January 2011 Archives

January 28, 2011

Employment-Supreme Court Rules That An Employer's Firing An Employee, Because Of An EEOC Charge Filed By His Fiancée, Violates Title VII's Anti-Retaliation Rule

In Thompson v. North American Stainless, LP, No. 09-291 (2011), the plaintiff, Eric Thompson ("Thompson"), and his fiancée, Miriam Regaldo ("Regaldo"), both worked for North American Stainless, LP ("NAS"). Regaldo filed a sex discrimination charge with the Equal Employment Opportunity Commission (the "EEOC") against NAS. Three weeks later, NAS fired Thompson. He then filed his own charge with the EEOC, and this suit against NAS under Title VII of the Civil Rights Act, alleging that NAS fired him in retaliation for the charge that Regaldo filed. The question for the Supreme Court: Is Thompson's retaliation claim permitted?

The Supreme Court held that, under the above facts, the firing of Thompson by NAS constitutes unlawful retaliation, which violates Title VII's anti-retaliation provision. This provision prohibits an employer from discriminating against an employee for engaging in protected conduct. As such, it proscribes any employer action that might dissuade a reasonable worker from making or supporting a charge of discrimination. Here, a reasonable worker might be so dissuaded from engaging in a protected activity-here filing a charge with the EEOC- if she knew it would lead to her fiancée being fired.

Does Thompson have standing to bring suit under Title VII? The Court said that Title VII provides that a civil action may be brought by the person claiming to be aggrieved. Thompson may be treated as the "person aggrieved" for this purpose. He falls within the zone of interests protected by Title VII, since he was an employee of NAS, and was the intended victim of the retaliation. Therefore, the Court concluded that Thompson has standing to bring his suit under Title VII, and that his retaliation claim is permitted.

January 27, 2011

ERISA-Third Circuit Holds That The Plan Administrator 's Decision To Terminate Disability Benefits Was Arbitrary and Capricious, And Reinstates The Plaintiff's Benefits Retroactively To The Date Of The Termination

In Miller v. American Airlines, Inc., No. 10-1784 (3rd Cir. 2011), the plaintiff , a former airline pilot, sued his employer (American Airlines), the American Airlines, Inc. Pilot Retirement Benefit Program Fixed Income Plan (the "Plan") and its plan administrator under ERISA for the wrongful termination of his long-term disability benefits. The Plan is a defined benefit pension plan which is subject to ERISA. The district court granted summary judgment in the defendants' favor, and the plaintiff appealed.

The plaintiff was awarded long-term disability benefits from the Plan in November 1999, based on his psychosis and anxiety. However, in October 2006, the plan administrator terminated the benefits, on the grounds that it could no longer verify the disability. The plaintiff later brought this suit.

The Court noted that, since the Plan grants discretionary authority to the plan administrator to determine benefit eligibility, the plan administrator's decision to terminate the benefits must be reviewed under the arbitrary and capricious standard. However, the existence of procedural irregularities by the plan administrator will cause the reviewing court to conclude that the plan administrator's decision did not meet this standard. The Court found procedural irregularities, since:

--the plan administrator's decision was not based on substantial evidence, as reports from the plaintiff's examining doctor evidenced the disability;

--the plan administrator operated under a structural conflict of interest giving it the incentive to deny the plaintiff's claim : while the Plan is a defined benefit pension plan, every dollar the employer saved by terminating the disability benefits from the Plan decreased the employer's projected benefit obligation, and thus the amount the employer must ultimately contribute to the Plan-as such, the employer has a gain if the benefits are terminated;

--the plan administrator committed the following procedural errors: (1) it terminated the benefits without receiving new information, (2) it relied on non-existent plan requirements (here, it relied on the absence of an FAA medical certification to terminate the benefits, while the Plan does not require such certification) and (3) it failed to comply with the requirements for claims review in Section 503 of ERISA, as the letter informing the plaintiff of the termination of his benefits: (a) did not adequately set forth any specific reasons for the denial, but was too conclusory , (b) was not written in a manner calculated to be understood by the plaintiff and (c) did not advise the plaintiff how to perfect his claim; and

--the plan administrator did not properly take into account all relevant diagnosis of the plaintiff's condition, or properly evaluate the plaintiff's ability to perform his job in view of the relevant diagnosis.

Due to these irregularities, the Court concluded that the plan administrator's termination of the plaintiff's long-term disability benefits was arbitrary and capricious. But what is the remedy for the plaintiff? The choices are remand to the plan administrator for a new determination of benefit eligibility, or retroactive reinstatement of the plaintiff's long-term disability benefits. The Court concluded that, since termination of the benefits was arbitrary and capricious and thus unlawful, retroactive reinstatement (back to the date of the benefit termination) is the appropriate remedy.

