February 2011 Archives

February 28, 2011

ERISA-Sixth Circuit Discusses Whether A Fiancée Is a Domestic Partner And Thus The Beneficiary Of A Life Insurance Plan

In Union Security Insurance Company v. Blakeley, No. 09-4368 (6th Cir. 2011), the Court was asked to determine the beneficiary under a life insurance policy. The policy constituted a plan subject to ERISA (the "Plan"). In this case, at his death, Thomas Blakeley was unmarried, and left behind three children, a cohabitant and a purported fiancée named Sondra Billet. He had failed to designate a beneficiary under the Plan. The Plan provided that, in the absence of a designated beneficiary, the benefits are distributed in the following order: First to the insured's spouse, then to his domestic partner, his children (or his domestic partner's children), his living parents, or his estate. The issue is whether Sondra Billet qualifies as a domestic partner.

The Court said that the text of the Plan is the preferred source, as opposed to federal common law, for identifying the beneficiary. The Court cited Kennedy v. Plan Adm'r for DuPont Sav. and Inv. Plan, 129 S. Ct. 865, 875 (2009) for this proposition. Thus, if a court can identify a workable means of identifying beneficiaries in the Plan document--whether it be in a general definition section or in the Plan as a whole-it need look no further. In this case, the Plan, read as a whole, does define "domestic partner." Although this definition is missing from the Plan's general definition section, the Plan elsewhere lists seven criteria to help pinpoint a true "domestic partner". These criteria are:

(1) You and your domestic partner have had a committed relationship of mutual caring which has existed for at least 6 months, or meet the requirements and have registered as domestic partners, if the controlling governmental authority provides for such registration;

(2) You and your domestic partner are each age 18 or more and mentally competent to consent to contract;

(3) Neither you nor your domestic partner are married to someone else, and your relationship is mutually exclusive;

(4) You and your domestic partner are not related by blood any closer than would prohibit legal marriage;

(5) You and your domestic partner are financially interdependent;

(6) You and your domestic partner each have power of attorney for each other; and

(7) At least 6 months have elapsed since similar coverage was terminated on a previously insured domestic partner, if any, unless the previous domestic partner has died.

The Court said that these criteria offer the framework for deciding whether Sondra Billet qualifies as a true "domestic partner" and thus the beneficiary under the Plan. Since it did not have enough facts to make this decision, the Court remanded the case back to the district court to gather the facts and make the determination.

February 27, 2011

ERISA-Ninth Circuit Interprets A Mental Disorder Limitation On Long-Term Disability Benefits

In Parker v. Vulcan Materials Company Long Term Disability Plan, No. 09-56674 (9th Cir. 2011) (an unpublished memorandum), the long-term disability policy in question (issued by Hartford) had a mental disorder limitation on the payment of benefits. According to the District Court, the policy had a mental or emotional disorder limitation, under which it did not cover any loss caused or resulting from a "[d]isability beyond 24 months after the [e]limination [p]eriod if it is due to mental or emotional disorders of any type." But what does that mean?

The Ninth Circuit Court said the following on the mental disorder limitation:

"Hartford's mental disorder limitation is similar to that in Patterson v. Hughes Aircraft Co., 11 F.3d 948, 950 (9th Cir. 1993). The limitation is ambiguous, because it is not clear 'whether a disability is to be classified as "mental" by looking to the cause of the disability or to its symptoms' or whether a disability resulting from 'a combination of physical and mental factors' is included in the limitation. Id. Since ambiguities are construed against the drafter, [plaintiff] Parker's illness is not within the limitation if a physical illness contributes to, or is a cause or symptom of, the mental disorder. Id. at 950-51. Thus, if Parker's depression caused her physical symptoms, she would still be entitled to benefits. Similarly, if her physical problems contributed to the depression and anxiety that Hartford previously found to be totally disabling, she is still entitled to benefits, regardless of the limitation."

February 24, 2011

Employee Benefits-IRS Provides Guidance On Terminating A 403(b) Plan

In Revenue Ruling 2011-7 (the "Ruling"), the Internal Revenue Service ("IRS") provides guidance on terminating a 403(b) plan in accordance with the applicable regulations, and on whether amounts distributed to participants in connection with the termination are included in gross income.

