December 2009 Archives

December 30, 2009

ERISA-Seventh Circuit Overturns A Plan Administrator's Benefit Denial, Since The Plan Administrator Ignored Important Evidence Submitted By The Participant

In Majeski v. Metropolitan Life Insurance Co., No. 09-1930 (7th Cir. 2009), the plaintiff, Kirsten Majeski, had been employed by Metropolitan Life Insurance Company ("MetLife"), and had participated in MetLife's Short Term Disability Plan (the "Plan"). The case centers on the decision of MetLife, as plan administrator, to reject Majeski's claim for short-term disability benefits, after determining that Majeski had failed to submit enough evidence to support her claim. The district court had likewise rejected Majeski's claim for the benefits and had granted summary judgment against her.

The Court applied a deferential review to Metlife's decision to deny Majeski's claim for benefits, since the Plan granted discretionary authority to Metlife, as plan administrator, to determine a participant's entitlement to benefits. However, the Court found it troubling that one doctor's report--the sole basis for MetLife's decision to deny the claim--concludes, erroneously, that Majeski did not submit objective evidence of functional limitations that were the source of her disability. This doctor did not acknowledge or analyze the significant evidence that Majeski did offer on that matter. The Court felt that these omissions made Metlife's claim denial arbitrary and capricious, and said that a plan administrator's claims procedure is not reasonable if the plan administrator's determination of a benefit claim ignores, without explanation, substantial evidence that the plaintiff submitted on the central issue-here, Majeski's functional limitations.

Based on the foregoing, the Court overturned Metlife's benefit claim denial and the district court's summary judgment against the plaintiff. The Court remanded the case back to the district court, which would turn the case over to Metlife to again review the plaintiff's claim for short-term disability benefits, but this time taking into account the evidence she offered.

December 29, 2009

Employee Benefits-IRS Provides Guidance On Conversions To Roth IRAs

A lot of people are considering the conversion of all or a portion of their retirement savings to a Roth IRA in 2010. The Winter 2010/Volume 9 edition of the IRS's Employee Plans News contains, among other matters pertaining to Roth IRAs, some guidance on converting a traditional IRA or other retirement savings to a Roth IRA after 2009. Here is what it says.
Beginning January 1, 2010, the income and filing status requirements for rollovers (including conversions) to a Roth IRA will be eliminated. Additionally, for rollovers to a Roth IRA in 2010 only, a special 2-year option for reporting the taxable portions of the rollover will apply. Under the current rules, you can roll over a traditional individual retirement arrangement (IRA), a SEP IRA, a SIMPLE IRA and an eligible rollover distribution (ERD) from your retirement plan (other than from a designated Roth account) and from a plan in which you are the named beneficiary to a Roth IRA only if you meet both these requirements:
• your modified AGI for Roth IRA purposes is $100,000 or less; and
• your filing status is not married filing separate.

There are no such restrictions on rolling over amounts into a Roth IRA from either another Roth IRA or from a designated Roth account. Any previously untaxed amounts must be included in your gross income in the year of the rollover.
Under the new rules for 2010, regardless of your income or filing status, you will be able to roll over (convert) the following to a Roth IRA:
• your traditional IRA, SEP IRA or SIMPLE IRA;
• an ERD from your retirement plan (for example, a 401(k) or a 403(b) plan); or
• an ERD from a retirement plan for which you are a beneficiary.

For rollovers and conversions to a Roth IRA in 2010 only, you will have the option of reporting the taxable portion of your rollover in your gross income for 2010, or reporting half in 2011 and half in 2012.

December 28, 2009

Employee Benefits-The DOL Issues A Fact Sheet Which Discusses The Extension Of The COBRA Premium Reduction Subsidy

Here is some information from the Fact Sheet:

The American Recovery and Reinvestment Act of 2009 ("ARRA"), as amended on December 19, 2009 by the Department of Defense Appropriations Act, 2010 ("DODA") provides for premium reductions for health benefits under COBRA. Eligible individuals pay only 35 percent of their COBRA premiums and the remaining 65 percent is reimbursed to the coverage provider through a tax credit. To qualify, individuals must experience a COBRA qualifying event that is the involuntary termination of a covered employee's employment. The involuntary termination must occur during the period that began September 1, 2008 and ends on February 28, 2010. The premium reduction applies to periods of health coverage that began on or after February 17, 2009 and lasts for up to 15 months. The premium reduction for an individual ends upon eligibility for other group coverage or Medicare, after 15 months of the reduction, or when the maximum period of COBRA coverage ends, whichever occurs first. Individuals paying reduced COBRA premiums must inform their plans if they become eligible for coverage under another group health plan or Medicare. If an individual's modified adjusted gross income ("modified AGI") exceeds $125,000 (or $250,000 for joint filers), then the amount of the premium reduction must be repaid, in increasing amounts as modified AGI increases. Thus, an individual may waive his or her right to the premium reduction.

