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

Whenever I consider trying a new restaurant, I check to see about reservations.  Some places list them as "preferred," "required," "suggested" or "not taken."  Even establishments that require reservations may not really require them, but the thought of having to plan in advance sort of kills the adventure of changing plans.  Well, when it comes to administration of benefit plans, reservations are not only a good thing, they are absolutely required.

In this case, I am referring to reservation provisions in plans that allow the plan administrator to suspend, modify, amend or terminate any particular plan or benefit provided thereunder.  A well-drafted plan document (and corresponding summary plan description) will include plain language reserving the right of the sponsor to change the plan and modify benefits which then allows for a defense to claims that a particular benefit is guaranteed to participants.  The general rule is that for a plan to be able to change things, it has to tell participants that it has the ability to make changes.

Recently, the U.S. District Court for the Southern District of Iowa looked at a case where a class of retirees claimed that their former employer violated ERISA by amending their health insurance plan to eliminate certain medical benefits.  The retirees claimed that their right to the benefits was "vested" because they believed it was promised they would never lose benefits.  After trial, the Court ruled that the existence of a provision in the company plan providing that it could be amended or terminated at any time acted as a bar to any claim that the benefits could never be modified.  If a plan specifically reserves the right to change, then it can't be denied the ability to change.  See Brubaker v. Deere & Co., 08-CV-00113.

A reservation provision does not automatically provide an unfettered ability to modify plans.  Certainly there are numerous cases providing that separately bargained agreements or contracts can provide a specific limitation to the ability of a sponsor to amend a plan (like collective bargaining agreements or supplemental retirement programs).  But reservations provisions do provide some measure of protection to plan sponsors from general claims that amendment is prohibited.  At a time when many employers are looking at changing benefit plan structures to control costs, I would certainly recommend checking first to see if the plan has reserved the right to make the changes in advance of any decision to cut benefits.  And if your plan does not include such a provision, it should be amended to protect the sponsor going forward.

• Email This
• Print
• Comments
• Trackbacks

Interesting economic times create interesting problems for plan administrators.  Consider the possibility that a couple may get divorced solely for the purpose of withdrawing pension benefits from a pension plan.  Seem far fetched?  Well, not really.

In Brown v. Continental Airlines, the Court in the Southern District of Texas considered a case where pilots, concerned about the health of their pension plan, got divorced and had QDROs submitted that called for distribution of their pensions to their ex-spouses.  The plan administrator became concerned that the pilots were continuing to live with their ex-spouses as if no divorce had occurred or even remarried their ex-spouses after the distribution was made.  The plan administrator sought to have the distributions returned to the plan because it believed the divorces were "sham transactions."

The good news for plan administrators and sponsors is that the Court confirmed that the administrator could rely on the QDRO.  Orders have to be obeyed unless they fail under the specific terms of the statute. 

What information must a domestic relations order contain to qualify as a QDRO under ERISA?  QDROs must contain the following information:

1. The name and last known mailing address of the participant and each alternate payee
2. The name of each plan to which the order applies
3. The dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee
4. The number of payments or time period to which the order applies

And there are certain provisions that a QDRO must not contain:

1. The order must not require a plan to provide an alternate payee or participant with any type or form of benefit, or any option, not otherwise provided under the plan
2. The order must not require a plan to provide for increased benefits (determined on the basis of actuarial value)
3. The order must not require a plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO
4. The order must not require a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and his or her subsequent spouse

But the administrator is not required to (nor apparently allowed to) divine the intent of the parties when creating the QDRO.  If the requirements are met, it must be treated as valid. 

So while the plan administrator in this case did not get the money back, for the rest of us it affirms that following your statutory duties and confirming that the QDRO meets the requirements of the law is enough.  Plan administrators do not have to evaluate whether the purpose of the QDRO (or the divorce) is to circumvent the other requirements of the plan.

• Email This
• Print
• Comments
• Trackbacks

If you are an employer participating in a multiemployer pension fund, the last few months have probably brought up discussions about underfunding or withdrawal liability.  Briefly, withdrawal liability is the amount of unfunded liability that an employer has to pay when they cease being a contributing employer to a pension fund.  If you are familiar with it, this case might interest you.

In Pittsburgh Mack Sales v. IUOE Local No. 66 (Case No. 07-3938, 2009), the Third Circuit Court of Appeals found that a union's agreement to indemnify an employer for withdrawal liability to a pension plan was valid and enforceable, vacating the lower court decision that the agreement would violate "public policy."  Factually, the collective bargaining agreements between the company and the union contained a provision that provided that the union would hold the employer harmless for any liability to the fund in excess of specified contributions. 

