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

While it may seem boring to those who don't deal with benefit plans on a daily basis, the Supreme Court's recent decision in US Airways, Inc. v. McCutchen is somewhat important.  The issues litigated in that case were whether two equitable defenses applied in the context of a health plan's claim for reimbursement under ERISA Section 502(a)(3).  With it, comes some further insight into defining plan terms and available remedies.  This can be important for plan undergoing changes for PPACA compliance.

McCutchen was a participant in a self-funded ERISA health plan sponsored by US Airways.  He was injured in an automobile accident and the plan paid his medical expenses.  McCutchen subsequently recovered money from third parties, but refused to reimburse the plan claiming that (1) he should not have to reimburse the plan because he did not receive full recovery for his injuries and (2) the plan would be unjustly enriched if allowed to take full recovery without taking into account attorneys fees.  The district court rejected these arguments and granted summary judgment to US Airways on the ground that the plan terms clearly provided for full reimbursement of medical expenses.  The US Court of Appeals for the Third Circuit vacated the district court's order, holding that an award of "appropriate equitable relief" under ERISA Section 502(a)(3) may be limited by equitable defenses and principles, including unjust enrichment.

The Supreme Court held that equitable defenses cannot override clear plan terms.  However, equitable rules can be used to fill a gap where the plan is silent regarding an aspect of the reimbursement, especially for things like allocation of costs.  In other words, equitable defense cannot override clear language in a plan...plan terms speak for themselves.  So specific terms apply and if terms are missing, courts can fashion remedies based on equitable principles, even if the result is not what the plan sponsor intended.

So the lesson here is, for subrogation and reimbursement cases, health plans should make sure they have very specific subrogation and reimbursement language to avoid challenges on an equitable basis.  But the broader concept is an affirmation that plan terms mean what they say.  In a time when we are revising and redrafting plans to comply with PPACA, it is important to keep in mind that we have to say exactly what we mean.  To avoid "equitable" interpretations of plan language, be specific and detailed.  If you need help crafting specific plan language, you can always look to your attorneys at Fox Rothschild for assistance.  

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With PPACA, we have added an extra component of the appeals process to include an external review.  While this is added for health plans, other welfare plans like disability or life, and of course retirement plans, do not have this same requirement.  But what happens if, during the course of the appeals process, the plan administrator comes across information that might impact the decision on appeal that makes the administrator want to grant the appeal?  Does the administrator have to disclose why? 

First, we can operate on the presumption that there would not be an appeal unless the participant was being denied a benefit (or at least seeking to modify a benefit granted).  The initial "internal" appeal requires the administrator to consider what ever additional information the participant chooses to provide.  Plus the administrator has to provide to the participant that information it relied on in denying the claim.  But the administrator may also get information from someone other than the participant during the appeal.  So how does this impact the appeals process? 

In the recent case of Lee v. Hartford Life, the District Court for the District of Columbia dealt with an issue where, while the appeal was pending, the administrator received another medical report from its doctor affirming its original denial.  Hartford did not share that opinion with the participant until after the appeal was denied.  She subsequently claimed she was denied a full and fair review on appeal because she did not know about this second report during her appeal.  The Court confirmed that, when an appeal is filed, the administrator has to give the participant documents generated and relied on prior to the original claim denial, but not any documents received after the initial appeal is filed.  So the subsequent report was not something that had to be disclosed during the appeal because the appeal was already made.  Of course after the appeal was denied, the administrator has to reveal the basis for that denial, which it did, which gave rise to this lawsuit.

When applied to a health plan with an external review, the steps would work something like this: (1) initial claims denied; (2) appeal filed, give all documents relied on for original denial; (3) when appeal denied, give all documents relied on when making the denial of the appeal (including, in this case, the second report).  After a claim is denied and an appeal is filed, you don't necessarily have to supplement your original denial with information acquired after the appeal is filed until you actually deny the appeal.  So, why the title question about changing your mind?  Well, because information only has to be produced that existed prior to the filing of the appeal, but not information received during the appeal process unless the appeal is also denied.  If the plan administrator receives subsequent information that makes it want to rescind the original denial, it appears that there would not be an obligation to explain why the reversal occurred.  A plan administrator can simply grant the appeal without ever specifying it relied on something other than the participants appeal submission.

The point is you might not want the participant to know why you changed your mind, only that you did.  Plan administrators sometimes want to keep their resources close to the vest.  Fortunately, under this case, the basis for granting an appeal (or reversing a denial of benefits) does not have to be disclosed.  If the appeal is granted, there is no more requirement to provide a disclosure to the participant.  So it is OK to change your mind between the initial denial and the determination on the appeal and simply grant the appeal.  If there is no denial of the appeal, there is no obligation to disclose why it was granted. 

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Even when it is not all about PPACA, it can still be about PPACA.  I happened to be reading some recent court decisions and came upon a decision from the 6th Circuit Court of Appeals that has an impact on welfare benefits generally, but also a possible impact on PPACA health plans, so I thought I would share it.

In Price v. Laborers Pension Fund, the 6th Circuit was considering a case related to disability benefits.  Price was granted disability back in 1990.  In 2006, because of an amendment to the plan, his disability benefits were eliminated and he promptly filed a lawsuit.  In affirming the termination of his disability benefits, the Court made a couple critical observations that are important to all plan sponsors.  First, the Court affirmed the proposition that welfare benefits (as opposed to retirement benefits) do not generally "vest."  Welfare benefits can generally be terminated at any time so long as the termination is consistent with the terms of the plan.

Second, the Court resolved the issue by looking at the specific terms of the plan where the trustees had reserved the right to amend or terminate benefits, even retroactively.  The Court found that the specific language of the plan was such that it allowed for elimination of disability benefits at any time, thereby precluding an argument that the right to receive these benefits was "vested" or guaranteed. So in terms of these "welfare" type benefits, if a plan sponsor has reserved the right to amend or terminate benefits in the plan language and follows the terms in the plan when it takes action, it can generally avoid a claim that the right to the benefits has vested.

Under PPACA, many plan sponsors are considering eliminating or curtailing welfare benefits (like health, vision and dental coverage) for cost concerns.  All well and good provided that the plan sponsor has reserved the right in the plan to change, amend or terminate these welfare benefits at any time.  While ERISA might generally give a plan sponsor the right to act, if you are considering eliminating health insurance coverage for employees because of PPACA, a good place to start is to see if your health plan has a provision giving you the ability to amend or terminate coverage at any time.  Having a provision like this goes a long way to defeating any argument that the benefits have "vested."   

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In previous entries, I have written about what happens when you can't locate a spouse for waiver purposes, about how to deal with missing beneficiaries or even how to review QDROs.  Well, every now and then a new case comes around that throws in a new twist, so let's consider when a spouse really ceases being a spouse.

In Gallagher v. Gallagher, the Massachusetts District Court was asked to consider a case between the son a deceased participant and his not-quite-ex wife.  In 1989, Mr. Gallagher separated from his wife and entered into a separation agreement and continued to pay spousal support to his estranged wife.  But the participant never actually finalized the divorce.  He had not spoken to his estranged wife for several years and in 2005, the participant changed the beneficiary designation on his 401(k) plan to his son.  He then passed away in 2011 and his estranged wife and son instituted litigation over who was the appropriate beneficiary.

The Court ruled that even though the participant's intention to change his beneficiary was clear, since he was not actually divorced, he could not alienate his "spouse" and she was entitled to the account balance.  The spouse was still a "spouse" until legally she was no longer a spouse. 

So the lesson for plan administrators is don't assume an estranged spouse is no longer a proper beneficiary or that they have no claim under the plan.  Unless you see a divorce decree confirming the termination of the "spouse" status, don't do anything to adversely impact that spouse's claim to benefits.  Just because a participant says they are divorced, get proof.  In this case, if the plan had disbursed the money to the son, it might have had to pay it again to the spouse because it did not check.  So don't assume a spouse is not a spouse until you get proof.

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In case you are completely overwhelmed with PPACA compliance issues, I decided to write about my other favorite topic: withdrawal liability.  When employers who contribute to a multiemployer defined benefit retirement plan cease to have a contribution obligation, they can be assessed withdrawal liability, which can be a very big number and can really come as a surprise to a business if they did not plan for it.  It usually stays with the business and is not a personal liability for the owners.  But it can be if they are not careful.

In Central States Southeast & Southwest Areas Pension Fund v. Messina Products, LLC, the 7the Circuit Court of Appeals recently reversed a lower court decision that absolved Mr. and Mrs. Messina of any personal liability for the withdrawal of their company from the pension fund.  The Messinas owned a piece of property individually (not as a business entity but personally) that they rented to their business.  The 7th Circuit found that the rental property was a "trade or business" under common control and so the Messinas were liable as if they were sole proprietors of the business.  The Messinas argued that the real estate was a passive investment, and not an active trade or business, but in the absence of any operating documents or agreements, the Court disagreed.     

There are many cases that deal with individual liability for sole proprietors so this decision is not completely novel.  But it should serve as a reminder to any business owner that has a business that contributes to a multiemployer pension fund that it is extremely important to address these ownership issues in advance.  The definition of "trade or business" for withdrawal liability is unique and should not be assumed to be the same as in tax or common law.  So don't get caught unprepared and personally liable.  Structure and plan in advance to avoid a withdrawal surprise.

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When the Supreme Court decides not to take a case, that is generally not news.  But in the case of the Court's decision to decline a review of Walker v. Federal Express Corp., there should be some mention of its impact on claims under ERISA.  Usually, when I am defending a claim made against a plan or a plan administrator, I see that the Plaintiff has thrown in a claim for "breach of fiduciary duty" as a sort of catch-all argument.  Frequently, this claims is is coupled with some type of claim for failing to provide documents or for having defective notices.  But these types of claims may survive under ERISA, as the underlying decision in Walker illustrates. 

Factually, the case involved a claim for benefits under a life insurance policy.  In addition to the claim for benefits under Section 502(a)(1), the plaintiff included a claim for breach of fiduciary duty under Section 502(a)(2) for either failing to provide a conversion notice, or in breaching a duty to the participant by not giving benefits.  The Sixth Circuit Court of Appeals affirmed the decision of the Court from the Western District of Tennessee, finding that the relief available under Section 502(a)(2) for breach of fiduciary duty is not relief available to an individual.  It is relief that should be limited to the plan as a whole.  By not hearing the case, the Supreme Court has effectively left the 6th Circuit's decision intact. 

It is also important to note that this leaves intact the Appeals Court's decision that nothing in ERISA requires a life insurance plan fiduciary to issue a separate conversion notice beyond what is contained in the summary plan description, but that is not what I focus on here.

Certainly, other jurisdictions have had similar decisions and much has been written about relief available under 502(a)(2) and equitable remedies available under 502(a)(3).  But my point here is that making a claim for "breach of fiduciary duty" means something more than just disagreeing with a plan administrator's determination.  It has specific statutory and administrative limits.  So if you are a plan fiduciary facing an allegation that you have breached a fiduciary duty, your first consideration might be whether the requested remedy is even available.  I am not suggesting it is a good idea to engage in breaches of duty, but a claim for breach is not a blank check for a claimant.  It is a very specific claim that has very specific remedies and very specific limits.  Make sure that if you are a fiduciary, you are aware of your fiduciary obligations as well as the remedies so you don't further compound problems with your plan administration by giving the wrong thing. 

For more information about being a well-informed fiduciary, or to arrange for fiduciary training, please contact your attorney at Fox Rothschild.

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Between COBRA, discrimination testing and determining PPACA compliance, employers really have to know who to count when counting employees.  Take, for example, the case of Warnecke v. Nitrocision LLC, where a district court held that an employer had more than 20 employees and was subject to COBRA because even though the direct employer had fewer than 20 employees, it was part of a control group and when all employees of the commonly controlled company were added up, the companies exceeded the 20-employee threshold.  Remember that, for ERISA purposes, when two or more businesses are under common control, each can be considered to be a single employer of all employees in the group.

Now, PPACA says when we are counting up to 50 employees, not only do we have to account for part-time employees, but we also have to include employees in our control group.  Notice 2011-36 tells us that all employees of a controlled group under § 414(b) or (c), or an affiliated service group under § 414(m), are to be taken into account in determining whether any member of the controlled group or affiliated service group is an applicable large employer.  These code sections are the same ones that apply to discrimination testing for 401(k) plans and other benefit plans subject to discrimination testing.  So you have to know when to count people who may not be your actual employees but should be included because of control group status.

Basically there are three types of control groups: brother-sister, parent-subsidiary and affiliated service groups.  Each has specific rules for figuring out if they apply but the simple starting point is commonality of ownership.  A parent-subsidiary control group exists when one company owns 80% or more of a subsidiary.  In a brother-sister control group, 5 or fewer individuals own 80% or more of two or more companies.  This is common in many closely-held or family businesses.  In some cases, ownership by a spouse, parent, child or grandchild may be combined to determine whether a control group exists.  If you have more than 5 owners, there are special rules for testing that structure which can also create control group concerns based on the total percentage of ownership between related individuals or owners.

The point is that if you sponsor a benefit plan and the owners of your company own other businesses, control group status should be something to consider.  Don't assume that separate EIN numbers means that employees never get counted as a group.  If you don't know the rules about control group status, you might accidentally find yourself being considered as part of a much large whole, which means much larger penalties if you don't comply properly.  To find out your control group status, ask your attorney at Fox Rothschild to help you sort it out.

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I cannot stress enough the importance of documenting plan procedures and following them for each stage of plan administration.  Nothing brings this home as much as a high-dollar award against an employer for failure to satisfy an administrative obligation.  Since it seems like COBRA creates these scenarios most often, let's look at a recent decision related to a failure to provide a COBRA notice.

