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Looking Ahead: ERISA and Employee Benefits


It is likely that the Supreme Court will soon address both new and old questions about who is a fiduciary in the context of employee benefit plans and investment advice. For employee benefit plans, ERISA imposes fiduciary duties to the extent an actor exercises discretion in the management or administration of a plan. Employee Retirement Income and Security Act of 1974, 29 U.S.C. § 1002(21)(A). The managers of the plan itself, like common-law trustees, have a fiduciary responsibility under ERISA, but the circuits have begun to diverge regarding the fiduciary responsibility of third-party entities hired by the plan, such as plan administrators, actuaries, and pharmacy benefit managers (PBMs). Plaintiffs in Doe v. Express Scripts, Inc., have filed a petition for certiorari seeking review of the Second Circuit’s decision holding that neither Anthem, the health benefits provider, nor Express Scripts, the PBM, both of which the plan hired to set benefits pricing, were ERISA fiduciaries. 837 Fed. Appx. 44 (2d Cir. 2020). The court of appeals held that the providers’ price-setting functions were corporate business functions, not fiduciary actions. Id. at 48-49.

This decision deepens a circuit split regarding whether such a “business function” exception exists, despite the absence of any statutory language in ERISA creating such an exception. Compare DeLuca v. Blue Cross Blue Shield of Mich., 628 F.3d 743, 747 (6th Cir. 2010) (adopting “business” exception), with Mitchell v. Blue Cross Blue Shield of N. Dakota, 953 F.3d 529, 539-540 (8th Cir. 2020) (recognizing breach of fiduciary duty claim could be based on control over amounts plan was charged for medical costs); Patelco Credit Union v. Sahni, 262 F.3d 897 (9th Cir. 2001) (third-party administrator of self-funded health plan was acting as a fiduciary); Health Cost Controls of Illinois, Inc. v. Washington, 187 F.3d 703, 706 (7th Cir. 1999) (third-party service provider that determined reimbursement methods was acting as a fiduciary); Reich v. Lancaster, 55 F.3d 1034 (5th Cir. 1995) (third-party insurance agent was acting as a fiduciary). The Court’s ultimate decision on whether to apply a general “business” exception to ERISA’s statutory “fiduciary” definition could affect not only health benefits, but also retirement benefits, which frequently involve third-party administrator actions that determine investment choices, fees, and a host of other actions historically covered by ERISA.

The scope of fiduciary responsibility will also likely reach the Supreme Court in the context of investment advice. Under ERISA, a person is also a fiduciary “to the extent he [or she] renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of [an employee benefit] Plan or has any authority or responsibility to do so.” 29 U.S.C. § 1002(21)(A). The Internal Revenue Code contains the same definition of “fiduciary” with respect to an IRA. See Internal Revenue Code of 1986, 26 U.S.C. § 4975(e)(3). The Department of Labor (DOL)’s 2016 regulation interpreting the provision consistently with ERISA’s statutory language was challenged in multiple jurisdictions, upheld by several courts, and ultimately vacated by the Fifth Circuit. Chamber of Commerce v. U.S. Dept. of Labor, 885 F.3d 360 (5th Cir. 2018); Market Synergy Grp., Inc. v. U.S. Dept. of Labor, 885 F.3d 676 (10th Cir. 2018); Nat’l Ass’n for Fixed Annuities v. Perez, 217 F. Supp. 3d 1, 13 (D.D.C. 2016); Thrivent Financial for Lutherans v. Perez, No. 16–cv–03289, 2017 WL 7736730 (D. Minn. 2017). In the wake of this litigation, DOL reinstated the prior, narrow definition of “investment advice fiduciary” and later issued an exemption permitting most investment advice fiduciaries to give conflicted advice—i.e., advice that is in their own financial interests—as long as they do not put their own interests above those they advise. Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers and Retirees, 85 Fed. Reg. 82,798 (Dec. 18, 2020) (to be codified at 29 C.F.R. 2550). The exemption, however, also states that advice about rollovers from employee benefit plans to other investment vehicles or accounts may qualify as “fiduciary” advice subject to ERISA’s protections. Having garnered strong reactions from consumer-protection organizations and industry groups alike, the exemption, the definition of “fiduciary,” and the application of fiduciary protections to rollover advice will almost certainly be before the Supreme Court in the future.

In addition to fiduciary questions, the Court will continue to confront the issue of when ERISA preempts state and local regulation. ERISA has a broad preemption clause, reaching “any and all State laws insofar as they may now or hereafter relate to any employee benefit plans.” ERISA § 514(a), 29 U.S.C. § 1144(a). Last year, in Rutledge v. Pharm Care  Assn’, 141 S. Ct. 474, 480-81 (2020), the Court upheld states’ authority to address their citizens’ high health care costs by regulating pharmacy benefit managers, holding that the law did not “govern[] central matters of plan administration” or “interfere[] with nationally uniform plan administration.” Crucially, the Court explained “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.” Id. at 481. The decision clears the field for states to regulate third parties that affect health care costs.

Similarly, the Ninth Circuit blessed two programs designed to help workers save money. Seattle’s ordinance requiring hotels that have no employee health plan to pay their employees’ health care costs directly recently survived a preemption challenge. ERISA Industry Committee v. City of Seattle, 840 Fed. App’x 248, 248-49 (9th Cir. 2021).  The circuit court held that ERISA did not preempt the ordinance because it did not require creation of an employee health plan or affect existing health plans in any way. Id. A petition for rehearing en banc is pending. The Ninth Circuit also upheld California’s statute creating tax-deferred retirement savings accounts for workers whose employers do not have ERISA-covered retirement plans. Howard Jarvis Taxpayers’ Association v. California Secure Choice Retirement Savings Program, 997 F.3d 848, 867 (9th Cir. 2021). The Ninth Circuit has denied rehearing en banc, but Oregon and Illinois have similar programs that will likely also face preemption challenges, making this particular type of statute a likely candidate for eventual Supreme Court review.  

Finally, the Court will likely soon resolve a brewing circuit split concerning whether ERISA claims for breach of fiduciary duty can be arbitrated. In Dorman v. Charles Schwab Corp., 934 F.3d 1107, 1110-11 (9th Cir. 2019), the Ninth Circuit addressed the plaintiff’s argument that breach of fiduciary duty claims brought under ERISA § 501 cannot be arbitrated because they are inherently representative claims brought on behalf of the plan, and the plaintiff cannot waive the plan’s statutory right to be heard in court. The court held that under Supreme Court precedent, such arbitration clauses must be upheld. The Second Circuit, however, reached the opposite conclusion in Cooper v. Ruane Cunnif & Goldfarb, Inc., 990 F.3d 173, 184-85 (2d Cir. 2021), holding that an individual arbitration requirement cannot satisfy the representational nature of breach of fiduciary duty claims under ERISA. The same issue is now pending before the Seventh Circuit in Smith v. Bd. of Dirs. Of Triad Mfg., Inc., No. 20-2708 (7th Cir. 2021). The Supreme Court will likely resolve this circuit split at some point in the near future.

Dara Smith

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