In Saumer v. Cliffs Natural Resources Inc., No. 16-3449 (6th Cir. 2017), the Sixth Circuit Court of Appeals (the “Court”) began by noting that ERISA requires plan fiduciaries to, among other things, manage plan assets prudently and diversify investments so as to minimize the risk of large losses.  For the past forty years, however, ERISA has also encouraged employee ownership of employer stock.  To promote this goal, ERISA permits companies to offer an Employee Stock Ownership Plan (an “ESOP”)—a retirement option designed to invest primarily in employer stock.  Because ESOPs are, by definition, not prudently diversified, Congress fashioned an exemption to these core fiduciary duties: the diversification requirement and the prudence requirement (only to the extent that it requires diversification) of ERISA are not violated by acquisition or holding of employer stock.  In this case, the Court is being asked to reconcile ERISA’s requirement that a fiduciary act prudently with Congress’s blessing of undiversified ESOPs.

In this case, Cliffs Natural Resources (“Cliffs”) is a publicly traded iron-ore and coal-mining company.  Its business depends on the price of iron ore, which in turn depends on Chinese economic growth.  In 2011, Chinese construction projects drove iron-ore prices to all-time highs.  Betting on continued high prices,Cliffs financed the purchase of a mine located in Northern Quebec (“Bloom Lake Mine”). Projecting that the mine would increase cash-flow, Cliffs upped its stock dividend to double the S&P 500 average.  Unfortunately, in 2012, a global demand slump halved the price of iron ore, cutting deeply into Cliffs’s revenue.  The Bloom Lake Mine quickly turned from the company’s lifeblood to, in the words of Cliffs’s CEO, “the cancer that we have to take out.” The mine’s costs exceeded predictions, often by significant margins.  And the company’s decreased revenue and high costs exacerbated its financial weakness.  The market responded: in 2013, Cliffs stock performed worse than any other company in the S&P 500.  All told, Cliffs lost 95% of its value between 2011 and 2015 (compared to a roughly 50% gain for the broader market during the same period).

Plaintiffs are Cliffs employees who participated in the company’s defined-contribution plan, commonly known as a 401(k).  The plan allowed participants to invest in twenty-eight mutual funds, including an array of target-date, stock, and bond funds.  The plan also offered an ESOP that invested solely in Cliff’s stock. Employees enjoyed discretion about whether to invest their income and matching contributions in the ESOP.  If the employee failed to choose an investment option, the fiduciary directed contributions into a money-market fund.  After Cliffs stock cratered, plaintiffs filed a class action claiming that the plan’s fiduciaries—investment-committee members and corporate officers—imprudently retained Cliffs stock as an investment option.  In particular, plaintiffs allege that it was imprudent to continue investing in Cliffs because: (1) the company’s risk profile and business prospects dramatically changed from when the investment was introduced due to the collapse of iron ore and coal prices and Cliffs’s deteriorating financial condition, and (2) the fiduciaries possessed inside information showing that the stock was overvalued.

In an April 4 News Release, the U.S. Department of Labor (the “DOL”) announces a 60-day extension of the applicability dates of the fiduciary rule and related exemptions, including the Best Interest Contract Exemption.  The announcement follows a Feb. 3, 2017, presidential memorandum which directed the DOL to examine the fiduciary rule to ensure that it does not adversely affect the ability of Americans to gain access to retirement information and financial advice.  Here is what the News Release says.

Under the terms of the extension, advisers to retirement investors will be treated as fiduciaries and have an obligation to give advice that adheres to “impartial conduct standards” beginning on June 9 rather than on April 10, 2017, as originally scheduled.  These fiduciary standards require advisers to adhere to a best interest standard when making investment recommendations, charge no more than reasonable compensation for their services and refrain from making misleading statements.

The DOL has requested comments on the issues raised by the presidential memorandum, and related questions.  The DOL urges commenters to submit data, information and analyses responsive to the requests, so that it can complete its work pursuant to the memorandum as carefully, thoughtfully and expeditiously as possible.

