage or Medicare, the individual is an assistance eligible individual and is entitled to the COBRA premium assistance.

Does Eligibility For Other Health Coverage That Does Not Include Vision or Dental Benefits Terminate an Assistance Eligible Individual’s Eligibility For the COBRA Subsidy for Vision-Only or Dental-Only Coverage?

Yes. Eligibility for the COBRA premium assistance ends when the Assistance Eligible Individual becomes eligible for coverage under any other disqualifying group health plan or Medicare, even if the other coverage does not include all of the benefits provided by the COBRA coverage.

Which Entity May Claim the Tax Credit for the COBRA Subsidy?

Where a group health plan (other than a multiemployer plan) subject to COBRA covers employees of two or more employers, each common-law employer is generally treated as the premium payee entitled to claim the premium assistance tax credit with respect its own employees and former employees, even where such common-law employers are part of a controlled group.

The Notice also clarifies that an entity that provides health benefits to employees of another entity, but is not a third-party payer of their wages, will not be treated as a third-party payer for purposes of applying Notice 2021-31. For example, if a group health plan covers employees of two or more unrelated employers in a multiple employer welfare arrangement (“MEWA”), the entity entitled to claim the tax credit is generally the common law employer; the association that sponsors the MEWA is not entitled to claim the tax credit for the COBRA subsidy.

Reminder: Tell Participants that the Subsidy Period is Ending

As we mentioned in our previous Legal Update, ARPA requires plan sponsors to notify participants 15-45 days before their COBRA subsidy ends. Participants will need to be informed (i) when their subsidy ends, and (ii) how much their non-subsidized COBRA premium will be. Employers may already have sent this notice on a “one-off” basis to COBRA qualified beneficiaries whose 18 or 36 months of COBRA coverage has ended or will end before September 30th. However, the subsidy will expire on September 30, 2021 for all COBRA qualified beneficiaries (even if they may still have time remaining in their 18 or 36 month COBRA period); thus, employers may need to do one last bulk mailing. The mailing needs to go out any time between August 16, 2021 and September 15, 2021. The Department of Labor’s model notice is here.

Please contact Irine Sorser ([email protected]), Kelly Joan Pointer([email protected]) or any member of Seyfarth’s Employee Benefits Group if you would like further information about these updates.

Irine Sorser and Kelly Joan Pointer

§ 1.61  Anti-Vax Tax Facts: Legal Considerations for Premium Differentials Based on Vaccination Status

Seyfarth Synopsis: As employers continue to struggle with strategies for safely re-opening their workplaces, we have previously discussed the possibility of mandating a vaccine or providing incentives for getting the vaccine [Here]. As employers shift their focus toward the cost of COVID hospitalizations (which studies show are a much greater risk for unvaccinated individuals), employers are increasingly considering imposing a premium differential between vaccinated and unvaccinated covered participants. Imposing such a premium differential is doable, but likely creates a group health plan wellness program, which implicates both HIPAA (under rules issued by HHS), and the ADA and GINA (governed by the EEOC) wellness program rules.

There are myriad intricacies to consider when setting up a wellness program. We will hit some of the highlights here:

HIPAA Wellness Programs

HIPAA’s rules divide the world of wellness programs into two main categories:

1. Participation-only programs. These are programs that do not require any conditions for receiving a reward and have very few requirements associated with them, except that they must be available to all similarly situated individuals.
2. Health-contingent programs. These are programs that base rewards on satisfying a standard related to a health factor, which are further subdivided into
   1. activity-only, and
   2. outcomes-based programs

While at first blush it may seem like getting a vaccine is participation-only as a person simply needs to get the shot, and does not need to remain free from COVID-19, there is some thought that it may actually be health-contingent because not everyone can get the vaccine due to underlying health conditions.

Most practitioners do not believe such a program is a health-contingent “outcomes-based” program, as the reward does not depend on staying COVID-19-free. However, at least one consultant has taken the position that this type of program could even be outcomes-based if having simply received the vaccine is considered a “health status.”

Although HHS has not provided any direct guidance here, we think it is more likely that such a program would be a health-contingent “activity-only” program. In general, a health-contingent activity-only wellness program must meet the following requirements:

• Incentive Limit:
  • Limit the incentive to 30% of the cost of coverage (this limit is increased to 50% if the program includes a tobacco cessation component);
  • The limit is based on the overall cost of coverage — i.e., the COBRA rate — applicable to the value of coverage elected — i.e., self-only, family, etc.;
  • This incentive would need to be combined with any other “health contingent” wellness program offered under the plan when determining whether the incentives exceed the limit (except that if any incentive is linked to smoker status, the limit is increased to 50%)
• Reasonable Alternative
  • A reasonable alternative must be offered to persons who cannot get vaccinated because it is medically inadvisable or, as a result of the overlay of Title VII, due to a sincerely held religious belief.
  • Participants must be notified of the availability of the reasonable alternative in all materials substantially describing the program.
• Annual Opportunity to Qualify:
  • Provide an opportunity to qualify for the reward at least once per year
• Be uniformly available to all similarly situated individuals; and
• Not be a subterfuge for discrimination.

(Note: There are additional requirements for health contingent wellness programs that are outcomes-based programs.)

EEOC and the ADA

The EEOC has modified its wellness program rules a few different times in the last few months. Ultimately, we read the current loosening of the EEOC’s wellness program rules as the administration’s attempt to not discourage incentives.

If the wellness program is for a health-contingent activity-only program, the EEOC is okay if the plan meets the HIPAA/HHS standards. (The new EEOC wellness program rules will also allow an incentive for participatory programs that is not overly large (i.e., considered coercive).)

Similarly, recent EEOC guidance has indicated that vaccine status alone is not a “medical exam or disability-related inquiry” under the ADA. So, if an employer simply requests proof of vaccination status but does not require the employee to get the vaccine directly from the employer (or its contractor), the program is arguably outside of the scope of the EEOC’s wellness guidelines entirely.

Affordable Care Act

For ACA purposes, if the “incentive” is structured as an increased premium, the employer must treat all employees as if they failed to get vaccinated and were required to pay the increased amount for purposes of determining the affordability of coverage, regardless of whether that’s the case. However, there are ways for plan sponsors to mitigate this concern. For instance, the employer could design its “penalty” as a deductible increase rather than a premium increase, which would not impact affordability. (It would impact minimum value, but the employer likely has more flexibility there.) Similarly, because the ACA only requires that employers offer one affordable option, the employer could link the incentive only to its higher-cost benefit options (leaving untouched its lower-cost, “affordable” option.)

*     *     *

While beyond the scope of this legal update, employers should also be cautious of how they structure the program considering collective bargaining obligations, HIPAA privacy concerns and Section 125 requirements (for mid-year implementations). We will continue to monitor trends in this space with an eye toward any agency indications as to whether they intend to regulate these types of programs.

Benjamin J. Conley and Diane V. Dygert

§ 1.62  If You Have Been Racing to Meet these Deadlines… You May Have Just Gotten an Extension

Seyfarth Synopsis: The Departments of Labor, Health and Human Services, and Treasury (the “Departments”) have issued FAQs which address certain provisions of the Affordable Care Act (ACA) and Title I (No Surprises Act) and Title II (Transparency requirements) of the Consolidated Appropriations Act of 2021 (CAA). The FAQs provide welcome relief for group health plans as they postpone many compliance deadlines and allow for some breathing room.

The ACA requires “transparency in coverage” cost-sharing disclosures by most health plans. In November of 2020, the Departments issued Final Transparency in Coverage Rules (TiC Rules) which require group health plans and health insurance issuers to disclose cost-sharing information to participants, beneficiaries, and, in some cases, the public. See our legal update here. The CAA also includes Transparency requirements, some of which overlap with the TiC Rules.

The No Surprises Act protects plan participants from surprise medical bills for services provided by out-of-network or nonparticipating providers and facilities. The No Surprises Act also contains extensive provisions regarding reporting and disclosure of charges and benefits. The first round of guidance on the surprise billing requirements was issued in July, 2021 (see our legal update here).

The FAQs address some of the guidance expected under the TiC Rules and the CAA, and announce that no further guidance will be issued for certain provisions. This legal update addresses what requirements will apply to group health plans, and when.

Machine-Readable Files

For plan years beginning on or after January 1, 2022, the TiC Rules require plans to disclose on a public website information regarding in-network provider rates for covered items and services, out-of-network allowed amounts and billed charges for covered items and services, and negotiated rates and historical net prices for covered prescription drugs in three separate machine-readable files. (According to the preamble to the TiC Rules, this will allow the public to have access to health coverage information that can be used to understand pricing and potentially dampen the rise in health care spending.)

FAQ Takeaways – According to the FAQs, the Departments will enforce the machine-readable file provisions in the TiC Rules, subject to two exceptions.

1. The requirement that plans publish machine-readable files relating to prescription drug pricing is deferred pending further rulemaking to determine if these requirements remain appropriate.
2. The requirement to publish in-network rates and out-of-network allowable amounts and billed charges is deferred until July 1, 2022. The FAQs state, however, that on July 1, 2022, the Departments will begin enforcing the requirement that plans publicly disclose information for plan years beginning on or after January 1, 2022.

Price Comparison Tools

Both the TiC Rules and the CAA require plans to create an internet-based self-service tool to disclose cost-sharing information to participants. The TiC Rules require a plan to provide cost-sharing information for a covered item or service: (i) by billing code or description, and/or (ii) in connection with an in-network provider, or an out-of-network allowed amount for a covered item or service provided by an out-of-network provider. The CAA’s price comparison is mostly repetitive of the TiC Rules, but it added the requirement that this information must also be provided over the telephone, if requested. The TiC Rules’ effective date is January 1, 2023 with respect to 500 items and services listed in the preamble to the TiC Rules, and January 1, 2024 with respect to all covered items and services. The CAA’s effective date is January 1, 2022.

FAQ Takeaways – The Departments will:

• Propose rulemaking and seek public comment to determine if the internet-based self-service tool requirements of the TiC Rules satisfy the requirements under the CAA.
• Propose rulemaking to require that the pricing information required under the TiC Rules must also be provided over the telephone if requested.
• Defer enforcement of the requirement to provide a price comparison tool until January 1, 2023. Until that time, the Departments will focus on compliance assistance.

Plan or Insurance Identification Cards

The No Surprises Act requires plans to include, in clear writing, on physical or electronic insurance identification (ID) cards, any applicable deductibles and out of pocket maximum limitations, and a telephone number and website address for individuals to seek consumer assistance. This requirement is effective January 1, 2022.

FAQ Takeaways – The Departments:

• Do not intend to issue regulations addressing the ID card requirements before the effective date. Instead, plans are expected to make a good faith interpretation of the law to reasonably design the ID cards to provide the required information.
• When analyzing a plan’s compliance efforts, the Departments will consider whether the ID cards are reasonably designed and implemented to provide the required information to all participants, beneficiaries, and enrollees.

Good Faith Estimate of Expected Charges

The No Surprises Act requires providers and facilities, upon an individual’s scheduling of items or services, or upon request, to provide a notification of a good faith estimate of the expected charges for furnishing the scheduled item or service and any items or services reasonably expected to be provided in conjunction with those items and services. If the individual is enrolled in a health plan and is seeking to have a claim submitted to the plan, the provider must provide this notification to the plan. Otherwise, the notification must be provided to the individual.

The effective date is January 1, 2022. Because uninsured individuals do not have the claims and appeals processes in place to protect them as do individuals covered by a group health plan, with respect to uninsured individuals, HHS intends on enforcing the good faith requirements beginning January 1, 2022, and issuing regulations prior to January 1, 2022.

FAQ Takeaways – The Departments will:

• Defer enforcement for individuals enrolled in a health plan until future rulemaking is issued.
• Issue regulations implementing good faith estimate requirements for uninsured individuals prior to January 1, 2022.

Advanced Explanations of Benefits

The No Surprises Act requires that plans, upon receiving a good faith estimate, provide participants with an Advanced Explanation of Benefits (the “AEOB”) in clear and understandable language. The AEOB must include whether the provider or facility is in-network; the contracted rate for the item or service, or an explanation as to how the individual can obtain information on participating providers; the good faith estimate received from the provider; an estimate of what the plan will pay and the participant’s cost-sharing obligation; and whether any medical management techniques apply. The statutory effective date is January 1, 2022.

FAQ Takeaway – The Departments intend to undertake notice and comment rulemaking in the future to establish appropriate data transfer standards between plans and providers to implement the AEOB requirement. In the meantime, the Departments will not enforce the requirement.

Prohibition on Gag Clauses

Effective December 27, 2020, the Transparency requirements of the CAA prohibit plans from entering into an agreement that would restrict the plan from accessing or sharing certain information with a provider, network of providers, third-party administrator, or other service provider offering access to a network. Specifically, an agreement cannot restrict a plan from: (i) providing provider-specific cost or quality of care information to referring providers, the plan sponsor, participants and beneficiaries, or individuals eligible for coverage; (ii) electronically accessing certain de-identified claims information for each participant; or (iii) sharing such information with a HIPAA business associate.

FAQ Takeaway – The Departments will not be issuing regulations and expect plans to implement the requirements using a good faith, reasonable interpretation. The Departments will begin collecting attestations of compliance in 2022 and intend on issuing guidance to explain how plans should submit their attestations.

Provider Directories

The No Surprises Act requires plans to establish a process to update and verify the accuracy of provider directory information and to establish a protocol for responding to requests by telephone and electronic communication from a participant, beneficiary, or enrollee about a provider’s network participation status. Under a correction method provided, if a participant is provided with incorrect information that a provider is in-network and a service or item is provided by a nonparticipating provider, then the plan cannot impose a cost-sharing amount that is greater than the cost-sharing amount that would be imposed for items and services furnished by a participating provider and the plan must count cost-sharing amounts toward any in-network deductible or in-network out-of-pocket maximum. The effective date is January 1, 2022.

FAQ Takeaways – The Departments will not:

• Issue regulations until after January 1, 2022. Until then, plans are expected to implement these provisions using good faith, reasonable interpretation of the law.
• Deem a plan out of compliance, provided the correction method is used.

Balance Billing Disclosures

The No Surprises Act requires plans to make publicly available, post on a public website of the plan and include on each explanation of benefits (EOB) for an item or service information on the prohibitions on balance billing. The disclosure provisions are effective January 1, 2022.

FAQ Takeaways – The guidance states:

• The Departments may provide guidance in the future. Until then, plans are expected to implement these requirements using a good faith, reasonable interpretation of the law.
• A model notice that may be used to satisfy the disclosure requirements is available on the CMS website. (See here)

Continuity of Care

The No Surprises Act ensures that participants won’t lose coverage when changes in provider or facility network status occur. These provisions are effective January 1, 2022.

FAQ Takeaway – The FAQs state that the Departments expect to issue further guidance to fully implement these provisions and provide a new, prospective effective date. Until then, plans are to implement the requirements using a good faith, reasonable interpretation of the law.

Grandfathered Health Plans

The FAQs provide that the CAA does not include an exception for grandfathered health plans.

Reporting on Pharmacy Benefits and Drug Costs

The Transparency requirements of the CAA require that by December 27, 2021, and by each June 1st thereafter, plans submit relevant information to the Departments regarding plan coverage for prescription drugs. This includes, but is not limited to, a list of the 50 most frequently dispensed brand prescription drugs, and the total number of paid claims for each such drug; the 50 most costly prescription drugs by total annual spending, and the annual amount spent by the plan for each such drug; and the 50 prescription drugs with the greatest increase in plan expenditures over the plan year preceding the plan year that is the subject of the report, and, for each such drug, the change in amounts expended by the plan or coverage in each such plan year.

Additionally, plans must report (i) total spending on health care broken down by type of costs (i.e. hospital, provider costs for primary care and specialty care, costs for prescription drugs and other medical costs), and spending on drugs by the plan and participants; (ii) average monthly premium paid by employer and employee; (iii) any impact on premiums by rebates, fees and other amounts paid by drug manufacturers to the plan; and (iv) any reduction in premiums and out-of-pocket costs associated with rebates, fees, and other amounts paid by drug manufacturers.

FAQ Takeaways – The Departments:

• Will issue regulations to address these reporting requirements.
• Will defer enforcement of the requirement to report the specified information until the issuance of regulations or further guidance.
• Strongly encourage plans to start working to ensure they are in a position to report the data for 2020 and 2021 by December 27, 2022.

To stay up to date with future guidance, be on the lookout for additional Seyfarth Legal Updates.

Joy Sellstrom and Sarah N. Magill

§ 1.63  Seventh Circuit Rejects Plan’s Attempt to Compel Individual Arbitration of Participant’s Fiduciary Breach Claims

Seyfarth Synopsis: Recognizing that the Plan contained an unambiguous arbitration provision, and that “ERISA claims are generally arbitrable,” the Seventh Circuit Court of Appeals nonetheless found that arbitration could not be compelled where the provision prospectively barred the plaintiff from pursuing certain statutory remedies.

In Smith v. Bd. of Dirs. of Triad Mfg., Inc., a Plan participant brought a putative class action suit asserting that the Plan’s fiduciaries breached their fiduciary duties and engaged in prohibited transactions in connection with the sale of all of the Plan sponsor’s stock to the Plan. Within two weeks of the transaction, the shares’ ostensible value dropped from $106 million to less than $4 million.

After the stock transaction—but before the suit was filed—the Plan sponsor amended the Plan to add an arbitration provision with a class action waiver. The provision prohibited an individual from bringing claims in anything other than an individual capacity, and further stated that an individual could not “seek or receive any remedy which has the purpose or effect of providing … relief to any [person] other than the Claimant.”

Based on this language, the Plan moved to compel individual arbitration of Plaintiff’s suit. The district court denied the motion. On appeal, the Seventh Circuit stated it was guided by the “liberal federal policy favoring arbitration agreements,” but nonetheless affirmed the decision of the district court, based on the “effective vindication” exception to the FAA. This exception invalidates arbitration agreements that operate as prospective waivers of a party’s right to pursue statutory remedies. Here, the plaintiff sought a variety of equitable remedies—including the potential removal of the Plan’s trustee—which would inescapably have had the effect of providing relief to individuals beyond the Plaintiff. As such, Plaintiff’s requested relief was impermissibly in conflict with the Plan’s arbitration provision.

The Seventh Circuit stated that its holding is limited to the language of the arbitration provision at issue, and that it was not deciding whether a claimant could be bound by an amendment enacted after his employment ended, or whether a plan sponsor can unilaterally amend a plan to require arbitration as to all participants. The Court was also quick to say that it did not view its decision as creating conflict with the Ninth Circuit’s holding in Dorman v. Charles Schwab Corp. (discussed here), in which that court held a that an ERISA plan’s mandatory arbitration and class action waiver provision was enforceable, and could require individualized arbitration of fiduciary breach claims. Still, the tension between the Seventh Circuit’s holding in Smith and the Ninth’s in Dorman—together with the Supreme Court’s repeated statements encouraging enforcement of arbitration provisions—has already lead to speculation that a petition for certiorari will be filed.

Thus, while the Seventh Circuit in Smith stated that ERISA claims are generally arbitrable, Smith leaves open many questions about the proper scope of such provisions and how those provisions (to the extent they are enforceable) will shape ensuing arbitration and litigation. Stay tuned as we continue to track this evolving area of the law.

Tom Horan, Ian Morrison and Sam Schwartz-Fenwick

§ 1.64  More Vax Facts – The Agencies Weigh In

Seyfarth Synopsis: We previously discussed how to apply the HIPAA wellness rules to a premium differential based on a participant’s vaccination status in our Legal Update.  At the time, we were left to interpret the existing rules to the brave new world of COVID-19 vaccination incentive programs.  Well, the Departments of Labor, Health and Human Services, and Treasury have now weighed in. FAQs about Affordable Care Act Implementation Part 50, Health Insurance Portability and Accountability Act and Coronavirus Aid, Relief, and Economic Security Act Implementation (dol.gov)  And, fortunately, our analysis held up. See below for highlights of the FAQs.

What Kind of Wellness Program Is It?

