October 2010 Archives

October 29, 2010

Employment-New York State Court Rules That Defendant Can Have Access To Plaintiff's Facebook And MySpace Accounts

In Romano v. Steelcase Inc. and Educational & Institutional Cooperative Services Inc., No. 2006-2233 (Supreme Court, Suffolk County 9/21/10), the plaintiff claimed that she had been permanently injured at work, and sought substantial damages from her employer on the grounds that this injury caused her to suffer loss of enjoyment of life. The defendant asked the Court for an order granting the defendant access to the plaintiff's non public current and historical Facebook and MySpace pages and accounts, including all deleted pages and related information, on the grounds that the plaintiff had placed certain information on these sites which was inconsistent with her claims. The defendant contended that a review of the public portions of these pages and accounts reveals that the plaintiff has had an active lifestyle and has traveled to Florida and Pennsylvania during the time period she claims that her injuries prohibited such activity.

The Court said that the information sought by the defendant regarding the plaintiff's Facebook and MySpace accounts is both material and necessary to the defense in this case and/or could lead to admissible evidence. To permit a party claiming substantial damages for loss of enjoyment of life to hide behind the nonpublic portion of a website, the primary purpose of which is to enable people to share information about how they lead their social lives, risks depriving the opposite party of access to material that may be relevant to ensuring a fair trial.

The Court continued by stating that production of the plaintiff's entries on her Facebook and MySpace accounts would not violate her right to privacy, and any concerns for her privacy are outweighed by defendant's need for the information. New York courts have yet to address whether there exists a right to privacy regarding what one posts on their on-line social networking pages such as Facebook and MySpace. However, whether one has a reasonable expectation of privacy in internet postings or e-mails that have reached their recipients has been addressed by the Second Circuit, which has held that individuals may not enjoy such an expectation of privacy (citing US v Lifshitz, 369 F3d 173 (2nd Cir 2004)). Further, neither Facebook nor MySpace guarantees complete privacy, and warn that any posted material may become public. As such, the Court granted the defendant the order it requested giving the defendant access to the plaintiff's nonpublic Facebook and MySpace accounts and pages.




October 28, 2010

Employee Benefits-IRS Provides Guidance On Computing Defined Contribution Plan Contributions For Self-Employed Individuals

Computing the amount of the contributions to be made to a qualified defined contribution plan on behalf of a self-employed individual has always been very confusing. Fortunately, in the October edition of employee plans news (2010-09, October 8, 2010), the Internal Revenue Service (the "IRS") has provided some guidance on this topic.

In the news, the IRS posits the following hypothetical facts and question: I am self-employed and have a profit-sharing plan for my employees and myself. For 2009, I decided to make a plan contribution equal to 10% of each participant's compensation. To determine the amount allocated to my own account, I multiplied my net profit on my Schedule C by 10%. Was this correct?

The IRS answers the hypothetical employer by saying that you are wrong, and you made two errors: (1) you used the net profit from your business to base your percentage on and (2) you did not reduce the plan's contribution rate that you used for yourself. For a self-employed individual, "compensation" means "earned income." You must use your earned income to calculate plan contributions for yourself. Your earned income is not the same as net profit from your business. You calculate your earned income by taking your net profit from Schedule C and subtracting: (a) ½ of your self-employment (SE) tax and (b) plan contributions for yourself. Your earned income and the amount of your plan contributions for yourself depend on each other. You must reduce the plan contribution rate to calculate the correct amount of plan contributions for yourself. IRS Publication 560 has a worksheet that may be used for this purpose.

The IRS offers the following example. Joe's 2009 Schedule C net profit is $200,000 and he paid $18,600 in SE taxes. The plan contribution rate is 10% of each participant's compensation. Joe would compute the amount of the 2009 plan contribution for himself as follows:
1. Net profit from Schedule C: $200,000
2. Less ½ of SE tax: (9,300)
3. Joe's net profit less ½ SE tax is: $190,700
4. Joe's reduced plan contribution rate (based on plan contribution rate of 10% of compensation): x 0.090909 (from rate table in Pub. 560)

5. Joe's plan contribution for himself: $17,336.35

The limit on annual compensation (adjusted annually) for determining retirement plan contributions was $245,000 in 2009. Joe's 2009 earned income (his compensation) was less than the 2009 annual limit and, therefore, he does not have to restrict contributions for himself.

The IRS added that plan contributions for a self-employed individual are deducted on Form 1040 (on the line for self-employed SEP, SIMPLE, and qualified plans) and not on the Schedule C. It said that if you made the deduction on Schedule C, or made and deducted more than your allowed plan contribution for yourself, you must amend your Form 1040 tax return and Schedule C. If your plan contribution for yourself was higher than allowed by the terms of your plan, you may have a plan qualification issue. However, you may fix this error by using the IRS's Employee Plans Compliance Resolution System. -employed and have a profit-sharing plan for my employees and myself. For 2009,

October 25, 2010

ERISA-DOL Issues Proposed Rule On Definition of "Fiduciary" Of Employee Benefit Plans

A News Release (dated October 21, 2010) announces that the Department of Labor (the "DOL") has issued a proposed rule, in the form of a regulation, to update the definition of "fiduciary" ,used for purposes of ERISA, to more broadly include in the term a person who provides investment advice to plans for a fee or other compensation.

According to the News Release, the DOL's proposed rule would amend a 1975 regulation that defines when a person providing investment advice becomes a fiduciary under ERISA. The amendment would update that definition to take into account changes in the expectations of plan officials and participants who receive advice, as well as the practices of investment advice providers. The 1975 rule's approach to fiduciary status may inappropriately limit the department's ability to protect plans, participants and beneficiaries from conflicts of interest that may arise from today's diverse and complex fee practices in the retirement plan services market. The proposed rule is designed to remedy this limitation, and protect plan officials and participants who expect unbiased advice, by giving a broader and clearer understanding of when individuals providing such advice become fiduciaries and are therefore subject to ERISA's fiduciary standards.

