April 2011 Archives

April 29, 2011

ERISA-Second Circuit Court Rules That Over-Funded Pension Plan Was Transferred To Spun-Off Employer

In Lockheed Martin Corporation v. Retail Holdings, N.V., No. 09-2766-cv (2nd Cir. 2011), the dispute revolved around the interpretation of a 1986 Reorganization and Distribution Agreement (the "Spin-Off Agreement") between the Appellee's predecessor, The Singer Company ("Old Singer"), and Appellant's predecessor, SSMC Inc. ("New Singer"). The issue is whether the Spin-Off Agreement transferred a particular pension plan, the Executive Office Foreign Service Retirement Plan (the "Plan"), from Old Singer to New Singer. The Plan is overfunded, and the party with legal rights to it will gain control of approximately $6 million in cash and stock. The district court, relying on extrinsic evidence, concluded that the Spin-Off Agreement did not transfer the Plan to New Singer, and accordingly ruled that Old Singer is entitled to the disputed assets. The Second Circuit Court found that the Spin-Off Agreement has only one reasonable interpretation, which is that the Plan was transferred to New Singer. Accordingly, the Second Circuit Court reversed the district court's decision.

Prior to 1986, Old Singer had decided to spin off its sewing and furniture businesses. Old Singer carried out this plan in 1986 by executing the Spin-Off Agreement with New Singer (then a subsidiary of Old Singer known as SSMC Inc.). Pursuant to the Agreement, Old Singer was split into two entities: New Singer, which acquired the sewing and furniture businesses, and Old Singer, which retained the company's aerospace technology businesses. But what did the Spin-Off Agreement do with the Plan?

In analyzing the Spin-Off Agreement, the Second Circuit Court concluded that the Plan was covered by Sections 2.01 and 4.02 of the Spin-Off Agreement. Those Sections have expansive asset and liability transfer provisions, which transferred "all" of Old Singer's sewing-related assets and liabilities to New Singer. The provisions of those Sections included Old Singer's rights and obligations under the Plan. The Spin-Off Agreement broadly include in the transferred assets "all of the assets of the sewing and related products and furniture businesses of [Old] Singer." Under the Plan, any residual Plan surplus in excess of pension liabilities would revert to Old Singer at termination, in accordance with and subject to ERISA § 4044(d). The Plan pertained to Old Singer's sewing businesses. Thus, Old Singer's right under the Plan to any residual surplus are included in the transferred assets under Section 2.01. Similarly, the obligations owed to participants under the Plan are included in "liabilities." That term is defined broadly in the Spin-Off Agreement to include "any and all debts, liabilities and obligations ... including, without limitation, those arising under any ... contract, commitment or undertaking." Thus, Old Singer's obligations under the Plan were covered by Section 4.02, which transferred "all" sewing-related liabilities to New Singer. Accordingly, the Court concluded that Sections 2.01 and 4.02 of the Spin-Off Agreement served to transfer the Plan to New Singer.

The Court referred to Section 8.02 of the Spin-Off Agreement. That Section enumerates six pension plans that would be fully or partially transferred to New Singer, and specifies certain actions that were to be taken with respect to those plans. The Plan at issue was not among them. However, the Court said that nothing in Section 8.02 indicates that it was intended to contain an exhaustive list of the plans to be transferred. The Court also ruled that the provisions in Sections 2.01 and 4.02, under which the Plan was transferred to New Singer, are clear and unambiguous on this point. Since there is no ambiguity with respect to the contract, the Court ruled that it was error for the district court to consider extrinsic evidence to interpret the Spin-Off Agreement.

April 28, 2011

ERISA: Mullins Again: Court Upholds Penalty Under ERISA For Failure To Furnish SPD On Request

The plaintiff in Mullins v. AT&T Corporation (see yesterday's blog) did not go home empty handed. The Fourth Circuit Court upheld the lower court's decision to impose a penalty-in the amount of $18,400-on the administrator for failing to furnish a summary plan description ("SPD") on request. Here is what happened:

In February 2001, the plaintiff's former counsel requested copies of the "AT&T [LTD] policy . . . and a copy of all other plan documents concerning that [LTD] policy." Two months later, AT&T produced copies of the LTD plan and AT&T/CGLIC Agreement, but did not include a copy of the SPD. In March 2003, after litigation was initiated by the plaintiff's new counsel, AT&T produced a copy of the SPD to the plaintiff.

First, the Court treated the February 2001 request as being a request for the SPD. Next, the Court noted that, under section 502(c)(1) of ERISA, the district court may, in its discretion, impose a penalty of up to $110 per day on a plan administrator who fails to furnish a plan document upon request by a participant. Two factors generally guide the district court's discretion: (1) prejudice to the participant and (2) the nature of the administrator's conduct in responding to the participant's request for the plan document.

In this case, the district court did not find that the participant was prejudiced by the administrator's failure to produce the SPD. However, the Fourth Circuit Court said that, while prejudice is a pertinent factor, it is not a prerequisite for imposing the penalty. The district court did find that, while the administrator had not acted in bad faith, it had failed to produce the SPD upon request, in violation of ERISA. The Fourth Circuit Court said that this failure is sufficient to impose the penalty, since the penalty was intended to punish noncompliance with ERISA. Finally, the district court had ruled that the maximum penalty of $110 per day ($100 in the case) was unwarranted, but that a penalty of $25 per day would be appropriate. The Fourth Circuit Court agreed, and upheld the imposition of the $18,400 penalty.


April 27, 2011

ERISA-Fourth Circuit Upholds The Administrator's Decision That The Plaintiff Is Not Disabled Within The Meaning Of The Plan

In Mullins v. AT &T Corporation, Nos. 04-2135, 04-2136, 07-1717, 10-2010 (4th Cir. 2011 ) (Unpublished Opinion), the plaintiff, Margaret Mullins ("Mullins"), had appealed the district court's grant of summary judgment against her, on her claim for disability benefits. The benefits would be payable under a long-term disability plan (the "Plan"), which was self-funded by Mullins' employer, AT&T Corporation ("AT&T"), administered by Connecticut General Life Insurance Company ("CGLIC"), and governed by ERISA.