January 26, 2011

ERISA-Fourth Circuit Finds That The Plan Administrator 's Decision To Deny Disability Benefits Was Unreasonable, And Upholds The Plaintiff's Claim For Those Benefits

In DuPerry v. Life Insurance Company of North America, No. 10-1089 (4th Cir. 2011), the plaintiff had sued Life Insurance Company of North America ("LINA") under ERISA for wrongly denying her disability benefits. The district court had awarded the benefits to the plaintiff, and granted judgment in her favor. LINA appealed.

The Plaintiff had worked as a payroll and benefits clerk for Railroad Friction Products Corporation ("RFPC") until April 7, 2006. While at RFPC, she participated in a group LTD benefits plan administered by LINA and funded by an insurance policy that LINA issued ("the Policy"). The Policy is subject to ERISA. Plaintiff filed a claim for LTD benefits under the Policy, on the grounds that she had become disabled due to rheumatoid arthritis, osteoarthritis, and fibromyalgia.

In analyzing the case, the Court noted that LINA, as plan administer, had decided to reject the plaintiff's claim under the Policy for LTD benefits. Since the Policy gave LINA discretionary authority to determine benefit claims under the Policy, LINA's decision to reject the claim is entitled to a deferential review by a court. However, even under a deferential review, LINA's decision will be overturned if it is not reasonable. The Court found that, considering all of the evidence together, there is no reasonable basis in the record for LINA's decision to reject the plaintiff's benefit claim. The evidence showed that the plaintiff was suffering from chronic diseases that are potentially debilitating. She presented substantial evidence from her attending physicians that these diseases prevent her from working. She also presented her own declaration and declarations from her family and her former employer confirming the severity of her symptoms. The only counter evidence was provided in the reports of one of LINA's own doctors, who had not examined the plaintiff. But these reports did not contain any significant basis supporting a conclusion that the symptoms from the plaintiff's illness are not sufficiently severe as to prevent her from working. Especially in light of the structural conflict present here, due to LINA's dual role as insurer and administrator of the Policy, the Court concluded that LINA's rejection of the plaintiff's benefit claim was unreasonable and therefore had to be overturned.

Must the plaintiff's subjective complaints of pain be considered? On this issue, the Court said that, while LINA was not required to simply accept the plaintiff's subjective complaints of pain without question, it could not simply dismiss these complaints out of hand, especially where -as here-there is objective medical proof of a disease that could cause such pain. The Court concluded, in effect, that LINA's dismissal of these complaints was additional evidence of the unreasonableness of its decision to reject the plaintiff's benefit claims.

What then, is the remedy when LINA's rejection of the plaintiff's claim for benefits must be overturned? The Court felt that, due to the way LINA had been handling the claim, remanding the case back to LINA, as plan administrator, to make any further determinations, e.g., whether the plaintiff is entitled under the Policy to "any-occupation period" benefits (those available after 24 months of disability benefit payments), would serve no purpose. Therefore, the Court affirmed the district court's judgment, under which the LTD benefits were awarded to the plaintiff.

January 24, 2011

ERISA-Third Circuit Holds That The Successor Liability Rule May Be Applied To Hold Buyer Of Assets Liable For Seller's Unpaid Plan Contributions

In Einhorn v. M.L. Ruberton Construction Company, No. 09-4204 (3rd Circuit 2011), the Court faced the question of whether the purchaser of an employer's assets is liable under ERISA for the employer's delinquent plan contributions. Here, under two collective bargaining agreements, Statewide Hi-Way Safety, Inc. ("Statewide") was obligated to make contributions to a multiemployer pension plan and a multiemployer health and welfare plan. Statewide became delinquent in making these contributions. After the delinquency arose, Statewide sold its assets to the defendant, M.L. Ruberton Construction Company ("Ruberton"). Is Ruberton liable for the delinquent contributions under the theory of successor liability?

In analyzing the case, the Court noted the Supreme Court's decision in Golden State Bottling Co. v. NLRB, in which the Court held that the purchaser of a business could be liable for remedying an employee's unlawful discharge, when the purchaser had notice of the discharge and continued, without interruption or substantial change, the seller's business operations. The Court also noted the Third's Circuits decision in Teamster Pension Trust Fund of Phila. & Vicinity v. Littlejohn, holding that successor liability for delinquent ERISA fund contributions could be imposed on the surviving corporation following a merger.

Building on those and other cases, the Court held that a buyer of assets, here Ruberton, may be liable under ERISA for the seller's delinquent pension and welfare plan contributions, when the buyer had notice of the liability for those contributions prior to the sale, and there exists sufficient evidence of continuity of operations between the buyer and seller. The Court expounded on this rule. It said that "notice" centers on whether the buyer knows about the liability (and acknowledged that the buyer had such notice here), as opposed to whether the buyer knows that the liability will be enforced. As to substantial continuity, the following factors are relevant: (1) continuity of the workforce, management, equipment and location, (2) completion of work begun by the predecessor, and (3) constancy of customers. The Court remanded the case back to the district court to apply the foregoing.

