September 29, 2014

ERISA-Ninth Circuit Holds That Decision To Prohibit Transfer Of Account Balances From One Plan To Another Did Not Violate Anti-Cutback Rule

In Andersen v. DHL Retirement Pension Plan, No. 12-36051 (9th Cir. 2014), the Ninth Circuit Court of Appeals (the "Court") dealt with the question of whether the Defendants' ("DHL") decision to eliminate Plaintiffs' right to transfer their account balances from DHL's defined contribution plan to its defined benefit plan violated the ERISA "anti-cutback" rule. This rule, found at 29 U.S.C. § 1054(g), prohibits any amendment of an employee benefits plan that would reduce a participant's "accrued benefit."

In this case, prior to the amendment challenged in this case, the Plaintiff's, who were participants in an individual account profit sharing plan at DHL (the "Profit Sharing Plan"), could transfer the funds from their Profit Sharing Plan accounts to the defined benefit retirement plan in which they also participated at DHL (the "Retirement Plan"). The Retirement Plan would offset a participant's benefit under that plan by his or her Profit Sharing Plan account balance. As a result, the transfer option, if exercised, provided increased funds for the participant under the Retirement Plan, but also reduced the Profit Sharing Account balance to zero, so that there was no offset. As such, the transfer could work to the participant's advantage. However, DHL amended the Retirement Plan to prohibit the transfers, and this suit ensued.

In analyzing the case, the Court concluded that the amendment to the Retirement Plan eliminating the transfer option did not violate the anti-cutback rule. There is no reduction is a participant's accrued benefit. The amount of the accrued benefit is determined by formula in Section 4.01 of the Retirement Plan. The amendment did not affect this formula. Under that formula, a participant's accrued benefit is, and always has been, calculated on the basis of a participant's final average compensation and years of service, with an offset for an attributed annuity amount based on the participant's account balance, if any, in the Profit Sharing Plan. The transfer option eliminated was in Section 7.11, and that Section was not part of a participant's accrued benefit. The Court noted that the anti-cutback rule prohibits the elimination of an optional form of benefit (29 U.S.C. § 1054(g)(2)). But the Court reasoned that the only plan feature eliminated was the Retirement Plan provision under which transfers were accepted, and IRS regulations under the anti-cutback rule permit elimination of this type of feature.

September 26, 2014

Employee Benefits-DOL Requests Information On Brokerage Windows

According to Employee Plans News, Issue 2014-15, September 22, 2014, the Department of Labor's Employee Benefits Security Administration (DOL/EBSA) on, August 21, published a Request for Information on the use of brokerage windows, self-directed brokerage accounts and similar features in 401(k)-type plans.

Some 401(k)-type plans offer participants access to brokerage windows in addition to, or in place of, specific investment options chosen by the employer or another plan fiduciary. These "window" arrangements can enable or require individual participants to choose from a broad range of investments. DOL/EBSA received a number of questions about brokerage windows following the 2012 publication of a final regulation on participant-level fee disclosure.
The RFI asks questions concerning brokerage windows, including:

• the scope of investment options typically available through a window;• demographic and other information about participants who commonly use
brokerage windows;
• the process of selecting a brokerage window and provider for a plan;
• the costs of brokerage windows; and
• what kind of information about brokerage windows and underlying investment
options typically is available and disclosed to participants.

Comments are due by November 19, 2014. Comments can be submitted electronically by email to E-ORI@dol.gov or through the federal eRulemaking portal. Written comments may also be sent to:

U.S. Department of Labor
Office of Regulations and Interpretations
Employee Benefits Security Administration, N-5655
Attn: Brokerage Window RFI
200 Constitution Ave, NW,
Washington, DC 20210

September 24, 2014

Employee Benefits-IRS Talks About Missing Participants Or Beneficiaries

In Employee Plans News, Issue 2014-15, September 22, 2014, the IRS talks about missing participants or beneficiaries. It says the following:

Plan sponsors, administrators and qualified termination administrators (QTAs)
sometimes need to locate missing participants or beneficiaries. For example, correction of a plan failure under the Employee Plans Compliance Resolution System (EPCRS) may require payment of additional benefits to terminated participants. See Revenue Procedure 2013-12, Section 6.02(5)(d), for plan correction principles relating to lost participants.

