December 2010 Archives

December 24, 2010

ERISA-Second Circuit Rules That A Company's Alter Ego Is Responsible For Withdrawal Liability

In the Retirement Plan of the UNITE HERE National Retirement Fund v. Kombassan Holding A.S., No. 07-4143-cv (2nd Cir. 2010), the defendant, Kombassan Holding A.S. ("Kombassan"), was appealing a judgment from the district court holding it liable to the plaintiffs, the Retirement Plan of the UNITE HERE National Retirement Fund (the "Plan") and its trustees, for withdrawal liability incurred under ERISA by the entity Hit or Miss ("HOM").

In this case, HOM had entered into a collective bargaining agreement, under which it was obligated to make contributions to the Plan. The Plan was a multiemployer pension plan. Kombassan had owned HOM, but had assigned its shares in HOM to four Turkish corporations, in order to avoid a Turkish law limiting overseas investments. Some time after the assignment was made, HOM incurred financial difficulty. As a result, HOM went into bankruptcy and ceased its operations, triggering the withdrawal liability. HOM did not have the funds to pay the withdrawal liability. The issue faced by the Court was whether Kombassam was the "alter ego" of HOM, and therefore responsible for paying the withdrawal liability.

On that question, the Court found that there were sufficient facts to show commonality of control and business purpose between Kombasson and HOM, including: (1) a single individual served as chairman of Kombassan and each of the four assignees of the HOM shares, (2) Kombassan had made multiple representations to the HOM bankruptcy court that it controlled HOM and its board (for example, Kombassan had repeatedly stated to that court that it held, directly or indirectly, 100% of HOM's outstanding stock and was in control of the HOM board) and (3) Kombassan's general counsel testified that the purpose of the assignment was to circumvent Turkish law, which would otherwise have prevented Kombassan's ownership of HOM, while retaining control of HOM's day-to-day business operations. The Court indicated that the application of the alter ego theory, in the context of determining responsibility for withdrawal liability, is broad and flexible. The Court ruled that the forgoing facts established that Kombassan was the alter ego of HOM, and therefore responsible for paying the withdrawal liability.


December 23, 2010

Employee Benefits/Tax-President Signs The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Which Affects Compensation and Benefits

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "Act"). The Act affects compensation and benefits as follows:

-- From Notice 1036 (see my blog entry for Dec. 20): for 2011, the employee tax rate for social security is decreased from 6.2% to 4.2%. The employer tax rate for social security stays at 6.2%. The 2011 social security taxable wage base is $106,800. Employers should implement the 4.2% employee social security tax rate as soon as possible, but not later than by January 31, 2011. After implementing the new 4.2% rate, employers should make an offsetting adjustment in a subsequent pay period to correct any over-withholding of social security tax as soon as possible, but not later than by March 31, 2011. For self-employed individuals, for 2011, the social security tax rate was reduced from 12.4 percent to 10.4 percent.

--Federal unemployment compensation benefits are extended for 13 months.

--The Work Opportunity Tax Credit is extended, with some modification, for hires through the end of 2011.

--The federal tax exclusion for transit passes and van pooling (combined), and for employer-provided parking (by itself), will be $230/month for 2011.

--Tax-free IRA distributions of up to $100,000, for charitable purposes, may be made by an individual at least age 70 and 1/2 during 2010 (retroactively) and 2011.

--The following were extended through the end of 2012: (1) the $1,000 child tax credit, the employer-provided child care tax credit and the American Opportunity Tax Credit (for education), (2) the improvements to the adoption tax credit, earned income tax credit and dependent care tax credit, (3) the employee tax exclusion, and the employer tax deduction, (in each case up to $5,250) for employer-provided educational assistance, and (4) the annual $2000 contribution limit for Coverdell Educational IRAs, and payment of elementary and secondary school expenses from this IRA.

Aside from provisions affecting compensation and benefits, the Act contains a significant number of general tax provisions, such as: (a) retaining the current individual income tax, dividend and capital gains rates through 2012, (b) having no itemized deduction limit or personal exemption phase-out through 2012, (c) a patch on the alternative minimum tax for 2010 and 2011, (d) an extension and increase in the bonus depreciation allowance for 2011, (e) an extension of the maximum amounts and phase-out thresholds for the Code section 179 depreciation deduction through 2012, (f) the extension of various tax credits for fuels and other energy costs and (g) a reduction in the top estate tax rate from 55% to 35%, with a corresponding increase to $5 million per spouse (with future inflationary increase for 2012) in the exemption from estate and general skipping transfer taxes, plus a revival of the step up basis rules for property, through 2012.

