Employee Benefits Lawyer & Attorney : Fox Rothschild Law Firm : Health Care, Retirement, ERISA : Philadelphia, New York, Northeast

As part of uniform "regulation of insurance," states are permitted to establish certain mandates in health benefits.  These mandates can be fairly extensive, covering everything from the common such as birth control (required in New Jersey but not New York) to the more extreme, such as surgical treatment for morbid obesity (required only in Maryland, Indiana and Florida).  Mandates can also define who must be included as covered persons.  For example, New York mandates that adopted children be defined as a covered person, while New Jersey has no such mandate.  This is not to say that other laws may not impact the nature of benefits provided (since adopted children are "dependents covered under New Jersey insurance laws), but rather to point out that state insurance regulation is very complex and it is important for employers with facilities in multiple states to be aware of what they may be required to provide.

Self-insured ERISA plans routinely contend that they are not subject to state mandates because of the impact of ERISA preemption.  However, employers sponsoring these plans should be aware of the mandates of the jurisdiction where they operate if for no other reason then to evaluate the effect of their own plan in comparison to others offered (particularly union sponsored plans if union avoidance is a concern). 

To review the Council for Affordable Health Insurance's 2008 report on state mandates, client here.

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The Pension Protection Act left open certain areas of pension plan administration to further amendment. We are beginning to see proposed regulations that would fill in the gaps created by the PPA. The first of these regulations are proposed by the Pension Benefit Guaranty Corporation (PBGC). These proposed regulations modify parts of the multiemployer pension plan withdrawal liability rules under ERISA. These new rules may alter the amount of withdrawal liability that would otherwise be assessed to an employer withdrawing from a multiemployer pension plan, depending on the adoptive options taken by the plan Trustees.

The proposed regulations, which are based on the statutory changes made by the Pension Protection Act of 2006 (PPA), present 4 key items:
* there is a mandated adjustment to the withdrawal liability calculation for multiemployer plans that are in “critical status”
* there is a “Fresh Start” rule that applies to calculations
* there is a limited exception that allows an employer to delay making withdrawal liability payments until a final decision is rendered by a court or arbitrator
* there is a change to the allocation of a plan’s total unfunded vested benefits (UVBs) among employers in a mass withdrawal.
Comments on the proposed regulations are due by May 19, 2008, and the regulations would be effective as of the approved date unless otherwise stated.

Withdrawal Liability Calculations for Critical Status Plans
As most employers participating in multiemployer funds have now become aware, the PPA introduced new rules for multiemployer plans whose funding is in “critical status.” Part of the relief provided under the PPA allows “critical” plans to reduce “adjustable benefits” and also requires contributing employers to pay a surcharge equal to 5% of contributions (10% after the first year the plan is in critical status). The PPA requires that such adjustments must be disregarded in determining a plan’s UVBs, and the employer surcharge is not taken into account in calculating an employer’s allocable portion of UVBs for purposes of determining withdrawal liability. The proposed rule expands the definition of “nonforfeitable benefits” and “unfunded vested benefits” to include adjustable benefits that have been reduced while the plan is in critical status. The proposed rule also provides that the employer surcharge would be subtracted from both the numerator and denominator of the allocation fraction used to determine an employer’s withdrawal liability. This change will impact how withdrawal liability is calculated, but it may not necessarily decrease overall withdrawal liability for plans. These changes are effective for withdrawals occurring during plan years beginning on or after January 1, 2008.

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In anticipation of the April 15 tax deadline, CNN.com had an article titled "Gay couples face higher tax bills."  The content of the article came from Mount Laurel, New Jersey and it addressed how same-sex couples in a civil union in New Jersey paid higher taxes because they could not file jointly for federal purposes.

I thought it was particularly interesting that there was no mention of the tax consequences of not being able to use a cafeteria plan to pay for health insurance premiums or reimbursement of medical expenses from a flexible spending account.  Clearly these would create a higher tax burden as well.  But political and social implications aside, I am always concerned that employers in New Jersey properly treat same-sex couples in their benefit plans.

First, because of the impact of the Defense of Marriage Act on federal tax laws, the employer paid cost of providing coverage for same sex partners who are not “dependents” under the Internal Revenue Code would be considered regular compensation and would be taxable as income.  Moreover, that portion of the premium that an employee pays that is attributable to the same-sex partners coverage would not be eligible for pre-tax treatment under a cafeteria plan.  Plus, the medical expenses of the same-sex partner could not be paid with money from a Flexible Spending Account unless the partner otherwise qualified as a dependent under federal tax law. This means that employers who have employees who take advantage of the new civil union will have to make sure the value of the partner’s benefit is properly treated for federal tax purposes.