Previously, the IRS provided letter-forwarding services to help locate missing plan
participants, but with the August 31, 2012, release of Revenue Procedure 2012-35, the IRS stopped this letter forwarding program. The IRS will no longer process requests to locate retirement plan participants or beneficiaries.

In the absence of IRS letter forwarding services, sponsors, administrators and QTAs may use a variety of other methods to locate missing participants and beneficiaries, including:

• commercial locator services;
• credit reporting agencies; and
• internet search tools.

The Department of Labor in Field Assistance Bulletin No. 2014-01 lists the following search methods as the minimum steps the fiduciary of a terminated defined contribution plan must take to locate a participant:

• Send a notice using certified mail;
• Check the records of the employer or any related plans of the employer;
• Send an inquiry to the designated beneficiary of the missing participant; and
• Use free electronic search tools.

Field Assistance Bulletin 2014-01 generally updates DOL/EBSA guidance on how fiduciaries of terminated defined contribution plans can fulfill their obligations under ERISA to locate missing participants and properly distribute the participants' account balances.

September 23, 2014

Employee Benefits-IRS Reminds Us That Errors by IRA Trustees, Issuers and Custodians On Form 5498 May CauseTax Trouble

In Employee Plans News, Issue 2014-15, September 22, 2014, the IRS says that incorrect information on Form 5498, IRA Contribution Information, may cause taxpayers to make IRA reporting errors on their tax returns. Common examples of incorrect information include:

• Reporting the IRA contribution for the wrong year;

•Failing to report the contribution as a conversion from a traditional IRA to a Roth IRA; and

• Issuing duplicate Forms 5498.

IRA trustees, issuers and custodians can avoid making these common errors by
checking the information on Form 5498 before submitting it to the IRS and providing a copy to the client.

September 19, 2014

Employment-Third Circuit Holds That Employee Has Established A Prima Facie Case of Interference and Retaliation Under The FMLA

In Budhun v. Reading Hospital and Medical Center, No. 11-4625 (3rd Cir. 2014), the plaintiff, Vanessa Budhun ("Budhun"), was appealing the district court's summary judgment in favor of her employer, the Reading Hospital and Medical Center ("Reading"), on her Family Medical Leave Act ("FMLA") interference and retaliation claims.

In this case, in accordance with applicable law, Reading provides its employees with up to twelve weeks of job-protected FMLA leave during any rolling twelve-month period. Reading requires employees to submit a leave certification from a healthcare professional prior to approving any FMLA leave. It also requires employees to submit a "fitness-for-duty" certification in the form of a return to work form that confirms that the employee can work "without restriction" before returning. If an employee does not contact Reading's human resources department at the end of his or her leave, Reading's policy states that it will consider the employee to have voluntarily resigned.

After taking FMLA leave due to a broken finger, and failing to inform Reading human resources at the end of the leave, Reading terminated Budhun. This suit ensued. In analyzing the case, the Third Circuit Court of Appeals (the "Court") noted that FMLA guarantees an employee the right to return to work, the right allegedly being interfered with. The Court said that, although we have never had occasion to address specifically what constitutes invocation of one's right to return to work, Budhun has adduced enough evidence such that a reasonable jury could find that she did so here, and that Reading interfered with her rights when they did not let her return.. She submitted a "fitness-for-duty" certification, which clearly stated that she could return to work with "no restrictions." Under the FMLA regulations, prior to permitting an employee to return to work, an employer, as Reading did here, may request that an employee provide such a certification. In it, an employee's healthcare provider must merely certify that the employee is able to resume work. Budhum met these requirements, establishing a prima facie case of interference under the FMLA.

Next, the Court dealt with Budhun's retaliation claim. Budhun argues that Reading retaliated against her for taking FMLA leave when it impermissibly replaced her with another employee after her FMLA-protected leave expired. Budhun's claim is based on circumstantial evidence. Thus, to succeed on her claim, it is her burden to establish that (1) she invoked her right to FMLA-qualifying leave, (2) she suffered an adverse employment decision, and (3) the adverse action was causally related to her invocation of rights. The record indicates that that Budhun made out these elements, meeting element (2) by alleging that she was replaced her with another employee and meeting element (3) by alleging that Reading had decided to replace her prior to the end of her FMLA leave, and actually replaced her just two days after the leave ended. This at least established a prima facie case of retaliation under the FMLA.
As such, the Court overturned the district court's grant of summary judgment, and remanded the case back to the district court.

