Part 2: Partial Plan Terminations

Workforce reductions seem to be an inescapable consequence of economic downturns. Whether this occurs through the sale of a business, layoffs or plant closures, employers too often overlook the potential impact on their employer-sponsored retirement plans. Unfortunately, failure to recognize and timely address the retirement plan implications of a reduction in force can jeopardize the plan’s tax qualified status and lead to costly and time-consuming corrections.

Earlier this month, we kicked off our blog series focused on the benefits implications of an economic downturn in Winter Is Coming: Employee Benefits Planning for the Eventual Economic Downturn. With Part 2, we now shift our focus to partial plan terminations. Fear not – as night gathers, our watch begins.


Section 411(d)(3) of the Internal Revenue Code requires tax qualified retirement plans—both defined contribution plans (including 401(k) plans) and defined benefit plans—to fully vest affected participants upon the occurrence of a partial plan termination.

Failure to timely recognize and properly administer this obligation may result in the improper forfeiture of accrued benefits of terminated participants, correction of which may grow more-costly and administratively burdensome with the passage of time. For example, affected participants may include those who have terminated employment and received distribution of their account balances. Correction would likely require establishing a new account for the participant, crediting the amount improperly forfeited (with earnings), and communicating the error to the participant. That is, of course, if you can locate the former employee. In addition to potentially onerous correction, these types of failures also create a potential litigation risk from former participants related to claims for impermissibly reduced accrued vested benefits.

Has a Partial Termination Occurred?

A partial termination generally occurs when a sufficiently large number of plan participants are terminated over a specified period of time. The IRS has also indicated that a partial termination can occur for reasons other than turnover, such as plan amendments that exclude a group of employees that has historically been covered by the plan.

Whether a partial termination has occurred is generally measured over the plan year, though a longer period may apply if the reductions are in connection with a “corporate event.” Corporate events may include reduction in workforce (RIF) programs, plant closures, sales of businesses, or similar events.

To determine whether a partial termination has occurred, the following ratio must be calculated:

Plan Participants Terminated
During the Period (both Vested and Unvested)

Plan Participants at the Beginning of the Period +
New Participants Hired During the Period

If the resulting ratio for this period meets or exceeds 20%, a partial termination is presumed to have occurred.

There has been confusion in the past regarding who must be counted for purposes of calculating the turnover ratio. IRS guidance has clarified that both vested and nonvested participants are included in the calculation. The guidance has also clarified that employees who terminate employment other than those who die, become disabled, or retire at normal retirement age during the period must be included unless the employer can demonstrate that the employee would have resigned even if the corporate event had not occurred. This, of course, may be a difficult showing the make and generally leads to inclusion of all terminations other than those resulting from death, disability or retirement.

Who Must Be Fully Vested?

The IRS takes the position that all participants who terminate during the period covered by the partial termination must be vested. While it is possible to take the position that an employee who was terminated for cause or other unrelated reasons, or who voluntarily resigned during the period, should not be vested, most employers follow the IRS’s position and vest all employees who terminate during the applicable period.

Navigating a Partial Termination

While a plan termination may be “partial”, the plan sponsor should be fully engaged in planning for the event to avoid the burdensome correction previously mentioned. Advance planning will also allow the employer to anticipate future qualification issues that may increase the cost of plan compliance following the event. For example, if a plan sponsor of a 401(k) plan terminates a significant number of non-highly compensated employees, the plan may experience non-discrimination testing issues in the future, necessitating additional employer contributions to the plan or unwelcome benefit reductions among highly compensated employees.

While this blog has primarily focused on implications to 401(k) plans, partial plan terminations also may occur in defined benefit plans. We will focus on partial plan terminations in defined benefit plans—and other implications of reductions in force unique to defined benefit plans—in an upcoming blog.

The Wrap

In the event a plan sponsor proceeds with widespread layoffs, closing of a facility, reducing the pool of eligible employees, or similar action, care must be taken to comply with the resulting requirements, namely the accelerated vesting of participant retirement plan accounts. However, with a strategic plan, the risks associated with a partial plan termination can be anticipated and mitigated, resulting in the successful cost-savings that are necessary in an economic downturn.

Part 1: Introduction

Some economists are now predicting a global economic downturn as soon as 2020, as indicators from bonds, interest rates, currencies, and commodities signal declining growth, including the recent inversion of the yield curve. While there is not a consensus on this point (as George Bernard Shaw once said, “if all economists were laid end to end, they would still not reach a conclusion”), it’s hard to ignore the growing chorus. There is no doubt that the ebbs and flows of the economy and business trends impact employee benefit plans and the employers that sponsor them, often leading to hard decisions to reduce or eliminate benefits. Poor execution can turn already difficult decisions into potential liabilities and result in a devastating increase to employer costs.

This blog series will explore common benefits cost reduction decisions and associated compliance pitfalls. Future blog posts will consider, among other topics—

401(k) Plans

  • Reductions in Employer Contributions to a 401(k) Plan: Employers are generally free to make changes to employer contributions to a 401(k) plan but must do so in accordance with a variety of legal requirements. Failure to properly implement changes can create fiduciary risk and potential loss of tax-qualified status of the plan.
  • Terminating a 401(k) Plan: Plan termination may result in significant cost savings, but also must be accomplished in accordance with legal requirements. Nor is plan termination a quick and painless process: plan documents must be updated, and missing participants must be addressed. Missteps in properly communicating and implementing a termination may also carry fiduciary risks.
  • Partial Termination of a 401(k) Plan: Even without an intent on the part of the employer, significant decreases in plan participation as a result of layoffs, reorganizations, or amendments limiting plan eligibility may lead to a partial plan termination requiring full vesting of affected participants. Failure to recognize the occurrence of a partial plan termination may result in fiduciary exposure and qualification problems for the plan.
  • Company Stock in a 401(k) Plan: Risks associated with plan investments in employer stock can be exacerbated in a down economic environment. Plan fiduciaries may have to disclose certain information to participants or decide whether to discontinue the plan’s investment in company stock.