In Evans v. Books-A-Million, a recent case out of the Northern District of Alabama, the District Court awarded $83,000 in penalties and attorneys fees to a plaintiff who brought suit for a failure to provide a COBRA notice.  Of that award, $37,950 was the penalty which the court calculated as 506 days at $75 a day.  The reason that the court gave such a stiff penalty was because, at trial, the evidence was clear that not only did the plaintiff not get a notice, but the people who were responsible for COBRA administration could not articulate the basic procedures for COBRA administration and provided contradictory statements regarding what actions they took in dealing with this plaintiff.

This award may seem a little drastic, but the Judge's opinion made it very clear that the lack of documented procedures and a clean administrative record weighed very much in favor of a punitive result.  Which brings us back to my original statement that failure to comply with the rules of plan administration can lead to much larger and more expensive problems.  Think of the documentation procedure as both a road map and an insurance policy.  The road map gives plan employees a clear direction on what steps to take and provides consistency in administration.  The existence of written procedures, and evidence that those procedures were followed, gives insurance against a claim of administrative failure (and breach of fiduciary duty).

So document, document and document.  Create them and follow them.  And if you need help in creating or following them, your attorney at Fox Rothschild can be your guide.

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When I was in law school, I vaguely remember learning about "springing" interests.  They pop up when some event occurs that creates some claim to the property or trust.  Well, in some instances, fiduciary status can spring up based on whether you actually exercise discretion over plan assets.  In other words, you might not intend to be a fiduciary, but as soon as you exercise discretion, you are one.

Consider the recent decision in Borroughs Corp. v. Blue Cross Blue Shield of Michigan.  In this case, the plan was self-funded and Blue Cross was acting as the TPA under a service agreement.  The service agreements with Blue Cross provided that the amounts sent each month to pay benefits were specifically NOT plan assets.  Unbeknownst to the plan, Blue Cross was taking a little bit of the money each month as a service fee so the plan sued for breach of fiduciary duty.  First, the Court said that even though the contract said otherwise, the amounts transferred were plan assets.  You could not contract away the fact that the money coming from the plan to pay benefits is a plan asset.  Then the court held that because Blue Cross exercised discretionary authority over those assets (meaning it decided to take a little as a fee), it was a fiduciary.  Finally, the court concluded that using plan assets to pay yourself a fee that only you determine and know about is a prohibited transaction and a breach of fiduciary duty.

The fiduciary status sprung from the possession of plan assets and the use of discretionary authority.  The same thing can happen to anyone that comes into possessions of assets of a plan if they begin exercising discretionary authority.   For example, a lawyer that has money from a plan in an escrow account to be used to pay a settlement is in possession of plan assets.  If he or she just distributes it as directed by the plan, no exercise of discretionary authority and no fiduciary status.  The assets are still plan assets, but the non-exercise of discretion eliminates the fiduciary status.  But if the lawyer takes some money out of the account for any purpose other than what the plan directs, then there is an exercise of discretion and fiduciary status springs to life.

This is why it is very important for plan sponsors, plan employees and plan service providers to be keenly aware of the actions they are taking when they have plan assets under their control.  If you act with direction from a fiduciary without your own discretion, you tend to stay away from fiduciary status.  But if you start to make decisions related to the distribution of those assets, fiduciary status springs upon you.  So it is always important to know (1) if you are dealing with plan assets and (2) are you exercising authority over those assets.  Being aware of these two things is the first step in avoiding having fiduciary status arise unexpectedly.  And if you have questions about your status or whether you are dealing with plan assets, ask for assistance from your attorneys at Fox Rothschild.

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Frequently I am asked about the possibility of giving "something extra" to employees because of a long work history or because of special circumstances and the employer wants to do something special for them.  Unfortunately, they sometimes look to the benefit plan and that might mean bending the benefit plan a little or giving some extra benefit beyond what the plan provides.  This can be in the form of modifying eligibility or providing extra payments.  But the problem with that can be that changing plan terms for special treatment of a particular participant can create a variety of issues that frustrate good plan administration.

A recent decision out of the third circuit considered a case where an employer left an employee on their health plan during leave even though she was not eligible for coverage.  The plan paid a large amount of money in benefits for this person and then sought reimbursement from a stop-loss carrier.  The court determined that the stop-loss carrier was not liable for the reimbursement claim because the benefits were outside of what was required by the plan.  While not addressed by the court, it would stand to reason that since the plan should not have paid, paying those claims in the first place would be a breach of fiduciary duty.  And what if someone else came along and wanted the same dispensation?

A recent fourth circuit decision relating to severance plans looked at a claim for discrimination made by a former employee alleging that male employees were given extra severance as opposed to female employees.  While the crux of the decision related to whether Title VII applies to severance from employment, the facts plead suggest that some male employees were in fact given something beyond what the plan called for generally.  Similarly, I recently read a seventh circuit case that dealt with a claim by a former employee complaining that he was not offered the same continuation of health coverage that other employees received as part of their severance, which was provided coverage outside of normal COBRA continuation.  He claimed he was the victim of discrimination as well.

The point is that the plan has terms and the terms have to be followed.  Even if your plan is self-funded, you have to treat all participants equally under the terms of the plan.  Once you start giving special benefits to individual participants, you invite claims by any participant who does not get the "extras."  Being flexible in eligibility or benefits invites claims that the plan is being administered in an "arbitrary and capricious" fashion, which is something all plan sponsors should want to avoid.  So being nice can prove to be problematic.  Don't be flexible in applying plan terms because, when it comes to plan administration, bending the rules is the same as breaking them.

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For employers with around 20 employees, finding out whether they are subject to COBRA can be confusing.  Many states have "mini-COBRA" that are state laws that provide for a continuation of health insurance even if employers are too small to be subject to COBRA.  But as a recent case lays out, it is very important to know whether COBRA applies and what are the consequences if it does or does not.

First, to determine whether or not you are subject to COBRA, you have to decide if you have 20 or more employees.  The DOL specifies that the rule for measuring employees for COBRA is if you "employed at least 20 employees or more on more than 50% of a typical business day during a previous calendar year."  If you meet that measurement, you are subject to COBRA.  And that is important because in Hanysh v. Buckeye Extrusion Dies, Inc., the issue was one where the employer made a mistake and ended up having to pay. 

Factually, the case came from a former employee that sued his employer after his COBRA continuation coverage was retroactively terminated by the employer’s insurer.  The employee received a COBRA notice and election form and elected COBRA coverage and paid the required premiums.  For some reason, the employee filed a complaint with the DOL regarding his COBRA coverage and when the DOL investigated the complaint, the DOL determiend that the employer was not subject to COBRA.  The employer's insurer then retroactively terminated the employee’s COBRA coverage.  The employee sued to stop the employer from denying his COBRA coverage and made a claim for his medical expenses.  He claimed he had relied on "material misrepresentations" about his COBRA eligibility.  The court ultimately found that the employer could be liable for the employee’s continuation coverage and the medical expenses because it was responsible for knowing how many people they employed and whether COBRA applied.

So notwithstanding whether or not you properly administer COBRA, step one is to figure out whether you are subject to COBRA.  Don't assume, make the calculation.  If you are subject to COBRA, know that you are and comply.  If you are not, know whether you are subject to state mini-COBRA and comply with those rules.  And if you are not sure, ask your attorneys at Fox Rothschild for help. 

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Frequently benefit plan fiduciaries have to rely on experts for advice relating to plan administration.  Legal counsel, actuaries, investment advisors, appraisers and the like are essential components of the administration of benefit plans, but they are not fiduciaries.  And fiduciaries are subject to the "Prudent Man Rule" when satisfying their fiduciary obligations.

The good news is that generally courts don't look at the results of a decision so much as the process.  Fiduciaries who use experts for advice and counsel properly can sometimes be insulated from breach of fiduciary duty claims because they made diligent efforts to reach a conclusion, even if it was ultimately a bad decision.  For example, numerous court cases have found that making a bad investment is not a breach of fiduciary duty if the fiduciaries satisfied their fiduciary obligation to properly investigate the investment before they made the decision.  The process is reviewed, not the outcome.  So investment losses are not necessarily a breach if the investment decision was made properly.  As one judge noted "the test of prudence- the Prudent Man Rule -is one of conduct and not a test of the result performance of the investment.  The focus of the inquiry is how the fiduciary acted in his selection of the investment and not whether the investment succeeded or failed."

To rely on experts, fiduciaries are charged with the obligation to provide accurate and complete information, and to properly review and become familiar with recommendations and advice.  It is not enough to rubber stamp the recommendation of a fund advisor.  Fiduciaries have to understand why the advice was given and evaluate whether it was based on accurate information (and sometimes accurate assumptions).  Similarly, choosing experts is a component of the evaluation process and a decision to use a particular expert should be based on a thorough review of the need for the expert and their credentials.

Fiduciaries need not become experts themselves, and can rely on expert advice when making decisions.  Reliance on experts is an essential component of administering a plan, but it starts with choosing good experts and giving them complete and accurate information.  Year-end reviews are always a good time for fiduciaries to look at their processes for making decisions.  Consider reviewing how your plan uses experts, and who those experts are, to make sure you can verify the processes for their selection and using their advice.  Put checks and balances in place to make sure they get accurate information.  And above all, ask questions.  Fiduciaries may not have to be experts, but they always have to be prudent.     

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Often times the silliest of facts patterns illustrate the important principles of plan administration.  Take the case of McDonough v. Federal Insurance, a recent case out of Massachusetts where the fight was over accidental death benefits for an employee who died of a cocaine overdose.  The plan denied the claim under its "Intentional Injury" exclusion as "self-inflicted," which meant there was no coverage for the claim. 

The Court disagreed.  The Court went straight to the language of the policy exclusion and determined that because the language did not specifically exclude drug-related deaths as "intentional," the insurance company had to rely on it's definition of accident.  It could not reasonably be said that the decedent intended to die from ingesting cocaine, so the denial of the claim as "intentional" was overturned.  But the Court did not grant recovery in favor of the estate.  Instead, the Court held the matter open for more briefing over the definition of "accident" in the policy.  See, one of the key terms defining accident in the plan is that the death has to be "unexpected."  So the case will now turn on how much cocaine was consumed that lead to the overdose and whether one would have expected to die from ingesting that amount.

While the facts sound a little crazy, the concepts are clearly relevant to plan administrators.  As much as facts and circumstances are relevant to court cases, the starting point of every analysis is always the language of the plan.  You always look first to what the plan says.  So it is important for plan sponsors to make sure their plans clearly say what they mean for them to say.  Definitions should be clear, consistent and free of ambiguities.  Exclusions should likewise be specific and plan sponsors should not assume "catch-all" phrases will be sufficient.  Even with discretion to interpret the plan, poorly worded documents or unclear definitions lead to disputes and litigation.

If you would like a review of your disability plan, health plan or any other benefit plan to avoid ambiguities, ask your attorney at Fox Rothschild for help.

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When dealing with withdrawal liability, employers frequently question how it is calculated and the answer is usually "by an actuary."  One key to to understanding the actual calculation is to understand that it is an estimate of the value of the assets and liabilities of the pension plan from which you are withdrawing.  But how the "estimate" is reached can be of some discussion and the 7th Circuit Court of Appeals recently determined that the actuary's best estimate is the one the plan should use.

In Chicago Truck Drivers Helpers and Warehouse Workers Union (Independent) Pension Fund v. CPC Logistics Inc., the Court was asked to a look at a calculation of withdrawal liability by a withdrawing employer.  The arbitrator had ruled that the liability was overstated by about $1million, and the plan appealed that decision.  The key to the case is that to figure out whether or not the plan met its annual minimum funding requirements, an actuary uses a “funding" rate assumption, which is an estimate of the interest rate for tax purposes.  However, there is also another possible rate, called the "blended" rate that can be used for determining withdrawal liability.  Depending on which is used, the withdrawal liability calculation can be very different.

The factors used when making a determination under the "blended" rate are different that the factors used to calculate a "funding" interest rate because of the difference between short and long-term assumptions and rates for annuities.  If the short-term interest rates used in determining the "blended" rate exceed the long-term interest rates used to calculate the "funding" rate, an exiting employer's withdrawal liability assessment would be less.  So the rate used could definitely have an impact on the withdrawal liability allocation.  The trustees, based on advice from their actuary, should then adopt the rate that they believe best represents the plan's experience.

in this particular plan, the trustees of the plan instructed the actuary to use which ever rate would generate higher withdrawal liability allocations when making withdrawal liability computations, which happened to be the "funding" rate.  The result of using the higher "funding" rate was that the employer had a withdrawal liability of almost $3.4million.  The arbitrator determined that because the higher rate was used, the employer was charged almost $1million more than it should have.  The Court agreed, finding that when making calculations, an actuary is obligated to use the "best estimate" of a plan's anticipated experience.  Since the "blended" rate was, even according to the actuary, the correct interest rate to use, it had to be used even if it resulted in a lower withdrawal liability allocation.

This case shows how actuarial computations can vary based on certain assumptions and it explains the distinction between minimum funding computations and withdrawal liability computations.  It also should serve as a reminder that, because the withdrawal liability rules do not provide a specific set of assumptions that must be used, the "best estimate" rule requires trustees and actuaries to give serious thought to their decisions related to what interest rates to apply when computing withdrawal liability.  And it also gives withdrawing employers an additional piece to review when considering whether to challenge a withdrawal liability allocation. 

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For employers that withdraw from a multiemployer pension plan, it is now very common that they encounter withdrawal liability.  Challenging withdrawal liability requires undertaking a very specific procedural process and it is generally weighted in favor of the plan.  One of the primary problems with challenging a withdrawal liability determination is that the assumptions used by the fund (or more specifically, the fund actuary) need only be reasonable.  What is "reasonable" can be a tricky question.  But at least one Court has determined that "reasonable" should at least mean "consistent." 