In the Ruling, the IRS presents four situations in which a 403(b) plan attempts to terminate, and applies the following rules to those situations. The key point is that the termination must meet the requirements of Treas. Reg. Sec. 1.403(b)-10(a). These requirements are:

--The 403(b) plan may be amended to eliminate future contributions for existing participants, or to limit subsequent participation to existing participants. All benefits must be vested upon termination.

--The 403(b) plan may contain provisions that allow plan termination, and allow benefits to be distributed upon termination.

--If the plan holds amounts in section 403(b)(7) custodial accounts, or has accepted elective deferrals, the following applies: the 403(b) plan may terminate and distribute benefits only if the employer (considering the employer aggregation rules of Code section 414(b), (c), (m) or (o)) does not make any contributions to another 403(b) plan during the "applicable period." The "applicable period" is the period which starts on the date of the 403(b) plan's termination, and which ends12 months after the completion of the distribution of benefits from that plan. For this purpose, if at all times during the period beginning 12 months before the date of termination, and ending 12 months after the completion of the distribution of benefits, less than 2% of the employees who were eligible to participate in the terminating 403(b) plan (as of the date of termination) are eligible to participate in that other 403(b) plan, the contributions to that other 403(b) plan are disregarded.

--All benefits must be distributed as soon as administratively practicable after the 403(b) plan's termination. For this purpose, the distribution of a fully paid individual insurance annuity contract, or of an individual certificate evidencing fully paid benefits under a group annuity contract, is treated as a distribution.

The Ruling indicates that benefits are taxable when paid. However, the tax on benefits paid as an eligible rollover distribution is deferred to the extent that the distribution is rolled over, as a direct rollover or otherwise. The issuance of a fully paid individual insurance annuity contract, or of an individual certificate evidencing fully paid benefits under a group annuity contract, is not a payment for this purpose, and therefore is not a taxable event. Amounts are taxable only when actually paid from the annuity contract.

February 22, 2011

ERISA-Seventh Circuit Rules That Stock Based Payments Are Not Taken Into Account When Calculating Benefits Under A Top-Hat Plan

Comrie v. Ipsco Incorporated, No. 10-2393 (7th Cir. 2011) dealt with a supplemental pension plan for top executives (the "Plan") maintained by Ipsco Incorporated ("Ipsco"). The Plan was an unfunded top-hat plan for ERISA purposes. It provided benefits which exceeded the tax deferral limit under the Internal Revenue Code. In this case, John W. Comrie, IPSCO's Chief Legal Officer, resigned and requested his benefits under the Plan. Ipsco agreed that Comrie was entitled to the benefits, but the amount of the benefits was in question.

Benefits under the Plan are based on the number of years the executive has worked at IPSCO times 2% of the executive's average compensation in the five years before departure. A clause in the Plan provided that a "bonus" is not included in compensation. Here, the parties disagreed as to whether Comrie's stock options and other stock-linked payments (Comrie's "Stock-Linked Payments") should be included in compensation. Comrie said yes, while the committee administering the Plan (the "Administrative Committee) said that the Stock-Linked Payments are bonuses that, based on the foregoing provision of the Plan, should not be included in compensation. The Plan expressly confers interpretive discretion on the Administrative Committee.

The Court upheld the Administrative Committee's decision, and ruled that the Stock-Linked Payments are bonuses and should not be included in compensation for purposes of determining Comrie's benefits under the Plan. The Court refused to disregard the language of the Plan that confers interpretive discretion on the Administrative Committee. In doing so, it rejected Comrie's arguments that members of the committee labored under a conflict of interest and that the administrator of a top-hat plan is not a "fiduciary" for purposes of ERISA.


February 16, 2011

ERISA-DOL Advisory Opinion Concludes That Certain Health Care Programs Are MEWAs

In Advisory Opinion 2011-02A, the Department of Labor (the "DOL") was asked by the State of Florida to determine: (1) whether the health care programs offered by the Depawix Employee Welfare Benefit Plan (the "Depawix Plan") and by Peck & Peck, Inc. (Peck & Peck) d/b/a Green Cross Managed Health System (the "Green Cross Program") are "multiple employer welfare arrangements" (or "MEWAs") within the meaning of ERISA section 3(40), and (2) whether ERISA section 514(a) precludes the State of Florida from applying its insurance laws and regulations to the Depawix Plan or Green Cross Program, or to any persons who sell or market them in Florida. The DOL answered as follows.