Pension Plans

  • Freezing plan participating and benefit accruals: Freezing a pension plan requires employers to carefully navigate anti-cutback rules and participant notice requirements.
  • Terminating a Pension Plan: Pension plans generally must be fully funded before they may be terminated. And the involvement of the PBGC—the government insurer of private pension plans—adds additional complexity to the termination process.
  • PBGC Reportable Events: Pension plans are required to notify the PBGC of certain events that indicate a pension plan or employer may be in severe financial distress.
  • Withdrawal from Multiemployer (or Union) Pension Plan: Multiemployer pension plans have increasingly faced funding challenges, which may be exacerbated by a difficult economic environment. Certain employer actions may result in a withdrawal from the plan and trigger liability for the employer’s proportionate share of the plan’s unfunded vested liabilities.

Health and Welfare Plans

  • Health Plan Contributions and Unpaid Claims: Employers in extreme financial distress may be tempted to view obligations under health and welfare plans as those of a creditor but doing so may cause fiduciary exposure and trigger costly prohibited transactions.
  • COBRA Obligations Resulting from a Reduction in Force: COBRA requires the continuation of coverage for a limited time under group health plans for most employers upon certain qualifying events.
  • Terminating a Health and Welfare Plan: While an employer generally may terminate a health or welfare plan, such action may be a recipe for significant tax penalties arising from the employer’s failure to offer group medical coverage to its full-time employees and their children.

Severance Plans

Many employers inadvertently create ERISA plans when providing former employees severance payments payable over time under an administrative scheme. If the severance plan is an ERISA plan, there are additional legal requirements that must be met, including annual Form 5500 filings. Plan counsel should be consulted to determine whether severance benefits are not subject to ERISA.

Over the coming months, the series will dive deeper into these and other possible decisions precipitated by an economic downturn. Each blog will identify lessons learned and opportunities for strategic employer cost-savings and provide employers with a road map to navigate associated legal risks and obstacles. Winter is coming, but we can help plan sponsors be better prepared for these uncertain economic times.

Employee stock ownership plans (“ESOPs”) are a valuable tool for businesses to create a succession plan and provide retirement benefits to employees by having employees purchase employer stock. Although self-interested transactions are generally prohibited under the Employee Retirement Income Security Act of 1974 (“ERISA”), ESOPs are encouraged under ERISA despite the fact that the plans can only invest in the employer stock through related party transactions. This Congressional encouragement has even been noted by the Supreme Court in the recent Fifth Third Bancorp v. Dudenhoeffer case when the Court reiterated that Congress has sought to “promote ESOPs” and has warned against “regulations and rulings” that “block the establishment and success of” ESOPs. In Dudenhoeffer, the Supreme Court protected the Congressional intent of promoting ESOPs by requiring plaintiffs to bear a heightened pleading standard before being able to proceed in a suit against plan fiduciaries for maintaining employer stock within the company’s retirement plan.

Despite the Congressional pronouncements to protect ESOPs, and the recognition of those pronouncements by the Supreme Court, some federal trial and appellate courts have placed burdens upon ESOP fiduciaries that exceed the obligations of the express terms of ERISA. Congress encouraged the creation of ESOPs and permitted an ESOP to purchase employer stock so long as the ESOP “pays no more[] than adequate consideration” for the company’s stock. 29 U.S.C. § 1108(b)(17). Due to regulatory inaction on behalf of the Department of Labor, what constitutes adequate consideration has not been well defined. This inaction has opened the door to litigation against ESOP fiduciaries to litigate ESOP transactions for over paying for company stock.

A plaintiff adequately pleading that an ESOP fiduciary paid more than adequate consideration for company stock can have critical implications for defendants. Specifically, some federal trial and appellate courts have ruled that, once a plaintiff pleads that an ESOP fiduciary paid more than adequate consideration, the burden shifts to the ESOP fiduciary to prove that the ESOP purchased the company’s stock for no more than adequate consideration – a burden shift not contained within ERISA or its implementing regulations, which runs counter to both the express indications of Congress in ERISA and the Supreme Court’s pronouncements in Dudenhoeffer and which flies in the face of traditional American jurisprudence. But, a recent case from the District Court in the Eastern District of North Carolina (Lee v. Argent Trust Company), has rejected this incorrect trend by implicitly concluding that burden shifting is improper and following the general premise of Dudenhoeffer in requiring more than bald assertions in complaints. This tension between these differing pleading standards is demonstrated by looking at the Court’s conclusion in Lee as compared to looking at the Western District of Virginia’s recent decision in Pizzella v. Vinoskey.

Lee v. Argent Trust Company (E.D.N.C.)

The Eastern District of North Carolina recently came to the conclusion that baldly asserting that an ESOP overpaid for the employer stock does not shift the obligation to the ESOP fiduciary to prove that the plan didn’t pay more than “adequate consideration.” In Lee v. Argent Trust Company, et al., the Court ruled that the plaintiff failed to state a claim for damages and dismissed the plaintiff’s complaint. Choate Construction Company Employee Stock Ownership Plan (“Choate ESOP”) purchased 80% of Choate Construction Company’s (“Choate”) shares for $198 million. Like most ESOP transactions, the ESOP did not actually finance the purchase itself. Instead, Choate obtained financing from lenders, which it used to make a loan to the ESOP, and the ESOP issued notes to the selling shareholders. Thus, the ESOP’s purchase was fully leveraged by debt incurred or guaranteed by Choate.

These obligations on Choate following the ESOP’s purchase understandably caused the first post-transaction valuation of the Choate stock held within the ESOP to recognize a per share value that was significantly less than the value paid by the ESOP a few weeks prior. Based on this apparent significant drop in stock price immediately after the close the transaction, the plaintiff brought class-wide allegations that the ESOP trustee paid more than adequate consideration, in violation of ERISA. The defendants moved to dismiss for lack of standing and for failing to state a claim upon which relief could be granted.