In Roche v. Aetna, Inc., No. 16-1712 (3rd Cir. 2017) (Non Precedential Decision), Aetna Life Insurance Company (“Aetna”), a health care plan administrator, took the position that Michelle Roche, a plan member, had to reimburse it for medical expenses it paid on behalf of Roche under the relevant benefits plan (since Roche settled with the tortfeasor who injured her, giving rise to those medical expenses).  Roche reimbursed Aetna but then filed this action, contending that she should not have had to reimburse Aetna.  The district court concluded that, before filing this action, Roche needed to exhaust her administrative remedies, and denied her claim.  On appeal, Roche argues that she was not required to exhaust those remedies.

Upon review, the Third Circuit Court of Appeals (the “Court”) held that, because the plan unambiguously requires Roche to exhaust her remedies-which she apparently did not do- the Court will affirm the judgment of the district court.

IRS Announcement 2017-4 provides relief from certain excise taxes under § 4975 of the Internal Revenue Code (the “Code”), and any related reporting requirements, to conform to the temporary enforcement policy described by the Department of Labor (“DOL”) in Field Assistance Bulletin (FAB) 2017-01 with respect to the DOL’s final fiduciary duty rule and the related prohibited transaction exemptions, including the BIC Exemption and the Principal Transactions Exemption  (all such exemptions collectively the “PTEs”) (see blog entry of March 23).  Here is what the Announcement says.


On April 8, 2016, the DOL published a final regulation defining who is a “fiduciary” of an employee benefit plan under § 3(21)(A)(ii) of ERISA as a result of giving investment advice to a plan or its participants or beneficiaries. The final rule also applies to the definition of a “fiduciary” of a plan under § 4975(e)(3)(B) of the Code.  The final rule treats persons who provide investment advice or recommendations for a fee or other compensation with respect to assets of a plan as fiduciaries in a wider array of advice relationships than was true of the prior regulatory definition.

In Stephanie v. Blue Cross Blue Shield of Massachusetts HMO Blue, Inc., No. 16-1997 (1st Cir. 2017), the plaintiff, Stephanie C. (“Stephanie”), was continuing to seek reimbursement under an ERISA covered plan (the “Plan”) for certain medical expenses connected with the treatment of her teenage son, M.G.  The plan administrator, defendant Blue Cross Blue Shield of Massachusetts HMO Blue, Inc. (“BCBS”), denied the portions of her claim that are now in dispute.  The district court, reviewing the denial de novo, upheld BCBS’s action.  Stephanie appeals.

Upon reviewing the case, the First Circuit Court of Appeals (the “Court”) said that an ERISA plan-such as the Plan here- is a form of contract.  Thus, contract-law principles inform the construction of an ERISA plan, and the plain language of the Plan provisions should normally be given effect.  Seen in this light, the dispositive issue here is not whether M.G.’s course of treatment at Gateway was beneficial to him but, rather, whether that course of treatment was covered under the Plan. Applying the plain language of the Plan, the Court held that the clear weight of the evidence dictates a finding that the disputed medical charges were not medically necessary (as defined by the Plan) and, thus, were not covered.  Accordingly, the Court affirmed the district court’s decision.

Further, to yesterdays’ blog, the DOL had issued earlier FAQs (in December 2012) pertaining to the ERISA claims procedure regulations.  The earlier FAQs are here.  They make one interesting suggestion, that would appear to apply to the prior and new provisions in those regulations relating to disability claims. The earlier FAQs indicate that, when the plan determines whether a participant is disabled, and thus entitled to disability benefits, based on a determination of disability made by a third party (not the plan), then the following obtains: a claim for disability benefits, filed by a participant, is treated as any other claim for pension benefits, and the prior and rules in the claims procedure regulations pertaining to disability claims do not apply.

More specifically, the earlier FAQs say the following, in Q-A9:

“However, if a plan provides a benefit the availability of which is conditioned on a finding of disability, and that finding is made by a party other than the plan for purposes other than making a benefit determination under the plan, then the special rules for disability claims need not be applied to a claim for such benefits.  For example, if a pension plan provides that pension benefits shall be paid to a person who has been determined to be disabled by the Social Security Administration or under the employer’s long-term disability plan, a claim for pension benefits based on the prior determination that the claimant is disabled would be subject to the regulation’s procedural rules for pension claims, not disability claims.”