Earlier this month, the Seventh Circuit Court of Appeals looked at the case of Chicago Truck Drivers Helpers and Warehouse Workers Union (Independent) Pension Fund v. CPC Logistics Inc.  The Appeals Court affirmed the District Court's affirmation of an arbitrator's decision that the fund had over-allocated withdrawal liability to CPC as a withdrawing employer.

 When CPC withdrew from the Fund, it was allocated withdrawal liability and challenged that allocation.  The matter went to arbitration and the arbitrator was asked to consider the assumptions used by the Fund when allocating liability.  As it turned out the actuary used two different sets of assumptions, one for calculating withdrawal liability, and the other for determining the annual minimum funding obligation of the the plan.  While the formulas may be different, both formulas use an interest rate assumption and, in this case, the actuary used two different interest rate assumptions.  The rate assumption used to calculate withdrawal liability resulted in a higher allocation that it would have if the lower funding assumption rate was used.  The Court said that because ERISA requires that the computation of withdrawal liability be based on the actuary’s best estimate and reasonable assumptions, using two rates for two different calculations seemed "unreasonable."

This not to suggest that all withdrawal liability calculations should immediately be challenged or that it would always be unreasonable to use two different interest rate assumptions.  But as withdrawal liability becomes a more common problem in the multiemployer world, it is important for both plan trustees and participating employers to be aware of this "reasonable" requirement.  Defending a claim for withdrawal liability is often as complex as calculating with withdrawal liability in the first place, but, based on this decision, it appears that the consistency in interest rates the plan uses in its formulas is something that should be considered.

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Many plan sponsors are unaware of the "safe harbor" provisions of the Americans with Disabilities Act as it relates to health insurance.  Basically it provides that certain insurance plans are exempt from the ADA restrictions related to screenings, medical examinations and making inquiries of employees related to their health status.  Health plans are allowed to collect information related to health conditions for the purpose of underwriting or clarifying risks, or for plan administration purposes.

In late 2011, the Southern District of Florida ruled, in a case called Seff v. Broward, that wellness plans fall within the ADA safe harbor.  At issue in the case was that a county sponsored wellness program consisted of biometric screening and a health risk assessment.  This information was collected and used to identify certain part high-risk conditions and then those participants were eligible to participate in disease management programs and waivers of co-pays for medication.  Employees who refused to participate in the wellness program were charged $20, and Seff sued because of the charge.  His claim was that the screening process violated the ADA.

The 11th Circuit affirmed the District Court's decision in favor of the county and further clarified that the wellness program was a "term" of the group health plan and was thus integrated into the health plan to be covered by the safe harbor.  Even though the plan document did not expressly reference the wellness program, the Court reasoned that since it was only available to health plan enrollees and was sponsored by the same insurer that provided the group coverage, it was part of the health plan.

Though the EEOC has not commented on this decision and has not issued formal guidance on wellness plans and ADA compliance, the Court's decision seems to continue to confirm that an integrated wellness program, even as an undefined "term" gets the same safe harbor protection as a health plan.  However, plan sponsors should be cautioned that making appropriate references to the wellness program in plan documentation will certainly go a long way toward bolstering that position.  If you have concerns or questions about the adequacy of your plan documentation, your attorney at Fox Rothschild is available to assist.

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A retirement plan participant can designate a beneficiary other than a spouse, but a waiver is required.  Many plans have specific provisions that provide for the order in which distributions will be made in the event a specific beneficiary is not designated.  For plan administrators, the rules about beneficiary designations require strict adherence to the plan documents, which can mean that those who think they have a right to benefits may not in fact have those rights and that leads to litigation.

Such was the case in Herring v. Campbell, a recent case decided by the Fifth Circuit Court of Appeals.  In this case, a plan participant designated his wife as his primary beneficiary with no secondary beneficiary.  His wife died before he did, but he made no other beneficiary designation.  When he died, the plan distributed his account balance in accordance with the plan rules, to his surviving siblings.  Of course, he happened to have step-children, who sued the plan administrator for not giving them the money.  The plan rules provided that in the absence of a beneficiary designation, surviving children get a the distribution before the deceased participant's siblings.

The Court upheld the plan administrator's interpretation of the definition of "children" to mean biological or legally adopted children.  Step-children did not meet this definition so they were not entitled to the benefits.  The step-children argued that they had been "equitably adopted" but the Court found that this concept applies only to those seeking to require a parent to recognize a child, not a benefit plan making distributions.  So in the end, the Court decided that the plan had properly distributed the benefits to the siblings and excluded the step-children.

So when considering the distribution of benefits from a participant's account, the participant certainly can designate step-children as beneficiaries by an affirmative designation.  And step-children can become "children" through adoption, which would give them "child" status when considering plan distribution rules.  But, as we see in this case, unless a "child" clearly satisfies the plan's definition of beneficiary (that is if they are in fact children under the definition of the plan), they will not be entitled to a distribution as a beneficiary.

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I recently spoke at a seminar where the question was raised about a plan sponsor's obligations to act where they see a participant has made foolish investment choices in their self-directed accounts.  Is there a fiduciary obligation to tell a participant that they have made an unwise investment choice?

Well, those short answer is no, there is not.  That is the nature of defined contribution plans.  There is a fiduciary obligation to provide appropriate diversity and sufficient options for investment.  And there is a responsibility to provide some type of educational component to participants.  But a plan sponsor should not substitute their own opinions with respect to appropriate retirement investing for the choices made by participants.  Fiduciaries have to operate on the assumption that participants have made an election based on their own goals and objectives.  The best that a fiduciary can do is limit the investment options in a plan to those strategies that meet the acceptable diversification criteria outlined in ERISA.

That said, there are times when a fiduciary can make an investment election for a participant and, if done properly, the fiduciary is protected from claims of breach of fiduciary duty.  Such was the case in Bidwell v. Univ. Medical Ctr., a recent decision from the 6th Circuit Court of Appeals.  In this case, the plan administrator elected to change the default investment from a stable value fund to a target date fund.  Participants in the stable value fund were notified that unless instructed otherwise, the plan administrator would move their account balances to the target date fund.  Two participants claimed they did not receive notice and brought suit for losses they sustained because of the transfer.

The Court upheld the district court's determination that a breach of fiduciary duty had not occurred because the safe harbor for qualified default elections protects the plan administrator if a participant fails to make an affirmative investment election.  Not just the initial election, but subsequent elections like this.  If notice is provided, a failure by the participant to affirmatively elect means the plan administrator can apply the appropriate default election, even to funds already invested.

So participants can pick whatever options are available, and plan administrators have to make appropriate options available.  At the same time, plan administrators are protected if they have qualified default investment options in place to cover those participants that don't make appropriate elections.  Choosing the default investment option, providing appropriate notice and properly diversifying options are all things a plan administrator must do to protect participants.  But you also have to let them make their own choices, ideally with some educational assistance.  And don't be afraid to ask your plan professionals for assistance in making sure your plan has the right pieces.

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This morning, the United States Supreme Court issued its opinion on the constitutionality of PPACA.  In a 5-4 vote, the Court appears to have upheld those provisions of PPACA that most significantly impact employers and plan sponsors.  Initial impressions indicate that the Court found that the individual mandate is constitutional under the Taxing Powers. 

Now for the practical part.  For the next few days, there will be lots of noise about what this means, and efforts to interpret what the results are and what are the political implications.  There will be lots of people trying to explain the decision and lots of debate about what to do next.  Plan sponsors, including those that have health plans maintained through the purchase of insurance will probably be best served by not overreacting.  At this point, we have worked very hard to comply with PPACA and we should assume we are going to have to continue to comply until we are told otherwise.

So take an inventory of what changes you have made and verify what changes might have to be made to comply between now and the start of your next plan year.  Continue working on your summary of benefits coverages that have to go out for open enrollment.  Get ready to report health coverage costs on the 2102 W-2s.  Make sure you have all required PPACA amendments in place and documentation to verify compliance.  And keep in touch with your benefits professionals to seek their guidance on changes to compliance.  In other words, keep moving forward.

Your attorneys at Fox Rothschild will continue to keep you updated on any additional guidance issued and are always available to assist in your ongoing compliance efforts.

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We are all expecting the Supreme Court to rule on the constitutionality of PPACA before the end of this month.  While there is much anticipation, good plan sponsors should already be hedging their bets on how they will respond to the decision.  So let's look at some road-maps to prepare for the possible outcomes.

(1) Assume PPACA is Upheld as Constitutional

If PPACA is upheld, we have to look at complying with the upcoming requirements for the 2012 and 2013 plan years.  Most importantly, we need a summary of benefits and coverage and we need to be prepared to hand that out in the next open enrollment.  We also have to be prepared for health plan reporting on W-2s which is mandatory for the 2012 tax year.  Also recall that beginning in January 2013, an individual’s annual maximum contributions are limited to $2,500 for flexible spending accounts.  So if it is upheld, we have some significant changes to make in our administration process before the end of the 2012 plan year. 

(2) Assume PPACA is Struck Down as Unconstitutional

If PPACA is struck down, the first thing we will have to do is analyze what we have changed and how we changed it.  Many plan sponsors will incorrectly assume that we revert back to the pre-PPACA status.  But remember that we are dealing with ERISA plans and you can't just change an ERISA plan at the drop of a hat.  We will have to prepare for mid-year coverage changes and amendments to coverage for the 2013 plan year.  Enrollment and eligibility will have to be analyzed and appropriate notices issued to current participants.  We will have to analyze tax implications to see if any special reporting is required for coverage provided to adult children.  And we will have to decide whether or not it is cost effective to eliminate certain benefits provided to comply with PPACA as some of the changes made might actually be worth keeping.  But most of all, we will have to amend plans to undo amendments already made, and follow the appropriate procedures for making plan amendments.

(3) Partially Upheld, Partially Struck Down.

It is because of this option that plan sponsors should use this time to develop a map of what changes they have made and design a plan for undoing those changes.  Plan sponsors do not want to be caught short trying to figure out what they still have to do to comply, or what they might have to do to revise their plan.  Now is the perfect time to make a list of all the changes you made to comply with PPACA and how specifically you made the changes.  Then prepare to either follow that map in reverse to undo changes, or continue forward to finish what we already started.  We can't say for sure yet what the court will do, but we should at least know what we have done and what we still might have to do to comply (or change) and we will have a short window in which to do it.  So take the time now to analyze your compliance thus far.  Whatever the decision, we are going to have some serious work ahead of us.  Your professionals at Fox Rothschild are ready to assist either way.

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Some time back I wrote about the Supreme Court's decision in Cigna v. Amara and pointed out that terms in a summary plan description (SPD) have to match terms in the plan document.  The issue in Amara was that the benefit calculation set out in the SPD was not included in the plan document and so there was considerable discussion about whether it constituted a "plan term."  The Court seemed to pretty clearly conclude that since the SPD was only a summary, the plan document was where we would have to look for the actual terms controlling the operation of the plan.

In March of this year, the 9th Circuit looked at a similar case, Skinner v. Northrop Grumman Retirement Plan B, and sort of agreed, but in another way.  In Skinner, the benefit calculation was described in the plan document but not the SPD.  The 9th Circuit found in favor of the plan when it determined that silence in the SPD did not mean it was not a plan term.  So it appears that if it is in the SPD but not the plan document, it is not really a plan term, and if it is in the plan but not the SPD, it is a plan term but not properly summarized. 

Justice Scalia, in his concurrence in Amara, clearly suggests that because Congress defined both an SPD and plan document in ERISA, it is expected that both will exist.  But an SPD is nothing more than a summary of the terms of the plan, and provided that summary is written in plan language and includes the right statements, it satisfies the SPD requirements.  There is nothing that specifically precludes the plan document and the SPD from being the same document as long as the one document meets the requirement for both.  Section 104(b)(4) of ERISA requires a plan administrator to furnish an SPD and any "trust agreement, contract or other instruments under which the plan is established or operated."  It does not say they have to be separate.  So your plan document and SPD could be one in the same or separate.

Depending on your plan, and whether it is subject to separate trust regulations, you might want to consider incorporating both documents, or you might be better served having two.  But if you have two, make sure the terms in rights and remedies set out in the SPD are included in the plan document.  If it is only in the SPD, then it is not a plan term.  If it is in the plan document, it should be in the SPD but it is still a plan term.  If the SPD and plan document are rolled into one, then make sure you spell that out clearly and then they should all be considered as plan terms.

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In past entries, I have written about the ongoing struggle plan administrators face when trying to locate participants to provide notices.  COBRA notices can be a particular concern because participants frequently argue a violation of COBRA when they did not receive notices.  But it is not required that an administrator prove a terminated participant received the notice, only that they sent it.

Consider Somer v. Cudd Energy Services, recently decided in the Western District of Oklahoma.  The participant argued that she was not provided with a COBRA notice and election form until she actually called and complained to HR.  As a result, the notice was 3 months late.  Fortunately, the plan sponsor was able to show that it had mailed a COBRA notice to the last known address of the participant in a timely manner.  The Court affirmed that the employer has to comply with the sending, not prove the receipt.  So the demonstration that a system was in place to send notices to the last known address, coupled with the copies of the letters sent, was enough to establish a "good faith attempt to comply."

There are a couple of good lessons from this case.  First, employers and administrators should keep copies of the notices sent as proof of sending.  They should also have a documented process and be able to demonstrate they followed the process in each case if challenged.  Having a standard procedure and following that procedure is certainly a best practice.  But beyond COBRA, consider the other various notice requirements associated with employee benefit plans.  Cases like this tend to demonstrate for us the importance of having procedures for all notices and being able to demonstrate that we followed them.  So consider this a reminder to document and save copies (even electronic versions) in case a participant claims they never got their notice.

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I can't find my spouse!  Believe it or not, benefit plan administrators hear that statement on a regular basis.  Plans with qualified joint and survivor annuity options ("QJSAs") can be faced with a dilemma when a participant is seeking a distribution in a form other than as a QJSA without spousal consent and the participant also asserts they cannot get that consent because their spouse has "disappeared."  If the spouse refuses to consent, then there is no distribution.  But what if they really have no idea where their spouse is?

