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Sun Capital III: Private Equity Funds Liable for Withdrawal Liability with Portfolio Company

by Myriem Bennani, posted Monday, April 11, 2016


On March 28, 2016, the U.S. District Court – District of Massachusetts issued a much-anticipated ruling on remand in Sun Capital Partners III LP v. New England Teamsters & Trucking Industry Pension Fund, holding that two non-parallel private equity funds formed a “partnership-in-fact” and conducted a “trade or business” and, as such, were jointly and severally liable for multiemployer pension plan withdrawal liability triggered by a portfolio company of the two funds.


The case presented issues of first impression involving the imposition of a portfolio company’s withdrawal liability obligations on two private equity funds that had invested in the bankrupt company, owning respectively 30% and 70% of the company.

Under ERISA, multiemployer withdrawal liability is imposed on an entity other than the contributing employer if such entity is under “common control” with the employer and is a “trade or business.” The pension fund asserted that the funds were also liable for the withdrawal liability because they were engaged in a trade or business under common control with the portfolio company. Conversely, the equity funds argued that they were mere passive investors that had indirectly controlled and tried to turn around the struggling company.

In 2013, the First Circuit Court of Appeals applied an “investment plus” standard (i.e., passive/active management of portfolio company and level of economic benefit received), ultimately holding that one of the funds was engaged in a trade or business and remanding to the District of Massachusetts District Court for a factual determination with respect to the second fund.

The Latest Chapter

On remand, applying the “investment plus” standard, the District Court found that the second fund was also a trade or business. The court held that the two equity funds were therefore jointly and severally liable for the portfolio company’s withdrawal liability obligations as under common control with the company (i.e., combined ownership of at least 80%).

In reaching its decision, the court reasoned that the two equity funds were engaged in a single “partnership” notwithstanding that the two funds had separate lifecycles and investors, had separate financial statements and bank accounts, were not parallel funds, and had, for the most part, different portfolio companies. Just as troubling is the court’s acknowledgment that the two funds had expressly stated in the operating agreement of the LLC that they did not intend the investment overlap to constitute a partnership or joint venture.

This is a critical decision for private equity funds that have portfolio companies (or are considering investing in companies) that contribute to multiemployer pension plans. The decision is likely to spur more litigation on the “trade or business” question in other circuits, as more pension funds seek to collect on withdrawal liability from private equity funds as deep pockets. Of course, whether other circuit courts adopt the Sun Capital rationale and conclusions remains to be seen.

For more information, please contact Myriem Bennani at (262) 956-6227 or mbennani@whdlaw.com, Erik Eisenmann at (414) 978-5371 or eeisenmann@whdlaw.com, or another member of the Employee Benefits Team.

IRS Issues Guidance on Mid-Year Changes to Safe Harbor Plans

by David W. Eckhardt, posted Tuesday, April 05, 2016

On Jan. 29, 2016, the IRS issued Notice 2016-16, which provides guidance on mid-year changes to a safe harbor plan under sections 401(k) and 401(m) of the Internal Revenue Code.
Generally, a mid-year change to a safe harbor plan or a plan’s safe harbor notice does not violate the safe harbor rules provided that certain conditions are satisfied. A mid-year change is a change that is first effective during the plan year but not as of the beginning of the plan year, or a change that is effective as of the beginning of the plan year but adopted mid-year.
The notice condition requires that a notice describing the change and its effective date be delivered to each employee otherwise required to be provided the safe harbor notice within a reasonable period before the change. This requirement is deemed satisfied if the updated notice is provided at least 30 days and not more than 90 days before the effective date of the change.
Additionally, employees must be given an opportunity before the effective date of the change to change their election under the plan.
There are certain changes that a plan cannot make. A plan cannot: increase the number of completed years of service that are required for an employee to have a right to their safe harbor account balance; reduce the number of employees who are eligible to receive safe harbor contributions; change the type of the safe harbor plan; or modify the formula used to determine matching contributions if it increases the amount of matching contributions.
This guidance is helpful to employers who want or need to make changes to the safe harbor plans at mid-year. Employers who make changes to their safe harbor plan should make sure that change is not prohibited. Further, employers should be careful to follow the notice requirements when making changes, including allowing employees to make changes to their elections.
For more information, please contact David Eckhardt at (414) 978-5414 or deckhardt@whdlaw.com, or another member of the Employee Benefits Team.