The company sold its assets to another entity and the pension fund assessed $413,000 in withdrawal liability.  The company demanded that the union hold it harmless and litigation ensued.  The District Court ruled in favor of the union under a theory that the indemnity provision was contrary to public policy and that ERISA laws governing withdrawal liability could not be defeated by contract.  The Third Circuit disagreed, stating there was no "well-defined and dominant" public policy that would justify overriding the contract provisions and that the parties could contract away responsibility for withdrawal liability.

This decision is interesting primarily because the tradition view of withdrawal liability under the Multiemployer Pension Plan Arbitration Act (MEPPA) is that the withdrawing employer is liable by statute, and payment is due under the terms of that statutory framework.  However, this decision appears to give rise to the possibility that, while the liability cannot be avoided by contract, a contract can be created that indemnifies employers for that withdrawal liability.  In other words, you cannot contract away the liability, but you can contract for someone else to pay the company back for the loss.

So next time you are in collective bargaining, consider asking for a similar provision.  This case says it might be worth asking.

• Email This
• Print
• Comments
• Trackbacks

Sometimes the hardest thing to interpret in benefit plans is when a disability occurs.  Most questions about disability focus on short term and long term disability plans, but retirement plans and other welfare plans can have benefit levels that are triggered or impacted by a disability determination.  Ultimately, the plan administrator is obligated to apply the terms of the plan to make a determination if a participant is "disabled" under the terms of the plan.

In Hobson v. Met Life, 2nd Cir., 7/29/09, the Court looked at a situation where a participant claimed complete disability which was denied by the plan administrator.  After applying the now required Glenn analysis to the determination, the Court also had to look at a situation where the Social Security Administration made a determination that the participant was disabled.  The plan administrator disagreed, applying the plan definition of disability to determine that the participant was not unable to work and was therefore not entitled to long term disability benefits.  The Court agreed with the plan administrator, but issued a warning that if an administrator is going to disagree with SSA, it should make sure the basis for its determination, and ultimately the basis for its disagreement, be very carefully and completely explained.  An SSA determination is not binding on a plan, but the plan had better explain WHY it disagrees in such a way that a meaningful appeal can be made.

This decision continues the long line of cases that gives deference to decisions made by plans that retain discretion.  But I believe it also should serve as a reminder to plan administrators to be very thoughtful in the application of "determinations."  Met Life was very thorough and collected a lot of medical information on its own.  It had detailed notes and records about all of the steps it took in evaluating each stage of the claim and was meticulous in its record-keeping as to how the decision was ultimately made.  It did not simply rely on an outside determination but did the hard legwork itself.

So from this case, it appears that SSA determinations are not the defining definition of "disability," but plans should be prepared to explain in detail how an alternative conclusion was reached.  And be prepared to prove HOW the conclusion was reached.

• Email This
• Print
• Comments
• Trackbacks

Except in very limited circumstances, Section 204(g) of ERISA provides that the accrued benefit of a participant under a plan may not be decreased.  This is generally referred to as ERISA's "anti-cutback" provision.  I happened to be looking at this provision recently because of discussions I ma having with employers about eliminating certain benefits as a cost saving mechanism.  Of course the question asked is what constitutes an improper cutback.

On July 17, 2009, the Tenth Circuit Court of Appeals issued a decision in Karber v. Qwest Pension Plan that considered the elimination of a Pensioner Death Benefit component of its Death Benefit Plan.  Although not all employers have "death benefit plans," this decision did take the time to explain some of the issues facing employers when considering reduction of benefits.

The Court decided that a death benefit was not a "retirement type benefit" or retirement subsidy that would be part of a pension plan.  This is significant because retirement-type benefits are subject to vesting requirements, giving rise to an argument that the benefit had "accrued."  The benefit was not impacted by years of service and the participant did not earn portions of the benefit for each year of service.  Generally non-retirement benefits, such as welfare plans, do not vest.  This lack of vesting makes it difficult to argue that the benefit has "accrued," meaning that, generally, it is easier to reduce them.  Notice I said generally.

The Court also had to consider the issue of "contract vesting" which was essentially an argument that the language of the plan itself precluded reduction of benefits.  The Court also had to contend with an argument that some other contractual promise existed to preclude the reduction.  While the Court ruled that contract vesting did not apply, the fact that the Court considered this component serves as a reminder that a simple reduction of benefits could give rise to a cause of action based on prior representations.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks

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. 