COBRA generally does not apply to plans sponsored by employers with fewer than 20 employees. Many States have requirements which are similar to COBRA for insurance companies that provide coverage to small employers. The ARRA/DODA premium reduction is available for insurers covered by these State laws.

DODA extended the COBRA premium reduction eligibility period for two months until February 28, 2010 and increased the maximum period for receiving the subsidy for an additional six months (from nine to 15 months). In addition, individuals who had reached the end of the reduced premium period before the legislation extended it to 15 months will have an extension of their grace period to pay the reduced premium. To continue their coverage they must pay the 35 percent of the premium by February 17, 2010, or, if later, 30 days after notice of the extension is provided to them by their plan administrator. Individuals who lost their subsidy and paid the full 100 percent premium in December 2009 should contact their plan administrator or employer sponsoring the plan to discuss a credit for future months of coverage or a reimbursement of the overpayment.

ARRA, as amended, mandates the provision of certain notices. As part of the COBRA election notice, plan administrators must provide information about the premium reduction to all individuals who have COBRA qualifying events from September 1, 2008 through February 28, 2010. Plan administrators must also provide notice about the changes made to the premium reduction rules by DODA to individuals who have already been provided a COBRA election notice (unless the election notice included the updated premium reduction information) as follows:
• Individuals who are eligible for the premium reduction must be provided this notice by February 17, 2010;
• Individuals who experience a termination of employment on or after October 31, 2009 and lose health coverage must be provided this notice within the normal timeframes for providing continuation coverage notices; and
• Individuals who are in a "transition period" (a period that begins immediately after the end of the nine months of premium reduction in effect under ARRA before the amendments made by DODA, as long as those nine months ended before December 19, 2009 and the premium reduction requirements of DODA would apply due to the extension from nine to 15 months) must be provided this notice within 60 days of the first day of the transition period.

December 23, 2009

ERISA-Third Circuit Rules That A Plaintiff's Release Is Not Void Under ERISA As Being Against Public Policy, And Does Not Bar The Plaintiff From Bringing a Lawsuit Under ERISA

In In Re: Schering Plough Corporation ERISA Litigation, No. 08-4814 (3rd Cir. 2009), the plaintiff, Michele Wendell, is a former employee of Schering-Plough Corporation ("Schering-Plough") who participated in the Schering-Plough Corporation Employees' Savings Plan (the "Plan"). She brought a class action against Schering-Plough and certain of its officers and directors under section 502(a)(2) of ERISA, claiming that breaches of fiduciary duty had occurred in the offering and management of the Plan, for example, causing a decline in the value of the Plan's company stock fund. One issue faced by the Court was whether a release, consisting of a general release and covenant not to sue, the plaintiff had signed in connection with her separation from Schering-Plough violated ERISA and was therefore void, so that the plaintiff could sue and maintain the class action.

As to the release, the first question is whether section 410(a) of ERISA renders the release, including the covenant not to sue, void as against public policy. Section 410(a) of ERISA provides that "any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty under this part shall be void as against public policy." The Court concluded that section 410 applies only to instruments that purport to alter a fiduciary's statutory duties and responsibilities, whereas an individual release or covenant not to sue merely settles an individual dispute without altering a fiduciary's statutory duties and responsibilities. Therefore, the plaintiff's release is valid.

The second question is whether the valid release bars the plaintiff from being able to bring a suit under section 502(a)(2) of ERISA. The Court said that claims brought under section 502(a)(2) are, by their nature, plan claims. The vast majority of the courts have concluded that an individual release has no effect on an individual's ability to bring a claim on behalf of a plan under section 502(a)(2). As such, the Court concluded that the plaintiff's valid release does not prevent the plaintiff from bringing this suit.

However, the existence of the release, among other matters, caused the Court to question as to whether the plaintiff could maintain a class action. The Court remanded the case back to the district court to decide that issue.

