This Supreme Court Case Shows Exactly Why Every Employer Needs to Understand ERISA Requirements

As an employer, it is important to understand ERISA and the penalties involved for non-compliance.

The U.S. Supreme Court recently ruled unanimously against the arguments of Intel Corp. in a significant lawsuit (Intel Corporation Investment Policy Committee v. Sulyma) surrounding the Employee Retirement Income Security Act (ERISA) provisions and guidelines.

In 2015, a former Intel Corp. employee brought a lawsuit against Intel Corp. for a breach of fiduciary duties. The former employee alleged that the plan fiduciaries violated their obligation to act as a responsible fiduciary by making high-risk investment allocations that caused substantial plan losses.

According to The Wall Street Journal, the lawsuit was brought to court more than three years after Intel Corp. disclosed the investment allocation arrangements through its plan participant website.

Derrick Wong, account executive, Risk Cooperative

Intel Corp. argued that the lawsuit was filed outside the Employment Retirement Income Security Act of 1974 (ERISA) statute of limitations guideline that requires the plaintiff to sue within three years of obtaining “actual knowledge” of a breach.

The district court ruled in favor of Intel and dismissed the case due to the statute of limitations, but the U.S. Supreme Court reversed the decision in February 2020. The U.S. Supreme Court held that “actual knowledge” could not be established merely by making disclosures available online to the plaintiff.

Since the U.S. Supreme Court deemed that the plaintiff did not have “actual knowledge” of the potential fiduciary breach, the six-year statute of limitations period was applied to the case.

The Importance of ERISA Compliance

The decision will likely impact how plan sponsors, like Intel, communicate with participants moving forward, putting the onus on employers to ensure that plan beneficiaries acknowledge receipt of these disclosures.

This decision will also impact how plan sponsors make and communicate investment allocations to employees, further ensuring that plan sponsors are responsible fiduciaries.

As an employer, it is important to understand ERISA and the penalties involved for non-compliance.

What Is ERISA?

The U.S. Department of Labor (DOL) passed the ERISA as a federal law that sets minimum standards for retirement and welfare benefit plans, including 401(k), pension, profit-sharing and group health plans.

Under ERISA, employers are required to provide notice to participants about the benefit plan terms, including funding, coverage and costs.

This type of transparency and accountability ensures employers are acting in the best interest of the plan participants and their beneficiaries.

Common Retirement Accounts Subject to ERISA

401(k) plans
Simplified Employee Pension (SEP) plans
Savings Incentive Match Plan for Employees (SIMPLE) plans

Common Welfare Benefit Plans Subject to ERISA

Medical, dental, and vision plans
Prescription drug plans
Group life insurance plans
Accidental death and dismemberment (AD&D) plans
Short-term and long-term disability plans
Health reimbursement arrangements (HRAs)
Flexible spending accounts (FSAs)

Exemptions from ERISA

Government entities
Church organizations
Compliance plans offered for the specific purpose of complying with a state or federal statute
Foreign plans maintained outside the United States that benefit non-citizens or non-resident aliens

Potential Penalties

ERISA is administered by the Employee Benefits Security Administration (EBSA), a division of the DOL. Violations of ERISA can be met with investigations, enforcement actions, and penalties from the DOL. These breaches in compliance can also open the door to private lawsuits from employees.

Les Williams, partner and chief revenue officer, Risk Cooperative

The EBSA regularly conducts audits of benefit plans to ensure compliance and maintain the integrity of the employee benefit plan system in the United States. According to the FY 2019 DOL Fact Sheet, EBSA’s administrative authority covers approximately 690,000 retirement plans and 2.2 million health plans.

The EBSA closed 1,146 civil investigations in FY 2019, with 67% of those cases resulting in monetary results for plans or remedial action.

Over $2.5 billion was recovered in direct payment to plans, participants, and beneficiaries. There were 275 criminal investigations that closed in FY 2019, which led to the indictment of 76 individuals (including plan officials, corporate officers and service providers) for offenses related to employee benefit plans.

Minimize the Chance for Potential Penalties: The Wrap Document

What is a wrap document?

A wrap document incorporates all required language to meet ERISA guidelines and “wraps around” existing insurance policy language to create a fully compliant plan document.

How does a wrap document impact Form 5500 filing?

ERISA requires that all benefit plans subject to ERISA have a governing plan document and a summary plan description (SPD).

Wrap documents allow an employer to file a single Form 5500 for multiple benefits coverage, which saves an exponential amount of time and money.

Without a wrap document, a separate Form 5500 must be filed for each welfare benefit plan offered by the employer.

Partnership: A Wise Investment

Experts recommend that employers partner with professional retirement plan consulting practices to help alleviate the burden of fiduciary liabilities.

These certified consulting practices provide fiduciary oversight by implementing a proactive approach to plan governance, ensuring employers adhere to the fiduciary standards under ERISA. Some professional consulting practices can even serve as the fiduciary.

History has made clear that ERISA class action lawsuits are not limited to the largest companies. Employers and plans of all sizes are vulnerable to these potential penalties and litigation.

It is important for employers to educate themselves on the complex and continually changing ERISA guidelines and make informed decisions to help minimize potential violations that can lead to substantial fines or, in the most severe cases, criminal punishments.

It is an investment that all employers should make. &

Les Williams, CRM, is Cofounder and Chief Revenue Officer of Risk Cooperative. He holds a BS in mechanical engineering from the University of Virginia and an MBA from Harvard Business School. Prior to joining Risk Cooperative, Les served in various institutional sales positions at SoHookd, JLL, and IBM. Derrick Wong is an Account Executive at Risk Cooperative, a specialized strategy, risk, and insurance advisory firm based in Washington, D.C. He holds a BS in Business Management from St. John Fisher College and has over 10 years of experience as a licensed professional in the health insurance industry.

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.