Recognizing the unique realities of an ESOP transaction, the Eastern District of North Carolina granted the motion to dismiss for lack of standing because the plaintiff could not show she suffered any injury. Because the plaintiff only relied on the purchase price compared to the valuation, the Court noted the plaintiff “fundamentally misunderstands the nature of the” ESOP transaction and the subsequent stock valuation.  Merely looking at the drop in value ignores the fact that the ESOP did not actually own any equity in the shares at that point. Instead, much like a mortgage without a down payment, the ESOP took on debt in exchange for an equal amount of assets, but no new equity. Instead of showing a drop in value to the plaintiff, the fact that these shares had a value of $64.8 million mere weeks after closing actually showed an immediate equitable benefit to the plaintiff that plaintiff would not otherwise have seen. Without any injury, the plaintiff did not have standing.

In short, the Eastern District of North Carolina correctly recognized that a stock drop immediately post transaction does not prima face demonstrate the ESOP fiduciary paid more than adequate consideration for company shares, but is instead a reality of an ESOP transaction financed by the company itself taking on debt. Therefore, without any showing of actual injury, the plaintiff could not state a claim for relief.

Pizzella v. Vinoskey (W.D. Va.)

On the other end of the spectrum is Pizzella v. Vinoskey, the recent decision after a week-long bench trial in the Western District of Virginia. Unlike Lee, Pizzella highlights the importance of recognizing the distinction between a mere stock-drop case and one that involves allegations of valuation errors, especially as it relates to valuing control.

In Pizzella, the Court permitted the case to proceed and required the ESOP fiduciary to bear the burden of proof that it did not cause the ESOP to pay more than adequate consideration when it purchased shares of the employer’s stock. As in Brundle v. Wilmington Trust, N.A., the Court took specific issue with the fact that the valuation expert applied a control premium to the purchase price, even though it concluded that the ESOP did not have full control over the company.

As a contrast to Lee, the Court found that the allegation that the ESOP fiduciary caused the ESOP to overpay when coupled with specific arguments that the ESOP failed to “control” the company following the ESOP sale was sufficient to find the ESOP fiduciary breached its ERISA duties.  Interestingly, while the Court’s conclusion that the ESOP lacked “control” to operate the company following the transaction was pivotal in concluding that the ESOP fiduciary didn’t carry its misplaced burden of proof, the lack of ESOP “control” was not an element of the complaint. Instead, the complaint rested upon the premise that the stock value dropped following the transaction and that the ESOP fiduciary didn’t take adequate steps to protect the participants as a result of that drop in value.


Despite the differing conclusions of the Courts, the complaints in Lee and Choate are largely indistinguishable – allegations of post transaction drops in value resulting from the debt taken on by the company sponsoring the ESOP to facilitate the transaction. However, because of the misplaced application of the shifting burden of proof, the results between the two matters vary widely. The differing application of the standard of proof in ESOP litigation needs to be addressed. Courts should, at the least, follow the general principles the Supreme Court announced in Dudenhoeffer and mandate a higher pleading standard for a claim against an ESOP fiduciary prior to shifting the burden to the ESOP fiduciaries. And, more readily, Courts should re-think the bench-created shifting of burden all together and revert to applying ERISA’s explicit statute and express purpose of promoting ESOPs by following the standard obligation of American jurisprudence and mandate that the plaintiffs bear the burden of proving that an ESOP fiduciary paid more than “adequate consideration.” And, if the Supreme Court grants certiorari in the Putnam Investments LLC v. Brotherston case, the chance to correct this inequity may be presented.

Court filings made this week show that Johns Hopkins has settled its ERISA fee case on proposed terms that include making a $14.5 million settlement payment, the second highest settlement in a 403(b) fee case, behind Vanderbilt ($14.5 million), and ahead of Duke ($10.65 million), U. Chicago ($6.5 million) and Brown ($3.5 million). The most eye-catching feature of this proposed settlement is not the size of the monetary payment, but rather the litany of non-monetary obligations that Johns Hopkins is agreeing to undertake for the next three years.

The settlement documents submitted to the Court reveal that plaintiffs and Johns Hopkins reached a tentative agreement on the monetary settlement of their long-running fee litigation in April 2019. But “Plaintiffs also required non-monetary relief in the form of changes to the Plan going forward.” Negotiating those additional non-monetary items took the parties another two or three months to finalize.

Onerous Non-Monetary Features

Johns Hopkins agreed to some significant and intrusive non-monetary concessions:

  • Three-Year Period of Monitoring by Plaintiffs’ Counsel – during which “Plaintiffs’ counsel will stay involved to monitor compliance with the settlement terms and bring enforcement action if necessary.”
  • Provide Customized Annual Reports to Plaintiffs’ Counsel – including a list of the Plan’s investment options, fees charged by those investments, and a copy of the Investment Policy Statement (if any).
  • Retain an Independent Consultant – who will assist the fiduciaries in reviewing the Plan’s existing investment structure (including investment options in the “vendor windows” and those that are frozen to new participant contributions) and developing a recommendation for the Plan’s investment structure (including recommending the removal of any investment options included in the Plan that are not monitored by the Plan’s fiduciaries, a mapping strategy (if applicable) for any funds recommended to be removed from the Plan, and treatment of any assets that are now frozen to new participant contributions). If the fiduciaries do not follow the independent consultant’s recommendations, they will document the reasons and provide them to Plaintiffs’ Counsel.
  • Issue RFP’s; Forbid Cross-Selling – for recordkeeping and administrative services, including an agreement by the service provider not to solicit current Plan participants for the purpose of cross-selling proprietary non-Plan products and services, including IRA’s, insurance and many other specified items.
  • Share RFP Bids with Plaintiffs’ Counsel – including the final bid amounts that were submitted in response to the RFPs (but apparently not the identity of all bidders). The Fiduciaries shall provide copies of the winning contracts to Plaintiffs’ Counsel.
  • Communicate the Results of Reviews and RFPs – to participants within 18 months. Among other things, participants shall be provided with a link to a webpage containing the fees and the 1-, 5-, and 10-year historical performance of the frozen accounts and the investment options that are in the Plan’s approved investment structure and the contact information for the individual or entity that can facilitate a fund transfer for participants who seek to transfer their investments in frozen annuity accounts to another fund in the Plan.
  • Consider Specifically-Identified Factors – when determining investment options, including the cost of different share classes and the availability of revenue sharing rebates.

Why These Non-Monetary Terms on Top of Cash?