Under the Plan, an employee is generally considered disabled if, in the sole opinion of CGLIC, the employee is determined to be incapable of performing the requirements of any job for any employer (including non-AT&T employment), for which the individual is qualified or may reasonably become qualified by training, education or experience, other than a job that pays less than 50 percent of the employee's annual base pay. In April 1998, Mullins was diagnosed with bilateral carpal tunnel syndrome ("CTS"), which caused her to experience sensitivity and pain in her hands. Mullins also had diabetes, which was thought to aggravate her CTS condition. In September 1999, Mullins applied for disability benefits under the Plan, claiming that the pain and weakness in her hands rendered her "incapable of performing the requirements of any job for any employer" under the terms of the Plan. CGLIC denied the application, and Mullins filed this suit under ERISA. The issue for the Court: was Mullins disabled within the meaning of the Plan?

In analyzing the case, the Court stated that, since the Plan confers discretion on the administrator to interpret its provisions and issue a determination on a claim for benefits, the Court must review CGLIC's denial of Mullins' claim for benefits under the abuse-of-discretion standard. As such, CGLIC's denial will be upheld if it is "reasonable", that is, if it is the result of a deliberate, principled reasoning process and it is supported by substantial evidence. The Court concluded that CGLIC's decision was reasonable. Mullins had been seen by two surgeons and a neurologist for the pain and sensitivity in her hands. The medical opinions of these physicians conflicted, both as to her specific diagnosis as well as to her functional capacity to perform work. It was CGLIC's responsibility, and within its discretion, to resolve this conflict. CGLIC had reasonably considered and relied upon the opinions of two of Mullins' treating physicians, as well as the results of a functional capacity examination, which indicated that Mullins was capable of performing sedentary work within her limitations. CGLIC further determined that there were actual jobs available in the relevant market which Mullins could perform within her limitations and earn at least the 50% minimum required by the Plan. Based on the foregoing, CGLIC concluded that Mullins had failed to prove that she was "incapable of performing the requirements of any job for any employer" for which she was or could become reasonably qualified, and therefore Mullins was not disabled within the meaning of the Plan. The Court concluded that CGLIC's determination was clearly supported by substantial evidence in the administrative record, and it affirmed the district court's summary judgment against Mullins.


April 25, 2011

ERISA-First Circuit Finds That An Administrator's Interpretation Of The Term "Earnings" In A Long-Term Disability Plan Subject To ERISA Is Unreasonable, And Overturns Its Decision To Stop Benefits

In D&H Therapy Associates v. Boston Mutual Life Insurance, Nos. 10-1423, 10-1494 (1st Cir. 2011), the plaintiff, D & H Therapy Associates ("D & H"), acquired a long-term disability plan (the "Plan") from the defendant, Boston Mutual Life Insurance ("Boston Mutual"), in 2000. The Plan is subject to ERISA. Under the Plan, employees who suffer specified reductions in monthly earnings due to long-term disability are eligible for benefits. Dolan is both a part-owner and an employee of D&H. In 2001, she became physically unable to continue some of her tasks as an employee. This prompted a reduction by D & H in her monthly W-2 earnings. In 2002, she began receiving long-term disability ("LTD") benefits under the Plan. After a 2006 audit, however, Boston Mutual terminated the benefits and demanded Dolan return past payments. It told Dolan that she had failed to account for her non-salary income, including earnings from her ownership stake in D&H. Taking those amounts into account, Dolan's monthly earnings had been (and continue to be) too high for her to receive ("LTD") benefits under the Plan.

Dolan argued, among other things, that the Plan defines "earnings" as W-2 income, so that the non-salary income is not relevant to the determination of whether she is entitled to the LTD benefits. Boston Mutual counterclaimed that, under the Plan, it is entitled to reimbursement of the $163,661.57 it paid to Dolan as LTD benefits.

In analyzing the case, the Court said that, since the Plan gave Boston Mutual authority to determine benefit eligibility and construe its terms, Boston Mutual's decision to terminate Dolan's benefits is entitled to a deferential review. However, the Court found that Boston Mutual's interpretation of the Plan-to include non-salary income in "earnings"- was very unreasonable. This obtained because the interpretation was not consistent with how the term "earnings" was used in the Plan, particularly considering certain other definitions. Thus, the Court found that Boston Mutual's decision to terminate Dolan's benefits cannot be upheld, even under the deferential review. The Court ruled that Dolan is allowed to continue to receive LTD benefits from the Plan, and it denied Boston Mutual's claim for reimbursement for past payments.

April 22, 2011

ERISA-N.J. District Court Rules That In The Absence Of An Assignment Of Benefits, There Is No Complete Preemption By ERISA And No Removal To Federal Court

The question of whether a claim is subject to "complete preemption" by ERISA-making the case removable from state to federal court-has come up a lot recently. Here is the latest:

In Advanced Surgery Center v. Magnacare, No. 10-3778 (MLC) (D. N.J. 2011), the plaintiff, a medical provider (the "Plaintiff"), had brought an action in state court to recover $14,430 for services provided to a participant (the "Participant") in an employee benefit plan (the "Plan"). The Plaintiff alleged that the Participant had issued an assignment of benefits to the Plaintiff, which assigned all rights and interests she has to receive medical care and payment from the Plan. The defendants sought to remove the case to federal district court. However, the Court raised the following question: is the Plaintiff's claim completely preempted by ERISA so that removal is proper? The Court indicated that the party requesting removal-the defendants here- has the burden of proving complete preemption.