December 22, 2009

Employee Benefits-U.S. Federal Circuit Court of Appeals Rules That A VEBA May Not Avoid Income Tax By Claiming That It Used Investment Income To Pay Members' Benefits

In CNG Transmission Management VEBA v. United States, 06-CV-541 (U.S. Federal Circuit 2009), the U.S. Federal Circuit Court of Appeals held that a voluntary employees' beneficiary association (the "VEBA") may not avoid income tax by claiming that it used investment income to pay members' benefits, in order to circumvent the limit on exempt function income ("EFI") in section 512(a)(3)(E)(i) of the Internal Revenue Code (the "Code"). In this case, the VEBA had filed an amended Form 990-T, requesting a refund of income tax it had paid on unrelated business taxable income ("UBTI") , on the ground that the amount it had reported as UBTI was instead non-taxable EFI. The IRS denied the VEBA's refund request.

In analyzing the case, the Court said that a VEBA, which is otherwise exempt from federal income taxation under section 501(a) of the Code, is nevertheless taxed on its UBTI under section 511 of the Code. UBTI generally consists of all income other than EFI. Under the Code, there are two classes of EFI: (1) member contributions to the VEBA, and (2) income, including investment income, which is set aside (i.e., held by the VEBA) for the payment of life, sick, accident or other member benefits. However, an amount will not be treated as "set aside", to the extent it results in the VEBA having, at year-end, assets set aside to pay benefits in excess of the statutory account limit under sections 419A and 512(a)(3)(E)(i) of the Code (the "Statutory Account Limit") for that year. This limit is generally the amount necessary to pay for incurred but unpaid benefit claims as of the end of the year in question, as well as certain related administrative costs. The issue, in this case, is whether the VEBA's investment income resulted in the VEBA having an amount of assets set aside to pay benefits which is in excess of the Statutory Account Limit-if there is no excess, there is no UBTI and the VEBA could get its refund. The VEBA's position is that its investment income did not result in any excess because the VEBA spent that income during the year on member benefits. The IRS's position is that, because the VEBA's investment income caused the VEBA's total assets set aside to pay benefits to exceed the Statutory Account Limit, that excess cannot be classified as EFI and is therefore taxable as UBTI.

The Court ruled that the IRS was correct. The key is that the VEBA's investment income "resulted in" the VEBA's total assets set aside to pay benefits exceeding the Statutory Account Limit. That does not change merely because the VEBA claims that it spent money from investment income, rather than money from some other source, on member benefits. The Code does not say that a VEBA's investment income results in a year-end excess of the VEBA's assets set aside to pay benefits over the Statutory Account Limit only to the extent that the actual dollars included in those assets are directly traceable to income made on investments.

Further, the IRS's regulation, at section 1.512(a)-5T. must be followed. Under that regulation, a VEBA's UBTI, for any year, will generally be equal to the lesser of (1) the VEBA's income for that year or (2) the excess of the total amount set aside (i.e., the VEBA's total assets held to pay benefits) at year-end over the Statutory Account Limit. Here, the VEBA did not establish the amount in prong (2), so its UBTI equals the amount in prong (1). The VEBA has income, in prong (1), even if it applied the income to the payment of members' benefits.

As a result of the above, the VEBA is not entitled to a refund.

Comment: It seems strange to be able to conclude, as the Court did, that income can result in an asset accumulation even though the income has been spent: the income is either there or it isn't . Even so, there is still Treasury regulation section 1.512(a)-5T to contend with. It is equally as strange that the VEBA did not try to establish the amount in prong (2) above, since it might have been able to obtain all or a part of the desired tax refund by doing so.

December 21, 2009

Employee Benefits-Congress Extends COBRA Premium Reduction Subsidy

I just read that the President has signed the Fiscal Year 2010 Defense Appropriations Act (the "Act"), which extends the 65% COBRA premium reduction subsidy. The subsidy is provided by the American Recovery and Reinvestment Act of 2009 ("ARRA"). The Act extends the eligibility period (i.e., the period during which involuntary job loss must take place) for the subsidy for an additional two months (through Feb. 28, 2010) and the maximum period for receiving the subsidy for an additional six months (from nine to 15 months). I'll post more details here as I get them.

A press release from the Department of Labor announcing the extension of the COBRA premium reduction subsidy is here.

December 17, 2009

Executive Compensation-IRS Provides Guidance On Application Of Section 409A To Changes To Nonqualified Deferred Compensation Plans Made To Comply With An Advisory Opinion Of The Office Of The Special Master For TARP Executive Compensation

This item is of interest because it illustrates how issues involving section 409A can arise.

IRS Notice 2009-92 (the "Notice") provides guidance for a financial institution (a "TARP Recipient"), which has received financial assistance under the Troubled Asset Relief Program ("TARP"), on how to comply with section 409A of the Internal Revenue Code (the "Code") when amending its nonqualified deferred compensation plan to comply with an advisory opinion of the Office of the Special Master for TARP Executive Compensation (the "Special Master").