Plaintiffs’ Counsel have asked the Court to approve payment of their fees based solely on the cash portion of the settlement (not more than one-third of $14.0 million, or $4,666,667). So why did Plaintiffs spend two or three additional months negotiating for non-monetary items? They say in their court filings that the non-monetary terms “materially add to the total value of the settlement” and “ensure that current and future participants in the Plan are offered a prudently administered retirement program” going forward. So they use the non-monetary concessions as a way to justify their cash-based fee request, though not in a formulaic sense.

The more interesting question is why did the Johns Hopkins fiduciaries agree to non-monetary terms that contractually (and judicially) entangle themselves with the Plaintiffs’ Counsel for another three years? Some defendants see non-monetary concessions as a “cost-free” way to settle a case for a smaller cash payment. But they don’t always account for the soft costs (inconvenience, compliance costs, and the burden of having an adversary looking over your shoulder from inside the tent) when they agree to ongoing non-monetary obligations. With a purely cash payment, defendants no longer have to deal with the plaintiffs’ lawyers who sued them. With non-monetary relief in the form of changes to the way the plan is run, there is an ongoing relationship between parties who have called a truce, but where one side has agreed to conduct itself in a certain way under the watchful eye of the other. The ingredients for future disputes are present.

Future Questions

If the settlement is approved by the Court (as is necessary to settle a class action such as this), these non-monetary obligations will be both contractual (per the terms of a signed settlement agreement) and judicial (to the extent incorporated or approved in a final order approving the class action settlement). But there is no mention of amending the Plan documents to incorporate these non-monetary settlement terms, these so-called “changes to the Plan going forward.” As non-monetary settlement terms become more common, and more intrusive into the fiduciaries’ process, what happens, one wonders, if a conflict arises between the terms of the Plan documents and the terms of a class action settlement?

If you are interested in learning more about this case and other ERISA Litigation Updates, sign up here to attend a complimentary one hour webinar on September 12 from 12:00 pm – 1:00 pm ET.


It sounds like something you might see on Dateline. A happy couple with a white picket fence in the suburbs. And then … the unthinkable happens …. one spouse murders the other. The last thing on anyone’s mind is what happens to the retirement plan assets….unless you are a plan administrator.

A principal purpose of the Employee Retirement Income Security Act of 1974 (ERISA) is to provide a uniform set of rules for plan administrators to administer plans in multiple states. In doing so, Section 404(a)(1)(D) of ERISA directs fiduciaries to administer plans in accordance with the documents and instruments governing the plan. A typical retirement plan describes a participant’s right to designate a beneficiary and provides a default beneficiary in the event that a participant fails to do so or if a beneficiary designation is invalid for any reason. However, state slayer statutes can add a layer of complexity to the plan administrator’s decision of whom to pay following the death of a participant.

But Wait, Aren’t State Laws Preempted by ERISA?

Section 514(a) of ERISA preempts a state law where the state law “relate[s] to” an employee benefit plan.

Many states have enacted “slayer statutes” which prevent an individual responsible for the death of another to benefit from his or her crime.

So what happens when a beneficiary kills a plan participant? ERISA requires the plan to follow the plan terms and pay the murderer beneficiary. The state statute forbids the beneficiary from capitalizing on his or her bad act.

Litigation on Preemption

The Supreme Court has yet to decide the issue of preemption in the context of state slayer statutes. The closest Supreme Court decision available may be Egelhoff v. Egelhoff.   In Egelhoff, a husband had designated his wife as his beneficiary and later divorced. After the divorce, Mr. Engelhoff died without a will. His children filed suit claiming that the designation should be invalid based on a state statute nullifying a spousal beneficiary designation in an employee benefit plan upon divorce. Citing to ERISA’s goal of uniform plan administration, the Supreme Court found that the state law is preempted and the beneficiary designation to the now former spouse is valid.

On the flip side, a recent Seventh Circuit decision analyzes the state slayer statute preemption issue directly. In Laborers’ Pension Fund v. Miscevic, a plan participant was killed by his wife who was determined to be legally insane at the time of the killing. The plan filed an interpleader action asking the court to determine the appropriate party to receive the benefit. The wife argued for ERISA preemption (meaning she’s the proper beneficiary). The husband’s estate argued that the state statute should not be preempted (meaning the minor children are the proper beneficiaries). Ultimately, the Seventh Circuit found that the slayer statute is rooted in domestic relations law and therefore is not preempted by ERISA.

WAPATD – What’s A Plan Administrator To Do?

A plan administrator can file an interpleader action and ask the court to determine the proper beneficiary (as was done in the Miscevic case). Of course, filing an action in federal court is not without cost, but should result in payment to the proper beneficiary.

Instead, a plan administrator can require the beneficiary determined by the plan administrator in accordance with the terms of the plan (the deemed beneficiary) to indemnify the plan if a court later determines that the plan administrator got it wrong. This doesn’t sound like a great option because it requires the deemed beneficiary to still have the funds at the time a court makes a different determination and it may require the plan administrator to take costly legal action against the deemed beneficiary.

WWTSCD – What Would the Supreme Court Do?

There is no way to know whether the Supreme Court would determine that a state slayer statute is preempted in the case of a retirement plan beneficiary issue. However, it is hard to imagine the Supreme Court ruling that ERISA provides a loophole to allow a beneficiary who murders a plan participant to receive plan benefits.

A number of federal district courts have upheld state slayer statutes when determining proper beneficiaries under retirement plans, much like the Miscevic decision. However, until further guidance is available, plan administrators should carefully analyze the circumstances of each situation to ensure that a murdered plan participant’s benefit ends up in the right hands.

You are working hard to administer your benefit plan in accordance with all the requirements of ERISA and the Code when you receive a written request for “a copy of the bargaining agreement, trust agreement, contract or other instrument under which the plan is established or operated.” This language is directly from Section 104(b)(4) of ERISA, but does that mean you have to provide a copy of the long, detailed and sometimes confidential service provider agreement? With ERISA penalties looming, this issue can become increasingly important in contentious disputes over plan administration. Although many courts do not require disclosure of these contracts, whether a service provider’s contract needs to be disclosed is an unanswered question to pay attention to.

