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

Having written about same-sex marriage and civil unions in the past, I would be remiss in not mentioning that New Hampshire has become the sixth state to legalize gay marriage.  However, in a unique twist, the bill legalizing same-sex marriage exempted "church-related organizations that sere charitable or education purposes are exempt from having to provide insurance and other benefits to same -sex spouses of employees."

As previous posts have noted, this recognition does not automatically mean that same-sex spouses will be recognized as beneficiaries under plans governed by ERISA.  However, non-qualified plans will likely have to be administered with the same-sex spouse as a recognized "souse" or beneficiary once the same-sex union is performed.

The New Hampshire law also provides that couples in a civil union will automatically be assumed to be in a civil marriage, so plans providing benefits to civil union partners should be revised to recognize that this equates to legal spouse, at least for residents of the state of New Hampshire.

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In recent months, we have seen an increase in severed employees filing claims for wrongful discharge under a variety of theories.  It is easy to forget that ERISA also contains a possible remedy under Section 510.  Section 510 provides that it unlawful for an employer to discharge an
ERISA plan participant for the purpose of interfering with the attainment of any right
to which such participant may become entitled under the plan.

Such was the case in Pendelton v. QuikTrip, decided by the 8th Circuit on June 9, 2009.  Pendelton told his employer that he was leaving but agreed to postpone his departure while transitioning his work.  During the transition, he disparaged a co-worker and was terminated by his employer.  He sued for wrongful discharge, alleging that his termination was a 510 violation because he was terminated to avoid certain benefits under the severance plan, including stock option benefits.  The Court disagreed, reasoning that he was not entitled to the benefits claimed in the first place, so his termination could not have been to avoid payment of benefits to which he was entitled.

I think this case is important because it reminds us of the standard that has to be set in section 510 claims.  The common view is that a claim under this section is viable if the plaintiff can allege simply they were fire because they made a claim for benefits.  They tend to overlook that for claim to survive, there had to first be a right to obtain the benefits.  It is not enough to say "I was terminated because I asked."  It must be "I was terminated because I asked for what I was entitled to."

I also think that it is very important for employers and plan sponsors who are downsizing to evaluate the benefits severed employees are entitled to upon termination and provide those benefits correctly.  If employees have made a claim for benefits to which they were entitled in the past, the employer should make sure that these benefits were provided.  If they have made a claim for benefits to which they were not entitled, make sure proper notice and appeal rights are provided.  But don't assume the claim will simply go away if the employee is terminated. 

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New Jersey and New York have mini-COBRA statutes which essentially provide for application of certain continuation rights for benefits when COBRA does not apply.  Pennsylvania has now adopted its own version.  Sarah Ivy of our Chester County Office summaries the new "Pennsylvania Mini-COBRA" as follows:

Pennsylvania has enacted a Mini-COBRA law (“Mini-COBRA”) that requires employers with fewer than 20 employees to provide COBRA-like benefits. Generally, small employers with fewer than 20 employees are exempt from the Federal COBRA laws requiring continuation of group health care coverage when there is a termination of employment (or reduction of hours) resulting in a loss of group health care coverage. Pennsylvania’s Mini-COBRA law becomes effective on July 10, 2009 and applies to group health insurance policies that are issued to employers with more than two but fewer than 20 employees.

Under Pennsylvania's Mini-COBRA law, eligible employees (and their dependents) may elect to continue group health within 30 days following the occurrence of a “qualifying event,” including termination from employment, divorce, death, or loss of dependent status.

Eligible employees include those employees who:

1. had coverage under their employer’s group health plan for the three months prior to termination,

2. are not eligible for Medicare, and

3. are not eligible for or covered by other private group health insurance.

Eligible employees who elected continuation coverage under Pennsylvania's Mini-COBRA law may be required to pay up to 105% of the group rate (unlike 102% under Federal COBRA). Further, employees who are involuntarily terminated between July 10, 2009 and December 31, 2009, must be offered a Mini-COBRA subsidy equal to 65% of the premium under the American Recovery and Reinvestment Act of 2009.