In October, 2008, the Treasury Department established TARP under the Emergency Economic Stabilization Act of 2008 ("EESA"). Under an interim final rule published by the Treasury Department on June 15, 2009, a TARP Recipient may request an advisory opinion from the Special Master as to whether a compensation structure is consistent with TARP, EESA, and the public interest. Also, the Special Master may render such an advisory opinion at his own initiative. The advisory opinion is not binding on the TARP Recipient who receives it, but the TARP Recipient may rely on the advisory opinion as to whether the covered compensation structure discussed in the opinion meets the consistency requirement.

An advisory opinion issued by the Special Master may indicate that changes to the time or form of payment of compensation under the TARP Recipient's nonqualified deferred compensation plan (the "Plan") are needed for the Plan to be consistent with TARP, EESA, and the public interest. The advisory opinion may also indicate that, to achieve such consistency, payment of compensation made under the Plan must be subject to
certainTARP-related conditions, for example, the prior repayment of some or all of
the financial assistance received by the TARP Recipient. However, the foregoing raises the problem that, to modify the Plan in the manner indicated in the advisory opinion, payments of compensation made under the Plan might have to be accelerated or delayed, causing the Plan to fail to meet the requirements of Code section 409A. The Notice addresses this problem.

The Notice applies when the advisory opinion is issued after September 30, 2009. Under the Notice, any changes made to the time or form of payment of compensation under a Tarp Recipient's Plan, as required by the advisory opinion, will not cause the Plan to fail to meet the requirements of section 409A, so long as a number of conditions are met. In general, these conditions are:

-- the advisory opinion is specifically addressed to that TARP Recipient and Plan;

--the TARP Recipient has fully disclosed to the Special Master the employees whose compensation will be affected by complying with the advisory opinion, and
any similarly situated employees;

-- the advisory opinion explicitly sets forth (1) a revised time and form of
payment for the compensation which complies with section 409A and/or (2) a condition on payment of compensation under the Plan that is directly related to the TARP financial assistance received by the TARP Recipient, or to the ability of the TARP Recipient to repay the TARP financial assistance;

-- the advisory opinion does not authorize the TARP Recipient or any recipient of compensation under the Plan to elect another time or form of payment of compensation due from the Plan, other than in a manner which complies with section 409A;

-- the TARP Recipient and any recipient of compensation under the Plan must enter into a written agreement containing the revised time and form of payment, and any applicable conditions on payment, not later than by the end of the compensation recipient's taxable year in which the advisory opinion is issued, or by the 15th day of the third month following the date on which the advisory opinion is issued, if later; and

-- the TARP Recipient and any recipient of compensation under the Plan
complies with the terms of the advisory opinion in all material respects.

December 16, 2009

Employee Benefits-IRS Extends Deadline For Adopting Certain Amendments For Pension Protection Act And WRERA Requirements

In Notice 2009-97 (the "Notice"), the IRS extends the deadline for amending qualified retirement plans to meet certain requirements of the Internal Revenue Code (the "Code"), which were added to the Code by the Pension Protection Act of 2006 ("PPA "), and which were subsequently modified by the Worker, Retiree, and Employer Recovery Act of 2008 ("WRERA"). Under the Notice, the deadline for amendment is extended to the last day of the first plan year that begins after 2009, and applies to:

--the deadline for amending single-employer defined benefit plans to meet the requirements of sections 401(a)(29) and 436 of the Code, relating to funding-based limits on benefits and benefit accruals;

--the deadline for amending cash balance and similar defined benefit plans to meet the requirements of section 411(a)(13) (other than section 411(a)(13)(A)) and section 411(b)(5) of the Code, relating to vesting and other special rules applicable to those plans; and

--the deadline for amending defined contribution plans to meet the requirements of section 401(a)(35) of the Code, relating to diversification requirements when the plan invests in employer securities.

Generally, prior to this Notice, the above amendments had to be adopted by the last day of the first plan year beginning after 2008.The Notice applies to both interim (required) or discretionary plan amendments, as defined in Revenue Procedure 2007-44, pertaining to the above Code sections. The employer must operate its plan in compliance with the requirements of the above Code sections on and after their effective date.

The Notice also provides limited relief from the anti-cutback requirements of section 411(d)(6) of the Code for amendments that are adopted by the extended deadline for amending a plan to meet the requirements of sections 401(a)(29) and 436. Under this relief, an interim plan amendment, which eliminates or reduces a Code section 411(d)(6) protected benefit, will not cause a plan to fail to meet the anti-cutback requirements of section 411(d)(6), if the amendment is adopted by the last day of the first plan year beginning after 2009, and the elimination or reduction is made only to the extent necessary to enable the plan to meet the requirements of sections 401(a)(29) and 436. In addition, this Notice provides that limited section 411(d)(6) relief is expected to be granted for amendments that are adopted by the extended deadline for amending a plan to meet the requirements of section 411(b)(5), once final regulations under sections 411(a)(13) and 411(b)(5) are issued.