• Email This
• Print
• Comments
• Trackbacks

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.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

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.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks

Imagine this scenario: plan participant calls plan administrator and ask about benefit entitlements under the terms of the plan. Plan administrator gives information and it is wrong or participant either misunderstands what he is told. When participant does not receive the full benefit, he files a lawsuit saying he is entitled to the full benefit because of the representation.

These types of claims tend to give rise to a debate over estoppel as it applies to ERISA plans. In sum, the argument is that the plan is "stopped" from denying the benefit because the participant relied on the statements. While it is generally recognized that a claim for estoppel may be a viable cause of action under ERISA, it is equally clear that an estoppel claim cannot apply where the terms of the plan are clear and unambiguous.

In Regency Hospital v. Blue Cross of Tennessee (2009 US Dist. LEXIS 37111), the Southern District of Ohio looked at a claim by a medical provider alleging that a plan was estopped from denying payment of a claim that was pre-approved. The result of the case was not as significant to me as how they got there. The Court rejected the provider's claim, in part, because the alleged misrepresentation contradicted the clear terms of the plan and refused to allow an estoppel claim to survive. The Court articulated that for an estoppel claim to survive, 5 factors must be met: (1) a representation of fact made with gross negligence or fraudulent intent, (2) made by a party aware of the true facts, (3) intended to induce reliance by the person requesting the information, (4) who is unaware of the true facts and (5) the person reasonably or justifiably relies on the statement to his detriment.

This last factor is the most important because the Court further articulated that a person cannot reasonably or justifiably rely on a statement that counters clear, unambiguous terms of the plan. If the plan terms are correct and thee is no ambiguity subjecting those terms to interpretation, it would appear to be unreasonable to rely on the misrepresentation. In other words, participants are to some extent charged with going and looking up the answer themselves in the plan document rather than simply calling an administrator and asking for an answer.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks

Anyone who sponsors a defined benefit plan should be familiar with the minimum funding requirements of Section 302 of ERISA.  Basically, the minimum funding requirement sets forth the minimum annual contribution required to maintain the plan, and measures the funding standard account to determine if an accumulated funding deficiency has occurred.  It is in essence a snapshot of the general health of the plan as it relates to contribution is versus payments out. 

There is not necessarily a direct correlation between the required minimum funding and a general underfunding of the plan.  Plans can be underfunded (meaning without sufficient assets to pay all vested benefits) but still have a positive funding standard account balance.  The minimum funding requirement of Section 302 does not require the employer to eliminate all underfunding, only that they meet the required annual contribution.  This became very significant in the case of Cress v. Wilson (S.D. NY Dec. 2008).

In the Cress case, a class of Plaintiffs sued the trustees of a Northwest Airlines pension plan, claiming that by permitting the plan to become grossly underfunded, they breached their fiduciary duties.  The Court determined that in fact, the plan had met all of the funding requirements of Section 302 (meaning the minimum funding requirements were met) and that, since that was the required measure of funding in ERISA, no breach had occurred.

The Court did not suggest that the underfunding of the plan could not have occurred as a result of some other breach, but it does appear that, at least to this Court, meeting the annual funding obligation in a timely manner serves as some protection to plan sponsors if their plan is underfunded.  So make sure you make minimum funding obligations to the plan.

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

There are certain requirements in ERISA that employees be provided with documents like summary plan descriptions.  There is also a requirement under ERISA Section 104(b)(4) that a plan administrator must, upon written request from a participant, furnish a copy of the latest updated summary plan description, latest annual report, trust agreement, collective bargaining agreement or any other instrument under which the plan is established or operated.  Of course there are penalties for not providing this information.

This brings me to the case of Strom v. Siegel, Fenchel & Puddy (2nd circuit, 2007).  In this case, an attorney with the firm was making a claim that she was a "partner" in the firm and thus entitled to participate in the retirement plan.  She asked for a copy of the summary plan description to confirm whether she qualified as a participant.  The firm refused to provide it to her because she did not qualify as a participant so they had no obligation to provide the plan documents.  The Court determined that she was entitled to receive the document.  Why?  Because how could she appeal whether or not she was a participant without first seeing the document that governed the right to make a claim.

The case seems sort of silly, but it does remind us that participants (or people claiming to be participants) have a right to see the plan documents.  Also, ERISA requires that the plan provide them upon request.  There should be nothing secretive about what is contained in those documents.  You are not obligated to provide more than what the law requires, but my recommendation is always provide what the law requires when asked.  That way you don't subject your self to claims like the one in Strom.

Special side note: ERISA obligates plan administrators to provide notices of plan changes, summaries of material modifications and updated summary plan descriptions to participants.  When sending these documents to participants, make sure that they also go to participants who may be out on short or long term disability, COBRA, general leave or family medical leave.  They are still participants and still entitled to receive the information.

