August 2010 Archives

August 31, 2010

Employee Benefits-DOL Provides Tips To Individuals Whose COBRA Subsidy Is Expiring

The Department of Labor (the "DOL") has added to its website a Fact Sheet which provides tips to individuals whose subsidy for COBRA premiums is expiring, so that they can maintain their health care coverage.

By way of background, the American Recovery and Reinvestment Act and subsequent legislation (the "ARRA") has provided a COBRA premium reduction (sometimes called the "subsidy") for eligible individuals who were involuntarily terminated from employment through May 31, 2010. Individuals who qualified on or before May 31, 2010 may continue to pay reduced premiums for up to 15 months, as long as they are not eligible for another group health plan or Medicare. Those individuals who qualified for the premium reduction were only required to pay 35 percent of the COBRA premium otherwise due to the plan. After 15 months of the premium reduction, an individual must pay the full amount to continue his or her COBRA continuation coverage. The Fact Sheet provides the following tips for individuals whose 15 months have expired:

1) Make sure you know when your 15 months of premium assistance ends and how much you need to pay to continue your coverage.
If you are unsure about the above, ask your plan. Plans are not required to remind you or bill you for the increased amount. Not making the full payment within the correct time period can result in the cancelation of your COBRA coverage.

2) Make sure you pay the full premium for coverage after the first 15 months.
COBRA coverage is terminated for non-payment. Individuals who exhaust their COBRA coverage are generally eligible to obtain coverage through state high risk pools and also qualify for special enrollment in a new employer's plan or spouse's plan. These rights are lost if an individual's COBRA is terminated for non-payment.

3) Check for other coverage options.

--If you did not make the premium payment on time and your coverage was canceled, you may want to contact your plan and ask if they will reinstate your coverage. However, if your coverage was terminated for not making the payment within the grace period, the plan is not required to reinstate your coverage. If you believe your coverage was canceled inappropriately, you should contact an EBSA Benefits Advisor at 1.866.444-3272 for assistance.

--If you have lost coverage, and are not eligible to enroll in a new employer's plan or a spouse's plan, you may want to contact your state department of insurance to get information about obtaining an individual policy. You may be able to cover your children under your state's Children's Health Insurance Program- call 1-877 KIDS NOW (1.877.543.7669) or go to www.insurekidsnow.gov to find out about eligibility and enrollment.

--Additionally, the newly enacted Affordable Care Act provides that plans or issuers that make available coverage to dependent children must make such coverage available for children up to age 26. Because this provision has a varying applicability date, contact the plan to see if such coverage is available. The Affordable Care Act also established Pre-existing Condition Insurance Plans (PCIP) for those with pre-existing conditions. For information about how these plans work, go to www.healthcare.gov.

--If you have limited income and resources (assets), you may want to contact your state to determine if you are eligible for Medicaid or other programs that may assist you in obtaining other health coverage.


August 30, 2010

ERISA/Employee Benefits-DOL Issues Interim Federal Procedures For Reviewing Group Health Plan External Claims

In Technical Release 2010-01, the Department of Labor (the "DOL") issued Federal procedures for reviewing external claims from group health care plans.

By way of background, Section 2719 of the Public Health Service Act (the "PHS Act"), as in effect after recent healthcare legislation, generally applies to group health plans which are not "grandfathered" health plans (a "grandfathered" plan is generally a plan in existence on March 23, 2010). Section 2719 sets forth standards for covered plans regarding both internal claims and appeals and external review of those claims. It applies in any plan year starting on or after September 23, 2010. The DOL (along with the Internal Revenue (the "IRS") and the Department of Health and Human Services) published interim final regulations implementing Section 2719 on July 23, 2010. However, those regulations did not establish the requirements for Federal procedures for reviewing external claims. Technical Release 2010-01 fills that gap.

The Federal procedures for reviewing external claims apply to covered self-insured group health plans, and any covered insured health care whose insurer is not subject to State external claims review procedures that meet the requirements of Section 2719 of the PHS Act. The new Federal procedures include rules for requests by participants for external review, a preliminary review of the requests, referral of the claims to independent reviewing organizations and expedited reviews for serious medical conditions.

