August 2011 Archives

August 31, 2011

Employee Benefits-IRS Provides Guidance On Compensation Errors In Qualified Retirement Plans

In the Summer 2011 edition of Retirement News For Employers, the Internal Revenue Service ("IRS") provides guidance on compensation mistakes which incur in qualified retirement plans. The IRS says the following.

Using an incorrect definition of compensation in your qualified retirement plan can lead to costly operational failures that can affect your plan's qualified status. Impacted areas may include:

• Contributions and benefits
For example, a plan operational failure will occur when an employer makes profit-sharing contributions using base compensation instead of base compensation plus commissions as required by the plan document.

• Nondiscrimination requirements
A qualification failure may occur if the plan excludes overtime (or other) pay from its definition of compensation resulting in nonhighly compensated employees receiving a lower contribution rate than highly compensated employees.

• Employer's deduction for plan contributions
A nondeductible contribution may result if the employer uses a higher amount of compensation than that allowed under the Internal Revenue Code (see Code §404). The employer may owe additional tax including excise taxes on the excess (see Code §4972 and Pub. 560 - Excise taxes).

• Highly compensated or key employees, plan limits and top-heavy minimum benefits
The plan will have a qualification failure unless it uses the statutory definition of compensation for these limits and minimums (see Code §§ 415 and 416).

Tips to avoid compensation-related errors:

1. Review your plan document's definitions of compensation for each plan purpose.
2. Use the statutory definition of compensation when required.
3. Transmit accurate compensation data for each employee to your payroll processor and plan administrator.
4. Consider amending your plan to use one definition of compensation for all plan purposes.
5. Periodically review your plan for errors and fix them as quickly as possible using IRS correction programs.

The IRS also provides a more detailed discussion of correcting compensation errors in qualified defined contribution plans.

August 30, 2011

Employment -A Reminder: As Of July 15, Employers Must Report Information On Any Dependent Health Coverage Provided

This is a reminder about a new reporting requirement, which is part of New York's new hire reporting rules. Effective as of July 15, 2011, an employer with employees working in New York State must report information on any dependent health care coverage that the employer provides to those employees.

The information must include: (i) the employee's name, address and social security number and date of hire, (ii) the employer's name, address and employee identification number, and (iii) the availability of the dependent health care coverage (including the date of availability). The information must be filed within 20 days after the employee's date or hire (or rehire), and quarterly thereafter. The information may initially be filed on-line (at www.nynewhire.com), on Form IT-2104 (Employee's Withholding Allowance Certificate) or IT-2104-E (Certificate of Exemption From Withholding), or in any written form that includes the required information. The information is also reported quarterly on Form NYS-45 (as updated for use in the third quarter of 2011).The penalty for the failure to provide the information is $20 per employee.

August 25, 2011

ERISA-First Circuit Upholds Denial Of Disability Benefits, Based On Failure To Explain Sudden Change In Condition

In Kindelan v. Disability Management Alternatives, LLC, No. 10-1620 (1st Cir. 2011), the plaintiff, Kathleen Kindelan ("Kindalen"), was appealing a decision of the district court sustaining an insurer's denial of her disability benefits. What had happened here?

Kindelan had had serious back trouble for over thirty years, with a number of surgeries, the most recent being a lumbar fusion in 2005. Dr. Mark Palumbo saw her on September 25, 2007, and noted that she was getting along "reasonably well" and "doing well from a functional standpoint." On October 3, however, she returned to report back and lower extremity pain. The doctor noted anxiety and agitation, and recommended four to six weeks at home, with back exercises and pain killers. Kindelan followed the advice and applied for short term disability benefits under a group plan (the "Plan"). The Plan expressly excluded coverage for self-reported symptoms which cannot be verified without medical tests. The Plan denied the benefits, and Kindelan filed this suit.

The First Circuit Court of Appeals (the "Court") agreed with the benefit denial, and affirmed the district court's decision. The Court said that, although Kindelan's chronic back trouble generated a history of test results confirming the symptoms she reported over the years, her burden in order to obtain the desired disability benefits is to document what she claims to have been a debilitating change in the course of the week after her regular periodic examination. Because she says that the allegedly covered disability occurred after her September visit to the doctor, what counts under the Plan is her condition in that ensuing period. On September 25, Dr. Palumbo noted that she had no serious functional difficulties. On October 3 she reported such pain that the doctor recommended time off from work. But she and her treating physician provided no test results or medical diagnostic evidence to explain the sudden deterioration. After the October 3 visit, Dr. Palumbo did not order any additional tests, medical or psychological. At the end of the day Kindelan offered nothing to explain the change she claimed, beyond the "self-reported" pain that the Plan expressly excludes as an independently covered disability.