The Green Cross Program and Depawix Plan had attempted to establish themselves basically as an employment opportunity that also provides medical benefits. To receive the benefits, an individual had to agree to become employed by the sponsor of the Depawix Plan as a "Research Tester" . This position involved completing an annual risk assessment questionnaire and similar functions. It is clear that the State of Florida is interested in regulating the behavior and marketing of the Green Cross Program and Depawix Plan.

As to question (1), ERISA section 3(40)(A) defines a MEWA, in pertinent part, as an employee welfare benefit plan, or any other arrangement, which is established or maintained for the purpose of offering or providing any benefit described in section 3(1) of ERISA (e.g., medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, and disability) to the employees of two or more employers. The DOL determined that the Green Cross Program and the Depawix Plan were established and are maintained for the purpose of offering or providing those types of benefits. But did they provide or offer those benefits to the employees of more than one employer?

The DOL found that the marketing materials for the Green Cross Program indicated that the program provided the foregoing benefits to the employees of more than one employer. Therefore, the Green Cross Program is a MEWA. The DOL also found that more than one of the Research Testers covered by the Depawix Plan is either a "self-employed individual", and thus his/her own employer, or an employee of another employer. Accordingly, the Depawix Plan offers benefits to the employees of more than one employer, and is also a MEWA.

As to question (2), the DOL concluded that ERISA section 514(a) does not preempt or preclude the application of Florida insurance laws or regulations to the Green Cross Program or the Depawix Plan, or to any individual who markets or sells the program or plan. This obtains because neither the Green Cross Program nor the Depawix Plan is an employee welfare benefit plan, within the meaning of section 3(1) of ERISA, so that neither the program nor the plan is subject to ERISA or its preemption requirements. The DOL did not state its reason for this conclusion. To be an ERISA-covered employee welfare benefit plan, a plan must be established and maintained by an employer for the benefit of its employees, and it is likely that the Green Cross Program and the Depawix Plan did not meet this requirement.

February 15, 2011

ERISA-DOL Advisory Opinion Concludes That The Purchase Of A Promissory Note and Deed Of Trust By An IRA Would Be A Prohibited Transaction

In Advisory Opinion 2011-04A, the Department of Labor (the "DOL") was asked whether the purchase of a promissory note (the "Note") and a deed of trust by an IRA from a bank would result in a prohibited transaction under section 4975 of the Internal Revenue Code (the "Code"). In this case, the IRA owner and his spouse were the obligors on the Note. Also, title to the real property encumbered by the deed of trust was held by a family trust of which the IRA owner and his spouse were the trustees and sole beneficiaries. The IRA owner directs the investment of the IRA's assets. Upon completion of the purchase, the IRA would become the holder of the Note, and the IRA owner and his spouse would make all payments on the Note to the IRA.

The Advisory Opinion indicates that section 4975 of the Code sets forth a series of "prohibited transactions" involving a "plan" and a "disqualified person." Section 4975(e)(1) defines the term "plan" to include an IRA. Section 4975(e)(2) defines "disqualified person," in pertinent part, to include:(1) a fiduciary of the IRA ("fiduciary" includes a person who directs the investment of the IRA's assets) and (2) the fiduciary's family members, including his spouse. Thus, the IRA owner and his spouse are disqualified persons with respect to the IRA.

Section 4975(c)(1)(B) prohibits the lending of money between a plan and a disqualified person. Here, the IRA would hold the Note and receive payments on the Note from the IRA owner and spouse, who are disqualified persons with respect to the IRA. As such, a loan, which violates Code section 4975(c)(1)(B) and is thus a prohibited transaction, will exist between the IRA and the IRA owner and spouse once the IRA acquires the Note from the bank. This prohibited transaction will continue as long as payments on the Note are made by the IRA owner, his spouse or any other disqualified person.