The Federal procedures in the Technical Release are considered to be a "safe harbor". Therefore, neither the DOL nor the IRS will take any enforcement action, with respect to Section 2719 of the PHS, against any covered plan, to which the Federal procedures apply, that complies with the procedures described in the Technical Release.

August 26, 2010

Employee Benefits-IRS Answers Questions About Employers Who Failed To Timely Adopt Or File A Determination Letter Request For A Pre-Approved Plan

April 30, 2010, was the final day of the two-year period during which an employer, who had has been maintaining a pre-approved qualified defined contribution ("DC") plan (i.e., a master & prototype plan or a volume submission plan), could adopt an EGTRRA pre-approved restated document and file an application for an IRS determination letter. What happens if the employer failed to adopt and/or file by this deadline? The IRS discusses this problem in its recent Employee Plans News ( Issue Number 2010-07 - August 20, 2010).

According to the IRS, the following obtains if the employer failed to adopt an EGTRRA pre- approved DC plan document by April 30, 2010. Generally, under the six-year remedial amendment cycle rules described in Revenue Procedure 2007-44, this failure adversely affects the qualified status of the employer's plan. However, this failure can be corrected, for a reasonable fee, under the IRS' Employee Plans Compliance Resolution System (the "EPCRS"), which is currently set forth in Revenue Procedure 2008-50. VCP is available as long as the plan (or, in the case of a tax-exempt entity, the adopting employer) is not under examination by the IRS. See Section 5.07 of Revenue Procedure 2008-50 for the definition of "under examination." To assist an employer who wishes to make a VCP submission to correct the failure to timely adopt the EGTRRA pre-approved document, the IRS has developed a Voluntary Correction Program Submission Kit, to be used to make this correction.

Note that an individual determination letter application in regard to the pre-approved DC plan is not required to be submitted to the IRS in connection with the VCP filing. An employer adopting a pre-approved DC plan is usually entitled to rely on the opinion or advisory letter issued with respect to the plan. However, if the employer desires to obtain an individual determination letter with respect to its plan, then, after receiving an executed compliance statement from the IRS under the VCP, the employer may make an off-cycle determination letter application to the IRS, as discussed below.

If the employer failed to file an application for a determination letter by the April 30 deadline, but still wishes to do so, the following obtains, Applications for pre-approved DC plans submitted after April 30, 2010, will be treated as off-cycle filings. This means that the application will be placed in suspense and generally will not be reviewed by the IRS until all on-cycle applications have been reviewed. For post April 30, 2010, off-cycle applications that have already been submitted, the IRS will contact the submitting employers and offer them the right to withdraw such applications. If such withdrawal request is made, the IRS will refund any user fees that have been paid. The Employee Plans News discusses several exceptions to this off-cycle treatment, by which an application will be considered to have been filed on-cycle.


August 24, 2010

ERISA-Ninth Circuit Rules That Insurer's Decision To Stop LTD Benefits Was Reasonable

Gunn v. Reliance Standard Life Insurance Company, No. 09-55089 (Ninth Circuit 2010) (Memorandum Decision), involved the plaintiff, Igor Gunn ("Gunn"), and the defendants, the Paine Webber Long Term Disability Plan (the "Plan") and Reliance Standard Life Insurance Company ("Reliance"), the issuer of the insurance policy funding the Plan and the Plan's claims administrator.

Gunn had begun to receive long-term disability ("LTD") benefits from the Plan, based on his multiple sclerosis and severe depression. However, after receiving the benefits for 24 months, the Plan's "mental illness exclusion" began to apply, and Reliance, as claims administrator, had decided to terminate Gunn's LTD benefits due to this exclusion. Gunn brought this suit under ERISA against the defendants, challenging the termination of his LTD benefits. The district court had found that Reliance's decision to terminate the LTD benefits was an abuse of discretion and restored the benefits to Gunn. The defendants appealed.