The Court said that an assignment of benefits will be treated as completely preempted by ERISA when the assignment is shown, by the party requesting removal, to concern the right of a medical provider to payment or a participant's eligibility for coverage under a plan, and not the amount of a payment sought by a medical provider. This showing has been made by the defendants, since they offered evidence the Plan did not consider the Plaintiff to be eligible for coverage. However, for complete preemption to obtain, an actual document containing an assignment of benefits must be produced by the party requesting removal. The Court said that the defendants did not do this, so there is no complete preemption and no removal of the case to the federal district court.


April 21, 2011

ERISA-Tenth Circuit Determines That Plaintiff Has No Standing To Bring Suit Under ERISA, So That His Claim Cannot Be Removed To Federal Court

In Hansen v. Harper Excavating, Inc., No. 08-4089 (10th Cir. 2011), the plaintiff, Jeffery Hansen ("Hansen"), had worked for the defendant, Harper Excavating, Inc. ("Harper"), for six months beginning in 2003. During this time, he attempted to enroll in Harper's health insurance plan (the "Plan"). The Plan is subject to ERISA. However, unknown to Hansen, Harper never enrolled him in the Plan, although it did deduct Plan contributions from his paycheck. Shortly after he left the company, Hansen fell ill, and incurred thousands of dollars in medical expenses. The Plan did not pay these expenses, since Hansen was not enrolled in the Plan. Hansen sued Harper in federal court under ERISA, and won a substantial damages award. During discovery related to that suit, Hansen learned of other alleged behavior on the part of Harper that led him to file a lawsuit against Harper based entirely on state law claims (fraud, conversion, breach of contract, etc.). Harper removed that case to federal court. Hansen then made a request to remand the case back to state court. The question for the Tenth Circuit Court: should the request for remand be granted?

The Tenth Circuit Court explained that, under certain Supreme Court decisions, if an individual filing suit in state court could have brought his claim under ERISA § 502(a)(1)(B), and if there is no other independent legal duty that is implicated by the defendant's actions, then the individual's case is deemed to be completely pre-empted by ERISA. In the case of complete preemption, the case may be removed from state to federal court (with remand back to state court not available). ERISA § 502(a)(1)(B) generally authorizes a civil action by a "participant" to recover benefits, or to enforce his rights or clarify his rights to future benefits, under a plan.

Is Hansen a participant with standing to bring suit under ERISA § 502(a)(1)(B)? The Court said that this question must be answered at the time Hansen filed his complaint. At that time, he would have needed to fall into one of the following four categories: (1) an employee currently in covered employment; (2) an employee reasonably expected to be in covered employment; (3) a former employee with a reasonable expectation of returning to covered employment; or (4) a former employee with a colorable claim to vested benefits, that is, a former employee with a colorable claim that (a) he will prevail in a suit for benefits, or (b) his eligibility requirements will be fulfilled in the future. Hansen is in none of these categories. In particular, he does not meet category (4)(a) because he already prevailed in a suit for benefits. Therefore, the Court concluded that Hansen is not a participant with standing to bring suit under ERISA § 502(a)(1)(B). This means his claim is not completely preempted by ERISA, and his request for remand to state court must be granted.

Note on preemption: The doctrine of complete preemption, discussed in this case, is separate and apart from ERISA's preemption of state law found in Section 514(a) of ERISA. The complete preemption creates federal jurisdiction, while Section 514(a) preemption is a defense to a state law claim pertaining to an employee benefit plan.

April 20, 2011

ERISA-Second Circuit Finds A Dispute As To Plaintiff's Disability and Vacates Summary Judgment Against Her

In O'Hara v. National Union Fire Insurance Company of Pittsburgh, PA, No. 10-1433-cv (2nd Cir. 2011), the plaintiff, Patricia O'Hara ("O'Hara "), had sued the defendant, National Union Fire Insurance Company of Pittsburgh, PA ("National Union"), under ERISA for disability benefits. The district court granted summary judgment in favor of National Union, and O'Hara appealed. National Union had argued that O'Hara is not entitled to disability benefits because she was present at work during the period of alleged disability. However, the Second Circuit Court found that O'Hara had presented evidence that she was disabled during all periods required by National Union's plan. Based on this evidence, a reasonable fact finder could conclude that O'Hara was entitled to disability benefits. The Second Circuit Court therefore vacated the district court's judgment and remanded the case for further proceedings.

O'Hara had been employed by ITT Flygt Corporation ("ITT"). There, she had participated in a voluntary disability plan which was established by ITT, and which was insured and administered by National Union ("the Plan" ). O'Hara fell and suffered a head injury in March, 2001. As a result of this injury, she began to have headaches. She was fired in June, 2002. In August, 2002, O'Hara was diagnosed as suffering from post traumatic headache disorder. In January, 2004, she submitted a claim for disability benefits under Plan. Her claim was denied, and this suit was filed.

In analyzing the case, the Court noted that, since the Plan did not vest the administrator with discretionary authority to determine eligibility for benefits, National Union's denial of benefits is not entitled to deference, and must be reviewed de novo. Further, the district court may not grant summary judgment if the record reveals a dispute over an issue of material fact.

Under the Plan, O'Hara is eligible for benefits if she is totally and permanently disabled from qualified work, and that disability commences within one year of an accident and continued for at least one year. National Union argues that O'Hara cannot meet the foregoing, because she had appeared at work from the time of her injury, until the date on which she was fired, about 15 months later. However, the Court said that there is no blanket rule that an employee cannot be disabled when she is present at work; one can be physically present at her place of employment but unable to work. If there is a genuine dispute about whether the employee was disabled, this question is for the fact finder. Here, there was such a dispute, since O'Hara had presented evidence from which a reasonable fact finder could conclude that she was disabled within the meaning of the Plan. For example, one doctor reported that O'Hara was totally disabled from qualified work within 1 year of the March, 2001 fall. O'Hara also presented evidence that her head injury prevented her from successfully interacting with others in a work environment, and that her headaches and memory disturbance prevented her from engaging in other work. Due to the dispute over material facts, the district court's grant of summary judgment is in error. Accordingly, the Court vacated the summary judgment and remanded the case.