The DOL further notes that section 4975(c)(1)(D) prohibits any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of the IRA. Section 4975(c)(1)(E) prohibits a fiduciary from dealing with the income or assets of an IRA in his own interest or for his own account. The acquisition and holding of the Note by the IRA would violate those Code sections, if the transaction was part of an agreement, arrangement or understanding in which the fiduciary-here the IRA owner- caused plan assets to be used in a manner designed to benefit such fiduciary, or any person(s) in which the fiduciary had an interest that would affect the exercise of his best judgment as a fiduciary. Here, the IRA would be making an investment (i.e., the purchase of the Note) where the IRA owner would have an understanding, as a fiduciary, that the assets of the IRA are being used to create a prohibited transaction (i.e., an ongoing loan between the IRA and disqualified persons) once the IRA acquires the Note. Under these circumstances, the DOL concludes that the IRA's purchase of the Note, by itself, would be a separate prohibited transaction under Code section 4975(c)(1)(D) and (E).


February 14, 2011

ERISA-EBSA Postpones Effective Date For New 408(b)(2) Disclosure Rules

According to a News Release dated February 11, 2011, the Employee Benefits Security Administration (the "EBSA") will postpone the effective date for the new disclosure rules under section 408(b)(2) of ERISA to Jan. 1, 2012.

The News Release says that an interim-final regulation on these new rules was issued on July 16, 2010. The regulation requires certain persons, who provide services to employee pension benefit plans, to disclose information about the services to plan fiduciaries. This information will help the fiduciaries assess the reasonableness of the fees being charged for the services, and review any potential conflicts of interest that might affect the quality of the services. The new rules had been scheduled to apply to plan contracts or arrangements for services in existence on or after July 16, 2011.

The delay in the effective date will allow the EBSA to review all of the input it has received on the new rules, and will provide time for plans and service providers to take steps to comply with any changes made to the rules as a result of this review.

February 14, 2011

ERISA-Third Circuit Upholds Denial Of Claim For Dependent Accidental Death Benefits

In Bicknell v. Lockheed Martin Group Benefits Plan, No. 10-1212 (3rd Cir. 2011) (Non-precedential Opinion), the plaintiff was a participant in the Lockheed Group Benefits Plan, an employer-sponsored plan subject to ERISA (the "Plan"). As a Plan participant, the plaintiff purchased accidental death insurance covering his dependent children. This purchase was made online. The insurer was defendant Prudential Insurance Company of America ("Prudential"). Later, the plaintiff's son, Michael, died in a car accident at the age of twenty seven. Following Michael's death, the plaintiff filed a claim for the accidental death benefit from the Plan. Prudential denied the claim because, as a result of his age, Michael was ineligible for coverage under the Plan. The plaintiff then filed this suit under ERISA. The district court granted summary judgment to the defendants, thereby denying the plaintiff's benefit claim. The plaintiff appealed, and the Third Circuit Court affirmed the district court's decision.

Two issues stand out. First, the plaintiff alleged that Michael's coverage under the Plan could not be denied, because certain employees of his employer had advised him that, if the coverage of any dependent could be purchased online-and here it was-then the dependent is eligible for coverage. To this, the Court said that the plain language of the documents for the Plan, including the summary plan description, clearly indicate that coverage of a dependent child for accidental death benefits under the Plan ends prior to age 27. Therefore, Michael was ineligible for this coverage at the time of his death. Under ERISA, the written terms of the plan documents control and cannot be modified or superseded by the employer's oral statements. The participants in an ERISA plan have a duty to inform themselves of the details provided in their plans.

Second, the plaintiff argued that he is entitled to convert the dependent coverage, provided by the Plan while Michael was eligible for benefits, to an individual policy retroactively. This obtains because Prudential failed to provide him with notice of the conversion privilege as required by the Plan. The plaintiff argued that the following language in the governing Group Life Contract creates a notice requirement:

"The individual contract must be applied for and the first premium paid by the later of: (1) the thirty-first day after you cease to be insured for [an accidental death benefit] with respect to the dependent; and (2) the fifteenth day after you have been given written notice of the conversion privilege. But, in no event may you convert the insurance to an individual contract if you do not apply for the contract and pay the first premium prior to the ninety-second day after you cease to be insured for [an accidental death benefit] with respect to the dependent."


To this, the Court said that the above language does not affirmatively obligate Prudential to provide separate written notice of the conversion privilege. This language alerted the plaintiff to the fact that he needed to apply to convert coverage to the individual policy within a limited period of time after his dependent child became ineligible for coverage under the Plan. It is the only notice required by ERISA. Again, participants in a plan subject to ERISA have a duty to inform themselves of the details provided in their plans.