In analyzing the case, the Ninth Circuit applied the abuse of discretion standard to Reliance's decision to terminate the LTD benefits, since the Plan had granted discretionary authority to Reliance. It also took into account Reliance's conflict of interest resulting from Reliance being both the claim decider and benefit payer. In this case, the Plan had a "mental illness exclusion", under which LTD benefits would stop after 24 months when the disability is caused by or contributed to by mental or nervous disorders, such as severe depression. Reliance had taken the position that, for the benefits to continue beyond the 24 months, Gunn would have to show that he was totally disabled solely due to his physical condition stemming from his multiple sclerosis, without taking into account the disabling effects of the severe depression. The records of Gunn's treating physicians did not make this showing.

The Court found that Reliance's interpretation of the mental illness exclusion did not conflict with other Plan terms and was reasonable. The physicians' reports provided evidence supporting Reliance's decision to stop the benefits. The Court also concluded that the district court gave too much weight to Reliance's conflict of interest. Therefore, the Court concluded that Reliance's decision to stop the LTD benefits was not an abuse of discretion. It overturned the district court's ruling and remanded the case with an order to enter judgment in the defendants' favor.

August 20, 2010

Employment-PA Court Rules, In A Worker's Compensation Case, That There Is No Expectation Of Privacy When Praying In A House Of Worship

In Tagouma v. Investigative Consultant Services, Inc., 2010 PA Super 147 (August 10, 2010), an employee, Ahmed Tagouma, had fallen at work, suffering an acute fracture of his right hand. He was later diagnosed with Reflex Sympathetic Dystrophy Syndrome (RSD). The employee sought workers' compensation benefits, and his employer contested the claim. While the claim was pending, the workers' compensation carrier retained the defendants to perform surveillance on the employee.

The defendants took video tape pictures of the employee while he was praying at the Al-Hikmeh Institute in the Islamic Center of PA. The Center is situated just to the rear of two businesses that sit, respectively, just in front of it to its left and just in front of it to its right, making it difficult for passersby to see the Center. At the time the pictures were taken, however, the employee was in plain view from the street. The employee brought this suit against the defendants, on the grounds of invasion of privacy and intrusion on seclusion. The lower court dismissed the employee's suit and the employee appealed.

The Superior Court said that the employee has failed to show that he had an expectation of privacy while praying in public. First, the employee had a diminished expectation of privacy because of his workers' compensation claim. Second, it is undisputed that the Islamic Center was open to the public and employee was praying directly in front of a plate glass window. The foregoing obtains even though the defendants used vision-enhanced photographic equipment to take the video pictures. As such, the Superior Court affirmed the lower court's dismissal of employee's suit.

August 18, 2010

Employment-8th Circuit Upholds Restrictive Covenants Against Former Employees/Shareholders

In Mayer Hoffman McCann, P.C. v. Barton, No. 09-2061 (8th Cir. 2010), the plaintiff, the accounting firm of Mayer Hoffman McCann, P.C. ("MHM"), sued the defendants, who were former employees and shareholders of MHM, under restrictive covenants that MHM had with the defendants. The district court had granted judgment to MHM, awarding MHM permanent injunctive relief against the defendants and $1,369,921 in liquidated damages. The defendants appealed. The Eighth Circuit upheld the district court's decision.

The restrictive covenants in this case, found in the defendants' shareholder agreements with MHM, provided that, for the "Post-Employment Restrictive Period," which was a period of two years following the termination of defendants' employment with MHM, the defendants would not: (1) solicit, directly or indirectly, or attempt to solicit MHM's clients or otherwise interfere with MHM's relationship with its clients, (2) solicit MHM's employees, or (3) copy, disseminate, or use MHM's confidential information at any time. The shareholder agreements also had a liquidated damages provision.

In 2008, the defendants formed their own accounting firm. Each defendant prepared and sent a letter to various MHM clients, or otherwise attempted to contact MHM clients by fax or email, which in effect solicited business from the client. They also recruited four MHM employees to work at the new firm, and used and disclosed MHM confidential information. MHM subsequently filed suit against the defendants, seeking to enforce the restrictive covenants and asking for liquidated damages.