The agencies confirmed that a plan may impose a premium differential based on vaccination status if it complies with the HIPAA wellness plan rules. In this regard, the agencies confirmed that a premium differential based on vaccination status will be a “health-contingent activity-only” wellness program. Recall that there was some debate about whether such a program would be “participatory only” or whether it might even be considered a “health-contingent outcomes-based” wellness program. While the agencies did not go into any deep analysis, at the time we based our view that the program would be “activity-only” on the fact that some individuals may not be able to get the vaccination due to their personal health status (e.g., someone undergoing chemotherapy treatment) making getting the vaccine health-contingent. And, the agencies settled that getting a COVID-19 vaccination is an activity related to a health factor.

Can Cost Sharing Be Imposed on Vaccines?

The agencies reiterated that effective January 5, 2021, plans and issuers must cover COVID-19 vaccines along with their administration without cost sharing immediately upon a vaccine becoming authorized under an Emergency Use Authorization (EUA) or approved under a Biologics License Application (BLA). The agencies clarified that this includes immediate required coverage for any authorized booster shots upon the date authorized and immediate required coverage for any expanded age group (e.g., children under age 12) on the date authorized. Due to apparent confusion about the effective date of required coverage for expanded vaccinations under any amended EUA or BLA, this requirement will be effective prospectively only.

Can Group Health Plan Eligibility or Benefits Be Conditioned on Vaccination Status?

This is a hard no, as it would be considered discriminating based on a health factor. To be clear, while a health plan cannot condition eligibility or benefits on vaccination status, the agencies have noted that plans may condition premiums or cost-sharing on vaccination status, within the parameters of HIPAA as described in our earlier alert.

How Does a Premium Differential Impact ACA Affordability?

The agencies also confirmed our prior view that premium incentives will be treated as not earned for purposes of measuring affordability under the ACA. This is true for all wellness incentives, other than for those related to tobacco use.

Benjamin J. Conley and Diane V. Dygert

§ 1.65  We Have No Idea When the Outbreak Period Will End, But We Have a Better Idea When COBRA Payments Are Due

Seyfarth Synopsis: The IRS has attempted to provide clarity (following the DOL’s earlier attempt) on how the coronavirus Outbreak Period will work and how it applies  to COBRA election and premium payment deadlines, in Notice 2021-58.

Background

At the beginning of the COVID-19 National Emergency, in May of 2020, the Department of Labor (DOL) and the Internal Revenue Service (IRS) issued a Joint Notice that extended certain timeframes applicable to COBRA continuation coverage under a group health plan by requiring plans to disregard the period from March 1, 2020 until 60 days after the announced end of the COVID National Emergency or such other date announced by the relevant agencies (the “Outbreak Period”). (See our prior legal update).

The Joint Notice provided extensions for the following COBRA timeframes:

• The 60-day election period for COBRA continuation coverage,
• The dates for making COBRA premium payments,
• The date for individuals to notify the plan of a qualifying event or determination of disability, and
• The date for providing a COBRA election notice for group health plans.

In February of 2021, we explained how the DOL clarified that the extensions would apply separately to each individual and would last until the earlier of (1) one year from the date relief was first available (e.g. an individual’s original election due date or payment due date), or (2) the end of the Outbreak Period. At the end of this disregarded period, the applicable timeframes that were disregarded resume.

Recently the IRS issued Notice 2021-58 to clarify certain questions that have arisen as to how the disregarded period applies to COBRA election and premium payment deadlines.

COBRA Payment Deadlines

We now know that the periods run concurrently. For example, an individual may not delay electing COBRA for a year and then add another year to make payment. The following timeframes will apply to individuals making initial COBRA premium payments:

• If an individual elected COBRA continuation coverage more than 60 days after receipt of the COBRA election notice, that individual generally will have one year and 105 days after the date COBRA notice was provided^[1] to make the initial COBRA premium payment.
• If an individual elected COBRA continuation coverage within 60 days of receipt of the COBRA election notice, that individual will have one year and 45 days after the date of the COBRA election to make the initial COBRA premium payment.

For each subsequent COBRA premium payment, the maximum time an individual has to make a payment while the Outbreak Period continues is one year from the date the payment originally would have been due in the absence of previous extensions, but subject to the transition relief provided below.

Transitional Relief for COBRA Payments

Despite the new guidance that the periods run concurrently, an individual cannot be required to make an initial premium payment before November 1, 2021 (even if November 1, 2021 is more than one year and 105 days after the election notice is received), provided that the individual makes the initial payment within one year and 45 days after the date of the election.

Coordination with ARPA’s COBRA Subsidy

The American Rescue Plan Act (ARPA) provided a temporary 100% COBRA premium subsidy for “Assistance Eligible Individuals” for periods of coverage beginning on or after April 1, 2021 through September 30, 2021.

ARPA also gave individuals who either (a) were eligible for COBRA but did not elect COBRA as of April 1, 2021, or (b) elected and discontinued COBRA coverage before April 1, 2021 another chance to elect COBRA during the period beginning April l, 2021 and ending 60 days after notice of the “extended election period” is received. Employers were required to give notice of this extended election period (ARPA Notice) by May 31, 2021. (See legal update).

Notice 2021-58 reiterates that the extensions of the timeframes do not apply to the periods for providing the required ARPA Notice, or for electing subsidized COBRA. A plan may require an individual to elect COBRA retroactive to the date of loss of coverage within 60 days of receiving the ARPA Notice or lose eligibility for retroactive COBRA. For example, an individual who receives a COBRA election notice on August 1, 2020 would have until September 30, 2021 (one year and 60 days) to elect COBRA retroactive to August 1, 2020. But if the individual elects subsidized COBRA under ARPA, the individual would only have 60 days after the receipt of the ARPA Notice to elect retroactive COBRA coverage. If the individual receives the ARPA Notice on May 31, 2021 and elects subsidized COBRA beginning April 1, 2021, but does not elect retroactive COBRA, the individual cannot later elect retroactive COBRA.

Payment for Retroactive COBRA under ARPA

Notably, the disregarded periods continue to apply to payments of COBRA premiums after subsidized COBRA ends, to the extent that the individual is still eligible for COBRA continuation coverage and the Outbreak Period has not ended. Notice 2021-58 provides this example:

On November 1, 2020, Charley is involuntarily terminated and receives a COBRA election notice. On April 30, 2021, Charley receives notice of the ARPA extended election period. On May 31, 2021, Charley elects both retroactive COBRA coverage beginning on November 1, 2020, and subsidized COBRA beginning April 1, 2021.

Charley has until February 14, 2022 to make the initial COBRA premium payment (one year and 105 days after November 1, 2020). The initial COBRA payment would include premium payments for November 2020 through January 2021. The February 2021 premium payment would be due by March 3, 2022 (one year and 30 days after February 1, 2021), and the March 2021 premium payment would be due by March 31, 2022 (one year and 30 days after March 1, 2021). Premium payments would be due every month after that for the months Charley is eligible for COBRA coverage, except that no payments would be due for the periods beginning on or after April 1, 2021, through September 30, 2021.

Other helpful examples are provided that should help plan administrators and COBRA administrators in collecting COBRA premium payments. Please contact the employee benefits attorney at Seyfarth Shaw LLP with whom you usually work if you have any questions.

^[1]The Notice uses both the date “provided” and the date “received” in explaining when the initial COBRA premium must be paid. Additional clarification as to whether “provided” means the date sent or date received would be helpful.

Joy Sellstrom

§ 1.66  ERISA Fiduciary Breach Litigation Can Involve Complicated Damages Analyses

Seyfarth Synopsis: If an ERISA plaintiff establishes a fiduciary breach, expect the computation of damages to be a complicated process that may enhance damages through judgment.  And a court judgment in complicated cases can take years to issue.  This is the lesson from a recent decision of the Court of Appeals for the Second Circuit.

Browe v. CTC Corporation, 2021 WL 4449878 (2d Cir. 9/29/21) is a complex ERISA case, both procedurally and substantively. This article focuses on the portion of the ruling that relates to the calculation of fiduciary breach damages. This is because the computation of ERISA fiduciary breach damages is central to successful discovery and settlement negotiations.

In Browe, former employees and officers of a defunct corporation asserted ERISA claims against the corporation and its former CEO for mismanagement of the firm’s deferred compensation plan. The controversy arose from a decision to terminate the Plan and use its funds to pay business operating expenses. The district court found in favor of plaintiffs and awarded damages based on the projected account balances as of Plan termination, after rejecting plaintiffs’ assertion that ERISA required restoration of Plan losses through judgment.

The Second Circuit overturned the restoration award.  It found that the Plan was improperly terminated — so it was not terminated at all. The Court then held that ERISA required that the award “return the participants to the position they would have occupied” but for this fiduciary breach. This included all losses, including unrealized gains, through the date of judgment. It remanded the case back to the district court for recalculation of award to capture losses through the date of judgment.

Citing to Donovan v. Bierwirth, 754 F.2d 1049 (2d Cir. 1985), the Court instructed that the award be based on the assumption that Plan funds were prudently invested, with the caveat that if several investment strategies were equally plausible, the district court should presume that the funds would have been invested in the most profitable of various options. The Court added that uncertainties in fixing damages must be resolved against the breaching fiduciary.

Damage Computation Takeaway – By computing damages for a fiduciary breach through judgment, the Court is advising fiduciary breach litigants that there will be a battle of the experts in determining what investment likely “would have happened.”  If a fiduciary breach case survives a motion to dismiss, expect complicated and expensive expert damage discovery that serve to inflate settlement demands.

Mark Casciari and Michael Cederoth

This article is the second in a series identifying a number of myths related to IP rights, and explaining, in simple terms, steps you can take to recognize and protect the IP your business creates and acquires. In the first installment, the authors discuss trademark myths.

Second in this three-part series identifying myths related to IP rights is Copyright Myths.

Copyright is a form of protection provided by the laws of the United States to the authors of “original works of authorship” that are fixed in a tangible form of expression. An original work of authorship is a work that is independently created by a human author and possesses at least some minimal degree of creativity. A work is “fixed” when it is captured (either by or under the authority of an author) in a sufficiently permanent medium such that the work can be perceived, reproduced, or communicated for more than a short time. Copyright protection in the United States exists automatically from the moment the original work of authorship is fixed.

U.S. copyright law is federal law (17 U.S.C. §§ 101-1401), which addresses both unpublished and published works of authorship. There is no state law governing copyright rights, and a state cannot register or enforce a copyright. 

Copyright law is a nebulous area of law, and many aspects of it do not have a straightforward answer. Below, we try to dispel certain copyright misconceptions.

1. I can sue for copyright infringement as long as I have submitted my application to the United States Copyright Office.

In the Supreme Court case, Fourth Estate Public Benefit Corp. v. Wall-Street.com, 139 S.Ct. 1881 (2019), the court unanimously ruled that a copyright infringement suit must wait until the copyright is successfully registered by the United States Copyright Office. Therefore, a pending copyright application is insufficient grounds to bring suit. Given that copyright applications are relatively inexpensive ($60 per application), we recommend registering your work whenever possible.

2. Copyright can protect my ideas.

Copyright applies to a tangible work, and cannot apply to something as intangible as an idea. Indeed, section 102(b) of the Copyright Act explicitly states, “in no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work.”

3. I can copyright a name or title.

Copyright laws require creativity and originality, and do not apply to items such as names and titles that may be duplicated coincidentally, or that may be legitimately used in unrelated instances. Book titles are among the list of things that cannot be copyrighted. Titles are only “short phrases,” not original enough to be eligible for protection. The Copyright Office will not restrict titles to one book; there may be other works for which a title may be equally usable and appropriate. For example, in McGraw-Hill Book Co. v. Random House, Inc., 32 Misc.2d 704, 710, 225 N.Y.S.2d 646, 653 (Sup.Ct. 1962), McGraw Hill was unable to bar Random House from publishing a book titled, “John F. Kennedy & PT 109” even though McGraw Hill had first published a book titled, “PT 109: John Kennedy in World War II.” The court found legitimate use of the words “PT 109” and “John Kennedy” and that the words could not be copyrighted. Id. at 713.

4. Everything on the internet is in the public domain and free to use.

This is false. Although much information posted to the internet is freely available to the public, the internet is not itself public domain. Most material posted there is protected by copyright law, regardless of whether a content host obtained the requisite permissions from the author. A work does not fall into the public domain until its copyright expires, which is typically many decades after an author’s death.

5. Anything without a copyright notice is not protected.

Use of a copyright notice is optional, and has been since March 1, 1989. Thus, copyright protections apply regardless of whether a copyright notice is displayed on the work. An author of an original work may receive absolute protection as soon as the work is created. Registration is not mandatory, but it is worthwhile to place a copyright notice on a work because it reminds others that copyright exists and, therefore, may help deter infringement. Additionally, putting a notice on your work may help establish willful infringement, which enhances the monetary compensation to which you are entitled.

6. If I change someone else’s work, I can claim it as my own.

The act of copying or adapting someone else’s work is a restricted act. Any adaptation will be legally regarded as a derived work. The purpose and character of your intended use of the material is the single most important factor in determining whether a use is fair under U.S. copyright law. If you simply adapt a work, it will still be considered the work of the creator, and that person may object if you publish an adaptation without permission to do so. They are also entitled to reclaim any money you make from selling their work. If, however, your use is transformative—i.e., the new work has significantly changed the appearance or nature of the copyrighted work—you are more likely to succeed in a fair use defense. The transformative use concept arose from a 1994 decision by the U.S. Supreme Court, Campbell v. Acuff-Rose Music, 510 U.S. 569 (1994), concerning the song “Pretty Woman” by the rap group 2 Live Crew, a parody of “Oh, Pretty Woman” by Roy Orbison. The court focused not only on the small quantity taken from the copyrighted work, but also on the transformative nature of the defendant’s use, and was persuaded that no infringement occurred because the defendant added a new meaning and message rather than simply superseding the original work. This meant the new work likely would not affect the market for the original work, so the copyright owner would not suffer financial harm.

7. I can legally copy 10 percent without it being infringement.

This is not the case. Unless it is explicitly allowed under the doctrine of fair use, any unauthorized use of a copyrighted work can potentially lead to legal action. When using quotes or extracts, there is no magic figure or percentage that can be applied. Courts typically look to the quality and importance of the content copied, not simply the quantity. In fact, if you base a creation on someone’s copyrighted work, the result is called a “derivative work.” A derivative work must be substantially different from the original work (minor changes are not enough) in order to not be considered copyright infringement.

8. It’s okay to use, copy, or publish another’s work if I don’t make any money from it.

No, except in limited circumstances permitted under the doctrine of fair use, any copying or publication without the consent of the copyright owner may be deemed copyright infringement, and you could face legal action. If the use has a financial impact on the copyright owner (i.e., lost sales), then you could also face a claim for damages to reclaim lost revenue and royalties. The key factor is not the user, but the nature of the material, how it is being used, and whether the new use adversely affects the value of the original work. Because even a nonprofit educational use can undermine the value of a copyrighted work, it is advisable to consult an attorney before copying any original work.

***

We hope this has been a helpful starter guide on copyright law. Please tune in next month for part three of the series, in which we will debunk popular patent myths.

If you have questions or would like to follow up on the topics discussed in the series, please reach out to any of the authors listed above at Hunton Andrews Kurth LLP.

Editors

Chelsea Mikula

Tucker Ellis LLP
950 Main Avenue, Suite 1100
Cleveland, OH 44113
216-696-2476
[email protected]

Giovanna Ferrari

Seyfarth Shaw LLP
560 Mission Street, Suite 3100
San Francisco, CA 94105
415-544-1019
[email protected]

§ 1.1 Introduction

Trial lawyers eagerly anticipate the day they begin opening statements in the courtroom and get to take their client’s matter to trial. With a trial comes a lot of hard work, preparation, and navigation of the civil rules and local rules of the jurisdiction. This chapter provides a general overview of issues that a lawyer will face in a courtroom, either civil or criminal. The authors have selected cases of note from the present United States Supreme Court docket, the federal Circuit Courts of Appeals, and selected federal District Courts, that provide a general overview, raise unique issues, expand or provide particularly instructive explanations or rationales, or are likely to be of interest to a broad cross section of the bar. It is imperative, however, that prior to starting trial, the rules of the applicable jurisdiction are reviewed.

§ 1.2 Pretrial Matters

§ 1.2.1 Pretrial Conference and Pretrial Order

Virtually all courts require a pretrial conference at least several weeks before the start of trial. A pretrial conference requires careful preparation because it sets the tone for the trial itself. There are no uniform rules across all courts, so practitioners must be fully familiar with those that affect the particular courtroom they are in and the specific judge before whom they will appear.

According to Federal Rule of Civil Procedure 16, the main purpose of a pretrial conference is for the court to establish control over the proceedings such that neither party can achieve significant delay or engage in wasteful pretrial activities.[1] An additional goal is facilitating settlement before trial commencement.[2] Following the pretrial conference, the judge will issue a scheduling order, which “must limit the time to join other parties, amend the pleadings, complete discovery, and file [pre-trial] motions.”[3]

A proposed pretrial conference order should be submitted to the court for review at the conference. Once the judge accepts the pre-trial conference order, the order will supersede all pleadings in the case.[4] The final pretrial conference order is separate from pretrial disclosures, which include all information and documents required to be disclosed under Federal Rule of Civil Procedure 26.[5]

§ 1.2.2 Motions in Limine

A motion in limine, which means “at the threshold,”[6] is a pre-trial motion for a preliminary decision on an objection or offer of proof. Motions in limine are important because they ensure that the jury is not exposed to unfairly prejudicial, confusing, or irrelevant evidence, even if doing so limits a party’s defenses.[7] Thus, a motion in limine is designed to narrow the evidentiary issues for trial and to eliminate unnecessary trial interruptions by excluding the document before it is entered into evidence.[8]

In ruling on a motion in limine, the trial judge has discretion to either rule on the motion definitively or postpone a ruling until trial.[9] Alternatively, the trial judge may make a tentative or qualified ruling.[10] While definitive rulings do not require a renewed offer of proof at trial,[11] a tentative or qualified ruling might well require an offer of evidence at trial to preserve the issue on appeal.[12] A trial court’s discretion in ruling on a motion in limine extends not only to the substantive evidentiary ruling, but also the threshold question of whether a motion in limine presents an evidentiary issue that is appropriate for ruling in advance of trial.[13] Where the court reserves its ruling on a motion in limine at the outset of trial and later grants the motion, counsel should remember to move to strike any testimony that was provided prior to the ruling. 

Motions in limine are not favored and many courts consider it a better practice to deal with questions as to the admissibility of evidence as they arise at trial.[14]

§ 1.3 Opening Statements

One of the most important components of any trial is the opening statement—it can set the roadmap for the jury of how they can find in favor of your client. The purpose of an opening statement is to:

“acquaint the jury with the nature of the case they have been selected to consider, advise them briefly regarding the testimony which it is expected will be introduced to establish the issues involved, and generally give them an understanding of the case from the viewpoint of counsel making a statement, so that they will be better able to comprehend the case as the trial proceeds.”[15]

It is important that any opening statement has a theme or presents the central theory of your case. As a general rule, a lawyer presents facts and evidence, and not argument, during opening statements. Being argumentative and introducing statements that are not evidence can be grounds for a mistrial.[16] It is also important that counsel keep in mind any rulings on motions in limine prohibiting the use of certain evidence. Failure to raise an objection to matters subject to a motion in limine or other prejudicial arguments can result in the waiver of those rights on appeal.[17] And the “golden rule” for opening statements is that the jurors should not be asked to place themselves in the position of the party to the case.[18]

Defense counsel may decide to reserve their opening until their case in chief — this is a strategic decision and is typically disfavored in jury trials.