February 13, 2011

ERISA-DOL Issues An Advisory Opinion Discussing Whether A Domestic Relations Order Is A QDRO

In Advisory Opinion 2011-03A, the Department of Labor (the "DOL") discussed whether a domestic relations order maybe treated as a "qualified domestic relations order" or "QDRO". In doing so, the DOL addressed the more specific question of whether a domestic relations order issued by a Family Court of the Navajo Nation, a federally-recognized Native American tribe, may be treated as a QDRO. The DOL said the following.

Section 206(d) of ERISA sets out ERISA's anti-alienation rule. Section 206(d)(1) generally requires that plan benefits may not be assigned or alienated. Section 206(d)(3)(A) states that section 206(d)(1) applies to an assignment or alienation of benefits pursuant to a domestic relations order, unless the order is determined to be a QDRO. Section 206(d)(3)(B)(i) generally defines a "QDRO" as being a domestic relations order "which creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan". In turn, section 206(d)(3)(B)(ii) generally defines a "domestic relations order" as being "any judgment, decree, or order which - (I) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant, and (II) is made pursuant to a State domestic relations law." Section 3(10) of ERISA defines the term "State" as any State of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, American Samoa, Guam, Wake Island, and the Canal Zone.

Nothing in ERISA requires that a domestic relations order be issued by a State court. Rather, the DOL has previously concluded that a division of marital property in accordance with the proper final order of any State authority, which is recognized within the State's jurisdiction as being empowered to achieve such a division of property pursuant to State domestic relations law, would be considered a "judgment, decree, or order" for purposes of ERISA section 206(d)(3)(B)(ii). Section 3(10) of ERISA, and Federal law in general, does not treat Indian tribes as States, or as agencies or instrumentalities of States. In the DOL's view, a tribal court order may constitute a "judgment, decree or order . . . made pursuant to State domestic relations law" for purposes of ERISA section 206(d)(3)(B)(ii), if it is treated or recognized as such by the law of a State that could issue a valid domestic relations order with respect to the participant and alternate payee in question. In this case, however, the domestic relations order in question does not satisfy ERISA section 206(d)(3)(B)(ii), and therefore is not a QDRO, since the law of the applicable State-New Mexico- does not recognize or treat orders of the Family Court of the Navajo Nation as orders issued pursuant to New Mexico state domestic relations law.

February 12, 2011

Employee Benefits-IRS Says Breast Pumps And Supplies That Assist Lactation Are Medical Expenses

In Announcement 2011-14, the Internal Revenue Service ("IRS") said that breast pumps and supplies that assist lactation are medical care, within the meaning of section 213(d) of the Internal Revenue Code (the "Code"). This obtains because (like obstetric care) those items serve the purpose of affecting a structure or function of the body of a lactating women.

This announcement means the following:

--if the requirements of section 213(a) of the Code are met (e.g., total medical expenses exceed 7.5% of AGI), the costs of breast pumps and supplies that assist lactation are deductible medical expenses; and

--amounts reimbursed for these costs by a flexible spending arrangement, Archer medical savings account, health reimbursement arrangement or health savings account are not taxable.

February 11, 2011

ERISA-Fourth Circuit Upholds District Court's Grant of Authority To An Independent Fiduciary To Terminate A Pension Plan

Can a court grant a plan fiduciary the authority to terminate a pension plan? The Fourth Circuit says yes.

In Solis v. Malkani, Nos. 09-1383, 10-1061 (4th Cir. 2011) (unpublished opinion), the defendants had asked the Court to review, among other matters, whether the district court abused its discretion by granting an independent fiduciary the authority to terminate a pension plan (in this case a defined contribution, profit sharing plan). An independent fiduciary had been appointed to administer the pension plan, since the plan had a history of mismanagement and having its funds misused. The Court answered the question as follows:

The Court said that a federal court enforcing fiduciary obligations under ERISA is given broad equitable powers to implement its remedial decrees. These necessarily include the power to order the termination of a plan. The Court further noted that § 1109(a) of ERISA provides that any person who is a fiduciary with respect to a plan, and who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by ERISA, is subject to such equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary. 29 U.S.C. § 1109(a). In cases initiated by the Secretary of Labor (as here), a court is further authorized to provide other "appropriate relief" where necessary. 29 U.S.C. §§ 1132(a)(2), 1132(a)(5). Thus, the Court concluded that, in certain narrow circumstances, it is wholly appropriate for a court to provide an independent fiduciary with the power to terminate a plan.