From an administrators perspective, how they disappeared is not as important as confirming that they have actually disappeared.  Or, to put it more correctly, that the spouse cannot be located to give or deny consent.  It is one thing when a participant can't find their spouse, but a plan cannot simply accept that the spouse is gone.  Such was the case in Lester v. Reagan Equipment, where the participant gave the plan administrator an affidavit listing all the ways he tried to find his missing spouse.  The plan accepted the affidavit and distributed the plan account balance without tying it up in a QJSA.  Sure enough, the "missing" spouse popped up demanding her benefit after the participant died.  The court found that relying on the affidavit was not enough.  The administrator had to "take reasonable steps on its own to verify that the spouse could not be located."

So what are reasonable steps?  Section 205(c) or ERISA and Code Section 417(a)(2)(B) provide that a plan can make a distribution without a QJSA if it is established to the satisfaction of a plan representative that the consent required may not be obtained because there is no spouse or because the spouse cannot be located.  But what constitutes proof?  There are locator services through the IRS Letter Forwarding program and Social Security that a plan administrator should use as proof they tried.  An certifications from participants certainly help.  But the Code and ERISA are delightfully silent on other options.

Well, consider what the federal government does.  Under 5 CFR 846.202, the Federal Employees Retirement System provides that the Office of Personnel Management may waive the requirement of spousal consent upon a showing that the former spouse's whereabouts cannot be determined.  A request for waiver on this basis must be accompanied by—

1. A judicial or administrative determination that the former spouse's whereabouts cannot be determined; or
2. Affidavits by the employee or Member and two other persons, at least one of whom is not related to the employee or Member, attesting to the inability to locate the former spouse and stating the efforts made to locate the spouse; and Documentary corroboration such as newspaper reports about the former spouse's disappearance.

It also provides that OPM may waive the requirement of consent  based on "exceptional circumstances" if the employee or Member presents a judicial determination regarding the former spouse that would warrant waiver of the consent requirement based on exceptional circumstances.

Unfortunately most plan administrators are not prepared to deal with a missing spouse and did not draft rules or procedures to address this issue.  Maybe it will never happen to your plan.  But consider the possibility that it might and be prepared in advance if it does.  By providing a framework in the SPD on which a decision will be made, you put participants on notice of how they will need to comply.  It is not enough to just take their word for it. 

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Employment agreements and offer letters that make reference to employee benefits can create a whole host of potential problems.  Not the least of which is an argument over whether a subsequent claim for "breach of contract" is preempted by ERISA if the employee does not get the benefits they think they were promised in their contract.  Whether or not a claim for breach of contract is preempted by ERISA depends on what the contract actually promises.

First, consider the decision in Arditi v. Lighthouse International, recently decided by the 2nd Circuit.  Applying the standard articulated by the Supreme Court in Aetna Health Inc. v. Davila (ERISA preempts a cause of action where (1) an individual could have brought his claim under ERISA §502(a)(1)(B), and (2) no other independent legal duty is implicated by the defendant's actions), the Court reasoned that a mere promise to participate in the plan and receive benefits in accordance with the plan terms warranted preemption.  The former employee claimed his contract guaranteed him a certain benefit but the Court disagreed, finding that the employment agreement only described the benefits and made it clear that benefits arose from, and were governed by, the terms of the plan.

Contrast that with Dakota, Minnesota & Eastern Railroad v. Schieffer, where the 8th Circuit found that a breach of contract claim was not preempted by ERISA.  In this case, the contract provided for a severance benefit separate from any welfare plan offered by the company.  Therefore, preemption did not apply because the damages (in this case severance) could be satisfied outside of any plan and directly from the employer.  In short, a contract referencing a specific benefit would not necessarily be preempted if that benefit is provided outside of a plan (or even could be).  For example, promising an employee "health benefits for life" in an employment agreement might create a breach of contract claim that would not be preempted by ERISA even if it was intended to provide those health benefits through the company plan.

Employers have to be careful about what their employment contracts and offer letters say.  To avoid breach of contract claims, offer of benefits should be limited to participation in plans in accordance with the terms of the plan and not separate from the plans themselves.  Don't summarize the benefits provided by the plans, just reference participation in the plans.  Be careful not to promise something that can be construed as anything other than what the plan gives (and in accordance with plan terms).  Otherwise, you might find that ERISA preemption does not apply and your company, not your plan, is under the gun.

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Owners of companies should avoid signing collective bargaining agreements themselves.  Maybe that is too broad of a statement, but I present it because over the last couple of years, a series of cases have been decided that put personal liability on the owners of companies for withdrawal liability and delinquent contributions because they personally signed the agreement obligating the company to make contributions to a multiemployer fund.

The theory from the fund side goes something like this: unpaid contributions to ERISA funds constitute plan assets when they are due.  A person who exercises discretionary authority over plan assets is a fiduciary, so if your company is obligated to make contributions to a fund and the company does not do it, you have breached a fiduciary duty and are personally liable for the deficiency.  Lots of individual owners are now being sued for "breach of fiduciary duty" and, in many instances, have been found to be personally liable for the delinquent contributions.

What typically happens is that the fund trust agreement provides that contributions are assets of the plan when due.  Then the collective bargaining agreement contains a very innocuous provision that, in addition to creating a contribution obligation, incorporates all of the trust provisions into the contract.  So by signing the contract, you acknowledge and agree to be bound to the proposition that contributions are plan assets when due.  So if the company does not pay, you as the owner are personally liable because it is assumed you exercised the authority by deciding not to pay. 

The counter to this position is that ERISA fiduciary status does not attach to someone unless they know they are a fiduciary and surprising liability on owners and corporate officers is not favored.  If the owner of the company does not sign the bargaining agreement, he or she is not agreeing to be bound by the terms of the trust and fiduciary status does not personally attach to them.  In short, if you personally do not sign the agreement that requires contributions, you are not personally bound by the trust provisions.  Now, having said this, it is still possible to have some claim for fiduciary obligation associated with a decision to not make contributions.  But it certainly helps in defending a claim for personal liability if you have not signed the document creating the contribution obligation.

If you are the owner of a company and don't have the luxury of having someone else sign, perhaps a good fall back position is to actually get a copy of the trust agreement for the funds and read it as well as the bargaining agreement to see if a "springing" fiduciary status is being created.  But don't just sign and assume.  Read and understand because personal liability for delinquent contributions, and even withdrawal liability, is something you definitely want to avoid. 

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Sometimes displaced employees try to co-mingle law to suggest a variety of nasty acts by their employer.  Sometimes employment law and benefits law can overlap, and sometimes they don't.  Such was the case in Thompson v. Morris Heights Health Center, recently decided by the U.S. District Court for the S.D. of New York. 

Thompson was terminated as an employee from the medical center and filed a claim with the EEOC, claiming that her employer had retaliated against her in violation of Title VII of the Civil Rights Act for filing a previous EEOC charge.  In her latest EEOC charge, she alleged, in part, that the medical center retaliated against her by failing to provide a timely COBRA notice and election form.  The late part was correct.  The employer did send it four months late, but when it finally did send it, it offered coverage retroactive to the original qualifying event date.  The EEOC dismissed her claim and she filed a federal court action alleging that her former employer (1) did not timely issue her information regarding benefits under COBRA, and (2) failed to expeditiously provide her with a statement of benefits and a disbursement under the Pension Plan.

The Court quickly disposed of the pension plan claim because it so happened that the plan was not a calendar year plan (the year ended 6/30), and since her request was mid-year, it was not unreasonable to have to wait until after the end of the plan year to receive a statement.  On the COBRA issue, the court ruled that Thompson failed to demonstrate that the late COBRA notice was "post-employment retaliation in violation of Title VII."  The Court reasoned that because Title VII is limited to to prohibit only actions that affect current employment or the ability to secure future employment, she would have had to prove that the delay in furnishing her COBRA election notice had hindered her ability to search for or procure future employment.  She could not show that she had suffered "any prejudice from this delay of the sort cognizable under Title VII."  So her claim was dismissed.  

It is important for employers to note that even though Thompson could not make a case under Title VII for post-employment retaliation, she still could have tried to assert a claim for COBRA penalties for the late election notice (although why she chose not to is not reported).  So this decision does not say there could not be any remedy, just not a remedy under Title VII.  But it does serve as a reminder that the actions taken by the plan, and the employer as plan sponsor, are distinct from the actions taken by the employer as employer.  Sometimes that works in the employer's favor.

For assistance in distinguishing actions taken as an employer or as a plan sponsor, please do not hesitate to call you attorney at Fox Rothschild. 

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In prior entries, I have talked about the new fee disclosure rules and also how they would impact plan sponsors.  Coupled with these disclosures is the underlying issue of whether a plan sponsor breaches a fiduciary duty by failing to monitor fees and actively pursue the opportunity to reduce fees to plan participants.  Well, now we have a court decision that pretty well clears that up.

In Tussey v. ABB, Inc., which recently came out of the Western District of Missouri, the Court found that a plan sponsor breached its fiduciary duty to plan participants because it failed to monitor record keeping fees and revenue-sharing payments and paid record keeping fees in excess of the market cost to subsidize other record keeping services.  Factually, ABB sponsored two 401(k) plans that offered Fidelity Investments mutual funds as investment options.  Fidelity was also the investment adviser and the record keeper.  Fidelity then used some of those fees to offset losses it was taking on other services provided to ABB.  There were other issues related to investment options as well, but the key consideration here was the excessive fee issue.

While revenue sharing can be used to pay for plan record keeping services, the Court felt that by not actually calculating the amount that was generated by revenue sharing for Fidelity, ABB could not properly analyze how revenue sharing would benefit the plans and could not use the relative size of the plan as leverage to offset or reduce record keeping costs.  So by failing to make a "meaningful effort" to monitor revenue sharing payments and insure that revenue sharing payments were actually being used to reduce record keeping costs, ABB breached it's duty to defray expenses.  Plus, using the revenue sharing arrangement to offset other costs was completely inappropriate because it resulted in the plans paying above market rate for the record keeping services generally.  All told, the liability was more than $13 million, which is a pretty hefty penalty.

Certainly the facts of this case suggest there was something fishy about the arrangement.  However, it was not a development that occurred overnight and you can imagine how, over time, minor decisions related to costs and fees can compound into major problems for plan sponsors.  Plan sponsors should make themselves keenly aware of what fees and expenses can and cannot be charged to the plan and also make inquiries about the reasonableness of fees.  This case also serves as a reminder that regular review of fees (monitoring) is an important component of satisfying that fiduciary obligation and your plan should be reviewed on a regular basis to see if (1) you are being charged the correct amounts under your agreements, (2) those amounts are reasonable and (3) there are ways to reduces those fees.  Otherwise, you might end up paying back the plan.

For assistance in evaluating your plan, contact your attorney at Fox Rothschild.

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Last week, the United States Supreme Court heard oral arguments on the constitutionality of the Patient Protection and Affordable Care Act (PPACA).  Call it an employee benefits version of "March Madness."  The arguments were heard over 3 days and while the media generally reported that the "individual mandate" was the key argument, there were actually 4 separate issues being argued.  I will attempt to summarize them below, but without betting on the outcome of any particular argument.

"Does the Anti-Injunction Act Bar the Challenge?"

The Anti-Injunction Act precludes the court from hearing challenges to assessments or collection of taxes before they actually go into effect.  The Court itself was concerned about whether or not it even had the ability to hear this case before the 2014 penalties and assessments went into effect.  Since both the White House and opponents of PPACA are anxious to have this case decided, both sides argued that the Anti-Injunction Act does not apply.  The Supreme Court actually appointed an independent lawyer to argue that the Act did apply so that the Court could be certain it heard full argument on the issue.  So day one involved an argument about whether or not the case was "ripe" for consideration before the mandate and tax go into effect.

"Is the Individual Mandate Constitutional?"

Day two saw the challenge and defense of the individual mandate.  The White House argued that the individual mandate regulates the national health insurance market which is permitted because the Constitution gives Congress the power to regulate interstate commerce, because Congress can tax under the "General Welfare Clause," and Congress can do what is "Necessary and Proper" to carry out its ability to regulate interstate commerce.  Opponents argued that the mandate does not actually regulate commerce but instead forces buyers into the commerce stream.  Therefore, PPACA does not regulate commerce but rather forces people to engage in commerce. 

"Is the Individual Mandate Severable?"

Day three saw arguments related to whether the individual mandate could be separated from the other provisions of PPACA.  To hear this argument, the Court had to presume the mandate was unconstitutional and then looked to see what, if any, part of PPACA might survive.  Opponents argued that if the mandate falls, the whole act must fall, while the White House argued that many other new rules should remain.  Day three also brought arguments related to the constitutionality of the expansion of Medicaid, with states arguing the required expansion (which makes them extend Medicaid to more participants in order to get federal funding) was unconstitutional "coercion" by the Federal government.  The White House argued that the "Spending Clause" of the constitution means Washington can set whatever rules it wants for states to get federal funds.

Despite everyone saying they know, nobody really knows how the Court will rule.  It is anticipated that a decision will be issued before the end of the current Court term, which is in June of this year.  Regardless of the outcome, the decision will have significant impact on employers, insurers and plans.  However, because compliance is still required until a ruling is issued, and may still be required after a decision is issued, employers and plan sponsors should continue to prepare for compliance and not gamble on the outcome.

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Back in 2009, we looked at a Third Circuit case called Pittsburgh Mack Sales v. IUOE, Local No. 66 that found that it was not against public policy to require a union to reimburse an employer for withdrawal liability.  Well, the Sixth Circuit agrees.  In Shelter Distribution v. General Drivers, Warehousemen & Helpers Local Union No. 86, the Sixth Circuit Court of Appeals considered a situation where an employer was assessed withdrawal liability because of a termination of a collective bargaining agreement.