August 24, 2011

ERISA-Seventh Circuit Rules That A Plan's Notice Of Benefit Denial Did Not Comply With ERISA

In Kough v. Teamsters' Local 301 Pension Plan, No. 10-2128 (7th Cir. 2011) (Nonprecedential Opinion), the plaintiff had suffered a disability, and then returned to work in 2005. He soon (in that year) suffered a heart attack and abandoned his attempt to work. He filed a claim for disability benefits under a union pension plan subject to ERISA (the "Plan"), but the claim was denied by the Plan. The plaintiff then filed this suit. The district court granted summary judgment against the plaintiff, and the plaintiff appealed. One issue for the Seventh Circuit Court of Appeals (the "Court"): did the letter from the Plan containing the benefit denial comply with ERISA?

The Court concluded that the Plan's denial letter failed to comply with the notice requirements in section 503 of ERISA (29 U.S.C. § 1133) and the underlying regulations (at 29 C.F.R. § 2560.503-1(g)). In this case, the Plan's denial letter merely stated that the plaintiff was not permanently disabled and thus not entitled to disability benefits under the Plan. Given the plaintiff's prior disability and attempt to return to work, this denial letter did not comply with ERISA's notice requirements. Specifically, contrary to those requirements, the denial letter did not provide all of the specific reasons for the adverse determination, did not reference the specific plan provision on which it was based, did not provide a description of any additional material required and why that material is necessary, did not include a statement of the plaintiff's right to bring a civil action, and did not provide reference to the criteria relied on in making the adverse decision. Significantly, the letter did not state that the Plan required evidence from the Social Security Administration that the plaintiff's disability from 2005 forward was related to his 2005 heart attack.

Given that the Plan's denial letter did not meet the notice requirements of ERISA, the Court ordered that the case be remanded back to the Plan to determine, de novo, whether the plaintiff was entitled to disability benefits.

August 23, 2011

Employee Benefits-Clear and Consistent Disclosure Is Coming For Health Benefits

The recently enacted Affordable Care Act requires that, on and after March 23, 2012, group health plans (among others) must provide their participants with clear, consistent and comparable summaries of the benefits and coverage provided under those plans. The government (particularly, the Departments of the Treasury, Labor and Health and Human Services ) has now issued proposed regulations pertaining to these summaries. An on-line Fact Sheet says the following about these proposed rules.

Under the proposed regulations, participants would have access to at least two forms that will help them understand and evaluate their health insurance choices. These forms include:
• An easy to understand Summary of Benefits and Coverage; and
• A uniform glossary of terms commonly used in health insurance coverage such as "deductible" and "co-pay".

The proposed summary form and glossary were developed through a public process led by the National Association of Insurance Commissioners ("NAIC") and others. Further input, prior to the March 23, 2012 effective date, is welcome.

The Summary of Benefits and Coverage will be a concise document detailing, in plain language, simple and consistent information about health plan benefits and coverage. The rules are intended to ensure that this summary will help participants better understand the coverage they have and, for the first time, allow them to easily compare different coverage options. It will summarize the key features of the plan or coverage, such as the covered benefits, cost-sharing provisions, and coverage limitations and exceptions. The Summary of Benefits and Coverage will include a new, standardized health plan comparison tool for participants known as "Coverage Examples," much like the Nutrition Facts label required for packaged foods. The Coverage Examples would illustrate what proportion of care expenses the plan would cover for three common benefits scenarios--having a baby, treating breast cancer, and managing diabetes.

Under the proposed regulations, beginning on March 23, 2012, all group health plans will provide the Summary of Benefits and Coverage and the uniform glossary to participants. The plan will automatically provide a Summary of Benefits and Coverage to a participant prior to enrolling in the plan, and 30 days prior to the start of each plan year. Further, people enrolled in a group health plan must be notified of any significant changes to the terms of coverage, as reflected in the Summary of Benefits and Coverage, at least 60 days prior to the effective date of the change. A participant can request a copy of the Summary of Benefits and Coverage and must receive it within seven days. The uniform glossary will also be made available upon request, as well as in an online link provided by the plan.. The Departments of Health and Human Services and Labor will also post the glossary on their websites. The Summary of Benefits and Coverage may be provided to participants in either paper or electronic form if certain consumer safeguards are met. Therefore, it may be possible for a plan to post the Summary of Benefits and Coverage on its website or on HealthCare.gov, or provide it by email.

The proposed regulations and a sample Summary of Benefits and Coverage with various instructions may be found here.

August 22, 2011

ERISA-Eighth Circuit Holds That An Employment Agreement, A Contract Involving A Single Employee, Is Not A Plan Within The Meaning Of ERISA.