§ 1.4 Selection of Jury

§ 1.4.1 Right to Fair and Impartial Jury

The right to a fair and impartial jury is an important part of the American legal system. The right originates in the Sixth Amendment, which grants all criminal defendants the right to an impartial jury.[19] However, today, this foundational right applies in both criminal and civil cases.[20] This is because the Seventh Amendment preserves “the right of trial by jury” in civil cases, and an inherent part of the right to trial by jury is that the jury must be impartial.[21] Additionally, Congress cemented this right when it passed legislation requiring “that federal juries in both civil and criminal cases be ‘selected at random from a fair cross section of the community in the district or division where the court convenes.’”[22]

Examples of ways that jurors may not be impartial include: predispositions about the proper outcome of a case,[23] financial interests in the outcome of a case,[24] general biases against the race or gender of a party,[25] or general biases for or against certain punishments to be imposed.[26]

Over the years, impartiality has become more and more difficult to achieve. This is due mainly to citizens’ (potential jurors) readily available access to news, and the news media’s increased publicity of defendants and trials.[27] In Harris, the Ninth Circuit analyzed whether pre‑trial publicity of a murder trial biased prospective jurors and prejudiced the defendant’s ability to receive a fair trial.[28] The court recognized that “[p]rejudice is presumed when the record demonstrates that the community where the trial was held was saturated with prejudicial and inflammatory media publicity about the crime.”[29] However, the court found that despite immense publicity prior to trial, because the publicity was not inflammatory but rather factual, there was no evidence of prejudice in the case.[30]

§ 1.4.2 Right to Trial by Jury

All criminal defendants are entitled to a trial by jury and must waive this right if they elect a bench trial instead.[31] However, a criminal defendant does not have a constitutional right to a bench trial if he or she decides to waive the right to trial by jury.[32] In civil cases, the party must expressly demand a jury trial. Failure to make such a demand constitutes a waiver by that party of a trial by jury.[33] For example, in Hopkins, the Eleventh Circuit explained that a plaintiff waived his right to trial by jury in an employment discrimination case when he made no demand for a jury trial in his Complaint and did not file a separate demand for jury trial within 14 days after filing his complaint.[34] Some jurisdictions require payment of jury fees to reserve the right to a jury trial.

Additionally, not all civil cases are entitled to a trial by jury. First, the Seventh Amendment expressly requires that the amount in controversy exceed $20.[35] Additionally, only those civil cases involving legal, rather than equitable, issues are entitled to the right of trial by jury.[36] Equitable issues often arise in employment discrimination cases where the plaintiff seeks backpay or another sort of compensation under the ADA, ERISA, or FMLA.[37]

Another issue that arises in civil cases is contractual jury trial waivers. Most circuits permit parties to waive the right to a jury trial through prior contractual agreement.[38] Generally, the party seeking enforcement of the waiver “must show that consent to the waiver was both voluntary and informed.”[39]

§ 1.4.3 Voir Dire

Voir dire is a process of questioning prospective jurors by the judge and/or attorneys who remove jurors who are biased, prejudiced, or otherwise unfit to serve on the jury.[40] The Supreme Court has explained that “voir dire examination serves the dual purposes of enabling the court to select an impartial jury and assisting counsel in exercising peremptory challenges.”[41]

Generally, an oath should be administered to prospective jurors before they are asked questions during voir dire.[42] “While the administration of an oath is not necessary, it is a formality that tends to impress upon the jurors the gravity with which the court views its admonition and is also reassuring to the litigants.”[43] Moreover, jurors under oath are presumed to have faithfully performed their official duties.[44]

Federal trial judges have great discretion in deciding what questions are asked to prospective jurors during voir dire.[45] District judges may permit the parties’ lawyers to conduct voir dire, or the court may conduct the jurors’ examination itself.[46] Although trial attorneys often prefer to conduct voir dire themselves, many judges believe that counsel’s involvement “results in undue expenditure of time in the jury selection process,” and that “the district court is the most efficient and effective way to assure an impartial jury and evenhanded administration of justice.”[47]

“[I]f the court conducts the examination it must either permit the parties or their attorneys to supplement the examination by such further inquiry as the court deems proper or itself submit to the prospective jurors such additional questions of the parties or their attorneys as the court deems proper.”[48] However, a judge still has much leeway in determining what questions an attorney may ask.[49] For example, in Lawes, a firearm possession case, the Second Circuit found that it was proper for a trial judge to refuse to ask jurors questions about their attitudes towards police.[50] If, on appeal, a party challenges a judge’s ruling from voir dire, the party must demonstrate that trial judge’s decision constituted an abuse of discretion.[51] Thus, it is extremely difficult to win an appeal regarding voir dire questioning.[52]

§ 1.4.4 Jury Selection Methods

Each court has its own proceeds for jury selection.  The two basic methods are the struck jury method and the jury box method (also known as strike-and-replace).  At a high level, the methods differ with respect to how many prospective jurors are subject to voir dire and the order in which jurors can be challenged or struck from the jury panel.  For example, the jury box method seats the exact number of jurors in the jury box needed to form a viable jury,  and allows voir dire and challenges to those jurors..  The stuck method allows voir dire of a larger number of prospective jurors, usually the number of jurors needed to form a viable jury, plus enough prospective jurors to cover all preemptory challenges.  Counsel should review local and judge rules to determine which method will be applied.  Where there is no set rule or judicial preference, counsel may stipulate with opposing counsel as to the method. 

§ 1.4.5 Challenge For Cause

A challenge “for cause” is a request to dismiss a prospective juror because the juror is unqualified to serve, or because of demonstrated bias, an inability to follow the law, or if the juror is unable to perform the duties of a juror. 18 U.S.C. § 1865 sets forth juror qualifications and lists five reasons a judge may strike a juror: (1) if the juror is not a citizen of the United States at least 18 years old, who has resided within the judicial district at least one year; (2) is unable to read, write, or understand English enough to fill out the juror qualification form; (3) is unable to speak English; (4) is incapable, by reason of mental or physical infirmity, to render jury service; or (5) has a criminal charge pending against him, or has been convicted of a state or federal crime punishable by imprisonment for more than one year.[53]

In addition to striking a juror for these reasons, an attorney may also request to strike a juror “for cause” under 28 U.S.C. § 1866(c)(2) “on the ground that such person may be unable to render impartial jury service or that his service as a juror would be likely to disrupt the proceedings.”[54]

A challenge “for cause” is proper where the court finds the juror has a bias that is so strong as to interfere with his or her ability to properly consider evidence or follow the law.[55] Bias can be shown either by the juror’s own admission of bias or by proof of specific facts that show the juror has such a close connection to the parties, or the facts at trial, that bias can be presumed. The following cases illustrate examples of challenges for cause:

• U.S. v. Price: The Fifth Circuit explained that prior jury service during the same term of court is not by itself sufficient to support a challenge for cause. A juror may only be dismissed for cause because of prior service if it can be shown by specific evidence that the juror has been biased by the prior service.[56]
• Chestnut v. Ford Motor Co.: The Fourth Circuit held that the failure to sustain a challenge to a juror owning 100 shares of stock in defendant Ford Motor Company (worth about $5000) was reversible error.[57]
• United States v. Chapdelaine: The First Circuit found that it was permissible for trial court not to exclude for cause jurors who had read a newspaper that indicated co‑defendants had pled guilty before trial.[58]
• Leibstein v. LaFarge N. Am., Inc.: Prospective juror’s alleged failure to disclose during voir dire that he had once been defendant in civil case did not constitute misconduct sufficient to warrant new trial in products liability action.[59]
• Cravens v. Smith: The Eighth Circuit found that the district court did not abuse its discretion in striking a juror for cause based on that juror’s “strong responses regarding his disfavor of insurance companies.”[60]

§ 1.4.6 Peremptory Challenge

In addition to challenges for cause, each party also has a right to peremptory challenges.[61] A peremptory challenge permits parties to strike a prospective juror without stating a reason or cause.[62] “In civil cases, each party shall be entitled to three peremptory challenges. Several defendants or several plaintiffs may be considered as a single party for the purposes of making challenges, or the court may allow additional peremptory challenges and permit them to be exercised separately or jointly.”[63]

Parties can move for additional peremptory challenges.[64] This is common in cases where there are multiple defendants. For example, in Stephens, two civil codefendants moved for additional peremptory challenges so that each defendant could have three challenges (totaling six peremptory challenges for the defense).[65] In deciding whether to grant the defendants’ motion, the court recognized that trial judges have great discretion in awarding additional peremptory challenges, and that additional challenges may be especially warranted when co-defendants have asserted claims against each other.[66] The court in Stephens ultimately granted the defendants’ motion for additional challenges.[67]

Parties may not use peremptory challenges to exclude jurors on the basis of their race, gender, or national origin.[68] Although “[a]n individual does not have a right to sit on any particular petit jury, . . . he or she does possess the right not to be excluded from one on account of race.”[69] When one party asserts that another’s peremptory challenges seek to exclude jurors on inappropriate grounds under Batson, the party challenged must demonstrate a legitimate explanation for its strikes, after which the challenging party has the burden to show that the legitimate explanation was pre-textual.[70] The ultimate determination of the propriety of a challenge is within the discretion of the trial court, and appellate courts review Batson challenges under harmless error analysis.[71]

Finally, some courts have found that it is reversible error for a trial judge to require an attorney to use peremptory challenges when the juror should have been excused for cause. “The district court is compelled to excuse a potential juror when bias is discovered during voir dire, as the failure to do so may require the litigant to exhaust peremptory challenges on persons who should have been excused for cause. This result, of course, extinguishes the very purpose behind the right to exercise peremptory challenges.”[72] However, courts also acknowledge that an appeal is not the best way to deal with biased jurors. The Eighth Circuit recognized that “challenges for cause and rulings upon them . . . are fast paced, made on the spot and under pressure. Counsel as well as court, in that setting, must be prepared to decide, often between shades of gray, by the minute.”[73]

§ 1.5 Examination of Witnesses

§ 1.5.1 Direct Examination

Direct examination is the first questioning of a witness in a case by the party on whose behalf the witness has been called to testify.[74] Pursuant to Fed. R. Evid. 611(c), leading questions, i.e., those suggesting the answer, are not permitted on direct examination unless necessary to develop the witness’ testimony.[75] Leading questions are permitted as “necessary to develop testimony” in the following circumstances:

• To establish undisputed preliminary or inconsequential matters.[76]
• If the witness is hostile or unwilling.[77]
• If the witness is a child, or an adult with communication problems due to a mental or physical disability.[78]
• If the witness’s recollection is exhausted.[79]
• If the witness is being impeached by the party calling him or her.[80]
• If the witness is frightened, nervous, or upset while testifying.[81]
• If the witness is unresponsive or shows a lack of understanding.[82]

Additionally, it is improper for a lawyer to bolster the credibility of a witness during direct examination by evidence of specific instances of conduct or otherwise.[83] Bolstering occurs either when (1) a lawyer suggests that the witness’s testimony is corroborated by evidence known to the lawyer, but not the jury,[84] or (2) when a lawyer asks a witness a question about specific instances of truthfulness or honesty to establish credibility.[85] For instance, in Raysor, the Second Circuit found that it was improper for a witness to bolster herself on direct examination by testifying about her religion or faithful marriage.[86]

When a party calls an adverse party, or someone associated with an adverse party, the attorney has more leeway during direct examination. This is because adverse parties may be predisposed against the party direct-examining him. Because of this, the attorney may ask leading questions, and impeach or contradict the adverse witness.[87] Courts have broadened who they consider to be “associated with” or “identified with” an adverse party. Employees, significant others, and informants have all constituted adverse parties for purposes of direct examination.[88] Further, even if the witness is not adverse, an attorney may also ask leading questions to a witness who is hostile. In order to ask such leading questions, the direct examiner must demonstrate that the witness will be resistant to suggestion. This often involves first asking the witness non-leading questions in order to show that the witness is biased against the direct examiner.[89]

When a witness cannot recall a fact or event, the lawyer is permitted to help refresh that witness’s memory.[90] The lawyer may do so by providing the witness with an item to help the witness recall the fact or event. Proper foundation before such refreshment requires that:

the witness’s recollection to be exhausted, and that the time, place and person to whom the statement was given be identified. When the court is satisfied that the memorandum on its face reflects the witness’s statement or one the witness acknowledges, and in his discretion the court is further satisfied that it may be of help in refreshing the person’s memory, the witness should be allowed to refer to the document.[91]

However, the item/memorandum does not come into evidence.[92] In Rush, the Sixth Circuit found that although the trial judge properly permitted defense counsel to refresh a witness’s memory with the transcript of a previously recorded statement, the trial judge erred in allowing another witness to read that transcript aloud to the jury.[93]

Further, sometimes the party calling a witness wishes to impeach that witness. Generally, courts are hesitant to permit parties to impeach their own witnesses because the party who calls a witness is vouching for the trustworthiness of that witness, and allowing impeachment may confuse the jury or be unfairly prejudicial.[94] Prior to adoption of the Federal Rules of Evidence, a party could impeach its own witness only when the witness’s testimony both surprised and affirmatively damaged the calling party.[95]

However, Federal Rule of Evidence 607 states that “the credibility of a witness may be attacked by any party, including the party calling the witness.”[96] The Advisory Committee Notes of Rule 607 indicate that this rule repudiates the surprise and injury requirement from common law.[97] A party can impeach a witness through prior inconsistent statements, cross-examination, or prior evidence from other sources.[98] However, a party may not use Rule 607 to introduce otherwise inadmissible evidence to the jury.[99] Additionally, a party may not call a witness with the sole purpose of impeaching him.[100] Further, even courts that do not permit a party to impeach its own witness still permit parties to contradict their own witnesses through another part of that witness’s testimony.[101]

§ 1.5.2 Cross-Examination

Cross-examination provides the opposing party an opportunity to challenge what a witness said on direct examination, discredit the witness’s truthfulness, and bring out any other testimony that may be favorable to the opposing party’s case.[102] Generally under the federal rules, cross-examination is limited to the “subject matter” of the direct examination and any matters affecting the credibility of the witness.[103] The purpose of limiting the scope of cross-examination is to promote regularity and logic in jury trials, and ensure that each party has the opportunity to present its case in chief. However, courts tend to liberally construe what falls within the “subject matter” of direct examination.[104] For example, in Perez-Solis, the Fifth Circuit found that a witness’s brief reference to collecting money from a friend permitted opposing counsel to cross-examine him on all of his finances.[105] Additionally, the language of Fed. R. Evid. 611(b) states that although cross-examination “should not” go beyond the scope of direct examination, the court may exercise its discretion to “allow inquiry into additional matters as if on direct examination.”[106] However, if the questioning goes beyond the subject matter, it generally should not include leading questions.

One of the main goals of cross-examination is impeachment. The Federal Rules of Evidence explain three different methods of impeachment: (1) impeachment by prior bad acts or character for untruthfulness,[107] (2) impeachment by prior conviction of a qualifying crime,[108] and (3) impeachment by prior inconsistent statement.[109] Additionally, courts still apply common law principles and permit impeachment through three additional methods as well: (1) impeachment by demonstrating the witness’s bias, prejudice, or interest in the litigation or in testifying, (2) impeachment by demonstrating the witness’s incapacity to accurately perceive the facts, and (3) impeachment by showing contradictory evidence to the witness’s testimony in court.[110] The following present case examples of each of the six methods of impeachment:

1. Prior bad act or dishonesty: In O’Connor v. Venore Transp. Co.,[111] the First Circuit found that trial judge did not abuse discretion when he allowed defense counsel to cross-examine plaintiff with his prior tax returns with the purpose of demonstrating dishonesty.
2. Conviction of qualifying crime: In Smith v. Tidewater Marine Towing, Inc.,[112] the Fifth Circuit found that, in Jones Act action arising from injuries plaintiff received while working on a tugboat, defense counsel permissibly crossed the plaintiff about his prior convictions.
3. Prior inconsistent statement: In Wilson v. Bradlees of New England, Inc.,[113] a product liability case, the First Circuit found that defense counsel appropriately crossed plaintiff with an inconsistent statement made in a complaint filed in a different case against a different defendant.
4. Bias or prejudice: In Udemba v. Nicoli,[114] the First Circuit found that it was permissible for defense counsel to cross-examine the plaintiff’s wife about domestic abuse to show bias in a case involving excessive force claims against the police.
5. Incapacity to accurately perceive: In Hargrave v. McKee,[115] the Sixth Circuit found that the trial court should have permitted defense counsel to question a victim about how her ongoing psychiatric problems affected her perception and memory of events.
6. Contradictory evidence: In Barrera v. E. R. DuPont De Nemours and Co., Inc.,[116] the Fifth Circuit held, in a personal-injury action, that the trial judge erred in denying the use of evidence showing that plaintiff received over $1000 per month in social security benefits because the evidence was admissible to contradict defendant’s volunteered testimony on cross-examination that he did not have a “penny in his pocket.”

Once the right of cross-examination has been fully and fairly exercised, it is within the trial court’s discretion as to whether further cross-examination should be allowed.[117] In order to recall a witness, the party must show that the new cross-examination will shed additional light on the issues being tried or impeach the witness. Further, it is helpful if the party seeking recall demonstrates that it came into possession of additional evidence or information that it did not have when it previously crossed that witness.[118] Further, it is difficult to succeed on an appeal of a trial court’s failure to permit recall for further cross‑examination. This is because courts review a trial judge’s decision for abuse of discretion, and often find that the lack of recall was a harmless error.[119]

§ 1.5.3 Expert Witnesses

Experts are witnesses who offer opinion testimony on an aspect of the case that requires specialized knowledge or experience. Experts also include persons who do not testify, but who advise attorneys on a technical or specialized area to better help them prepare their cases. A few key criteria should be considered at the outset when choosing an expert. First is the level of relevant expertise and the ability to have the expert’s research, assumptions, methodologies, and practices stand up to the scrutiny of cross-examination. Many law firms, nonprofits, commercial services, and government agencies maintain lists of experts categorized by the expertise; those lists are a helpful place to begin. Alternatively, counsel may begin by researching persons who have spoken or written about the subject matter that requires expert testimony. An Internet search is, in many cases, the place to start when developing a list. Counsel also might consider using a legal search engine to identify persons who have provided expert testimony on the subject matter in the past. Westlaw and LexisNexis both maintain expert databases.

Any expert who is on counsel’s list of candidates should produce, in addition to his or her curriculum vitae (CV), a list of prior court and deposition appearances, as well as a list of publications over the last 10 years. In federal court, this information must be disclosed in the expert report, per Federal Rule of Civil Procedure 26(a)(2).[120]

Another consideration when retaining an expert is whether he or she will be a testifying expert, or whether the expert will only act in a consulting role in preparing the case for trial (non-testifying expert) because this will determine the discoverability of the expert’s opinions. Testifying experts’ opinion are always discoverable, while consulting experts’ opinions are nearly always protected from discovery.

A testifying expert must be qualified, and the proponent of an expert witness bears the burden of establishing the admissibility of the expert’s testimony by a preponderance of the evidence. Federal Rule of Evidence 702 sets forth a standard for admissibility, wherein a witness may be qualified as an expert by knowledge, skill, experience, training or education and may testify in the form of an opinion if they meet certain criteria. Opposing counsel may challenge the qualifications of the expert before the expert’s opinions are presented; to do so, opposing counsel can ask to voir dire the expert (usually outside of the presence of the jury).  It is for the trial court judge to determine whether or not “an expert’s testimony both rests on a reliable foundation and is relevant to the task at hand,” thereby making it admissible.[121]

§ 1.6 Evidence at Trial

§ 1.6.1 Authentication of Evidence

With the exception of exhibits as to which authenticity is acknowledged by stipulation, admission, judicial notice, or exhibits which are self-authenticating, no exhibit will be received in evidence unless it is first authenticated or identified as being what it purports to be. Under the Federal Rules of Evidence, the authentication requirement is satisfied when “the proponent . . . produce[s] evidence sufficient to support a finding that the item is what the proponent claims it is.”[122]

When an item is offered into evidence, the court may permit counsel to conduct a limited cross-examination on the foundation offered. In reaching its determination, the court must view all the evidence introduced as to authentication or identification, including issues of credibility, most favorably to the proponent.[123] Of course, the party who opposed introduction of the evidence may still offer contradictory evidence before the trier of fact or challenge the credibility of the supporting proof in the same way that he can dispute any other testimony.[124] However, upon consideration of the evidence as a whole, if a sufficient foundation has been laid in support of introduction, contradictory evidence goes to the weight to be assigned by the trier of fact and not to admissibility.[125] It is important to note that many courts have held that the mere production of a document in discovery waives any argument as to its authenticity.[126]

While there are many topics to discuss regarding authentication of evidence, this section will focus on electronically stored information. Proper authentication of e-mails and other instant communications, as well as all computerized records, is of critical importance in an ever-increasing number of cases, not only because of the centrality of such data and communications to modern business and society in general, but also due to the ease in which such electronic materials can be created, altered, and manipulated. In the ordinary course of events, a witness who has seen the e-mail in question need only testify that the printout offered as an exhibit is an accurate reproduction.