December 15, 2009

Employee Benefits-IRS Issues 2009 Cumulative List of Changes in Plan Qualification Requirements

IRS Notice 2009-98 contains the 2009 Cumulative List of Changes in Plan Qualification
Requirements (the "2009 Cumulative List"). The 2009 Cumulative List is to be used for guidance in amending qualified retirement plans, primarily by employers maintaining individually designed plans in Cycle E (i.e., the last digit of the employer's EIN is 5 or 0). Cycle E begins on February 1, 2010 and ends on January 31, 2011. Pursuant to IRS Notice 2008-108, as an alternative to submitting a plan in Cycle D (February 1, 2009 - January 31, 2010), an employer, whose first plan year beginning after 2008 ends on or after February 1, 2010, may defer submission of its plan until Cycle E.

Under Rev. Proc. 2007-44, each year the IRS issues a list which identifies statutory, regulatory, and other changes to the plan qualification rules, and which must be taken into account by employers who submit applications to the IRS for individual determination letters on or after the February 1st following the date of issuance. The 2009 Cumulative List reflects law changes under, among other acts, the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), with technical corrections made by the Job Creation and Worker Assistance Act of 2002 ("JCWAA"), the Pension Funding Equity Act of 2004 ("PFEA"), the American Jobs Creation Act of 2004 ("AJCA"), the Pension Protection Act of 2006 ("PPA '06"), the U.S. Troop Readiness,Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, the Heroes Earnings Assistance and Relief Tax Act of 2008 ("HEART Act"), the Emergency Economic Stabilization Act of 2008 ("EESA"), and the Worker, Retiree, and Employer Recovery Act of 2008 ("WRERA").

In Notice 2009-98, the IRS says that it will not consider, when reviewing submissions made for Cycle E, any:

-- guidance issued after October 1, 2009;

-- statutes enacted after October 1, 2009;

-- qualification requirements first effective in 2011 or later; or

-- statutory provisions that are first effective in 2010, for which there is no
guidance identified in the notice.

Terminating plans must include all law changes in effect at the time of
termination. The Notice contains special rules for the Heart Act and WRERA.

December 15, 2009

Employee Benefits-IRS Delays Effective Date On Rules Pertaining To Use Of Credit/Debit Cards To Provide Qualified Transportation Fringes

In Notice 2009-95 (the "Notice"), the IRS further delayed the effective date of Revenue Ruling 2006-57 (the "Revenue Ruling") until January 1, 2011.

The Revenue Ruling provides guidance to employers on the use of smartcards, debit or credit cards, and other electronic media to provide qualified transportation fringes to employees under sections 132(a)(5) and (f) of the Internal Revenue Code. Since certain transit systems needed time to modify their technology and make it compatible with the Revenue Ruling's requirements, the IRS had postponed the effective date of the Revenue Ruling several times, most recently until January 1, 2010. The IRS feels that additional time to make those modifications is needed.

Despite the delay in the effective date, the Notice allows employers and employees to rely on the Revenue Ruling with respect to transactions occurring prior to January 1, 2011.

December 14, 2009

Employee Benefits-IRS Announces A Remedial Amendment Period and Safe Harbor Reliance Rules for 403(b) Plans

In Announcement 2009-89 (the "Announcement"), the IRS said that it expects to publish, during the next few months:

- a revenue procedure for obtaining an opinion letter from the IRS that the form of a prototype or other pre-approved plan (a "pre-approved plan") meets the requirements of Section 403(b) of the Internal Revenue Code (the "Code"); and

- a revenue procedure for obtaining an individual determination letter from the IRS for a 403(b) plan.

The IRS reminds us that, as part of the relief provided by IRS Notice 2009-3 from the requirements of Code Section 403(b) and the underlying regulations, a written 403(b) plan, intended to meet those requirements, must be adopted on or before December 31, 2009. The Announcement provides that, if the employer adopts a written plan by that date, the employer will have a remedial amendment period, starting on January 1, 2010, during which the employer will have reliance that its 403(b) plan satisfies those requirements, so long as, during this remedial amendment period:

 the employer adopts a pre-approved 403(b) plan, which has received a favorable opinion letter from the IRS, retroactive to January 1, 2010; or
 applies for an individual determination letter on its 403(b) plan, and amends its 403(b) plan to correct any defects in form retroactive to January 1, 2010.