While Pennsylvania’s Mini-COBRA law mirrors the Federal COBRA statute in several ways, there are significant differences, including:

Mini-COBRA is available for nine months, as opposed to 18 or 36 months under Federal COBRA;
Mini-COBRA applies only to hospital, surgical, and major medical policies, and does not apply to vision and dental plans;
Mini-COBRA requires three months of coverage before employees become eligible as opposed to one day of coverage under Federal COBRA;
Mini-COBRA ends upon eligibility for Medicare or group hospital, surgical or major medical coverage; whereas Federal COBRA eligibility ends upon actual enrollment or coverage;
Mini-COBRA requires employee verification of non-eligibility for employer-based health insurance as a dependant through, for example, a spouse’s group health plan; and
Insurers, and not employers, bear responsibility for notifying eligible employees about their rights under Mini-COBRA. The plan administrator, or the employer if there is no designated plan administrator, is responsible for notifying the insurer of an employee’s Mini-COBRA election within 14 days of receipt.

In order to prepare for the July 10, 2009 enactment of Mini-COBRA, small Pennsylvania employers should work with their group health plan insurers to ensure that the requirements of Mini-COBRA are satisfied. Additional regulatory guidance is expected from the Pennsylvania Department of Insurance.

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Withdrawal liability is becoming a more interesting topic for employer participating in multiemployer pension plans.  Typically, these "union" defined benefit plans require employer contributions pursuant to a collective bargaining agreement and a "withdrawal" from the plan occurs when the employer ceases operations or ceases to have a contribution obligation (such as when the union contract expires or when the employer negotiates a new contract that excuses participation in the retirement fund). 

In these difficult economic times, two factors of a perfect storm are coming together creating extensive discussion about withdrawal liability.  First, negative market returns are increasing the amount of underfunding in these pension plans.  When an employer withdraws from an underfunded pension plan, withdrawal liability is assessed against that employer.  Briefly, withdrawal liability is an actuarial calculation that attributes a portion of the unfunded vested liability to the employer, meaning that the withdrawing employer has to take with them (and pay to the fund) that liability.  I have written previous posts about withdrawal liability and it is becoming more problematic.  Part 2 of the storm is the distress of employers.  In looking for costs savings and reductions in workforce, or even in terminating business, employers are seeing the possibility of withdrawing from these multiemployer funds as a possible way of controlling costs.

A question came up to me recently about when a withdrawal actually occurs.  This is important because withdrawal liability is determined based on the unfunded status of the plan in the plan year immediately preceding the year in which the withdrawal occurs.  So if the plan year ends 12/31/09, and you cease having a contribution obligation on 10/1/09, your liability is determined as of the value of the plan on 12/31/08.  But be careful because you can get caught between plan years and that can be a problem.  Here is what I mean:

Your collective bargaining agreement expires on 12/31/09 that corresponds with a 12/31/09 pension plan year.  Through negotiations with the union, you determine that in your next bargaining agreement, you are no longer going to contribute to the pension fund.  So as of 12/31/09 you would "cease having a contribution obligation" thereby effecting a withdrawal from the multiemployer pension fund.  But your date of withdrawal for computing withdrawal liability will not be 12/31/09.

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In previous entries on this topic, I have noted that we should be continuing to receive guidance from the Department of Labor and the IRS on how to administer the subsidies.  Once employers got past the notice period, the task of administration becomes the main focus and the IRS has given some additional explanation of the administrative process by adding 19 new questions and answers to their website on subsidy compliance.

Some highlights:

(1)  As long as an employer's determination that an employee's termination was involuntary is consistent with a "reasonable" interpretation of the statutory provisions defining "involuntary termination," the IRS will not challenge the employers determination when considering whether an employer is entitled to a payroll tax credit for a terminated employee.  I believe this creates a "reasonableness" standard of review in future audits that will allow protections for "good faith" efforts to comply.  So a mistake will not result in a penalty if it was based on a reasonable interpretation of the rules.

(2)  An employer must retain appropriate documentation of its determinations that includes a statement by the former employee or employer that the employee was involuntarily terminated. Forms requesting treatment as an assistance-eligible individual may be used for this purpose.  I have also been considering, at least initially, keeping copies of  of any termination letters or resignation letters with the subsidy request forms as verification of the termination process.