The collective bargaining agreement that expired contained the following provision: "The Union and the members of the Bargaining Unit have agreed that only the liability of the Company to the Pension Benefit Plan are, have been and shall be limited to the actual contributions it makes during the course of the past, present and future Contracts and the Company shall not be liable for any other obligation or contingent obligation of any kind or nature whatsoever.  The Union shall indemnify the Company for any contingent liability which may be imposed under MEPPAA."  Sure enough, it happened and the company went looking for indemnification from the union.

The union argued that it was against public policy because it shifts the liability Congress imposed on employers and would defeat the statute.  But the Court disagreed, noting that since ERISA allows fiduciaries to insure against risk, there must be a way to shift potential liability, including indemnification contracts.  So it was not a frustration of the statute and not against public policy.

So when undertaking future bargaining with your unions, consider adding this indemnification language that has now been twice confirmed.  Of course, it will be part of collective bargaining and it may cost you something, but it might be worth it in the long run.  If you need assistance in dealing with multiemployer plans, or in collective bargaining, please contact your attorney at Fox Rothschild.

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Plan fiduciaries are frequently faced with difficult decisions regarding plan administration and it is important for them to know not only what the plan says, but also what the potential penalties are for not following the plan.  And sometimes, strict adherence to "form over substance" can create a fiduciary breach.  Such was the case in Klepeis v. J&R Equipment, recently decided in the Southern District of New York.

Klepeis left employment in January of 2005 and was entitled to have his 401(k) account balance rolled over as of December 31, 2005.  Klepeis made a rollover request, but it was not on the correct form.  The plan administrator testified that to make a rollover, the form provided by the participant was not required, only authorization from the plan trustee (who happened to be the owner of the company).  The defendants argued a variety of defense, claiming the request was untimely and that the funds in the plan were frozen pending an IRS approval of the plan's termination. 

The Court found that though the SPD provided that upon termination, plan assets would be distributed as soon as practicable, that did not allow a fiduciary to withhold assets until the actual termination occurred, particularly where the participant had no notice of the termination.  Moreover, because the fiduciary was aware of the request and only need to authorize the distribution, it was a breach of fiduciary duty to delay the approval.  When the plan terminated, Klepeis' account was transferred to an IRA, but he lost almost $7,000 between the time he should have received his distribution and the actual rollover date.  The Court awarded this as damages, plus interest and attorneys fees. 

I think this case illustrates what I consider to be an ongoing warning to fiduciaries.  To satisfy their obligations as fiduciaries, they are charged with acting reasonably and in the best interests of the plan.  Strict adherence to the law is one thing but requiring strict adherence to form requirements or ignoring participant's reasonable requests can be a breach of duty.  So fiduciaries should comply with the law, seek to know the requirements of the law and the plan and administer the plan accordingly.  But being a draconian administrator can be as problematic as being too lax.  Satisfying your fiduciary obligations requires a balance of both.  Your plan professionals should be consulted to help you figure out what is "reasonable" to avoid these problems.

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With PPACA comes potential coverage of dependents to age 26.  But how do you confirm dependent status and what can you do with non-cooperative participants?  Many plans are undertaking to conduct "dependent audits" to make sure covered dependents are actually eligible for coverage.  But what happens when you find someone on the plan who should not be there, or you can't get cooperation.

This was the situation in Muhammad v. Ford Motor Co. (E.D. Mich. 1/12/12).  The Ford plan had discretionary authority to (1) determine eligibility, (2) demand proof of dependent status and (3) garnish wages to recover overpayment of benefits.  Ford repeatedly asked Muhammad to provide proof that his dependents met the qualifications of eligibility under the plan, which he refused to do.  ford terminated the dependents and also garnished his wages to recover over payment for the dis-enrolled dependents.  He sued and lost because, in the minds of the court, the plan had acted fairly and in accordance with its terms.

What most likely saved Ford in this case was that its plan documents and notices specifically laid out its rights and remedies.  The plan has the right to set its proof for dependent status and as long as that requirement is evenly applied and reasonable, it can also dis-enroll (or deny enrollment) for failure to satisfy those requirements.  Similarly, if the administrative processes are followed as written, the discretionary authority grant in the plan will serve to protect the plan administrator when it makes a decision.

So plans should consider doing audits to make sure they are only covering eligible dependents.  Plus, plan sponsors should undertake to update or amend their plan language to allow them to require proof and state specific remedies for failure to provide proof.  Then, set up administrative guidelines for establishing how those proofs will be treated.  Don't assume you can require proof and terminate without it.  Check your language and work with your plan service providers to make sure you can do what you need to do.

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Picking plan investments can be a difficult task.  Chances are your investment strategy will not maximize returns to a plan because, statistically, in any given time frame, there was some investment option that outperformed your investment choices.  Of course this leads to problems for plan sponsors faced with claims of breach of fiduciary duty under ERISA 404, particularly in light of the obligation to sufficiently diversify plan assets and to try to maximize returns to participants.

Recently, the 4th Circuit decided Plasterer's Local Union No. 96 Pension Plan v. Pepper, which happens to be a case about a multiemployer plan, but it also has some significant implications for single employer retirement plans.  The new trustees sued to old trustees for breach of fiduciary duty claiming the old trustees failed to properly investigate alternative investment strategies.  The Court agreed but the issue of damages was key to the ultimate decision.  Some key points that I find relevant to plan sponsors (and trustees):

1. The expert used determined that from 2003 to 2005, the optimum investment strategy for the fund would have been 50% of the assets in an equity index and the other 50% in an aggregate bond index.  Hindsight being what it is, I wonder if most plans wish they had gone that route.
2. There must be a causal link between the breach of duty and the losses to the plan.  A breach does not automatically equate to liability and damages.  There has to be a connection where the breach caused the loss.
3. When assessing damages for a breach, the measure of damages would be those damages actually caused by the totality of the breach, not just a haphazard measurement window. 

Point three is key to defending plan investment decisions because plan participants usually want to pick out a finite window (in this case 2003-2005) and show how they would have made more money investing in something else.  But the Court said you can't pick a measurement period out of the air.  In this case, had they used 1999 to 2005 as a measuring period, there would have been almost not actual damage to the plan.  So there has to be some logical connection between the alleged breach and the time period measured for the damages.

I also think point two is significant because it reminds us that ERISA 404 is not an absolute penalty statute.  In many ways, it encourages fiduciary compliance by setting out a standard for fiduciaries to meet and, as long as they do so in good faith and to the best of their ability, they will not be liable unless there is actual damage associated with an actual breach.  The market ebbs and flows and plan assets can rise and fall.  Fiduciaries who satisfy their 404 duties can sleep somewhat more soundly knowing that just because there might have been an investment option with higher returns, they will not automatically have to make up the difference because they did not choose it.

Of course all of this assumes you are following the rules and satisfying your 404 duties.  So if you are a plan fiduciary that has concerns about what those duties are and how you to satisfy them (and how to document you satisfied them), this decision should also be a wake up call that there is personal liability and while measuring damages may be tricky, you can still be on the hook for them.  Make sure you have sound guidance from your professionals to rely on.

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As a follow up to last week's entry about the Supreme Court taking on the PPACA cases, today the Supreme Court determined to hear three separate cases on the constitutionality of PPACA.  The Court also  set aside 5 1/2 hours for oral argument, to be held in March.  However, the Court, did not grant all of the issues raised and it chose issues to review only from three of the five separate appeals before it.

The Court will hold two hours of argument on the constitutionality of the requirement that virtually every American obtain health insurance by 2014, 90 minutes on whether some or all of the overall law must fail if the mandate is struck down, one hour on whether the Anti-Injunction Act bars some or all of the challenges to the insurance mandate, and one hour on the constitutionality of the expansion of the Medicaid program for the poor and disabled.  Rather than hear all issues, the Court chose those issues from appeals by the federal government, by 26 states, and by a business trade group.  It opted not to review the challenges to new health care coverage requirements for public and private employers.

The blog of the US Supreme Court reports that the Court's order does the following:

• Determined to hear the issue of “severability” of the insurance mandate from the other provisions of the law, if the mandate is nullified
• Determined to hear arguments on the constitutionality of the insurance mandate
• Directed the Parties to brief and argue whether the lawsuit brought by the states to the insurance mandate is barred by the Anti-Injunction Act (
• Determined to hear the constitutionality of the Medicaid expansion

Supreme Court observers suggest that this may be a modern record for the amount of time set aside for oral arguments.  Due to the complexity of the issues presented, it is not a surprise that the Court has allotted this much time to argument, and it is also suggested that a decision could be rendered as early as June of 2012, which could significantly impact the upcoming presidential election.

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There are multiple cases related to health care reform (PPACA) that are now ready for consideration by the US Supreme Court.  These cases include:

• Thomas More Law Center, Jann Demars; John Ceci; Steven Hyder; And Salina Hyder, v. Barack Hussein Obama, et al. (docket 11-117) (constitutional);
• National Federation of Independent Business, et al., v. Sebelius (docket 11-393)(dismissed for lack of jurisdiction);
• State of Florida v. Department of Health and Human Services (two petitions: docket 11-398 and docket 11-400) (unconstitutional); and
• Liberty University v. Timothy Geithner (docket 11-438)(dismissed for lack of jurisdiction) 

The Court will consider at least 5 petitions related to PPACA during a private conference to be held on November 10.  According to the one source, the Justices will use this conference to decide (a) which petitions, if not all of the petitions, should be reviewed, (b) which issues it is ready to decide, (c) how to line up the lawyers on each side of those issues, and (d) how much time to allow for oral argument.  These cases should be heard during the Court's current term, which is expected to run until near the end of June.  Using this as a benchmark, arguments should be made some time in March or April.

This does not mean that a decision will be issued immediately after arguments and there is certainly no guarantee that a decision will even be rendered in 2012.  But it is good to know that we might have some ruling on the constitutionality of PPACA before the January 2014 deadlines.

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In these tough economic times, employers have been cutting employees.  But in doing so, some employers as plan sponsors are forgetting to make sure terminated employees are provided with all appropriate notices and documentation to deal with their benefit plans.

Of course we have the COBRA notice obligations, and this may include COBRA notices and continuation rights under FSAs, dental or vision plans.  But what about retirement plans?  A recent case out of the Fifth Circuit serves as a reminder that failing to satisfy the obligation to provide information to participants can be very costly.

In Kujanek v. Houston Poly Bag, a terminated employee alleged that he was not provided with sufficient information about how to roll-over his 401(k) account balance.  He claimed a loss of almost $184,000 because of the delay.  First there was a debate about whether the employee had requested information from the plan.  Under ERISA 104(b), a plan administrator has to provide certain information to the participant upon request.  But it also appears that the plan forgot the requirements of IRC 402(f) that requires a plan administrator of an employer plan to provide a participant, who is about to receive an eligible rollover distribution from the plan, with a written explanation of the rollover and other tax treatment of the distribution.  There was no indication that the plan had provided this notice at the time of his eligibility for distribution.

While not at issue in this case, group life insurance policies can also have a notice obligation.  Many states require that group life insurance policies provide conversion rights when an employee terminates.  While ERISA generally preempts state law relating to benefit plans, insurance laws (like those governing life insurance policies) are saved from preemption.  There have been multiple cases involving the failure of an administrator of a life insurance plan to provide conversion notices.  Often times the insurance regulations leave that obligation entirely to the policyholder (meaning the employer in most instances).  So failing to give notice of that conversion option would be an ERISA breach and state law may make it the sole responsibility of the plan sponsors to provide the notice.

So when terminating employees, it is good practice to have a notice or form checklist related to all the benefit plans the employee previously participated in and make sure that on their way out the door, they have all the required notices.  If you have any questions about what notices are required for your plans, don't hesitate to contact your attorney at Fox Rothschild.

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It is pretty clear that COBRA is not available for employees that are terminated for gross misconduct.  In my May 13, 2008 post, I looked at what constitutes "gross misconduct."  So what kind of notice do we give to an employee and dependents if he termination is for gross misconduct?  Do we have to give them any notice at all?

That was the issue in Berry v. Frank's Auto Body Carstar, Inc., recently decided in the Southern District of Ohio.  The employee in this case was terminated after a fight with another employee.  The facts pretty clearly supported a finding that the termination was justified.  But the employee still brought an ERISA Section 510 claiming that the employer terminated him in retaliation for his son’s large health insurance claims.  The employee also sued for failure to provide COBRA notices and election forms to him and his family members.

First, the court decided there was no Section 510 violation because the violent altercation was a legitimate and nondiscriminatory reason to discharge the employee.  There was no evidence that it was a pretext for retaliation based on his son’s significant medical claims.  After that, the Court looked at the "gross misconduct" component and clarified that this type of termination is not a "qualifying event" for the purposes of COBRA notice and election.  The Court went on to clarify that when an employee is terminated for gross misconduct, the plan is not required to provide the terminated employee and his family a COBRA election.  In effect, because there was no qualifying event, there is no requirement to provide a notice or election form.

Unfortunately, the Court did not get into what type of notification does have to be issued.  Even though there is no qualifying event, there is still some obligation by the plan to provide notice that there would be no COBRA coverage.  Ultimately, the determination that a qualifying event did not occur creates an issue that can be appealed, so the employee and his dependents had to at least be given some measure of notice that they have appeal rights.  According to the DOL, the Notice of Unavailability of COBRA Coverage" comes into play when group health plans deny a request for continuation coverage or for an extension of continuation coverage, or when the plan determines the requester is not entitled to receive it.  When a group health plan makes the decision to deny a request for continuation coverage from an individual, the plan must give the individual a notice of unavailability of continuation coverage.  The notice must be provided within 14 days after the request is received, and the notice must explain the reason for denying the request.