The U.S. Department of Labor (the “DOL”) has revised the ERISA claims procedures which apply to claims for disability benefits, in a Final Rule which changes the ERISA claims procedures regulations and which was published on December 16, 2016.  The revisions generally become effective after 2017.  Plans which provide disability benefits (both pension and welfare plans) will have to revise their summary plan descriptions, and change internal procedures for handling disability claims, prior to the end of 2017 to comply with the Final Rule.  The DOL has issued a Fact Sheet which describes the Final Rule.  Here is what the Fact Sheet says.

Background.  Section 503 of ERISA generally requires employee benefit plans to provide written notice to any participant or beneficiary whose claim for benefits has been denied, and to provide the claimant a full and fair process for review of the claims denial.  The Fact Sheet notes that proposed regulations-now finalized under the Final Rule- was published on November 18, 2015.

Overview of Final Regulation.  The Final Rule amends the DOL’s current claims procedure regulation at 29 C.F.R. §2560.503-1 for disability benefits to require that plans, plan fiduciaries, and insurance providers comply with additional procedural protections when dealing with disability benefit claimants.  Specifically, the Final Rule includes the following improvements in the requirements for the processing of claims and appeals for disability benefits:

DB Healthcare, LLC v. Blue Cross Blue Shield of Ariz., Inc., No. 14-16518, No. 14-16612 (9th Cir. 2017) is actually two cases, which involve reimbursement disputes between health care providers and employee health benefit plan administrators.  The Ninth Circuit Court of Appeals (the “Court”) decided the cases together, because they raise a common central issue: whether a health care provider designated to receive direct payment from a health plan administrator for medical services is authorized to bring suit in federal court under ERISA.  The Court considered two separate potential bases for such authority under ERISA’s civil enforcement provisions: direct statutory authority and derivative authority through assignment.  Although the contractual relationships between the health care providers and the plan administrators, and between the providers and the patients, under these two bases differ in relevant ways, the Court concluded that the providers cannot-under either base- enforce ERISA’s protections in federal court on either basis.

Why this conclusion?

Agreeing with other circuits, the Court reaffirmed that health care providers are not health plan beneficiaries who have direct statutory authority to sue for declaratory relief and money damages under ERISA section 502(a)(1)(B) or injunctive relief under ERISA section 502(a)(3).  Rather, a health care provider must bring claims derivatively, relying on its patients’ assignments of their benefit claims.  The Court held that the health care providers here, however, lacked derivative authority to sue, given the nature of the governing agreements and of the purported assignments.  In one case, the governing employee benefit plans contained non-assignment clauses that overrode any purported assignments.  In the other case, although the provider agreement permitted assignment, and payment authorization forms could be construed as assigning the provider limited rights, the provider’s claims fell outside the scope of the assigned rights.

There is uncertainty about how the Trump administration will ultimately treat the new definition of fiduciary for ERISA purposes, and the related new prohibited transaction exemptions, that have been promulgated by the U.S. Department of Labor (the “DOL”).  Accordingly, the DOL has issued Field Assistance Bulletin No. 2017-01 (the “FAB”), which sets out a temporary enforcement policy for these new rules.  The FAB is here, and says the following.


The FAB announces a temporary enforcement policy related to the DOL’s recent proposal to extend for sixty (60) days the applicability date of:

In a private letter ruling, dated October 11, 2016 and given number: 2016-0077, the Internal Revenue Service provided the following guidance for determining whether unused funds in a flexible benefit plan default to the U.S. Treasury, when a business ceases operations.

A flexible benefit plan (a type of “cafeteria plan”) is subject to requirements under section 125 of the Internal Revenue Code (the “Code”).  Section 125 does not require that unused funds revert to the U.S. Treasury when the employer ceases operations and the plan terminates.  In addition, how unused funds are disposed of when the plan terminates would depend on what the plan document provides about plan termination and the facts and circumstances at that time.  Proposed Treasury Regulations under section 125 of the Code, however, do set forth rules on the use of unused amounts forfeited by a plan participant with respect to an ongoing plan. Proposed Treasury Regulation § 1.125- 5(o)(1) provides that forfeitures may be:

  • Retained by the employer maintaining the plan,