September 17, 2014

ERISA-Sixth Circuit Upholds Grant Of Benefits, But Not Imposition Of Penalties, For Failure To Provide Benefits For Treatment For Alcohol Addiction

In Butler v. United Healthcare of Tennessee, Inc., No. 13-6446 (6th Cir. 2014), the following obtained. More than nine years ago, the plaintiff, Janie Butler ("Janie"), checked into a substance-abuse treatment facility to obtain inpatient rehabilitation for her alcohol addiction. She sought coverage for the treatment through her husband's employer-issued ERISA plan run by the defendant, United Healthcare of Tennessee, Inc. ("United"). United denied treatment, deeming it medically unnecessary. After seven years' worth of internal reviews, trips to the district court and remands to the plan for reconsideration, the district court decided that enough was enough. It held that United had acted arbitrarily and capriciously in continuing to deny the requested coverage. And it awarded John Butler (her then-husband and the assignee of Janie's plan benefits) the cost of the requested benefits plus prejudgment interest and statutory penalties. United objects to the decision to grant benefits and to the order to pay penalties.

Upon reviewing the case, the Court affirmed the grant of benefits, but reversed the penalty award. Why? As to the benefits, the Court said that Janie obviously qualified for rehabilitation benefits under United's residential-rehabilitation guideline, which grants residential-rehabilitation benefits to insured individuals with a "[h]istory of continued and severe substance abuse despite appropriate motivation and recent treatment in an intensive outpatient . . . program." The Court concluded that United's denial of these benefits is a clear abuse of discretion.

As to the penalties, the Court noted that the district court had awarded statutory penalties to John Butler, reasoning that ERISA allows penalties of "up to $100 a day" if the plan "administrator" "fails or refuses to comply with a request for any information" that the statute requires the administrator to provide. See 29 U.S.C. § 1132(c)(1)(B). However, since United is not the "administrator" of the plan, that was a mistake. The plan did not name an administrator, so under ERISA the employer is treated as being the "administrator". Further, John Butler did not allege a violation of section 1132 (the alleged violation being of section 1133), so that the $100/day penalty cannot apply.

September 16, 2014

Employment-Sixth Circuit Rules That Damages In The Amount of $173,000 May Be Awarded For An FMLA Violation

In Wallace v. FedEx Corporation, Nos. 11-5500, 5577 (6th Cir. 2014), the following obtained. The plaintiff, Tina Wallace ("Wallace"), worked for the defendant, FedEx Corporation ("FedEx"). By the summer of 2007, Wallace had developed a variety of health problems that required her to take leave from her job. FedEx offered Wallace leave under the Family and Medical Leave Act ("FMLA"), and its representatives verbally asked her to complete a medical-certification form. FedEx, however, never explained the consequences of not returning a completed form. Wallace failed to provide FedEx with the medical certification, and once she was absent for two consecutive days after the form was due, FedEx terminated her employment.

Wallace filed suit under the FMLA, alleging that FedEx interfered with her rights under the statute. A magistrate judge dismissed Wallace's request for liquidated damages and front pay, but after a trial, the jury sided with Wallace on the issues of liability and back pay, awarding damages in the amount of $173,000. Both parties filed post-judgment motions, and the magistrate judge denied all of them, except to reduce Wallace's damages award to $90,788. The question for the Sixth Circuit Court of Appeals (the "Court"): Should the original damage award of $173,000 be restored?

The Court concluded that the $173,000 damages award should be restored. Why? The issue is one of procedure. Having found that the magistrate judge had granted a Rule 59 motion for remittitur, the Court said that the magistrate judge then committed procedural error by not offering Wallace the option of a new trial on damages. Therefore, the Court must reverse the magistrate judge's decision to reduce the damages award.

September 10, 2014

Employment-EEOC Issues Fact Sheet for Small Businesses Discussing Pregnancy Discrimination, Including Effect On Benefits

The Equal Employment Opportunity Commission (the "EEOC") has issued a Fact Sheet discussing pregnancy discrimination. The Fact Sheet is being issued by the EEOC, along with Enforcement Guidance on Pregnancy Discrimination and FAQs on the Enforcement Guidance. The Fact Sheet is here.

This document explains the requirements of the Pregnancy Discrimination Act (the "PDA"), as well as the requirements of Title I of the Americans with Disabilities Act (the "ADA") as it applies to women with pregnancy-related disabilities. The PDA and ADA apply to employers with 15 or more employees.