U.S. Supreme Court Limits Health Plan Subrogation Rights

by David W. Eckhardt and Erik K. Eisenmann, posted Tuesday, March 01, 2016

On Jan. 20, 2016, the U.S. Supreme Court held that an ERISA benefit plan cannot enforce its subrogation right to recover expenses from a participant’s general assets when the participant has spent any third-party settlement on items that cannot be traced. See Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan.

In Montanile, the plan reimbursed the participant’s medical costs after a serious injury, but required the participant to reimburse the plan if the participant received any amounts from a third party (an obligation the participant confirmed in a signed agreement).  

Upon receiving a settlement from a third party, the participant’s lawyers held the amount in a client trust account. The participant’s lawyers attempted to negotiate with the plan for repayment, but when negotiations broke down, the lawyers demanded that the plan file an “objection” within 14 days (an arbitrary deadline established by the participant) or waive its right to those proceeds. The plan did not timely object, and the participant subsequently spent all of the funds.

The Supreme Court held that although the plan’s claim against the participant was an equitable claim, enforcing the claim against the participant’s general assets was not equitable. Because the participant spent the money on nontraceable items (e.g., food, travel), the equitable lien could not be enforced.

The case emphasizes the importance of carefully reviewing subrogation agreements, which could include naming the participant as a fiduciary who is obligated to return any funds to the plan, and the importance of tracking recoveries from third parties. It also highlights that a plan may be required to “negotiate” with a participant’s counsel for repayment amounts, even where the plan has a clearly superior right to that money. Finally, it shows that a plan will be required (at least for now) to timely object to artificial deadlines imposed by counsel for participants, or risk having proceeds spent on nontraceable items.  

For more information, please contact David Eckhardt at (414) 978-5414 or deckhardt@whdlaw.com, Erik Eisenmann at (414) 978-5731 or eeisenmann@whdlaw.com, or another member of the Employee Benefits or Labor & Employment teams. 

EEOC Discusses Health Insurance Incentive Programs

by David W. Eckhardt, posted Tuesday, February 09, 2016

As a follow-up from WHD’s previous blog post regarding wellness programs, this post will address informal comments made by the EEOC regarding wellness programs.
The American Bar Association Joint Committee on Employee Benefits met with EEOC staff on May 7, 2015. In that meeting, staff members stated that a program that only measures a participant's waistline would not be subject to ADA rules because measuring a waistline is not a disability-related question or medical examination. However, staff reiterated that incentives tied to answering disability-related questions or underdoing a medical examination cannot exceed 30% of the total cost of self-only coverage.
For example, an employer informed an employee and his spouse that the spouse must participate in the program to avoid a reduction in coverage level. EEOC staff indicated that this reduction in coverage would violate both the HIPAA nondiscrimination rules and the similar ADA provision.  

Staff confirmed that a voluntary “Biggest Loser” challenge is not considered a workplace wellness program subject to the proposed ADA wellness rules when it is provided through a third-party vendor. The program is also not part of an employer’s group health plan and does not involve incentives related to the group health plan.
These comments provide helpful insight into how the EEOC views these types of wellness programs. With the issuance of regulations under the ACA, ADA and GINA, employers will need to navigate the various laws based on their programs’ specifics.

For more information, please contact David Eckhardt at (414) 978-5414 or deckhardt@whdlaw.com, or another member of the Employee Benefits Team.