• Web print out – Printouts of Internet website pages must first be authenticated as accurately reflecting the content of the page and the image of the page on the computer at which the printout was made before they can be introduced into evidence; then, to be relevant and material to the case at hand, the printouts often will need to be further authenticated as having been posted by a particular source.[127]
• Text message – When there has been an objection to admissibility of a text message, the proponent of the evidence must explain the purpose for which the text message is being offered and provide sufficient direct or circumstantial corroborating evidence of authorship in order to authenticate the text message as a condition precedent to its admission; thus, authenticating a text message or e-mail may be done in much the same way as authenticating a telephone call.[128]
• Social networking services – Proper inquiry for determining whether a proponent has properly authenticated evidence derived from social networking services was whether the proponent adduced sufficient evidence to support a finding by a reasonable jury that the proffered evidence was what the proponent claimed it to be.[129]

§ 1.6.2 Objecting to Evidence

Objections must be specific. The party objecting to evidence must make known to the court and the parties the precise ground on which the objecting party is basing the objection.[130] The objecting party must also be sure to indicate the particular portion of the evidence that is objectionable.[131] However, a general objection may be permitted if the evidence is clearly inadmissible for any purpose or if the only possible grounds for objection is obvious.[132]

The purpose of a specific objection to evidence is to preserve the issue on appeal. On appeal, the objecting party will be limited to the specific objections to evidence made at trial. However, an objection raised by a party in writing is sufficiently preserved for appeal, even if that same party subsequently failed to make an oral, on-the-record objection.[133]

Objections to evidence must be timely so as to not allow a party to wait and see whether an answer is favorable before raising an objection.[134] Failure to timely object results in the evidence being admitted. Once the evidence is admitted and becomes part of the trial record, it may be considered by the jury in deliberations, the trial court in ruling on motions, and a reviewing court determining the sufficiency of the evidence.[135] In some instances, the trial judge may prohibit counsel from giving descriptions of the basis for his or her objections. However, the attorney must still attempt to get in the specific grounds for the objection on the record.[136]

Counsel objecting the evidence should remember to strike the evidence from the record after their objection is sustained.

§ 1.6.3 Offer of Proof

If evidence is excluded by the trial court, the party offering the evidence must make an offer of proof to preserve the issue on appeal.[137] For an offer of proof to be adequate to preserve an issue on appeal, counsel must state both the theory of admissibility and the content of the excluded evidence.[138] Although best practice is to make an offer of proof at the time an objection is made, an offer of proof made later in time, even if it is made at a subsequent conference or hearing, may be acceptable.[139] An offer of proof can take several different forms:

1. A testimonial offer of evidence, whereby counsel summarizes what the proposed evidence is supposed to be. Attorneys using this method should be cautious, however, as the testimony may be considered inadequate.[140]
2. An examination of a witness, whereby a witness is examined and cross-examined outside of the presence of a jury.[141]
3. A written statement by the examining counsel, which describes the answers that the proposed witness would give if allowed to testify.[142]
4. An affidavit, taken under oath, which summarizes a witness’s expected testimony and is signed by the witness.[143] However, this use of documentary evidence should be marked as an exhibit and introduced into the record for identification on appeal.[144]

There are exceptions to the offer of proof requirement. First, an offer of proof is unnecessary when the content of the evidence is “apparent from the context.”[145] Second, a cross-examiner who is conducting a proper cross-examination will be given more leeway by a court, since oftentimes the cross-examiner does not know what a witness will say if permitted to answer a question.[146]

§ 1.7 Closing Argument

Different than an opening statement, closing argument is the time for advocacy and argument on behalf of your client. It is not an unfettered right, however, and there are certain rules to remember about closing argument. First, present only that which was presented in evidence and do not deviate from the record.[147] You also do not want to comment on a witness that was unable to testify or suggest that a defendant’s failure to testify results in a guilty verdict.[148] Further, an attack on the credibility or honesty of opposing counsel is considered unethical.[149] But that does not mean lawyers cannot comment on the credibility of evidence and suggest reasonable inferences based on the evidence.[150] And keep in mind, generally, courts are “reluctant to set aside a jury verdict because of an argument made by counsel during closing arguments.”[151]

§ 1.8 Judgment as a Matter of Law

Federal Rule of Civil Procedure 50 governs the standard for judgment as a matter oflLaw, sometimes referred to as a directed verdict in state court matters.[152] A motion for  judgment as a matter of law “may be made at any time before the case is submitted to the jury” and the motion “must specify the judgment sought and the law and facts that entitle the movant to the judgment.”[153] But, “[a] motion under this Rule need not be stated with ‘technical precision,’” so long as “it clearly requested relief on the basis of insufficient evidence.”[154] Although it may be “better practice,” there is no requirement that the motion be made in writing.[155] The 6th Circuit Court of Appeals has even held that it is “clearly within the court’s power” to raise the motion “sua sponte.”[156]

Importantly, Rule 50 uses permissive, not mandatory, language, which means “while a district court is permitted to enter judgment as a matter of law when it concludes that the evidence is legally insufficient, it is not required to do so.” The Supreme Court has gone as far as to say “the district courts are, if anything, encouraged to submit the case to the jury, rather than granting such motions.”[157] There is a practical reason for this advice: if the motion is granted, then overturned on appeal, a whole new trial must be conveyed. Conversely, if the case is allowed to go to the jury, a post-verdict motion or appellate court can right any wrong with more ease.

In entertaining a motion for judgment as a matter of law, courts should review all of the evidence in the record, but, in doing so, the court must draw all reasonable inferences in favor of the nonmoving party, and it may not make credibility determinations or weigh the evidence.[158] Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge.[159] The question is not whether there is literally no evidence supporting the party against whom the motion is directed but whether there is evidence upon which the jury might reasonably find a verdict for that party. Since granting a judgment as a matter of law deprives the party opposing the motion of a determination of the facts by a jury, it is understandable that it is to be granted cautiously and sparingly by the trial judge.

§ 1.9 Jury Instructions

§ 1.9.1 General

The purpose of jury instructions is to advise the jury on the proper legal standards to be applied in determining issues of fact as to the case before them.[160] The court may instruct the jury at any time before the jury is discharged.[161] But the court must first inform the parties of its proposed instructions and give the parties an opportunity to respond.[162] Although each party is entitled to have the jury charged with his theory of the case, the proposed instructions must be supported by the law and the evidence.[163]

§ 1.9.2 Objections

Federal Rule of Civil Procedure 51 provides counsel the ability to correct errors in jury instructions.[164] The philosophy underlying the provisions of Rule 51 is to prevent unnecessary appeals of matters concerning jury instructions which should have been resolved at the trial level. An objection must be made on the record and state distinctly the matter objected to and the grounds for the objection.[165] Off-the-record objections to jury instructions, regardless of how specific, cannot satisfy requirements of the rule governing preservation of such errors.[166] A party may object to instructions outside of the presence of the jury before the instructions and arguments are delivered or promptly after learning that the instructions or request will be, or has been, given or refused. [167] Even if the initial request for an instruction is made in detail, the requesting party must object again after the instructions are given but before the jury retires for deliberations, in order to preserve the claimed error.[168]

Whether a jury instruction is improper is a question of law reviewed de novo.[169] Instructions are improper if, when viewed as a whole, they are confusing, misleading, and prejudicial.[170] If an instruction is improper, the judgment will be reversed, unless the error is harmless.[171] A motion for new trial is not appropriate where the omitted instructions are superfluous and potentially misleading.[172]

Further, while some courts have been lenient on whether objections are made in accordance with Rule 51, many courts hold that one who does not object in accordance with Rule 51 is deemed to have waived the right to appeal. A patently erroneous instruction can be considered on appeal if the error is “fundamental” and involves a miscarriage of justice, but the movant claiming the error has the burden of demonstrating it is a fundamental error.[173]

§ 1.10 Conduct of Jury

§ 1.10.1 Conduct During Deliberations

Jury deliberations must remain private and secret in order to protect the jury’s deliberations from improper, outside influence.[174] Control over the jury during deliberations, including the decision whether to allow the jurors to separate before a verdict is reached, is in the sound discretion of the trial court.[175] During this time, a judge may consider the fatigue of the jurors in determining whether the time of deliberations could preclude effective and impartial deliberation absent a break.[176] Although admonition of the jury is not required, one should be given if the jury is to separate at night and could potentially interact with third parties.[177]

The only individuals permitted in the jury room during deliberations are the jurors. However, in the case of a juror with a hearing or speech impediment, the court will appoint an appropriate professional to assist that individual and the presence of that professional is not grounds for reversal so long as the professional: (1) does not participate in deliberations; and (2) takes an oath to that effect.[178]

Courts have broad discretion in determining what materials will be permitted in the jury room.[179] Materials received into evidence are generally permitted,[180] including real evidence,[181] documents,[182] audio recordings,[183] charts and summaries admitted pursuant to Federal Rule of Evidence 1006,[184] video recordings,[185] written stipulations,[186] depositions,[187] drugs,[188] and weapons.[189] Additionally, jurors are typically permitted to use any notes he or she has taken over the course of trial.[190] Pleadings, however, are ordinarily not allowed.[191]

§ 1.10.2 Conduct During Trial

Traditionally, the trial judge has discretion to manage the jury during trial.[192] To ensure the jurors are properly informed, the court may, at any time after the commencement of trial, instruct the jury regarding a matter related to the case or a principal of law.[193] If a party wishes to present an exhibit to the jurors for examination over the course of trial, counsel should request that the court admonish the jury not to place undue emphasis on the evidence presented.[194] Additionally, the trial court may, in its informed discretion, permit a jury view of the premises that is the subject of the litigation.[195]

During trial, the court may allow the jury to take notes and dictate the procedure for doing so.[196] The trial court may permit note-taking for all of the trial or restrict the practice to certain parts.[197] A concern of permitting note-taking during trial is that jurors may place too much significance on their notes and too little significance on their recollection of the trial testimony.[198] To mitigate this risk, a judge should give a jury instruction informing each juror that he or she should rely on his memory and only use notes to assist that process.[199]

Allowing a juror to participate in examining a witness is within the discretion of the trial court,[200] although some courts have strongly opposed the practice.[201] If allowed, procedural protections should be encouraged to mitigate the risks of questions.[202] Additionally, the court should permit counsel to re-question the witness after a juror question has been posed.[203]

While trial is ongoing, jurors should not discuss the case among themselves[204] or share notes[205] prior to the case being submitted for deliberations. The same rule applies to communication between jurors and trial counsel[206] or jurors and the parties,[207] although accidental or unintentional contact may be excused.[208]

§ 1.11 Relief from Judgment

§ 1.11.1 Renewed Motion for Judgment as a Matter of Law

Pursuant to Federal Rule of Civil Procedure 50(b) a party may file a “renewed” motion for judgment as a matter of law, previously known as a “motion for directed verdict,” asserting that the jury erred in returning a verdict based on insufficient evidence.[209] However, in order to file a renewed motion, a party must have filed a Rule 50(a) pre-verdict motion for judgment as a matter of law before the case was submitted to the jury.[210] The renewed motion is limited to issues that were raised in a “sufficiently substantial way” in the pre-verdict motion[211] and failure to comply with this process often results in waiver.[212] The renewed motion must be filed no later than 28 days after the entry of judgment.[213]

The standard for granting a renewed motion for judgment as a matter of law mirrors the standard for granting the pre-suit motion under Rule 50(a).[214] A party is entitled to judgment only if a reasonable jury lacked a legally sufficient evidentiary basis to return the verdict that it did.[215] In rendering this analysis, a court may not weigh conflicting evidence and inferences or determine the credibility of the witnesses.[216] Upon review, the court must:

“(1) consider the evidence in the light most favorable to the prevailing party, (2) assume that all conflicts in the evidence were resolved in favor of the prevailing party, (3) assume as proved all facts that the prevailing party’s evidence tended to prove, and (4) give the prevailing party the benefit of all favorable inferences that may reasonably be drawn from the facts proved. That done, the court must then deny the motion if reasonable persons could differ as to the conclusions to be drawn from the evidence.”[217]

The analysis reflects courts’ general reluctance to interfere with a jury verdict.[218]

§ 1.11.2 Motion for New Trial

Federal Rule of Civil Procedure 59 permits a party to file a motion for new trial, either together with or as an alternative to a 50(b) renewed motion for judgment as a matter of law.[219] Like a renewed motion for judgment as a matter of law, a motion for new trial must be filed no later than 28 days after an entry of judgment.[220]

Rule 59 does not specify or limit the grounds on which a new trial may be granted.[221] A party may move for a new trial on the basis that “the verdict is against the weight of the evidence, that the damages are excessive, or that, for other reasons, the trial was not fair . . . and may raise questions of law arising out of alleged substantial errors in admission or rejection of evidence.”[222] Other recognized grounds for new trial include newly discovered evidence,[223] errors involving jury instruction,[224] and conduct of counsel.[225] Courts often grant motions for new trial on the issue of damages alone.[226]

Unlike when reviewing a motion for judgment as a matter of law, courts may independently evaluate and weigh the evidence.[227] Additionally, the Court, on its own initiative with notice to the parties and an opportunity to be heard, may order a new trial on grounds not stated in a party’s motion.[228]

When faced with a renewed judgment as a matter of law or a motion for new trial, courts have three options. They may (1) allow judgment on the verdict, if the jury returned a verdict; (2) order a new trial; or (3) direct the entry of judgment as a matter of law.[229]

§ 1.11.3 Clerical Mistake, Oversights and Omissions

Federal Rule of Civil Procedure 60(a) provides that “the court may correct a clerical mistake or a mistake arising from oversight or omission whenever one is found in a judgment, order, or other part of the record. The court may do so on motion or on its own, with or without notice.” This rule applies in very specific and limited circumstances, when the record makes apparent that the court intended one thing but by mere clerical mistake or oversight did another; such mistake must not be one of judgment or even of misidentification, but merely of recitation, of the sort that clerk or amanuensis might commit, mechanical in nature.[230] It is important to note that this rule can be applied even after a judgment is affirmed on appeal.[231]

§ 1.11.4 Other Grounds for Relief

Federal Rule of Civil Procedure 60(b) provides for several additional means for relief from a final judgment:

• mistake, inadvertence, surprise, or excusable neglect;
• newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b);
• fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;
• the judgment is void;
• the judgment has been satisfied, released or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or
• any other reason that justifies relief.

Courts typically require that the evidence in support of the motion for relief from a final judgement be “highly convincing.”[232]

§ 1.12 Virtual Hearings and Trials

In the wake of the COVID-19 pandemic and numerous government shut downs, hearings and trials in both criminal and civil matters have been proceeding electronically. It may be necessary, now and in the future, to submit an application for a trial to proceed remotely.[233] Courts have almost universally found that the COVID-19 pandemic constitutes “good cause” to permit a remote trial. We also know that courts have been challenged but have ultimately found that trials by zoom are not an abuse of discretion, and as such, they may be around for some time to come, or maybe even permanently.[234]

And while trials always present unique and challenging issues, virtual trials present a new set of challenges, especially jury trials. It brings about a whole new set of factors—what makes for a successful trial in person can be very different from a successful trial over a virtual platform. There are new considerations for jury selection, opening statement demonstratives, testimony by witnesses who are no longer in the same room as counsel, presentation of evidence when counsel can no longer bring binders or large boards, jury selection, and a myriad of other issues. What remains the same, however, is that preparation and practice are key. Being familiar with the local court’s practice and working out any technology issues in advance are critical to ensuring a successful virtual trial.To date, the Courts have not created consistent rules for remote trials; every judge has their preferred procedures and technology.  Accordingly, it is important to review judge and court rules regarding remote proceedings.  For example, many judges have rules that prohibit the coaching of witnesses through off-screen methods, dictate courtroom behavior and appearance, limit public access and recording, and provide guidance on presentation of documents including documents that are filed under seal,[235] These rules not only dictate how the trial proceeds day-to-day, but may provide a basis for motions in limine and should be discussed with your judge in the pre-trial conference.[236]

So the question remains will remote trials remain a part of practice or not? Some would agree with the 1996 Advisory Committee Note to Federal Rule of Civil Procedure 43 “the importance of presenting live testimony in court cannot be forgotten” and that “the opportunity to judge the demeanor of a witness face-to-face is accorded great value in our tradition.”

[1] See Fed. R. Civ. P. 16.

[2] Id.

[3] Id.

[4] See Basista v. Weir, 340 F.2d 74, 85 (3d Cir. 1965)

[5] See Fed. R. Civ. P. 26.

[6] Luce v. United States, 429 U.S. 38, 40 n.2 (1984).

[7] United States v. Romano, 849 F.2d 812, 815 (3d Cir. 1988).

[8] Frintner v. TruPosition, 892 F. Supp. 2d 699 (E.D. Pa. 2012).

[9] United States v. LeMay, 260 F.3d 1018, 1028 (9th Cir. 2001).

[10] Wilson v. Williams, 182 F.3d 562, 565-66 (7th Cir. 1999).

[11] Id. at 566 (“Definitive rulings, however, do not invite reconsideration.”).

[12] Fusco v. General Motors Corp., 11 F.3d 259, 262-63 (1st Cir. 1993).

[13] Flythe v. District of Columbia, 4 F. Supp. 3d 222 (D.D.C. 2014).

[14] U.S. v. Denton, 547 F. Supp. 16 (E.D. Tenn. 1982).

[15] Henwood v. People, 57 Colo 544, 143 P. 373 (1914). An opening statement presents counsel with the opportunity to summarily outline to the trier of fact what counsel expects the evidence presented at trial will show. Lovell v. Sarah Bush Lincoln Health Center, 397 Ill. App. 3d 890, 931 N.E.2d 246 (4th Dist. 2010).

[16] Testa v. Mundelein, 89 F.3d 445 (7th Cir. 1996) (“being argumentative in an opening statement does not necessarily warrant a mistrial, but being argumentative and introducing something that should not be allowed into evidence may be a predicate for a mistrial.”).

[17] Krengiel v. Lissner Copr., Inc., 250 Ill App. 3d 288, 621 N.E.2d 91 (1st Dist. 1993) (“party whose motion in limine has been denied must object when the challenged evidence is presented at trial in order to preserve the issue for review, and the failure to raise such an objection constitutes a waiver of the issue on appeal.”).

[18] Forrestal v. Magendantz, 848 F.2d 303, 308 (1st Cir. 1988) (suggesting to jury to put itself in shoes of plaintiff to determine damages improper because it encourages the jury to depart from neutrality and to decide the case on the basis of personal interest and bias rather than on the evidence.).

[19] U.S. CONST. amend. VI.

[20] See Kiernan v. Van Schaik, 347 F.2d 775, 778 (3d Cir. 1965); McCoy v. Goldston, 652 F.2d 654, 657 (6th Cir. 1981).

[21] U.S. CONST. amend. VII; Kiernan, 347 F.2d at 778.

[22] Fleming v. Chicago Transit Auth., 397 F. App’x 249, 249-50 (7th Cir. 2010) (quoting Jury Selection & Serv. Act of 1968, 28 U.S.C. §§ 1861-74 (2006)).

[23] Irvin v. Dowd, 366 U.S. 717, 727 (1961).

[24] Zia Shadows, L.L.C. v. City of Las Cruces, 829 F.3d 1232 (10th Cir. 2016).

[25] Turner v. Murray, 476 U.S. 28 (1986).

[26] Wainwright v. Witt, 469 U.S. 412, 423 (1985).

[27] Harris v. Pulley, 885 F.2d 1354, 1361 (9th Cir. 1988).

[28] Id. at 1362.

[29] Id. at 1361.

[30] Id.

[31] People v. Jordan, 2019 IL App (1st Dist.) 161848.

[32] Singer v. United States, 380 U.S. 24, 36 (1965) (finding that it is constitutionally permissible to require prosecutor and judge to consent to bench trial, even if the defendant elects one); United States v. Talik, No. CRIM.A. 5:06CR51, 2007 WL 4570704, at *6 (N.D.W. Va. Dec. 26, 2007).