April 18, 2011

ERISA-7th Circuit Finds That Asset Sale Exception To Withdrawal Liability Applies, Despite Earlier Workforce Reductions

Central States, Southeast and Southwest Areas Pension Fund v. Georgia-Pacific LLC, No. 10-2489 (7th Cir. 2011) involved the application of ERISA's withdrawal liability rules. In 2004, the defendant, Georgia-Pacific LLC ("Georgia-Pacific"), sold its building-products division to BlueLinx Corp. ("BlueLinx") . After that sale, Georgia-Pacific no longer had any employees participating in the multiemployer Central States, Southeast and Southwest Areas Pension Fund ("the Plan"). Georgia-Pacific claimed it did not have any withdrawal liability to the Plan. It relied on 29 U.S.C. §1384(a)(1), which provides that an employer will not incur any withdrawal liability, when "solely because, as a result of a bona fide, arm's-length sale of assets to an unrelated party . . ., the [employer] ceases covered operations or ceases to have an obligation to contribute for such operations" and the buyer not only assumes liability for the contributions but also posts a bond to ensure payment. Under that provision, the employer is secondarily liable for the first five years of the buyer's payments. BlueLinx began contributing to the Plan and posted the bond, and Georgia-Pacific stood behind its obligations. Thus, it appeared that the requirements of §1384(a)(1) were met.

Nevertheless, the Plan claimed that Georgia Pacific owed about $5 million in withdrawal liability. Why? The Plan argued that the sale to BlueLinx is not "solely" responsible for the fact that Georgia-Pacific no longer contributes to the Plan. At the beginning of 1994, Georgia-Pacific had three divisions with employees on whose behalf Georgia-Pacific contributed to the Plan. During 1994 and 1995, Georgia-Pacific laid off workers in one of those divisions (its wood-pulp division), but not enough to incur a partial withdrawal under 29 U.S.C. §1385. In 1997, Georgia-Pacific closed some facilities in the second of those divisions (its building division) and laid off workers, this time incurring a partial withdrawal and a resulting liability in the amount of $81,585.62. Seven years later, Georgia-Pacific sold the third of those divisions (building-products) to BlueLinx. The aggregate reduction in employees participating in the Plan, attributable to the foregoing layoffs and sale, would constitute a complete withdrawal. According to the Plan, this complete withdrawal did not occur "solely because . . . [of an] arm's-length sale of assets to an unrelated party". The question for the Court: do the 1994, 1995 and 1997 layoffs (the "pre-sale layoffs") cause Georgia-Pacific to fail the "solely" requirement in the asset sale exemption from withdrawal liability?

The Court said that the asset sale exception should be formulated as follows: If the sale had not occurred, everything else had remained the same, and no withdrawal liability would have accrued, then the sale to a buyer that continues the pension contributions does not entail withdrawal liability. Under this formulation, there is no withdrawal liability in this case. The pre-sale layoffs are disregarded in determining whether the "solely" requirement in the asset sale exception is met. Those layoffs would be counted only if Georgia-Pacific planned in advance to effect the layoffs and sale, since such a plan would allow it to evade the withdrawal liability requirements. The arbitrator in this case found that there was no such plan. The Court ruled that the asset sale exception of §1384(a)(1) allowed Georgia -Pacific to avoid the purported $5 million of withdrawal liability.

April 16, 2011

Employee Benefits-IRS Is Still Concerned About Tax Schemes Involving Retirement Plans

According to IR-2011-39 (4/7/11), the Internal Revenue Service (the "IRS") has included abusive retirement plans in the 2011 Dirty Dozen Tax Scams. Here is what the IRS said:

The IRS continues to find abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets at less than fair market value into IRAs, or into companies owned by their IRAs, to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.

April 15, 2011

ERISA-Seventh Circuit Rules That Investment In Employer Stock Resulted In A Breach of Fiduciary Duty Under ERISA And Liability For Damages; Still No Formal Adoption Of The Moench Presumption

In Peabody v. Davis, Nos. 09-3428, 09-3452, 09-3497, 10-1851, 10-2079, 10-2091 (7th Cir. 2011), the defendants were the Rock Island Corporation, its subsidiary, its retirement savings plan which is subject to ERISA (the "Plan"), and the Plan's trustees, Andrew Davis and Robyn Kole (together, the "Defendants"). The district court ruled, among other matters, that the Defendants had breached their fiduciary duty under ERISA with respect to the Plan. The Defendants appealed. The Seventh Circuit Court affirmed the district court's ruling of breach, and remanded the case to compute the amount of the damages.

The plaintiff, Jonathan Peabody ("Peabody"), was an employee of Rock Island Corporation ("RIC"). His account under the Plan had been invested in 835 shares of RIC stock (the "Shares"). When Peabody terminated his employment with RIC, RIC agreed to purchase all of the Shares. However, RIC's obligation to pay for the Shares was embodied in a loan from RIC to Peabody in the amount $292,250 plus interest. Later, RIC told Peabody that it could not make any payments under the loan, and went out of business. Peabody then filed suit against the Defendants, claiming (among other things) breach of fiduciary duty under ERISA. This claim took the form of an action on behalf of the Plan against the Defendants, as ERISA fiduciaries, under section 502(a)(2) of ERISA.

In analyzing the case, the Court said that the remedy in an action on a plan's behalf for breach of fiduciary duty is for the fiduciary to "make good" the loss to the plan, in accordance with section 409 of ERISA. The fiduciaries have a duty of prudence with respect to the Plan's investment in employer stock under section 404(a)(1)(B) of ERISA. This obtains even though the Plan is an eligible individual account plan, and, under section 404(a)(2) of ERISA, the Plan is therefore exempt from ERISA's diversification requirement (in section 404(a)(1)(C)) which would otherwise apply to the holding of employer stock.