Not Usually

Several courts don’t require disclosure of service provider contracts because they simply don’t govern the relationship between the plan participant and the provider. For example, the Ninth Circuit determined a service provider contract doesn’t need to be disclosed under Section 104(b)(4) for that very reason.  Similarly, the District of New Jersey found no penalty for refusing to provide a service provider’s contract because it wasn’t “a legal document that (1) describes the terms of the plan or its financial status, or (2) otherwise restricts or governs the Plan’s operation.”

But It Depends

This is not an across the board rule followed by every court in every case, however. The Seventh Circuit, for example, required disclosure of a claims administration agreement because the contract “identified the respective authority and obligations of American Family and CIGNA with respect to the plan.” Other courts have avoided determining as a matter of law that a service provider’s contract is not subject to disclosure because the terms of the contract could affect the plan participant’s rights.  Therefore, unlike the Ninth Circuit and the District of New Jersey, these courts recognized that there can be times where a service provider contract does impact a plan’s operation.

You Must Read It

The tension in these decisions leads to one conclusion—you probably should read the service provider contract before determining whether disclosure is required. The Eastern District of Missouri essentially reached this conclusion in requiring disclosure of a service provider’s contract. There, disclosure was required because the terms of the contract granted discretion to determine eligibility for benefits or interpret the terms of the plan document.  Although the court recognized that a service provider’s contract is not a formal plan document because it “merely memorialized the obligations” of the contracting parties, the administrative services agreement was subject to disclosure because, unlike decisions that don’t require disclosure, the contract had a term “that purports to grant discretion and authority from AIG Inc. to Defendant DRMS to determine eligibility for benefits and construe and interpret all terms and provision of the Group Insurance Policy.” Notably, the Eastern District of Missouri reached this conclusion despite the fact that the 8th Circuit generally limits disclosure under Section 104(b)(4) only to “formal documents that establish or govern the plan.”

In short, the question of whether disclosure of service provider contracts is required doesn’t have an easy answer because it most likely will ultimately come down to the terms of the contract itself.

So your company sponsors a self-insured health care plan, and you’ve been tasked with administering the plan, but in reality, most of the day to day administration is handled a third party administrator (“TPA”). Just curious – do you know what your TPA’s policies are with respect to recovering overpayments? Do you know whether your TPA engages in a recovery practice known as cross-plan offsetting? If you don’t know the answer to that question, now is the time to ask. Given the Eighth circuit’s recent decision in Peterson v. UnitedHealth Group Inc . (and the amicus brief filed by the Department of Labor (“DOL”) during the course of that litigation ), you can be assured that healthcare providers, plaintiffs’ attorneys, and the DOL are paying attention, and may be asking you those very questions soon.

Cross-Plan What?

Cross-plan offsetting is an industry practice that’s been in use for over a decade by a number of insurers and TPAs to recoup overpayments (or alleged overpayments) made to healthcare providers. The practice involves offsetting, or shorting, payments to a healthcare provider on one claim to make up for, or recoup, an overpayment made to the same provider on a prior claim, generally one submitted under a different health plan.

The practice is most often used in connection with non-network (or “out-of-network”) providers. When dealing with network providers, TPAs have a contract in place that sets expectations and parameters for billing rates and recovery practices. As a result, disputes over payments are less likely to arise with network providers, and if disputes do arise, they’re generally resolved pursuant to the contract. The situation can be very different when dealing with non-network providers, who have less incentive to compromise with respect to billing and overpayment disputes. In response, TPAs discovered that, where providers are uncooperative or dispute the overpayment, recoveries can be forced by withholding, or offsetting, payments on future claims.

As an example of what cross-plan offsetting might look like in practice, consider the following:

  • TPA Z administers a number of different medical plans, including three separate self-insured medical plans, Plans A, B, and C, each of which is sponsored by a different unrelated employer.
  • The employer-sponsor of Plan A transfers $100,000 to TPA Z to cover claims processed under Plan A in June. Later, in July, Z determines that it erred in processing one of those claims, resulting in a $3,000 overpayment to Dr. Smith. Z seeks repayment from Dr. Smith, but he refuses, arguing that he was actually owed the full amount he received.
  • At the same time, two other claims submitted by Dr. Smith are pending with TPA Z – one under Plan B and one under Plan C. Z determines that, under the terms of those plans, $2,000 is due to Dr. Smith for services rendered to a participant of Plan B and $4,000 is due to Dr. Smith for services rendered to a participant of Plan C. The employer-sponsors of Plans B and C have transferred sufficient funds to Z to cover those claims. However, rather than transfer the full $6,000 to the doctor, Z withholds $3,000 (the amount of the alleged overpayment made with respect to Plan A), pays $3,000 to Dr. Smith, and (presumably) utilizes the remaining $3,000 to reimburse the employer-sponsor of Plan A.

Why the concern now if this has been going on for over a decade?

For the most part, not much attention was paid to this practice until a group of healthcare providers, suing under the Employee Retirement Income Security Act (“ERISA”) on behalf of their patients, prevailed in a pair of consolidated class action cases against United HealthCare. The consolidated suit, Peterson v. United Health Group, Inc., centered on the premise that the relevant plan documents did not authorize United HealthCare to engage in cross-plan offsetting with respect to non-network providers The United States District Court for the District of Minnesota agreed and granted partial summary judgment to the plaintiffs.[1] United HealthCare appealed, and on January 15, 2019, the Eighth Circuit Court of Appeals issued an opinion affirming the district court.[2]

While the case was on appeal, the DOL weighed in, filing an amicus brief[3] in support of the plaintiffs, in which the DOL took the position that cross-plan offsetting violates ERISA’s exclusive benefit rule[4] (the requirement that a plan fiduciary must act for the exclusive purpose of providing benefits to the plan’s participants and their beneficiaries) and constitutes a prohibited transaction.[5] The DOL characterized cross-plan offsetting as a practice that deprives one plan’s participant of benefits to which that participant was entitled (i.e., full payment of that participant’s claim) in order to satisfy recovery obligations owed to another plan.[6] Additionally, the DOL expressed concern that the practice exposes affected participants to potential liability stemming from the fact that non-network providers may balance bill patients (a process whereby the provider can bill the patient for any amount not paid by the plan) when the TPA fails to transmit full payment, even if the difference relates to an alleged overpayment on a prior bill.