Further, said the Court, in light of the deteriorating state of the pension plan in question, in this case the district court acted within its discretion when it provided the independent fiduciary with authority to terminate the plan. Again, the plan has a history of mismanagement and repeated attempts to misappropriate its funds. The pension plan is now almost completely dormant, as only seven of its original 309 participants remain active. In the event that the pension plan is formally terminated, ERISA requires that participants have their contributions returned, with any surplus assets allocated by the independent fiduciary to the appropriate participants.

February 10, 2011

ERISA-Fifth Circuit Upholds Denial Of Claim For Reinstatement Of Disability Benefits, Despite Doc's Change Of Opinion

In Crowell v. CIGNA Group Insurance, No. 09-51086 (5th Circuit 2011), the plaintiff had been covered under his employer's long-term disability plan (the "Plan"). The Plan was insured by defendant Life Insurance Company of North America ("LINA"), and LINA had been appointed a fiduciary of the Plan, with the full discretion to decide benefit claims, and to interpret the Plan. The plaintiff had been receiving long-term disability benefits under the Plan due to heart problems. However, LINA decided to discontinue the benefits, and the plaintiff brought suit under ERISA to have the benefits reinstated. The district court granted summary judgment for LINA, and the plaintiff appealed.

The Fifth Circuit affirmed the district court's ruling. Applying a deferential review to LINA's decision to discontinue the benefits (due to LINA's discretionary authority to decide claims) , the Court found that LINA's decision was based on substantial evidence. This evidence outweighed any potential conflict of interest from LINA's serving as claims decider and benefit payer.

One key issue: During 2005, the plaintiff's cardiologist, Dr. Rodney Brown, provided LINA with information that the plaintiff's condition had improved and that he would be able to return to work without restriction starting late in 2005. In early December 2005, LINA received more information from Dr. Brown, confirming his earlier prognosis that Crowell could return to unrestricted work in late 2005. However, in early January 2006, Dr. Brown sent another letter to LINA, in which he expressed a contrary opinion. According to the January letter, the plaintiff could not return to his original position. Dr. Brown did not provide any medical records, evaluations, examinations, or tests in support of his contrary opinion. Therefore, since it appears that the contrary opinion was not based on any new examination or evaluation, the Court disregarded the contrary opinion in the January 2006 letter. Additionally, the Court noted that the January 2006 letter did indicate that the plaintiff was capable of working enough hours per week so that he was not considered disabled under the Plan. This afforded a second reason for determining that this letter does not support plaintiff's claim.


February 9, 2011

ERISA-Eleventh Circuit Upholds Denial Of Claim For Out-Of-Network Health Care Benefits

In Lieberman v. United Healthcare Insurance Co., Nos. 10-12942, 10-13222 (11th Circuit 2011) (unpublished opinion), in a suit brought under ERISA, the plaintiff had alleged that the defendant, United Healthcare Insurance Company ("United"), inappropriately denied her claim for out-of-network health care benefits under her employer's group health insurance plan (the "Plan"). The district court dismissed the plaintiff's complaint, and the plaintiff appealed.

At issue was the method United used to determine the reimbursement due from the Plan, for the cost of a medical procedure received by the plaintiff's daughter from a doctor who had not agreed to join United's provider network, or to accept the discounted rates United pays network providers (that is, from an out-of-network provider). Although the Plan permits the plaintiff to obtain reimbursement for the cost of health care services she and her family receives from an out-of-network provider, the plaintiff's Certificate of Coverage specifically grants United the discretion to choose from among four specified methods for determining the amount of the reimbursement.

The plaintiff stated that United improperly and arbitrarily picked a method that operated to minimize its financial responsibility. As a result, she was left financially responsible for $9,763.16 of a $10,000 service, so that, in effect, her benefit claim had been denied. However, the Court found that the Certificate expressly affords United the discretion to calculate reimbursement based on the method it selected -here, a method based on a percentage of the relevant Medicare rate. United had no obligation to select an alternative method that would have resulted in a higher reimbursement for the plaintiff. Therefore, the Court affirmed the district court's decision to dismiss the plaintiff's case.