An employer that first establishes a 403(b) plan after December 31, 2009, by
adopting a written plan intended to satisfy the requirements of Code Section 403(b) and the underlying regulations, will also have reliance, as to the satisfaction of those requirements, beginning on the effective date of the plan and throughout a remedial amendment period. This reliance is conditioned on the employer, during the remedial amendment period, either adopting a pre-approved 403(b) plan with a favorable opinion letter from the IRS, or applying for an individual determination letter and correcting any defects in the form of its 403(b) plan retroactive to the effective date.

The revenue procedures to be issued by the IRS will provide the details on the remedial amendment period, e.g., its length and the conditions an employer must satisfy in order to use it.

December 11, 2009

ERISA-DOL Advises That Assets of Target-Date or Lifecycle Mutual Funds, Which Consist Of Shares Of Affiliated Mutual Funds, Are Not "Plan Assets"

In Advisory Opinion 2009-04A, the Department of Labor (the "DOL") was faced with the questions of whether the assets of "target-date" or "lifecycle" mutual funds ("Funds") constitute "plan assets" of employee benefit plans which invest in the Funds, and whether the Funds' investment advisers would be considered fiduciaries of the investing employee benefit plans under ERISA. The Funds' assets typically consist of shares of affiliated mutual funds. In answering these questions, the DOL assumed that the Funds are investment companies registered under the Investment Company Act of 1940 "(Registered Investment Companies").

The DOL noted that, under Section 3(21)(B) of ERISA, the investment of an employee benefit plan in a Registered Investment Company does not, by itself, cause such company or its investment adviser to be a fiduciary (or a party in interest) of the investing plan for purposes of Title I of ERISA. Also, under Section 401(b)(1) of ERISA, when an employee benefit plan invests in a share of a Registered Investment Company, the assets of the investing plan will include that share, but not any of the assets of that company.

The DOL said that, in its view, nothing in ERISA Section 3(21)(B) or Section 401(b)(1) suggests that a Registered Investment Company's investment in the shares of affiliated mutual funds would, by itself, affect the application of those Sections. Thus, the DOL concluded that the fact that a Fund's assets consist of shares of affiliated mutual funds does not, by itself, make the assets of the Fund "plan assets" of an employee benefit plan which invests in the Fund, or make the Fund's investment advisers fiduciaries of the investing employee benefit plan under ERISA.

December 8, 2009

Employee Benefits-DOL Advises That An IRA Owner, Who Provides A Security Interest In His Personal Accounts To Cover The IRA's Debts, Causes A Prohibited Transaction

In Advisory Opinion 2009-03A, the Department of Labor (the "DOL") faced the question of whether a prohibited transaction would result, under Section 4975(c)(1)(B) of the Internal Revenue Code (the "Code"), if an IRA owner grants a brokerage firm (the "Broker") a security interest in the assets of his non-IRA accounts held by the Broker as a requirement for establishing an IRA with the Broker. This security interest is intended to cover any indebtedness that the IRA may incur with the Broker. The IRA owner directs the investment of the IRA, so that the IRA is considered to be "self-directed".

The DOL ruled that this arrangement would result in a prohibited transaction. A prohibited transaction involves a "plan", such as an IRA, and a "disqualified person" , such as a fiduciary. In turn a "fiduciary" includes an IRA owner who self-directs the IRA. Section 4975(c)(1)(B) of the Code prohibits the direct or indirect lending of money or other extension of credit between an IRA (the plan) and the IRA owner (the disqualified person). The granting of a security interest in the IRA owner's personal accounts to cover indebtedness of, or arising from, the IRA is akin to a guarantee of the payment of such indebtedness by the IRA owner and therefore constitutes the proscribed extension of credit.

The DOL also noted that, to the extent that the contemplated arrangement involves the granting by the IRA owner to the Broker of a security interest in the IRA's assets to cover the indebtedness of the IRA owner, a prohibited transaction would likewise occur under Sections 4975(c)(1)(B), (D) and (E) of the Code. This obtains because:

-- the grant of the security interest in the IRA's assets would be an extension of credit by the IRA to the IRA owner, a disqualified person, and cause a violation of Section 4975(c)(1)(B);

-- the grant of the security interest in the IRA's assets involves a transfer or use of the IRA's assets to or by the IRA owner, a disqualified person, and is therefore prohibited by Section 4975(c)(1)(D); and

--the arrangement allows the IRA owner, a disqualified person and a fiduciary, to deal with the income or assets of the IRA for his own benefit and account, and is therefore prohibited by Section 4975(c)(1)(E).