The Court found that Defendants Davis and Kole breached their duty of prudence. The Plan did not require or encourage investment in RIC stock, so there was no barrier to divesting the Shares. A prudent investor would not have remained as heavily invested in RIC's stock as did Peabody's account under the Plan, given a sharp decline in profitability of RIC's business over the applicable period. In general, a widely-known and permanent change in the regulatory environment had undermined RIC's core business model, and consequently the Shares became an imprudent investment. The Plan did not comply with section 404(c) of ERISA, so that provision's safe harbor for fiduciaries is not available here. The breach of duty obtains even though Peabody initially agreed to the investment of his Plan account in the Shares. The Court noted that the loan to Peabody constituted a prohibited transaction under section 406(a)(1)(B) of ERISA. However, neither Peabody nor the Plan suffered any loss as a result of this loan, so no separate damages result from the loan.

The Court continued by saying that damages resulted due to the breach of fiduciary duty. The Court remanded the case back to the district court to compute the amount of the damages. The Court provided some guidelines for this calculation, such as the assumptions that the divestment of the Shares had begun at the time that RIC's profitability began to decline sharply, and that the divestment had been carried out in an orderly way.

On the Moench Presumption: The Court referred to, but did not formally adopt for the Seventh Circuit, the Moench presumption. This presumption was formulated by the Third Circuit in Moench v. Robertson, 62 F. 3d 553 (3rd Cir. 1995). The presumption applies when a defined contribution retirement plan has invested in employer stock. In such cases, the presumption is that the plan's fiduciary has met the ERISA requirement of prudence when it has allowed the initial and continuing investment in employer stock by the plan. The Moench presumption has been adopted by the Fifth, Sixth and Ninth Circuits.

In this case, the Seventh Circuit said that Defendants Davis and Kole had breached their duty of prudence, even if the Court was using the Moench presumption. Thus, the Court did not need to adopt the presumption at this time. Practitioners are waiting to see if the Second Circuit will formally adopt the Moench presumption, particularly since it has been used by district courts in that circuit.

April 14, 2011

Employee Benefits-Eligibility Failure Of A 403(b) Plan Can Be Corrected Under The Voluntary Correction Program

Further to my blog of yesterday, the IRS had previously indicated, in Employee Plans News (2/11/11), that an eligibility failure of a 403(b) plan may be corrected under the Voluntary Correction Program ("VCP"). Here is what the IRS said:

If a retirement plan was intended to satisfy the requirements of Code §403(b) but was adopted or operated by a plan sponsor that is not, or has ceased to be, a tax-exempt organization described in Code §501(c)(3) or an educational organization described in Code §170(b)(1)(A)(ii), the plan may have an "eligibility failure". The failure can, however, be corrected under the VCP, as indicated in Revenue Procedure 2008-50.

To correct the failure, the plan sponsor must complete all parts of Appendix F, Streamlined VCP Submission, and Schedule 6, Employer Eligibility Failure (401(k) and 403(b) Plans only). For example, the sponsor must provide:

• the plan name, Employer Identification Number, and plan number information on each page of the submission;
• the year in which the sponsor ceased being eligible to adopt or operate a Code §403(b) plan; and
• a description of the proposed method of correction.

The plan sponsor must also include the correct amount of fees as indicated in the Appendix F instructions with the submission.


April 13, 2011

Employee Benefits-IRS Warns That Some 403(b) Plan Errors Are Not Eligible For Voluntary Correction Program

In Employee Plans News (March 23, 2011), the Internal Revenue Service (the "IRS") warned that some errors made in connection with 403(b) plans may not be corrected under the IRS' Voluntary Correction Program ("VCP"). Here is what the IRS said:

Recently, we have received several VCP submissions for 403(b) retirement plan failures that are currently ineligible for correction through VCP. Ineligible submissions include cases where:

-- the plan's written program did not satisfy the legal requirements under Code §403(b) and the 403(b) final regulations, or the plan failed to adopt a written plan program before December 31, 2009; or

-- the plan failed to operate according to its written program's terms.

We will return all VCP submissions (including fees) containing ineligible failures. An employer sponsoring a 403(b) plan may currently use VCP to correct employer eligibility and demographic failures, and the operational failures listed in Revenue Procedure 2008-50 §5.02(2)(a). We are in the process of updating Revenue Procedure 2008-50 to expand EPCRS to include post-December 31, 2008 failures.

April 12, 2011

ERISA-Second Circuit Upholds Lower Court's Interpretation Of Collective Bargaining Agreements and Funds' Policies To Require That Contributions Be Made

In New England Health Care Employees Welfare Fund v. Bidwell Care Center, LLC, No. 10-1859-cv (2nd Cir. 2011) (Summary Order), the lower court had awarded the plaintiffs damages under ERISA for delinquent contributions, and denied defendants' related counter-claim for alleged overpayments, to the plaintiffs. The plaintiffs are pension and welfare funds (the "Funds"). The defendants appealed.

In this case, the applicable collective bargaining agreements ("CBAs") require the defendants to contribute to the Funds a certain percentage "of the gross payroll for [e]mployees in the bargaining unit who regularly work an average of twenty (20) or more hours per week.. . . Said contributions shall be calculated in accordance with the Fund's contribution policies." The defendants claim that the magistrate judge erred in failing to recognize the plain meaning of "work . . . hours"-used to determine whether contributions will be made on a particular employee's behalf-as hours in which the employee was present at the worksite, instead deeming the term ambiguous and construing it, on the total record, to mean all hours for which an employee was paid, including vacation leave and sick time.