[33] Fed. R. Civ. P. 38; Hopkins v. JPMorgan Chase Bank, NA, 618 F. App’x 959, 962 (11th Cir. 2015).

[34] Hopkins, 618 F. App’x at 962.

[35] U.S. Const. amend. VII.

[36] Lorillard v. Pons, 434 U.S. 575, 583 (1978).

[37] See Lutz v. Glendale Union High Sch., 403 F.3d 1061, 1069 (9th Cir. 2005) (“[W]e hold that there is no right to have a jury determine the appropriate amount of back pay under Title VII, and thus the ADA, even after the Civil Rights Act of 1991.  Instead, back pay remains an equitable remedy to be awarded by the district court in its discretion.”); see also Bledsoe v. Emery Worldwide Airlines, 635 F.3d. 836, 840-41 (6th Cir. 2011) (holding “statutory remedies available to aggrieved employees under the Worker Adjustment and Retraining Notification (WARN) act provide equitable restitutionary relief for which there is no constitutional right to a jury trial.”).

[38] K.M.C. Co. v. Irving Tr. Co., 757 F.2d 752, 758 (6th Cir. 1985); Leasing Serv. Corp. v. Crane, 804 F.2d 828, 832 (4th Cir. 1986); Telum, Inc. v. E.F. Hutton Credit Corp., 859 F.2d 835, 837 (10th Cir. 1988).

[39] Zaklit v. Glob. Linguist Sols., LLC, 53 F. Supp. 3d 835, 854 (E.D. Va. 2014); see also Nat’l Equip. Rental, Ltd. v. Hendrix, 565 F.2d 255, 258 (2d Cir. 1977).

[40] United States v. Steele, 298 F.3d 906, 912 (9th Cir. 2002) (“The fundamental purpose of voir dire is to ‘ferret out prejudices in the venire’ and ‘to remove partial jurors.’”) (quoting United States v. Howell, 231 F.3d 615, 627-28 (9th Cir. 2000)); Bristol Steel & Iron Works v. Bethlehem Steel Corp., 41 F.3d 182, 189 (4th Cir. 1994) (stating that the purpose of voir dire is to ensure a fair and impartial jury, not to operate as a discovery tool by opposing counsel).

[41] Mu’Min v. Virginia, 500 U.S. 415, 431 (1991).

[42] United States v. Piancone, 506 F.2d 748, 751 (3d Cir. 1974).

[43] Id.

[44] United States v. Delgado, 668 F.3d 219, 228 (5th Cir. 2012).

[45] Finks v. Longford Equip. Int’l, 208 F.3d 225, at *2 (10th Cir. February 25, 2000).

[46] Fed. R. Civ. P. 47(a).

[47] Hicks v. Mickelson, 835 F.2d 721, 726 (8th Cir. 1987).

[48] U.S. v. Lewin, 467 F.2d 1132 (7th Cir. 1972) (citing Fed. R. Crim. P. 24(a)).

[49] U.S. v. Lawes, 292 F.3d 123, 128 (2d Cir. 2002); Hicks v. Mickelson, 835 F.2d 721, 723-26 (8th Cir. 1987).

[50] Lawes, 292 F.3d at 128 (noting that “federal trial judges are not required to ask every question that counsel—even all counsel—believes is appropriate”).

[51] Finks v. Longford Equip. Int’l, 208 F.3d 225, at *2 (10th Cir. 2000).

[52] Mayes v. Kollman, 560 Fed. Appx. 389, 395 n.13 (5th Cir. 2014); Richardson v. New York City, 370 Fed. Appx. 227 (2d Cir. 2010); c.f. Kiernan v. Van Schaik, 347 F.2d 775, 779 (3d Cir. 1965) (finding that judge’s refusal to ask prospective jurors questions about connection to insurance companies constituted reversible error).

[53] See 28 U.S.C. § 1865(b).

[54] 28 U.S.C. § 1866.

[55] United States v. Bishop, 264 F.3d 535, 554-55 (5th Cir. 2001).

[56] United States v. Price, 573 F.2d 356, 389 (5th Cir. 1978).

[57] Chestnut v. Ford Motor Co., 445 F.2d 967 (4th Cir. 1971); c.f. United States v. Turner, 389 F.3d 111 (4th Cir. 2004) (finding that district court was within its discretion in failing to disqualify jurors who banked with a different branch of the bank that was robbed).

[58] United States v. Chapdelaine, 989 F.2d 28 (1st Cir. 1993).

[59] Leibstein v. LaFarge N. Am., Inc., 767 F. Supp. 2d 373 (E.D.N.Y. 2011), as amended (Feb. 15, 2011).

[60] Cravens v. Smith, 610 F.3d 1019, 1032 (8th Cir. 2010).

[61] See 28 U.S.C. § 1866 (stating that a juror may be “excluded upon peremptory challenge as provided by law”).

[62] Davis v. United States, 374 F.2d 1, 5 (1967) (“The essential nature of the peremptory challenge is that it is one exercised without a reason stated, without inquiry and without being subject to the court’s control.”).

[63] 28 U.S.C. § 1870; see also Fedorchick v. Massey-Ferguson, Inc., 577 F.2d 856 (3d Cir. 1978).

[64] Stephens v. Koch Foods, LLC, No. 2:07-CV-175, 2009 WL 10674890, at *1 (E.D. Tenn. Oct. 20, 2009).

[65] Id.

[66] Id.

[67] Id.

[68] See Batson v. Kentucky, 476 U.S. 79 (1986) (race); J.E.B. v. Alabama ex rel. T.B., 511 U.S. 127 (1994) (gender); Rivera v. Nibco, Inc., 372 F. App’x 757, 760 (9th Cir. 2010) (national origin).

[69] Powers v. Ohio, 499 U.S. 400, 409 (1991).

[70] Robinson v. R.J. Reynolds Tobacco Co., 86 F. App’x 73, 75 (6th Cir. 2004).

[71] Rivera v. Illinois, 556 U.S. 148 (2009); see also King v. Peco Foods, Inc., No. 1:14-CV-00088, 2017 WL 2424574 (N.D. Miss. Jun. 5, 2017).

[72] Kirk v. Raymark Indus., Inc., 61 F.3d 147, 157 (3d Cir. 1995) (holding, in asbestos litigation, that trial court’s refusal to remove two panelists for cause was error, and the party’s subsequent use of peremptory challenges to remedy the judge’s mistake required per se reversal and a new trial) (citations omitted).

[73] Linden v. CNH Am., LLC, 673 F.3d 829, 840 (8th Cir. 2012).

[74] Black’s Law Dictionary 460 (6th ed. 1990).

[75] Fed. R. Evid. 611(c).

[76] McClard v. United States, 386 F.2d 495, 501 (8th Cir. 1967).

[77] Rodriguez v. Banco Cent. Corp., 990 F.2d 7, 12-13 (1st Cir. 1993).

[78] United States v. Rojas, 520 F.3d 876, 881 (8th Cir. 2008) (citing U.S. v. Butler, 56 F.3d 941, 943 (8th Cir. 1995)).

[79] United States v. Carpenter, 819 F.3d 880, 891 (6th Cir. 2016), reversed and remanded on other grounds, 138 S.Ct. 2206, 201 L. Ed. 2d 507 (2018).

[80] U.S. v. Hernandez-Albino, 177 F.3d 33, 42 (1st Cir. 1999).

[81] United States v. Grassrope, 342 F.3d 866, 869 (8th Cir. 2003) (permitting leading questions when examining a sexual assault victim).

[82] U.S. v. Mulinelli-Navas, 111 F.3d 983, 990 (1st Cir. 1997).

[83] See United States v. Lin, 101 F.3d 760, 770 (D.C. Cir. 1996).

[84] United States v. Jacobs, 215 Fed. Appx. 239, 241 (4th Cir. 2007) (citing United States v. Lewis, 10 F.3d 1086, 1089 (4th Cir. 1993)).

[85] Raysor v. Port Authority of New York & New Jersey, 768 F.2d 34, 40 (2d Cir. 1985).

[86] Id.

[87] Elgabri v. Lekas, 964 F.2d 1255, 1260 (1st Cir. 1992).

[88] See Rosa-Rivera v. Dorado Health, Inc., 787 F.3d 614, 617 (1st Cir. 2015) (employees); United States v. Bryant, 461 F.2d 912, 918-19 (6th Cir. 1972) (informants); United States v. Hicks, 748 F.2d 854, 859 (4th Cir. 1984) (girlfriend).

[89] See U.S. v. Cisneros-Gutierrez, 517 F.3d 751, 762 (5th Cir. 2008).

[90] Fed. R. Evid. 612 authorizes a party to refresh a witness’s memory with a writing so long as the “adverse party is entitled to have the writing produced at the hearing, to inspect it, to cross-examine the witness thereon, and to introduce in evidence those portions which relate to the testimony of the witness.”

[91] Rush v. Illinois Cent. R. Co., 399 F.3d 705, 715-22 (6th Cir. 2005).

[92] Rush v. Illinois Cent. R. Co., 399 F.3d 705, 715-22 (6th Cir. 2005).

[93] Id. at 718-19.

[94] United States v. Logan, 121 F.3d 1172, 1175 (8th Cir. 1997).

[95] United States v. Lemon, 497 F.2d 854, 857 (10th Cir. 1974).

[96] See Fed. R. Evid. 607.

[97] Id.

[98] Util. Control Corp. v. Prince William Const. Co., 558 F.2d 716, 720 (4th Cir. 1977).

[99] United States v. Gilbert, 57 F.3d 709, 711 (9th Cir. 1995).

[100] United States v. Finley, 708 F. Supp. 906 (N.D. Ill. 1989).

[101] United States v. Finis P. Ernest, Inc., 509 F.2d 1256, 1263 (7th Cir. 1975); United States v. Prince, 491 F.2d 655, 659 (5th Cir. 1974).

[102] See Davis v. Alaska, 415 U.S. 308, 316, 94 S. Ct. 1105, 1110, 39 L. Ed. 2d 347 (1974) (“Cross-examination is the principal means by which the believability of a witness and the truth of his testimony are tested.”).

[103] See Fed. R. Evid. 611(b) (effective December 1, 2011) (“(b) Scope of Cross-Examination. Cross-examination should not go beyond the subject matter of the direct examination and matters affecting the witness’s credibility. The court may allow inquiry into additional matters as if on direct examination.”).

[104] See United States v. Perez-Solis, 709 F.3d 453, 463-64 (5th Cir. 2013); see also United States v. Arias-Villanueva, 998 F.2d 1491, 1508 (9th Cir. 1993) (cross-examination is within the scope of direct where it is “reasonably related” to the issues put in dispute by direct examination), overruled on other grounds; United States v. Moore, 917 F.2d 215 (6th Cir. 1990) (subject matter of direct examination under Rule 611(b) includes all inferences and implications arising from the direct); United States v. Arnott, 704 F.2d 322, 324 (6th Cir. 1983) (“The ‘subject matter of the direct examination,’ within the meaning of Rule 611(b), has been liberally construed to include all inferences and implications arising from such testimony.”).

[105] Perez-Solis, 709 F.3d at 464.

[106] Id; see also MDU Resources Group v. W.R. Grace and Co., 14 F.3d 1274, 1282 (8th Cir. 1994), cert. denied, 513 U.S. 824, 115 S. Ct. 89, 130 L. Ed. 2d 40 (1994) (“When cross-examination goes beyond the scope of direct, as it did here, and is designed, as here, to establish an affirmative defense (that the statute of limitations had run), the examiner must be required to ask questions of non-hostile witnesses as if on direct.).

[107] Under Fed. R. Evid. 608, if the witness concedes the bad act, impeachment is accomplished. If the witness denies the bad act, Rule 608(b) precludes the introduction of extrinsic evidence to prove the act. In short, the cross-examining lawyer must live with the witness’s denial.

[108] To qualify, “the crime must have been a felony, or a misdemeanor that has some logical nexus with the character trait of truthfulness, such as when the elements of the offense involve dishonesty or false statement. The conviction must have occurred within ten years of the date of the witness’s testimony at trial, or his or her release from serving the sentence imposed under the conviction, whichever is later, unless the court permits an older conviction to be used, because its probative value substantially outweighs any prejudice, and it should, in the interest of justice, be admitted to impeach the witness. If the prior conviction is used to impeach a witness other than an accused in a criminal case, its admission is subject to exclusion under Rule 403 if the probative value of the evidence is substantially outweighed by the danger of unfair prejudice, delay, confusion or the introduction of unnecessarily cumulative evidence. If offered to impeach an accused in a criminal case, the court still may exclude the evidence, if its probative value is outweighed by its prejudicial effect.” Behler v. Hanlon, 199 F.R.D. 553, 559 (D. Md. 2001).

[109] Fed. R. Evid. 608 (bad acts or character of untruthfulness); Fed. R. Evid. 609 (qualifying crime); Fed. R. Evid. 613 (prior inconsistent statement).

[110] Behler, 199 F.R.D. at 556.

[111] 353 F.2d 324, 325-26 (1st Cir. 1965).

[112] 927 F.2d 838, 841 (5th Cir. 1991).

[113] 250 F.3d 10, 16-17 (1st Cir. 2001).

[114] 237 F.3d 8, 16-17 (1st Cir. 2001).

[115] 248 Fed. Appx. 718, 726 (6th Cir. 2007).

[116] 653 F.2d 915, 920-21 (5th Cir. 1981).

[117] United States v. James, 510 F.2d 546, 551 (5th Cir. 1975).

[118] United States v. Blackwood, 456 F.2d 526, 529-30 (2d Cir. 1972).

[119] Id.

[120] FED. R. CIV. P. 26(a)(2).

[121] Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 597 (1993).

[122] Fed. R. Evid. 901.

[123] U.S. v. Goichman, 547 F.2d 778, 784 (3d Cir. 1976) (“[T]here need be only a prima facie showing, to the court, of authenticity, not a full argument on admissibility . . . .  [I]t is the jury who will ultimately determine the authenticity of the evidence, not the court.”).

[124] Id.

[125] Fed. R. Evid. 803(6), 902(11); United States v. Senat, 698 F. App’x 701, 706 (3d. Cir. 2017).

[126] See, e.g., Stumpff v. Harris, 31 N.E.3d 164, 173 (Ohio App. 2 Dist. 2015) (“Numerous courts, both state and federal, have held that items produced in discovery are implicitly authenticated by the act of production by the opposing party); Churches of Christ in Christian Union v. Evangelical Ben. Trust, S.D. Ohio No. C2:07CV1186, 2009 WL 2146095, *5 (July 15, 2009) (“Where a document is produced in discovery, ‘there [is] sufficient circumstantial evidence to support its authenticity’ at trial.”).

[127] In re L.P., 749 S.E.2d 389, 392-392 (Ga. Ct. App. 2013).

[128] Rules of Evid., Rule 901(a). Idaho v. Koch, 334 P.3d 280 (Idaho 2014).

[129] State v. Smith, 2015-1359 La. App. 4 Cir. 4/20/16, 2016 WL 3353892, *10-11 (La. Ct. App. 4th Cir. 2016); see also OraLabs, Inc. v. Kind Group LLC, 2015 WL 4538444, *4, Fn 7  (D. Colo. 2015) (in a patent and trade dress infringement action, the court admitted, over hearsay objections, Twitter posts offered to show actual confusion between the plaintiff’s and defendant’s products.).

[130] Jones v. U.S., 813 A.2d 220, 226-227 (D.C. 2002).

[131] Dente v. Riddell, Inc., 664 F.2d 1, 2 n.1 (1st Cir. 1981).

[132] Mills v. Texas Compensation Ins. Co., 220 F.2d 942, 946 (5th Cir. 1955).

[133] U.S. v. Gomez-Alvarez, 781 F.3d 787, 792 (5th Cir. 2015).

[134] Jerden v. Amstutz, 430 F.3d 1231, 1237 (9th Cir. 2005).

[135] See, e.g., Hastings v. Bonner, 578 F.2d 136, 142-143 (5th Cir. 1978); United States v. Johnson, 577 F.2d 1304, 1312 (5th Cir. 1978); United States v. Jamerson, 549 F.2d 1263, 1266-67 (9th Cir. 1977).

[136] See United States v. Henderson, 409 F.3d 1293, 1298 (11th Cir. 2005).

[137] Inselman v. S & J Operating Co., 44 F.3d 894, 896 (10th Cir. 1995).

[138] See United States v. Adams, 271 F.3d 1236, 1241 (10th Cir. 2001) (“In order to qualify as an adequate offer of proof, the proponent must, first, describe the evidence and what it tends to show and, second, identify the grounds for admitting the evidence.”).

[139] Murphy v. City of Flagler Beach, 761 F.2d 622 (11th Cir. 1985).

[140] See id. at 1241-42 (“On numerous occasions we have held that merely telling the court the content of . . . proposed testimony is not an offer of proof.”).

[141] Fed. R. Evid. 103(c) (The trial court “may direct an offer of proof be made in question-and-answer form.”). See, e.g., United States v. Yee, 134 F.R.D. 161, 168 (N.D. Ohio 1991) (stating that “hearings were held for approximately six  weeks” on whether DNA evidence was admissible).

[142] Adams, 271 F.2d at 1242.

[143] Id.

[144] Palmer v. Hoffman, 318 U.S. 109, 116 (1943).

[145] Fed. R. Evid. 103(a)(2); Beech Aircraft v. Rainy, 488 U.S. 153 (1988).

[146] Alford v. United States, 282 U.S. 687, 692 (1931).

[147] United States v. Harris, 536 F.3d 798, 812 (7th Cir. Ill. Aug. 6, 2008), overruled on other grounds.

[148] See, e.g., United States v. St. Michael’s Credit Union, 880 F.2d 579 (1st Cir. 1989); Griffin v. California, 380 U.S. 609, 615 (Apr. 28, 1965).

[149] Model Rule of Professional Conduct Rule 3.4(e).

[150] Jones v. Lincoln Elec. Co., 188 F.3d 709, 731 (7th Cir. 1999) (“We find nothing improper in this line of argument. Closing arguments are the time in the trial process when counsel is given the opportunity to discuss more freely the weaknesses in his opponent’s case.”).

[151] Vineyard v. County of Murray, Ga., 990 F.2d 1207, 1214 (11th Cir. 1993).

[152] See, Fed. R. Civ. P. 50(a)(1) (“If a party has been fully heard on an issue during a jury trial and the court finds that a reasonable jury would not have a legally sufficient evidentiary basis to find for the party on that issue, the court may: (A) resolve the issue against the party; and (B) grant a motion for judgment as a matter of law against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue.”).

[153] Fed. R. Civ. P. 50(a)(2).

[154] Arch Ins. Co. v. Broan-NuTone, LLC, 509 F. App’x 453, fn. 5 (6th Cir. 2012) (quoting Ford v. Cnty. of Grand Traverse, 535 F.3d 483, 492 (6th Cir. 2008).

[155] U. S. Indus., Inc. v. Semco Mfg., Inc., 562 F.2d 1061, 1065 (8th Cir. 1977).

[156] Am. & Foreign Ins. Co. v. Gen. Elec. Co., 45 F.3d 135, 139 (6th Cir. 1995).

[157] Unitherm Food Sys., Inc. v. Swift-Eckrich, Inc., 546 U.S. 394, 405 (2006).

[158] Reeves v. Sanderson Plumbing Prod., Inc., 530 U.S. 133, 120 S. Ct. 2097, 147 L. Ed. 2d 105 (2000); citing Lytle v. Household Mfg., Inc., 494 U.S. 545, 554-555, 110 S.Ct. 1331, 108 L.Ed.2d 504 (1990); Liberty Lobby, Inc., supra, at 254, 106 S.Ct. 2505; Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 696, n.6, 82 S.Ct. 1404, 8 L.Ed.2d 777 (1962).

[159] Id.

[160] Daly v. Moore, 491 F.2d 104 (5th Cir. 1974) (explaining that a court should refuse instructions not applicable to the facts).

[161] Fed. R. Civ. P. 51(b)(3).

