A $100 million appeal by 401(k) trustees over how
The main problem with the trustees’ argument is that these tax credits would not exist without John Hancock, because the 401(k) plans can’t claim the credits on their own, Judge Andrew L. Brasher said during the arguments in Miami.
The credits actually exist because of the “joint relationship” between John Hancock and its clients, said Matthew Weinshall, the Podhurst Orseck PA attorney representing the trustees. The two have jointly created something valuable that, under the Employee Retirement Income Security Act, should be used to benefit the retirement plans absent an express agreement otherwise, Weinshall said.
The class action, filed by trustees of a 401(k) plan that used John Hancock’s annuities and recordkeeping services, says the company wrongly kept more than $100 million in foreign tax credits that actually belong to the retirement plans holding the company’s variable annuity contracts, because they were generated from investments owned by the plans.
These credits stem from a tax code provision allowing taxpayers to claim credit for taxes paid to foreign governments in certain circumstances. According to the plaintiffs, who’ve asked the US Court of Appeals for the Eleventh Circuit to revive their case, many mutual funds that invest in foreign companies are allowed to pass these credits on to shareholders, and ERISA requires John Hancock to share them with its 401(k) customers.
Duty Creation
Judge Nancy G. Abudu questioned the beginning of John Hancock’s fiduciary duty to share the credits. She asked Weinshall whether the company is obligated to claim these credits in the first place, or if it’s free to make other choices when filing its taxes.
Weinshall said the company didn’t have ERISA obligations with respect to its corporate tax forms; only that it must share the value of these credits once it receives them.
Brasher appeared unpersuaded. The “necessary implication” of the trustees’ argument is that John Hancock would violate its ERISA duties if it opted not to take the credits, he said.
“If we say they owe you these tax credits, the next case filed the day after that opinion comes out is that there’s a fiduciary duty to claim these credits and file your taxes in a way that would be beneficial to the funds,” he said.
Weinshall also challenged John Hancock’s alleged failure to tell its clients it would be keeping the credits, saying the company could have negotiated for and disclosed this fact.
Judge Adalberto Jordan pushed back, asking why the 401(k) trustees don’t have the same obligation to negotiate.
“It’s not a take it or leave it thing,” Jordan said.
Standing
A Florida federal judge awarded John Hancock summary judgment in 2022, ruling that the tax credits aren’t ERISA plan assets and that the company didn’t act as an ERISA fiduciary when it kept them. The judge also said the plaintiffs hadn’t shown a loss stemming from the company’s conduct or an injury giving them standing to sue.
Jordan questioned John Hancock’s attorney, Jaime Santos of Goodwin Procter LLP, about whether the judge’s standing analysis was “wrong.”
If you “assume the validity of the claim,” the trustees have shown an injury caused by John Hancock that could be remedied by a favorable court decision, he said.
“We have to address that,” he said.
Santos agreed it may not be “best practice” for standing to be addressed so late in a lawsuit, but she said it may have stemmed from how plaintiffs’ legal theories “evolved” over time.
Santos also emphasized that ERISA doesn’t prevent retirement plan service providers like John Hancock from structuring their offerings “in the ways that are most financially beneficial to them.”
The case is Romano v. John Hancock Life Ins. Co., 11th Cir., No. 22-12366, argued 1/25/24.