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

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

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

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

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

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

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

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

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

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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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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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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.

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