The Case That Almost Demolished the Retirement Plan Regulatory System

The U.S. Supreme Court has ruled in Kisor v. Wilkie, a case not specifically about retirement plans or the Employee Retirement Income Security Act (ERISA), but which nonetheless could have resulted in the total upheaval of the retirement plan regulatory system established by the Department of Labor (DOL) under ERISA.

At the core of Kisor v. Wilkie is a Vietnam War veteran named James Kisor, who more than a decade ago appealed the denial of his disability benefits by the Department of Veterans Affairs. As case documents show, the underlying disagreement stems from differing definitions of the term “relevant” as used in regulations “which are created, interpreted, and enforced by the VA.”

According to Alex Hontos, a partner in Dorsey & Whitney’s Minneapolis office who specializes in government litigation and enforcement, the outcome of this seemingly unrelated case could have been monumental for the retirement planning industry, as it ultimately tested the principle that courts should defer to agency interpretations of ambiguous regulations under a precedent known as “Auer Deference.”

According to Hontos, the Auer Deference has survived, “but just barely.”  He says the Supreme Court’s multiple published opinions in the case are muddled, implying that it will likely have to return to the issue as soon as next year, because lower courts are going to come to divergent approaches.

“A fractured and divided court produces fractured and divided decisions—the Kisor case proves it,” Hontos says. 

Indeed, a summary of the ruling published on SCOTUSblog demonstrates the complexity of the ruling issued: “Justice Kagan announced the judgment of the Supreme Court and delivered the opinion of the court with respect to Parts I, II–B, III–B, and IV, in which Chief Justice Roberts and Justices Ginsburg, Breyer, and Sotomayor joined, and an opinion with respect to Parts II–A and III–A, in which Justices Ginsburg, Breyer, and Sotomayor joined. Chief Justice Roberts filed an opinion concurring in part. Justice Gorsuch filed an opinion concurring in the judgment, in which Justice Thomas joined, in which Justice Kavanaugh joined as to Parts I, II, III, IV, and V, and in which Justice Alito joined as to Parts I, II, and III. Justice Kavanaugh filed an opinion concurring in the judgment, in which Justice Alito joined.”

According to Hontos, the practical upshot of all this complexity is that courts after Kisor are less likely to defer to agency interpretations of their own regulations, but they still have room to do so.

“Business and other conservative interests had aligned against Auer Deference,” he notes. “They will be somewhat disappointed that the Supreme Court failed to overrule Auer outright. The fact that Justice Kagan’s opinion cabins Auer, however, will be a positive for those seeking to reframe the way courts defer to agency interpretations.”

Hontos adds that the liberal justices were able to preserve Auer Deference from an attack by the conservative bloc lead by Gorsuch.  

“The liberal justices were also able to reaffirm the importance of stare decisis—the legal principle of determining points in litigation according to precedent—something that has been under threat by the conservative bloc,” Hontos adds.

Reflecting on the implications of the ruling, Kevin Walsh, a principal with Groom Law, says that while the decision could have had a far greater impact, it will still “directly influence the way courts defer to federal agencies such as the DOL when they issue sub-regulatory guidance or they take positions in legal briefs that they say are providing their viewpoint on ambiguous statues or regulations.”

“The Aeur doctrine essentially says that when an agency is interpreting its own regulations, that courts should generally refer to the agency’s interpretation,” Walsh says. “My early sense is that this decision does in fact chip away at the doctrine, without actually tossing it out completely. They have driven home that there is a whole lot of stuff that a lower court should do before it goes along with the agency’s interpretation.”

According to Walsh, courts have granted Aeur Deference more broadly than the majority opinion may lead one to believe. But moving forward, the test outlined by SCOTUS in the new decision is one where there is less likely to be broad deference to agencies of the type seen in the past.

“The test they outline has a few parts,” Walsh notes. “First, a court has to make sure that the regulation in question in actually ambiguous, and before making this conclusion, the court is directed to use all its traditional tools of construction to see if it can figure out what the regulation means. By directing courts to apply their traditional tools before concluding something is ambiguous, that will almost certainly lead to fewer cases of genuine ambiguity. Next, a court has to determine that an agency’s interpretation is reasonable, and then it also has to decide that this is the type of interpretation that deserves deference.”

One of the examples the Supreme Court gives here is that, if an agency announces a position in litigation for the first time, then in this case Aeur Deference is not appropriate. The court is also supposed to ask if these questions are being asked in an area in which the agency has great and unique expertise.

“Again, moving forward, there is so much more that lower courts are going to have to do before deferring to an agency,” Walsh says. “A stricter rule being applied before deference implies that less deference will be given. It’s going to be very interesting to see how this impacts the way lower courts interpret sub-regulatory guidance. I think it really tees up, probably for next term, whether or not agencies get deference when they interpret statues when they issue regulations.”

Practically speaking, Walsh says this development could impact everything from the impact of Regulation Best Interest to the use of many different safe harbors by retirement plan fiduciaries.

“As an example, consider DOL Field Assistance Bulletin 2014-1, which sets out what a terminated retirement plan has to do before it can give up looking for a missing participant,” Walsh says. “That guidance lays out a couple of mandatory steps. But when we look at the Kisor decision, it begins to call into doubt whether or not those steps are mandatory per se. Of course, a court could still agree with what the DOL thinks is necessary, but it calls into doubt the deference that would have existed beforehand. That’s a big deal, because in our space, we constantly rely on sub-regulatory guidance, and at the same time it could somewhat limit enforcement actions.”