• Email This
• Print
• Comments
• Trackbacks

Frequently I am asked if it is good enough to just publish the new SPDs through the company intranet, making them available on-line.  I usually say no because it does not cover former employees on COBRA or dependents.  Now apparently I have a Court case that makes me right.

In Gertjejansen v. Kemper Insurance Companies, the 9th circuit recently held that posting the SPD to the company intranet site alone is insufficient.  As a rule, ERISA requires SPDs to be distributed to plan participants in a manner reasonably calculated to ensure actual receipt by participants.  Mailing them or delivering them electronically can satisfy this requirement.  if you rely on electronic distribution, you would have to make sure that all employees have regular access to a computer at work and that non-employee participants are provided a copy through other means. 

In this case, the Court found that a mere posting is not sufficient delivery because it was not an actual distribution.  Making an SPD available on the company intranet did not constitute a "distribution."  Plus, because all employees did not have regular access to a computer at work, the company could not verify that it was distributed to all participants. 

DOL Reg 2520.104b-1(c) gives a safe harbor for electronic distribution, but it definitively requires a transmission of the SPD, not merely a posting.  So in the future, make sure you are actually DISTRIBUTING the documents, not merely making them available.

• Email This
• Print
• Comments
• Trackbacks

In the 80s and 90, many employers instituted cash balance plans as a means of providing richer benefits to employees with a shorter service time.  These types of plans had two prime benefits to employees: they allowed for faster accrual of benefits and they expressed the benefits in a lump sum value.  The problem was that they clearly appeared to provide younger workers higher benefits than older workers because the benefits earned by younger employee (shown as retirement annuities).  Naturally litigation ensured.

Last week, the 9th Circuit Court of Appeals affirmed that these plans do not discriminate against older workers.  This is the fifth Court of Appeals to reach this conclusion and with the pro-employee 9th Circuit signing on, this appears to be the tail end of any challenge.  To quote the Court, "although a younger worker's total accrued benefit at retirement age will be greater under the cash-balance formula than an older worker's if both started at the same time, the difference is due to the time value of money rather than age discrimination."  This follows the 7th Circuit's 2006 decision that confirmed nothing in federal law suggests opposition to younger workers having greater opportunity to save for retirement because they have more time left to work.

As part of the Pension Protection Act of 2006, Congress did protect cash balance plans from age discrimination suits which may lead to an increase in their use.  At a time when employees have seen their 401(k) account balances hammered in a down market, the security of this benefit structure would certainly be more attractive.

• Email This
• Print
• Comments
• Trackbacks

Keeping up with the variety of 401(k) fee litigation cases that have been filed is somewhat difficult.  I know that there are fee litigation cases pending in the 2nd, 3rd, 6th and 7th Circuits and there are new cases filed every day.  From the perspective of a plan sponsor, the variety of the actions can be confusing because they cover the gamut of potential claims.  Plus they have loads of legal terms and ERISA procedural fights.  But I think I can pare them down to a couple of basic claims

First, there are cases against plan sponsors.  Typically these are class action type case where participants are suing plan sponsor for breaches of duty associated with failures to disclose fees to participants.  These cases can cover everything from claims that fiduciaries permitted excessive fees to claims that plan sponsors engaged in prohibited transactions with service providers by having service agreements benefiting the sponsor and not the participants.  My opinion is that these cases pose the greatest problem for employers as plan sponsors because they are most commonly based on "standard" service contracts or fee agreements that are not fully reviewed or understood by the employer.

A second set of cases are ones brought against service providers.  These are claims brought against entities that manage money, manage investment options or provide service to the plans participants.  Often the plan sponsor is brought into the case as a defendant as well.  However, there are cases where the plan sponsor, in its capacity as a fiduciary, is pursuing a service provider for excessive or unwarranted fees as exercise of its own fiduciary duty to the participants.  Again, the driving force here seems to be a claim for excessive fees, or at the least, a fee taken in excess of the contracted rate.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks

Frequently the coordination of COBRA coverage in conjunction with Medicare eligibility or disability can be confusing.  This particular case, from the Middle District of Pennsylvania, addressed the failure of a plan to provide COBRA to an employee who was determined to be disabled.

The employee in this case was placed on short-term disability when he failed to provide medical clearance to return to work as a result of his medical condition.  When he applied for unemployment, his employer interpreted that as a termination and ended his health coverage.  The employee eventually applied for and received Social Security Disability (SSDI).  The employee then sued his former employer for failing to provide a COBRA notice.  The employer acknowledged that it did not send the COBRA notice, but argued that receipt of SSDI made the former employee ineligible for COBRA coverage.