As to employee benefits and matters, the Fact Sheet says:

In General. The PDA requires that a covered employer treat women affected by pregnancy, childbirth, or related medical conditions in the same manner as other applicants or employees who are similar in their ability or inability to work. The PDA covers all aspects of employment, including firing, hiring, promotions, and fringe benefits (such as leave and health insurance benefits). Pregnant workers are protected from discrimination based on current pregnancy, past pregnancy, and potential pregnancy.

An employer may not discriminate against an employee because of a medical condition related to pregnancy and must treat the employee the same as others who are similar in their ability or inability to work but are not affected by pregnancy, childbirth, or related medical conditions. For example, under the PDA, since lactation is a medical condition related to pregnancy, an employer may not discriminate against an employee because of her breastfeeding schedule. (For information about a provision of the Patient Protection and Affordable Care Act that provides additional protections for breastfeeding employees, see the section on "Other Federal Laws Protecting Pregnant Workers" below.).

Benefits At Work. An employer must provide the same benefits of employment to women affected by pregnancy, childbirth, or related medical conditions that it provides to other persons who are similar in their ability or inability to work. The PDA requires employers who offer health insurance to include coverage of pregnancy, childbirth, and related medical conditions. An employer must provide the same terms and conditions for pregnancy-related benefits as it provides for benefits relating to other medical conditions.

September 9, 2014

Employment-Ninth Circuit Rules That Fed Ex Drivers Are Employees (And Not Independent Contractors)

In Alexander v. Fed Ex Ground Package System, Inc., Nos. 12-17458, 12-17509 (9th Cir. 2014), as a central part of its business, FedEx Ground Package System, Inc. ("FedEx"), contracts with drivers to deliver packages to its customers. The drivers must wear FedEx uniforms, drive FedEx-approved vehicles, and groom themselves according to FedEx's appearance standards. FedEx tells its drivers what packages to deliver, on what days, and at what times. Although drivers may operate multiple delivery routes and hire third parties to help perform their work, they may do so only with FedEx's consent. The question for the Ninth Circuit Court of Appeals (the "Court"): under California Law, are the drivers employees or independent contractors? At stake were unpaid employment expenses and unpaid wages that would be due employees under state law.

In analyzing the case, the Court noted that California law controls this dispute. Further, determinations of employment status under California law are governed by the right-to-control test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (Cal. 1989). The Court found that Fed Ex policy grants FedEx a broad right to control the manner in which its drivers' perform their work. This is the most important factor of the right-to-control test, and it strongly favors employee status. The other factors of the test, i.e., the right to terminate at will, integration of the work into the business, performing work under the principal's supervision, the required skills, provision of tools and equipment, length of time working for the principal, method of payment, and the parties' beliefs, do not strongly favor either employee status or independent contractor status. Accordingly, the Court held that the drivers are employees as a matter of law under California's right-to-control test.

The Court came to basically the same conclusion as to the Fed Ex drivers under Oregon law in Slayman v. Fed Ex Ground Package System, Inc., Nos. 12-35525, 12-35559 (9th Cir. 2014).

September 4, 2014

Employee Benefits-IRS Changes Group Trust Rules

The Internal Revenue Service (the "IRS") has made some changes to the 81-100 group trust rules. These changes are discussed in Employee Plans News, Issue 2014-13, September 2, 2014. Here is what the IRS says:

New Revenue Ruling

Revenue Ruling 2014-24 modifies the rules regarding 81-100 group trusts by:

• stating that certain retirement plans qualified under the Puerto Rico Code may
invest in 81-100 group trusts even if such a plan is not also qualified under the
Internal Revenue Code.

• clarifying that assets held by insurance company separate accounts may be
invested in 81-100 group trusts under some circumstances.

• giving transition relief for certain dual-qualified plans (plans with U.S. trusts qualified
under both the U.S. and Puerto Rico Codes) to allow sponsors of those plans an
additional year to spin off the assets and liabilities of their Puerto Rico employees
into Puerto Rico-only qualified plans satisfying ERISA Section 1022(i)(1).

• providing other miscellaneous guidance.

Group trust investment requirements

Rev. Rul. 81-100 provides that qualified retirement plans and individual retirement accounts (IRAs) may pool their assets for investment purposes in a group trust if certain requirements are met. Subsequent revenue rulings added Internal Revenue Code Section 403(b), 457(b) and 401(a)(24) plans to the list of plans that may invest in 81-100 group trusts and added some additional requirements (Rev. Ruls. 2011-1 and 2004-67).