The Eighth Circuit didn’t go as far as the DOL, declining to definitely rule that cross-plan offsetting violates ERISA, but it did opine in dicta that the practice “at the very least approaches the line of what is permissible” under ERISA.[7]

So what should Plan Sponsors do now?

 While United HealthCare recently petitioned the U.S. Supreme Court for review of Peterson,[8] for now, given that the DOL effectively put everyone on notice of its position, plan sponsors should proceed with caution when it comes to cross-plan offsetting.

Plan sponsors should determine whether their TPAs are engaging in cross-plan offsetting, and if so, what ability the plan sponsor has to disallow that practice.

Some TPAs, likely in response to Peterson, have ceased the practice altogether, at least with respect to non-network providers. Others, responding only to the Eighth Circuit’s narrow ruling, have taken the position that the practice is still permissible as long as it’s specifically authorized by the plan. Those TPAs have in some cases sent notices to plan sponsors advising them that the plan’s benefits booklets or coverage manuals would be updated with language specifically authorizing bulk recovery processes that may include cross-plan offsetting. These notices may ask the plan sponsor to affirmatively consent to the new language or advise that the new language will go into effect unless the plan sponsor affirmatively opts out by a specific date. In other cases, the TPA may not give the plan sponsor the option to opt out, or the TPA may take the position that opting out means opting out of all recovery services.

To the extent possible, plan sponsors looking to minimize risk, should opt out or otherwise end the practice of cross-plan offsetting. Even if the plan has already been given the opportunity to opt out, and the window has passed, nothing prevents a plan sponsor from revisiting the issue with the Plan’s TPA.

If the practice is not and will not be utilized to recoup overpayments, plan documents, summary plan descriptions, and any operative benefit booklets or other documents may need to be revised to remove any language authorizing or referencing cross-plan offsetting.

Plan sponsors should consider this as a general reminder that when it comes to ERISA welfare plans – particularly self-insured plans – the plan administrator (often the plan sponsor or a committee appointed by the plan sponsor) owes a fiduciary duty to the plan, and needs to stay on top of what the plan’s TPAs are doing. It’s fine, and in fact prudent in many cases, to rely on qualified TPAs to handle the actual day to day administration of the plan – I.e., to process claims, make medical necessity and precertification decisions, coordinate benefits or pursue subrogation, and to pursue recovery of overpayments when errors occur. After all, most employers aren’t experts in the healthcare industry. Plan administrators can’t just set it and forget it. Instead, plan administrators need to maintain a clear understanding of how their TPAs are administering their plans and continually evaluate the authority that’s been granted to those TPAs. Those that don’t may unexpectedly find themselves on shaky ground.


[1] Louis J. Peterson, D.C. v. UnitedHealth Group Inc., et al., Nos. 14-CV-2101, 15-CV-3064, 242 F. Supp. 3d 834, 2017 WL 991043 (D. Minn. 2017).

[2] Louis J. Peterson, D.C., et al. v. UnitedHealth Group Inc., et al., No. 17-1744, 2019 WL 190929 (8th Cir. Jan. 15, 2019).

[3] Brief for the Secretary of Labor as Amicus Curiae, Peterson v. UnitedHealth Group, Inc., available at

[4] 29 U.S.C. § 1104(a)(1).

[5] 29 U.S.C. § 1106(b)(1)-(2).

[6] Supra note 3 at 1, 11.

[7] Supra note 2 at 10.

[8] See (last visited July 22, 2019).

News coverage of the current administration’s enforcement of immigration policies has demanded the attention of the entire country. It should therefore come as no surprise that this issue has permeated every corner of the legal world, and the law governing retirement plans is no exception. What may come as a surprise given the prevalence and immediacy of this issue is the lack of clear guidance on the impact of unauthorized workers on employer sponsored retirement plans.

With increasing frequency, 401(k) plans and other employer sponsored retirement plans are faced with the question of how to handle the retirement benefits of unauthorized workers. Many plan administrators simply deny unauthorized workers their accrued retirement benefits on the grounds that they were obtained fraudulently or under false pretenses and thus should be forfeited. As discussed below, this approach is not without risk.

The legal landscape: uncertainty abounds

The Employee Retirement Income Security Act of 1974 (ERISA) imposes various obligations on those charged with administering retirement plans sponsored by private employers. Among other things, a plan administrator—commonly the employer sponsoring the retirement plan—must discharge its duties “solely in the interest of the participants and beneficiaries and…for the exclusive purpose of…providing benefits to participants and their beneficiaries….”[1] The plan administrator also generally must operate the plan consistent with its written terms.

ERISA does not enumerate immigration status requirements when defining “employee” for retirement plan eligibility purposes. While the Internal Revenue Code permits exclusion of nonresident aliens with no US-source income for certain retirement plan purposes, this exclusion is not relevant under the circumstances: unauthorized workers necessarily have US-source income paid by the employer. Plan documents typically do not address unauthorized workers because the law prohibits their employment.

Given the absence of plan language authorizing forfeiture on the basis of unauthorized status and fiduciary obligations to act solely in the interest of participants and beneficiaries, what support do plan administrators have for forfeiture? Some may view the U.S. Supreme Court’s opinion in Hoffman Plastics Compounds, Inc. v. NLRB as authorizing such treatment. In Hoffman the Supreme Court interpreted the Immigration Reform and Control Act of 1986 (IRCA) to deny unauthorized workers who were victims of a National Labor Relations Act violation from collecting backpay awards.[2] In doing so the Supreme Court noted that awarding backpay for years of work not performed by individuals who only obtained the position through criminal fraud ran counter to the policy of IRCA.

Since Hoffman, however, several courts of appeal have distinguished situations involving claims related to work actually and already performed from the circumstances involved in Hoffman. In a relatively recent decision, the U.S. District Court for the Eastern District of New York also distinguished Hoffman when it determined that a Union Fund was entitled to recover unpaid benefit contributions to a retirement plan related to work actually and already performed by certain unauthorized workers.[3] The Court noted that holding otherwise would incentivize employers to hire unauthorized workers knowing that they would be relieved from many federal employment requirements. These cases, at the very least, inject uncertainty on this issue.