The proposed rule, as published in the Federal Register on Oct. 22, 2010, is here.

October 22, 2010

ERISA-Sixth Circuit Decides That The Plan Administrator's Promise To Keep Plan Costs Down Does Not Create A Conflict of Interest When Reviewing Benefit Claims

Since the Supreme Court issued its decision in Metro. Life Ins. Co. v. Glenn, 554 U.S. 105 (2008), the courts realize that when they review a plan administrator's denial of a claim for benefits under the arbitrary and capricious standard (which applies when the plan gives the plan administrator discretionary authority to interpret the plan or determine benefit eligibility), the courts must give weight to any conflict of interest that the plan administrator may have in deciding a benefits claim-the more severe the conflict, the more the scrutiny the court applies to the plan administrator's decision. But when is there a conflict of interest? Clearly, as indicated in Glenn, there is an conflict of interest when the plan administrator, such as an insurer, both decides and pays benefits claims. Is there a conflict of interest in any other situation? The Court faced this question in Morris v. American Electric Power Long- Term Disability Plan, No. 08-4412 (Sixth Circuit 2010).

In this case, plaintiff Paul Morris ("Morris"), was an employee of American Electric Power. He was injured in a work-related automobile accident in 1992 and, as a result, began receiving long-term disability ("LTD") benefits from the American Electric Power Long-Term Disability Plan ("the Plan") in 1993. In 2004, the Plan's new third-party administrator, Broadspire, requested documentation of Morris's ongoing disability. Following a series of independent examinations and Plan-sponsored file reviews, Broadspire decided to terminate Morris's LTD benefits. Morris, after exhausting his internal appeals, filed suit under ERISA with the district court. The district court affirmed Broadspire's decision to terminate the benefits as being neither arbitrary nor capricious. Morris appealed.

In analyzing the case, the Court found that the arbitrary and capricious standard of review applied to Broadspire's decision to terminate the LTD benefits . It then said that courts must evaluate potential conflicts of interest and consider them as factors in determining whether the decision to deny benefits was arbitrary and capricious. Apparently, Broadspire did not both decide benefit claims and pay the claims granted out of its own assets. However, Morris had contended that a conflict of interest exists as to Broadspire, the plan administrator, in that Broadspire's advertising materials contain language indicating that its mission is to help its clients contain costs and have a positive impact on their employees and their bottom line. This promise aligns Broadspire's interests with those of the Plan, so that there is a conflict between the promises to keep costs down and any decision to honor benefit claims against the Plan. The Court responded to this contention by holding that there is no conflict of interest in this situation. Broadspire has implemented a long-term strategy to carry out its duties as plan administrator for the benefit of the employer, rather than for the benefit of the plan participants and beneficiaries--presumably on the belief that, in so doing, they will be able to attract new and continued business. This differs from the conflict of interest present when a decision maker-such as an insurer who decides benefits claims and pays approved claims out of its own funds - will immediately or definitely benefit or suffer as a direct consequence of its decisions. Thus, the Court did not give any weight to a conflict in interest when evaluating Broadspire's decision to terminate Morris's LTD benefits.

October 21, 2010

Employee Benefits-IRS Issues Guidance On Hybrid Defined Benefit Pension Plans

The Internal Revenue Service (the "IRS") has issued final regulations (TD 9505) and proposed regulations ( Reg-132554-08) which provide guidance on certain provisions of the Internal Revenue Code (the "Code") that apply to hybrid defined benefit pension plans, such as cash balance plans.

The Code provisions in question are sections 411(a)(13) and 411(b)(5), which were added to the Code by the Pension Protection Act of 2006, and then amended by the Worker, Retiree, and Employer Recovery Act of 2008. In general, sections 411(a)(13)(A) and (C)(i) establish the "applicable" defined benefit plan. An "applicable" defined benefit plan is a defined benefit plan under which a participant's accrued benefit is expressed either as the balance of a hypothetical account (e.g., a cash balance plan), or as an accumulated percentage of the participant's final average compensation. Under Section 411(a)(13)(C)(ii), the IRS is required to issue regulations which include in the definition of an applicable defined benefit plan any defined benefit plan which has an effect similar to a plan described in section 411(a)(13)(C)(i). Section 411(a)(13)(B) requires that, under an applicable defined benefit plan, a participant with at least 3 years of service must have a nonforfeitable right to 100 percent of his or her accrued benefit derived from employer contributions.

Section 411(b)(1)(H)(i) of the Code provides that a defined benefit plan fails to comply with section 411(b) of the Code if, under the plan, a participant's benefit accrual is ceased, or the rate of the participant's benefit accrual is reduced, because of the attainment of any age. Section 411(b)(5) (A) elaborates on that provision by providing, generally, that a plan does not fail to meet section 411(b)(1)(H) if a participant's accrued benefit is equal to or greater than that of any similarly situated, younger individual who is or could be a participant. For purposes of this "equal to or greater than test", section 411(b)(5)(A)(iv) provides that a participant's accrued benefit may be expressed as an annuity payable at normal retirement age, the balance of a hypothetical account, or the current value of the accumulated percentage of the participant's final average compensation. Section 411(b)(5)(B) imposes certain requirements on an applicable defined benefit plan-such as a minimum interest credit and rules pertaining to conversions of a traditional defined benefit plan to an applicable defined benefit plan- in order for the plan to satisfy section 411(b)(1)(H). Similarly Sections 411(b)(5)(C) through (E) allow the applicable defined benefit plan to have certain features-namely benefit offsets, social security integration and indexing of accrued benefits- without violating section 411(b)(1)(H).