December 7, 2009

ERISA-Second Circuit Upholds District Court's Dismissal Of Plaintiff s' Claims Of Breach Of Fiduciary Duty Stemming From Savings Plan Investments and Fees

This case is to be contrasted with Braden v. Wal-Mart Stores, Inc. (see my blog of December 1), in which the Eighth Circuit let some similar claims go forward.

In Taylor v. United Technologies Corp., No. 09-1343-cv (2nd Circuit 2009), in a summary order, the Second Circuit upheld the District Court's dismissal of the plaintiffs' claims of breach of fiduciary duty under ERISA stemming from savings plan investments and fees. In doing so, the Second Circuit essentially adopted the District Court's opinion in Taylor v. United Technologies Corp., No. 06-cv-1494, (D. Conn. 2009).

In this case, the plaintiffs, participants in the United Technologies' Employee Savings Plan (the "Plan"), had alleged that United Technologies Corp. and the Plan's fiduciaries (the "defendants") had breached their fiduciary duties to the Plan by (1) holding cash in the Plan's company stock fund, (2) payment of excessive recordkeeping and administrative fees, including "sub-transfer fees" and "revenue sharing fees", (3) making misleading representations regarding fees and expenses, (4) providing participants with confusing, false and misleading information, including information regarding payments to the Plan's recordkeeper, (5) failure to capture "float" , (6) payment of excessive investment management and brokerage fees with respect to the mutual funds made available for investment under the Plan, and (7) inclusion of imprudent investment options-actively managed funds- in the Plan. The District Court dismissed the plaintiffs'claims, for the reasons summarized below.

As to claim (1), the District Court said that the plaintiffs did not provide evidence that the defendants imprudently retained an excessive amount of cash in the company stock fund. Also, the evidence indicates that the defendants' evaluation of the merits of retaining this cash to provide transactional liquidity satisfies ERISA's prudent person standard. The fees at issue in claim (2) were fees paid by mutual funds in which plan participants had invested, and therefore did not involve any payments made with plan assets. As to claims (3) and (4), the evidence indicates that the defendants did not make misleading communications to Plan participants, and that they disclosed information as required by ERISA. Also, the plaintiffs failed to demonstrate the materiality of any nondisclosure, with "materiality" being determined by whether the nondisclosure would mislead a reasonable participant when making an adequately informed investment decision. The plaintiffs did not produce enough evidence as to claim (5). As to claims (6) and (7), the facts detail the evaluation and analytical process by which UTC selected the investment options and reviewed the fees to be charged versus the possible returns net of expenses. The existence and use of this process negates the claim of imprudent selection and excessive fees.


December 2, 2009

Employment- EEOC Assumes New Area of Jurisdiction to Protect Confidentiality of Genetic Information

According to a Press Release dated 11/20/09, in the first legislative expansion of its jurisdiction since the passage of the Americans with Disabilities Act (the "ADA") in 1990, the U.S. Equal Employment Opportunity Commission (the "EEOC") on Saturday, November 21, assumes responsibility for enforcing Title II of the Genetic Information Nondiscrimination Act ("GINA").

The Press Release says that GINA, signed into law in May 2008, prohibits discrimination by health insurers and employers based on individuals' genetic information. Genetic information includes the results of genetic tests to determine whether someone is at increased risk of acquiring a condition (such as some forms of breast cancer) in the future, as well as an individual's family medical history. More specifically, GINA prohibits the use of genetic information in making employment decisions, restricts the acquisition of genetic information by employers and others, imposes strict confidentiality requirements, and prohibits retaliation against individuals who oppose actions made unlawful by GINA or who participate in proceedings to vindicate rights under the law or aid others in doing so. The same remedies, including compensatory and punitive damages, are available under Title II of GINA as are available under Title VII of the Civil Rights Act and the ADA.

The EEOC is responsible for enforcing federal laws prohibiting employment discrimination, and is charged with issuing regulations implementing Title II of GINA. On March 2, 2009, the EEOC published proposed regulations under Title II. The final regulations under Title II are still under review.

December 2, 2009

Employment-Second Circuit Rules That A Product Design Specialist Is Entitled To Overtime

In Young v. Cooper Cameron Corp., No. 08-5847 (Second Circuit 2009), the Court faced the issue of whether a product design specialist fell outside the "professional exemption" from the overtime requirements of the Fair Labor Standards Act (the "FLSA") . In this case, the plaintiff, Andrew Young ("Young"), had worked for the defendant, Cooper Cameron Corp. ("Cooper"), for three years as a product design specialist. When hired, Young had approximately 20 years of engineering-type experience, and his work at Cooper had involved complicated technical expertise and responsibility. However, Young lacked any formal education beyond a high school diploma.