Planning Note: The rule of successor liability requires careful due diligence on employee benefit matters by the buyer in the context of an asset sale. When potential liability for any employee benefit is discovered, the buyer should negotiate a price reduction, or at least a provision in the sale agreement under which the seller or its owners will indemnify the buyer for any successor liability imposed for that benefit.

January 20, 2011

ERISA-Eleventh Circuit Holds That Health Plan Was Entitled To Reimbursement From Employee's Entire Settlement Proceeds For An Injury

In Johnson Controls, Inc. v. Flaherty, No. 10-10215 (11th Cir. 2011) (unpublished), the plaintiff, Johnson Controls, Inc. ("Johnson Controls"), sought reimbursement from its employee, Flaherty, under ERISA for medical benefits that its health plan (the "Plan") had paid on Flaherty's behalf in connection with a bicycle injury. Flaherty had received a monetary settlement for the injury from a third party. The issue was whether Flaherty's attorney fees and costs incurred in obtaining the settlement -- in the amount of $14,467.44 -- must be deducted from the proceeds, before the funds are subject to the Plan's reimbursement claim.

The Court said that the Plan expressly provides that, when an employee receives benefits under the Plan and thereafter recovers for his injuries from a third party, the Plan "has the right to be reimbursed for such benefits in full," and "no portion of the [Plan]'s recovery shall be reduced by the fees or costs (including attorney's fees) associated with any claim, lawsuit, or settlement agreement in connection with any recovery, without the express written consent of the Plan Administrator." Further, the Court noted that the Summary Plan Description plainly says that the Plan "ha[s] the right to be reimbursed in full before any amounts (including attorneys' fees) are deducted from any policy, proceeds, judgment or settlement," and that the Plan's "right to . . . reimbursement takes preference over any other claims against the recovery, . . . regardless of how settlement proceeds are characterized."

The Court concluded that when the plan's terms are clear and unambiguous -- as they are here -- the Court must enforce them as written. Thus, the Court ruled that Flaherty had to reimburse Johnson Controls for the entire amount the Plan paid in medical expenses on Flaherty's behalf, without deduction for attorneys' fees and costs (it looks like the Plan was self-funded by Johnson Controls, so that Johnson Controls was entitled to the reimbursement).

January 19, 2011

ERISA-Sixth Circuit Rules That Trustees' Decision To Terminate Plaintiff's Disability Benefits Under A Pension Plan Is Subject To A Deferential Review

In Price v. Board of Trustees of the Indiana Laborer's Pension Fund, Nos. 09-3897/4204 (6th Cir. 2011), the Court faced several complex issues arising under ERISA. For many years, the plaintiff had received occupational disability benefits from a plan, a multi-employer pension plan, which is subject to ERISA (the "Plan"). His benefits were discontinued, when the Plan's trustees amended the Plan to limit occupational disability benefits to a period of two years. The plaintiff then sued the Plan and its trustees, on the grounds that his benefits had vested, so that the amendment violated ERISA. The district court agreed, and ruled in the plaintiff's favor. The Plan and its trustees appeal.

The Court began its analysis by noting that the disability benefits are welfare benefits, and ERISA itself does not require that welfare benefits vest. In certain circumstances, vesting may be inferred from the parties' agreements. In the Sixth Circuit, the courts apply the Yard-Man inference, under which an inference in favor of vesting is used to determine whether retiree health insurance benefits continue beyond the expiration of a collective bargaining agreement. But does Yard-Man apply here? The Court said that it does not, since the occupational disability benefits differ from retiree health benefits. Another source of vesting could be the Sixth Circuit's Sprague case. That case holds that when a benefit is unilaterally provided by an employer, vesting will obtain if the plan documents contain a clear and express statement of intent to vest. However, the Court said that Sprague does not apply here either, since the benefits in that case were offered unilaterally, while the disability benefits here were bargained-for.

The remaining possible source of vesting is the Plan itself. The terms of the Plan prohibit an amendment that reduces the benefits of any participant "whose rights have already become vested". Have the plaintiff's benefits become vested, so that the trustees' amendment could not apply to him? Here, the Plan gave the trustees the discretion to interpret the Plan. Accordingly, the Court said that deference must be given to the trustees' decision to amend the Plan and terminate the plaintiff's occupational disability benefits. Further, the Court said that the word "vested" as used in the Plan refers to retirement benefits, not disability benefits. As such, it was reasonable for the trustees to interpret the Plan to provide that plaintiff's disability benefits had not vested and therefore could be terminated by an amendment . However, the Court noted that the district court did not review the trustees' decision to terminate the benefits using the deferential standard. The Court concluded that the district court's decision must be vacated, and the case must be remanded back to the district court for a decision applying this standard.