The newly issued final and proposed regulations are intended to be used to implement the above Code sections.

October 19, 2010

Employee Benefits-EBSA Issues Even More FAQs On Affordable Care Act

Further to my blogs of 9/25 and 10/13, the Employee Benefits Security Administration (the "EBSA") continues to issue FAQs on the Affordable Care Act. The latest FAQs have been dubbed "FAQs III". FAQs III has only 2 Q & As. They deal with an exemption from some of the new requirements under the Affordable Care Act. Here is what they say:

The HIPAA statutory exemptions, in effect since 1997 for group health plans with "less than two participants who are current employees" (a "HIPAA Exempt Plan"), apply to the group market reforms of the Affordable Care Act. The preamble to the interim final regulations previously issued on grandfathered plans (75 FR 34539-34540, published June 17, 2010) indicated that HIPAA Exempt Plans are also exempt from the group market reform requirements of the Affordable Care Act.

Until further guidance is issued, the Departments responsible for enforcing the Affordable Care Act (namely the Department of Labor, the Treasury Department and the Health and Human Services Department) will treat a plan which covers only retirees and/or individuals on long-term disability as being a HIPAA Exempt Plan and thus exempt from the Affordable Care Act's group market reforms. To the extent future guidance on this issue is more restrictive as to this exemption, it will be applied prospectively only. Pending such further guidance, a plan may adopt any or all of the HIPAA and Affordable Care Act market reform requirements, without prejudice to its exemption. This voluntary compliance is encouraged.

October 18, 2010

ERISA-EBSA Issues Final Rule On Disclosure Of Fees And Expenses To Retirement Plan Participants

The Department of Labor's Employee Benefits Security Administration (the "EBSA") has released its final rule, in the form of ERISA regulations, on the disclosure of fees and expenses to participants in defined contribution retirement plans. The EBSA has also issued a Fact Sheet which describes the final rule. Here is what the Fact Sheet says.

The final rule contains the following categories of information:

--Plan-Related Information. This includes general information about the plan, administrative expense information and individual expense information. This information must be given to participants by no later than the first date on which they can direct the investment of their individual accounts and annually thereafter. In addition, participants must receive statements, at least quarterly, showing the dollar amount of the plan-related fees and expenses (whether "administrative" or "individual") actually charged to or deducted from their individual accounts, along with a description of the services for which the charge or deduction was made. These quarterly disclosures may be included in the quarterly benefit statements required under section 105 of ERISA.

--Investment-Related Information. This information includes investment performance data, benchmark information and fee and expense information pertaining to plan investment options. This information includes the address of an internet Web site at which additional information may be found. It also includes a general glossary of terms, or the address of an internet Web site where a glossary may be found. The investment-related information must be furnished to participants no later than by the first date on which they can direct the investment of their individual accounts, and annually thereafter. The information must be furnished in a chart, or similar format, designed to facilitate a comparison of each investment option available under the plan. The final rule includes a model comparative chart in the appendix (the model chart is currently available on the EBSA website).

Other Information in the Fact Sheet:

--The final rule provides plan administrators with protection from liability for the completeness and accuracy of information provided to participants, if the plan administrator reasonably and in good faith relies upon information provided by a service provider.
--After a participant has invested in a particular investment option, he or she must be provided with any materials the plan receives regarding voting, tender or similar rights in the option.
--Upon request, the plan administrator must also furnish prospectuses, financial reports and statements of valuation and of assets held by an investment option.
--The general disclosure regulation at 29 CFR § 2520.104b-1 applies to material furnished under this regulation, including the safe harbor for electronic disclosures at paragraph (c) of that regulation. The final rule would also make conforming changes to the disclosure requirements for plans that elect to comply with the existing ERISA section 404(c) regulations.

Effective and Applicability Dates:

• The final rule will be published on October 20, 2010.
• The final rule will become effective beginning on December 20, 2010.
• The final rule will become applicable to defined contribution plans for plan years beginning on or after November 1, 2011. For calendar year plans, compliance will be required on January 1, 2012.

October 15, 2010

Employee Benefits-IRS Provides Relief For W-2 Reporting Of The Cost Of Coverage Of Group Health Insurance

In Notice 2010-69 (the "Notice"), the Internal Revenue Service ("IRS") has provided interim relief to employers on the requirement that the cost of coverage under an employer-sponsored group health plan be reported on Form W-2.

By way of background, Section 6051(a)(14) was added to the Code by the Affordable Care Act (signed into law on March 23, 2010). Section 6051(a)(14) provides, generally, that the aggregate cost of group health care coverage must be reported on Form W-2. This Section is effective for taxable years beginning on or after January 1, 2011.
To provide relief to employers, the Notice says that this reporting requirement need not be met for a Form W-2 issued for 2011. Thus, an employer will not be subject to any
penalties for the failure to meet this reporting requirement on a Form W-2 issued for that year.

October 14, 2010

ERISA-Ninth Circuit Holds That A Top Hat Plan Of An Insolvent Employer Could Not Distribute Its Funds To Its Participants

In Community Lending, Inc. v. Becker, Nos. 09-15302, 09-16191 (9th Cir. 2010) , the Court faced the issue of whether a plan of deferred compensation (the "Plan") could distribute its funds to the participants, even though the employer maintaining the Plan was insolvent. The plaintiffs were the Plan participants, and the Plan was a "top hat plan" for ERISA purposes. ERISA defines a "top hat plan" as one which is unfunded, and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. To be "unfunded", the Plan included numerous provisions stating that all employee contributions remain subject to claims by the company's creditors in the event of insolvency. Specifically, Article 10.6 of the Plan states that the "vested Account balance of a Participant shall be paid from the Trust only to the extent the Employer is not at the time of payment insolvent."