In Dakota, Minnesota & Eastern Railroad Corporation v. Schieffer, No. 10-2484 (8th Cir. 2011), Kevin Schieffer ("Schieffer") became President and CEO of the Dakota, Minnesota & Eastern Railroad ("DM&E") in 1996. In December 2004, anticipating a change of control, Schieffer and DM&E entered into an employment agreement (the "Employment Agreement") to encourage his ongoing employment and to provide Schieffer with severance benefits should he be terminated without cause or resign for good reason. In October 2008, with regulatory approval of a merger imminent, DM&E terminated Schieffer without cause, triggering the Employment Agreement's various severance provisions. Post-merger disputes arose as to the amounts DM&E owed. Schieffer filed a demand for arbitration under the Employment Agreement. DM&E commenced this action, alleging that the arbitration provisions of the Employment Agreement were preempted by ERISA. The district court granted Schieffer's motion to dismiss, on the grounds that the Employment Agreement was not a plan covered by ERISA, and consequently the district court did not have subject matter jurisdiction to hear the case. DM&E appealed.

In analyzing the case, the Eighth Circuit Court of Appeals (the "Court") noted that ERISA preempts any state-law cause of action that duplicates, supplements, or supplants the ERISA civil enforcement remedy. Here, Schieffer's arbitration demand included a request for double damages under South Dakota's failure-to-pay-wages statute, a remedy that clearly is preempted by ERISA if the Employment Agreement is an ERISA plan. Further, the Employment Agreement was an individually negotiated contract between DM&E as employer and Schieffer, a single employee. Whether such a "one-person" contract may be an ERISA plan is a question of first impression for this Court.

The Court recognized that several circuit court decisions have concluded that a contract with a single employee to provide severance or other post-termination benefits may be a "one-person" ERISA plan if it satisfies the "administrative scheme" criteria of the Supreme Court's Fort Halifax case. But the Court said that the reasoning in those cases was quite perfunctory, and none considered the plain language of ERISA section 3(1). That section indicates that an ERISA welfare plan-the only type of plan that the Employment Agreement could be- involves a class of employees or more than one employee. Moreover, none of those cases considered that ERISA broadly preempts state laws that interfere with multi-employee benefit plans. Congress has never preempted state laws that regulate and enforce individual employment contracts between employers and their executives. That remains an important prerogative of the States. As such, the Court concluded that the Employment Agreement is not a plan that is subject to ERISA.

But what about certain provisions of the Employment Agreement that relate to employee benefit plans subject to ERISA? The Employment Agreement promised to allow Schieffer to participate in all employee health, welfare, and retirement benefit plans and programs made available generally by DM&E to its senior executives for a period of three years after paying Schieffer a severance payment due under the Employment Agreement itself. Schieffer generally alleged a failure by DM& E to make those benefits available. If it is determined that Schieffer's demands involve the payment of benefits under plans subject to ERISA, then ERISA preemption applies, and the district court has subject matter jurisdiction to proceed with this case. However, if it is determined that those demands arise out of the single-employer Employment Agreement, and simply pegg DM&E's payment obligations to amounts that would have been due under ERISA plans, there is no preemption, and no subject matter jurisdiction. As such, the Court vacated the district court's decision and remanded the case back to the district court to make that determination.


August 18, 2011

Employee Benefits-Seventh Circuit Finds That A Plaintiff Is Entitled To Monetary Damages, But Not A Statutory Penalty, For The Failure To Provide A Timely COBRA Notice

In Gomez v. St. Vincent Health, Inc., No. 10-2379 (7th Cir. 2011), the two plaintiffs brought suit against a plan administrator, St. Vincent Health, Inc. (the "Company"), for (among other things) the statutory penalty and damages arising out of the failure to provide them with timely notices pertaining their rights under COBRA. The district court denied their request for the statutory penalty, and awarded damages to only one of the plaintiffs. The plaintiffs appealed.

One plaintiff, Gomez, left her job on November 30, 2004. She had health care and dental coverage, which continued until December 31, 2004. Under COBRA, Gomez was eligible to extend her health care and dental coverage for eighteen months by paying monthly premiums. She should have received a notice describing her rights under COBRA (a "COBRA Notice") by January 13, 2005. However, she did not receive a mailed COBRA Notice until approximately June 22, 2006, when it was too late to elect the extended coverage. Gomez testified, however, that she would not have elected to extend her health care and dental coverage, because she could not have afforded the monthly premiums.

