2024 is ending with a swing back to a Republican Administration, a plan to cut back on the federal bureaucracy, and a focus on shoring up Social Security. The scheduled expiration of the 2017 Tax Cuts and Jobs Act at the end of 2025 also looms on the horizon. However, it is to be hoped that the Administration, Congress and the courts will not lose sight of some specific benefits related changes that are overdue and would simplify the job of those who run employee benefit plans. While nobody has a crystal ball, here is a short list of developments this benefits professional wishes would come true in 2025.
1. Continued bipartisan agreement on pension reform.
Despite their differences, Republicans and Democrats have united in passing pension reforms, most recently in passing SECURE 2.0. Congress is expected to be considering SECURE 3.0 next year.
It is in the country’s interest to increase access to workplace retirement plans and the likelihood that employees can use these plans to accumulate enough to live on in retirement. Those goals can be met more easily by building on the foundation of private employer pension plans and making plan administration less complicated. Continuing tax incentives for the adoption of new plans and providing statutory and regulatory safe harbors for plan fiduciaries and simplified plan testing can encourage employers to adopt plans. Incentivizing employers to join Pooled Employer Plans (PEPs) in which there is fiduciary management by a registered provider and enabling 403(b) plans to use collective trusts would help.
2. Don’t Give Up on 401(k) Plans.
Congress should not give up on the private pension system or believe exaggerated criticisms of 401(k) plans, which are improving all the time with features such as automatic reenrollment, “do it for me” professional investment options and target date funds with annuity features..
Earlier this year, Congress heard testimony on the Retirement Savings for Americans Act, a proposed law that would create a national retirement savings program run by the federal government in which the government would fund additional contributions for participating employees. This would seriously undermine the private pension system where employers fund their own matching or nonelective contributions and establish an unnecessary new bureaucracy.
3. More and faster SECURE Act guidance
While they admittedly have a huge task to issue regulations interpreting the SECURE Acts and other recent legislation, Treasury and the Department of labor are issuing this guidance so slowly that vendors and plan sponsors are not sure what their legal obligations are. A current example is the SECURE 2.0 requirement that new plans must have automatic enrollment and auto-escalation, and provide a withdrawal period of up to 90 days during which employees who were auto-enrolled but want to opt out of participation can withdraw their contributions. This provision is effective on January 1, 2025, but as of today we still do not know whether the requirement applies to new hires on and after January 1, 2025, new hires after December 29, 2022 when SECURE 2.0 was adopted, or whether new plans that already have auto-enrollment must re-enroll everyone as of January 1, 2025. Even if guidance comes out tomorrow, there will not be time to update systems by January 1 to reflect any unanticipated rules. SECURE 1.0 contemplated guidance and sample plan language for PEPs, yet all that has been issued so far are rules for pooled plan provider registration.
4. Subject ERISA litigation to reasonable pleading rules.
ERISA litigation can hold those who don’t administer their plans in the interest of participants accountable, and has reportedly caused some decreases in average plan fees. However, there are too many nuisance suits in which fiduciaries who appear to have done nothing wrong are targeted in the hopes of getting a quick settlement. Many of these cases allege prohibited self-dealing based on typical plan practices that all plans engage in, such as hiring or renewing contracts of outside service providers.
The Supreme Court has agreed to review the pleading standards for prohibited transactions as set out in Cunningham v. Cornell Univ. (86 F. 4th 901 (2d Cir, 2023). The Second Circuit decision held that in order to survive a motion to dismiss, a prohibited transaction claim must not only allege that the plan pays fees to a service provider-which all plans need to do- but also that either the services are unnecessary or the fees are unreasonable. This will resolve a dispute among the circuit courts and, if the Supreme Court upholds the Second Circuit’s common sense reading of the statutory language, has the potential to cut back on some of this nuisance litigation.
Courts at all levels can also scrutinize any benchmarks used in complaints to compare a plan’s fees to make sure that the benchmark is appropriate for the particular plan. Too many complaints fail to factor in the complexity of the plan or service levels.
5. A final decision whether ERISA fiduciary breach claims may be subject to mandatory arbitration
This was on last year’s wish list. The Supreme Court still hasn’t accepted a case to decide this basic question thar remains unanswered 50 years after the enactment of ERISA. Supreme Court decisions have upheld mandatory arbitration and class action waivers in the employment context, (see, e.g., Epic Systems v. Lewis, 13855 S. Ct. 1612 (2018) and Lamps Plus v. Varela. 1395 S.Ct. 1407 (2019)) and the Federal Arbitration Act antedates ERISA. Previously, the Supreme Court also said that in order to avoid application of the Federal Arbitration Act, Congress must indicate an intent not to permit mandatory arbitration. ERISA does not do that, yet several courts have applied a judicially-created barrier to mandatory arbitration by stating that arbitration may not be used where it would impede the effective vindication of statutory rights. The Supreme Court should take one of these cases and settle the matter once and for all.
6. Loper Bright will have limited impact.
Earlier this year in Loper Bright Enterprises v. Raimondo (144 S.Ct. 2244) the Supreme Court ended Chevron deference to administrative agencies’ interpretation of the law. This creates open season on challenging regulations that were thought to be settled law, and creates the possibility of many circuit conflicts about what statutory provisions mean. To avoid creating chaos in benefit plan administration and investments, courts can still recognize that experts at these agencies are in the best position to determine what should be regulated, and Congress can make clear delegations of authority to administrators to interpret statutory terms when it passes new legislation.
7. Congress will not cut back employee plan tax benefits to raise revenue
There may be temptation to lower the maximum benefit and contribution limits or the maximum amount of compensation plans may count, repeal the new Savers’ Credit (not effective yet) or to require contributions to be made on a ROTH basis to pay for extended tax cuts or to shore up Social Security. Increasing retirement savings is more important than temporary income offsets and Roth contributions aren’t right for everyone. Further, employer tax credits for starting new plans should be better publicized rather than cut back.
8. The best of the Affordable Care Act will be preserved.
The Affordable Care Act de-linked medical coverage from jobs, and created marketplaces where everyone could obtain coverage. Surveys show that Americans support provisions like the prohibition on denying coverage due to pre-existing conditions and extending dependent coverage up to age 26. Any new options should be in addition to and not in place of existing rights and protections. Repealing the Affordable Care Act without a viable replacement would cause hardship to the sickest people and those without good employer-based coverage.