In this case, the employer may have been insolvent, but had terminated the Plan. This raised the question as to whether the "no payment if insolvent" rule of Article 10.6 still applied. The Court held that the rule did still apply. A payment by the Plan, while the employer was insolvent, would cause the Plan to lose its unfunded status. Article 10.2 of the Plan governs plan termination, and that article expressly states that the Plan is intended to be an unfunded top hat plan. By including this language in Article 10.2, the Plan's drafters explicitly provided that the termination provisions cannot be applied to jeapardize the unfunded status of the Plan. In accordance with the parties' express intent to create an unfunded top hat plan, Article 10.6's prohibition on distributing the Plan's assets when the employer is insolvent must be interpreted to apply even in the event of plan termination. Thus, the Court held that the Plan could not distribute its funds, if the employer was in fact insolvent. The Court remanded the case to the district court to consider the involvency question.

October 13, 2010

Employee Benefits-EBSA Issues More FAQs On Affordable Care Act

The Employee Benefits Security Administration (the "EBSA") has issued additional FAQs (called "FAQs II") on the Affordable Care Act. See my blog of September 25 for a discussion of the FAQs issued earlier. FAQs II offers guidance on whether a group health plan has lost its status as a "grandfathered" plan. Generally, a group health plan in existence on March 23, 2010 is initially given grandfather status. This status is very important because it exempts the plan from a number of onerous requirements in the Affordable Care Act, such as discrimination testing and external claims review procedures. Here are the highlights of this guidance:

Factors Causing Loss of Grandfather Status. Paragraph (g)(1) of the Department of Labor's interim final grandfather regulations provides that any of six changes (measured from March 23, 2010) are considered to change a group health plan so significantly that they will cause the plan to lose its grandfather status. In sum, these six changes are:

1. Elimination of all or substantially all benefits to diagnose or treat a particular condition.
2. Increase in a percentage cost-sharing requirement (e.g., raising an individual's coinsurance requirement from 20% to 25%).
3. Increase in a deductible or out-of-pocket maximum by an amount that exceeds medical inflation plus 15 percentage points.
4. Increase in a copayment by an amount that exceeds medical inflation plus 15 percentage points (or, if greater, $5 plus medical inflation) (the "copayment increase limit").
5. Decrease in an employer's contribution rate towards the cost of coverage by more than 5 percentage points (the "contribution rate decrease limit").
6. Imposition of annual limits on the dollar value of all benefits below specified amounts.

For a plan that is continuing the same insurance policy, these six changes are the only changes that would cause a loss of grandfather status under the interim final regulations. The Departments involved in health reform are separately considering under what circumstances otherwise grandfathered plans may change insurance policy issuers without losing their grandfather status.

Different Benefit Packages. The issue of whether a group health plan has grandfather status applies on a benefit-package-by-benefit-package basis. Consider a plan which offers three benefit package options - a PPO, a POS arrangement, and an HMO. If the HMO loses grandfather status, that does not mean that the PPO and POS arrangement must also lose grandfather status.

Tiers of Coverage. The contribution rate decrease limit (item 5 above) is applied on a tier-by-tier basis. As a result, if a group health plan modifies the tiers of coverage it had on March 23, 2010 (for example, from self-only and family to a multi-tiered structure of self-only, self-plus-one, self-plus-two, and self-plus-three-or-more), the employer contribution for any new tier would be tested by comparison to the contribution rate for the corresponding tier on March 23, 2010. In this example, if the employer contribution rate for family coverage was 50 percent on March 23, 2010, the employer contribution rate for any new tier of coverage other than self-only (i.e., self-plus-one, self-plus-two, self-plus-three or more) must be within 5 percentage points of 50% (i.e., at least 45 percent). If, however, the plan adds one or more new coverage tiers without eliminating or modifying any previous tiers and those new coverage tiers cover classes of individuals that were not covered previously under the plan, the new tiers are not taken into account in applying the contribution rate decrease limit.

Changes in Cost Sharing. Each change in cost sharing is taken into account separately in determining whether the group health plan has lost grandfather status. For example, if the employer raises the copayment level for a category of services (such as outpatient or primary care) by an amount that exceeds the copayment increase limit (item 4 above), but retains the copayment level for other categories of services (such as inpatient care or specialty care), the entire plan will lose its grandfather status.

Wellness Programs. Group health plans may continue to provide incentives for wellness by providing premium discounts or additional benefits to reward healthy behaviors by participants or beneficiaries, by rewarding high quality providers, and by incorporating evidence-based treatments into benefit plans. However, penalties (such as cost-sharing surcharges) may run afoul of one of the six circumstances (items 1 to 6 above) causing loss of grandfather status, and therefore should be examined carefully.

October 12, 2010

ERISA-First Circuit Rules That Elimination Of An Option To Transfer A Profit-Sharing Plan Account Balance To A Defined Benefit Plan Does Not Violate The Anti-Cutback Rule

In Tasker v. DHL Retirement Savings Plan, No. 09-2661 (1st Cir. 2010), the Court faced the question of whether the elimination of a plan participant's unexercised option to transfer funds from his profit-sharing plan account to his retirement plan violated the anti-cutback rule of ERISA, contained in 29 U.S.C. § 1054(g), and implemented under Treasury Department regulation, 26 C.F.R. § 1.411(d)-4 (the "anti-cutback rule"). The Court ruled that, due to unambiguous language in the regulation, the elimination of this option did not violate the anti-cutback rule.