[162] Fed. R. Civ. P. 51(b) (1)-(2); see also Vialpando v. Cooper Cameron Corp., 92 F. App’x 612 (10th Cir. 2004) (explaining that “a district court can no longer give mid-trial instructions without first advising the parties of its intent to do so and giving the parties an opportunity to object to the proposed instruction.”).

[163] Apple Inc. v. Samsung Elecs. Co., No. 11-CV-01846-LHK, 2017 WL 3232424 (N.D. Cal. July 28, 2017); see also Daly, 491 F.2d.104 (affirming court’s omission of instructions on the due process requirements of the Fourteenth Amendment since no facts supported a violation).

[164] Fed. R. Civ. P. 51.

[165] Estate of Keatinge v. Biddle, 316 F.3d 7 (1st Cir. 2002).

[166] Positive Black Talk Inc. v. Cash Money Records, Inc., 394 F.3d 357, 65 Fed. R. Evid. Serv. 1366 (5th Cir. 2004), abrogated on other grounds.

[167] Fed. R. Civ. P. 51(c)(2); Fed. R. Crim. P. 30(d); see also Abbott v. Babin, No. CV 15-00505-BAJ-EWD, 2017 WL 3138318, at *3 (M.D. La. May 26, 2017) (explaining that upon an untimely objection courts may only consider a plain error in the jury instructions).

[168] Fed. Rules Civ. Proc. Rule 51; Foley v. Commonwealth Elec. Co., 312 F.3d 517, 90 Fair Empl. Prac. Cas. (BNA) 895 (1st Cir. 2002).

[169] Chuman v. Wright, 76 F.3d 292, 294 (9th Cir. 1996).

[170] Benaugh v. Ohio Civil Rights Comm’n, No. 104-CV-306, 2007 WL 1795305 (S.D. Ohio June 19, 2007), aff’d, 278 F. App’x 501 (6th Cir. 2008).

[171] Chuman v. Wright, 76 F.3d 292, 294 (9th Cir. 1996) (reversing judgment since the instructions could allow a jury to find the defendant liable based on premise unsupported by law).

[172] United States v. Grube, No. CRIM C2-98-28-01, 1999 WL 33283321 (D.N.D. Jan. 16, 1999) (denying motion for new trial since the omitted instructions were superfluous and potentially misleading); see also Cupp v. Naughten, 414 U.S. 141, 94 S. Ct. 396, 397, 38 L. Ed. 2d 368 (1973); Lannon v. Hogan, 555 F. Supp. 999 (D. Mass.), aff’d, 719 F.2d 518 (1st Cir. 1983) (generally cannot seek such relief based on a claim of improper jury instructions, unless the error “so infect[ed] the entire trial that the resulting conviction violated the requirements of Due Process Clause and the Fourteenth Amendment.”).

[173] Fashion Boutique of Short Hills, Inc. v. Fendi USA, Inc., 314 F.3d 48 (2d Cir. 2002) (failure to make specific objections to jury instructions before jury retires to deliberate results in waiver, and Court of Appeals may review the instruction for fundamental error only.).

[174] United States v. Olano, 507 U.S. 725, 737 (1993).

[175] Cleary v. Indiana Beach, Inc., 275 F.2d 543, 545-46 (7th Cir. 1960); Sullivan v. United States, 414 F.2d 714, 715-16 (9th Cir. 1969).

[176] Cleary, 275 F.2d at 546; Magnuson v. Fairmont Foods Co., 442 F.2d 95, 98-99 (7th Cir. 1971).

[177] See United States v. Williams, 635 F.2d 744, 745-46 (8th Cir. 1980) (“It is essential to a fair trial, civil or criminal, that a jury be cautioned as to permissible conduct in conversations outside the jury room. Such an admonition is particularly needed before a jury separates at night when they will converse with friends and relatives or perhaps encounter newspaper or television coverage of the trial.”); United States v. Hart, 729 F.2d 662, 667 n.10 (10th Cir. 1984) (“[A]n admonition . . . should be given at some point before jurors disperse for recesses or for the day, with reminders about the admonition sufficient to keep the jurors alert to proper conduct on their part.”).

[178] United States v. Dempsey, 830 F.2d 1084, 1089-90 (10th Cir. 1987).

[179] United States v. Gross, 451 F.2d 1355, 1359 (9th Cir. 1971).

[180] United States v. Williams, 87 F.3d 249, 255 (8th Cir. 1996).

[181] Taylors v. Reo Motors, Inc., 275 F.2d 699, 705-06 (10th Cir. 1960).

[182] United States v. DeCoito, 764 F.2d 690, 695 (9th Cir. 1985).

[183] United States. v. Welch, 945 F.2d 1378, 1383 (7th Cir. 1991).

[184] Pierce v. Ramsey Winch Co., 753 F.2d 416, 431 (5th Cir. 1985).

[185] United States v. Chadwell, 798 F.3d 910, 914-15 (9th Cir. 2015).

[186] United States v. Aragon, 983 F.2d 1306, 1309 (4th Cir. 1993).

[187] Johnson v. Richardson, 701 F.2d 753, 757 (8th Cir. 1983).

[188] United States v. de la Cruz-Paulino, 61 F.3d 986, 997 (1st Cir. 1995).

[189] United States v. Gonzales, 121 F.3d 928, 945 (5th Cir. 1997), overruled on other grounds.

[190] United States v. Anthony, 565 F.2d 533, 536 (8th Cir. 1977); Unites States v. Johnson, 584 F.2d 148, 157-58 (6th Cir. 1978).

[191] McGowan v. Gillenwater, 429 F.2d 586, 587 (4th Cir. 1970).

[192] United States v. Weisner, 789 F.2d 1264, 1268 (7th Cir. 1986).

[193] Fed. R. Civ. P. § 51(b)(3).

[194] United States. v. Venerable, 807 F.2d 745, 747 (8th Cir. 1986).

[195] United States v. Gray, 199 F.3d 547, 550 (1st Cir. 1999).

[196] United States v. Scott, 642 F.2d 791, 797 (9th Cir. 2011); United States v. Bassler, 651 F.2d 600, 602 n.3 (8th Cir. 1981).

[197] See, e.g., United States v. Darden, 70 F.3d 1507, 1537 (8th Cir. 1995) (court permitted note-taking while examining exhibits only); United States v. Porter, 764 F.2d 1, 12 (1st Cir. 1985) (court permitted note-taking only during opening statements, closing statements, and jury charge).

[198] United States v. Scott, 642 F.3d 791, 797 (9th Cir. 2011).

[199] See United States v. Rhodes, 631 F.2d 43, 45-46 (5th Cir. 1980) (“The court should also explain that the notes taken by each juror are to be used only as a convenience in refreshing that juror’s memory and that each juror should rely on his or her independent recollection of the evidence rather than be influenced by another juror’s notes.”).

[200] United States v. Richardson, 233 F.3d 1285, 1288-1289 (11th Cir. 2000).

[201] United States v. Rawlings, 522 F.3d 403, 408 (D.C. Cir. 2008); United States v. Bush, 47 F.3d 511, 514-516 (2nd Cir. 1995); DeBenedetto by DeBenedetto v. Goodyear Tire & Rubber Co., 754 F.2d 512, 516 (4th Cir. 1985).

[202] Perhaps the most important protection is a screening mechanism where questions are submitted to a judge and reviewed by counsel prior to the question being posed. Rawlings, 522 F.3d at 408; United States v. Collins, 226 F.3d 457, 463 (6th Cir. 2000).

[203] Collins, 226 F.3d at 464.

[204] Charlotte Cty. Develop. Co. v. Lieber, 415 F.2d 447, 448 (5th Cir. 1969).

[205] United States v. Balsam, 203 F.3d 72, 86 (1st Cir. 2000).

[206] Budoff v. Holiday Inns, Inc., 732 F.2d 1523, 1527 (6th Cir. 1984).

[207] United States v. Barfield Co., 359 F.2d 120, 123-24 (5th Cir. 1966).

[208] Dennis v. General Elec. Corp., 762 F.2d 365, 367 (4th Cir. 1985).

[209] Fed. R. Civ. P. 50(b).

[210] Exxon Shipping Co. v. Baker, 554 U.S. 471, 486, 128 S. Ct. 2605, 2617 n.5, 171 L. Ed. 2d 570 (2008).

[211] CFE Racing Prod., Inc. v. BMF Wheels, Inc., 793 F.3d 571, 583 (6th Cir. 2015).

[212] Id. (explaining that the waiver rule serves to protect litigants’ right to trial by jury, discourage courts from reweighing evidence simply because they feel the jury could have reached another result, and prevent tactical victories at the expense of substantive interest as the pre-verdict motion enables the defending party to cure defects in proof) (quoting Libbey-Owens-Ford Co. v. Ins. Co. of N. Am., 9 F.3d 422, 426 (6th Cir. 1993)).

[213] Bowen v. Roberson, 688 F. App’x 168, 169 (3d Cir. 2017).

[214] McGinnis v. Am. Home Mortg. Servicing, Inc., 817 F.3d 1241, 1254 (11th Cir. 2016).

[215] Bavlsik v. Gen. Motors, LLC, 870 F.3d 800, 805 (8th Cir. 2017).

[216] McGinnis, 817 F.3d at 1254.

[217] Id.

[218] See, e.g., Stragapede v. City of Evanston, Illinois, 865 F.3d 861, 866 (7th Cir. 2017), as amended (Aug. 8, 2017) (upholding jury verdict in favor of plaintiff for ADA violation when challenged in renewed 50(b) motion on grounds that the jury properly discounted employer’s evidence).

[219] Fed. R. Civ. P. 59.

[220] Fed. R. Civ. P. 59(b).

[221] Molski v. M.J. Cable, Inc., 481 F.3d 724, 729 (9th Cir. 2007) (noting that federal courts are guided by the common law’s established grounds for permitting new trials).

[222] Montgomery Ward & Co. v. Duncan, 311 U.S. 243, 251, 61 S.Ct. 189, 85 L.Ed. 147 (1940).

[223] Kleinschmidt v. United States, 146 F. Supp. 253, 257 (D. Mass. 1956) (explaining that a party seeking new trial on ground of newly discovered evidence has substantial burden to explain why the evidence could not have been found by due diligence before trial).

[224] Gross v. FBL Fin. Servs., Inc., 588 F.3d 614, 617 (8th Cir. 2009) (granting new trial in age discrimination case where jury instruction improperly shifted the burden of persuasion on a central issue).

[225] Warner v. Rossignol, 538 F.2d 910, 911 (1st Cir. 1976) (counsel’s conduct in going beyond the pleadings and evidence to speculate and exaggerate the plaintiff’s injuries, despite repeated warnings from the trial judge, warranted new trial).

[226] See, e.g., Bavlsik v. Gen. Motors LLC, No. 4:13 CV 509 DDN, 2015 WL 4920300, at *1 (E.D. Mo. Aug. 18, 2015) (granting new trial on issue of damages and rejecting defendants’ argument that the record demonstrated a compromised verdict).

[227] McGinnis, 817 F.3d at 1254.

[228] Fed. R. Civ. P. 59(d).

[229] Fed. R. Civ. P. 50(b).

[230] In re Transtexas Gas Corp., (5th Cir 2002), 303 F.3d 571.

[231] U.S. v. Mansion House Center North Redevelopment Co., (8th Cir. 1988), 855 F.2d 524,, certiorari denied 109 S.Ct. 557, 488 U.S. 993, 102 L.Ed.2d 583 (district court had jurisdiction to modify judgment, even after it was affirmed on appeal, in order to clarify its intentions and conform judgment to parties’ pretrial stipulation).

[232] See United States v. Cirami, 563 F.2d 26, 33 (2d Cir. 1977).

[233] Flores v. Town of Islip, No. 18-CV-3549 (GRB)(ST), 2020 WL 5211052, at *1 (E.D.N.Y. Sept. 1, 2020) (the court granted a motion to proceed with a virtual trial but required counsel and the court staff to have a pre-trial conference to discuss the logistics of a virtual trial).

[234] In re Alle, No. 2:13-BK-38801-SK, 2021 WL 3032712 (C.D. Cal. July 19, 2021).

[235] See, e.g., New Jersey Federal Bankruptcy Court Zoom Trial Guidelines.

[236] For example, see the State of Washington’s Best Practices for Remote Jury Trials, https://www.courts.wa.gov/newsinfo/content/Best%20Practices%20in%20Response%20to%20FAQ.PDF

The following is an excerpt adapted from Showing the Value of the Legal Department: More Than Just a Cost Center, published in 2022 by the American Bar Association Business Law Section.

There are many types of intellectual property (IP)—for example, trademarks, trade secrets, copyrights, or patents. These are all valuable assets of a company. One way the legal department can help generate money for a company is to find ways to monetize the company’s IP. Being aggressive with enforcing patents is a good strategy, but the strategy goes nowhere if the company does not have any patents to fight with. To get over this hump, the first step is creating or enhancing a patent development program. It is a fairly straightforward process to generate patents. The licensing half, however, is not easy, but can be very lucrative if the patents are valid, have value, and you find the right targets.

A patent is a government-granted monopoly to build, sell, and use your invention (and prevent others from doing so). If you are issued a patent in the United States, it is typically good for twenty years, after which time your patent expires and anyone can copy, build, and sell your invention. In exchange for a short-term monopoly, you must disclose the details of your invention to the public so that someone practiced in the arts could recreate it. To receive a patent, your idea must meet four requirements.

1. The subject matter must be patentable, as defined by Congress and the courts.
2. Your idea must be new.
3. The idea must be useful.
4. Your idea must be non-obvious.

Additionally, there is what lawyers commonly called the Alice decision whereby the U.S. Supreme Court established a two-part test to determine if a software patent was patentable or not as pertaining to ineligible subject matter. To sum it up quickly, under Alice, simply reciting the use of a conventional computer in the claims to implement the known idea does not make the idea for a utility patent patentable subject matter.

There are three types of patents you can file for:

1. Utility patents may be granted to anyone who invents or discovers any new and useful process, machine, article of manufacture, or composition of matter, or any new and useful improvement thereof (good for twenty years).
2. Design patents may be granted to anyone who invents a new, original, and ornamental design (good for fourteen years).
3. Plant patents may be granted to anyone who invents or discovers and asexually reproduces any distinct and new variety of plant (good for twenty years).

There is a lot that goes into determining if your technology or idea is patentable and, if so, which type of patent is best. Unless the company has the money to have its own patent attorney on staff, you will need experienced outside counsel to help you with this process and draft the application. Simply put, getting a patent is not easy (unless you buy them from someone looking to sell or in bankruptcy, which is always an option). The overall process takes a lot of work and time. It can also be expensive—roughly $15,000–$25,000 to get a patent issued. Buying already issued patents is likely far more expensive. To start, in the United States, you need to file a patent application that sets out in detail a description of your idea. These applications must be filed by a patent attorney (in-house or outside) skilled in the art of drafting a patent application. You must also review publications and other sources to make sure there is nothing already out there that overlaps with your idea or would allow someone skilled in the arts to build your invention just from reading what is already out there. (This is called prior art.) Then an examiner from the U.S. Patent and Trademark Office (USPTO) reviews your application. They might reject it in total, or they might reject part of it (for any of the reasons noted). You have a chance to appeal (called an office action), and the examination process (with the exception of design patents) generally goes back and forth for several years before either your patent is issued or finally denied. At each stage, you must determine whether it is worth the cost and the effort to continue or, depending on the objections from the examiner, whether the changes you must make to your patent leave you with anything good after it is all said and done.

You also need to decide in which jurisdictions you will seek patent protection. Patents are only valid in the country where they are issued. You cannot enforce a patent issued in the United States against a business operating within the European Union or in China. You would need patents issued in those countries. Additionally, in the United States, you must seek patent protection within one year of when you first sold or disclosed the patented material. If you wait too long (more than twelve months), you cannot get a patent. Finally, one neat trick in the U.S. system is filing for what is called a provisional patent. This is a relatively inexpensive process that allows you to get an application on file quickly (with far less detail and expense than a regular patent application). The provisional patent application is good for one year and buys you time to decide if you truly want to pursue a full patent while preserving your position as first to file.

Given the cost, the business side will ask why they should get a patent. It is a fair question, especially if you are going to be spending time and treasure trying to get inventions patented. Ultimately, the answer to the question depends on the company’s strategy concerning IP generally and patents specifically. You can break the reasons down as follows:

• Protect innovations. The most straightforward reason to get a patent is to protect a valuable invention, in particular, one you believe competitors or others may reverse engineer or invent on their own.
• Offensive use. This means getting patents to use for licensing purposes (i.e., money) or to preclude others (competitors) from practicing your invention, which, if done correctly, could mean they are no longer competitors.
• Defensive use. This contemplates getting patents to use to defend the company in the event a competitor or other patent owner tries to assert their patent against you. If the party asserting the patent operates a real business (versus being a patent troll), then you may own a patent that you could enforce against them. When this happens, the parties often agree to a cross-licensing program that allows each party to use the other’s patents.
• Increase shareholder value. Patents have value. A portfolio of patents can increase the value of your company for its shareholders, particularly in cases of a potential sale of the business. You will always see questions around patents (and other IP) in a due diligence request. Additionally, if your company is publicly traded, a fulsome patent portfolio (or simply obtaining a single new, but important, patent) can mean an increase in share price.
• Taxes. Being able to demonstrate that you apply for and have patents can be used as a justification for research and development costs, which typically qualify as deductions for purposes of corporate income taxes.
• Prestige. Companies with large patent portfolios (or even just a handful of important patents) are viewed as innovators in their field. Employees, especially for technology companies, take pride in the innovations developed by their companies, including patents. This can lead to an improvement of morale generally, especially among the technical teams.

Another important consideration regarding any particular piece of intellectual property is whether you should protect it with a patent or treat it as a trade secret. Not all ideas are worth the cost of trying to obtain a patent. Additionally, once the patent issues, the particulars of the invention are disclosed to the world, and your protection only lasts for twenty years (and it also depends on how willing you are to enforce your patents). Accordingly, there are times when a patent simply does not make sense. For example, the good folks at Coca-Cola could have patented the formula for Coke. But, for obvious reasons, it was a far better decision to treat the formula as a trade secret and keep it out of the public realm. A patent only lasts twenty years. A trade secret can last forever. So, when deciding to patent something, you need to think hard about whether this is, in fact, the right course or if you are better off keeping it as a trade secret.

There are two key documents you must have in place as you look to develop your company’s IP. The first is an invention disclosure form. This is a form you require inventors to fill out so their inventions can be properly evaluated. The form should only be a few pages long to encourage inventors to complete it. The inventor should provide information such as:

• a description of the technology, how it operates, the identity of competitors in the field, and their products/technology;
• how the invention will make a difference in the marketplace for the company and allow the company’s products to surpass others (i.e., why is it worth seeking a patent);
• are there easy ways to design around the technology;
• the date the invention was created; and
• whether the invention has been offered for sale and, if so, when?

The second document is a form whereby all employees who join the company agree to assign ownership of any inventions that employee creates on company time or using company resources to the company. This form is often combined with other agreements such as confidentiality, non-solicitation, and non-compete agreements. You do not want to be in a position where the company is defending challenges to its attempt to obtain a patent from an employee claiming she is the real owner.

What Is a Securitization?

Securitization is a subset of structured finance. Structured finance transactions are generally finance transactions that involve the isolation of a pool of financial assets from the originator of those assets and a loan that relies on the strength of the assets rather than the creditworthiness of the owner. A securitization is a transaction in which a sponsor or originator obtains funding by causing a special purpose entity to issue securities backed by (and paid from) the proceeds of financial assets. The underlying assets are generally originated by companies seeking funds to finance operations or other corporate initiatives.

A variety of assets are used in securitizations. For example, securitizations may involve residential or commercial mortgages, credit card receivables, auto loans, student loans, corporate loans, or other financial assets.

A key feature of securitizations is legal isolation of the underlying assets. The underlying assets are transferred to the issuer of the securities on a “true sale” basis, and the issuer is structured in such a way as to be isolated from the bankruptcy risk of the originator.