Interesting Point: Keeping the individual income tax rates at their current levels (they would have increased otherwise) could significantly help individuals who convert(ed) their traditional IRAs to Roth IRAs, or their retirement savings to an in-plan Roth account, in 2010 and elect to split the associated income and pay the taxes on this income in 2011 and 2012.

December 22, 2010

Employee Benefits-IRS Delays Effective Date Of Rules For Use Of Smartcards, Etc. to Provide Qualified Transportation Fringes

In Notice 2010-94 (the "Notice"), the Internal Revenue Service (the "IRS") delays the effective date of Revenue Ruling 2006-57 (the "Ruling"). The Ruling provides guidance to employers on the use of smartcards, debit or credit cards, and other electronic media to provide qualified transportation fringes under Sections 132(a)(5) and (f) of the Internal Revenue Code. The Notice delays the effective date of the Ruling from January 1, 2011 for one year, until January 1, 2012. This delay is intended to provide additional time for certain transit systems to adopt their technology to satisfy the Ruling's requirements for vouchers. However, employers and employees may rely on the Ruling with respect to transactions occurring prior to 2012.

December 21, 2010

Employment-Second Circuit Rules That Plaintiff's Retaliation Claim, That He Was Fired For Complaining About A Derogatory Comment On His Background/Religion, Fails Because Plaintiff Did Not Provide Any Proof Of The Employer's Intent To Retaliate

In El Sayed v. Hilton Hotels, No. 10-453 (Second Circuit 2010), the plaintiff brought suit alleging that he was terminated in retaliation for complaining about a derogatory comment concerning his background and religion, in violation of Title VII.

In this case, the plaintiff, Walid El Sayed, is a United States citizen of Egyptian descent, who is Muslim. He was hired by the defendant, Hilton Hotels, as an Assistant to the Director of Housekeeping in December 2004. He was terminated on August 9, 2006, approximately three weeks after he complained to the defendant that a co-worker referred to him as a "Terrorist Muslim Taliban." The defendant stated that the decision to terminate the plaintiff was not based on his complaint about the co-worker's comment, but rather was based upon the fact that the plaintiff had omitted certain prior employment history from his work application, which was discovered in August 2006, and which constituted grounds for dismissal under the defendant's employment policies.

In analyzing the case, the Court said that, by demonstrating temporal proximity between his complaint about the derogatory comment and his discharge, the plaintiff arguably established a prima facie case of retaliation under Title VII. However, under the three step burden-shifting framework set out in the McDonnell Douglas case, the prima facie case establishes only a rebuttable presumption of retaliation. The district court accepted the defendant's explanation of the legitimate non-retaliatory reasons for the plaintiff's discharge. At that point, the burden shifted back to the plaintiff to come forward with evidence establishing that it is more likely than not the employer's decision was motivated, at least in part, by an intent to retaliate against him. The Court found that the plaintiff had no such evidence, and ruled that the plaintiff's claim of retaliation fails.


December 20, 2010

Employment-IRS Releases 2011 Percentage Method Tables for Income Tax

In Notice 1036 (Rev. December 2010), the Internal Revenue Service (the "IRS") issued the 2011 Percentage Method Tables for income tax withholding. These tables reflect the recently passed Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Employers should begin to use these tables as soon as possible, but not later than January 31, 2011.

Note that Making Work Pay credit expires on December 31, 2010. As a result, the 2011 Percentage Method Tables do not reflect this credit, and there is no longer
an optional additional withholding adjustments for pension recipients.

December 19, 2010

Employee Benefits-IRS Modifies Rules For Group Trusts; Amendments May Be Required Very Soon

In Revenue Ruling 2011-1 (the "Ruling"), the Internal Revenue Service (the "IRS") modifies the rules which a group trust must meet in order to be treated as a tax-exempt entity. Prior to the Ruling, these rules were set forth in Revenue Ruling 81-100, as clarified and modified by Revenue Ruling 2004-67.