In this case, the plaintiff was a participant in his employer's profit-sharing plan and defined benefit retirement plan. Under the terms of the retirement plan, the benefit payable by the retirement plan to a participant was offset by the participant's account balance under the profit-sharing plan. At the time he retired, the retirement plan permitted a participant, prior to his election to begin receiving benefits, to transfer the balance from his profit-sharing plan account into the retirement plan. The profit-sharing plan likewise permitted this transfer. Such a transfer, when effected, would reduce the participant's profit-sharing plan account balance to zero and would therefore avoid any offset. Initially, the plaintiff did not request the transfer. Later, the retirement plan and profit-sharing plan were amended to eliminate the transfer feature. Several years after the amendments were adopted, the plaintiff attempted to exercise the transfer option, but this attempt was rejected. Plaintiff then brought suit under ERISA, and the case found its way to the First Circuit Court of Appeals.

In analyzing the case, the Court noted that, under the anti-cutback rule: (1) the accrued benefit of a participant under a plan may not be decreased by an amendment of the plan (with nonapplicable exceptions) and (2) for purposes of (1), a plan amendment which has the effect of eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment, is treated as reducing accrued benefits. The Treasury Department regulation states that:

Q-2. To what extent may section 411(d)(6) protected benefits under a plan be reduced or eliminated?

A-2. Provisions for transfer of benefits between and among defined contribution plans and defined benefit plans. A plan may be amended to eliminate provisions permitting the transfer of benefits between and among defined contribution plans and defined benefit plans.

26 C.F.R. § 1.411(d)-4, Q&A-2(b)(2)(viii). At first glance, the elimination of the transfer option is expressly excepted from the anti-alienation rule by this provision in the regulation. The issue is that the elimination of the option in this case decreases the participant's benefit under the retirement plan, since the participant cannot make the transfer and eliminate the offset for the profit-sharing plan account balance. The Court ruled that the decrease in the participant's benefit did not invalidate the exception from the anti-cutback rule in the above provision, so that the transfer option could be eliminated. Other provisions in the Treasury Department regulations (such as Section 1.411(d)-4, Q&A-2(b)(1)) do not change the result.

October 11, 2010

ERISA-Eighth Circuit Rules That Death Benefit Was Paid In Accordance With The Terms Of The Plan

When a plan participant dies, who gets the death benefit? Very often, that is not an easy question, particularly when the participant has a spouse (or former spouse) and one or more children each claiming all or part of the benefit. Here is what the Court did in Matschiner v. Hartford Life and Accident Insurance Company, No. 09-3576 (8th Cir. 2010).

In this case, RoJane Lewis obtained life insurance under a group policy issued by Hartford Life and Accident Insurance Company ("Hartford") to her employer, Inacom Corporation. In 1991, she submitted a beneficiary designation form granting sixty percent of the death benefit under the policy to her husband, Alan Lewis, and twenty percent to each of her daughters, Katherine and Kristina Matschiner (the "1991 beneficiary designation"). After RoJane's death, Katherine Matschiner claimed that Kristina had a more recent beneficiary designation and that Alan Lewis intended to disclaim his share of the $122,000 death benefit. Hartford contacted Alan, who stated that he wished to collect his share of the death benefit and submitted a signed claim form. The daughters also submitted claim forms, and Kristina faxed Hartford a copy of a year 2000 divorce decree in which a Nebraska state court awarded Alan and RoJane, individually, the "cash values of any life insurance policies currently owned by him or her or the cash proceeds . . . to be received therefrom." When neither daughter submitted a more recent beneficiary designation, Hartford paid the policy benefits in accordance with the 1991 beneficiary designation.

The Matschiners sued Hartford and Alan Lewis in state court to recover the benefit paid to Alan. Hartford removed the action because the policy was an employee welfare benefit plan governed by ERISA. The district court granted summary judgment to the Matschiners, concluding that Hartford abused its discretion by paying the death benefit in accordance with the 1991 beneficiary designation. Hartford appealed. The Eighth Circuit Court of Appeals found that Hartford paid the death benefit in accordance with the plan documents and therefore complied with ERISA as construed by the Supreme Court in Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 129 S.Ct. 865 (2009). Accordingly, the Court overturned the district court's summary judgment.

The Court first ruled that Kennedy applies to any plan subject to ERISA, including an employee welfare benefit plan. Kennedy requires that a death benefit be paid in accordance with the plan documents. As relevant here, Hartford's Group Insurance Policy provided, as to the death benefit:

Payment will be made in a lump sum to the beneficiary or beneficiaries named in writing by you, provided the names are on file with the Policyholder.
* * * * *
You may change your beneficiary at any time by:
(1) making such change in writing on a form acceptable to The Hartford; and
(2) filing the form with the Policyholder.
* * * * *
Payment for loss of life will be made: (1) according to the beneficiary designation in effect when payment is made, or, if none is in effect; (2) to your estate.

In applying these provisions, the 2000 divorce decree was irrelevant, because RoJane never signed and submitted a beneficiary designation form eliminating Alan as a designated beneficiary, in accordance with that decree, to the Policyholder (her employer) or to Hartford. There is evidence of a 1997 beneficiary designation, which reduces Alan's share of the death benefit from sixty to forty percent, but there is no evidence that this designation was ever submitted to the Policyholder or Hartford before the death benefit was paid. Katherine Matschiner had advised Hartford of a later beneficiary designation, but did not furnish one before the death benefit was paid. Rather, Hartford paid the death benefit in accordance with the only designation in its files, namely the 1991 beneficiary designation, as the provisions of the policy required. As such, the Court ruled in Hartford's favor.

