Compliance News | July 9, 2024

SCOTUS Decision Impacts Regulations Affecting Benefit Plans

In an expected, hugely impactful decision, the U.S. Supreme Court eliminated “Chevron deference,” which has been the cornerstone behind judicial review of government regulatory action for the last 40 years. The Court’s decision places a significant limit on federal agencies’ ability to interpret statutes and issue regulations, including guidance affecting health and retirement plans.

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In 1984, the Supreme Court issued a decision in Chevron v. Natural Resources Defense Council that said courts should defer to an agency’s interpretation of vaguely written laws if the agency did not act in an arbitrary or capricious manner. Over the last several years, the Supreme Court has created multiple exceptions to the Chevron doctrine which weakened its effect.

Recent decisions

On June 28, 2024, in Loper Bright v. Raimondo, the Supreme Court held that the Chevron approach is inconsistent with and has always violated the Administrative Procedures Act (APA). The APA, which was enacted in 1946, requires that the federal courts have sole responsibility to decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action. The Court argues that the Chevron decision failed to consider the APA but that the deference approach was a violation of the APA and, thus, needs to be overruled.

The Court emphasized that agency interpretations, especially those issued close to passage of a law, may influence a court’s decision but the court may not be required to defer to the agency’s interpretation of the law. Courts may defer to agency interpretations of fact within the agency’s expertise.

The Court applied the new decision prospectively. In theory, this protected any prior court decision relying on Chevron deference. However, in a decision issued a few days later, in Corner Post v. Board of Governors, the Court held that the statute of limitations for challenging a regulation is six years from the time a plaintiff is injured by the regulation rather than six years from when the regulation is issued. This decision allows plaintiffs to create a new entity and claim that the statute of limitations begins running at the time the entity was created, rather than the time the regulation became effective many years earlier. Consequently, the language in Loper Bright protecting old regulations appears to be significantly weakened.

The immediate impact

There are numerous cases pending in the courts with respect to pension, health, welfare and labor law regulations and other guidance. The courts may now examine regulations in more detail, depending on the authority given to the regulators by the applicable statute. The Supreme Court recognized some statutes provide agencies with specific authority to define a specific term or process. If the specific statutory authority exists, then agency guidance is not relying on Chevron deference and Loper Bright does not affect the guidance.

However, it is not always clear when an agency has been given the authority and, if it has, how broad that authority is. For example, many statutes give general regulatory authority to the secretary of the agency. It is unclear if, and how broadly, the courts will recognize general regulatory authority as being enough to avoid a Loper Bright problem. This will have to work its way out in the courts in the future.

Application to retirement plans

The DOL is currently defending challenges to its regulation defining a fiduciary and its regulation addressing environmental, social and governance factors in investment considerations. In both cases, the Justice Department has argued on appeal that the DOL has authority under ERISA to address the issues and that the DOL was not relying on Chevron deference to justify the rule. The lower courts have not yet ruled.

Application to health plans

Litigation concerning federal group health plan regulations has been extensive, particularly since the passage of the ACA. Recently, challenges have been made to the ACA’s preventive services requirements for non-grandfathered health plans. Also under challenge are regulations implementing the No Surprises Act, which some providers claim do not properly set forth the methodology for calculating payment terms. This litigation has resulted in the stop and go delays in processing surprise billing independent review decisions. 

Immediately after the Chevron decision, on July 3, 2024, three federal district courts in Texas, Mississippi and Florida held that portions of the ACA Section 1557 final regulation published May 6, 2024, violated the APA and enjoined all or part of the regulation.

Although not currently in litigation, broader health regulations that could be challenged include Treasury and Internal Revenue Service regulations defining flexible spending account and health reimbursement arrangement requirements or HHS’s recent regulations interpreting the Inflation Reduction Act. Finally, most employee benefits observers expect the DOL’s soon-to-be-published regulations implementing the Mental Health Parity and Addiction Equity Act to be challenged under multiple arguments, including the APA.

What’s next?

The Loper Bright decision has shaken up the regulatory world. How much will depend on the specific issue and underlying statute. Agencies have already been reading the writing on the wall and trying to find their regulatory authority in their enabling statutes rather than relying on Chevron deference.

In light of the Loper-Bright decision, Congress may be challenged to write more detailed rules when it adopts a new law. However, it does not have the staff time or expertise to even identify many of the issues that normally arise after the agencies and impacted parties start looking at the law’s language and the law’s impact. Further, obtaining agreement among all parties on statutory language is already a difficult and sensitive matter.

Subregulatory guidance, such as FAQs and IRS Notices, have never been subject to the APA. They provide sponsors with useful interpretive guidance and some reliance but are not binding in court. The elimination of Chevron deference has no direct impact on them. In the past, some parties have criticized the agencies use of subregulatory guidance as a way around the APA. However, in the future, we may see even fewer regulations and more reliance on subregulatory guidance. Additionally, the DOL maintains a robust program for auditing employee benefit plans for potential violations of ERISA, the ACA and other federal health care laws. In many cases, the DOL appears to be undertaking enforcement activities rather than issuing regulatory guidance.

The result for the public may be more uncertainty for a longer time and likely contrary decisions in the different courts of appeal. Agencies may increase their reliance on an aggressive audit policy to set doctrine. Most plan sponsors want reliance, certainty and no litigation exposure, when establishing or administering a benefit plan. Nevertheless, uncertainty appears to be one of the major consequences of the decision.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.