(3) In a nod to employer concerns regarding treatment of control groups, In situations where one employer maintains a plan on behalf of related employers in the same controlled group, each of the employers will be viewed as a separate employer for payroll tax purposes.  In these cases, the payroll tax credit must be appropriately allocated among them, presumably based on the EIN numbers of each employing entity.  It also appears that, in certain circumstances, one state agency that maintains a plan can claim the credit for other state and local government agencies that participate in the plan.

(4) And finally, some additional good news.  No information reporting of the COBRA premium subsidy is required to be provided to an assistance-eligible individual or to the IRS by an employer, multiemployer plan or insurer.  However, any person claiming a payroll tax credit for the COBRA premium on Form 941, Employer's Quarterly Tax Return (or other applicable form) must keep records of the individual payments and other documentation to support the credit claimed.

For more answers provided by the IRS to multiple questions, please click here.

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Since COBRA is a very hot topic right now, I also thought this case might be of interest. 

In Laselva v. Schmidt, the District Court for the Northern District of New York affirmed that there is no qualifying event when health insurance coverage is canceled due to an employer's non-payment of premiums.  An employee sued in state court alleging that his employer breached his employment agreement by terminating health coverage and that COBRA was violated because no continuation coverage was offered.  The employer terminated the coverage by ceasing to pay premiums for the coverage. 

The case was removed to federal court and the federal court found that the COBRA claim was merit-less, remanding the case to state court.  But in doing so, the Court found that in order for COBRA to apply, the basic rule is that there has to be a "qualifying event."  A loss of coverage due to the employers termination of the health coverage, or failure to pay the premiums so that the coverage is terminated, does not create a qualifying event.

While not discussed in the decision, I believe that it is worth mentioning that the new COBRA subsidy rules have a similar restriction.  A former employee can only get COBRA, and can only receive the subsidy, so long as there is a plan in which to continue.  So if the employer terminates the coverage, the plan and the subsidy both disappear.

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Although not thrilling to the general public, the issue of discretionary authority in interpretation of plan provisions ha always been one of significant concern for ERISA practitioners.  The general standard of review of the determination of a plan administrator's decisions regarding implementation of plan provisions was originally defined in Firestone v. Bruch, a 1989 Supreme Court case the held that if plan language provides that the plan administrator has "discretionary authority" in interpreting plan provisions, a court will give deference to the plan administrator's decision when reviewing the case.  If no discretionary authority is granted, the court applies a "de novo" standard of review.

Various cases have looked at how to measure that standard and then in June of 2008, the Supreme Court, in Metropolitan Life v. Glenn, made a somewhat significant modification to that standard of review.  The Court found that while discretionary authority still applied (and thus a decision would only be overturned if it was "arbitrary and capricious"), an appropriate factor to consider would be whether the plan administrator had a conflict of interest in making the claim determination.  Specifically, if the plan administrator would also be the entity responsible for funding the payment of benefits, the court could consider that factor when making its review.  In Glenn, the Court said since the insurance company making the claim determination would also be the entity paying the claim, that inherent conflict has to be considered.

Now, the states have gotten involved and several states have passed laws providing that insurance policies written in their states cannot retain discretionary authority in determining benefits decisions.  Last month, in Am. Counsel of Life Insurers v. Ross, the 6th Circuit Court of Appeals held that such a state law is not preempted by ERISA, meaning that a state law can do away with discretionary review altogether.

in Ross, the Court was considering a Michigan state law that precludes insurance policies from containing language that gives them discretion in interpreting benefits denials, thereby taking away the "arbitrary and capricious" standard of review given in Firestone.  Thus any review of a claim determination for these insured plans would be "de novo."  The 6th Circuit found that this type of regulation was "saved" from preemption as the regulation of insurance.  Thus, the level of deference provided previously would be gone, and every review would be done without considering what the plan administrator thought.  This would also eliminate the need for any conflict of interest determination suggested in the Glenn case.

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