January 18, 2011

Employment-Seventh Circuit Rules That Alcoholism By Itself Did Not Entitle An Employee to FMLA or ADA Protection

In Ames v. Home Depot Incorporated, No. 09-4151 (7th Circuit 2011), the plaintiff was terminated for coming to work under the influence of alcohol and failing a blood alcohol test. She sued her employer for violation of the Family and Medical Leave Act (the "FMLA") and the Americans with Disabilities Act (the "ADA"). The district court granted summary judgment against the plaintiff and she appealed. The Seventh Circuit Court of Appeals affirmed.

The Court noted that, under the FMLA, an eligible employee is entitled to up to 12 weeks of unpaid leave each year for a "serious health condition" that makes the employee unable to perform the functions of her job. Here, the plaintiff did not establish that she is afflicted with a serious health condition. The Court said that substance abuse (including alcoholism) can qualify as a serious health condition, if treatment for substance abuse involves inpatient care or continuing treatment by a health care provider. The plaintiff did not show that she was receiving such care or treatment. Therefore, the Court ruled that the plaintiff does not have protection under the FMLA.

The Court continued by stating that, to establish a claim under the ADA, the plaintiff had to show that she has a disability within the meaning of the ADA. Alcoholism may qualify as a disability if it substantially limits one or more major life activities. A "substantial limitation" is one that renders an individual unable to perform, or significantly restricts an individual in performing, a major life activity. Major life activities can include caring for oneself, sleeping, walking, and working. Here, the plaintiff did not show that her alcoholism substantially limited any major life activity. Therefore, the Court ruled that the plaintiff does not have a disability, within the meaning of the ADA, and her ADA claim fails.

January 17, 2011

Employment/ERISA-Fourth Circuit Rules That Employer Properly Denied Short-Term Disability Benefits

Leone v. Tyco Electronics Corporation, No. 09-1821 (4th Circuit 2011)(an unpublished opinion) is a curious case. The plaintiff , Joseph Leone ("Leone"), had sued his former employer, Tyco Electronics Corporation ("Tyco"). He claimed that Tyco breached a contractual provision of its short-term disability policy (the "Policy"), by refusing to pay him short-term disability benefits from June 6, 2007 through December 5, 2007. He also claimed that Tyco's refusal of his claim violated the North Carolina wage law. The district court granted summary judgment in favor of Tyco on both claims, and Leone appealed. For convenience, the wage law claim is not discussed below.

In analyzing the breach of contract claim, the Court applied North Carolina law and reviewed the Policy. It found that the Policy does not guarantee that an employee will receive short- term disability benefits, even if the employee meets the Policy's requirements for having a short-term disability. Rather, the Policy allows the employee to file a claim for benefits, under an established claims procedure that provides Tyco with the discretionary right to determine whether the benefits will be paid. Thus, an employee's right to short-term disability benefits is subject to Tyco's approval. Here, Tyco did not approve the benefit claim. Under North Carolina contract law, Tyco is required to exercise its discretionary power in a reasonable manner based upon good faith and fair play. The evidence shows that Tyco met this requirement when denying Leone's claim. Accordingly, the Court affirmed the district court summary judgment in Tyco's favor.

My question: What happened to ERISA? The Policy appears to be a welfare benefit plan, subject to ERISA. On this question, the Court stated, in effect, that ERISA is not relevant to its breach of contract analysis. Why?

January 16, 2011

Employee Benefits-IRS Postpones Discrimination Requirements For Insured Health Plans

IRS Notice 2011-1 (the "Notice") postpones the provisions of the Affordable Care Act which prohibits an insured group health plans from discriminating in favor of highly compensated individuals. In general, the Affordable Care Act requires that an insured group health plan must satisfy the nondiscrimination requirements of section 105(h)(2) of the Internal Revenue Code (the "Code"), and that rules similar to the rules in paragraphs (3) (nondiscriminatory eligibility classifications), (4) (nondiscriminatory benefits), and (8) (certain controlled groups) of section 105(h) will apply. The term "highly compensated individual" is defined in section 105(h)(5).

An insured group health plan which fails to meet these new nondiscrimination requirements and rules may generally be subject to: (a) an excise tax of up to $100 for each day of failure, per each affected participant, under section 4980D of the Code, or (b) a civil action to enjoin the noncompliant act or practice, or for other appropriate equitable relief, under part 5 of ERISA. The new requirements and rules do not apply to an insured grandfathered health plan.

The Notice states that, since regulatory or administrative guidance is needed to apply the new nondiscrimination requirements and rules, those requirements and rules will not become effective until the plan year beginning after a specified period following the date on which the guidance is issued. The applicable departments-namely the Treasury, Department of Labor and the Department of Health and Human Services- will not seek to enforce the new requirements and rules until they become effective. The Notice asks for public comments on the issues pertaining to the new requirements and rules.

