Benefits Monthly Minute
Actual Knowledge Means Aware: Supreme Court Upholds Participant Win in Intel Case
As reported in our June 2019 newsletter, the Ninth Circuit in Intel Corp. Investment Policy Committee et al. v. Sulyma addressed when a participant has actual knowledge of a potential fiduciary breach. The actual knowledge standard is significant given it can shorten the typical 6-year window under ERISA to sue for fiduciary breaches to 3 years. The Ninth Circuit ruled for participants who had argued that the shortened limitations period begins to run once the participant reads the disclosure containing information on the alleged violation, not merely when the disclosure is received, and on February 26, 2020, the Supreme Court agreed. In the unanimous ruling, the Court found “[t]hat all relevant information was disclosed to the plaintiff is no doubt relevant in judging whether he gained knowledge of that information. To meet §1113(2)’s “actual knowledge” requirement, however, the plaintiff must in fact have become aware of that information.” The Supreme Court’s holding significantly raises the bar for plan administrators to ensure that plan disclosures are not merely provided and received, but that they are also reviewed, in order to satisfy the heightened “actual knowledge” standard and shorten the applicable limitations period. What, then, can be done to establish actual knowledge? Records showing that a participant viewed the disclosure and evidence suggesting that action was taken in response to information contained in a disclosure are cited by the Supreme Court as ways to prove “actual knowledge.”
Spending Package Impacts Cadillac Tax and PCORI Fees
There’s good news and bad news under President Trump’s new spending package, which includes the Further Consolidated Appropriations Act (“FCAA”). The good news is the FCAA has repealed the “Cadillac Tax” which was the part of the Affordable Care Act imposing a tax on high-cost coverage. Interestingly, its repeal comes before employers were even required to comply given the unpopular tax was previously delayed until 2022. More good news is that the budget legislation also repealed, effective 2021, the annual fee on health insurance providers. The repeal of this fee, which health care reform had imposed on certain entities engaged in the business of providing health insurance with respect to United States health risks, is in contrast to the extension of the PCORI fee. This is the bad news. Specifically, the Patient-Centered Outcomes Research Institute, created by health care reform, is funded in part by fees paid by health insurers and sponsors of self-insured plans. Generally, PCORI payments made in 2019 were slated to be the last. This has all changed now that the FCAA reinstated and extended the PCORI fee requirements through 2029. Most employers did not include the PCORI fee in their 2020 budget, so it is important to plan for that payment now.
Open Questions About Insider Information for Plan Fiduciaries That Offer Investment in Employer Stock
We also previously reported on Retirement Plans Committee of IBM et al. v. Larry W. Jander, in our June 2019 newsletter which was an employer stock-drop case from the Second Circuit. In this case, IBM workers claimed the Retirement Plans Committee breached its fiduciary duty by allowing retirement funds to be invested in artificially-inflated employer stock because the committee members knew, but did not disclose, that IBM's microelectronics division was overvalued. At oral argument, the fiduciaries argued that the decision of the lower court was wrong because ERISA does not obligate fiduciaries to use insider information and that securities laws already provide a framework addressing disclosure of material information about public companies. The Justices ultimately declined to address these arguments, and remanded the case back to the Second Circuit “to decide whether to entertain these arguments in the first instance.” While it is possible that the Second Circuit will find that the IBM defendants waived these arguments to the extent that they were not properly raised previously, hopefully the Second Circuit’s final decision will shed more light on the intersection of ERISA and securities law with respect to employer stock investment and related disclosures.
KMK Employee Benefits and Executive Compensation email updates are intended to bring attention to benefits and executive compensation issues and developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.