In the wake of a lawsuit against Johnson & Johnson (J&J) for alleged breach of fiduciary duty in their benefits planning, employers nationally are reassessing their own vulnerabilities. This post is intended as informational and does not constitute legal advice.

This case, which accuses both the benefits planning committee and individual HR leaders of overpaying on pharmacy costs, has sent ripples through the corporate world, highlighting the potential for similar legal challenges.

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What does ERISA actually say

At the heart of these legal challenges is the concept of fiduciary duty, as defined under the Employee Retirement Income Security Act (ERISA) of 1974. Specifically, ERISA law states: "(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;" (29 U.S. Code § 1104 - Fiduciary duties).

So what does prudent actually mean? This means that a fiduciary's actions are evaluated based on what was known or should have been known, considering the information available at the time, not based on how things turned out later. The issue for employee benefits resides with the lack of publicly available information.

For J&J’s benefit planning committee, was there enough publicly available information on drug prices and other dynamics that they violated their fiduciary duty? It will be difficult to prove yes, but that is the crux of the argument.

Take a step back and quick self-assess the easy things

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1. Your benefit strategy – Have you done or do you have a formal process for a broker or consultant RFP that occurs on a semi-regular basis?

The nice part about the employer<>broker relationship is that the broker consults and provides market expertise on  the majority of the benefits strategy – with oversight from the employer. In this situation, an employer is paying a third party with specific qualifications to design and implement a strategy. But, nearly 1/3rd of employers have had their same broker the past five years. Ensure you have a process in place to justify your choice for your insurance broker or consultant.

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2. Your broker compensation – Is what you are paying your broker excessive?

Broker compensation is a large plan expense each year and therefore could be scrutinized by someone external. Broker compensation benchmarks though are not widely available and only recently have more transparency rules been enacted to see the full picture. Reviewing 25K+ fully insured plans from the most recent 12 months, it is easy to see the variation in broker compensation. For employers of similar size ranges and industry, broker compensation can vary by 3X+ from the 25th percentile to the 75th percentile. While geography and several other plan design features can have an effect, the values should be more closely centered around the mean.

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3. Other ERISA payouts – What are your other plan expenses that could be scrutinized?

Each plan is different and can vary based on your benefits strategy. Therefore each plan can have different expenses that are material – some can be pharmacy carve out related, tax strategy driven or other programs. Evaluate you major line items to ensure their amount can be justified.

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4. Contracts & Gag Clauses – Do your contracts follow the new legal guidelines?

Defined as contractual terms that restrict the sharing of cost, quality, or claims data with plan members or sponsors, gag clauses have come under scrutiny. Code section 9824, ERISA section 724, and PHS Act section 2799A-9, a “gag clause” is a contractual term that directly or indirectly restricts specific data and information that a plan or issuer can make available to another party. The federal government now requires employers to attest annually that their contracts do not have gag clauses. This is an easy one – make sure you are following the regulations.

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5. Correct Tax Filings – Are your Dept of Labor filings accurate or a source of potential liability?

As you know, if you have 100+ employees, you have to file your benefit plan each year with the Dept of Labor; if under 100 and you offer a retirement plan, you also have to file. This form and process are nuanced at best. Fully-insured companies have a litany of items to report, self-insured items are limited.

10% of employers over the last five years have a material issue with one of their filings including missing schedules, incorrect broker compensation, materially wrong data reported and more. This is an easy way to open yourself up to liability.

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In this evolving legal landscape, understanding and fulfilling your fiduciary duty is more critical than ever. The lawsuit against J&J serves as a stark reminder of the potential consequences of failing to meet these obligations. We're committed to helping employers navigate these complexities with our free assessment service.

If you would like to see the broker compensation benchmarks for your industry, region and size or a short assessment of your Dept of Labor filings, feel free to reach out to us directly.

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One recent lawsuit is testing uncharted legal waters when it comes to determining exactly what fiduciary duty employers owe employees with regard to the provision of employee health plans.