 The Court found for the employee, clarifying that only Medicare benefits obtained would preclude COBRA.  SSDI benefits do not in an of themselves terminate the right to continuation coverage.  A qualified beneficiary who becomes entitled to Medicare coverage may have his or her COBRA coverage terminated in favor of Medicare, but the mere receipt of SSDI benefits does not have the same effect.

This case demonstrates how important it is for a plan administrator to understand the nature of Social Security benefits received and how Medicare and Social Security interact.  As a plan administrator, one cannot simply assume that because an former employee is receiving SSDI, there is no COBRA obligation.

See Carstetter v. Adams County Transit Authority (2008 WL 2704596, M.D. Pa. 2008)

• Email This
• Print
• Comments
• Trackbacks

Although fallout from the La Rue decision has yet to be fully experienced, there is some good news for fiduciaries of individual account plans.  The Fifth Circuit, in Kirschbaum v. Reliant Energy adopted a rebuttable presumption that fiduciaries have acted prudently when they follow the specific terms of the plan.

Factually, Reliant's plan provide for the purchase of company stock through a company stock fund that was an investment alternative option under the plan.  The plan mandated that investment into the company stock fund necessitated purchase of company stock.  A class of participants sued the company and the investment committee, alleging that the continued purchase of company stock was a breach of fiduciary duty because the value of the stock was artificially inflated and they contended it was not a prudent investment.  They contended that the plan should have terminated and liquidated the company stock fund, and certainly should not have made further investment into it.

The Plaintiffs were essentially arguing that, notwithstanding the terms of the plan, the fiduciaries had a duty to amend the investment policy statement of the plan to halt contribution to the company stock fund.  They contended that continued investment was a breach of a duty to amend the policy statement when it became clear that the company stock was not a sound investment.  The Court disagreed, affirming the lower court grant of summary judgment in favor of the company.

Continue Reading...

• Email This
• Print
• Comments
• Trackbacks

There is certainly a lot of discussion recently about the relative health of the economy and corporations.  In tough times, company executives might think about misusing benefit plan contributions to prop up a struggling company.  Don't do it!  ERISA theft can result in some serious consequences.

In US v. Jackson, the 4th Circuit upheld the 7-10 year prison convictions of two executives for ERISA theft.  The CEO and CFO of the company were convicted based on their failure to make required contributions to the retirement plan and for using health plan contributions for purposes other than paying benefits.  The executives deliberately withheld the plan contributions and then falsified plan records to cover up the missing contributions.  In their defense, the executives said the company was indeed failing and that it did not have the resources to make the contributions.  The Court was not swayed.

The Court in this case reaffirmed the position that plan assets are "assets of the plan" when they are due for contribution, not when they are actually contributed.  So on the day the company was obligated to make its contributions, withholding was a breach of fiduciary duty.  Moreover, direction of those assets to some other payment constituted theft and embezzlement from the plan, even though they did not personally profit.  Regardless of other financial concern, then, it is extremely important for plan fiduciaries to remember to satisfy funding obligations and protect plan assets.

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

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.

• Email This
• Print
• Comments
• Trackbacks

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. 

• Email This
• Print
• Comments
• Trackbacks

In LaRue v. DeWolfe, decided by the Supreme Court on February 20, the US Supreme Court validated the ability of individual plan participants to seek remedies for breach of fiduciary duty outside of traditional "plan" remedies.  As previously interpreted, remedies for breach of fiduciary duties were limited to those for the plan as a whole.  LaRue forces plan administrators to rethink this posture.  The decision clarifies that, for individual account plans, remedies for the individual account are akin to remedies for the plan at large.  This means individual participants can now seek relief even if the only injury to the plan was to their individual account.

The impact of this decision will probably be most readily felt by administrators of 401(k) plans and other defined contribution plans that have participants that actively change investment directives or directly transmit investment instructions to outside advisors or custodians.  The participant will assume that the plan fiduciary is guaranteeing that the instructions will be correctly followed.  For plans utilizing self-direction of investments, it would be worthwhile for fiduciaries to consider educating participants about their individual responsibilities to monitor account activities and how important it is for them to notify the fiduciary of any problems.  Fiduciaries could also consider using a separate provision in participation agreements that provide some measure of protection by obligating the participant to provide notice.

From my perspective, the decision should serve as a warning to fiduciaries that they have to establish definitive, written investment procedures and then be prepared to adhere to those procedures to avoid potential claims.

• Email This
• Print
• Comments
• Trackbacks