Puerto Rico plans and transition relief

With respect to Puerto Rico plans, Rev. Rul. 2014-24:

• states that a plan described in ERISA Section 1022(i)(1) is eligible to participate in
an 81-100 group trust if the requirements of Rev. Rul. 2011-1, as modified by Rev.
Rul. 2014-24, are satisfied; and

• extends certain transition relief provided in Rev. Rul. 2008-40 to transfers to ERISA
Section 1022(i)(1) plans from qualified retirement plans that participated in 81-100
group trusts on January 10, 2011, if the transfers occur before January 1, 2016.
The transition relief under Rev. Rul. 2008-40 is not extended for any other plans.

Separate account investment requirements

Rev. Rul. 2014-24 provides that assets held in an insurance company's separate
account may be invested in an 81-100 group trust if the:

• assets of the separate account consist solely of assets from group trust retiree
benefit plans;

• insurance company timely enters into an agreement with the trustee of the group
trust that meets the requirements of Rev. Rul. 2014-24; and

• assets of the separate account are insulated from the claims of insurance
company's creditors.

Written agreement timing requirements

If plan assets are invested through an insurance company's separate account in a 81-
100 group trust as of December 8, 2014, the trustee of the group trust and the
insurance company must enter into a written arrangement meeting the requirements of
Rev. Rul. 2014-24 before January 1, 2016. Otherwise, the group trust trustee and the
insurance company must enter into a written arrangement no later than the time of the
investment.

Other provisions clarified

Rev. Rul. 2014-24 also:

• clarifies that, in the case of a governmental plan, the governing document includes
any statute that sets forth the terms applicable to the plan as well as any
regulations, ordinances, and other state or local rules or policies binding on the plan
under state or local law; and

• modifies condition 6 under Rev. Rul. 2011-1 to make clear that the group trust
instrument must expressly provide for separate accounting (not separate accounts)
to reflect the interest that each adopting group trust retiree benefit plan has in the
group trust.

September 3, 2014

ERISA-Tenth Circuit Holds That Suit For Disability Benefits Is Barred Due To Failure To Exhaust Administrative Remedies

In Holmes v. Colorado Coalition For The Homeless Long Term Disability Plan, No. 13-1175 (10th Cir. 2014), the plaintiff, Lucrecia Carpio Holmes ("Ms. Holmes"), appeals the district court's ruling that her claim for disability benefits under ERISA is barred due to her failure to exhaust administrative remedies.

In this case, Ms. Holmes is a former employee of the Colorado Coalition for the Homeless (the "Coalition") and participated in an employee benefits plan funded, in part, by a disability insurance policy through Union Security Insurance Company ("Union Security). While employed by the Coalition, Ms. Holmes presented with a number of medical conditions, including breast cancer, cataplexy, apnea, blackouts, diabetes, carpal tunnel syndrome, and neuropathy. As a result, she filed a claim for disability benefits with Union Security on March 10, 2005. Union Security sent written notification to Ms. Holmes on May 27, 2005 that it had denied her claim because she failed to prove she was disabled as defined by the Policy. The denial letter included an explanation of Ms. Holmes's right to internal review of the decision and attached a copy of a Group Claim Denial Review Procedure (the "Denial Review Procedure"), which describes a two-level review process.

On November 21, 2005, in accordance with the Denial Review Procedure, Ms. Holmes filed a request for review of the denial (the first-level review). Union Security issued a decision on the first-level review 137 days later on April 7, 2006, when it informed Ms. Holmes in writing that it had affirmed the denial of benefits. Union Security's April 7, 2006, letter contained a second copy of the Denial Review Procedure, which informed Ms. Holmes that she may request another review of Union Security's decision, and that this second-level review is the final level of administrative review available. The Denial Review Procedure further states that if Ms. Holmes's claim is denied as part of the second-level review, she will have a right to bring a civil action. Rather than filing the second-level appeal, on April 28, 2008, she filed this suit.