So if you are planning to deny coverage because of gross misconduct, you still have to provide a notice.  It should probably be provided within 14 days of the termination or at least 14 days from the date the employee asks for COBRA continuation information.  And it has to provide for an appeal right.  You may still be right about denying continuation coverage, but make sure you don't do so in a way that potentially creates some other cause of action (like failure to provide notice).  If you have questions about what to send and when, you can always contact your attorney at Fox Rothschild.

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Often times, administrators of self-insured plans make decision based on particular circumstances.  "When in doubt, err on the side of helping out the covered participant."  But doing so can create other problems for the plan.  Consider the decision in Clarcor, Inc. v. Madison Nat. Life Ins. Co., recently decided in the District Court for the Middle District of Tennessee.

This is a fight between the employer-sponsor of a medical plan and its stop-loss carrier about significant medical expenses incurred by an employee on short-term disability leave.  The employee in question had originally left full-time employment to go on FMLA leave but when she did not return from that leave, the employer-sponsor decided to place her on short-term disability leave and gave her an additional 6 months of coverage under the plan.  She was not offered COBRA until after the 6-month leave expired.  The stop-loss carrier refused to reimburse the expenses incurred during the disability leave, arguing that the employee’s move to short-term disability, without electing COBRA, made her ineligible under the terms of the plan.  The court, noting that the employer continued to ignore the plain language of the plan—under which coverage ended when the FMLA leave ended— concluded that the termination of FMLA leave was the COBRA qualifying event and therefore the employer’s much-later offer of COBRA was not timely and claims should not have been covered by the plan and were thus not eligible for stop-loss reimbursement.

Undoubtedly, the employer did what they did to help out the employee.  But in doing so, ignored the actual terms of its plan.  In the end, the plan paid the benefits and could not be reimbursed from the stop-loss coverage.  So plan administrators should be careful about making decisions to "help people out."  Making a benefits determination that exceeds plan terms, or ignores plan terms, can potentially subject a plan sponsors to claims that it is administering the plan in a discriminatory manner.  It can also give rise to claims that the plan is being administered contrary to its terms, which is itself a potential breach of fiduciary duty.

But in this instance, it result in the plan sponsor being shut out of stop-loss reimbursement.  Stop loss carriers will not reimburse plans for claims it covers that it should not have been covered under the plan terms.  So when considering whether to be "generous" with plan interpretations (like expanding eligibility to someone who is not otherwise eligible) consider the potential repercussions.  Plan sponsors and plan administrators are cautioned to stick to plan terms and not look for ways to bend the rules to help participants out.  The results can be very costly.  For assistance in interpreting plan rules in special situations, and for avoiding potential pitfalls, don't hesitate to contact your attorneys at Fox Rothschild.

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Are your 401(k) fees too high?  Are you breaching your fiduciary duty?  No question that this "fee" issue is becoming an increasingly hot topic, so let's take a look at the Third Circuit's decision in Renfro v. Unisys Corp. that came out last week.

Originally, this action was brought as a breach of fiduciary duty claim where the participants alleged that the fiduciaries had “inadequately selected" the mix and range of plan investment options.  The claim was that the plan might have had the opportunity to offer cheaper options.  Factually, the plan’s investment options consisted of 73 funds, 67 of which were retail mutual funds managed by the plan’s service provider and added as part of a bundled service agreement with the provider.  The participants claimed that the fees on the provider’s mutual funds were excessive when compared to the services they provided, other mutual funds, and other types of investment options that could have been included.  The trial court dismissed the case based on its finding that the plan’s “sufficient mix of investments” did not support a fiduciary breach claim and the Third Circuit affirmed.  In sum, just because other cheaper options may have been out there, at least a variety of options was offered and that was sufficient.

To reach their conclusion, the 3rd Circuit looked to decisions  in the 7th Circuit and the 8th Circuit and determined that the analysis hinges on the the characteristics of the mix and range of the investment options offered.  So the determining factor was the reasonableness of the options offered in the aggregate.  For example, the 7th Circuit concluded that a set of options that 23 retail mutual funds and a brokerage option with access to over 2,500 funds satisfied the fiduciary obligation.  The 8th Circuit determined that a narrower range of options in a plan that offered only 13 investment options, 10 of which were retail mutual funds, was not acceptable and upheld a claim for breach of fiduciary duty.  So the 3rd Circuit decided that because the menu of options available had a “variety of risk and fee profiles, including low-risk and low-fee options,” the breadth of the options weighed in favor of a dismissal of a claim for breach of fiduciary duty.

This is not to say that more investment options will always be better.  The court seemed particularly focused more on the range and mix.  Certainly a variety of options, both in terms of investment strategy and fees, was a key component.  For example, offering 3 large-cap stock funds may not be enough if all three have the same fee component.  Plan sponsors would do well to consider offering a mix of fee options.  To do that, plan sponsors have to make themselves aware of the fees charged.  Which brings us back to the whole debate about reporting.  Participants not only need to know the risk and have various options to control that risk, but they also have to have variety of fee options (and be told which investments cost less).

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Service providers beware!  A recent ruling in the Ninth Circuit Court of Appeals seems to suggest that anyone who participates in the administration of a benefit plan is a potential defendant under ERISA. 

Generally, we look at claims brought by participants under ERISA Section 502 as limiting of who may bring a suit, and ERISA clearly provides that fiduciaries (including plan administrators) are certainly potential defendants in actions brought under that section.  However, in the recent case of Cyr v. Reliance Standard Life Insurance (9th Cir. 6/22/11), the Court found that Section 502 does not appear to limit which parties may be defendants in a civil action brought under that provision. 

Cyr sued the plan administrator, but also sued Reliance as the actual insurer of the benefits in question.  Reliance was not the administrator but did control approval or denial of the insured disability benefits.  The court reasoned that, based on the holding in Harris Trust v, Smith Barney, there is really not set restriction in Section 502 about who can be sued, so there is no reason to read in such a limitation.  Reliance was a "logical defendant" because it was the ultimate payer and effectively controlled the plan, even though it was not the designated plan administrator. 

So where does this leave us?  Well, companies that participate in the process of providing plan benefits, though not specifically designated as fiduciaries or administrators, are viable defendants if they have authority to accept or reject claims.  The extent of that authority may be subject to debate, but those would be issues raised against any potential defendant.  So be wary that just because you are not "named" as a fiduciary, if you exercise decision making power over claims, you could be a defendant in an ERISA litigation.

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Your communications with your attorney are not privileged.  Wow, that is a scary thought, isn't it? 

Courts have carved out a very broad exception to the attorney-client privilege in the context of fiduciary litigation.  When an attorney advises a fiduciary about the administration of a benefit plan, courts have found that the the attorney's client is actually the beneficiaries of the plan and not the fiduciary personally.   So courts have consistently held that the attorney-client privilege should not be used as a shield against the parties who the fiduciaries are obligated to serve.  Consequently, the 4th Circuit recently confirmed (in Solis v. Food Employers Labor Relations Ass'n) that the attorney-client privilege does not extend to communications between a plan fiduciary and legal counsel related to plan administration.

The fiduciary exception in ERISA litigation is not without limit.  The fiduciary exception applies only when the person receiving legal advice acted in a fiduciary capacity pursuant to ERISA at the time the communication was made.  So in general terms, the fiduciary exception should apply only if the legal advice at issue concerns the administration or interpretation of an employee benefit plan.  The exception should not apply, for instance, to communications concerning a decision to amend or terminate an employee benefit plan because these are settlor functions and an employer does not act as an ERISA fiduciary in these cases.  A plan sponsor owes no fiduciary duty to plan participants and beneficiaries when making a decision to amend or terminate an employee benefit plan.  The duty is owed once the decision is made and how the decision is implemented.

But how do you make those distinctions at litigation time?  Is the corporate counsel who also helps with the plan going to get caught up in the privilege issue?  Who can determine what communications are and are not related to administration as opposed to settlor functions?  What if your business attorney advises about 401(k) administration?  Can he still defend a claim for breach of fiduciary duty?

The answers to these questions can be complex the deeper you go, but a simple start would be to consider having separate employee benefits counsel, someone who specifically limits representation to the benefit plan issues and their administration.  Maybe it is from the same law firm, or from a different law firm, but you should be thinking about this issue BEFORE having to defend a claim.  If you have counsel that limits their advice to fiduciary matters, you can at least know that in a breach of fiduciary duty suit, their communications would not be privileged.  You can base your communications on that "known" factor.

So instead of wondering, why not consider designating a specific attorney as benefits counsel.  That way you can segregate their knowledge and their advice based on an expectation that those communications could be discovered.  I hate to say it, but the less they know about your other business operations, the less likely it is that what they do know could some day be at issues.  At least you would be in control of the information flow, and that ultimately can strengthen the privilege.

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Since it is hot off the presses, I would be remiss in not at least commenting on the the Supreme Court's recent decision in Amara v. Cigna.  The Court declares quite plainly that plan summaries, like summary plan descriptions and summaries of modifications, are not the "plan" provisions that can be enforced under ERISA.  Instead, the formal plan document is what controls the benefits and courts cannot change the benefits provided by the plan.  Were it that simple, the Amara case would be a huge boon for every plan sponsor struggling with plan communications.

Factually, the case arose from Cigna's conversion of its pension plan into a case balance plan.  The participants sued, claiming that Cigna did not satisfy the ERISA disclosure requirements during the transition.  The District Court agreed and "reformed" the new plan, then ordered Cigna to pay benefits under the reformed plan.  The Second Circuit agreed but the Supreme Court did not.

First, the Supreme Court found that ERISA only grants the ability to enforce plan terms, not to change them.  So the District Court could not modify the terms of the plan.  Second, and something that can be seen as a boon to plan sponsors, administrators and fiduciaries, the Court found that claims for benefits under ERISA 502(a)(1)(B) cannot be based on wrong information in summary documents.  The claim for benefits can only be based on what the plan provides.  Third, the Court rejected the idea that it was enough to show "likely harm" to pursue a claim.  There has to be actual harm.  So plaintiffs have to show they actually suffered some loss.

But it is not all rosy.  The Court went on to find that "equitable remedies" under 502(a)(3) might include monetary damages.  Or it might include equitable estoppel.  Which means that while the District Court could not reform the plan, it might be able to find some other form of remedy to compensate the plaintiffs.  Just not plan benefits.  So while this case affirms that ERISA does not provide specific relief for misrepresentations, it does clear the way somewhat for courts to re-evaluate what equitable remedies might be in these situations.

So what does that mean for us?  Well, step one is to see what our plan document is.  If you have a "wrap document" where the SPD and plan document are rolled into one, this may have no bearing on you.  But if you have separate SPDs and plan documents, now would be a good time to review them to make sure they don't conflict.  More importantly, make sure your plan document actually provides the benefits you think it provides. 

Continue Reading...

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Plan administration is a tricky thing.  There is a long history of court cases arising from claims for misrepresentation, but ERISA has generally been found to protect simple state aw claims for negligent misrepresentation.  However, a misrepresentation can give rise to a claim for breach of fiduciary duty.

Take the case of Stark v. Mars, where the S.D. of Ohio recently ruled that a claim for breach of fiduciary duty for misrepresentation could proceed against the benefits committee.  Stark utilized the company website to confirm her retirement benefit of about $5,300 a month.  She also called a company employee and was again told that her monthly benefit would be $5,300.  After she made here election, she was informed that there was an error in the calculation and her true monthly benefit would be $2,300 a month and she had to pay back an overpayment of $15,000.  Naturally she brought a lawsuit.

The Court first found that the complaint failed to establish that the company was a fiduciary.  But it did find that the benefit committee was a fiduciary and was therefore subject to a claim for breach of fiduciary duty.  To the extent the committee was responsible for plan administration, including giving advice to participants about their benefits, that would be sufficient discretionary authority to sustain a claim for breach of fiduciary duty.  Since the case was only at the motion to dismiss stage, the Court did not rule on whether Stark would recover, only that she could proceed with her claim.

Now it is very likely that the members of the benefits committee individually did not have contact with Stark.  But they had a duty to make sure benefit information was communicated properly.  So I think this case serves as a reminder to fiduciaries that one of their duties is to ensure that the plan, service providers and other plan representatives communicate accurate information to participants.  Participants are allowed to rely on representations made by the plan.  If your communication are not accurate (such as miscalculated benefit statements, incorrect eligibility language or missing disclaimers on notices), the participant may not necessarily get the benefit from the plan.  But they can pursue a claim for breach of duty against the fiduciaries. 

So make sure you are providing accurate statements.  And make sure you have your benefits professionals review communications on a regular basis to confirm they are accurate and correct under the current state of the law.  It will go a long way toward avoid claims for breach of fiduciary duty based on misrepresentations. 

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Plan administration can be tricky sometimes but it is good to see when a court upholds an administrators determination as "reasonable" when it also makes common sense.  Take the case of Redeaux v. Southern National Life Insurance Company, recently decided by the 5th Circuit.

In this case Redeaux was covered under a life insurance policy (the plan) issued by Southern National Life Insurance Company.  He died in an automobile accident in 2002.  His mother, the listed beneficiary, received the life insurance benefits, but the plan denied her claim for accidental death benefits.  It turns out that Mr. Redeaux died in a single-car accident and the death certificate showed that his BAC at the time of death was .21 (significantly over the .10 legal limit). 

Southern denied the claim for accidental death benefits based on a policy exclusion "for a loss which in any way results from . . . injury or death occurring as a result of the commission of a crime or the attempt to commit a crime."   After removal of the state court action to federal court, the district court granted summary judgment in favor of Redeaux, and Southern appealed.   According to the 5th Circuit, the only issue on appeal is whether Southern erred when it denied the claim on the basis of the policy exclusion. 

the 5th Circuit reviewed Southern's denial using a deferential standard of review because of language in the plan providing for the right to interpret plan provisions.  The question became whether the insured's death occurred as the result of committing a crime.  While the deceased was not charged with a crimes, driving a vehicle while intoxicated is a crime under state law.  The Court found that an actual criminal charge is not required to conclude that he was driving illegally.  As such, the Court concluded that Southern did not err in finding that the accidental death benefit was not payable from the plan because of the exclusion.   The 5th Circuit reversed the lower court's decision and rendered judgment in Southern's favor.