In analyzing the case, the Second Circuit Court said that the CBAs do not explain how employers should determine who regularly works an average of twenty hours or more per week. Instead, the CBAs explicitly instruct that the calculations be made in accordance with the Funds' contribution policies. Those policies indicate that "work... hours" means "hours paid". Also, the meaning of "work... hours" is ambiguous, so the magistrate judge may interpret that term in accordance with the evidence in the record, including extrinsic evidence. As such, the Court affirmed the lower court's decision.

April 11, 2011

ERISA-N.J. District Court Rules That State Law Claims For Fraud and Misrepresentation Are Not Preempted By ERISA

In Aetna Health Inc. v. Health Goals Chiropractic Center, Inc., No. 10-5216-NLH-JS (D. NJ 2011), Defendant Kathleen Baumgardner, D.C. (hereinafter "Dr. Baumgardner") is a licensed chiropractor and officer of Defendant Health Goals Chiropractic Center, Inc. (collectively the "Defendants"). Plaintiffs Aetna Heath Inc. and Aetna Life Insurance Co. (collectively the "Plaintiffs") are health care benefits and health insurance providers. At all relevant times, Dr. Baumgardner was an in-network healthcare provider with the Plaintiffs. As an in-network provider, she was obligated to accept discounted rates when she provided professional chiropractic services to individuals covered by the Plaintiffs' insurance plans. Under the terms of the in-network contract, the Plaintiffs were required to pay Dr. Baumgardner for all services deemed medically necessary or otherwise covered by the plans.

The Plaintiffs alleged that the Defendants entered into a scheme to defraud the Plaintiffs, and submitted insurance claims and statements to Plaintiffs for services which, among other things: (i) contained knowingly false and misleading information, (ii) misrepresented the services performed and (iii) failed to disclose information which affected their right to payment. According to the Plaintiffs, the claims submitted included excessive, phantom and duplicate charges. As a result of this alleged fraud, the Plaintiffs allege that they paid Defendants $1,078,079.42 to which they were not entitled. The Plaintiffs filed suit in the Superior Court of New Jersey. The Plaintiffs' complaint relies exclusively on state law and alleges that the Defendants committed common law fraud, statutory fraud and negligent misrepresentation of their services when they submitted their claims to the Plaintiffs. Later, the Defendants removed the case to the New Jersey District Court, alleging that the Plaintiffs' state claims were preempted by ERISA. Are they right? If not, removal is not proper.

In analyzing the case, the Court said that section 502(a) of ERISA, which embodies ERISA's civil enforcement provisions, is designed to create a comprehensive statute for the regulation of employee benefit plans. Consequently, a state law that either supplements, replicates or duplicates the ERISA enforcement remedy is preempted. The Third Circuit (in which the District Court lies) uses a two part test to determine whether section 502 of ERISA preempts a state law claim. Under this test, the Court continued, a defendant seeking removal must prove that: (1) the plaintiff could have originally brought the claim under section 502 and (2) no other legal duty supports the claim. The Plaintiffs did not meet prong (1), since they were not bringing a claim on behalf of any employee benefit plans or the participants therein. Further, the Plaintiffs did not meet prong (2), since an independent legal duty other than ERISA - namely, New Jersey's insurance fraud statute and its common law counterparts- governed the relationship between the Plaintiffs and the Defendants. As such, the Plaintiffs' state law claims are not preempted by ERISA, and the removal to District Court was not proper.

April 8, 2011

Employee Benefits-More Interest Points in FAQs VI On The Affordable Care Act

As noted in my blog of April 4, the EBSA has issued FAQs VI on the Affordable Care Act (the "Act"). These FAQs deal with the grandfather rules for group health care plans. Here are a few more interesting points from the new FAQs:

Value-Based Insurance Design. A previous FAQ contained an example which addressed the interaction of value-based insurance design ("VBID") and the no cost-sharing preventive care services requirements under the Act. In that example, a group health plan did not impose a copayment for colorectal cancer preventive services when performed in an in-network ambulatory surgery center. In contrast, the same preventive service provided at an in-network outpatient hospital setting generally required a $250 copayment, although the copayment was waived for individuals for whom it would be medically inappropriate to have the preventive service provided in the ambulatory setting. The FAQ indicated that this VBID did not cause the plan to fail to comply with the no cost-sharing preventive care requirements.

The example is now varied to be the following. Under the group health plan, similar preventive services are available both at an in-network ambulatory surgery center and at an in-network outpatient hospital setting, but currently no copayment is imposed for these services in either setting. This has been the case since March 23, 2010. This plan now wishes to adopt the VBID approach described in the above example, by imposing a $250 copayment for these preventive services only when performed in the in-network outpatient hospital setting, and with the same waiver of the copayment for any individuals for whom it would be medically inappropriate to have these preventive services provided in the ambulatory setting.

The FAQ states that the imposition of the $250 copayment would not be considered to exceed the thresholds described in the interim final regulations, and would not cause the plan to relinquish its grandfather status.

Retiree Health Coverage. A group health care plan covers both retirees and active employees. For retirees, the employer contributes $300 per year multiplied by the individual's years of service for the employer, capped at $10,000 per year. In this example, the employer is making contributions based on a formula. Accordingly, the plan will cease to be a grandfathered health plan if the employer decreases its contribution rate towards the cost of coverage by more than five percent below the contribution rate on March 23, 2010. If the formula does not change, the employer is not considered to have reduced its contribution rate, regardless of any increase in the total cost of coverage. However, if the dollar amount that is multiplied by years of service decreases by more than five percent (or if the $10,000 maximum employer contribution cap decreases by more than five percent), the plan will cease to be a grandfathered health care plan.