In general, the Ruling sets out the conditions under which the assets of one or more of the following plans or accounts may pooled in the group trust, without adversely affecting the tax-exempt status of the group trust or the tax status of the investing plan or account : a qualified retirement plan under section 401(a) of the Internal Revenue Code (the "Code"), an individual retirement account (an "IRA") under section 408 of the Code (including a Roth IRA under section 408A), an eligible governmental plan under section 457(b) of the Code, a custodial account under section 403(b)(7) of the Code, a retirement income account under section 403(b)(9) of the Code, and a governmental plan under section 401(a)(24) of the Code. For convenience, each such plan or account is referred to below as a "Plan", unless otherwise indicated.

Under the Ruling, on or after January 10, 2011, the conditions for pooling are generally as follows:

(1) The group trust is adopted as a part of each investing Plan.

(2) The group trust instrument expressly limits participation to Plans.

(3) The group trust instrument expressly prohibits any part of its corpus or
income that equitably belongs to any adopting Plan from being used for, or diverted to, any purpose other than for the exclusive benefit of the participants and the beneficiaries of that Plan.

(4) Each Plan, which adopts the group trust, is itself a trust, a custodial account, or a similar entity that is tax-exempt under Code section 408(e) or 501(a) (or is treated as tax-exempt under section 501(a)). A section 401(a)(24) governmental plan is treated as meeting this requirement if it is not subject to Federal income taxation.

(5) Each Plan, which adopts the group trust, expressly and irrevocably
provides in its governing document that it is impossible for any part of the corpus
or income of that Plan to be used for, or diverted to, purposes other than for the exclusive benefit of the plan participants and their beneficiaries.

(6) The group trust instrument expressly limits the assets that may be held by the
group trust to assets that are contributed by, or transferred from, a Plan to the group trust (and the earnings thereon), and the group trust instrument expressly provides for separate accounts (and appropriate records) to be maintained to reflect the interest which each adopting Plan has in the group trust.

(7) The group trust instrument expressly prohibits an assignment by an adopting
Plan of any part of its equity or interest in the group trust.

(8) The group trust is created or organized in the United States and is maintained
at all times as a domestic trust in the United States.

In addition, the assets of a custodial account under Code section 403(b)(7) can be invested only in a group trust that contains solely the assets of other section 403(b)(7) custodial accounts. The Ruling contains model language that may be used by a group trust to comply with the requirements of the Ruling. The Ruling also contains guidance/transitional rules: for meeting requirements (3), (5) and (6) above, for certain commingled trust funds maintained by the Pension Benefit Guaranty Corporation, for reliance on prior determination letters and for plans described in section 1022(i)(1) of ERISA (i.e., Puerto Rico situs trusts) that are participating in a group trust.

IMPORTANT NOTE: Requirements (4), (5) and (6) above are new, and they become effective on January 10, 2011. Therefore, an existing group trust or an investing Plan may have to be amended (and maybe very soon) to reflect one or more of these requirements. The Ruling provides some guidance on these amendments, for example, it says that an amendment to comply with the separate accounts rule in requirement (6) need not be adopted until January 10, 2012 (but is curiously silent on the timing of any amendment to reflect the contribution/transfer rule in (6)). It appears that requirement (4) is met in operation, rather than by plan provision, but that is not a certainty. Any one maintaining a group trust or an investing Plan should read the Ruling carefully, and review the document for the group trust or investing Plan, to determine whether and when an amendment is needed.

December 15, 2010

ERISA-Eighth Circuit Rules That Plaintiff Did Not State A Claim Of Imprudent Investment Based On Actions Concerning Employer's Product; Court Declines To Adopt Moench Presumption

In Brown v. Medtronic, Inc., No. 09-2524 (8th Cir. 2010), the plaintiff was a participant in an ESOP maintained by one of the defendants, Medtronic, Inc. ("Medtronic"). The plaintiff's account in the ESOP was invested in a fund which held Medtronic common stock (the "Stock").