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On February 5th, a class action lawsuit was filed against Johnson & Johnson in US District Court alleging the company breached its fiduciary duty to employees by egregiously overpaying for prescription drugs.

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The plaintiffs, or employees and former employees, support their claim by citing the seemingly exorbitant sticker prices that the company plan appears to be paying for certain medications - prices that supposedly far exceed the cost that uninsured customers pay for the same medication.

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Interestingly, in addition to naming Johnson & Johnson as a defendant in the case, the plaintiffs also filed suit specifically against the Johnson & Johnson Planning & Benefits Committee as well as each of the individual fiduciaries that make up that committee, which may be the first time that such fiduciaries have been personally named as defendants in a case like this for employee benefits.

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ERISA Fiduciary Liability 

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The Employee Retirement Income Security Act of 1974 (ERISA) governs primarily two components for an employer - their retirement and employee benefits. 

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Retirement - As a corollary, about 10-15 years ago, with new ERISA requirements for retirement plans, a number of lawsuits were filed against employers for violation of fiduciary duty. These lawsuits have primarily focused on allegations that plan fiduciaries failed to uphold their duties, leading to significant repercussions for plan participants and beneficiaries. The core issues at the heart of these legal battles include:

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1. Excessive Fees - One of the most common grounds for ERISA lawsuits is the accusation that plan fiduciaries allowed excessive fees to be charged for plan administration and investment management. Plaintiffs argue that fiduciaries did not adequately review or negotiate lower fees, which could erode retirement savings over time. Courts have scrutinized whether fiduciaries have conducted regular and thorough fee benchmarking against comparable plans to ensure that fees are reasonable for the services provided.

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2. Poor Investment Options - Another significant area of litigation involves claims that fiduciaries offered poor investment options that underperformed relative benchmarks or were inappropriately risky for the plan’s investment objectives. These lawsuits often allege that fiduciaries failed to properly monitor investment options and replace underperformers, leading to lower returns for plan participants.

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3. Mismanagement of Plan Assets- Lawsuits also have targeted fiduciaries for mismanagement of plan assets, accusing them of failing to follow the plan's investment policies, engaging in prohibited transactions, or not acting in the best interests of plan participants. These cases often hinge on the fiduciary duty of prudence and loyalty, requiring fiduciaries to act with care, skill, prudence, and diligence under the circumstances.

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The outcomes of these lawsuits have varied, with some resulting in substantial settlements or judgments against fiduciaries, while others have been dismissed. The legal landscape surrounding ERISA fiduciary liability has evolved, with courts increasingly setting higher standards for fiduciary conduct. These cases have led to greater awareness and changes in how retirement plans are managed, including more transparent fee structures, improved investment option monitoring, and the adoption of best practices in plan governance.

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Fast-forward to benefits - It remains to be seen how receptive the judicial system will be to the plaintiffs’ claims given that the excessive list prices plaintiffs are highlighting in the suit may be more a reflection of bundling practices common among pharmacy benefit managers (PBMs) than an indication of price gouging or negligent administration.

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Perhaps regardless of the ultimate outcome, however, any validation of the underlying premise that the fiduciary duty owed to employees by employers and health plan fiduciaries may extend to these matters will likely bring with it a surge in employees suing their employers for excessive medical care costs and fees.

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These suits could come in a variety of forms as it relates to employee benefits, which span not only medical but also cover dental through disability and voluntary. Key items that attorneys may be considering include:

• Failing to manage employer benefit spend as a fiduciary, specifically overpaying for medical, dental, vision or other as in the J&J case
• Improper payments to a broker, consultant or third-party vendor
• Denial of benefit claims
• Improper amendment or termination of a plan
• Failure to provide proper updates or adjustments
• Failure to act in a timely manner

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Strategy vs. Duty

Company leadership is hired to run a company effectively. They have a duty to shareholders to run the business to the best of their ability. Senior officers, directors and officers have insurance to protect themselves. When a company performs below expectations, are they liable to shareholders? Only if there are egregious and potentially illegal errors.