The Lesson: As always, keep your beneficiary designation up to date.

October 11, 2010

ERISA-Eighth Circuit Rules That Death Benefit Was Paid In Accordance With The Terms Of The Plan

When a plan participant dies, who gets the death benefit? Very often, that is not an easy question, particularly when the participant has a spouse (or former spouse) and one or more children each claiming all or part of the benefit. Here is what the Court did in Matschiner v. Hartford Life and Accident Insurance Company, No. 09-3576 (8th Cir. 2010).

In this case, RoJane Lewis obtained life insurance under a group policy issued by Hartford Life and Accident Insurance Company ("Hartford") to her employer, Inacom Corporation. In 1991, she submitted a beneficiary designation form granting sixty percent of the death benefit under the policy to her husband, Alan Lewis, and twenty percent to each of her daughters, Katherine and Kristina Matschiner (the "1991 beneficiary designation"). After RoJane's death, Katherine Matschiner claimed that Kristina had a more recent beneficiary designation and that Alan Lewis intended to disclaim his share of the $122,000 death benefit. Hartford contacted Alan, who stated that he wished to collect his share of the death benefit and submitted a signed claim form. The daughters also submitted claim forms, and Kristina faxed Hartford a copy of a year 2000 divorce decree in which a Nebraska state court awarded Alan and RoJane, individually, the "cash values of any life insurance policies currently owned by him or her or the cash proceeds . . . to be received therefrom." When neither daughter submitted a more recent beneficiary designation, Hartford paid the policy benefits in accordance with the 1991 beneficiary designation.

The Matschiners sued Hartford and Alan Lewis in state court to recover the benefit paid to Alan. Hartford removed the action because the policy was an employee welfare benefit plan governed by ERISA. The district court granted summary judgment to the Matschiners, concluding that Hartford abused its discretion by paying the death benefit in accordance with the 1991 beneficiary designation. Hartford appealed. The Eighth Circuit Court of Appeals found that Hartford paid the death benefit in accordance with the plan documents and therefore complied with ERISA as construed by the Supreme Court in Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 129 S.Ct. 865 (2009). Accordingly, the Court overturned the district court's summary judgment.

The Court first ruled that Kennedy applies to any plan subject to ERISA, including an employee welfare benefit plan. Kennedy requires that a death benefit be paid in accordance with the plan documents. As relevant here, Hartford's Group Insurance Policy provided, as to the death benefit:

Payment will be made in a lump sum to the beneficiary or beneficiaries named in writing by you, provided the names are on file with the Policyholder.
* * * * *
You may change your beneficiary at any time by:
(1) making such change in writing on a form acceptable to The Hartford; and
(2) filing the form with the Policyholder.
* * * * *
Payment for loss of life will be made: (1) according to the beneficiary designation in effect when payment is made, or, if none is in effect; (2) to your estate.

In applying these provisions, the 2000 divorce decree was irrelevant, because RoJane never signed and submitted a beneficiary designation form eliminating Alan as a designated beneficiary, in accordance with that decree, to the Policyholder (her employer) or to Hartford. There is evidence of a 1997 beneficiary designation, which reduces Alan's share of the death benefit from sixty to forty percent, but there is no evidence that this designation was ever submitted to the Policyholder or Hartford before the death benefit was paid. Katherine Matschiner had advised Hartford of a later beneficiary designation, but did not furnish one before the death benefit was paid. Rather, Hartford paid the death benefit in accordance with the only designation in its files, namely the 1991 beneficiary designation, as the provisions of the policy required. As such, the Court ruled in Hartford's favor.

The Lesson: As always, keep your beneficiary designation up to date.

October 8, 2010

ERISA-Iowa Court Upholds Calculation Of Disability Benefit By Plan Administrator

One of the more perplexing questions in the ERISA world is how exactly to compute long-term disability ("LTD") benefits. The Court of Appeals of Iowa faced this question in Bronner v. Sun Life Insurance and Annuity Company of New York, No. 0-598/10-0459 (October 6, 2010). The plaintiff was a participant in an LTD plan maintained by his employer (the "Plan"). Sun Life was the insurer and plan administrator of the Plan. The plaintiff brought suit against Sun Life under ERISA, alleging that Sun Life improperly calculated his monthly LTD benefit from the Plan. The district court granted summary judgment in the suit against the plaintiff, and he appealed. The Iowa Court of Appeals found that Sun Life's calculation was consistent with the Plan's terms and definitions, and therefore affirmed the district court's decision.

Under the Plan, in general, a participant's LTD benefit is a percentage of "Total Monthly Earnings" (up to a maximum amount), and is reduced by "Other Income" . The plaintiff claimed that Sun Life, as plan administrator, miscalculated plaintiff's benefits by failing to include the value of his cafeteria plan benefits in " Total Monthly Earnings ", and by including in "Other Income" his LTD benefits from Social Security.

In analyzing the case, the Court stated that where- as here-the plan gives the plan administrator discretionary authority to determine benefit eligibility or to construe the plan's terms, the Court must review the plan administrator's decisions-including a calculation of benefits-for an abuse of discretion. This review must take into account the plan administrator's conflict of interest where-again as here-the plan administrator is both the payer and decider of benefits. Reviewing Sun Life's calculation of the plaintiff's LTD benefits under these rules, the Court found that Sun Life had adhered to the Plan's unambiguous terms, so that there was no abuse of discretion. The Plan defines "Total Monthly Earnings" as the employee's average monthly earnings from form W-2 (using the box on that form which reflects wages, tips, and other compensation), and those earnings (based on the number in that box) do not include the value of cafeteria plan benefits. Further, the Plan defines "Other Income", which reduces the LTD benefit, to include the disability or retirement benefits under the United States Social Security Act. This clearly requires the plaintiff's social security disability benefit to be included in "Other Income". The Court acknowledged that the Plan contained, in effect, an exception to the inclusion of Social Security disability benefits from other income, but that exception applied only when the participant's disability arises after the participant reached Social Security Normal Retirement Age, which did not happen here.