Medtronic manufactures and markets a broad assortment of medical devices, including Infuse-brand bone graft material ("Infuse") and Sprint Fidelis-brand lead wires for implantable defribillators and pacemakers ("Fidelis"). Regarding Fidelis, the plaintiff alleged that the defendants failed to respond properly to a February 2007 report from a physician, Dr. Hauser, who observed an approximate 1% failure rate in Fidelis use among approximately 600 patients. In October 2007, Medtronic stopped marketing Fidelis, issued a recall of unused Fidelis devices, and instructed physicians to cease using Fidelis. This recall led to a drop in the price of the Stock, and a corresponding drop in the value of plaintiff's ESOP account. Regarding Infuse, the plaintiff alleged Medtronic promoted Infuse for uses not approved by the FDA and improperly paid reviewing physicians for favorable reviews. When this information came to light in a September 4, 2008 Wall Street Journal article, again, a drop in the price of Stock and the value of plaintiff's ESOP account resulted. As a result of these events, the plaintiff alleged that the defendants had violated ERISA by imprudently permitting the ESOP to the continue holding the Stock.

In reviewing the case, the Court said that, to state a claim for relief, the plaintiff must plead facts sufficient to show that the claim is plausible. In this case, the Court found that the facts plead by the plaintiff were insufficient to make this showing. The Court did not find enough of a connection between any of the alleged conduct by Medtronic concerning Fidelis or Infuse and any possible imprudence in the ESOP holding Stock. Interestingly, the Court failed to adopt the Moench presumption-that that the investment by an ESOP in company stock is entitled to a rebuttable presumption of prudence (already adopted in the 5th, 6th and 9th Circuits)-since, even without this presumption, the Court felt that the plaintiff did not state a plausible claim.

December 15, 2010

Employee Benefits-IRS Issues 2010 Cumulative List of Changes in Plan Qualification Requirements

The Internal Revenue Service (the "IRS") has issued Notice 2010-90 (the "Notice"), which contains the 2010 Cumulative List of Changes in Plan Qualification Requirements (the "2010 Cumulative List"). This list identifies statutory, regulatory, and guidance changes that must be taken into account by plan sponsors and practitioners, when submitting determination, opinion, or advisory letter applications for plans during the period beginning February 1, 2011 and ending January 31, 2012. These plans will primarily be:

--single employer, individually designed defined contribution plans (including ESOPS) and defined benefit plan which are in Cycle A (the last digit of the employer identification number of the plan sponsor is 1 or 6); and

--defined contribution pre-approved plans (that is, defined contribution plans that are master and prototype (M&P) or volume submitter (VS) plans) for the second submission under the remedial amendment cycle of Rev. Proc. 2007-44.

The list of the changes contained in section IV of the Notice does not extend the deadline by which a plan must be amended to comply with any statutory, regulatory, or guidance changes. These deadlines may generally be found in section 5.05 of Rev. Proc. 2007. For the plans described above, the IRS will accept the applications for the period which starts on February 1, 2011 and which ends on January 31, 2012, except that applications for mass submitters and national sponsors of pre-approved plans must be filed by October 31, 2011.

December 10, 2010

ERISA-Sixth Circuit Rules That Blue Cross Blue Shield Did Not Violate Its Fiduciary Duties Under ERISA Because It Was Not Acting As A Fiduciary When Engaging In Negotiations That Raised Plan Costs

In DeLuca v. Blue Cross Blue Shield Of Michigan, No. 08-1085 (6th Cir. 2010), the defendant, Blue Cross Blue Shield of Michigan ("BCBSM") was a fiduciary of a self-funded health care plan (the "Plan"), which was maintained by Flagstar Bank for its employees and their families. BCBSM is a non-profit health care corporation. It offers three forms of health-care coverage: a traditional open-access plan (a "traditional plan"), a preferred provider (PPO) plan, and a health maintenance organization (HMO). For each of these plans, BCBSM negotiates rates of health care service with Michigan health-care providers, such as doctors and hospitals. BCBSM could be the insurer of an insured plan, or the administrator of a self-insured plan.