January 15, 2011

Employee Benefits-The IRS Provides Additional Guidance On FSA and HRA Debit Cards

According to IR-2010-128 (12/23/10), the Internal Revenue Service (the "IRS") has issued guidance permitting the continued use of debit cards, for the purchase of prescribed over-the-counter medicines and drugs, in conjunction with a health flexible spending arrangement (an "FSA") or a health reimbursement arrangement (an "HRA"). The new guidance, IRS Notice 2011-5 and new FAQs: (1) require that, after January 15, 2011, the use of debit cards to make these purchases must comply with procedures reflecting those that pharmacies currently follow when selling prescribed medicines or drugs (including that a prescription for the medication be presented to the pharmacy (or the mail-order or web-based vendor) that dispenses the medication, and that proper records be retained), and (2) contain details on health FSA and HRA debit card purchases, including purchases from health care providers other than pharmacies and mail order and web-based vendors.

The IRS release refers to the requirement, in the Affordable Care Act, under which the cost of over-the-counter medicines or drugs (other than insulin) cannot be reimbursed from a health FSA or HRA , unless a prescription has been obtained. It reminds us that this requirement applies to purchases made on or after Jan. 1, 2011, and not to purchases made in 2010 even if reimbursed after 2010. It also reminds us that the requirement applies only to over-the-counter medications, and does not apply to other health care expenses such as medical devices, eye glasses or contact lenses.

January 14, 2011

Employment/Tax-Supreme Court Upholds A Treasury Department Rule Under Which A Medical Resident's Pay Is Not Exempt From FICA Tax

In Mayo Foundation For Medical Education and Research v. United States, 09-837 (2011), the Supreme Court faced the issue of whether a Treasury Department rule (discussed below) is valid. This rule was being applied to determine whether a medical resident is a student whose pay is exempt from FICA tax under section 3121(b)(10) of the Internal Revenue Code (the "Code"). The Eighth Circuit Court of Appeals had determined that the rule is valid.

According to the Court, most doctors who graduate from medical school pursue additional education in a specialty to become board certified to practice in that field. The Court explained that the plaintiff (referred to as "Mayo" for convenience) offers medical residency programs which provide this education. Mayo's residency programs, which usually last three to five years, train doctors primarily through hands-on experience. Residents often spend between 50 and 80 hours a week caring for patients, typically examining and diagnosing them, prescribing medication, recommending plans of care, and performing certain procedures. Residents are generally supervised in this work by more senior residents and by faculty members known as attending physicians. Mayo residents also take part in a formal and structured educational program. Residents are assigned textbooks and journal articles to read and are expected to attend weekly lectures and other conferences. Residents also take written exams and are evaluated by the attending physicians. However, the bulk of residents' time is spent caring for patients.

Section 3121(b)(10) exempts from FICA taxation "service performed in the employ of ... a school, college, or university ... if such service is performed by a student who is enrolled and regularly attending classes at such school, college, or university." The Court noted that, since 1951, the Treasury Department (the "Department") has applied this exemption to students who work for their schools "as an incident to and for the purpose of pursuing a course of study" there. On December 21, 2004, the Department adopted a rule under which an employee's service is "incident" to his studies only when the educational aspect of the relationship between the employer and the employee, as compared to the service aspect of the relationship, is predominant. The rule categorically provides that the services of a full-time employee--as defined by the employer's policies, but in any event including any employee normally scheduled to work 40 hours or more per week--are not incident to and for the purpose of pursuing a course of study. The rule clarifies that the Department's analysis is not affected by the fact that the services performed may have an educational, instructional, or training aspect. Treas. Reg. Sec. 31.3121(b)(10)-2(d)(3)(i) and (iii). Also, see Example (4) of Sec. 31.3121(b)(10)-2(e). This rule is referred to as the "full-time employee rule". But is this rule valid?

The Court stated that the statute does not address the precise question at issue. The Court then held that the Department's full-time employee rule is valid, affirming the Eighth Circuit's decision.

The Court did not actually determine whether the full-time employee rule would prevent the Mayo medical residents' pay from being exempt from FICA taxes under section 3121(b)(10). However, applying that rule to the facts here, it appears that the educational aspect of the relationship between Mayo and its medical residents did not predominate the relationship. Also, the medical residents had a 50 to 80 hour work week. Thus, it seems that the full-time employee rule would prevent the exemption of section 3121(b)(10) from applying, so that the Mayo medical residents' pay is subject to FICA taxes.

January 13, 2011

Employee Benefits-New Guidance On Application of HIPAA Nondiscrimination Rules To Wellness Programs

New FAQs issued by the Departments of Health and Human Services ("HHS"), Labor and the Treasury (the "Departments") provide guidance on the application of HIPAA nondiscrimination rules to wellness programs. Here are the highlights:

Nondiscrimination . The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") amended ERISA, the Code, and the Public Health Safety Act to add, among other things, provisions prohibiting discrimination by group health plans in eligibility, benefits, or premiums based on a health factor. However, there is an exception for wellness programs.