In analyzing the case, the Court said that the overtime requirements of the FLSA are subject to an exemption (found at 29 U.S.C. § 213(a)(1)) for persons employed in a bona fide professional capacity. Under the regulations (at 29 C.F.R. § 541.3(a)(1) and 541.301) a bona fide professional capacity is defined as work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study, as distinguished from a general academic education, an apprenticeship, or training in the performance of routine mental, manual, or physical processes. This type of instruction cannot be obtained at the high school level.

The Court concluded that, based on the foregoing, to qualify for the professional exemption, the job in question must require knowledge customarily acquired by a prolonged course of advanced intellectual study. The plaintiff's job-product design specialist-did not require such knowledge or study. The professional exemption does not apply to employees who have acquired their skill by experience rather than by advanced intellectual study. Therefore, the professional exemption does not apply to the plaintiff, and he is entitled to overtime under the FLSA.

December 1, 2009

ERISA-Eighth Circuit Holds That A Plaintiff Alleging Breach of Fiduciary Duty By Causing A 401(k) Plan To Have Excessive Fees-Due To "Revenue Sharing" Among Other Things- States A Claim For Relief Under ERISA

The Eighth Circuit's decision in Braden v. Wal-Mart Stores, Inc., No. 08-3798 (8th Cir. 2009) is noteworthy, since it illustrates how to state a claim for relief, that will at least survive a motion to dismiss the case, when a 401(k) plan's fiduciary is alleged to have breached its fiduciary duty by causing the plan to have excessive fees. In this case, under Wal-Mart's Profit Sharing and 401(k) Plan (the "Plan"), a participant could invest his or her account in a number of investment options. These options included ten mutual funds, a common/collective trust fund, Wal-Mart common stock, and a stable value fund. The options were selected by Wal-Mart's Retirement Plans Committee.

The plaintiff, Jeremy Braden, filed this lawsuit on March 27, 2008, alleging a number of causes of action against Wal-Mart and its executives serving on or responsible for overseeing the Retirement Plans Committee (the "defendants"). The gravamen of the complaint is that the defendants failed to adequately evaluate the investment options made available under the Plan, including the failure to properly consider Plan trustee Merrill Lynch's interest in making available funds that shared their fees with Merrill Lynch (commonly called "revenue sharing), resulting in excessive fees being charged to the Plan. The District Court dismissed the case, and the plaintiff appealed.

The major question facing the Court was whether the plaintiff had adequately stated a claim of breach of fiduciary duty under ERISA upon which relief could be granted, so as to be able survive a motion to dismiss the case. As to this question, the Court said that a complaint states a plausible claim for relief if, taking the plaintiff's factual allegations as true, its factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The facts pled must give the defendant fair notice of what the claim is and the grounds upon which it rests, and allow the court to draw the reasonable inference that the plaintiff is entitled to relief. Analyzing the plaintiff's complaints along those lines, the Court found that the plaintiff had stated the following claims upon which relief could be granted:

-- breach of the fiduciary duties of prudence and loyalty imposed by ERISA: This breach involves a faulty process of selecting plan investments. The complaint alleged that (1) the Plan comprises a very large pool of assets, the 401(k) marketplace is highly competitive, and retirement plans of such size consequently have the ability to obtain institutional class shares of mutual funds, but despite this ability, each of the ten funds made available for investment under the Plan offers only retail class shares, which charge significantly higher fees than institutional shares for the same return on investment; (2) seven of the Plan's ten mutual funds charge 12b-1 fees from which participants derive no benefit; (3) the defendants did not change the Plan's investment options even though most of them underperformed the market indices they were designed to track; and (4) the funds made available for investment under the Plan made revenue sharing payments to the Plan's trustee. If these allegations are substantiated, the process by which the defendants selected the Plan's investments would have been tainted by the failure of effort, competence, or loyalty.

--breach of fiduciary duty of loyalty, stemming from the failure to adequately disclose to participants complete and accurate material information about the fees being charged to the Plan, including the revenue sharing with the Plan's trustee: The plaintiff alleged sufficient facts to support an inference that nondisclosure of details about the fees charged to the Plan and the amount of the revenue sharing payments would mislead a reasonable participant in the process of making an adequately informed decision regarding his or her selection of investments in the Plan.

Based on the above, the Court vacated the District Court's dismissal of the plaintiff's claims, and remanded the case back to the District Court.