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The same line is drawn here. You cannot sue someone for implementing a strategy that was ineffective, but you can sue someone if they were negligent.

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How to Reduce Your Company’s Risk

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In order to minimize the risk exposure that the expansion of fiduciary duty in line with the plaintiff’s perspective presents, here are 3 steps employers can take to ensure that they are properly exercising their fiduciary duty with regard to employee health plan administration.

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Organize and Authorize a Health Plan Committee: In the complaint against Johnson & Johnson, the fact that they did not have a health plan committee in place to oversee health benefit plan issues may end up working against the company, especially in light of their implicit acknowledgment of the potential value of a such a committee as evidenced by the existence of their pension plan committee, which serves a similar function with regard to employee retirement benefits. 

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Request Disclosures From EBCs and PBMs: According to the Johnson & Johnson complaint, federal law requires contract service providers like employee benefits consultants and pharmacy benefits managers to disclose in writing any compensation of more than $1,000 that they receive for their services, whether that compensation is acquired directly or indirectly. Further, failure to obtain such written disclosure prior to entering into, renewing, or extending a contract with a contract service provider makes that contract a de facto ERISA violation, so fiduciaries responsible for these matters should insist that such disclosures are documented before those contracts and renewals are signed.

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Take Personal Responsibility: With each member of the benefits committee being named individually as a defendant in the Johnson & Johnson class action suit, proper oversight of health plans as well as the associated costs and administration is no longer any single fiduciary’s job - it is every fiduciary's job - which further underscores the value of health plan committees that are organized in part to provide accountability for these kinds of health-plan related issues.

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Although the outcome of the lawsuit has not yet been determined at this point, the ripples across the benefits industry are already being felt, and with rising medical costs trending in the opposite direction of many people’s ability to afford them, employers and benefits managers are almost certainly going to be targeted as possible recipients of the blame with increasing regularity going forward.

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You can read more about this case here.

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When recruiting, training, and optimizing Gen Z, business as usual isn’t going to cut it, and with Gen Z now matching (and soon to exceed) Baby Boomers as a proportion of the total workforce, employers would be wise to adjust accordingly.

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It is no secret that the competition for talent on the labor market has been historically tight for a long time now, with average unemployment nationwide below 4% for the past 2 years straight.

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These conditions have had wide-ranging impacts across industries throughout the labor market, including upward wage pressure that resulted in a 4.5% increase in average hourly pay over the last year, which outpaced the 3.4% increase in inflation that accumulated over 2023. 

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While there was some softening in the labor market during the summer and early fall, the last few months have once again seen huge additions of new jobs being added to US company payrolls, despite the Federal Reserve’s nearly two-year-long interest rate hiking campaign designed to cool the demand for labor.

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With the Fed signaling that those interest rates have hit their near-term peak and will likely begin coming down soon, however, demand for labor may well outpace the labor supply for the foreseeable future absent some kind of disruptive event.

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As Gen Z makes up an increasingly large share of not only the labor supply, but also the supply chain, and customer base, how can employers transition their business practices to better accommodate and capture value as business norms, sensibilities, and expectations change with the times?

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Gen Z Job Applicant Perception Problem - By The Numbers

A recent survey from ResumeBuilder.com highlighted by BizWomen illuminates some of the main issues surrounding the entrance of Gen Z into the workforce, and how best to address them. 

• Hiring Managers Prefer Older Workers: Nearly 1 out of 3 hiring managers (31%) report having a preference for hiring older workers over Gen Z applicants, which of course is an ultimately unsustainable strategy. 

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A closer look at some of  the underlying reasons why almost one-third of respondent hiring managers are inclined to steer clear of Gen Z workers, however, reveals that differences of perception are often a source of conflict and misunderstanding. 

