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

When is a waiver not a waiver?  The United States Supreme Court's decision in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan (1/26/2009) addresses a claim that an ex-spouse waived her interest in a deceased employee's pension plan account.  The central issue was whether the plan administrator could "interpret" the actions of the party to find a waiver.

William Kennedy divorced Liv Kennedy and in the divorce settlement, Liv wived any right to receive payment from the DuPont plan.  However, William did not change his beneficiary designation and Liv remained the sole named beneficiary on his account.  When he died, his daughter, Kari Kennedy became the administrator of his estate and asked the plan to make a distribution.  The plan, in accordance with the designation, made the distribution to Liv and the estate sued the Plan Administrator.

The Court affirmed that ERISA provides no exception to the plan administrator's duties to act in accordance with the plan documents.  By giving the plan participant's a clear set of instructions for making his wishes known, ERISA requires the administrator to be bound by those wishes.  There is no ability for the plan administrator to seek to diving expressions of intent.  This would give rise to less certain rules of administration and potentially give rise to claims of misinterpretation of intent.  Therefore, the only option for the plan administrator was to abide by the beneficiary designation and affirmed the lower court decision that the distribution to Liv was correct. 

The Court commented that this decision points out "the wisdom of protecting the plan documents rule" which generally holds that the plan administrator is safe as long as it abides by the terms and requirements of the plan.  So in the end, a waiver is only a waiver if it meets the requirements of a plan.  At the point at which a plan administrator is asked to interpret the intention of the parties in the absence of compliance with plan requirements, it loses the protection of the rule.  Thus, a plan's gotta' do what it is required to do under its terms.

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Everyone who sponsors a plan should be aware of ERISA Section 104(b)(4) that obligates plan administrators (usually the plan sponsor) to provide certain information to plan participants upon written request.  Section 502 of ERISA generally provides that there are civil penalties including a possible penalty of up to $100 for every day information is not provided.  On December 31, 2008, the DOL gave some final regulations dealing with some specific civil penalties for failing to provide certain retirement plan documentation and notices.

Under Section 101(j) of ERISA, a plan administrator of a single employer defined benefit pension plan is required to give notice to participants about funding-based limitations on benefits and accruals if the plan falls below prescribed funding levels.  Section 101(k) makes the same application to multi-employer plans and their participants, and Section 101(l) extends that to employers contributing to the plan as well.  The Pension Protection Act also provided guidance about these required notices.

Now for the penalties: The DOL will assess penalties based on the "degree of willfulness of the failure or refusal to furnish" these notices and apply maximum penalties of $1,000 per day per violation.  There does not appear to be a specific cap applied, so if a plan fails to distribute a required notice to 100 participants for 100 days, the potential penalty could be $10,000,000.  That's a pretty hefty penalty.  Adding to the danger is that plan assets may not be used to fund the penalty.  It is assessed against the plan administrator directly.  So if the company is both a plan sponsor and administrator, the company alone would be responsible for paying the penalty.

There is a requirement that the DOL send the notice of the penalties and also an appeal process for reasonable cause, but it is best to never get in that situation.  So plan sponsors and administrators should double check with their services providers right now to find out what notices they are required to send and make sure they have been properly sent.

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I am working on a presentation with an employment attorney here in the firm that addresses discrimination under Title VII of the Civil Rights Act in an employment setting.  The question came up about how discrimination impacts employee benefit plans and administration of these plans.  As I was explaining the difference it struck me that this might be a good topic to review with employers in general.  Discrimination in employee benefits is not just about compensation levels.

Employment discrimination laws generally preclude discrimination based on status in a protected class, such as race, gender, national origin and religion.  Several states have adopted laws that preclude discrimination based on sexual orientation and marital status.  While ERISA does not include a specific provision preventing discrimination in employment benefits, the application of other federal laws to plan sponsors has the impact of preventing discrimination in fringe benefits.  Fox example, a plan cannot not exclude from participation all female employees.  Not because of ERISA, but because it would be a violation of federal discrimination laws for an employer to exclude from a benefit a member of a protected class.

The Equal Employment Opportunity Commission manual has about 70 pages in its enforcement guidelines to evaluate whether there is discrimination in providing fringe benefits.  The EEOC looks to see if the administration of the benefits plans is such that a protected class is denied access to the benefit, or that the benefit is such that no member of a particular class receives the benefit and considers that discriminatory.  For example, a life insurance benefit offered only to senior executives might be flagged as discriminatory if all of your executives receiving the benefits are white males under 50.  You might recall I previously discussed the Age Discrimination in Employment Act and its impact on retirement plans, so you can see that these federal employment laws do have some overlap as it relates to you employee base.

This "discrimination" term is not the same as the discrimination testing that retirement plans go through annually.  Discrimination in this sense applies to highly compensated versus non-highly compensated employees.  A plan can be disqualified if it provides too much benefit to highly compensated employees as related to non-highly compensated employees, regardless of any protected class consideration.  So to truly understand "discrimination" in employee benefits, you have to consider not only the class of employees receiving the benefit as it relates to protected status, but also as it relates to compensation status within the company. 

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For the first time since 2006, the IRS has updated its Employee Plans Compliance Resolution System (EPCRS) which is the program instituted to encourage plan sponsors to identify and correct operational failures in plan administration and documentation.  The purpose of this program is to incentivise employers to find and correct deficiencies and errors voluntary.  There are three types of programs.

Self Correction Program (SCP) provides sponsors with the opportunity to correct operational failures or errors without making a formal request to the IRS.  While the sponsor does not receive approval from the IRS for the correction, there is an assurance from the IRS that the plan will not be disqualified for an error that has been correct under SCP.  Insignificant errors can be corrected at any time.  Significant errors must be corrected by the last day of the second plan year following the plan year in which the error occurred.

Voluntary Correction Program (VCP) adds the component of receiving IRS approval of the correction action taken.  In the VCP process, the plan sponsor submits a formal proposal of the correction method intended to be used and pays the required fee.  Once the IRS and the sponsor agree as to the appropriate corrective mechanism, the IRS issues a Compliance Statement confirming its approval.  This compliance statement is what makes the VCP preferable to sponsors concerned about errors.

The Audit Closing Agreement Program (Audit CAP) comes into play when an IRS audit reveals an operational error.  Since the error is not voluntarily disclosed, there is a penalty that has to be paid, but Audit CAP provides for negotiation of the penalty.  These three options apply to operational failures, such as failure to satisfy ADP or ACP tests, vesting errors annual limits errors and improper exclusion of an employee.

The Voluntary Fiduciary Correction Program (VFCP) is a little different and is not necessarily part of the EPCRS.  It provides for a correction of fiduciary errors and non-operation deficiencies.  These include things like making delinquent contributions, purchases of assets from parties in interest and benefit payments based on improper valuation of assets.  Like the VCP, the VFCP requires payment of a fee and submission of a formal request for correction.

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