2014 Mid-Year Supreme Court Case Review
The 2013-2014 term of the Supreme Court of the United States produced opinions that will have substantial effects on the design and administration of most employee benefits plans. This summary highlights three key decisions, one significant procedural ruling, and an emerging issue likely headed for Supreme Court review, all of which deserve the attention of employee benefits professionals.
Limitations Periods: Heimeshoff v. Hartford Life & Accident Insurance Co. and Wal-Mart Stores, Inc.
Well drafted welfare benefit plans, and many retirement plans, contain provisions that: (1) require a claimant to exhaust the administrative remedies (that is, complete the appeals procedure) before commencing a law suit for benefits under the plan; and (2) limit the period of time within which a suit for benefits may be commenced. In Heimeshoff v. Hartford Life & Accident Insurance Co. and Wal-Mart Stores, Inc. (published December 16, 2013), the Supreme Court held that a plan may include a reasonable limitations period, which is deemed part of the "contract" between the plan and each participant and therefore should be enforced in accordance with its terms. Of particular note, the Court held that a plan's contractual limitations period is enforceable even if it begins to run before the administrative review process is complete. (The limitations period in Heimeshoff began on the date the participant received the underlying medical service, as opposed to the date on which a final determination on appeal was made.)
In light of the Heimeshoff case, plan sponsors should review the limitations periods in their plan documents and consider adopting a reasonable limitations period that favors the plan. Plan language regarding limitations periods should be clear and unambiguous, and plan administrators should disclose the limitations periods to participants and beneficiaries through Summary Plan Descriptions and any other communications relating to the adjudication of claims.
Presumption of Prudence:Fifth Third Bancorp v. Dudenhoeffer
In Fifth Third Bancorp v. Dudenhoeffer (published on June 25, 2014), the Supreme Court held that fiduciaries of a retirement plan specifically requiring the holding of employer stock are not entitled to any presumption that they acted prudently when deciding not to dispose of the plan's employer stock. Dudenhoeffer involved the choice of the fiduciaries of an employee stock ownership plan (ESOP) to continue holding company stock despite the dire financial condition of the plan sponsor and a precipitous drop in the value of the stock. In rejecting the so-called "Moench presumption" long embraced by retirement plan fiduciaries and several federal Circuit Courts of Appeals, the Supreme Court found that ERISA provides no basis for any presumption of prudence and that the requirement for fiduciaries to follow the written terms of a plan does not trump the overarching requirement for fiduciaries to exercise prudent judgment solely in the best interests of the plan and its participants. The Court did, however, provide some comfort to fiduciaries of ESOPs and other plans that include employer stock funds – potential defendants in stock drop cases – by opining that: (1) complaints alleging that a fiduciary should have recognized market overvaluation (or undervaluation) based on publicly available information generally would be insufficient to state a cause of action; and (2) a viable complaint must plausibly allege an alternative action that the fiduciary could have taken without violating insider trading laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it. Therefore, while the fiduciaries of ESOPs and other retirement plans offering employer stock no longer enjoy a presumption that their actions are consistent with their fiduciary duties under ERISA, potential plaintiffs in stock drop cases appear to face a high threshold to overcome a motion to dismiss. Generally, the inclusion of employer stock investments in retirement plan portfolios continues to expose plan fiduciaries to the risk of litigation from plan participants who are unhappy with the performance of company stock, and sound fiduciary governance practices will continue to provide the best defense to such claims.
Mandated Provision of Contraceptives (Private Companies):Burwell v. Hobby Lobby Stores, Inc.