October 6, 2010

Employment/Tax-IRS Issues Letter Discussing Underwithholding of Tax On Pension Payments

In a letter to Senator Richard Lugar (No. 2010-0223, 9/24/10), the Internal Revenue Service ("IRS") discussed issues pertaining to underwithholding of federal income tax on pension payments.

According to the letter, in February 2009, the IRS revised federal income tax withholding tables for wages paid in 2009, and told employers to begin using them as soon as possible, but no later than by April 1, 2009. The revision was made to reflect the new Making Work Pay Credit (the "MWP credit"), a tax credit against federal income taxes. The credit is generally equal to the lesser of 6.2 percent of earned income or $400 ($800 for married couples filing jointly).

However, pension payments are not earned income for purposes of the MWP credit. In May 2009, the IRS released Publication 4766, Making Work Pay Credit and Form W-4 Employee's Withholding Allowance Certificate, which included a one page flyer explaining that certain individuals-including married couples and retirees who receive a pension and do not have any wage income, so that they cannot take the MWP credit- might need to adjust their tax withholding before the 2009 tax return filing season to avoid underwithholding under the new tables. Further, to deal with the underwithholding problem, on May 14, 2009, the IRS issued Notice 1036-P, which made available to pension payors a new optional procedure for adjusting withholding. The 2010 federal income tax withholding tables also include the optional adjustment procedure for pension payors. Pension payors have no requirement to use the optional adjustment procedure, and may use only the withholding tables.

For taxpayers not eligible for the MWP credit, the withholding changes may mean a smaller refund for 2009, or even a balance due. A few taxpayers, including those who usually receive very small refunds, could initially incur a penalty if the underpayment is more than the IRS can attribute to the change in the withholding tables. Individuals may owe an underwithholding penalty for 2009 if their
unpaid tax liability is $1,000 or more and if their total withholding and timely estimated payments did not equal at least the smaller of 90 percent of their 2009 tax or 100 percent of their 2008 tax. However, if an individual has an underpayment, the IRS will waive all or part of the penalty, if it determines that the adjustments made to the withholding tables in 2009 caused the underpayment. To request a waiver of the penalty, taxpayers must complete Form 2210, underpayment of Estimated Tax by Individuals, Estates, and Trusts.

The letter indicates that taxpayers receiving pension payments should look at IRS guidance (e.g., the IRS withholding calculator on line or Publication 919) to determining if underwithholding will occur in 2010, and may submit a Form W-4P to their pension payor to adjust withholding as necessary.

October 5, 2010

Employee Benefits-EBSA Issues Guidance On The Application Of GINA To Health Risk Assessments

The Employee Benefits Security Administration has issued FAQs on the Genetic Information Nondiscrimination Act ("GINA") (see my blog of 9/28/10). These FAQs discuss, among other things, the application of GINA to health risk assessments ("HRAs") that may be requested or required by a group health plan. The following points were made.

GINA prohibits a group health plan from collecting genetic information (including family medical history) prior to or in connection with enrollment, or for underwriting purposes. Thus, under GINA, a plan must ensure that any HRA conducted prior to or in connection with enrollment does not collect any genetic information. Under GINA, there is an exception for genetic information that is obtained incidental to the collection of other information. This exception applies: (1) if the genetic information obtained is not used for underwriting purposes, and (2) if it is reasonable to anticipate that the collection will result in the plan receiving health information, the plan explicitly notifies the person providing the information that genetic information should not be provided. As such, when conducting an HRA prior to or in connection with enrollment, the plan should ensure that the HRA explicitly states that genetic information should not be provided.

The plan may use an HRA that requests family medical history, but only if : (a) the individual is asked to furnish the HRA after and unrelated to enrollment in the plan, and (b) there is no premium reduction or any other reward for completing the HRA. The plan may offer a premium discount or other reward for completing an HRA that does not request family medical history or other genetic information, such as information about any genetic tests the individual has undergone. In such case, the plan should ensure that the HRA explicitly states that genetic information should not be provided.

The plan may use two separate HRAs- one that collects genetic information, such as family medical history, which is conducted after and unrelated to enrollment and is not tied to a reward, and another HRA that does not request genetic information, which can be tied to a reward. In addition, under GINA, the plan may also reward:
• participation in an annual physical examination with a physician (or other health care professional) who is providing health care services to the individual, even if the physician may ask for family medical history as part of the examination;
• more favorable cost-sharing for preventive services, including genetic screening; and
• participation in certain disease management or prevention programs. The incentives to participate in such programs must also be available to individuals who qualify for the program but have not volunteered family medical history information through an HRA.

