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

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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Taking advantage of the extra day, the Department of Labor proposed a new "safe harbor" rule for small plan contributions on February 29, 2008.  The proposed regulation addresses small plan (under 100 participants) contributions and the timing of these contributions.

Under the current regulations, participant contributions to a plan that are paid to the employer or deducted from payroll are due as of the earliest date such amounts can reasonably be segregated from the employers general assets, but in any event not later than (1) for retirement plans, the 15th business day of the month following the month in which the employer received the payment from the participant or would have otherwise paid the amount in cash to the participant; (2) for welfare plans, 90 days after the employer receives the amount withheld.

The difficulty has always been that following these regulations provided no assurance that the timing of the contribution from the employer was "reasonable."  The "no later than" language has left open the discussion that "sooner" was required to be a sound fiduciary.  This new proposed safe harbor provides that, at least for small plans, amounts deposited within the 7th business day after receipt of the withholding by the employer will be treated as reasonable.

Participants may generally assume that contributions made to a plan are deposited in their account almost immediately.  In this time of market volatility, plan sponsors have to be wary of making sure contributions are made in a timely manner.  While this new proposed regulation only applies to small plans, this new 7-day rule could be considered as an acceptable rule of thumb for larger plans.

The proposed regulations are open for comment until April 29, 2008, and will be final upon publication.  The DOL has clarified that it will not assert an ERISA violation against any small plan sponsor that adheres to this rule prior to its final effective date.  For a copy of the Federal Register provision, please click here.

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I was looking at my 401(k) balance this week and it struck me that I have no idea how fees and costs are allocated to our plan.  My first reaction was that this seems to be a confirmation that lawyers are their own worst clients.  But as I thought about it more, it struck me that, after LaRue (which is still the hot topic in benefits' circles), someone might be interested in 401(k) fees.

The Employee Benefits Security Administration has a site called "A Look at 401(k) Fees."  It provides a nice summary of the fees and costs associated with plan administration and also an explanation of how the various fees and expenses are calculated and how participants could compare fees and expenses.  What is missing is an explanation of how those fees and costs are set and how they are monitored.  There is also no clear cut statement of how expenses can or should be shared by the participants and the plan sponsor.

In 1998, a document titled "Study of 401(k) Plan Fees and Expenses," the Pension and Welfare Benefit Administration concluded that fees and expenses were being increasingly born by participants.  In December of 2006, the Department of Labor issued rules detailing the information plan sponsors must share with participants about how fees are calculated and allocated.  Today, I suspect that more and more of the total cost of plan administration is being allocated to participants.  And therein lies the rub.

Participants don't have the ability to negotiate fees with service providers, cannot monitor fees and expenses on an ongoing basis and very likely could not understand how costs would be attributed to their individual accounts.   They would also not have the ability to conduct audits of service providers without assistance from plan sponsor.  On the other had, the plan sponsor gets to make all the decisions about how costs will be allocated, what service provider to retain, what level of monitoring is appropriate and when an audit might be appropriate.  In other words, the sponsor holds all the card. 

So how long before participants start making claims against plan sponsors for not protecting them against excessive fees and costs?  How long before participants start making claims for breaches of fiduciary duty against plan sponsors for retaining service providers that charge too much?  How long before participants can bring claims against employers for not bearing 100% of the costs of plan administration instead of sharing it with participants?  As it turns out, not long at all.

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I recently came across a situation that reminded me about the importance of knowing the definitions contained in each plan separate from each other.  In this particular case, a disability plan and a life insurance plan had two separate definitions for "actively at work" that actually were not in agreement and created a significant conflict. 

The disability policy defined "actively at work" as being regularly schedule to work or receiving payroll from the company.  The life insurance coverage defined "actively at work" as being actually working and performing a job function.  Factually, the company had an employee who went out as a result of an illness in October of 2006, but stayed on the payroll.  In March of 2007, he applied for and received long term disability and came off the payroll.  Unfortunately he passed away in December of 2007.

From the disability carrier's point of view, he had ceased employment in March of 2007, when he ceased receiving payroll.  But from the life insurance carrier's point of view, he ceased being actively at work in October of 2006, when he actually stopped performing his job function.  Both coverages used the same term, and both coverages had a different way of defining it. 

It is important for employers as plan sponsors to review and identify inconsistencies in plan (and insurance coverage) definitions so that they can adequately administer benefits.  There may not be any way to make all providers use the same definition so it is essential that the employer understand how each coverage defines not only eligibility, but also its own terms.

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In light of the recent furor over the decision in LaRue, I thought it would be worthwhile to revisit an issue decided in January of 2007 by the 3rd Circuit Court of Appeals that dealt with age discrimination in a cash balance defined benefit plan.  In Register v. PNC Financial, the 3rd Circuit consider a challenge that conversion of a traditional defined benefit pension plan to a cash balance defined benefit plan resulted in age discrimination to older participants.

A "cash balance" plan is a defined benefit plan that results in hypothetical accounts for participants because they do not reflect actual contribution, gains or losses to a particular account.  Instead, the employer imputes the value of the hypothetical account in the form of annual credits ("pay" or "earnings" credits and "interest" credits).  Participants receive a pay or earnings credit and a right to future interest credits projected out until a normal retirement age.  In this particular case, the Plaintiff challenged the plan as discriminatory because they claimed the interest credit decreased in value as the participant moved closed to normal retirement age.  A person retiring at age 50 with 20 years of service would have an annual benefit larger than someone at age 65 with 20 years of service.

To solve the issue, the court looked at the definition of "benefit accrual" and determined that, in cash balances plans, "benefit accrual" refers to the stated account balance and that is how the benefit is defined.  It is the credits deposited in the account that are significant, not the actual cash value of the credits when they are realized.  The plan is not discrimination to the extent the credits allocated are not done so with age as a consideration.  In other words, while the value of the credits may be impacted by age and time, the credits themselves (benefit accrual) was not  at issue.

While this case is not directly analogous to LaRue, it does provide some illumination into the distinction between the individual account balances in a defined benefit plan and account balances in a defined contribution plan.  In LaRue, the damages were claimed as decreased monetary value as a result of the actions of the administrator.  In this case, the claim for decreased value could not be sustained because the credits were the measuring factor, not the actual monetary payment to the participant.  So the distinction between valuations in defined benefit and defined contribution plans can be significant. 

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