Another feature of securitizations is credit enhancement. There are several methods for credit enhancement, including “tranching,” whereby the bonds are divided in a number of tranches^[1] with varying risk profiles (see Figure 1 for an example of tranches). Another is “overcollateralization,” which involves having more assets than necessary to cover payment on the securities.

Figure 1: Example of tranching. A flow chart illustrates that the most senior tranche is paid first and the most junior tranche last.

Why Securitize?

The credit enhancement inherent to securitizations, especially due to the aforementioned legal isolation techniques, permits the originating companies to obtain higher ratings than if such companies were to obtain a traditional loan. Consequently, the originating companies can obtain financing at a lower cost of funding.

Main Parties and Legal Documents

While securitizations come in a variety of structures, the following highlights the main parties and documents in a typical securitization.

Parties

The Originator/Sponsor

The originator generates (originates) and/or owns the receivables (the cash-flowing assets) that it seeks to securitize. A securitization may have many originators. The sponsor is the person who initiates and drives the securitization. In some transactions, the originator is also the sponsor of the transaction.

The Servicer

The servicer is the person who performs the administrative services related to the collection of the receivables. The servicer may also have active management responsibilities with respect to the receivables/underlying assets, if the securitization’s portfolio is “dynamic.”

The Trustee/Collateral Agent

The Trustee/Collateral Agent is the person/organization (typically a bank) that holds the security interest on behalf of the investors and may perform certain other duties under the transaction documents. The person serving as Trustee may have multiple additional roles in a transaction, such as serving as custodian, account bank, or collateral administrator.

The Issuer

The Issuer is an entity created solely for purposes of a securitization and is responsible, among other duties, for issuing the securities. Some transactions have more than one issuer.

The Underwriter

The underwriter is the person responsible for arranging for the sale of the Issuer’s securities to the initial investors.

The Investors

The investors are the persons who invest in the securitization transaction by purchasing the securities originally issued by the Issuer and placed by the underwriter.

(See Figure 2 for a relationship diagram with typical transaction parties.)

Figure 2: Securitization Parties. A flow chart indicates the relationships between the main parties in a typical securitization.

Main Legal Documents

The two main legal documents in a securitization transaction are generally the indenture and the offering document.

Indenture

The indenture provides the terms of the securities issued in the securitization and describes the rights and duties of transaction parties.

Offering Document

The offering document is the main disclosure document that investors use to make their investment decisions. The offering document includes a description of the risk factors, the structure of the transaction, and the terms of the securities.

Bankruptcy Law

One of the main objectives in a securitization is to isolate the portfolio of underlying assets from the bankruptcy risk of the originator of those assets. Features of a securitization that are designed to achieve this objective include structuring the Issuer as a special purpose entity and transferring the underlying assets from the originator to the Issuer in a true sale.

Securities Law

In securitization transactions not registered with the U.S. Securities and Exchange Commission (“SEC”), the structure of the transaction and the types of investors investing in the transaction have to be carefully considered in order to meet the requirements of a private transaction. In registered transactions, the SEC reviews the offering document, and the document has to meet the disclosure requirements of a public transaction.

Other Regulatory Regimes

A number of other regulatory regimes can be relevant to securitizations. Examples include the restrictions on ownership or sponsorship of a “covered fund” by a banking entity under the Dodd–Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the risk retention rules under the Dodd Frank Act, and, in transactions that securitize consumer loans, rules issued by the Consumer Financial Protection Bureau.

[1] From the French word tranche, or “slice” in English.

In the event of a management deadlock among owners of a closely held entity with a limited number of shareholders, partners, or members, the non-operating owners often pursue a resolution of the parties’ management disputes through state court litigation. The simplest example of corporate deadlock involves a company with two co-owners who are equal (50–50) shareholders or members and can no longer agree on how to run or capitalize their business leading to major animosity and a lack of goodwill between the parties. In cases such as this, when the breakdown of the interest holders’ relationship is irreparable, an aggrieved shareholder or member who wants themself or their business partner(s) to exit the company, or to even wind up the company as a whole, may seek to accomplish his goals through the appointment of a state court receiver.^[1]

In state court, receivers are generally appointed by filing an order to show cause along with a verified complaint.^[2] Because an action to appoint a receiver is an equitable remedy, and the receiver’s duties and powers are determined based on the specific facts of each case, such actions are generally heard by a chancery court sitting in equity.^[3] Notwithstanding the equitable nature of a receivership action, courts view the appointment of a receiver as an extraordinary remedy that requires imposing and persuasive proof.^[4] As such, it can take months or even years before a receiver is appointed and given a directive by the appointing court to run, liquidate certain assets, or even dissolve a deadlocked company. Accordingly, breaking a corporate deadlock by using a state court appointed receiver can be a time consuming, expensive, and arduous process, which, in the interim, can lead to the further deterioration of a company’s finances and ability to conduct business as a going concern.

In contrast to the drawn out nature of a receivership action, a non-operating owner can break a company’s management deadlock in a relatively short amount of time by electing to put his or her company in a Chapter 7 bankruptcy proceeding.^[5] Indeed, once a Chapter 7 proceeding is filed the day to day control and operations of the business immediately pass to a Chapter 7 trustee, an independent and objective third party, pursuant to § 541(a) of the Bankruptcy Code. The non-operating owner can then negotiate with the Chapter 7 trustee to sell the business entity as a going concern through a § 363 asset sale or even request that the company be liquidated outright. Both of these actions would result in the non-operating owner (and perhaps the operating owner if he or she does not elect to purchase the assets alone or through another entity) essentially selling his or her interest in the now-bankrupt company and cashing out, thereby breaking the management deadlock. This is the case because the funds derived from the sale of the business or its assets after paying the administrative expenses associated with the sale(s) and all outstanding pre-petition creditors will be distributed to the entity’s members or shareholders under Bankruptcy Code § 726(a)(6).^[6]

In regard to selling a business as a going concern, a non-operating owner can also request that a Chapter 7 trustee request authorization from the bankruptcy court to temporarily operate the business under Bankruptcy Code § 721 to preserve the debtor entity’s business relationships and by extension its going concern value while working toward completing the sale. Unlike the drawn out process of a party seeking a state court receiver, a bankruptcy court can grant a trustee the authority to run a debtor’s business temporarily within a week of the bankruptcy filing if the trustee deems it necessary to file an expedited motion during the first days of the case. What’s more, with the expressed interest of a motivated buyer, a going concern sale or full asset liquidation can be accomplished within weeks of a bankruptcy petition being filed if the trustee is aware of the potential purchaser of the company or its underlying assets. Such a purchaser may be one of the company’s owners who now seeks to operate the business or a successor entity without the constraints of his or her former business partner.

This was exactly the case in the recent Chapter 7 bankruptcy case of In re Key Metal Refining, LLC filed in the United States Bankruptcy Court for the District of New Jersey.^[7] In that case, the 51 percent majority owner of Key Metal Refining, LLC (the Debtor) was a separate entity that filed the Debtor’s Chapter 7 petition. The minority owner of the Debtor was also an entity that together with its sole principal owned the remaining 49 percent of the Debtor. The principal of the minority owner also owned a separate real estate holding entity that, in turn, owned the property on which the Debtor operated. Prior to the management deadlock, the real estate holding entity had leased the property to the Debtor with such lease remaining in effect as of the date of the Debtor’s bankruptcy filing.

Once appointed, the Chapter 7 trustee^[8] in this case expeditiously filed first day motions with the bankruptcy court for the authority to operate the Debtor’s business on an interim basis and to obtain post-petition financing directly from the majority owner to fund the projected shortfall in the Debtor’s business operations and the costs of administering the Chapter 7 case. The goal of both of these motions was to allow the trustee to continue to operate the Debtor’s business pending the negotiation and consummation of a sale of the business’s assets in an effort to maximize the value of the Debtor’s assets, which otherwise would have significantly deteriorated in value. The bankruptcy court granted both the trustee’s motions on an interim basis just three days after the Debtor’s bankruptcy filing.

Thereafter, the trustee negotiated with the two deadlocked members of the Debtor and ultimately came to a consensual settlement and asset purchase agreement, which provided, among other things, that the trustee would sell substantially all of the Debtor’s assets to the Debtor’s majority owner. The proceeds of the sale would be placed in a settlement fund and then go toward the claims of the Debtor’s non-insider general unsecured creditors. The minority owner of the Debtor benefited from the sale and settlement agreement because the trustee rejected the Debtor’s property lease with the real estate holding company controlled by the debtor’s minority owner under Bankruptcy Code § 365. As such, the principal of the minority owner and his real estate holding company were now free to use the property for their own independent business operations. Moreover, the parties stipulated that the minority owner was entitled to a substantial claim for damages stemming from the trustee’s rejection of the lease agreement. This rejection claim was paid pro rata with other non-insider unsecured creditors from the settlement fund. The entire sale and settlement agreement between the parties was negotiated, agreed, and consummated within approximately six months of the Debtor’s bankruptcy filing.

The Key Metal Refining, LLC case goes to show that the time constraints associated with a Chapter 7 asset sale are likely to incentivize the deadlocked owners of a company to come to some form of an agreement regarding their business’s or a successor entity’s future management structure within a relatively short amount of time. This is the case as the value of the debtor company and its associated good will continue to deteriorate the longer it remains in a Chapter 7 bankruptcy proceeding without the ability to conduct its normal business operations.

In sum, while putting a company in a Chapter 7 proceeding is not a panacea, it is certainly worth considering in the right situations. Indeed, such an approach can be an economical and expedient way to break a management deadlock and solve what could otherwise be a prolonged and complicated litigation battle in state court for the appointment of a receiver.

[1] Generally, a receiver appointed in state court has the power to acquire legal title of the debtor’s assets and to liquidate and dissolve the debtor entity. See e.g., N.J.S.A. § 14A:14-4. Depending on state law and the retention order, receivers can also have the authority to continue to operate the debtor’s business, assume or reject unexpired leases, sell assets, collect rents, and have the power to close the business.

[2] In New Jersey, the procedures governing receiverships are provided in Court Rule 4:53-1, et seq.

[3] See e.g., Roach v. Margulies, 42 N.J. Super. 243, 245 (App. Div. 1956) (holding that it is well recognized that a court of equity has inherent power to appoint a receiver for a corporation).

[4] See Ravin, Sarasohn, Cook, Baumgarten, Fisch & Rosen, P.C. v. Lowenstein Sandler, P.C., 365 N.J. Super. 241 (App. Div. 2003).

[5] A significant limitation to this strategy is that the non-managing owner must have the authority to place the business in a bankruptcy proceeding or else he or she risks the case being thrown out upon a motion to dismiss being filed by one or more of the remaining owners of the company. State laws differ regarding whether a consensus among an entity’s owners is a prerequisite for a bankruptcy filing. For instance, in New Jersey, unless the members otherwise agree in writing, the law governing LLCs requires the unanimous vote of the members of an LLC to undertake actions outside the ordinary course. N.J.S.A. § 42-2C-37(c)(1)-(4); see also In re Crest By The Sea, LLC, 522 B.R. 540, 545 (Bankr. D.N.J. 2014) (concluding New Jersey LLC statute applies when LLC operating agreements are silent as to the vote required to authorize a debtor’s bankruptcy filing). In contrast, New York law does not specify what type of consent is required by the members of an LLC prior to filing a petition for bankruptcy; consequently courts look to the entity’s operating agreement for guidance. See In re E. End Dev., LLC, 491 B.R. 633, 639 (Bankr. E.D.N.Y. 2013) (holding that LLC operating agreement that conferred on the managing member broad authority to take any action necessary to preserve the value of its assets and to further its business operations, authorized managing member to file for bankruptcy on behalf of the LLC).

[6] Section 726(a) governs the order of distribution of property of the estate in a Chapter 7 case. A debtor, or the equity owners thereof, can receive nothing from the estate until after all administrative expenses and claims held by creditors are paid in full with interest. In re Deer Valley Trucking, Inc., 569 B.R. 341, 347 (Bankr. D. Idaho 2017).

[7] In re Key Metal Refining LLC, Case No. 19-24581-VFP, filed on July 28, 2019.

[8] The co-author of this article, Eric R. Perkins, served as the Chapter 7 trustee in this case.

The dramatic increase in SPAC IPOs in 2020 and early 2021 and related de-SPAC merger transactions that followed are creating billions of dollars’ worth of privately-placed common stock and warrants of newly public companies. That means more demand for “no registration” and legend removal opinions from company and selling stockholders’ counsel.

SPACs are special purpose acquisition companies—shell companies, also known as blind pool or blank check companies—that are newly formed to raise equity capital in an IPO and, after they are public, to pursue an acquisition of a target company, effectively taking a private target company public. Because SPACs by their terms must offer to redeem their outstanding common stock at the time of the acquisition and the acquisition price of the target company often exceeds the SPAC’s capital, SPACs typically raise additional capital to fund their acquisitions through PIPEs offerings (Private Investment/Public Equity) at the time of the merger.

The SPAC IPO boom cooled rapidly after the first months of 2021 for a number of reasons, not least of which was renewed SEC scrutiny. The SEC staff announced changes to the accounting for SPAC warrants, and the acting head of the Division of Corporation Finance questioned the availability of the safe harbor for forward-looking statements as applied to projections used in connection with de-SPAC transactions.^[1] There have also been high profile failures and stock price volatility of some de-SPAC companies. The perceived risk of de-SPAC transactions has increased and with it the pressure to get liquidity in the shares, which could mean increased urgency for legend removal when the Rule 144 exemption permitting public resales becomes available.

“No registration” and legend removal opinions are often needed for all types of public companies, but these opinions for a former SPAC company present a specific set of problems. In particular, because every SPAC is a shell company prior to its de-SPAC transaction, Rule 144 is not available until a year after the de-SPAC transaction. Also, to maintain Rule 144 eligibility, the company must have filed all of its reports (other than Form 8-K reports) required under the Securities Exchange Act of 1934 (the “’34 Act”) with the SEC for the 12 months prior to the sale. That means a critical part of diligence for giving “no registration” and legend removal opinions is determining whether the issuer of the shares is or was a SPAC or other shell company and, if so, whether it has filed all the required periodic reports.

Policing a Private Offering Exemption

The Securities Act of 1933 (the “’33 Act”) requires all offers and sales of securities to be registered with the SEC or to fit within an exemption from registration. Private companies usually issue shares under exemptions based on Section 4(a)(2) of the ’33 Act, which exempts offers and sales of securities by issuers in transactions “not involving a public offering” (i.e., ‎private offerings).‎ PIPEs offerings rely on this exemption. However, subsequent resales of privately-placed securities could result in the chain of transactions being considered a public offering, thereby invalidating the private offering exemption. As a result, companies restrict resales of privately-placed securities. Typically, the stock certificates for such securities will bear a legend to the effect that:

The shares represented by this certificate have not been registered under the Securities Act of 1933 or the securities laws of any state, and have been acquired for investment and not with a view to, or in connection with, the sale or distribution thereof. No such sale or distribution may be effected without an effective registration statement related thereto or an opinion of counsel in a form satisfactory to the company that such registration is not required under the Securities Act of 1933 or the securities laws of any state. (Emphasis added)

So, to transfer shares with a legend like the foregoing on the stock certificate, the holder needs an opinion of counsel. Imposing transfer restrictions and placing legends on stock certificates are ways that companies strive to “police” their private offering exemptions. They do not permit transfers of privately-placed shares without an opinion of counsel that the transfer does not require registration under the ’33 Act, and they place a legend on the new stock certificate unless counsel advises that no legend is required. Broker-dealers and transfer agents involved in the resale of shares also enforce the transfer restrictions. Broker-dealers will conduct due diligence because of their role in buying or placing shares and potential ’33 Act liability. Transfer agents will require legal opinions to remove ’33 Act restrictive legends because of their regulation by the SEC and liability concerns.^[2]

Stock certificate legends are not the only way for issuers to police their private offering exemptions. Qualified institutional buyers (“QIBs”), as defined in Rule 144A, are often viewed as being capable of complying with the ’33 Act on their own, so a letter from the QIB to the issuer may under some circumstances substitute for legended physical certificates.

Unregistered Public Resales

While there are exemptions that permit the private resale of shares, the privately sold shares remain subject to restrictions and consequently do not trade at the same price as freely tradable shares.^[3] Often, sellers are not interested in reselling privately at the kind of discount required, so, in the absence of registration of the resale, will only be interested in an unregistered public resale under Rule 144, which allows counsel to give both a “no registration” and a legend removal opinion.

Rule 144 is a safe harbor for resales under Section 4(a)(1) of the ’33 Act, which exempts resales “by any person other than an issuer, underwriter or dealer.” If the seller holds restricted securities as defined in Rule 144(a)(3)(i), that is, securities acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of ‎transactions not involving any public offering‎, then by reselling through a broker (as it typically would), the broker could be viewed as an underwriter, engaged in a distribution of the securities to the public. A stockholder who resells securities in compliance with the applicable conditions of Rule 144 and its broker, however, is deemed not to be engaged in a distribution of securities and, therefore, not to be an underwriter.

Rule 144 generally permits resales of restricted securities that have been held for at least six months, in the case of an issuer that has been subject to the reporting requirements of the ’34 Act for 90 days and is current in its annual and quarterly reports, or held for at least one year in all other cases. In the case of resales by affiliates of the issuer, Rule 144 requires, in addition, that volume and manner of sale limitations be met and that the seller file a Form 144 with the SEC. However, Rule 144(i) provides that the rule is not available for a SPAC or other shell company, even after its de-SPAC transaction, until one year after it ceased to be a shell company and has filed with the SEC information that would satisfy the requirements of Form 10 or, for foreign issuers, Form 20-F (“Form 10 Information”). Although business combination related shell companies are excluded from the Rule 144(i) limitation, SPACs are not business combination related shell companies.

Another difference between Rule 144 for SPACs and Rule 144 generally is the requirement in Rule 144(i) that a former SPAC or other shell company must have filed all reports required under the ’34 Act, other than reports on Form 8-K, for the 12 months preceding the sale. Under Rule 144, for non-affiliate stockholders, once they have completed a one-year holding period, there is no current public information requirement for resales under Rule 144, so for ordinary companies there is no need in the case of non-affiliate resales to ascertain whether the company has filed its periodic reports. Even if the company has for some reason, such as accounting irregularities making it unable to finalize its financial statements, been unable to file its ’34 Act reports, non-affiliate stockholders with restricted stock and a one-year holding period can freely resell their shares under Rule 144. However, if the company was a SPAC, Rule 144 would not be available.

Affiliates are subject to the current public information requirement of Rule 144(c) even after a one-year holding period, which in the case of public companies is satisfied by the filing of reports required under the ’34 Act (other than on Form 8-K) for the 12 months prior to the sale. A note to Rule 144(c) allows a stockholder to rely on a statement in the most recent quarterly or annual report that the company has filed its ’34 Act reports, but that note does not appear in Rule 144(i) for former shell companies.

SPAC Opinion Considerations

Lawyers asked to give a “no registration” or legend removal opinion need to ascertain if the issuer is or was a SPAC or other shell company. If so, Rule 144 will not be available for resales until one year after the company ceased to be a shell company (accomplished its de-SPAC transaction) and has filed full Form 10 Information with the SEC.

Also, as described above, there is an additional requirement for all holders of securities in a former SPAC that the issuer has made periodic report filings for the preceding 12 months. Counsel will seek confirmation that those filings have been made before giving the opinion. That will likely mean, in the absence of other satisfactory policing arrangements, that legend removal will not be available for the holders of shares of issuers that were once SPACs until a sale occurs—compared to the otherwise common practice of removing legends for non-affiliate holders of restricted stock once they have a one-year holding period.

Unlike typical post-IPO companies, SPACs cannot provide the usual liquidity to their private placement investors or their directors, executive officers and other affiliates shortly after the private company “goes public.” In a traditional IPO of an operating company, non-affiliated private placement investors that have held stock for one year can sell immediately after the IPO registration statement goes effective and, 90 days after that, Rule 144 becomes available to insiders and non-affiliates with a six-month holding period, subject in each case to the underwriters’ lock-up (typically 180 days).

