ERISA Group’s Lawsuit Seeks to Upend Final Federal Mental Health Parity Rules

ERIC argues the final rule goes beyond the authority federal officials have under the mental health parity law’s authority.

The ERISA Industry Committee filed a lawsuit Friday against the U.S. Departments of Labor, Treasury, and Health and Human Services, seeking to invalidate their final rule under the Mental Health Parity and Addiction Equity Act of 2008 and the Consolidated Appropriations Act of 2021. 

The ERISA Industry Committee v. United States Department of Health and Human Services et al. alleges that the final rule is unlawful because it exceeds the departments’ authority under the MHPAEA and the CAA, violates the due process clause in the Fifth Amendment, is “arbitrary and capricious” and violates the Administrative Procedure Act. 

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The lawsuit also claims that the January 1 effective date for many of the final rule’s provisions is arbitrary and capricious because it did not leave enough time for plans governed by the Employee Retirement Income Security Act to come into compliance with the new and “vaguely worded” regulations.  

Former Secretary of Labor Eugene Scalia and colleagues at Gibson, Dunn & Crutcher LLP are representing ERIC in the case. 

President Joe Biden’s administration issued the final rules last September, clarifying that employers offering health plans need to evaluate their provider networks, how much they pay out-of-network providers and how often they require—and deny—prior authorizations.  

Under the rules, health plans also cannot use nonqualified treatment limitations that rely on more restrictive prior authorization, other medical management techniques or narrower networks to make it harder for people to access mental health and substance use disorder benefits than to access physical health benefits. In addition, health plans are required to use similar factors in setting out-of-network payment rates for mental health and substance use disorder providers as they would for medical providers. 

“ERIC and its member companies whole-heartedly endorse the goals of the Mental Health Parity and Addiction Equity Act,” said Tom Christina, executive director of the ERIC Legal Center, in a statement. “To be clear, this suit is not about whether there is value in offering mental health and substance use disorder benefits, because ERIC member companies already voluntarily offer those benefits. … But the new regulations issued by the Biden administration exceed the Tri-Departments’ statutory authority under the laws that Congress passed, and threaten the ability of employers to offer high quality, affordable coverage for the mental health and substance use disorder needs of employees and their families.” 

The complaint argues that the parity rule would substantially increase administrative costs—in time and labor, as well as monetary expenditures—taking “valuable resources away from providing mental health/substance use disorder benefits, forcing employers to re-think the type and level of their coverage for those benefits.” 

“Rather than faithfully implementing the statutory requirements of the MHPAEA, much of the Parity Rule upends the regulatory and compliance framework that has evolved over decades pursuant to the limits established by Congress,” the complaint states. “The Parity Rule also imposes entirely new, ambiguous requirements that are so burdensome and unworkable that they will discourage employers from offering MH/SUD benefits at all.” 

Prior to the finalization of the rule, ERIC engaged in efforts to educate regulators about the “unintended consequences” of the rule change .  

The federal departments did not immediately respond to a request for comment. 

SEC Fines Vanguard for Misleading Retail Target-Date Fund Investors

The regulator determined that the firm failed to provide accurate details regarding the capital gains and tax consequences associated with a change in investment minimums.

 

The Vanguard Group Inc. will pay $106.41 million to settle charges by the Securities and Exchange Commission that the firm misled retail investors in taxable accounts holding Vanguard Investor Target Retirement Funds, the SEC announced Friday. The settlement money will be distributed to harmed investors. 

According to the commission, Vanguard’s statements about capital gains distributions and tax consequences for retail investors in the TRFs violated the Advisers Act and caused violations of the Securities Act and the Investment Company Act. Vanguard settled the charges without admitting or denying the SEC’s findings and agreed to be censured, cease and desist from future violations, and pay $106.41 million to be distributed to affected investors. That fine is in addition to the $40 million Vanguard had agreed to pay to investors as part of a class action suit. 

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A Vanguard spokesperson, in response to a request for comment, commented that the firm, “is committed to supporting the more than 50 million everyday investors and retirement savers who entrust us with their savings. We’re pleased to have reached this settlement and look forward to continuing to serve our investors with world-class investment options.” 

The case stems from Vanguard’s December 2020 decision to cut the minimum initial investment amount for Vanguard Institutional Target Retirement Funds to $5 million from $100 million. In the months following that change, many retirement plan investors redeemed their retail-oriented Investor TRFs and switched to the Institutional TRFs, which had lower expenses. 

To meet the demand for the redemptions, according to the SEC’s order, the Investor TRFs had to sell underlying assets that had experienced gains due to the rising financial markets. The order stated that, as a result, retail investors in the Investor TRFs who did not switch and continued to hold their fund shares in taxable accounts faced historically larger capital gains distributions and tax liabilities and were deprived of the potential compounding growth of their investments. 

The SEC’s order also states that Vanguard Investor TRFs’ prospectuses, effective and distributed in 2020 and 2021, were materially misleading because they stated that the funds’ distributions may be taxable as ordinary income or capital gains and that capital gains distributions could vary considerably from year to year as a result of the funds’ “normal” investment activities and cash flows. But, according to the SEC’s order, the prospectuses failed to disclose the potential for increased capital gains distributions resulting from the redemptions of fund shares by newly eligible investors switching from the Investor TRFs to the Institutional TRFs.  

The SEC order also states that Vanguard failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and rules thereunder with respect to the accuracy of the funds’ disclosures. 

“Materially accurate information about capital gains and tax implications is critical to investors saving for their retirements,” said Corey Schuster, chief of the SEC’s Division of Enforcement’s Asset Management Unit, in a statement. “Firms must ensure that they are accurately describing to investors the potential risks and consequences associated with their investments.” 

This settlement resolves the SEC’s investigation, along with settlements of parallel investigations of Vanguard announced today by state officials in New York, Connecticut and New Jersey on behalf of the North American Securities Administrators Association. 

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