In January 1996, Flagstar Bank entered into a contract with BCBSM, under which BCBSM agreed to provide claims-processing and other administrative functions for the Plan-presumably a traditional plan-in return for a fee. Prior to 2004, in general, the rates of health care service paid by BCBSM's traditional and PPO plans were lower than the rates of health care service paid by BCBSM's HMO plans. Beginning around 2004, in an effort to increase the HMO's competitiveness and to simplify pricing structures, BCBSM negotiated a series of letters of understanding with various hospitals that altered its existing rate agreements, so as to equalize the rates for health care services paid by the HMO plans with those paid by the PPO plans. BCBSM agreed to make the rate adjustments budget-neutral for the health-care providers by increasing the PPO and traditional plan rates to make up for the decrease in the HMO rates. The plaintiff, a Plan beneficiary through his wife's employment with Flagstar and her own participation in the Plan, filed this suit in 2006 under ERISA. He claimed that BCBSM violated its fiduciary duties to the Plan, by agreeing to increase its traditional and PPO plan rates in exchange for decreases in the HMO rates, therefore increasing the Plan's costs of obtaining health care services.

However, the Court found that BCBSM did not violate its fiduciary duties to the Plan , because it was not acting as a fiduciary when negotiating the rate changes at issue. Those negotiations were not directly associated with the Plan-the employee benefits plan at issue here- but were generally applicable to a broad range of health-care consumers. This conduct does not constitute "management" or "administration"' of the Plan, and relates to business concerns that merely affects the Plan among other consumers. Since BCBSM was not acting as a fiduciary of the Plan when engaging in the rate negotiations, the Court ruled that the plaintiff's claim against BCBSM fails.

December 9, 2010

ERISA-PBGC Provides Guidance On Reportable Events

In Technical Update 10-4, the Pension Benefit Guaranty Corporation (the "PBGC") provides guidance, for plan years beginning in 2011, on compliance with the reportable event requirements of section 4043 of ERISA and the underlying PBGC's regulation (29 CFR part 4043). The Update addresses two topics:

● Funding-related determinations for purposes of waivers, extensions, and the advance reporting threshold test. For these determinations, the Technical Update provides, in general, that for purposes of the reportable events regulation, a plan's unfunded vested benefits ("UVBs") and the value of its assets and vested benefits are determined for a plan year beginning in 2011 in the same manner as for variable-rate premiums ("VRPs") for the preceding plan year.

● Missed quarterly contributions. The Technical Update provides, in general, that for purposes of the reportable events regulation, if a required quarterly contribution for the 2011 plan year is not made to a plan by its due date, and financial inability to make the contribution is not the reason for this event, the reporting requirement under section 4043.25 of the reportable event regulation:

(1) is waived if the plan has fewer than 25 participants for the prior plan year; and

(2) if the plan has at least 25 but fewer than 100 participants for the prior plan year, will be considered satisfied if a simplified notice (described in the Update) is filed with PBGC by the time the report for the event would otherwise be due.

According to the Technical Update, the PBGC expects to supersede this Technical Update with a final rule amending the reportable events regulation sometime during 2011.

December 8, 2010

ERISA-EBSA Issues A Proposed Rule That Requires More Disclosure Of Investments In Target Date Funds

According to a News Release dated November 29, 2010, and an accompanying Fact Sheet, the Employee Benefits Security Administration (the "EBSA") has issued a proposed rule, which will enhance and provide more specific and comprehensive disclosure to participants concerning Target Date Funds ("TDFs") held under 401(k) plans and other qualified defined contribution plans. The proposed rule would amend:

-- the "qualified default investment alternative regulation" (29 CFR 2550.404c-5), which provides relief from certain fiduciary responsibilities for plan fiduciaries who, in the absence of directions from a participant, invest the participant's account in a qualified default investment alternative, including a TDF; and

-- the "participant-level disclosure regulation" (29 CFR 2550.404a-5), which requires plan administrators to furnish participants with certain investment-related information about each designated investment alternative under the plan, including any TDFs.

According to the Fact Sheet, TDFs are designed to make investment more convenient when saving for retirement, since they allocate investments among different asset classes, and change that allocation to become more conservative over time. However, TDFs are not managed according to uniform strategies. TDFs with the same target date can have very different investment strategies and asset allocations. Participants may not understand these differences, which can lead to very different levels of risk and investment results over time.

Further, according to the Fact Sheet, the proposed rule requires new disclosures about the design and operation of TDFs or similar investments, including:
• An explanation of how the asset allocation of the TDF will change over time, and when it will reach its most conservative position;
• An illustration of how the asset allocation of will change over time; and
• For a TDF that refers to a particular date (e.g., "Retirement 2050 Fund"), an explanation of that date's relevance.
The proposed rule also requires a statement concerning the risk that a participant who invests his or her plan account in a TDF may lose money in that investment, even when he or she is close to retirement.