Former SPAC companies, following the de-SPAC transaction, often file a shelf registration statement on Form S-1 to register resales by PIPEs investors and other holders of restricted and control stock. Sometimes, counsel will be asked for a legend removal opinion for shares registered with the SEC. However, until the shares are actually sold pursuant to a registration statement, they remain restricted shares. The issuer risks allowing an indirect public offering by removing the legends before those sales take place (subject to the potential alternative for QIBs described above and imposing other policing arrangements).

Even when a resale shelf registration statement is in place for PIPEs investors and affiliates, as a practical matter, the ability to freely resell shares may be severely constrained. PIPEs investors and affiliates do not typically have the right to conduct underwritten offerings. As a result, investment banks and other broker-dealers often strictly limit the amount of resales they facilitate pursuant to resale shelfs. They are concerned about potential ’33 Act liability and the lack of due diligence procedures, negative assurance confirmations and other protections available in an underwritten offering.^[4]

SPACs are often initially capitalized with privately-placed warrants alongside shares of common stock and their PIPEs offerings may feature warrants as well. Warrants can complicate the “no registration” and legend removal analysis. The holding period for shares issued upon a cash exercise of privately-placed warrants typically begins when the warrants are exercised and the stock is issued, which means that a new Rule 144 holding period begins at that time. If, instead of paying cash to exercise the warrants, the warrants are net-share-settled (cashless exercise), then Section 3(a)(9) of the ’33 Act exempts the issuance and the holding period of the warrants may be tacked onto the holding period of the shares, potentially satisfying the Rule 144 holding period.

Conclusion

Lawyers who are asked to give “no registration” and legend removal opinions should exercise special care. If the issuer is or was a SPAC or other shell company, Rule 144 will not be available until one year after the de-SPAC transaction (and filing of the Form 10 Information) and then only if the issuer has filed all of its ’34 Act reports (other than on Form 8-K). As a result, lawyers should get assurance that the issuer satisfies the requirements of Rule 144(i) before issuing such an opinion, and should think twice before issuing an opinion for legend removal in the absence of a specific sale.

Lawyers should have in mind that legend removal and “no registration” opinions have been a source of liability for lawyers in the past, particularly involving penny stocks and “pump and dump” schemes. The SEC has even used its authority to deny lawyers the ability to practice before it for improper legend removal opinions.^[5] The lack of available liquidity sometimes can prompt investors and companies to find creative ways to allow resales of restricted shares, which can put added pressure on lawyers when they are asked to give these opinions. All these considerations add up to the need for lawyers to use extra caution when giving “no registration” and legend removal opinions for shares of former SPACs.

This article originally appeared in the Winter 2021–2022 issue of In Our Opinion, the newsletter of the ABA Business Law Section’s Legal Opinions Committee. Read the full issue and previous issues on the Legal Opinions Committee webpage.

1. See John Coates (Acting Director, Division of Corporation Finance) and Paul Munter (Acting Chief Accountant), “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (‘SPACs’)” (April 12, 2021), available here; John Coates, “SPACs, IPOs and Liability Risk Under the Securities Laws” (April 8, 2021), available here. ↑

2. See Subcommittee on Securities Law Opinions, Federal Regulation of Securities Committee, ABA ‎Business Law Section, No Registration Opinions (2015 Update), 71 Bus. Law. 129 (2015/2016), ‎available here. ↑

3. See ‎Subcommittee on Securities Law Opinions, Federal Regulation of Securities Committee, ABA ‎Business Law Section, “Legal Opinions on Section 4(1-1/2) Resale Transactions” (to be published in a 2022 issue of The Business Lawyer). ↑

4. See Subcommittee on Securities Law Opinions, Committee on Federal Regulation of Securities, ABA Section of Business Law, “Negative Assurance in Securities Offerings (2008 Revision),” 65 Bus. Law 395 (2009), available here. ↑

5. See, e.g., the order entered by the SEC In The Matter of Virginia K. Sourlis, dated July 23, 2013, available here, suspending attorney Sourlis for five years under Rule 102(e) of the SEC’s Rules of the Practice, 17 C.F.R. § 201.102(e), for issuing a false opinion letter that facilitated the illegal public offering of securities; see also SEC v. Sourlis, 851 F.3d 139 (2d Cir. 2016) (related litigation finding Sourlis liable for securities law violations arising from the issuance of the opinion letter). ↑

One of the more daunting obstacles encountered by companies involved in a merger is the need to respond to a Second Request under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. HSR Second Requests often involve reviewing and producing substantial numbers of documents within extremely tight time frames, which can be both costly and inefficient; however, there are solutions that allow you to be as proactive as possible in an inherently reactive situation. This article explains the keys to ensuring you use best practices for improving processes and reducing the inefficiencies that are common when responding to Second Requests.

The days are long gone when a client could rely on a law firm to prepare the response to a typical Second Request entirely in-house. The sheer volume is likely to outstrip the scale of any captive solution, and legal departments are looking to their outside counsel to partner with them to mitigate the cost impact through process efficiencies, without sacrificing quality. Creating the right team of in-house counsel, outside counsel, technology vendor, and managed document review provider is essential to achieving these goals. The following list sets out best practices surrounding managed document review to alleviate the burden associated with responding to a Second Request.

Experience with Second Requests is crucial. You want team members who have been there before and can demonstrate that this is not their first rodeo. This means that the entire review team—from the project managers to the technologists and any secondary stakeholders—should have all worked on multiple Second Requests and have been on the receiving end of many calls from outside counsel asking how they can meet the demands of a regulator holding substantial compliance over their heads like a sword of Damocles. This can only come from a team of permanent employees who have been together for years and have worked hand in hand with case teams to confront these issues and make the impossible seem possible. (Further, permanent employees can return to a review even if there is a gap in stages—either before a “second sweep” or “topping off,” or to help with a white paper, preparing for witness interviews, or responding to a challenge to a merger, which means the client retains institutional knowledge of this transaction as well as general Second Request experience.)

Bringing this experience to bear can ensure you meet the substantive goals of responding to a Second Request: producing all responsive, not privileged materials; withholding or redacting privileged content; and identifying and escalating important documents to counsel as quickly as possible. In addition to providing the subject matter expertise of their review teams, the managed document review provider must also be able to make informed recommendations as to the use of technology and/or search terms to cut through the volume and reduce the time to respond. If technology-assisted review is an option, the provider can help design and implement the TAR protocol, as well as identify and account for any blind spots to give the regulator confidence in the robustness of the process. This is especially true when using continuous active learning, or CAL. The review provider must be able to seamlessly adapt to any changes in priorities in terms of custodians, subjects, and/or time frames as the regulator changes the focus of the review. While CAL can certainly facilitate this process, the managed document review provider must monitor changes in scoring for documents that have previously been reviewed; move any new ones that have received a higher score into the first-level review workflow for review and possible production; and provide details so that outside counsel can report back to the regulator if needed. It should also document the decisions made as a team and approved by outside counsel throughout the review, in case the regulator seeks additional information about how the response to the Second Request was prepared.

Even if documents are deemed responsive to the Second Request, not all of them will be produced, as the team must make a determination as to whether they are fully privileged or require redaction prior to production. Important considerations regarding this aspect of the review include:

• Ensuring that there is a process in place for the law firm to sign off on any documents or members of a document family that were once in the privilege review but are now going to be produced.
• Utilizing a tool that streamlines and to a certain extent automates the creation of the log of documents that are withheld for privilege, and customizing that tool for the needs of the particular matter and requirements of outside counsel.
• Putting in place a process that makes sure that all documents redacted for privilege are redacted accurately and consistently. (Note: This applies to redactions of any kind that the review requires, including for data privacy.)

It is also important to avoid pitfalls common to Second Requests. It’s crucial to:

• Recognize when outside counsel wants to start asserting work product over documents related to the potential transaction. Determine any exceptions, such as for documents pertaining to the antitrust clause of the merger agreement or ones where outside counsel for both parties are working jointly to establish “rules of the road” for pre-closing sharing of information between the parties.
• Determine how counsel wants to treat parties for purposes of maintaining privilege, e.g., economists hired specifically to address the regulator’s concerns about market power vs. investment bankers copied on the deal document. While the former would certainly be privileged, outside counsel differ on the approach to the latter.
• Identify third parties with whom communications would normally be at arm’s length and not considered privileged, and be careful to avoid producing communications with members or the client’s board of directors because they communicated with their Gmail addresses. To mitigate this risk, outside counsel should work with the client to provide a list of email addresses—either company emails, personal emails, or emails associated with the directors’ “day jobs”—that they use to communicate with the company.

It is more efficient to address these issues at the start, as opposed to spending precious time and resources on them unnecessarily at the end of the review, when there is pressure from the regulators, the parties (especially if you are working for the target company), the shareholders, or any combination of the above.

Finally, it is imperative to find important documents and escalate them to outside counsel as quickly as possible for further investigation. Reviewers will identify helpful documents based on their experience and review-specific training provided by outside counsel. Examples of helpful documents include ones that show robust competition in the relevant market; conversely, they should also be able to spot instances of gun-jumping or anti-competitive behavior, which are sometimes not as obvious and require a subtler understanding. Managed review teams should also be able to leverage technology and/or search terms to identify any documents similar to the ones confirmed as important by the case teams, as slight differences might provide more context.

Responding to a Second Request might be a necessary evil that is part of the merger clearance process; however, that does not mean that you have to absorb the full brunt of the chaos and inefficiency inherent in the high-volume, time-sensitive process. There are best practices from both a process and substantive perspective that you can deploy to reduce the associated cost and inefficiency and that also ensure the response is as robust as possible.

The second edition of my book, Structured Negotiation, a Winning Alternative to Lawsuits, adds two new quotations from business lawyers. I’m proud of those quotations because they confirm that the way I’ve practiced law for a quarter century as a disability civil rights lawyer has value to lawyers and clients on all sides of the table.

Structured Negotiation is a collaborative way to resolve legal claims. Born at the intersection of technology, disability rights, and dispute resolution, the method has been used for twenty-five plus years to resolve disability rights and other claims. In my own practice, I’ve used the strategy to advance digital accessibility—the civil right of disabled people to participate in the digital world.

Structured Negotiation has allowed me to bring together my clients and some of the largest organizations in the country to build relationships, solve problems, and resolve legal claims.  All without lawsuits.  Yes, Structured Negotiation is a dispute resolution strategy that has helped me avoid the courthouse, the deposition table, and the expert battles for decades.

Why Structured Negotiation

The process is called “Structured” Negotiation because it is comprised of building blocks that have brought win-win results in the disability community’s cases with dozens of public and private organizations including Walmart, Bank of America, Houston’s public transit agency, and CVS. Those building blocks include:

• writing an invitation to negotiate instead of a harsh demand letter
• negotiating ground rules (that replace court rules) for the collaboration
• sharing information without formal discovery (or discovery battles)
• meetings that build relationships for long-term results that stick
• using joint experts and relying on client skills and knowledge to bring needed expertise to the process
• drafting a settlement agreement without posturing
• a media strategy that does not attack potential negotiating partners at the outset, but waits for a positive resolution for a shared announcement
• monitoring commitments with flexibility to account for the unexpected

These elements of Structured Negotiation have helped my clients and our negotiating partners achieve results without lawsuits. And in the past few years, other lawyers have used the Structured Negotiation building blocks with a lawsuit on file to reduce the animosity, reputational damage, and excessive costs seemingly built into the United States litigation process.

But none of these elements would work—either outside of or within litigation—without the secret sauce of Structured Negotiation: a collaborative mindset. The Structured Negotiation mindset, and the language that accompanies it, are essential to successfully resolving claims outside the litigation system.  

I often refer to the elements of the mindset as dolphin skills.  Why? To emphasize that being a shark is unnecessary. Being a shark limits the possibility of collaboration. And in my experience, being a shark often makes lawyers miserable.

What are the dolphin skills that comprise the Structured Negotiation mindset? 

• Active patience and equanimity
• Good listening skills and not making assumptions
• Understanding and dismantling the fear that prevents so many people and organizations from resolving claims in efficient ways
• Transparency and trust

These qualities can be learned, just as lawyers have long learned that aggression, hiding the ball, and mistrust are tools of the trade. I’m sure of this because I have learned (and am still learning) these skills with each new case I resolve in Structured Negotiation. Read more about dolphin skills in Structured Negotiation.

What about language?

Did you know that the French root of the word “plaintiff” means “wretched complainer”? Should “defendants” always have to defend instead of problem solve?  Do lawyers representing different parties always have to oppose each other wearing the hat of “opposing counsel”? When you want something of someone, is it helpful to demand it in a terse letter, or invite participation in a collaborative process?

As the stories I share in my book reveal, in Structured Negotiation every communication (email, meetings, phone calls) is made with a collaborative intent. And that means language choices matter. Language that invites cooperation is a fundamental building block of this dispute resolution method.

What do business lawyers say?

Back to the two business lawyers whose quotations are mentioned earlier. One quotation comes from Brian Frumkin, Associate General Counsel at Bank of America.  Brian has been involved in many Structured Negotiations with Bank of America and my clients over the past 21 years.  (The very first web accessibility agreement in the United States in 2000 was the result of a Structured Negotiation between blind customers and the bank.)

Brian Frumkin’s quotation in the second edition of my book came from his remarks at a 2019 gala at which Bank of America received an award from a disability rights organization. In his speech, he said:

Bringing the collaborative approach to my practice has, I think, made me a more effective lawyer and, perhaps, a happier person.

The second quotation is from Priya Sanger, who was Deputy Legal Counsel at Patreon during a 2020 Structured Negotiation with that company. Start-ups, Sanger explained:

are mission-driven. As a rule, we tend never to have enough people or money to meet our big visions. Start-ups are solution-oriented. When we identify a problem, we want to get it fixed quickly and cost-effectively, with a focus on people. We don’t like spending money on litigation. These qualities make Structured Negotiation particularly well suited for our type of business.

[With Patreon] Structured Negotiation quickly brought the right people to the table and the process created room to educate teams on the value of adding disability awareness and inclusion in the digital space.

Sanger and Frumkin’s words underscore the value of Structured Negotiation to both business lawyers and their clients. In writing my book I interviewed many other lawyers who represented companies in Structured Negotiation. They too shared similar views on the value of Structured Negotiation to both themselves as lawyers and to their corporate clients.

Structured Negotiation is of course not suited for every dispute. But in many cases, there is nothing to lose (and much to gain) by trying it. Michael Bruno is a defense lawyer who has worked in Structured Negotiation. As he says in my book:

In court, discovery cut-offs, motion deadlines, and sometimes judges themselves force the parties to take expensive depositions that may be of little utility. I found Structured Negotiation to be fairer to my client than litigation. I like the process because it gives my client the opportunity to do the right thing and avoids costly litigation. And if the negotiation does not succeed, my client has not waived the right to engage in an aggressive, strategic defense.

I love hearing about how lawyers have used the tools of Structured Negotiation to advance their client’s interest with collaboration instead of conflict.  If you try it, please let me know!

“The Important Role of Business Lawyers as Custodians of the Rule of Law” is the sixth article in a series on intersections between business law and the rule of law, and their importance for business lawyers, created by the American Bar Association Business Law Section’s Rule of Law Working Group. Read more articles in the series.

What is the Rule of Law? Different organizations have answered that question using varying formulations. We have been working with the World Justice Project (which was founded in 2006 by William Neukom when he was president of the American Bar Association), which answers that question as follows:

The rule of law is a durable system of laws, institutions, and community commitment that delivers four universal principles:

• Accountability
  The government as well as private actors are accountable under the law.

• Just Laws
  The law is clear, publicized, and stable; and is applied evenly. It ensures human rights as well as property, contract, and procedural rights.

• Open Government
  The processes by which the law is adopted, administered, adjudicated, and enforced are accessible, fair, and efficient.

• Accessible & Impartial Dispute Resolution
  Justice is delivered timely by competent, ethical, and independent representatives and neutrals who are accessible, have adequate resources, and reflect the makeup of the communities they serve.

The World Justice Project maintains a Rule of Law Index that measures the following nine factors: Constraints on Government Powers; Absence of Corruption; Open Government; Fundamental Rights; Order and Security; Regulatory Enforcement; Civil Justice; Criminal Justice; and Informal Justice.

The Rule of Law is the foundation that supports the pillars of democracy and freedom, and it is in decline in the United States. The World Justice Project’s 2021 Rule of Law Index reflects that our country’s overall score declined, once again, and that our global ranking also declined—and this is in the context of an index that shows the Rule of Law in decline globally. The legal profession must take the lead in strengthening the Rule of Law, and the first step is to acknowledge the magnitude and urgency of the problem, and the consequences of inaction.

“Lack of Civic Literacy Threatens Our Republic” was the title of an opinion piece by Professor David Adler in July 2014. Professor Adler wrote: “The alarming deficit in civic literacy threatens the future of the republic.”^[1] He elaborated, “This is not a partisan position or conclusion. Studies and assessments conducted by a variety of organizations, including the conservative Intercollegiate Studies Institute, document a widespread lack of knowledge of politics and government, alienation and apathy, and low levels of civic engagement.”^[2]

Professor Austin Sarat, a professor of jurisprudence at Amherst College, found that “among millennials, support for the Rule of Law is even lower than it has been in previous generations: Only 33 percent of people who were born after 1980 believe it is ‘essential to live in a democracy,’ compared to 72 percent of people born before World War II.”^[3]

People frequently think of democracy as dying “at the hands of men with guns” but democracies can also die because they “erode slowly, in barely visible steps.”^[4] So there is an urgent need to educate the public about our democracy, and at the heart of our democracy is the Rule of Law.

The preamble to the Rules of Professional Responsibility states:

A lawyer, as a member of the legal profession, is a representative of clients, an officer of the legal system and a public citizen having special responsibility for the quality of justice.

So business lawyers, no less than trial lawyers, are officers of the legal system and public citizens having a special responsibility with respect to our system of laws. Also, while people may have a tendency to think about issues related to the Rule of Law in terms of the rights of individuals, businesses benefit from the Rule of Law to no less a degree than do individuals.

When Kenneth C. Frazier was the Chairman and CEO of Merck & Co., Inc., he wrote:

Some may argue that, from a corporation’s perspective, it suffices to focus on business aspects of the law—for instance, a well-functioning patent system for corporations like Merck that depend on patent rights—and that if business law works well, that is enough. Some may posit further that a legal system (by design or not) that has strong institutions for businesses but not for individuals, and particularly not for the disadvantaged, is exactly what corporations should want. Improving the system for others could undermine the advantages to corporations of a system disproportionately favorable to them.

These positions are shortsighted and unrealistic. Certainly, corporations have an interest in the segments of the law that most directly affect them. But while corporations may always place a higher value on advocating for reform and success in those areas, it is not an either-or proposition. A healthy corporation should nevertheless appreciate the extent to which it depends on a well-functioning system as a whole. Effective corporations take that broader perspective. Corporations may have little direct interaction with various segments of the law—family law and the world of indigent criminal defense, among others—but they have just as much at stake as individuals in the fairness of how justice is dispensed. Forward-thinking companies realize that compartmentalized justice is unlikely to work for them or others.^[5]

Consequently, the Rule of Law Working Group has as its mission engaging business lawyers and the business community in advancing the Rule of Law. We hope to increase the awareness of business lawyers of their responsibility for maintaining and encouraging support for the Rule of Law, as required under the Rules of Professional Responsibility.

The Working Group would like to get business lawyers actively involved in helping support the Rule of Law, and it is starting an initiative with the goal of doing so.  The Working Group will ask members of the Section to commit to making a presentation to a business client or a business group sometime during the month of May, which has been chosen because May 1 is Law Day.  The Working Group will provide support for members who commit to making such a presentation.  More details about this initiative will be coming soon.

For the Rule of Law Working Group,

John H. Stout, Co-Chair
Alvin W. Thompson, Co-Chair
Winda Chan, Vice Chair

[1] Idaho Press-Tribune, July 20, 2014, Page 12.

[2] Id.

[3] Remarks by Asha Rangappa, Connecticut Lawyer (January/February 2019) at 15.

[4] How Democracies Die, Steven Levitsky & Daniel Ziblatt (Crown 2018) at 3.

[5] Kenneth C. Frazier, “Why Big Business Should Support Legal Aid”: Daedalus (Jan. 1, 2019), 148 (1): 150–159, at https://doi.org/10.1162/daed_a_00548.