The issue before the Eighth Circuit was the enforceability of the restrictive covenants and the liquidated damages provision in the shareholder agreements. For this purpose, local state law (Missouri) would govern. The Court determined that the restrictive covenants were enforceable under state law, since in this case:

--the restrictive covenants were supported by consideration-namely because the shareholder agreements clearly provided that the restrictive covenants were necessary to protect the legitimate interests of MHM's business and identified those interests, and the restrictions were not "greater than fairly required" for MHM's protection;

--local law does not prevent restrictive covenants from being included in a shareholder's agreement;

--MHM has a protectable interest; and

--the restrictive covenants-in effect for two years after termination- were reasonable in scope.

The Court also held that the liquidated damages provision in the shareholders' agreements was enforceable under local law, since the provision sought to collect compensation for damages as opposed to imposing a penalty.


August 16, 2010

ERISA-8th Circuit Rules That Physician's Extra Pay Is Overtime, And Is Therefore Excluded In Determining The Amount Of His Disability Benefit

In Khoury v.Group Health Plan, Inc., No. 09-3276 (8th Circuit 2010), the plaintiff, Dr. Antoine Khoury, had obtained a residual disability benefit from ReliaStar Life Insurance Company ("ReliaStar"), his employer's long-term disability insurer and plan administrator. However, he questioned the amount of the benefit and filed this suit under ERISA.

Under the disability plan, the amount of a participant's benefit was determined under a formula which used "Basic Monthly Earnings". However, the plan defined Basic Monthly Earnings to exclude overtime pay. Under the terms of his employment contract, the plaintiff received "Base Department Compensation" of $500,000 per year. In order to receive this pay, the plaintiff was required to participate in a program under which he was expected to be on call one weekend every six weeks, and two weekdays per month. He received $2,500 for any additional day he was on call. The plaintiff's pay for these additional on call days amounted to about $80,000 per year. The issue was whether the $80,000 amount was overtime pay and thus not taken into account as Basic Monthly Earnings when computing the amount of the plaintiff's disability benefit.

ReliaStar had concluded that the $80,000 amount was overtime pay and thus excluded from Basic Monthly Earnings. ReliaStar had found that, although the plaintiff may have been required to perform additional call shifts due to staffing issues, he received extra pay for the additional on call days over and above his $500,000 base pay. ReliaStar noted that extra pay received for extra time worked is generally considered "overtime", and is certainly considered "overtime" by the insurance industry.

The Court analyzed the case by reviewing ReliaStar's conclusion that the $80,000 pay was overtime. In reviewing this conclusion, the Court applied a deferential standard, giving only some weight to ReliaStar's conflict of interest (as both plan administrator and benefit payor) since the plaintiff was unable to say how the conflict adversely affected ReliaStar's conclusion. The Court held that ReliaStar's conclusion was reasonable, so that the $80,000 amount was overtime and excluded from Basic Monthly Earnings. Therefore this amount should not be taken into account when determining the amount of the plaintiff's residual disability benefit.



August 13, 2010

ERISA-7th Circuit Allows Correction of Scrivener's Error, Saving the Plan 1.67 Billion Dollars

In Young v. Verizon's Bell Atlantic Cash Balance Plan, Nos. 09-3872 & 09-3965 (7th Circuit 2010), the cash balance pension plan maintained by Verizon Communications, Inc ("Verizon") contained a drafting error, resulting from what the Court termed "a single honest mistake", which if enforced literally would give Verizon pensioners substantially greater benefits than they expected. The Court concluded that ERISA's rules-including the written plan requirement- are not so strict as to deny an employer equitable relief from the type of "scrivener's error" that occurred here, and affirmed the district court's judgment granting Verizon equitable reformation of its plan to correct the scrivener's error.

In this case, Verizon had converted a traditional defined benefit plan to its cash balance pension plan. As part of this conversion, participants' benefits under the defined benefit plan were converted to initial account balances. To make this conversion, certain "transition factors," consisting of a series of multipliers that increased with an employee's age and years of service, were used. However, in drafting the amendments pertaining to the conversion, an in-house counsel accidentally used language under which, when determining the amount of a participant's initial account balance, the plan was required to multiply by two the product of (1) the cashout value of each participant's benefit in the old defined benefit plan and (2) the applicable transition factor. The language should have provided for no multiplication of this product.