Unfortunately, the Department of Labor (DOL)—the agency charged with enforcing ERISA’s fiduciary standards—has not provided clear guidance on the application of ERISA in this area. While the DOL has taken the position that unauthorized workers are “employees” for purposes of the Fair Labor Standards Act (FLSA) and the Migrant and Seasonal Agricultural Work Protection Act (MSPA), it has made no such pronouncements regarding the application of ERISA.

Now what?

Given the uncertain nature of the law in this area, plan administrators are wise not to simply forfeit an unauthorized worker’s retirement plan benefit without careful consideration and consultation with experienced counsel. The risk of doing so is likely most pronounced in the 401(k) plan setting where workers defer a portion of their pay that they otherwise would have received as taxable wages. These deferrals are clearly tied to work actually and already performed, and thus are distinguishable from the types of benefits denied in Hoffman. Accordingly, until clear guidance is issued to the contrary, the safest approach is to treat unauthorized workers in the same way as any other retirement plan participants.

Of course doing so may present other practical difficulties. While unauthorized workers may be entitled to their accrued retirement plan benefits, the realities of each workers’ legal status can make location and identity verification necessary to pay benefits extremely difficult. Obviously, it would not be appropriate for a retirement plan to pay out any accrued benefits based on a tax identification number that it suspects or knows to be fraudulent. Even in the event of an appropriate distribution, tax reporting considerations can be far more complex for unauthorized workers than for other retirement plan participants. In the end, it may be likely that a retirement plan is eventually forced to treat the unauthorized worker as a missing participant which may lead to forfeiture. Still, this approach may save plan administrators from unwanted interaction with DOL enforcement and the ever-increasing threat of participant litigation.

[1] ERISA §404(a)(1)(A)(I)

[2] See Hoffman Plastic Compounds, Inc. v. NLRB, 535 U.S. 137 (2002).

[3] See Trs. of the Pavers & Rd. Builders Dist. Council Welfare, Pension, Annuity & Apprenticeship Skill Improv. & Safety Funds v. M.C. Landscape Group, Inc., Dkt. No. 12-cv-0834 (E.D.N.Y) (2015).

The Department of Labor (DOL) has made it no secret that it actively engages in enforcement activities against employee stock ownership plans (ESOPs) with a particular focus on the valuation of the stock of privately held companies that is held or bought by the ESOP.[1] The valuation of the company stock is important to the DOL because the Employee Retirement Income Security Act of 1974 (ERISA) includes provisions to allow an ESOP to purchase employer stock as a retirement investment for employees participating in the ESOP, provided the stock purchase was for “adequate consideration.”[2] When the purchase price of the company stock held or purchased by an ESOP on behalf of participants is more or less than adequate consideration, there may be a violation of ERISA in terms of a breach of fiduciary duty.

While any size company can implement and sponsor an ESOP, many small business owners have found ESOPs to be an attractive business succession plan as the owner, often a baby-boomer, approaches retirement and wishes the company to be owned by its employees through an ESOP rather than finding a buyer or selling its ownership to a competitor. Because of this, many of these DOL enforcement actions regarding valuation issues end up targeting small businesses.

Dearth of Guidance

In these transactions, there is very little official guidance from the DOL regarding how to value the stock that is bought or owned by the ESOP. Valuators still rely on Revenue Ruling 59-60 to value privately owned stock for purposes of an ESOP transaction, even though that guidance is 60 years old and was originally issued for estate and gift tax purposes.[3] Additionally, old proposed regulations from the DOL in 1988 set forth a two-part test to determine fair market value. The DOL never finalized these proposed regulations, which are now 31 years old. The lack of official guidance leaves many ESOP fiduciaries wondering if a valuation is proper and will ultimately survive an investigation by the DOL.

On October 1, 2018, twenty-seven members of Congress wrote a letter to President Trump, with a copy to the DOL Secretary, stating that the “Department [of Labor] has released very little guidance on substantive issues including, for example, valuation…we believe the Department [of Labor] could immediately eliminate some of the regulatory uncertainty by collaborating with the ESOP community to develop clear guidance with respect to valuation and other important issues.” That letter goes on to accuse the DOL of regulating ESOPs by litigation instead of through officially issued guidance.

Indeed, despite very minimal official guidance from the DOL regarding the valuation of the stock that is owned or bought by the ESOP, there is a high level of enforcement and investigation activity from the DOL for valuation issues. Unfortunately, with such a void in official guidance from the DOL, trustees and fiduciaries are left to glean guidance from enforcement actions and settlement agreements with the DOL regarding valuation issues. Rather than issue official guidance regarding these issues, the DOL has even promoted recent settlement agreements with trustees and ESOP fiduciaries as “best practices” to satisfy a fiduciary duty under ERISA with respect to the appraisal guidelines, process requirements, and fiduciary engagements.[4]

The procedures and due diligence process set out in a 2014 settlement agreement with the DOL for appraisal guidelines serve as the industry’s standard for fulfilling a fiduciary duty when determining the fair market value of privately held stock purchased by the ESOP. Since then, the DOL has updated its procedures and migrated on a few details in later settlement agreements with other trustees after 2014 regarding valuation issues. Generally, despite some differences, all of the settlement agreements with the DOL focus on how the valuation advisor is selected, the oversight and monitoring of the valuation advisor during the process, and how the ESOP terms affect a repurchase obligation as well as the ability to repay the loan obtained to purchase the stock by the ESOP if the projections used to determine the fair market value of the stock do not later come to fruition.

Bottom Line

The bottom line is that trustees and ERISA fiduciaries often have a challenging task when ascertaining whether the valuation of privately held stock bought or held by an ESOP is a reasonable fair market value that will pass DOL muster in an investigation, and this is an arena in which the DOL often referees without an official rulebook. Until official guidance is issued by the DOL regarding ERISA duties in a valuation of privately held company stock held or bought by an ESOP, these trustees and ESOP fiduciaries must find value in old IRS Revenue Rulings, old proposed DOL regulations, and recent DOL settlement agreements that were not decided in a courtroom and often differ regarding valuation issues.