December 7, 2010

Employee Benefits-IRS Extends Deadline to Adopt Certain Amendments For Cash Balance And Other Defined Benefit Plans

In Notice 2010-77 (the "Notice"), the Internal Revenue Service (the "IRS") extends the deadline for amending cash balance and other defined benefit plans to meet certain requirements of the Internal Revenue Code (the "Code"), as revised by the Pension Protection Act of 2006 (the "PPA"), the Worker, Retiree, and Employer Recovery Act of 2008 and the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010. Under the Notice, this deadline is extended to the last day of the first plan year that begins after 2010. This extension applies to:

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

2. The deadline for amending cash balance and other "applicable defined benefit plans",
within the meaning of Code Section 411(a)(13)(C), to meet the requirements of Code Section 411(a)(13) (other than Section 411(a)(13)(A)) and Code Section 411(b)(5), relating to 3-year vesting and rules for meeting the "no reduction of benefit accrual rates on account of age" rule of Code Section 411(b)(1)(H).

This extension applies to interim (required) and discretionary amendments pertaining to those Code Sections. For this extension to be available for an interim amendment, in accordance with Section 1107 of the PPA, the amendment must be effective as of the effective date of the underlying Code Section, and the plan must be operated in accordance with the amendment as of its effective date.

The Notice also provides relief from the anti-cutback rule of Code Section 411(d)(6). It states that an interim plan amendment, which eliminates or reduces a Section 411(d)(6) protected benefit, will not cause the plan to fail to meet the requirements of Code Section 411(d)(6) if the amendment is adopted by the last day of the first plan year that begins after 2010, and the elimination or reduction is made only to the extent necessary to enable the plan to meet the requirements of Code Sections 401(a)(29) and 436. Similarly, the Notice indicates that when the regulations under Code Sections 411(a)(13) and 411(b)(5) (proposed on October 19, 2010) are finalized, it is expected that relief from the requirements of Code Section 411(d)(6) will be granted for a plan amendment that eliminates or reduces a Section 411(d)(6) protected benefit, so long as the amendment is adopted by the last day of the first plan year that begins after 2010, and the elimination or reduction is made only to the extent necessary to enable the plan to meet the
requirements of Code Section 411(b)(5).


December 7, 2010

ERISA-Seventh Circuit Rules That Plaintiff Is Not Entitled To A Death Benefit From An Accident And Health Plan, Since Her Husband Did Not Have An Accident Within One Year Before His Death

In Sellers v. Zurich American Insurance Company, No. 10-1448 (7th Cir. 2010), on November 16, 2006, the plaintiff's husband had surgery to remove a broken wire from his knee. The husband died nine days after this surgery (November 25, 2006) from a heart attack, which was caused by his immobilization following the surgery. The wire had been inserted in the husband's knee over a year earlier (on September 29, 2005), during an operation to repair his patella tendon, which he tore while performing training exercises at work (the accident occurring on September 15, 2005). The issue faced by the Court in this case, which arises under ERISA, is whether the plaintiff is entitled to a death benefit from the accidental death and dismemberment insurance policy (the "Policy") in a welfare plan maintained by the husband's employer. The Policy was administered by the defendant, Zurich American Insurance Company ("Zurich"). Zurich determined that the plaintiff is not entitled to a death benefit from the Policy. The Policy covers accidental deaths occurring within 365 days of the accident. The question became whether the husband's death can be traced to an accident that occurred within a year of his death.

The Court reviewed Zurich's decision to deny the death benefit under the arbitrary and capricious standard, since the Policy gave Zurich the authority to construe policy terms and determine benefit eligibility. Zurich denied the death benefit on the basis that there was no accident within one year of the plaintiff's husband's death. It had concluded that the broken wire was not an accident, because it was expected by the husband's doctor. The Court said that this conclusion was not reasonable-it is the expectation of an average person-not a doctor- that matters. By itself, this conclusion would not pass the arbitrary and capricious test. However, the wire breakage was a complication from the original surgery, and surgery, and any complications resulting from the surgery, cannot be an accident within the meaning of the Policy. The accident is the activity that led to the surgery-here the patella tendon tear. Therefore, the accident occurred more than one year before the husband's death, and Zurich's denial of the death benefit could not be overturned. As such, the Court concluded that no death benefit is payable to the plaintiff under the Policy.