The issue in this case was whether Verizon's claim for equitable reformation of its cash balance pension plan, in order to correct the scrivener's error (or any other drafting mistake), is the type of equitable relief authorized by section 502(a)(3) of ERISA. The Court concluded that section 502(a)(3) authorizes equitable reformation of a plan that-as here- is shown, by clear and convincing evidence, to contain a scrivener's error that does not reflect participants' reasonable expectations of benefits. It said that, in each case, a court must look beyond the plan document to extrinsic evidence to determine the parties' understanding of the plan. Thus, in this case, the reformation of the plan to correct the error must be allowed.

Some Thoughts: According to the district court, if not corrected, the scrivener's error would have caused the plan to pay an additional $1.67 billion in benefits. Even so, the Court's ruling puts a serious dent in ERISA's written document rule, since it allows a court to look outside the plan to determine participants' expectations. It remains to be seen where courts will go with this.

Also, the Court may have bailed out Verizon here, but shouldn't Verizon have had outside ERISA counsel review the conversion amendments with so much at stake?

August 10, 2010

Compensation/Tax-IRS Rules That Employees Can Waive Salary Without Gross Income Inclusion

In Private Letter Ruling 201024045, the IRS ruled that the amounts of salary waived by certain governmental employees are not includible in their gross incomes. Specifically, legislation ("Statute A") was passed which allowed the employees to voluntarily waive a statutorily specified amount of salary on a monthly basis. The waivers are irrevocable and must be filed by an employee by a specified date prior to the day on which the employee is paid. The employees have no claim to the waived amounts in the future.

The Ruling cites Code Sections 61 and 451, Treas. Reg. Sec. 1.451-1(a) and Revenue Rulings 66-167 (holding that fees or commissions are not includible in the gross income of the executor of an estate, where he effectively waives his right to receive such fees or commissions within a reasonable time after commencing to serve as the executor, and all his other actions with respect to the estate are consistent with an intention to render gratuitous service). Then, without any analysis, the Ruling concludes that the amounts of salary waived by the employees pursuant to Statute A are not includible in their gross incomes.

Note: I always thought that, as a general matter, you cannot turn your back on income without being taxed. Since there is no analysis in the Ruling, it is unkown how the thinking behind this Ruling could be applied to analogous waivers of salary, fees and commissions.

August 9, 2010

Employment/Tax-NYS Department of Labor Says HIRE Act Tax Credit Is Available For Part-Timers

The NYS Department of Labor website (at least as of today) says that the Hire Act tax credit is available for an employee hired on a part-time basis. According to the website, there is no hour minimum for the new employee in order to be credit eligible. The credit is available, so long as the employer is qualified (that is, it is not a state or federal government), and the worker was hired between February 3, 2010 and the end of the 2010, was out of work, and was not hired to replace another employee (unless the replaced employee left voluntarily or for cause).

August 7, 2010

ERISA/ Employee Benefits-DOL And Treasury Are Holding A Hearing On Issues Pertaining To Life Income Options For Retirement Plans

Oh those retirement benefits! In many employer-sponsored retirement plans, particularly defined contribution plans, the benefits are payable in the form of a single lump sum payment. The problem? The participant takes the lump sum-the participant's entire benefit under the plan-and spends it early, so that he or she has none of the money left for the rest of his or her retirement. One proposed solution is a "life income option". Under this option, the plan, generally through the purchase of an annuity contract, will pay the retirement benefit periodically (normally monthly) for the remainder of the participant's life. This way, the participant cannot outlive the benefit.

But the life income option raises a number of concerns. Accordingly, in a News Release dated August 5, 2010, the Department of Labor (the "DOL") and the Treasury Department will hold a joint public hearing on Sept. 14, 2010, and if necessary on Sept. 15, to hear testimony on several specific issues relating to the life income option and other arrangements that provide a stream of income after retirement for workers participating in employer-sponsored retirement plans.