The most common reasons listed for why hiring managers rejected Gen Z applicants were:

• Entitled Attitude: 41% of respondents claimed Gen Z interviewees acted too entitled;
• Poor Communication: 39% of respondents claimed Gen Z interviewees were poor communicators;
• Unpreparedness: 36% of respondents claimed Gen Z interviewees were unprepared; and
• Unrealistic Compensation Expectations: and 42% of respondents claimed Gen Z interviewees were asking for too much money. 

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When analyzing this list of top hiring manager complaints with Gen Z job interviewees, the lack of objectivity that characterizes most of the issues is hard to overlook, especially given how so many aspects of assessing entitlement, communication, and preparation are quite subjective in nature. 

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For example, many interviewers complained that Gen Z applicants were not dressed appropriately, and/or they failed to make appropriate eye-contact, and or they used inappropriate language. 

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Rooting all of these perceptions is the idea of what is and what is not appropriate in a given setting, which are understandings that are very much in flux generationally. 

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Similarly, what some hiring managers may perceive as entitlement may reflect different career-related priorities and/or the different labor market/social conditions that each generation may have found upon their entrance into the workforce

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Even the reasonableness of one’s compensation expectations, while more objective given market ranges, may be reflective of an underlying generational divide in light of the fact that dollars today earned by Gen Z workers have 86% less purchasing power than the wages brought home by Boomers at the same age. 

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Ultimately, company leadership will have to set the parameters and define what is appropriate when it comes to applicant and employee behavior, but the narrower that those parameters get relative to the broader understanding of what is and isn’t appropriate among the workforce and society in general, the harder it will be for companies to continue meeting their talent needs from an increasingly restricted labor pool. 

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You can read more about Gen Z in the workforce here.

Once again, US companies outperformed expectations last month, adding 353 thousand net jobs across their collective payrolls. 

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At the same time, the unemployment rate remained at 3.7% for the third consecutive month,  which marks 2 full years now that the national unemployment rate has been below 4%.

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That said, the report wasn’t exclusively good news, with the number of people who have been unemployed for more than 27 weeks rising by about 30 thousand to approximately 1.28 million last month, and that figure has grown by 200 thousand over the course of the last year, which is an increase of almost 20% year over year.

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There has also been a noteworthy uptick in the number of people who want a job but are not currently counted as unemployed because they weren’t actively seeking or were unable to take a job over the prior 4 weeks. That figure rose by about 120 thousand over the last month, climbing to about 5.8 million, which is up by about 475 thousand over the last 12 months.

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Still, the total number of people who want a job but don’t have one for whatever reason makes up less than 7% of the prospective labor force, which remains historically low, and the labor force participation rate continues to hold steady at 62.5%.

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With regard to job growth, professional and business services saw the largest increase in new payroll entries at plus 74 thousand, followed closely by the healthcare industry at 70 thousand. 

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Retail employment also had a great month, adding 45 thousand jobs, while government, social assistance, and manufacturing jobs grew by an average of about 30 thousand jobs per industry. The information sector also added about 15 thousand new jobs.

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There was little change in the net payroll figures across the construction, wholesale, financial activities, leisure and hospitality, and transportation and warehousing industries, although there was a net loss of about 5 thousand mining, quarrying, oil and gas extraction jobs.

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The average workweek fell another two-tenths of an hour to 34.1, which is down a half hour in total over the last 12 months, while average hourly earnings rose 19 cents to $34.55.

Mployer Advisor’s Take

On top of the additional 350 plus thousand new jobs added last month, this latest economic report also upwardly revised the job figures from the prior two months by more than 30%, accounting for an additional 126 thousand new jobs that had gone previously unreported.

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Further, a closer look at the very stable 3.7% unemployment rate reveals that the true figure is closer to 3.66% - down from 3.74% the month before, and predictions of imminent recession are far more scarce and less severe than they were at the beginning of each of the past 2 years.

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For the time being at least, the economy and the labor market continue humming along and the prospect for continued stability appears more likely than a near-term downturn. 