December 6, 2010

ERISA-Fifth Circuit Rules That Plaintiff Is Not Disabled Within The Plan's Meaning, So That The Administrator Was Correct In Stopping His Disability Benefits.

In Leipzig v. Principal Life Insurance Company, No. 10-10394 (5th Cir. 2010), the plaintiff, Bruce Leipzig ("Leipzig"), brought suit against the defendant, Principal Life Insurance Co. ("Principal"), alleging that Principal had stopped the payment of his disability benefits in violation of ERISA. The district court granted summary judgment against Leipzig on this ERISA claim, and he appealed.

Leipzig was a surgical "ear, nose and throat" doctor, or ENT, who was maintaining a medical practice in Brownwood, Texas. Leipzig had purchased a disability insurance policy (the "Plan") from Principal, which both administers and pays claims on the policy. Principal retained full discretion to interpret the Plan. Under the Plan, after the first two years for which disability benefits are payable, a participant would continue to receive disability benefits only if, solely and directly because of sickness, injury, or pregnancy, either: (a) the participant cannot work at any occupation for which he or she qualifies based on education, training, or experience, or (b) the participant is working and is unable to earn more than 66 2/3% of his or her pre-disability earnings.

In 2005, Leipzig had been diagnosed with diplopia (double vision) and extropia (crossed eyes). By April 2006, he had ceased performing surgery and sold his medical practice. Principal approved Leipzig's disability claim, effective June 15, 2006, and began paying him monthly benefits. However, in 2007, Leipzig underwent eye surgery and resumed a non-surgical ENT practice in Brownwood. He was physically capable of working a full schedule, but he worked no more than two days per week, since he could see all of his patients during those two days. Principal stopped the disability benefit payments after June 14, 2008, based on the foregoing definition of disability.

In analyzing this case, the Fifth Circuit Court said that it would review Principal's decision to stop the benefit payments using the abuse-of-discretion standard. This obtains because Principal was the Plan's administrator and had discretion to interpret the Plan. The question, in this case, was whether Principal's interpretation of the Plan reflects a fair reading. There is one part of the Plan's definition of disability that Leipzig does not satisfy, namely, that his inability to work must occur "solely and directly because of [the claimant's] sickness, injury or pregnancy." In this case, Leipzig was physically capable of working full-time, and his practice was limited to two days a week only because of market conditions in his city of residence. Therefore, his post-disability earnings-which were less than 2/3 of his pre-disability earnings since he worked only two days per week- were not "solely and directly" caused by his medical condition. The Court concluded that Principal's termination of Leipzig's disability benefits is based on a fair reading of the Plan. Accordingly, the Court affirmed the district court's grant of summary judgment against Leipzig on his ERISA claim.

December 5, 2010

Employment-New York DOL Posts A Reminder of New Domestic Workers' Bill of Rights

According to the New York State Department of Labor's website, the new domestic workers' bill of rights took effect on November 29, 2010. These rights include:

--the right to overtime pay at time-and-a-half after 40 hours of work in a week, or 44 hours for workers who live in their employer's home;

--a day of rest (24 hours) every seven days, or overtime pay if they agree to work on that day;

--three paid days of rest each year after one year of work for the same employer; and

--protection under New York State Human Rights Law, and the creation of a special cause of action for domestic workers who suffer sexual or racial harassment.

The website also offers a sample notice to be posted and a fact sheet on the bill of rights.

December 3, 2010

Employee Benefits-IRS Provides Forms And Additional Guidance On Small Business Health Care Tax Credit

In a Press Release, dated December 2, 2010, the Internal Revenue Service (the "IRS") announced that it has issued final guidance for small employers eligible to claim the new small business health care tax credit for the 2010 tax year.

More specifically, according to the Press Release, the IRS has issued, and made available:

--new Form 8941, Credit for Small Employer Health Insurance Premiums, and newly revised Form 990-T;

--the instructions to Form 8941; and

--Notice 2010-82, which is designed to help small employers correctly figure and claim the credit.