The News Release notes that the DOL received approximately 780 public comments in response to the request for information (RFI) on the life income option published in the Feb. 2, 2010 Federal Register. The purpose of the hearing is to gather additional information on discrete technical issues and proposals raised in RFI submissions. The News Release contains details for those who wish to speak at the hearing.

Witnesses at the hearing will address issues relating to:

--certain specific participant concerns affecting the choice of lifetime income relative to other options;

--information to help participants make choices on the management and spend down of retirement benefits;

--disclosure of account balances as monthly income streams;

--the fiduciary safe harbor for selection of lifetime income issuers or products; and

--alternative designs of in-plan and distribution lifetime income options.


August 5, 2010

ERISA-Eighth Circuit Reads Doctors' Letters To Support Conclusion of Permanent Disability

All too often, the results in cases involving claims for health or disability benefits depends on a doctor's report or letter before the plan administrator or the court, and on how the administrator or court interprets it. Such was the case in Rote v. Titan Tire Corporation, Nos. 09-2510, 09-2890 (8th Cir. 2010).

In that case, the plaintiff, Cindy Rote, had been seeking long-term disability benefits from the disability plan (the "Plan") of Titan Tire Corporation ("Titan") for over eight years. Rote had needed surgeries to replace the joints in both of her thumbs. After the surgery, Titan asked Dr. Anthony Sciorrotta to evaluate Rote's ability to return to work. Dr. Sciorrotta suggested that Rote be restricted to jobs that did not require frequent pinching with more than five pounds of force and did not involve kneeling or squatting. Titan informed Rote that there were no jobs compatible with those restrictions available at the plant, and presumably did not allow her to resume work.

Rote eventually filed an application for long-term disability benefits under the Plan. Titan, as the Plan's administrator, denied Rote's application for disability benefits. Rote then filed suit against Titan under ERISA, challenging the denial of her claim for the benefits. The case eventually found its way to the Eighth Circuit Court of Appeals. The question as to the entitlement to the benefits came down to whether Rote's disability was "permanent". In the course of the proceedings, Rote's attorney wrote to both Dr. Sciorrotta and a Dr. Neff. Her attorney's letter noted that a question had arisen as to whether the work restrictions imposed on Rote were only temporary, or were intended to be permanent, and then asked whether the doctors recommended that Rote continue to follow these work restrictions indefinitely. Both doctors responded affirmatively with respect to the restrictions on pinching and gripping. Dr. Sciorrotta explained that, with respect to whether he would recommend that Ms. Rote continue to follow these restrictions indefinitely, he would say that regarding her hands, she should continue with those restrictions since they were outlined by Dr. Neff and were felt to be of a permanent nature. Rote later submitted a letters from the doctors clarifying that they thought that Rote's restrictions should be permanent.

In denying Rote's claim for disability benefits, Titan had seized on the word "indefinitely", used in the doctors' letters, to conclude that Rote's condition was not permanent. The Court disagreed with Titan. It said that the intended meaning of "indefinitely" as used in the letters-that the restrictions are permanent-was clear from the context of the letters by Rote's attorney and the doctors. Rote's attorney first informed the doctors that there was a question about whether the restrictions were only temporary or were intended to be permanent, before asking whether the restrictions should be continued indefinitely. The doctors' affirmative responses, when read in context, show that the restrictions are permanent, not temporary. Moreover, the doctors resolved any doubt about their intent in their subsequent letters. The Court found that Rote's disability was permanent, and affirmed the decision of the District Court, which had awarded long-term disability benefits to Rote.


August 4, 2010

Employee Benefits/Tax-IRS Says That An S Corporation Cannot Deduct Accrued Expenses for ESOP Participants

In its most recent Employee Plans News, the IRS says that if an Employee Stock Ownership Plan (an "ESOP") owns an S corporation's stock, that S corporation may not deduct the accrued compensation of an ESOP participant, including retirement plan contributions based on accrued compensation.