In analyzing the case, the Tenth Circuit Court of Appeals (the "Court") said, first, that the plan document specifically authorized Union Security to advise Ms. Holmes of further appeal rights, which could include a second-level review. Next, the record shows that Union Security advised Ms. Holmes of her further appeal rights by supplying her with a copy of the Denial Review Procedures. The summary plan description (the "SPD") here did not discuss the second-level appeal, but, under the Supreme Court's decision in Amara, the SPD is not a part of the plan, and Ms. Holmes was not otherwise prejudiced by the failings of the SPD. Finally, based on the plan and the additional terms authorized by it, and the court-created requirement of exhaustion of internal claim procedures under ERISA, the Court concluded that Ms. Holmes was required to seek a second-level review before bringing this suit. Accordingly, the Court affirmed the district court's decision.

August 27, 2014

ERISA-Ninth Circuit Holds That Plan Administrator Abused Its Discretion In Refusing To Pay For More Than Three Weeks Of Inpatient Hospital Treatment

In Pacific Shores Hospital v. United Behavioral Health, No. 12-55210 (9th Cir. 2014), an employee of Wells Fargo, whom the Court called Jane Jones, was covered under the Wells Fargo & Company Health Plan (the "Plan"), governed by ERISA. United Behavioral Health ("UBH") is a third-party claims administrator of the Plan. Jones was admitted to Pacific Shores Hospital ("PSH") for acute inpatient treatment for severe anorexia nervosa. UBH refused to pay for more than three weeks of inpatient hospital treatment. UBH based its refusal in substantial part on mischaracterizations of Jones's medical history and condition. PSH continued to provide inpatient treatment to Jones after UBH refused to pay. Jones assigned to PSH her rights to payment under the Plan. PSH sued the Plan and UBH, seeking payment for the additional days of inpatient treatment.

In analyzing the case, the Ninth Circuit Court of Appeals (the "Court"), concluded that that UBH abused its discretion in refusing to pay for these days of treatment, and the Court therefore overturned its decision to pay for more than the three weeks of treatment. Why did the Court reach this conclusion?

The Court reviewed UBH's denial of benefits for abuse of discretion, since the Plan had unambiguously granted discretion to UBH. However, the Court said that it was "painfully apparent" that UBH did not follow procedures appropriate to Jones's case. No PSH hospital records were ever put into the administrative record. No UBH doctor or other claims administrator ever examined Jones. Rather UBH's decision was based entirely on telephone conversations and voicemail messages, and factual errors by certain evaluating doctors.

The Court said, further, that UBH owed a fiduciary duty to Jones under ERISA. UBH fell far short of fulfilling this duty. Dr. Zucker, UBH's primary decisionmaker, made a number of critical factual errors. Dr. Center, as an ostensibly independent evaluator, made additional critical factual errors. Dr. Barnard, UBH's final decisionmaker, stated that he arrived at his decision to deny benefits "after fully investigating the substance of the appeal." He then rubberstamped Dr. Center's conclusions. There was a striking lack of care by Drs. Zucker, Center, and Barnard, resulting in the obvious errors. What is worse, the errors are not randomly distributed. All of the errors support denial of payment; none supports payment. The unhappy fact is that UBH acted as a fiduciary in name only, abusing the discretion with which it had been entrusted. Therefore, reviewing the case for abuse of discretion, the Court concluded that UBH improperly denied benefits under the Plan in violation of its fiduciary duty under ERISA.

August 26, 2014

ERISA-Sixth Circuit Holds That Michigan State Law Which Taxes Claims Paid By, And Imposes Reporting And Other Requirements On, Self-Insured Health Plans Is Not Preempted By ERISA

In Self-Insurance Institute of America, Inc. v. Snyder, No. 12-2264 (6th Cir. 2014), the plaintiff, Self-Insurance Institute of America, Inc. ("SIIA"), represents various sponsors and administrators of self-funded ERISA benefit plans, which it claims are affected by Michigan's Health Insurance Claims Assessment Act (the "Act"). SIIA argues, among other things, that ERISA's express-preemption provision, 29 U.S.C. § 1144(a), prohibits the application of the Act to ERISA-covered entities.

In analyzing the case, the Sixth Circuit Court of Appeals (the "Court") held that the Act escapes ERISA preemption. The Court said, first, that the Act functions by imposing a one-percent tax on all "paid claims" by "carriers" or "third party administrators" to healthcare providers for services rendered in Michigan for Michigan residents."Carriers" include sponsors of "group health plans" subject to ERISA. On top of the tax, every carrier and third-party administrator paying the tax must submit quarterly returns with the Michigan Department of the Treasury and keep accurate and complete records and pertinent documents as required by the Department. Every carrier and third-party administrator must also develop and implement a methodology by which it will collect the tax subject to several conditions.