October 4, 2010

ERISA-Ninth Circuit Applies Moench Presumption To Find That 401(k) Plan Fiduciaries Did Not Imprudently Invest In Employer Stock

In Quan v. Computer Sciences Corporation, Nos. 09-56190 and 09-56248 (9th Cir. 2010), the plaintiffs, who were participants in a 401(k) plan (the "Plan") maintained by Computer Sciences Corporation ("CSC"), brought a class action lawsuit under ERISA against the Plan's fiduciaries. They claimed that, among other things, the fiduciaries imprudently invested plan assets in CSC stock. The district court granted summary judgment against the plaintiffs, and the plaintiffs appealed. The Ninth Circuit Court of Appeals affirmed the summary judgment. The Court stated, with respect to the plaintiffs' claim of imprudent investment, that the Ninth Circuit was joining the Third, Fifth, and Sixth Circuits by adopting the rebuttable "Moench presumption" (based on Moench v. Robertson, 62 F.3d 553 (3d Cir.1995)) that fiduciaries acted consistently with ERISA in their decisions to invest plan assets in employer stock. In doing so, the Ninth Circuit reversed the position it took in In re Syncor ERISA Litig., 516 F.3d 1095 (9th Cir. 2008), in which it had declined to adopt the Moench presumption.

In this case, the Plan allowed participants to allocate and reallocate their voluntary contributions among fourteen diverse investment alternatives, which included a nondiversified fund holding CSC stock (the "CSC Stock Fund"). Under the Plan's governing document, the Plan was required to make the CSC Stock Fund available for the investment of participants' accounts. The plaintiffs' claims arise from alleged material weaknesses in CSC's stock option granting and tax accounting practices, which ultimately caused significant decreases in the value of CSC stock and an alleged loss of hundreds of millions of dollars in retirement savings to Plan participants who had invested in the CSC Stock Fund.

As to plaintiffs' claim of imprudent investment in the CSC Stock Fund, the Court said that, under section 404(a)(1) of ERISA, a plan fiduciary is required to act "prudently" when determining whether or not to invest, or continue to invest, ERISA plan assets in the plan participants' employer's stock. Generally, a court's task in evaluating a fiduciary's compliance with this standard is to inquire whether the fiduciary, at the time he or she engaged in the challenged transactions, employed the appropriate methods to investigate the merits of the investment and to structure the investment. Further, despite previously declining to do so, the Court adopts the Moench presumption. When this presumption applies, as here, an investment of plan assets in employer stock is presumed to be prudent .

Continuing its analysis, the Court said that, to overcome Moench presumption, the plaintiffs must show that the fiduciary in question abused its discretion by investing in employer stock. If there is room for reasonable fiduciaries to disagree as to whether they are bound to divest from employer stock, the abuse of discretion standard protects a fiduciary's decision to not divest. To show abuse, the plaintiffs must make allegations which clearly implicate the employer's viability as an ongoing concern , or show a precipitous decline in the price of the employer's stock combined with evidence that the employer is on the brink of collapse or is undergoing serious mismanagement. It would not be sufficient to show that continued investment in employer stock is not prudent, or that the fiduciary ignored a decline in stock price. The plaintiffs must show publicly known facts that would trigger the kind of careful and impartial investigation by a reasonable fiduciary that the plan's fiduciary failed to perform. Here, the plaintiffs did not offer any issues of material fact that the Plan's fiduciaries should have stopped investment in CSC stock, or that were otherwise sufficient to rebut the Moench presumption. Thus, the plaintiffs' claim of imprudence fails.

Note: The Court could have been clearer on exactly when the Moench presumption is to apply. At one point, the Court indicated that the presumption will apply in any case involving an ESOP or "eligible individual account plan", within the meaning of section 407(d)(3) of ERISA. At another point, the Court indicated that the presumption will apply whenever the terms of the plan require or encourage the fiduciaries to invest primarily in employer stock. In this case, notwithstanding the use of the word "primarily" by the Court, it is clear that the presumption would apply, because the Plan, by its terms, was required to make the CSC Stock Fund available for investment by participants' accounts. It is not clear what will happen in the next case.

October 1, 2010

ERISA-Sixth Circuit Rules That Union's Release Of Claims Is Valid, So That Plaintiffs' Claim For Severance Pay Is Denied

In Otson v. Arkema, Inc., No. 09-1383 (6th Circuit 2010), the plaintiffs were six former employees of the defendant, Arkema, Inc. ("Arkema"). The plaintiffs sued Arkema, complaining that it denied them severance pay in violation of ERISA. The district court granted summary judgment in favor of Arkema, finding that a release of the plaintiffs' ERISA claim by their union barred the plaintiffs' suit. The Sixth Circuit agreed, and affirmed the district court's ruling.

The plaintiffs were unionized employees, represented by United Steelworkers, Local 2-591 (the "Union"). Arkema had offered a severance package to eligible workers, including the plaintiffs, with the intention of eliminating 46 bargaining-unit positions. Due to a dispute over the calculation of pension benefits, the plaintiffs did not agree to separate from their employment prior to the deadline for accepting the package. Arkema later sold the plant at which the plaintiffs worked. Within a few weeks of the sale, in exchange for settling various pending grievances and arbitrations, the Union agreed to release Arkema from various claims, including any arising out of ERISA violations (the "Release"). It was at this point--after the sale of the plant and the Union's release of claims against Arkema--that the plaintiffs sought to accept the severance package. Arkema refused to give the plaintiffs the severance pay available under the package, and the plaintiffs brought suit under ERISA seeking the severance pay.

The issue was whether the Release barred the plaintiffs' ERISA claim for severance pay. The plaintiffs first argued that a union may not waive ERISA claims as a matter of law. However, the Court would not entertain this argument, because it was not raised in the district court. The plaintiffs next argued that the Release did not clearly state whether it binds only the Union, or both the Union and its members. However, the Court found that, by its language, the Release bound both the Union and its members. Finally, the plaintiffs alleged that the Release fails to comply with the federal requirement that a waiver of statutorily protected rights be "clear and unmistakable." The Court disagreed, finding that the Release specifically referred to ERISA violations. Thus, the Court ruled that the Release barred plaintiffs' ERISA claim.