On June 30 the Supreme Court issued its decision in the much publicized case of Burwell v. Hobby Lobby Stores, Inc., finding that the Religious Freedom Restoration Act (RFRA) applies to closely held corporations owned by individuals with sincere religious beliefs and that the contraceptive coverage mandate of the Affordable Care Act (ACA) violates the rights of such entities under RFRA. The Hobby Lobbycase was brought by the owners of the company, who asserted that the provision of contraceptive benefits to employees under the company's group health plan violated their religious beliefs. In an opinion that seeks to limit the decision's application to the specific circumstances of the case, the divided Court concluded that: (1) the protections of RFRA that apply to individuals extend to the closely held corporations owned by the individuals; (2) the ACA's contraceptive coverage mandate substantially burdens the exercise of religion by individuals; and (3) the federal government failed to show that the contraceptive coverage mandate is the least restrictive means of furthering its interest in guaranteeing free access to contraception. Regarding the last point, the Court noted that current ACA regulations do not allow for profit companies to take advantage of the self-certification accommodation available to church-affiliated religious organizations (such as religious schools and hospitals) to avoid directly providing contraceptive services through their health plans.
The Hobby Lobby ruling provides conclusive relief for closely held businesses owned by individuals with sincere religious beliefs who do not wish to provide contraceptive care benefits. There does not, however, appear to be a basis for public companies or even widely held private companies to take advantage of the ruling. Further, most commentators agree that the decision cannot be expanded to support the exclusion of medical procedures and other forms of care (such as blood transfusions) that may be inconsistent with religious beliefs. In addition, the impact of the Hobby Lobby decision on the ACA is likely to be limited because the Department of Health and Human Services is expected to revise the contraceptive mandate regulations in a manner that conforms with the Court's decision.
Mandated Provision of Contraceptives (Church-Affiliated Organizations): Wheaton College v. Burwell
In another eleventh hour ruling the Supreme Court temporarily blocked the federal government from enforcing against Wheaton College the regulations governing the application of the contraceptive mandate to church-affiliated organizations such as religious schools, hospitals, and similar non-profit organizations. Church-affiliated organizations across the country have sought such protection, asserting that the ACA's self-certification process for exempting church-affiliated employers from the contraceptive mandate renders the organizations complicit in a scheme to facilitate contraceptive coverage against which they have a religious objection. Before the Wheaton College decision, requests to enjoin enforcement of the mandate met with mixed results, with many courts issuing injunctions and almost as many declining to do so. The Wheaton College ruling provides courts with strong authority to issue temporary injunctions in similar pending cases. This issue will almost certainly be on the Supreme Court docket for the 2014-2015 term.
Cases to Watch: The Scope of the "Church Plan" Exception
Within the past several months a split has developed between federal District Courts regarding the proper interpretation of the requirements for establishing a church plan under ERISA and the Internal Revenue Code. The split has significant implications for church-affiliated employers who have established retirement plans and, in reliance on the church plan exception, maintained the plans as exempt from ERISA. Two federal District Courts in the Ninth and Third Circuits (issuing opinions in Rollins v. Dignity HealthandKaplan v. Saint Peter's Healthcare System, respectively) concluded that the plain language of the church plan exceptions contained in ERISA and the Internal Revenue Code only supports the establishment of a church plan by an actual church (that is, an organization that provides places of worship). In the view of the judges that decided the Rollins and Kaplan cases, a tax-exempt entity controlled by or associated with a church may maintain a church plan for its employees but it may not establish a church plan. Accordingly, those decisions found that the IRS, which has maintained that church-affiliated organizations may themselves establish church plans exempt from ERISA, has interpreted the church plan exception incorrectly for more than 30 years. Conversely, a federal District Court in the Sixth Circuit (in Overall v. Ascension Health) found that the other District Courts misread the statutory language and ignored relevant legislative history, and held that church-affiliated organizations may indeed establish and maintain a church plan. These cases are now working their way through appellate courts and it is quite possible that the issue will need to be resolved by the Supreme Court.
This split in the courts limits the options available to a church-affiliated employer wishing to shore up the church plan status of its benefit plans, but two possibilities are worth considering. First, a church-affiliated employer may administer its plans in a way that is consistent with the requirements of ERISA without necessarily characterizing them as ERISA plans. Second, certain religious employers with common bonds could restructure their plans and attempt to have them "established" by a common church. Although these approaches ultimately may not succeed in preserving church plan status, they are worth considering until this issue is resolved.