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Perhaps what has changed the most over the last few months is that people are finally taking greater note of these favorable economic conditions and are feeling somewhat more optimistic that these conditions will remain favorable than they had been in the past.

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As always, these positive economic trends are always vulnerable to unknown factors ranging from international conflict to viral resurgence, but as has been the case for many months now, the trends look good for the time being at least. 

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Eager for more exclusive content? Check out the Mployer Advisor blog here.

Employee benefits have become not only an increasingly large component of total compensation packages, but they have also in many ways come to symbolize the amount of interest that an employer maintains in the well-being and productive longevity of their workers.

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As a result, employee benefits packages in the eyes of many employees, both current and prospective, reflect the degree of reciprocity they may be able to reasonable expect for their loyalty and dedication, which in turn can have major impacts on everything from recruitment and retention to productivity.

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As the employee benefits landscape continues to evolve right alongside work-life balance shifts and reexamined employer/employee relationships, this recent piece from BenefitsPro highlights 5 of the top trends that companies competing for top talent are leaning into in order to gain an edge over the rest of the field.

Top Focal Points In Employee Benefits 2024

• More Choices: One of the best ways to ensure that benefits packages can be tailored to the needs of your employees is to offer a wide array of less common voluntary benefits offerings, such as financial services, tax preparation assistance, and stress management counseling in addition to supplemental insurance options like critical illness, cancer, accident, and identity theft coverage. 
• Education Debt: About 40 million Americans are currently saddled with outstanding federal student loans, meanwhile payments and interest accrual having resumed in the wake of the three-year-long pandemic pause. For employers that are unable to offer loan repayment assistance or contribution matching similar to retirement account contributions, employers can still offer meaningful assistance to their employees by directing them toward some of the resources and opportunities made available from the Save Plan - including payment reductions from 10% of discretionary income to 5% in some cases, loan forgiveness after 10 years of payments for debts that were less than $12 thousand when originated, and the potential for reduced interest accrual for enrolled borrowers.
• Housing: Employer-Assisted Housing (EAH) programs are helping bridge the gap in the market between workers who wish to buy homes and those that are financially capable of doing so. EAH programs can enable employees to set aside a portion of their income pre-tax to be used as a downpayment. These kinds of programs can also include services that assist employees in qualifying for rental units and downpayment contributions, as well. 
• Family: The pandemic caused a lot of people to reevaluate their work-life balance, resulting in a large number of workers who now prioritize their family life and well-being perhaps to a greater degree than they may have in the past. Not every family has the same needs, however, which makes it vital that offerings are as diverse as your employee pool. Fertility benefits can be coupled with adoption support and day care offerings can be coupled with senior care and pet care services, for example.
• Retirement: Though retirement planning and account contributions are not equally prioritized by all employees, with older workers unsurprisingly much more concerned with retirement than younger workers, complaints about retirement benefits across generations seem to pretty consistently stem from disappointment that employer contributions aren’t larger. Employers that are unable to raise the dollar amount of their contribution matching program, however, can still provide significant additional value simply by providing additional resources that can help employees better navigate some of the advantages that accompany the SECURE Act  2.0, which can help employees both better plan for retirement and better financially manage emergencies when they arise during pre-retirement years. 

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You can read more about this topic and employee benefits on the rise in 2024 here.

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‍Each month, Mployer Advisor collects and presents some of the most relevant and most pressing recent changes in law, compliance, and policy in areas related to employee benefits, health care, and human resources. 

Employee vs. Independent Contractor Classification

Beginning on March 11, 2024, the Department of Labor will effectively revert back to ‘the economic reality’ test for determining whether a given worker should be classified as an employee or as an independent contractor.

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The economic reality test will take into account the following 6 factors when evaluating a workers employment status and classification:

• Whether it is possible for the worker to either profit or lose money as a result of the arrangement;
• What investments have the employer and worker each made toward completing the work;
• Is the work relationship a more permanent arrangement or more temporary;
• How much control does the employer exert over the worker’s process;
• How crucial is the worker’s output to the employer’s business; and
• The levels of skill and initiative possessed by the worker.