The Court said, next, that ERISA supersedes any and all State laws insofar as they relate to any employee benefit plan subject to ERISA. 29 U.S.C. § 1144(a). However, the Court found that the Act does not "relate to" any such plan, because the Act does not: (1) interfere with plan administration (the Act does not require a plan administrator to change how it administers the plan at all), (2) create inappropriate administrative burdens (despite requiring the returns and records, since those are not the plan's core functions) or (3) through its residency requirement, interfere with the relationship between the plan and its participants (even though the plan may be required to collect some additional information from participants). As such, ERISA does not preempt the Act.

August 25, 2014

Employee Benefits-Eighth Circuit Rules That The Taxpayer Made A Rollover Contribution To An IRA, Thereby Offsetting Income From An Earlier IRA Withdrawal

In Haury v. Commissioner of Internal Revenue, No. 13-1780 (8th Cir. 2014), the issue arose as to whether the taxpayer ("Haury") had made a $120,000 rollover contribution an IRA, which would offset the income attributable to earlier IRA withdrawals.

In this case, Haury had made certain loans to two companies, which he funded with withdrawals from his IRA account, taken from February 15, 2007 through October 25, 2007 totalling about $425,000, including a withdrawal of $168,000 on April 9, 2007. Haury was less than 59 ½ years old, so his IRA withdrawals were taxable as ordinary income subject to a 10% additional tax. Haury also made a $120,000 contribution to his IRA account on April 30, 2007. The issue is whether that contribution was a qualifying "rollover" that reduced Haury's 2007 taxable IRA-distribution income by $120,000.

The Eighth Circuit Court of Appeals (the "Court") noted that, under Code section 408(d)(3)(A)(i), an individual may exclude an IRA withdrawal from taxable income if it is "rolled over" into an IRA account, by not later than the 60th day after the day on which he receives the withdrawal. An amount less than the entire withdrawal is likewise excluded if it is paid into an IRA, under Code section 408(d)(3)(D). The rollover contribution exclusion does not apply if the distributee used it to exclude another withdrawal from tax in the year prior to the date of the withdrawal in question, under Code section 408(d)(3)(B).

The Court concluded that Haury's April 30, 2007 IRA contribution of $120,000 was made well within 60 days of the April 9 withdrawal of $168,000. There was no previous rollover contribution during the year preceding April 30, 2007. Therefore, the April 30 contribution was a qualifying partial rollover contribution under § 408(d)(3)(D), and Haury is entitled to reduce his taxable 2007 IRA withdrawals by $120,000.

August 21, 2014

ERISA-Fourth Circuit Expresses Its View On Assessing Liability For Breach Of Duty Of Prudence When Liquidating A Plan Investment

Tatum v. RJR Pension Investment Committee, No. 13-1360 (4th Cir. 2014) involved an appeal from a judgment in favor of R.J. Reynolds Tobacco Company and R.J. Reynolds Tobacco Holdings, Inc. (collectively "RJR"). Richard Tatum brought this suit on behalf of himself and other participants in RJR's 401(k) retirement savings plan (collectively "the participants"). He alleges that RJR breached its fiduciary duties under ERISA, when it liquidated two funds held by the plan on an arbitrary timeline without conducting a thorough investigation, thereby causing a substantial loss to the plan.

After a bench trial, the district court found that RJR did indeed breach its fiduciary duty of procedural prudence and so bore the burden of proving that this breach did not cause loss to the plan participants. But the court concluded that RJR met this burden by establishing that a reasonable and prudent fiduciary could have made the same decision after performing a proper investigation. In analyzing the case, the Fourth Circuit Court of Appeals (the "Court") affirmed the district court's holdings that RJR breached its duty of procedural prudence, in that RJR failed to engage in a prudent decision-making process, and therefore bore the burden of proof as to causation. But, because the Court concluded the district court then failed to apply the correct legal standard in assessing RJR's liability, the Court reversed its judgment and remanded the case back to the district court.

What did the Court say about the correct legal standard for assessing liability? The Court said that, to carry its burden and avoid liability for loss, RJR had to prove that despite its imprudent decision-making process, its ultimate investment decision was "objectively prudent," that is, a hypothetical prudent fiduciary would have made the same decision anyway. In making this determination, a court must consider all relevant evidence, including-in this case- the timing of the divestment.