Aside from being appearing to be an extremely rational decision, this also serves a a reminder to plan administrators that language giving the right to interpret the plan provisions to the administrator is good because of the deferential standard.  Plus it reminds us that clearer language may be needed to further protect the plan.  Had Southern said excluded benefits for the commission of a crime "whether or not the insured is actually charged with a crime," that might have eliminated the need for the appeal.  So read language carefully and don't assume what you meant is what every court will read.

For assistance in reviewing your plan language to avoid ambiguities, please contact your attorney at Fox Rothschild.

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On previous occasions I have referenced the fee disclosure rules for retirement plans with an emphasis on fee disclosures.  Today I discovered that the AARP has just introduced an on-line tool for calculating 401(k) fees.  This was done in conjunction with their release of a survey that had some interesting results:

1. 62% of respondents were unaware of the fees they were paying in their 401(k) plan
2. 81% of respondents said fees were very important or somewhat important to them
3. 71% of respondents believed the paid no fees whatsoever
4. 32% said they had no idea how fees impacted their retirement savings

As I read these figures, it leads me to believe that as a larger portion of the population gets closer to retirement, fees and efforts to reduce those fees by fiduciaries is becoming increasingly more important.

Then, I happened upon a class action case recently filed in US District Court in Washington that alleges that a pension plan fiduciary breached its fiduciary duty to the participants by over-investing in alternative, risky plan investments.  This allegedly caused the plan to become significantly underfunded, putting pension benefits at risk.  The claim is that the alternative investments were too complex to be given appropriate due diligence by the fiduciaries and that the fiduciaries may have put the company's own interest ahead of the participants.  This case was just filed so there is no ruling in it, but it does bring to bear the fact that participants are becoming more savvy about where their pensions are invested and what the risks and costs might be.

So a careful, prudent fiduciary has to be reminded to take steps to reduce costs, report adequately and follow a prudent investment policy.  Don't overlook the need for an investment policy statement and consider providing more information to participants about fees on their retirement accounts so that they themselves have options.  Make sure your communications are properly vetted by your benefits professionals before they go out, but definitely think about increasing communications.  Sometimes the best defense to a claim for breach of duty is showing in advance steps taken to satisfy that duty.

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If you are in a multiemployer pension plan as a result of union participation, you should be aware by now of the concept of withdrawal liability.  Basically, withdrawal liability means that portion of unfunded vested liabilities that is allocated to an employer who ceases to have a contribution obligation to the multiemployer fund.  The allocation occurs at the time of the withdrawal.  However, there are certain exceptions to withdrawal liability and one of them is when there is a sale of assets and the buyer agrees to continue to participate in the pension fund in substantially the same way as the seller used to.  If you are not in a multiemployer pension fund, you might want to stop reading now. 

ERISA Section 4204 is called the "asset purchase exception" and it provides that there will not be withdrawal liability solely because of a sale of assets if the purchaser assumes the liabilities.  In a recent case, Central States, Southeast and Southwest Areas Pension Fund v. Georgia-Pacific (2011), the pension fund challenged the word "solely" to determine when in fact a withdrawal occurs.  Georgia Pacific sold its assets to a buyer who assumed the contribution obligation in 2004.  But prior to 2004, Georgia Pacific had gradually taken actions to decrease the numbers of employees in the pension fund without causing a partial withdrawal (which occur when the contribution obligation decreases but is not complete).  

The Fund said "hey, the withdrawal from the fund was not solely from the sale of assets, but occurred over time, so the asset purchase exception does not apply."  In other words, they contended that the word "solely" meant it could be the ONLY occurrence of withdrawal.  Since there had been prior actions that resulted in cessation of contributions, this was not the sole withdrawal.  Fortunately for employers, the Seventh Circuit Court of Appeals disagreed.  The Court said that while this was the first opinion that looked at this issue, it agreed with the arbitrator that the prior reductions should not be treated as a single transaction with the ultimate sale.  These separate reductions had their own potential consequences and could not be tied to the actual final withdrawal.

This decision is important for employers that are considering an asset purchase transaction and possible exemption.  What is says is that the transaction will be viewed as its own withdrawal event.  Prior steps taken to lower potential liability, like partial closing or reductions in force that do not trigger a partial withdrawal, do not cause the ultimate sale to fall outside of the 4204 exception.  So in essence, this affirms that it is you are contemplating a sale in the future, it's OK to act in the present to reduce potential future issues.  Knowing that these actions won't be held against you is a positive.

For questions about withdrawal liability, multiemployer pension funds or union plans in general, please contact your attorney at Fox Rothschild.

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Most employers are aware that COBRA exempts from its applicability employers with fewer than 20 employees.  But sometimes there can be more than one employing entity that is "related" and that related entity has to be considered when determining applicability of COBRA.  Take the case of Franco-Santos v. Goldstar Transport, Inc., decided last week.

The terminated employee claimed her employer failed to provide her with a COBRA election notice. The employer argued that it was not required to comply with COBRA because it fell within COBRA’s small employer exception because it had fewer than 20 employees.  The court ultimately ruled that the employer met COBRA’s small employer exception.   But in doing so, the Court considered the employees of a related company to determine whether the 20-employee figure was met. 

The court reminded the parties of the COBRA regulations, which states that an employer has normally employed fewer than 20 employees during a particular calendar year if it employed fewer than 20 employees on at least 50% of its work days that year.   There is also a mechanism for counting part-time employees as a fractional full-time employee.  The court also assumed that the two related companies must be combined as a single employer. The court then found that the number of employees, 19.4, was still below the 20 employees required to subject the plan to COBRA’s requirements.

It is important to note that the Court did not make any further comment on how the companies were related.  However, IRS regulations make it clear that when counting employees, you have to include all employees of all related employers under "common control."  So while this case resulted in a win for the employer, it should also serve as a reminder to smaller employers that just because you have 3 companies, all with fewer than 20 employees, you are not automatically exempt from COBRA.  You have to aggregate your employee count based on the rules of "common control."  If you have any questions about measuring the relatedness of business entities, or about COBRA compliance generally, please contact your attorney at Fox Rothschild.

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Disability benefits provide an interesting problem for plan administrators because there are multiple times when an appeal right may attach.  The first is at the beginning when the claim is made.  Of course there could be appeals if benefit limits are changed.  And there is the potential for appeal if the decision is made to terminate disability benefits.  The latter is what the 3rd Circuit Court of Appeals was looking at in Miller v. American Airlines (Jan. 2011).

Miller was a pilot who was awarded long-term disability benefits from the Plan in November 1999, based on his psychosis and anxiety.  In October 2006, the plan administrator terminated the benefits, on the grounds that it could no longer verify the disability.   The Court determined the termination of benefits was "arbitrary and capricious" because the "decision making process that American applied was flawed in many aspects, demonstrating that the assessment of Miller's disability was not the product of a reasoned, disinterested fiduciary."

Some of the failure identified by the Court:

1. the plan administrator's decision was not based on substantial evidence, as reports from the plaintiff's examining doctor evidenced the disability and has not changed since 2003;
2. the plan administrator operated under a structural that created a conflict of interest.  Although the the Plan is a defined benefit pension plan, every dollar the employer saved by terminating the disability benefits from the Plan decreased the employer's projected benefit obligation, and thus the amount the employer must ultimately contribute to the Plan.. This meant that the plan administrator had an incentive to stop paying benefits because it would have a "gain" once the benefits were terminated.
3. the plan administrator added requirements midstream, like providing that the absence of an FAA certification justified the termination, though the plan itself had no such requirement.

The Court also opined that, in reviewing actions in the "remedy" phase, courts should focus on preserving the status quo, and that logic dictates differing approaches for an initial denial versus a termination of benefits.   "In a situation where benefits are improperly denied at the outset, it is appropriate to remand to the administrator for full consideration of whether the claimant is disabled.  In the termination context, however, a finding that a decision was arbitrary and capricious means that the administrator terminated the claimant's benefits unlawfully."

The Court's holding points out what the plan administrator did wrong, which is good to know.  But it also illustrates the possibility of a shifting standard of review and obligation on the part of plan administrators related to the appeals process.  The court seems to confirm that cutting off benefits once given might require a more stringent review than the initial decision to grant or deny benefits.  Implication aside, the court does make pretty clear that if you are going to modify or terminate benefits, the appeal of that decision should be "by the book" and in close compliance with the plan documentary provision.

So ultimately the warning to plan administrators (and sponsors) is to make sure you know the content of your plans, the requirements of the appeals process for those plans and the standard of review that may ultimately apply to the decision.  This will make you better prepared to defend that position if it is ever challenged.

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In some prior entries, I have made reference to the obligations of employers to make contributions to their own benefit plans and the obligation to make contributions to a multiemployer benefit plan.  These references have generally been associated with some question about the fiduciary duties of an employer or plan sponsor as it relates to those required contributions.  In a recent decision from the Western District of Pennsylvania, a district court touched on all of the relevant issues, including personal liability, that I felt it should be considered.

In Carpenters Combined Funds v. Klingman, the Court considered a case where the sole shareholder, officer and director of a company was personally sued for breach of fiduciary duty for failing to submit payment of employee fringe benefit contributions to the Funds.  The Court found that Klingman was personally liable for the delinquent contributions because they constituted "plan assets" such that he had a fiduciary obligation to contribute them to the Fund. 

Before questioning whether this means that all owners will now always be individually liable for contributions, consider the actual facts.  First, the Labor Agreement that created the contribution obligation had a specific provision that provided that in the event the employer failed to make contributions, personal liability would attach to each corporate officer.  So there was a signed bargaining agreement that provided for the possibility of such liability.  Second, the required contributions were deferrals and withholdings from payroll that were, at least in part, to be put into defined contribution plans.  So it was clear that the employees were putting money into the hands of the employer intended to go into the benefit plans.

Third, the Court' specifically limited its analysis to the fiduciary duties as defined under ERISA and stayed away from any labor relations laws that can cloud the issue.  Not every delinquent contribution is a "plan asset" that creates personal liability.  Instead, the Court looked to prior decisions that determined that when employee deferrals are withheld with the intention of submitting them to plans, the person (or persons) in charge of that process have a fiduciary obligation under ERISA 404 to timely submit these contributions to the plans.  hey are "plan assets" when withheld, not when contributed.  Moreover, under ERISA 409, a fiduciary can be personally liable for damages as a result of a breach of fiduciary duty.  So ERISA clearly envisions liability to an individual.

In the end, the decision really serves as a reminder to those who handle deferrals and contributions to benefit plans that they are fiduciaries because plan assets are "plan assets" when the deferrals are take out (when the contributions are due) not just when they are actually put into the plans.  By way of simple example, an employee deferral to a 401(k) plan is an asset of the plan when the deferral is made, and there is a fiduciary obligation to put that deferral into the plan in a timely manner.  Similarly, if the contribution obligation arises under a collective bargaining agreement, that contribution is a plan asset when the contribution is due, not necessarily when it is actually made. 

So be wary about how these contributions are handled.  Make sure bargaining agreements don't create personal liability.  Timely remit deferrals to the requisite benefit plans.  And above all, be aware that fiduciary liability can arise simply by taking control of plan assets, even if it is not anticipated.  If you have any questions about when fiduciary status arises, or how to protect against potential breaches, contact your attorney at Fox Rothschild.

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Every once in a while I like to throw in something that does not appear to immediately be a "benefits" related item but secretly is.  Susan Jordan of our Pittsburgh office brought this case to my attention and I thought it might be worth mentioning.

On January 11, the Supreme Court ruled that medical students training to be residents are employees, and not students, and therefore subject to Federal Insurance Contributions Act taxes (Mayo Foundation for Medical Education and Research v. United States, U.S., No. 09-837, 1/11/11).

After deciding the proper analysis to use, the court found that the Internal Revenue Service's interpretation of the “student rule” for FICA purposes—which found the medical students were employees—was reasonable and therefore taxes were owed.  “We do not doubt that Mayo's residents are engaged in a valuable educational pursuit or that they are students of their craft.  The question of whether they are "students" for purposes of §3121, however, is a different matter,” the court concluded.  “Because it is one to which Congress has not directly spoken, and because the Treasury Department's rule is a reasonable construction of what Congress has said, the judgment of the Court of Appeals must be affirmed.”  So FICA tax them.

Very "tax" related.  But now for the benefits part.  While not directly analogous to FICA tax requirements, consider that rules governing benefit plan administration are pretty specific about who is eligible to participate, how they are eligible and what can be done to limit their eligibility.  Paid interns or paid students are "employees" and, absent any more specific limitations, are treated as employees.  Arguably they could be seasonal, or temporary, but they are still employees.  Depending on how much they work, they could obtain eligibility to participate in benefit plans.  This is particularly important if you are in a state that has regulations about required compensation to interns or students.

Generally employers have authority to determine who is eligible to participate in their plans.  But they have to affirmatively exercise that authority and should not leave open questions about eligibility.  The important thing to remember before hiring students, interns or other temporary employees is that you have to check your plan eligibility rules in advance.  Don't assume these classifications automatically exclude participation.  Check to be sure.  And if necessary, amend the language to be really sure.  And of course, check with your attorney at Fox Rothschild if you have concerns.

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Before everyone gets excited about engaging in an argument about the constitutionality of health care reform and debating the various cases that are pending on the topic, understand this is not what this posting is about.  I am just bringing out the current status of the various cases challenging the reform so you know what is ahead.