April 7, 2011

ERISA-Third Circuit Determines That An Employee Losing His Retirement Benefits Due To A Sale Of The Division In Which He Was Working Does Not Have A Claim Under Section 510 of ERISA

In Muth v. LSI Corporation, No. 10-2567 (3rd Cir. 2011) (Non-precedential Opinion), the defendant, LSI Corporation ("LSI"), discharged plaintiff, Edwin Muth ("Muth"), after nearly thirty years of employment. This termination resulted from LSI's decision to sell the division of its business in which Muth worked (the Mobile Products Group, or "MPG") to Infineon Technologies North America ("Infineon"). All MPG employees became Infineon employees on the day after the sale closed, so Muth was never left without a job. He did, however, lose all of his benefits under LSI's retirement plan. He would have become entitled to the benefits if he had remained an LSI employee for one month more. The retirement plan was subject to ERISA. Muth unsuccessfully tried to negotiate with LSI for credit for that final month. Muth then sued LSI, claiming that LSI had violated ERISA § 510 by intentionally preventing him from obtaining retirement benefits. The district court granted summary judgment to LSI, and Muth appealed. The question: does Muth have a claim under § 510?

In analyzing this question, the Third Circuit Court said that the prima facie case for Muth's § 510 claim requires that he produce evidence showing three elements: (1) the employer committed prohibited conduct (2) that was taken for the purpose of interfering (3) with the attainment of any right to which the employee may become entitled. The Court concluded that Muth showed elements (1) to (3). However, Muth provided no evidence that all or part of the purpose of his discharge by LSI, or the timing thereof, was interference with his receipt of ERISA benefits. There was ample undisputed evidence that Muth was terminated because he was part of the business group transitioning to Infineon, and not for any other reason. Muth did not present any evidence that such reason for his termination was a pretext to deny ERISA benefits. LSI's failure to credit Muth with the final month needed for entitlement to the retirement benefits, despite Muth's attempt to negotiate with LSI for this credit, does not give rise to a violation of § 510. As such, the Court affirmed the summary judgment granted to LSI by the District Court.

April 6, 2011

Employment-April 9 Effective Date For New York Wage Theft Prevention Act Approaches

Guidelines and Frequently Asked Questions ("FAQs") available on the website of the New York Department of Labor (the "DOL") say the following, pertaining to the changes in the Labor Law made by the Wage Theft Protection Act:

Effective April 9, 2011, Section 195.1 of the Labor Law requires all New York State employers, other than governmental agencies, to give employees at the time of hire (before work is performed), and on or before February 1st of each year (starting in 2012), notice of the following:

1. the employee's rate or rates of pay;
2. the overtime rate of pay, if the employee is subject to overtime regulations
3. the basis of wage payment (per hour, per shift, per week, piece rate, commission, etc.);
4. any allowances the employer intends to claim as part of the minimum wage including tip, meal, and lodging allowances;
5. the regular pay day;
6. the employer's name and any names under which the employer does business (DBA);
7. the physical address of the employer's main office or principal place of business and, if different, the employer's mailing address; and
8. the employer's telephone number.

The employer must provide the notice in English and in the employee's primary language. The employer must have the employee sign a statement acknowledging receipt of the notice(s). The employee must also acknowledge that the employee has properly identified his or her primary language to the employer. The employer must keep the signed and dated notice(s) and acknowledgement for six years and provide a copy to the employee upon request.

The notice requirement applies with respect to both unionized and nonunionized employees. It applies only with respect to employees who work in New York State. Notice of a pay increase is not required (other than in the hospitality industry), so long as the increase is reflected on the employee's next paystub. The employer should inform its employees in writing of any pay reduction. Notice of any other change in the information described in items1-8 above must be furnished within 7 days after the change, unless the change is reflected in the employee's paystub for the next pay period. Some new requirements apply to wage statements, which must be provided with each pay check.

The New York State Department of Labor (the "DOL") has made available on its website sample notices and instructions. The notices are in English, Chinese, Haitian-Creole, Korean, Polish, Russian and Spanish. If the DOL has not made a notice available in a particular language, the employer need only provide a notice in English.

April 5, 2011

Employee Benefits-EBSA Issues Frequently Asked Questions, Part VI, On The Affordable Care Act.

The Employee Benefits Security Administration (the "EBSA") has now added to its website its Frequently Asked Questions ("FAQs"), Part VI, on the Affordable Care Act (the "Act"). These FAQs deal with group health plans maintaining their grandfathered status under the Act. Plans that retain their grandfathered status avoid a number of new requirements under the Act, such as the need for external review of denied benefit claims and (for insured plans) the need to meet nondiscrimination requirements. One highlight of the FAQs is a discussion of the "anti-abuse rule" in the interim final regulations relating to grandfathered status. The FAQs say the following:

Under the anti-abuse rule, transferring employees from one grandfathered plan or benefit package (the "transferor plan") to another (the "transferee plan") will cause the transferee plan to relinquish grandfather status , if amending the transferor plan to replicate the terms of the transferee plan would have caused the transferor plan to relinquish its own grandfather status. However, this rule applies only if there was no bona fide employment-based reason to transfer the employees.

For this purpose, the term "bona fide employment-based reason" embraces a variety of circumstances, including (but not limited to) any of the following:

--a benefit package is eliminated because the issuer exits the market, or no longer offers the product to the employer;

--low or declining participation in a benefit package makes it impractical for the employer to continue it;

-- a benefit package is eliminated from a multiemployer plan, as agreed upon as part of the collective bargaining process; or

-- a benefit package is eliminated for any reason, and multiple benefit packages covering a significant portion of other employees remain available to the employees being transferred.

