Thanks to two cases about federally mandated observers on fishing boats, judicial deference to agencies is likely to soon get weaker – and more unpredictable – with wide-ranging impacts for employee benefits. Less deference to agencies does not mean that agency rules will suddenly lose legal force or that employers are free to ignore agency guidance. However, legal challenges to new and even existing regulations will be significantly more likely to succeed in court. This includes challenges to a handful of controversial US Department of Labor (DOL), Internal Revenue Service (IRS), and US Department of Health and Human Services proposed rules, including proposals to redefine who is an investment fiduciary, revise the standards governing mental health parity, revisit rules addressing environmental, social and governance (ESG) investments, and regulate “junk” insurance, among others.

In Depth

On January 17, 2024, the US Supreme Court held oral arguments for the cases Loper Bright Enterprises v. Raimondo and Relentless Inc., v. Department of Commerce. While the facts of Loper Bright and Relentless concern whether fishing companies or the government should pay for legally required observers, the primary issue before the Court was whether to overrule the longstanding Chevron doctrine. This doctrine, established by the Supreme Court in Chevron v. Natural Resources Defense Council, created a two-step process which gave significant deference to agency interpretations of statutes when regulations face challenges in court. Chevron traditionally has been very favorable to regulators: as of 2017, when federal courts of appeals applied Chevron deference, the agency won about 77% of the time.

The Supreme Court has in recent years largely abandoned Chevron deference and instead begun curtailing government agencies’ actions through another legal channel, the major questions doctrine. But Chevron remains a force in the federal district and circuit courts, where the overwhelming majority of federal cases are resolved. This is especially true for employee benefit cases because challenges to employee benefits’ regulations rarely reach the Supreme Court. Thus, the impact of ending Chevron deference would be far greater than the Supreme Court’s current reticence to apply Chevron deference.

Not all agency actions benefit from judicial deference under Chevron. Agency guidance – that is not meant to carry the force of law or that is not subject to notice and comment or adjudication on the record – is not granted deference under Chevron. This means that sub-regulatory guidance such as IRS Private Letter Rulings and Revenue Rulings will not be directly affected by the end of Chevron. Courts use weaker forms of deference for these types of guidance, which the Supreme Court is not addressing in Loper Bright and Relentless.

The end or limiting of Chevron deference could open existing regulations to challenge and will raise the difficulty of crafting regulations that can withstand legal challenge, including in the benefits space. For example, a federal district court recently upheld the 2022 DOL ESG rule based on Chevron deference, which could make it vulnerable were Chevron to fall. Likewise, the DOL recently proposed a new rule, “Retirement Security Rule: Definition of an Investment Advice Fiduciary,” which significantly expands the definition of investment advice fiduciary, and which had been struck down by courts in earlier iterations. A novel and controversial rule like this will be especially vulnerable to legal challenge in a post-Chevron world.

Although legal challenges by plan sponsors may ultimately lighten regulatory burdens, less agency deference could present unexpected difficulties for benefit plan sponsors, too. Employees or class action lawyers could target plan administrative practices, arguing that compliance with a given regulation is not a safe harbor for plan administration.

If Chevron is overturned or significantly weakened, new DOL and US Department of the Treasury regulations featuring aggressive statutory interpretations (like the fiduciary rule) are likely to become rarer and more vulnerable to challenge. But there is much uncertainty in the details. It is unclear to what extent longstanding regulations subject to renewed challenge will be scrutinized under a post-Chevron regime. Adding to the uncertainty, because employee benefits cases challenging agency actions have only rarely reached the Supreme Court, employee benefit cases may be especially affected by how lower courts apply the result of Loper Bright and Relentless, which in turn may vary by federal circuit and district court.

Regardless of how the Supreme Court rules, regulations and agency guidance will not disappear. But if Chevron falls, controversial regulations especially will stand on less solid ground. In this case, plan sponsors and fiduciaries might need to apply a crystal ball in administering benefit plans, where compliance with governmental regulations is insufficient and future predictions of judicial intervention become the norm in making plan administrative and fiduciary decisions.