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I happen to be working on a matter regarding the status of an entity as a "fiduciary" for a plan and it has caused me to revisit some basic principles of ERISA that reminded me of the importance of understanding fiduciary status.

ERISA defines fiduciary status as (i) exercising discretionary authority or discretionary control respecting management of such plan or control of the disposition or management of plan assets, (ii) rendering investment advice for a fee with respect to money or property of the plan, or (iii) having discretionary authority or responsibility for administration of the plan.  It is this third one that caused me to look a little deeper into the issue.  What types of things would qualify as having discretion in plan administration?

In 29 CFR 2509.75-8, the Department of Labor looked at some purely administrative functions and decided the following:

"Q: Are persons who have no power to make any decisions as to plan policy, interpretations, practices or procedures, but who perform the following administrative functions for an employee benefit plan, within a framework of policies, interpretations, rules, practices and procedures made by other persons, fiduciaries with respect to the plan:

(1) Application of rules determining eligibility for participation or benefits;
(2) Calculation of services and compensation credits for benefits;
(3) Preparation of employee communications material;
(4) Maintenance of participants' service and employment records;
(5) Preparation of reports required by government agencies;
(6) Calculation of benefits;
(7) Orientation of new participants and advising participants of their rights and options under the plan;
(8) Collection of contributions and application of contributions as provided in the plan;
(9) Preparation of reports concerning participants' benefits;
(10) Processing of claims; and
(11) Making recommendations to others for decisions with respect to plan administration?

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If you read the preceding entry about the WalMart case, you might recall I ended with the notation that the plan had not actually sought to enforce its judgment.  Sure enough, a week later WalMart agreed to waive the enforcement of the judgment it obtained.  Public outcry aside, the plan successfully affirmed, through the Supreme Court no less, that its reimbursement provision was enforceable.

According to published reports, WalMart says that in response to this case, it amended its plan to allow for more discretion by the administrator in individual cases.  While I don't necessarily believe this was the case, it does bring out an interesting point about employee benefit plans.  Plan administrators, or fiduciaries, should definitely be granted discretionary authority in making plan determination.  Two reasons: (1) it gives the fiduciaries great latitude in making decisions regarding general and specific plan administrations and (2) it creates a higher (and more stringent) standard of review if plan decisions are challenged in Court.

In general, courts apply a de novo standard of review, meaning they look at the facts surrounding a decision and apply those facts anew, replacing the courts judgment for the administrators.  However, when a plan specifically gives fiduciaries discretionary authority in making decisions under the plan, the court must apply an "abuse of discretion" standard of review.  This means that the fiduciaries' decision will be presumed correct unless there is evidence of an abuse of discretion.  This is a much higher burden to meet.

So, in my opinion, the lesson from this case is really to make sure your plans have a provision providing the fiduciaries with discretionary authority to review and interpret plan provisions and to make determinations under the plan.  That way, fiduciaries can freely make administrative decisions.

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CNN.com has posted a story about the brain damaged WalMart employee who lost her appeal to keep the $470,000 due to the WalMart benefit plan on a reimbursement claim.  This case certainly plays well to the media and the anti-WalMart sentiment, but the public at large seems to miss some of the most important issues relevant to benefit plan administration.

First, the WalMart plan is self-insured, meaning that there is no insurance company being mean and there should be no debate about premium dollars paid.  As a self-insured plan, ERISA and the corresponding federal rules governing plan administration dictate that a plan be administered in accordance with its terms.  That means if it has a reimbursement provision in the plan, then that provision must be enforced or the plan administrator could be deemed to have breached a fiduciary duty.  Imagine the outcry if the plan could not pay benefits because it ran out of money and the shortfall could have been cured by enforcing reimbursement claims?  Would you forgo benefit payments for you and your children so that other employees could keep personal injury settlements in full?  And of course, that is the real issue.

In the vast majority of personal injury settlements, the recovery made is more than adequate to compensate the injured party AND reimburse the health plan for medical expenses paid.  Despite the fact that the law requires reimbursement, very few plans actually receive voluntary reimbursement.  Personal injury attorney and participants regularly refuse to reimburse plans, meaning higher plan costs and expenses to all other participants.  The courts (both the lower and appeals courts) affirmed the basic rule that if the plan is entitled to reimbursement, it must be reimbursed. 

I note that the WalMart plan has not actually enforced its judgment and has not collected any money.  It may never collect it.  But the rule of law has been affirmed: if the plan is entitled to reimbursement because of the terms of the plan, participants are required to abide by those terms.

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I happen to be working a distress termination of a single employer defined benefit plan for a company that is not in bankruptcy or insolvent and it struck me that in the current economy, there might be more employers that will have to deal with this issue.