The Press Release, and the above forms, instructions and notice, may be found here. The Press Release reminds us that the small business health care tax credit is designed to encourage small businesses and small tax-exempt organizations, which primarily employ moderate- and lower-income workers, to offer health insurance coverage to their employees for the first time or maintain coverage they already have. In general, the credit is available to qualifying employers that pay at least half of the premiums for their employees' health insurance coverage. The new guidance indicates that a broad range of employers qualify for the credit, including: (1) religious institutions that provide coverage through denominational organizations, (2) small employers that cover their workers through insured multiemployer health and welfare plans, and (3) employers that subsidize their employees' health care costs through a broad range of contribution arrangements. The Press Release also contains information on the availability and amount of the tax credit, and how the credit may be claimed by using Form 8941 and other returns.

December 2, 2010

Executive Compensation-IRS Modifies The Relief And Guidance It Previously Provided On The Correction Of Certain Failures Of A Nonqualified Deferred Compensation Plan to Meet Section 409A

The IRS has issued Notice 2010-80. This notice modifies certain provisions of Notice 2008-113 and Notice 2010-6, dealing with the correction of failures to comply with Section 409A of the Internal Revenue Code (the "Code"), by:

• Clarifying that the types of plans eligible for relief under Notice 2010-6 include a
nonqualified plan linked to a qualified plan or another nonqualified plan, provided
that the linkage does not affect the time and form of payments under the plans;

• Expanding the types of plans eligible for relief under Notice 2010-6 to include
certain stock rights that were intended to comply with the requirements of
Code Section 409A(a) (rather than be exempt from the requirements of Section 409A(a));

• Providing an additional method of correction under Notice 2010-6 for certain
failures involving payments at separation from service subject to the requirement
to submit a release of claims or similar document; and providing transition relief
permitting the correction of such failures that were in effect on or before
December 31, 2010 (including relief from the service provider information
reporting requirements);

• Providing relief from the service provider information reporting requirements
under Notice 2010-6 for corrections made under the transition relief ending
December 31, 2010; and

• Providing relief from the requirement that service recipients furnish certain
information to service providers under Notice 2008-113 for corrections made in
the same taxable year as the failure occurs.

December 1, 2010

Employee Benefits-IRS Issues Notice 2010-84 To Provide More Guidance On In-Plan Roth Rollovers

As noted in my blog yesterday, the Internal Revenue Service ("IRS") provided guidance on in-plan Roth rollovers in Retirement News for Employers - Fall 2010 Edition, and in Notice 2010-84. An "in-plan Roth rollover" is a rollover, made after September 27, 2010, of a distribution from a non-Roth account in a 401(k) plan or 403(b) plan into a designated Roth account in the same plan. The guidance in the Retirement News was discussed yesterday. Here are some highlights of Notice 2010-84 (the "Notice"):

--The rollover may be accomplished by a direct rollover, or by the distribution of funds to the plan participant, who then rolls over the funds into his or her designated Roth account in the plan within 60 days.

--An amount is not eligible for an in-plan Roth rollover, unless it satisfies the rules for distribution under the Code and is an eligible rollover distribution as defined in Code section 402(c)(4). For example, in the case of a 401(k) plan participant who has not had a severance from employment, an in-plan Roth rollover from the participant's pre-tax elective deferral account may be made only if the participant has reached age 59½, has died or become disabled, or receives a qualified reservist distribution as defined in Code section 72(t)(2)(G)(iii).

--If a plan loan is included in an in-plan Roth rollover, and the loan's repayment schedule is not changed, the inclusion of the loan in the rollover does not result in a new loan (so the rule in § 1.72(p)-1, Q&A-20, of the Income Tax Regulations-which could result in tax if the loan were new and the Code section 72 limits were exceeded-does not apply).

--The Notice reminds us that, if the plan offers in-plan Roth rollovers, this feature must be described the plan's 402(f) notice, and the Notice provides sample language which may be used for this purpose.

--The Notice reminds us that the plan must have a qualified Roth contribution program in place at the time the first in-plan Roth rollover is made.

--The Notice provides details on the deadlines for amending the plan to permit in-plan Roth rollovers.