Final regulations (issued in 2006) generally divide wellness programs into two categories: (1) those which do not require an individual to meet a health condition to obtain a reward (e.g., a fitness center reimbursement program), and are therefore permitted because they do not discriminate under HIPAA, and (2) those which do require that a health condition be met to receive the award (e.g., being a non-smoker, attaining certain results on biometric screenings, or exercising a certain amount). The programs in category (2) are discriminatory under HIPPAA, but are permitted under the exception for wellness programs, if the following rules are met:

--the total reward under the program is limited to 20 percent (raised to 30 percent after 2013 by the Affordable Care Act) of the total cost of employee-only coverage under the program (modified if dependents may participate);

--the program must be reasonably designed to promote health or prevent disease; and

--the program must give eligible individuals an opportunity to qualify for the reward at least once per year, and the reward must be available to all similarly situated individuals (with a reasonable alternative-disclosed in all plan materials- for those who would have difficulty obtaining the award due to a medical condition).

A wellness program is not subject to HIPPAA's nondiscrimination requirements if it is operated as an employment policy separate from the employer's group health plan, although other Federal or State nondiscrimination laws may apply.

Examples. A group health plan gives an annual premium discount of 50 percent of the cost of employee-only coverage to participants who adhere to a wellness program, which consists of attending a monthly health seminar. This does not violate HIPAA nondiscrimination-the reward is not based on meeting any health condition.

A group health plan gives an annual premium discount, equal to 20 percent of the cost of employee-only coverage, to participants who, under a wellness program, have a cholesterol count not exceeding 200. The plan also provides that if it is unreasonably difficult or medically inadvisable to achieve the targeted cholesterol count within a 60-day period, the plan will make available a reasonable alternative condition to qualify for the reward. Although the reward is based on meeting a health condition, this plan qualifies for the HIPPAA exception for wellness programs-it is available to all similarly situated individuals, it provides a reasonable alternative standard, and the reward is limited to no more than 20 percent of the total cost of employee-only coverage.

A group health plan offers two different wellness programs, both of which are offered to all full-time participants in the health plan. The first program requires participants to take a cholesterol test and provides a 20 percent premium discount for every individual with a cholesterol count under 200. The second program reimburses participants for the cost of a monthly membership in a fitness center. The programs, together, do not violate HIPAA nondiscrimination requirements. This assumes that the first program, which is based on a health condition, meets the exception to the HIPAA nondiscrimination rules for wellness programs. Note that both programs may be offered together, because only one of them must meet this exception.

January 12, 2011

ERISA-Seventh Circuit Rules That The Buyer Of An Employer's Assets Is Not Liable For Retirement Benefits Payable Under The Employer's Top Hat Plan

In Feinberg v. RM Acquisition LLC, No. 10-1890 (7th Cir. 2011), the plaintiff was a participant in a top-hat plan (the "Plan") maintained by his employer. The Plan was unfunded, and designated the employer as plan administrator. The employer sold all of its assets out of which the Plan's benefits might have been paid, and distributed the proceeds of the sale, presumably to its shareholders and creditors. The employer thus became a shell. Under the contract of sale, the buyer of those assets did not expressly assume any of the employer's liabilities under the Plan. The plaintiff sued the buyer under ERISA for his retirement benefits under the Plan.

The plaintiff argued that the buyer is liable for the retirement benefits as the "de facto plan administrator." In this case, the plan administrator could be liable for the benefits, because the employer had become a shell and no other payer was available. The Plan designated, as plan administrator, not only the employer, but also any successor to the employer by reason of merger, consolidation, the purchase of all or substantially all of the employer's assets, or otherwise. However, the Court ruled that, for the designation to apply to the buyer in this case, the buyer would have to consent to this designation, as by taking over the plan without rejecting the successorship clause. Here, the buyer never consented, implicitly or otherwise.

Also, the purchase of the employer's assets does not make the buyer responsible for the employer's liabilities. Here, buyer declined to assume these liabilities under the contract of sale. The buyer is not a mere continuation of the employer under another name. Generally, when a federal right is involved-here the plaintiff's right to retirement benefits under ERISA- the courts will impose liability on the buyer, even in a bonafide sale, so long as two conditions are met: (1) the buyer had notice of the liability before the purchase and (2) there is substantial continuity in the operation of the business before and after the sale. Prong (2) is normally met if no major changes are made in that operation. Here, the plaintiff failed to show that no major changes had occurred.

The Court concluded that plaintiff's claim against the buyer failed, so that the buyer was not liable for the retirement benefits payable under the Plan.