April 4, 2011

ERISA-Third Circuit Upholds The Plan Administrator's Interpretation Of A Clause In An Insurance Policy Which Limits The Insured's Death Benefit

In Bauer v. Reliance Standard Life Insurance Company, No. 10-1601 (3rd Cir. 2011) (nonprecedential opinion), E. Belinda Bauer, as Trustee of the Craig E. Bauer Insurance Trust ("Bauer"), brought suit against Reliance Standard Life Insurance Company ("Reliance") under ERISA. She was suing to recover a death benefit in excess of the $250,000, plus interest, that Reliance had awarded Bauer in such capacity. The award was made under her late husband's employer's accidental death insurance policy (the "Plan"), for which Reliance was the insurer and plan administrator. Bauer claimed that the Plan's terms entitled her to five times that amount, or $1,250,000, plus interest. The district Court granted summary judgment to Reliance, and Bauer appealed.

In analyzing the case, the Court said that Reliance's decision to limit the death benefit to $250,000, plus interest, was entitled to a deferential review. Under this review, the Court will uphold Reliance's decision if it finds that the decision was reasonable. The relevant Plan language states that the "Principal Sum" payable in the event of accidental death is "5 times Base Annual Earnings to a maximum of $250,000." Reliance determined that the "maximum of $250,000" refers to the highest payable Principal Sum under the Plan, and awarded Bauer that amount. Bauer contends that $250,000 is the maximum "Base Annual Earnings" amount that may be used to calculate the Principal Sum; because her husband's Base Annual Earnings were more than $250,000 at the time of his death, she argues that she is entitled to a Principal Sum of 5 times $250,000, or $1,250,000.

The Court felt that the foregoing Plan language is ambiguous. The question becomes whether Reliance's interpretation of this language was reasonable. To answer this question, the Court considered the following factors:(1) whether the interpretation is consistent with the goals of the Plan; (2) whether it renders any language in the Plan meaningless or inconsistent; (3) whether it conflicts with the substantive or procedural requirements of the ERISA statute; (4) whether the relevant entities have interpreted the provision at issue consistently; and (5) whether the interpretation is contrary to the clear language of the Plan. Based on these factors, the Court concluded that Reliance's interpretation of the Plan language was reasonable, and it therefore affirmed the summary judgment granted by the district court.

April 2, 2011

ERISA-Fourth Circuit Holds That The Plan Administrator Properly Paid Life Insurance Proceeds To A Designated Beneficiary, Even Though That Beneficiary Had Earlier Waived Any Claim To The Proceeds

In Boyd v. Metropolitan Life Insurance Company, No. 10-1702 (4th Cir. 2011), Emma C. Boyd ("Emma") was an employee of Delta Airlines, Inc. While so employed, she participated in a life insurance plan, which was insured and administered by Metropolitan Life Insurance Company ("MetLife"). The plan was governed by ERISA (the "Plan"). At the time of Emma's death in November 2008, the plan documents on file with MetLife designated Emma's husband, Robert Alsager ("Alsager"), as the primary beneficiary of the plan. In accordance with these documents, MetLife paid the plan proceeds to Alsager, even though he and Emma had previously separated, and even though he had previously signed a separation agreement in family court waiving any claim to the benefits.

In response, Mary Emma Boyd (Emma's mother) and W. P. Boyd (Mary Emma's son and the personal representative of Emma's estate) (together, the "Boyds") filed this suit, claiming eligibility for the benefits on the theory that Alsager had relinquished his right to receive them. The district court dismissed their suit, and the Boyds appealed. The Fourth Circuit Court stated that it agreed with the district court, based on the Supreme Court's recent decision in Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 129 S.Ct. 865 (2009). It therefore affirmed the district court's decision.

The Fourth Circuit Court said that, in Kennedy, the Supreme Court applied ERISA's "plan documents rule", under which a plan administrator looks solely at "the directives of the plan documents" in determining how to pay benefits. As in Kennedy, the plan documents on file at the time of Emma's death declared Alsager to be the primary beneficiary of the Plan, as Emma never took advantage of her option to designate a new beneficiary. Also as in Kennedy, Alsager had previously waived any claim to the benefits as part of his divorce proceedings. Given these similarities, the Court felt compelled to reach a similar conclusion to the Supreme Court in Kennedy, namely, that Alsager's waiver does not supersede plan documents, and that Metlife acted properly in disbursing benefits according to the plan documents on file. The Court concluded that the Boyds did not provide any arguments for departing from the Kennedy decision, even though: (1) Kennedy involved a pension plan, while this case involved life insurance proceeds payable under a welfare benefit plan and (2) the Plan-unlike the plan in Kennedy- did not have a formal provision under which Alsager could waive his benefits, since Alsager could nevertheless have choosen to not accept the benefits.

The Court noted that the waiver in the settlement agreement is not irrelevant. However, its interpretation and enforcement are not the plan administrator's concern, but are between Alsager and the Boyds.

April 1, 2011

Employee Benefits-IRS Provides Interim Rules For Reporting The Cost Of Group Health Care Coverage On Form W-2

In Notice 2011-28, the Internal Revenue Service (the "IRS") has provided interim guidance on reporting the cost of group health care coverage on Form W-2. The reporting is required under section 6051(a)(14) of the Internal Revenue Code, enacted as part of the Affordable Care Act. Generally, according to the Notice:

--the reporting on Form W-2 is for the employee's information only, and does not cause the reported amount to become taxable;

--the guidance provided by the Notice generally first applies to 2012 Form W-2s (that is, the W-2s required for calendar year 2012 that must be furnished in January 2013)-as per Notice 2010-69, an employer is not required to report the cost of group health care coverage on any Form W-2 that must be provided before January 2013 (although reporting is optional for 2011 Form W-2s);

-- for employers that are required to file less than 250 Form W-2s for 2011, the guidance in the Notice first applies to 2013 Form W-2s (those that must be furnished in January 2014)-these employers are not required to report the cost of group health care coverage on any Form W-2 that must be provided before January 2014; and

--no reporting is required for self-insured health care coverage that is not subject to federal COBRA.

The Notice provides details on how to calculate the cost of the group health care coverage that must be reported, and to whom the reporting requirement applies.