You can find more information from the DOL on determining employee and contractor status here.

Employers Rejecting Job Applicants Due to Credit Reports Must Provide Credit Rating Agency Info 

Beginning March 20, 2024 enforcement begins for Consumer Protection Bureau’s rule requiring Employers that reject job applicants due to information obtained through a credit report to provide the rejected applicant with information about the credit reporting agency from which the report was obtained, including name, address, and telephone number.

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This rule, which went into effect in April of 2023, is an update to 2018’s Summary of Your Rights Under The Fair Credit Reporting Act.

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You can read more about the new rule, its impact, and enforcement here. 

New Safety Reporting Regulations

There are a number of changes to Federal Law including updated mileage reimbursement rates and workplace safety standards that took effect when the new year began, January 1st, 2024. 

• IRS Mileage Reimbursement Rate Increase: The Internal Revenue Service raised the rate at which miles driven for business purposes are reimbursed up to $0.67 per mile for 2024, which is an increase of 1 and a half cents per mile over the 2023 mileage reimbursement rate of $0.65. As a reminder, this reimbursement rate is a recommendation and sets a generalized standard but is not required or enforceable.
• OSHA Electronic Submission Reporting Requirements: In addition to submitting form 300A, firms that have at least 100 employees and operate in industries that have been designated as hazardous must electronically submit data from their injury and illness logs. According to the general submission timeline, submissions regarding incidents that occurred during the calendar year of 2023 will be due on March 2, 2024.
• Minimum Wage Increase for Federal Contractors: For federal contracts that fall under Executive Order 13658, which were entered into on or after January 1, 2015, employees must now be paid a minimum of $12.90 per hour for wage workers and $9.05 per hour for tipped workers. Minimum wage for employees servicing contracts that fall under Executive Order 14026, which were entered into on or after January 30, 2022, is now set at $17.20 per hour for all employees, and contractors are no longer permitted to pay a lower rate to tipped workers under contracts governed by this Order. You can click here for an additional resource from the Department of Labor to help differentiate and distinguish between federal contracts that fall under Executive Order 13658 and Executive Order 14026.

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You can find additional information about the new IRS mileage reimbursement rate changes, OSHA electronic submission requirements, and minimum wage increases for federal contractors, including frequently asked questions about Executive Order 13658 and Executive Order 14026, in the embedded links.

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Secure Act 2.0 Takes Effect January 1, 2024

The Secure Act 2.0, which was signed into law in the closing days of 2022 and will take effect at the beginning of the new year, ushers in some sweeping changes to retirement planning and savings administration in the US, including: 

• Mandatory 401k Enrollment: Most companies with more than 10 employees that have been in operation for at least 3 years will be required to automatically enroll employees into their 401k plan with between 3% and 10% automatic contributions. There’s also a tax credit available for many companies to cover the additional administrative burden of automatic enrollment.
• Starter 401ks With No Employer Match Requirement: The expense of matching employee contributions has deprived many employees over the years of the benefits of having a 401k account even in the absence of matching employer contributions, which should no longer be an issue under the new law. 
• Increased Catch-up Contributions: The amount of annual contributions that employees can begin putting into their 401ks at age 50 is being increased by 50% from $6,500 to $10,000, and that limit is now indexed to inflation to ensure it keeps up with the cost of living.
• Increased Emergency Savings Account Flexibility: Despite more than 4 in 10 US workers expressing a desire to be automatically enrolled in an emergency savings account program through their employer, only about 1 in 10 employers offered such an opportunity as of 2022. The Secure Act increases the flexibility and ease with which employers can now offer such account via withholding as much as 3% of opting-in employees’ paychecks up to $2,500 to be placed into said emergency savings accounts, from which employees can then withdraw their money untaxed up to four times a year with no penalties whatsoever. 

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