January 11, 2011

Employee Benefits-FAQs Issued For Mental Health Parity Act

As noted in an earlier blog, the Departments of Health and Human Services ("HHS"), Labor and the Treasury (the "Departments") have issued FAQs for the Mental Health Parity Act and some other statutory requirements. Some of the highlights pertaining to the Mental Health Parity Act (the "Act") are:

Generally. The Act (more formally known as the Mental Health Parity and Addiction Equity Act of 2008) supplements the Mental Health Parity Act of 1996. The Act requires that a group health plan's financial requirements and treatment limitations imposed on coverage of mental health and substance use disorder cannot be more restrictive than the predominant financial requirements and treatment limitations that apply to substantially all of the plan's medical and surgical benefits. The Act is effective for plan years beginning after October 3, 2009. Interim final rules on the Act apply for plan years beginning on or after July 1, 2010.

Exemption. For Small Employers. Small employers remain exempt. For plans subject to ERISA and the Code, a "small employer" is one that has no more than 50 employees.

Criteria For Determinations. The Act and its implementing regulations state that the criteria for medical necessity determinations made under the plan, with respect to mental health or substance use disorder benefits, must be made available by the plan administrator to any current or potential participant, beneficiary, or contracting provider upon request.

ERISA Disclosure. Under ERISA, documents with information on the medical necessity criteria for both medical/surgical benefits and mental health/substance use disorder benefits are plan documents, and copies of plan documents must be furnished within 30 days of a participant's request. See ERISA regulations at 29 CFR 2520.104b-1. Additionally, if a provider or other individual is acting as a patient's authorized representative in accordance with the Department of Labor's claims procedure regulations at 29 CFR 2560.503-1, the provider or other authorized representative may request these documents.

Increased Cost Exemption. The Act contains an increased cost exemption, for plans that make changes to comply with the law and incur an increased cost of at least two percent in the first plan year that begins after October 3, 2009, or at least one percent in any subsequent plan year. When this cost is incurred in a plan year, the plan is exempt from the Act for the following plan year. The FAQs provide rules for applying this exemption.

January 10, 2011

Employee Benefits-FAQs Issued For Affordable Care and Mental Health Parity Acts

The Departments of Health and Human Services ("HHS"), Labor and the Treasury (the "Departments") have issued new FAQs for the Affordable Care Act, the Mental Health Parity Act and some other matters. FAQs on the Affordable Care Act were previously issued on September 20, 2010, October 8, 2010, October 12, 2010, and October 29, 2010. Further FAQs on the Acts are anticipated. Some points and highlights pertaining to the Affordable Care Act (Mental Health Parity and other matters later):

Recommended Preventive Services. The Affordable Care Act generally requires group health plans, other than grandfathered plans, to provide coverage for recommended preventive services without cost sharing. A complete list of the current recommended preventive services is available at www.healthcare.gov/center/regulations/prevention.html.

Copayments. A group health plan, which does not impose a copayment for colorectal cancer preventive services performed in an in-network ambulatory surgery center, may nevertheless require a $250 co-payment for this service when performed at an in-network outpatient hospital. Plans may use reasonable medical management techniques to steer patients towards a particular high-value setting. Further, a group health plan may charge a copayment for physician visits, which do not constitute preventive services, to individuals age 19 and over (including employees, spouses, and dependent children), but may waive this charge for those under age 19. While dependent coverage of children cannot vary based on age (except for children who are age 26 or older), the plan can make distinctions based upon age that apply to all coverage under the plan, including coverage for employees, spouses and dependent children.

Automatic Enrollment. The Affordable Care Act requires employers, with more than 200 full-time employees, to automatically enroll new full-time employees in the employer's group health plan, and to continue enrollment of current employees. However, this requirement will not apply until the Department of Labor issues regulations on this topic, probably in 2014.

Notice of Material Modifications. The Affordable Care Act requires a group health plan to provide a 60-day prior notice for material modifications to the plan or coverage. However, the plan is not required to provide this notice, until the Department of Labor issues certain standards for the summary of benefits and coverage explanation also required by the Act.

Grandfathered Status. A group health plan provides out-of-pocket spending limits that are based on a formula (a fixed percentage of an employee's prior year pay). If the formula stays the same, but a change in pay results in an increase in the out-of-pocket limit which exceeds the thresholds allowed under paragraph (g)(1) of the interim final regulations relating to grandfathered health plans, the plan will not lose its grandfathered status. When a plan has a fixed-amount cost-sharing arrangement other than a copayment (for example, a deductible or out-of-pocket limit), which is based on a percentage-of-pay formula, that arrangement will not cause the plan or coverage to lose its grandfathered status, so long as the formula remains the same as it was on March 23, 2010. Accordingly, the mere change in pay does not cause a loss of grandfathered status.

January 6, 2011

Employee Benefits-IRS Provides Refresher On Second Plan Loans

In Employee Plans News (December 17, 2010), the Internal Revenue Service (the "IRS") provides guidance on the tax consequences of a second plan loan.