Federal Court Decision Provides New Guidance for Employers Considering Wellness Programs

by Erik K. Eisenmann and Laura L. Ferrari, posted Monday, January 25, 2016

On Dec. 30, 2015, Judge Barbara Crabb from the U. S. District Court for the Western District of Wisconsin issued a decision in EEOC v. Flambeau, Inc., a case that clarifies employers’ rights under the Americans with Disabilities Act (ADA) to utilize workplace wellness programs. With employee wellness programs gaining popularity, this decision offers some much-needed guidance as to how this provision applies to the programs and what program features are essential in ensuring employers maintain compliance with the ADA.
Key Language in the ADA

2 U.S.C. § 12112(d)(4)(A) generally prohibits employers from requiring a medical examination or making inquiries as to the existence, nature or severity of a disability unless doing so is job-related and consistent with business necessity. There is, however, an exception to this rule that allows employers to conduct voluntary medical exams that are a part of a workplace health program.  
Section 12201(c)(2) of the ADA also outlines a safe harbor provision that allows employers to engage in activities to establish the “terms of a bona fide benefit plan that are based on underwriting risks, classifying risks, or administering such risks." 
The Employer’s Wellness Program
In Flambeau, the employer offered its employees the ability to participate in its self-funded, self-insured insurance plan. Participation was voluntary, and employees were not required to join as a condition of their employment. To be eligible for the insurance plan, however, employees were required to participate in a wellness program, which was comprised of a health risk assessment (including a questionnaire about diet, medical history, etc.), and a biometric test, which was similar to a routine physical exam. With the exception of information about tobacco use, the information associated with individual employees was not used; only aggregate information from all participating employees was used to identify any common health risks and allowed the employer to estimate the cost of insurance, set premiums and adjust co-pays. An employee who lost his coverage due to non-completion of the wellness program requirements sued his employer, claiming that the requirements violated the prohibition in the ADA on mandatory medical exams. The employer, however, maintained that these requirements were terms of the plan, thereby bringing the plan and its prerequisites within the safe harbor provision. Read more...

Recent ACA Guidance

by David W. Eckhardt, posted Friday, January 15, 2016

This post is the first in a series that will address recent guidance issued by the U.S. Treasury Department, Internal Revenue Service (IRS) and U.S. Department of Labor regarding various aspects of group health plans and the Affordable Care Act (ACA). This blog will supplement Employee Benefit Special Reports and provide more informal and frequent posts on employee benefits matters.
IRS Notice 2015-87  
While everyone was enjoying the holidays, IRS Notice 2015-87 was issued together with 26 frequently asked questions (FAQs) that covered the following topics:
  • Information reporting penalty relief;
  • Application of ACA reforms to various health care arrangements, such as health reimbursement arrangements and employer payment plans;
  • Application of the employer mandate provisions relating to contributions under HRAs, FSAs, and opt-out payments;
  • The impact of employer contributions on affordability for employees; and
  • COBRA rules related to FSAs.   
As the FAQs are very lengthy, detailed and cover a lot of ground, each topic will be covered in the Employee Benefits blog and Special Reports.
Penalty Relief and Reporting Deadlines
Starting with some good news for the new year, the Notice reiterates the relief provided for in the preamble to the final regulations under IRC §6056 that the IRS will not impose penalties on employers who can show they have made a good faith effort to comply with the information reporting requirements in 2016 for coverage offered in 2015. However, employers must still timely report to be eligible for the relief.
With regard to timing of reporting, the IRS released IRS Notice 2016-4, which delays the due dates for ACA information reporting both for furnishing to individuals and filing with the IRS. The notice delays the due date to furnish reports to individuals from Feb. 1, 2016, until March 31, 2016. The notice delays the filing with the IRS from Feb. 29, 2016, to May 31, 2016, if not filing electronically, and from March 31, 2016, to June 30, 2016, if filing electronically. Employers receive this extension automatically and are not required to submit any further documentation with the IRS.
Stay tuned for further blog posts regarding the ACA guidance issued under Notice 2015-87.
For more information, please contact David Eckhardt at (414) 978-5414 or deckhardt@whdlaw.com, Michael Taibleson at (414) 978-5514 or mtaibleson@whdlaw.com, or another member of the Employee Benefits Team.