There are four statutory tests for determining "distress" for the purposes of distress terminations: (1) liquidation in bankruptcy or insolvency proceedings, (2) reorganization in bankruptcy or insolvency proceedings, (3) inability to pay debts when due to continue in business unless a distress termination occurs, and (4) unreasonably burdensome pension costs due solely to a decline in employment.  While options 1 and 2 are considered the most common, options 3 and 4 may become more commonplace.

There are a couple of interesting hurdles to options 3 and 4 in a distress termination.  First, the determination is made by the PBGC, in its discretion, based on information provided by the plan sponsor.  The second hurdle is that the distress tests must be applied to the members of the control group of the sponsor, not just the sponsor itself.  That means that a troubled subsidiary may not be able to terminate its own plan if the parent is not equally distressed. 

When an underfunded plan terminates in a distress termination, the plan effectively goes into receivership. The PBGC becomes the trustee of the plan, takes control of any plan assets, and assumes responsibility for liabilities under the plan. The PBGC makes payments for benefit liabilities promised under the plan with assets received from two sources: assets in the plan before termination, and assets recovered from employers. The balance, if any, of guaranteed benefits owed to beneficiaries is paid from the PBGC's revolving funds.  Following a distress termination, the plan's contributing sponsor and every member of that sponsor's controlled group is liable to the PBGC for the excess of the value of the plan's liabilities as of the date of plan termination over the fair market value of the plan's assets on the date of termination. The liability is joint and several, meaning that each member of the controlled group can be held responsible for the entire liability.

Not surprisingly, the PBGC is not particularly receptive to distress terminations and will carefully scrutinize applications for termination where the sponsor is not in bankruptcy.  But if the choice is between bankruptcy and terminating the pension plan, sponsors should consider whether distress termination is a viable option to keep the company itself in operation.

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In light of recent events with the financial markets, it would seem essential to at least mention something about Bear Stearns. Despite the best efforts of the media, we don't really have all of the facts yet but I did find a couple of tidbits in the news that were interesting.

First, Dow Jones is reporting that on March 19, the company made a filing with the SEC that amended the company bylaws to allow Bear Stearns to reimburse its employees for the costs of defense for suits filed against them in any individual capacity. At least two lawsuits have been filed already. One class action suit has been brought on behalf of Bear Stearns employees. The second is a class action suit filed by investors alleging that the company made false and misleading statements regarding the status of the company and deliberately inflated the stock price. Both cases have been filed in the Southern District of New York.

Second, it looks like the Bear Stearns ESOP participants are preparing a lawsuit associated with the company improperly continued to offer and retain company stock when it was no longer prudent to do so. Clearly a concern of that suit would be whether the plan should have sold stock to protect the overall value of the plan's assets. We saw a similar type of action in the Enron collapse, so this type of action is not unexpected.

I would not surprised if there are other lawsuits being considered, particular by larger defined benefit plans that were heavily invested with the company and I expect it will be some time before a clear picture of the impact of this situation is developed. In the mean time, my suggestion to employers with plans that have been impacted by this crisis should make it a point to speak with their financial advisers to see what steps would be prudent to protect their own plan participants.

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Notwithstanding the provisions of the federal Defense of Marriage Act, I believe that the availability of non-spouse beneficiary rollovers in Section 829 of the Pension Protection Act of 2006 serves as a sort of "unofficial official" recognition of the desire of plan participants to provide beneficiary status to same-sex partners and the need for plans to deal with this issue.  What follows are some general observations about how they work.

The rules provide that a non-spouse beneficiary of a participant in a qualified plan may make a direct rollover of the deceased participant's account balance to an inherited IRA (effective for distributions after December 31, 2006).  An inherited IRA is an individual retirement account established specifically with reference to the decedent and the decedent's name must be included in the title.  So it would be something like "Jane Doe as beneficiary of John Doe."  Once the inherited IRA is established, the direct rollover is the ONLY means of moving money from the qualified plan to the IRA.  There cannot be a cash distribution and then and rollover contribution within the 60 day window.

The rollovers are exempt from the stranded direct rollover requirements, such as the mandatory 20% withholding on amounts not directly rolled over, and there is no need to issue a 402(f) rollover  notice.  Generally, the inherited IRA will be required to follow the same distribution rules of the plan from the which the rollover was made.  Non-spouse rollover provisions are required for 2008 plan operations however the PPA does not require that a plan amendment be made until the 2009 plan year.  It is interesting to note, though, that the plan does not have to be specifically amended to provide for the non-spouse rollover, but it has to be documented (possibly through board resolution) that the option is available.

I think administration of this provision will prove interesting to plan administrators, particularly where there are multiple potential beneficiaries, such as children raised by same-sex partners.  The more options participants are given to change and designate beneficiaries, the more likely they are to make mistakes.  I think administrators would do well to put in place some extra measure of confirmation from the participant of a non-spouse beneficiary if participants choose that option. 

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