February 7, 2011

ERISA-District Court Finds That The Augsburg Fortress Publishers Pension Plan Is A Church Plan, And Therefore Not Subject To ERISA

In Thorkelson v. Publishing House of the Evangelical Lutheran Church in America, d/b/a Augsburg Fortress Publishers, No. 10-1712 (D. Minn. 2011), the plaintiffs sought to represent a class of individuals that were participants of the Retirement Plan for Employees of Augsburg Fortress Publishers, Publishing House of the ELCA ("the Plan"). The Plan had been underfunded for many years, and was terminated in 2010. In the complaint, the plaintiffs asserted a number of claims, arising out of the underfunding, against the defendants under ERISA, as well as under state law, generally for breach of duty, promissory estoppel, and consumer fraud.

One issue faced by the Court is whether the Plan is a "church plan" for ERISA purposes. If it is a church plan, then ERISA will not apply, and only the state law claims may be reviewed. If it is not, then ERISA applies, and the state law claims are preempted. In analyzing this issue, the Court noted that, under ERISA, a "church plan" includes a plan established and maintained by a church, or by a convention/ association of churches (for convenience, below, a church, or a convention/association of churches, is referred to as a "church"). Further, under section 3(33)(C)(i) of ERISA, a "church plan" also includes one that is maintained by an organization, the principal purpose of which is the administration or funding of the plan for the provision of benefits for the employees of a church, if such organization is controlled by or associated with a church. Under section 3(33)(C)(ii)(II) of ERISA, the employees of a church include employees of an organization, which is exempt from tax under section 501 of the Internal Revenue Code, and which is controlled by or associated with a church.

The Court found that the Plan must be treated as a church plan. Augsburg Fortress Publishers ("AFP") is tax-exempt under section 501 of the Code, and is controlled by and associated with a church, namely, the Evangelical Lutheran Church in America (or "ELCA"). The Plan is sponsored by AFP, and is administered by AFP's Pension Committee. The Pension Committee's sole purpose is to administer the Plan. As such, based on the above provisions of ERISA, the Plan is a church plan, which is exempt from ERISA. Accordingly, the Court dismissed all claims based on ERISA. However, (other than a claim based on the Minnesota Consumer Fraud Act, which the Court dismissed) the Court held that the plaintiffs alleged sufficient facts to withstand dismissal of the state law claims.

One Thought: In many cases, plaintiffs would rather have ERISA not apply. Why? Because if ERISA does apply, the state law claims would be preempted, and state law often provides much better remedies for plaintiffs than ERISA.


February 6, 2011

ERISA-DOL Issues Advisory Opinion On Whether A MEWA Is Fully Insured

In Advisory Opinion 2011-01A (the "Opinion"), the Department of Labor (the "DOL") expressed its view on whether the Custom Rail Employer Welfare Trust Fund (the "Fund") is a "multiple employer welfare arrangement" (a "MEWA"), within the meaning of ERISA section 3(40), that is "fully insured" within the meaning of ERISA section 514(b)(6).

Based on Advisory Opinion 2007-06A, the Fund is a MEWA. But is it fully insured? And what is at stake here? Generally, in the case of a welfare benefit plan-which the Fund is assumed to be-ERISA preempts the application of all State law. However, for a MEWA like the Fund, the following exceptions apply. If the MEWA is not fully insured, then under ERISA section 514(b)(6)(A)(ii), any State law that regulates insurance may apply to the MEWA, to the extent that such law is not inconsistent with ERISA. However, if the MEWA is fully insured, then under ERISA section 514(b)(6)(A)(i), only those State laws that regulate the maintenance of specified contribution and reserve levels may apply to the MEWA. Thus, a fully insured MEWA could be subject to significantly less State regulation than a non-fully insured MEWA.