The IRS posits the following example: The plan participant, P, asks for a second plan loan. P's vested account balance is $80,000. Eight months ago he borrowed $27,000, and still owes $18,000 on that loan. A few points. First, P could take a second loan only if the plan's terms allow it. Second, the maximum amount that P may now borrow, without being taxed, is determined under Section 72(p)(2)(A) of the Internal Revenue Code. Using the example, under that Section, P will be taxed unless the new loan, plus the outstanding balance of all other plan loans, does not exceed the lesser of :

(1) $50,000, reduced by the excess of (a) the highest outstanding balance of P's loans during the 12-month period ending on the day before the new loan (here, $27,000) over (b) the outstanding balance of P's plan loans on the date of the new loan (here, $18,000); or

(2) The greater of $10,000 or 1/2 of P's vested account balance.

Here, prong (1) equals $50,000 minus ($27,000 over $18,000), or $41,000, while prong (2) is 1/2 of $80,000, or $40,000. Since the total permissible loan balance is $40,000 (the smaller of prong (1) and (2)), and since P's has a current outstanding loan balance of $18,000, P can borrow up to an additional $22,000 ($40,000 minus $18,0000) without being taxed.

One more point. If P repaid the $18,000 loan balance before taking the new loan, then prong (1) would be $50,000 minus ($27,000 over 0), or $23,000, while prong (2) would be as above. Thus, P could borrow up to an additional $23,000 without being taxed. There was not much to be gained by paying off the prior loan.

January 5, 2011

Employee Benefits-IRS Provides Guidance On Unforseeable Emergency Distributions From 457 (b) Plans

In Employee Plans News (December 17, 2010), the Internal Revenue Service ("IRS") provides guidance on the circumstances which constitute an unforseeable emergency, allowing a distribution from a 457(b) plan.

According to the IRS, in general, a 457(b) plan may permit distributions in the event of unforeseeable emergencies, if specific requirements are met. Revenue Ruling 2010-27 (the "Ruling") contains the following examples of expenses, losses or circumstances that may be eligible for this type of distribution:

--an illness or accident of the participant, the participant's beneficiary, or the participant's or beneficiary's spouse or dependent;

--property loss caused by casualty (for example, damage from a flood or other natural disaster not covered by homeowner's insurance) of the participant or beneficiary (the cost of repairing significant water damage to the participant's principal residence, when not covered by insurance, is an unforseeable emergency, because this is an extraordinary and unforeseeable circumstance and is substantially similar to a natural disaster);

--funeral expenses of the participant's spouse, dependent or non-dependent child; and

--other similar, extraordinary and unforeseeable circumstances resulting from events beyond the control of the participant or his or her beneficiary (for example, imminent foreclosure or eviction from a primary residence, or to pay for medical expenses or prescription drug medication).

Accumulated credit card debt would not be an unforseeable emergency. The participant seeking the distribution must show that the emergency expenses are not otherwise be covered by insurance, liquidation of the participant's assets or cessation of deferrals under the 457(b) plan.

Importantly, the above examples and related rules can be used to determine when an emergency distribution may be taken from a plan subject to Internal Revenue Code Section 409A.

January 4, 2011

Employee Benefits- IRS Provides Some Thought On Using Retirement Savings To Pay Business Start-Up Costs

A little old but still important-

In Retirement News for Employers , Fall 2010 Edition, the Internal Revenue Service (the "IRS") provided some thoughts on the practice of using retirement savings to pay the start up costs of a new business. The practice involves the roll over of retirement savings into a plan (a "ROBS plan") which uses the funds to purchase an ownership interest in the new business. The IRS does not yet consider a ROBS plan to be a tax avoidance transaction. However, these plans raise issues, because they may benefit solely one individual - namely the individual who rolled over his or her retirement savings into the ROBS plan. This could result in a prohibited transaction or have other adverse tax consequences.

Last year, the IRS began a ROBS project to study these issues. One finding was that most of the businesses in which the ROBS plans had invested had failed or were failing, that the retirement savings rolled over to the ROBS plans had been lost. Many ROBS plan sponsors had failed to file Form 5500, possibly resulting in large penalties, based on a misunderstanding of an exception to the filing requirements. That exception applies when plan assets are less than a specified dollar amount and the plan covers only an individual, or an individual and his or her spouse, who wholly own the business . Here, however, the ROBS plan itself owns the business, so the exception does not apply. Other problems found with ROBS plans were:

--the ROBS plan does not allow any of its participants to acquire an ownership interest in the business;
--the ROBS plan does not allow employees-other than the individual who rolled over retirement savings into the plan-to participate;
--payment of promoter fees with plan assets;
--incorrect valuation of plan assets; and
--failure to issue a Form 1099-R to report the distribution or rollover of the retirement savings.

Note: If you have used a ROBS plan, it may be time to get some legal advice, or just shoot me a message through the blog.