The reasoning is as follows. Under section 267(a)(2) of the Internal Revenue Code (the "Code"), a taxpayer, including an S corporation, may only deduct an expense pertaining to a related pary in the same tax year that the payment is reported as income by that party. Under section 267(e)(1)(B)(ii) of the Code, a related party includes any person who directly or indirectly owns any of that S corporation's stock. Therefore, if an ESOP holds an S corporation's stock, that ESOP's participants indirectly own stock in the S Corporation and are related parties. These participants do not include accrued compensation in their income until the year in which they receive it and, therefore, the S corporation cannot deduct any compensation (including any bonus or vacation pay) accrued to these participants. The S corporation also can't deduct any plan contributions for these participants that are based on accrued compensation.

August 3, 2010

ERISA-Seventh Circuit Rules That Trust Is Not Entitled To Receive Death Benefits From GE Plans

In Ponsetti v. GE Pension Plan, No. 09-2430 (7th Cir. 2010), the plaintiff, which was a trust (the "Trust"), had filed suit, alleging that the defendants had violated ERISA by refusing to disburse cash, representing death benefits, from the GE Pension Plan and the GE Savings and Security Program (the "Plans") to the Trust. The Trust had been established by a former employee of General Electric, now deceased, to receive death benefits from the Plans. The Plans had paid the death benefits to the employee's surviving spouse.

In this case, the deceased employee had not properly designated the Trust as his beneficiary. Under the Plans, in the absence of any beneficiary designation, the employee's surviving spouse receives the death benefits. To designate a nonspouse beneficiary, the Plans required the employee to provide a form that bore the signature of the beneficiary, the signature of the employee's spouse consenting to such beneficiary, and the signature of a notary or plan representative witnessing the prior two signatures. Here, the employee provided such a form, but the notary later swore in an affidavit that she did not actually witness the two signatures. Thus, the designation of the Trust as beneficiary was invalid.

Was the Trust nevertheless entitled to the death benefits under the Plans, instead of the surviving spouse? The Court said no. The Court went on to find that there was no ERISA violation-such as the failure to provide the Trust a full and fair claims review or other breach of fiduciary duty- that would result in the death benefits becoming payable by the Plans to the Trust.

The lesson, once again-make sure your beneficiary designations are up to date and completed properly.


August 1, 2010

ERISA-Ninth Circuit Rules That Plan Benefits Must Be Distributed In Accordance with Plan Documents

All too often, a plan participant designates his or her spouse as the beneficiary (payee) of the death benefits available under the plan. The participant then divorces that spouse, but fails to change the beneficiary designation. If the participant later remarries and dies, who gets the death benefits? The Court faced this question in Metropolitan Life Insurance Company v. Cline, No. 07-36031 (9th Circuit 2010).

In this case, Raymond Cline had been married to Teresa Valentine. Through his former employer, Mr. Cline participated in two employee benefit plans, a life insurance plan and a 401(k) plan, both of which are subject to ERISA. The plan documents designated Ms. Valentine as being entitled to all death benefits. Ms. Valentine and Mr. Cline divorced in 2002. The divorce decree provided that Ms. Valentine would receive all of the death benefits from her husband's insurance policies and half of her husband's benefits under the 401(k) plan. A year later, Mr. Cline married Roxann Cline. Despite the provision in the divorce decree, Mr. Cline designated Ms. Cline as the beneficiary under the 401(k) plan. Mr. Cline subsequently died.

Who gets the benefits under the plans? The Court said that ERISA requires that a plan fiduciary administer an ERISA plan for the purpose of providing benefits to participants and their beneficiaries and in accordance with the documents and instruments governing the plan. An exception exists where a qualified domestic relations order (a "QDRO") specifies a different beneficiary than the plan documents. Here, all of the proceeds from the life insurance plan are payable to Ms. Valentine, since she is the designated beneficiary of those proceeds under the plan document. Mr. Cline never changed that beneficiary designation. Similarly, the benefits under the 401(k) plan are payable to Ms. Cline, the beneficiary designated by Mr. Cline under that plan. In this case, the divorce decree does not qualify as a QDRO and thus does not alter the result.

The lesson for today: Keep your beneficiary designations current!