ERISA section 514(b)(6)(D) provides that a MEWA is not fully insured, unless all of the benefits it offers or provides are guaranteed under a contract or policy of insurance issued by an insurance company that is "qualified to conduct business in a State." In this case, as discussed in Advisory Opinion 2007-06A, the Fund had purchased a "Certificate of Insurance" (the " Original Certificate") from certain Underwriters at Lloyd's, London (the "Underwriters"). However, the Original Certificate did not unconditionally guarantee payment of all benefits due to participants under the Fund. Under the Original Certificate, the Underwriters' liability for paying benefits was conditioned upon, among other things:

--the Fund maintaining a "terminal fund" to pay benefits;

--the Fund failing to pay a participant's claim for benefits within thirty days of determining that the claim was payable; and

--the Fund assigning to the participant its right to recover from the Underwriters specific "incurred claims" that were not paid within a thirty-day period.

Since the Original Certificate did not unconditionally guarantee payment of all benefits due from the Fund, as concluded in Advisory Opinion 2007-06A, that certificate did not fully insure the Fund .

The Fund later obtained a Revised Certificate, presumably from the same source as the Original Certificate. The Revised Certificate did correct some of the problems with the Original Certificate. However, even under the Revised Certificate, the Fund, and not any Underwriter, retained" first-in-line" responsibility for all "incurred claims" of participants and beneficiaries. Here, the Underwriters could not assume this first-in-line responsibility, since they were not licensed to sell direct group health insurance to the Fund or its participants. As such, the Opinion concludes that, even under the Revised Certificate, the Fund is not fully insured. The Opinion referred to Advisory Opinion 93-11A, which discussed a fully insured MEWA.

The Opinion further points out that, to be considered "fully insured" within the meaning of ERISA section 514(b)(6), a MEWA-which like the Fund offers group health benefits- must obtain an insurance policy from an insurer which is licensed or admitted to conduct business under a State's group health insurance laws, and this policy must be regulated under such laws. The Revised Certificate does not meet this requirement, with the result-again- that the Fund is not fully insured.

February 3, 2011

Employment-First Circuit Holds That A Payroll Service Provider Was Not Responsible For Overpayment Of Salary

Many employers outsource administrative functions, such as managing payroll and handling employee benefits. As such, this case should be kept in mind.

In Ophthalmic Surgeons, Ltd. v. Paychex, Inc., No. 09-2291 (1st Circuit 2011), the defendant, Paychex, Inc. ("Paychex"), had provided payroll services to the plaintiff, Ophthalmic Surgeons, Ltd.("OSL"). OSL had brought suit against Paychex, alleging that Paychex had breached its obligations under a written agreement between OSL and Paychex (the "Agreement") when, over a period of six years (and without objection from OSL), it paid an OSL employee $233,159 more than her salary. The district court granted summary judgment in favor of Paychex, and OSL appealed.

In general, Paychex handled its duties by withdrawing from a client's bank account-to which the client made periodic deposits- the amounts needed to meet the client's payroll, and then remitting the amounts withdrawn to the client's employees as their pay. From the mid-1990s until her termination in 2006, Carleen Connor handled payroll for OSL, and was its office manager and designated payroll contact. From 2001 through 2006, in effect, Connor asked Paychex to pay her more than her salary. Paychex sent to OSL reports indicating all payments made, but these reports did not get passed Connor while she was the payroll contact. OSL discovered the excess payments when another employee took over Connor's duties. OSL then brought suit against Paychex to recover the excesss payments, on the theory of breach of contract.

The issue in this case: what did the Agreement between OSL and Paychex provide as to Paychex's liability for the excess payments? The Court applied New York law to interpret the Agreement. The Court said that the relevent language in the Agreement is that "Paychex is authorized to draw from Client's bank account as specified by Client, such amounts as are necessary to pay its employees." This language clearly and unambiguously establishes that the Client-here OSL- has to specify the amounts that Paychex is authorized to withdraw from the Client's bank account. The second operative clause-"such amounts as are necessary to pay its employees"- modifies the first clause. It creates a limitation on the amount of money that Paychex is authorized to withdraw from the Client's account. It does not create an affirmative responsibility for Paychex to verify the amounts the Client specifies. Thus, it was OSL's responsibility to specify the amounts that Paychex was authorized to withdraw from the bank account.

Further, Connor had the apparent authority to ask Paychex for payroll withdrawals, and Paychex could rely on this authority to issue the excess payments. This obtains because OSL put Connor in a position from which it appeared that she had the power to authorize the excess payments, and OSL never objected to the payments that Connor authorized.

Based on the above, the Court affirmed the district court's summary judgment in favor of Paychex.