[1] See “National Enforcement Projects” tab at where ESOPs are listed as the first of several enforcement projects.

[2] Section 3(18)(B) of ERISA states that “adequate consideration for a closely held business interest is the fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the terms of the plan.”

[3] Revenue Rulings 650192 and 65-193 later broadened the application of Revenue Ruling 59-60 for income tax and other purposes. Proposed DOL regulations issued in 1988 also relied on Revenue Ruling 59-60.

[4] See “National Enforcement Projects” tab at five recent settlement agreement are provided with titles such as “Appraisal Guidelines,” “Process Requirements,” and “Fiduciary Engagements.”

“Wilderness therapy? What’s that?”

That’s the common response I receive when I mention that wilderness therapy is a hot topic in mental health parity litigation. Wilderness therapy is a form of residential treatment that uses nature and the outdoors as a therapeutic tool.   Often used with operationally-defiant or drug-addicted teens, wilderness therapy combines traditional therapy with outdoor activities.

A number of lawsuits have been brought over the last year, alleging that group health plans have been impermissibly denying coverage for wilderness therapy. This series of cases is interesting because it gives us insight into how a court might apply the mental health parity rules based on varying plan language.

Quick Reminder

Regulations issued under the Mental Health Parity and Addiction Equity Act contain a complicated and wordy requirement that applies whenever a plan includes a non-quantitative limitation on mental health treatment (i.e., a limitation that is not expressed numerically). This requirement would apply, for example, when certain mental health services are subject to prior authorization or excluded altogether.

The non-quantitative limit rules generally prohibit a group health plan from imposing a treatment limitation on mental health or substance use disorder benefits unless, under the terms of the plan as written and in operation, any processes, strategies, evidentiary standards, or other factors used in applying the treatment limitation to mental health or substance use disorder benefits are comparable to, and are applied no more stringently than, the processes, strategies, evidentiary standards, or other factors used in applying the limitation with respect to analogous medical/surgical benefits. (See – I told you it was wordy.)

A limitation that applies only to mental health benefits and does not apply to an analogous medical or surgical benefit will very likely violate the rules.

Lessons Learned

  1. Identify the reason why the service is excluded.

Whenever an employer-provided health plan places a limit on treatment of mental health services, the employer should be prepared to defend that limit under the mental health parity rules described above. The employer will need to be able to identify the factors used in determining that the benefits should be limited and to justify how those factors apply comparably to limit an analogous medical/surgical benefit.

In a recent wilderness therapy case, a plan denied coverage for wilderness therapy because the therapy was not provided in a “Residential Treatment Center.” The definition of that term included the following language:

It does not include half-way houses, supervised living, group homes, wilderness programs, boarding houses or other facilities that provide primarily a supportive environment and address long term social needs, even if counseling is provided in such facilities . . .

Here, the particular standard used to justify the exclusion was included within the document – the employer did not want to cover services that were primarily supportive in nature as opposed to necessary to treat a medical or mental health issue.

Similar language was included in the definition of “Skilled Nursing Facility,” which was viewed as the analogous medical/surgical benefit. Accordingly, it was easy for the court to see that the standard applied comparably to the mental health and medical/surgical benefits, and the court determined that the plan document was in compliance with the mental health parity rules.

  1. Ensure that the reason for excluding the service actually justifies the exclusion.

Even if the plan document identifies the reason for the exclusion, and even if the reason for the exclusion applies comparably across the board, the plan could be violating the mental health parity rules if the given reason does not justify the actual exclusion.

In a recent wilderness therapy case, a court noted that the following exclusion was facially neutral:

Services for counseling in the absence of illness, not expressly described in this plan as a Covered Service, will not be covered. Examples of non-covered services: educational, social, image, behavioral or recreational therapy; sensory movement groups; marathon group therapy; sensitivity training; Employee Assistance Program (EAP) services; [and] wilderness programs…

However, the plaintiff alleged that the plan administrator excluded coverage for all wilderness programs, even if they provided counseling to treat an illness. The court denied the plan’s motion to dismiss because denying coverage for wilderness therapy that was provided to treat an illness (which was not justified under the factors used to develop the exclusion) could violate the mental health parity rules in operation.

If an employer does not wish to cover a service at all, the employer will need to carefully consider whether the given reason for the exclusion justifies a total exclusion. For example, the plan might provide that it excludes “any service or supply for education, training, or retraining services or testing, including special education, remedial education, wilderness treatment programs, job training and job hardening programs.” However, that exclusion likely would not justify denying coverage for wilderness therapy that is provided to treat substance abuse.

  1. A blanket exclusion may not be the best approach.

Given the discussion above, an employer might be tempted to remain silent on the reason for the exclusion and simply include a blanket exclusion for the service. Under a blanket exclusion, the plan document expressly provides that the plan does not cover the service. For example, a plan may include “wilderness therapy” in its list of exclusions.

A blanket exclusion may seem like a good idea because it clearly communicates the plan’s intent not to cover the service and does not leave open the possibility that the service would be covered in certain cases. However, if the blanket exclusion applies to mental health treatments, a mental health parity inquiry will not end with a review of the plan documents.

The wilderness therapy cases have demonstrated that, when plaintiffs plead mental health violations in the right way, cases challenging blanket exclusions tend to survive a motion to dismiss. When addressing a blanket exclusion for wilderness camps, one court  expressly indicated that the defendant would not be able to demonstrate compliance with the mental health parity rules unless it provided a detailed explanation of why wilderness camps were not covered.

In other words, a blanket exclusion is an invitation to litigation.


In addition to providing the lessons described above, the recent slew of wilderness therapy cases have illustrated that courts do not yet approach mental health parity analyses in the same manner. For example, despite my earlier generalization that blanket exclusions lead to litigation, one court granted a defendant’s motion to dismiss because “the Court cannot find that the Plan’s blanket exclusion of services at “wilderness camps” is a treatment limitation in violation of the Parity Act.” However, another court  expressed concern “that a blanket exclusion for all wilderness camps, which in practice has only been applied to mental health treatment, may constitute a violation.”

All of this uncertainty is causing me anxiety. I think I need some wilderness therapy.