Monday, a Virginia District court ruled in a case brought by the Virgina Attorney General, that the provisions of reform that mandate the individual purchase of insurance is unconstitutional.  This conflicts with some prior district court rulings that found that it was permissible.  Not surprisingly, those decisions also were divided along  party lines depending on which president appointed them.  There have also been a couple decisions tossing out claims made by entities who were determined to not have standing.  There are also other suits filed by other states that remain open that will generate other opinions and they also include a challenge to the laws administration of Medicaid and other mandated benefits. 

The key here is that eventually this issue of the "mandate" will find its way to the Supreme Court where there will be a determination as to whether or not an individual can be required to purchase health insurance coverage.  The concern is that much of the reform currently being enacted is premised on the idea that people will be required to pay premiums so that will eventually pay for the changes.  if people cannot be forced to buy coverage, funding may ultimately become an issue.  We are a long way from having a final answer on that.

But what I do know is this: January 1, 2011, is fast upon us and for most employers and plans, that means the first set of administrative and eligibility changes are due.  These court fights do not give us the liberty to avoid compliance now.  Make sure you have sent required notices, are prepared to deal with discrimination testing and have amended your plans and documents.  No matter how this "mandate" issue plays out in the courts, the administrative and eligibility changes we now see are with us for at least the foreseeable future, so make sure you are prepared.

If you have any concerns about your compliance with the required changes, please contact your attorney at Fox Rothschild.

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In the past, I have written about the importance of including accurate language in summary plan descriptions and how significant it is for plan sponsors to include appropriate "discretionary authority" language and "reservation of rights" provisions in plan documents.  These typically give the administrator the ability to interpret and amend the plan without giving rise to claims for breach of duty by participants once changes are made.  Recently, the US Supreme Court heard arguments in the case of CIGNA v. Amara that addresses these provisions.

At first blush, the reaction is to say "wait, they are going to say we can't rely on those provisions when we administer the plan."  And in fact, some commentators have suggested this case is about taking away the ability to rely on these provisions in administration.  But a closer look at the case reveals that its real issue is one about damages and remedies, and that should be the true concern for plan sponsors.

The appeals court decision affirmed a lower court decision that determined when Cigna switched from a traditional defined-benefits retirement plan to a cash-balance plan in 1998, the new summary plan description (SPD) misled employees about the benefits they'd be entitled to.  Specifically, the SPD left employees with the incorrect understanding that they would begin accruing incremental benefits under the new plan immediately.  However, the detailed plan document provided that each worker's cash-balance account had a starting balance that was less than the value of his or her defined-benefit account.  Thus, anyone who left the company before the new account caught up in value with the old one would not, in effect, have earned any new benefits.  Many employees thought, based on the SPD, they were to get the full value of the first plan plus new benefits accruing from the date of the change, so they commenced a class-action case and the lower courts gave them that relief.

 In an odd twist, Cigna does not dispute the finding that its SPD was misleading.  Instead, its appeal is based the lower court determination that all 27,000 participants in the lawsuit suffered "likely harm."  In other words, to recover, the participants do not actually have to show they "detrimentally relied" on the misstatement to recover.  The way the law currently sits, to recover on a claim for misrepresentation, there has to be a showing of detrimental reliance and actual harm.  In this case, there would have to be a showing that "but for the misrepresentation," the participants would not have acted the way they did.

Typically, ERISA relief is limited to benefits you would otherwise have received under the terms of the plan.  So in this case, you would expect the remedy to be limited to those who were either denied benefits, or those who can prove that had they know they were not going to get benefits, they would have acted differently.  But to simply say "everyone in the plan was misled" seems to expand the remedies available to something not intended under ERISA.

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Just because you work with retirement plan money, you are not necessarily a fiduciary.  This is generally good news to service providers who are trying to balance between potential liability under ERISA and their obligations under service contracts to plans and plan sponsors.

In Erickson v. ING Life Ins. & Annuity Co., the U.S. District Court of Idaho recently affirmed that a service provider moved money was not liable as a fiduciary.  At issue concerned moving money as a directed custodian.  The funds were transferred a day late which cost the plan money.  But the court would not allow a claim for breach of fiduciary duty to survive, finding that mere custodial responsibility (meaning acting at the direction of other fiduciaries) did not automatically give rise to fiduciary status under ERISA. 

The court reasoned that fiduciary status requires something more than merely having control of certain ministerial functions involving plan assets, like writing checks or moving money.  To be a fiduciary, one has to be using their own judgment and assume control, not simply acting at the direction of the plan.  Doing what you are told is not the same as assuming authority or control over plan assets for the purposes of being a fiduciary.

It is important to note that the court did not foreclose a possible negligence or breach of contract action against the custodian.  It merely concluded that this was not an ERISA case.  So for plan service providers, a case like this can provide some measure of comfort in the idea that just because you work with plan assets, you are not automatically a fiduciary.  but it also reminds us that service providers should be very clear in their contracts and agreements as to who is giving the directions and making the actual decisions for the plan.

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You might recall from a previous posting that I discussed the Supreme Court's decision in Metropolitan Life Insurance Co. v. Glenn.  In that case, the Court held that there is an inherent conflict affecting insurance companies that both decide and pay claims for benefits.  This conflict must be considered in determining whether an insurance company abused its discretion in denying a claim for benefits.  This does not eliminate the application of the "arbitrary and capricious" standard of review that ordinarily applies to benefit determinations. Instead, is creates a  two-step analysis for courts that are asked to review claims determinations.  The first is to determine whether a structural conflict exists which occurs when the administrator both evaluates claims for benefits and pays for them.   If this is the case, then step two applies and the court then must determine how much weight the conflict should be afforded in determining whether the administrator abused its discretion in denying the claim.

Subsequent to Glenn, the Second Circuit Court of Appeals recently ruled in Durakovic v. Building Service 32 BJ Pension Fund, that, like insurance companies, Taft-Hartley funds are inherently conflicted when making benefit determinations, and that this conflict needs to be considered by federal district courts when reviewing plan determinations under an arbitrary and capricious standard of review.  This could have significant implications for these multiemployer plans and their future benefit plan determinations.

By way of background, Taft-Hartley (or multiemployer plans) are generally administered by a board of trustees, with equal numbers of union and management trustees. Appeal of benefit determinations are made to the board that ultimately makes a ruling on the appeal. The assumption is always that the balance of union and management takes away any perceived conflict because both sides would be equally represented in a decision process.

In Durakovic, an employee applied for disability benefits from her union-sponsored plans.  The plans provided benefits to those deemed to be disabled.  The plans denied her claim for disability benefits after a review of her appeal and she subsequently filed suit in federal district court challenging the funds’ decision.  On appeal, it was agreed that the challenged decision was subject to an arbitrary and capricious standard of review by the court. However, both parties disagreed with the district court’s decision that the Fund’s “conflict” was a relevant factor.  The plans argued that they were not conflicted within the meaning of Glenn because Taft-Hartley funds are administered by an entity composed equally of union and employer representatives. Durakovic argued that the conflict should have been accorded more weight.

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While Congress has not yet determined to extend the COBRA subsidy further, one of the first court decisions dealing with subsidies, and more importantly, a denial of subsidy, has been decided.  Dorsey v. Jacobson Holman, from the DC district court deals with denial of the COBRA subsidy.

Dorsey applied for the COBRA subsidy and her employer denied the subsidy application saying she voluntarily terminated.  Dorsey did not return from an FMLA leave of absence.  After checking with the DOL, Dorsey informed her employer that the DOL considered the termination to be involuntary.  In fact, the DOL representative also contacted the employer and told them so.  But Dorsey did not actually file an appeal with the DOL.  Instead, she filed this lawsuit.

The Court dismissed the lawsuit finding that Dorsey had failed to exhaust administrative remedies, which is generally a precursor to filing a case under ERISA.  The court decided that since the ARRA provides a specific appeals process, that appeals process has to be exhausted before a suit can be brought.

This decision does not necessarily result in the employer avoiding the subsidy, but it does provide some guidance and assurance to plan sponsors that the subsidy process is tied into and consistent with the normal components of plan administration.  It appears that ERISA protections and responsibilities will apply.  Thanks to Susan Jordan, a partner in our Pittsburgh office, for bringing this to my attention. 

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The award of attorneys fees under Section 502(g) of ERISA (29 U.S.C. 1132(g)) is a pretty misunderstood concept.  502(g)(2) gives a plan or fiduciary the ability to recoup attorneys fees for cases involving delinquent contributions under Section 515 when the fund "prevailed" or was successful in its action.  But 502(g)(1) has remained a bit of a mystery because it simply provides that in suits by participants or fiduciaries brought to enforce ERISA, the court can award attorneys fees to either party in its discretion.

Most courts look to apply a 5-factor test to an award of attorneys fees: (1) culpability or bad faith of the opposing party, (2) ability to satisfy a fee award, (3) deterrence effect, (4) whether the decision benefits all participants or resolves a significant legal questions, and (5) relative merits of each party's position.  While 502(g)(1) does not specifically require a party to prevail to get an award for attorneys fees, many courts have found that in order to get them, you first have to win.

In Hardt v. Reliance Standard Life, the United States Supreme Court has now weighed in to find that there is no "prevailing party" requirement in 502(g)(1) that would require a win before fees could be awarded.  The Court determined that "some success" by the applicant on the merits of the case which is not merely trivial or procedural is required in order to support an award.  However, "some success" does not mean an complete and final determination on favor of the applicant.  Moreover, the Court completely rejected the traditional 5-factor test, finding it has no relation to ERISA laws as written.

In the Hardt case, the apparent success was an award remanding the claim to the plan for a second review.  It was not a determination that benefits were improperly denied.  So that was "some success."  But the Court's decision does not provide any further clarification as to what "some success" will mean going forward, only that it is less than a complete victory that may have previously been the default measurement.

So by eliminating the 5-factor test, and requiring only "some success," the Court has probably muddied rather than cleared the waters.  In theory, because Reliance also had some success, it too could have been awarded attorneys fees.  But since the award would be fully in the discretion of the lower Court, could that Court still have considered the traditional components of the 5-factor test even if it was not applied specifically?  It remains to be seen how courts will deal with this further.  But plan administrators should now be prepared to consider attorneys fees as a possible litigation risk even if it appears a plaintiff will not fully succeed on their claim.  Even a partial win could be a full win when it comes to fees.

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Some things did happen this week that had nothing to do with health care reform or COBRA.  Notably, the U.S. Supreme Court issued an opinion yesterday in Conkright v. Frommert, a case that some real positive implications for plan administrators.  I have written in the past about the deferential standard of review and this case further outlines its importance.

By way of background, in Firestone v. Bruch, the Supreme Court confirmed that if the benefit plan contains a provision that gives the administrator "discretionary authority" to interpret plan provisions, then that interpretation could only be overturned if it was "arbitrary and capricious."  This gives administrators the ability to reasonably interpret provisions that could otherwise be disputed as long as they did not do so in an unreasonable manner. 

In Conkright, a dispute arose over how to interpret plan provisions regarding reduction in benefits for past pension distributions for people who were re-hired after taking lump sum distributions.  The plan had a provision giving the administrator discretion to interpret.  The District Court applied the deferential standard of review and ruled in favor of the plan.  The Second Circuit reversed and remanded, finding the administrator's decision was "unreasonable."  The second time around, the District Court did not apply a deferential standard and found in favor of the employees.  The Second Circuit affirmed saying the district court could refuse to apply the deferential standard.

The Supreme Court said "not so fast."  The Court found that the Second Circuit erred in its holding that the District court could refuse to apply a deferential standard.  The Court affirmed that if the plan reserves the right to interpret and puts it in the hands of the administrator, that interpretation cannot be disturbed if it is reasonable.  The Court did not say the interpretation was correct, only that it must be viewed with the deferential standard.

Why is this important?  Well, first it reminds plan sponsors to include the ability to interpret (discretionary authority) in the plan.  Second, there are changes on the horizon associated with health care reform, and probably with respect to retirement plans and their administration.  Administrators should be cautioned to apply reasonable interpretations to plan provisions, but should also continue to be assured that the deferential standard will apply when considering those interpretations.

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With all of the changes to COBRA and questions about the subsidy for COBRA participants, it is important to keep in mind that accuracy of information is still very significant.  Plan administrators should keep in mind that the $110 a day penalty still looms large when dealing with COBRA content of notices and timing of distribution.

This was brought home recently in In re Olick, a bankruptcy case out of the Eastern District of Pennsylvania.  (2009 WL 5214583).  The employee terminated his employment and the employer sent a COBRA notice 4 months late, with a termination date (qualifying event date) that corresponded with a later termination date.  The employer asserted that claims denied during that 4 months were denied in error, and that the employee's actual qualifying event date was the later date.  Because the employee was in bankruptcy, the issue was presented to a bankruptcy court, that awarded $13,000 in penalties to the employee because of the intentional "misstatement" of the qualifying event date in the COBRA notice.  Oddly, the Court found that even though the employee's claims were paid by the health insurance carrier, damages were still warranted because the dating of the notice was not merely a clerical error and was not made in good faith.  It appeared intentional by the company to protect the company.

DOL COBRA regulations require the election notice to identify the qualifying event and the date coverage will terminate unless COBRA is elected, but not the specific date of the qualifying event.  But if the qualifying event date is provided in the notice, it must accurately reflect the actual qualifying event date.  In this case, the penalties covered the 120 days between the actual qualifying event date and the one erroneously reported on the notice.

This decision is consistent with past decisions relating to COBRA notice requirements and penalties and it should serve as a gentle reminder to plan administrators that information provided to COBRA eligible participants should be timely and accurate.  Even though the participant might not actually be prejudiced by the receipt of incorrect information, it can still give rise to penalties under the regulatory framework.  So make sure whatever information you are providing is accurate and accurately reflects your own plan records.

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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.

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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.

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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.

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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.

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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.

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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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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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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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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.

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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.

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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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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.

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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.

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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.

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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.

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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)

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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.

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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.

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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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