The second plaintiff, Barnett, left her job on November 28, 2004. She had health care, dental, and vision coverage that likewise continued until December 31, 2004. She should have received a COBRA Notice by January 11, 2005. However, she did not receive a mailed COBRA Notice until June 25, 2006, again, too late to elect the extended coverage. Unlike Gomez, Barnett testified that she would have elected to pay the premiums to extend her coverage. Her monthly COBRA premiums would have been $304.10 for health insurance, an additional $33.54 for dental benefits, and an additional $7.98 for vision benefits. Barnett claimed that she paid approximately $700 for prescription medications during the period between leaving her job and becoming covered by a health insurance program through her new employer in February 2005. She also provided evidence showing she incurred $648 of expenses for vision care between November 2004 and December 2005. She contends that she would not have incurred $940 in out-of-pocket health care expenses if she had received the required COBRA Notice on time.

As to the damages, the district court had awarded Barnett $396 in damages, the difference between her prescriptions costs ($700) and the premium she would have paid in order to extend her health coverage ($304). The Seventh Circuit Court of Appeals (the " Appellate Court") found that this award was appropriate, as monetary damages based on section 502(c)(1) of ERISA, which provides for "such other relief". Was she entitled to another $544 to compensate her for the vision-care expenses she sustained? The Appellate Court said no, since her testimony did not establish the specifics as to the amount that would compensate her for her losses. Further, the district court found that Gomez is not entitled to any damages, because she did not substantiate any medical expenses incurred, and would not have elected to extend her health coverage even if she had received a timely COBRA Notice. The Appellate Court agreed with this finding.

The Appellate Court noted that, because the Company did not provide the plaintiffs with a timely COBRA notice, a court has the discretion to hold the Company liable for a statutory penalty, of up to $110 a day from the date of the violation, under section 502(c)(1) of ERISA. The district court declined to impose the penalty, however, noting that neither plaintiff was significantly prejudiced by the delay in notification, that there was no indication of bad faith (such as a misrepresentation or willful delay in request for information) or gross negligence, and that the Company offered to provide retroactive coverage through a payment plan. The Appellate Court agreed, adding that the Company was not required to have an oversight system in place to ensure compliance with COBRA. As such, the Appellate Court affirmed the district court's decision that the penalty should not be imposed.

August 17, 2011

Employment-Eighth Circuit Rules That Minnesota Retirement Plan, With Its Age-55 Cliff, Discriminates Against Older Employees In Violation Of The ADEA

In Equal Employment Opportunity Commission v. Minnesota Department of Corrections, No. 10-2699 (8th Cir. 2011), the Minnesota Law Enforcement Association ("MLEA") was appealing the district court's grant of summary judgment to the Equal Employment Opportunity Commission ("EEOC"). The district court had concluded that, as a matter of law, MLEA's retirement plan (the "Plan") arbitrarily discriminates against older employees on the basis of age, in violation of the Age Discrimination in Employment Act (the "ADEA").

At issue was the "Early Retirement Incentive Program" ("ERIP") provision of the Plan. The ERIP provides that a participant who retires during the pay period of his or her 55th birthday, and who is covered by the Plan, is eligible to receive an unreduced continuation of the employer's contribution toward his or her health- and dental-insurance premiums payable under the Plan, until he or she reaches age 65. Meanwhile, any employee between the ages of 50 and 55 who elects to retire--and who has a certain length of tenure with MLEA --receives an ERIP benefit but less. Finally, any employee between the ages of 55 and 60-60 being the age of mandatory retirement--who chooses to retire receives no continuation of employer contributions. Thus, an employee must retire at 55 or lose the early retirement benefit. An employee hired after age 55 never could obtain the early retirement benefit. The question for the Eighth Circuit Court of Appeals the "Court"): does the ERIP violate the ADEA?

In analyzing the case, the Court said that where, as here, it is undisputed that an employee is ineligible for the early retirement benefit under the ERIP if he or she is over a certain age-here age 55-the ERIP is discriminatory on its face. The ADEA has a safe- harbor provision, which if satisfied will shield the employer from an ADEA violation. This safe-harbor provision states that it shall not be unlawful for an employer to "observe the terms of a bonafide employee benefit plan" that is a "voluntary early retirement incentive plan consistent with the relevant purpose of [the ADEA]". An arrangement such as the ERIP, which contain adverse changes in employment benefits based solely upon age, is inconsistent with the purposes of the ADEA. These purposes include the prohibition of arbitrary age discrimination, such as the disappearance of a benefit upon the attainment of a certain age. The ERIP has an age 55-cliff, meaning that the early retirement benefit vanishes when an employee attains age 55. This cliff arbitrarily discriminates on the basis of age, and is inconsistent the purposes of ADEA. Thus, the safe-harbor provision is not applicable to the ERIP. The Court concluded that the ERIP violated the ADEA, and affirmed the district court's judgment.

August 16, 2011

ERISA-Third Circuit Rules That Administrator Is Entitled To Recoup Overpayment of LTD Benefits Under Section 502(a)(3) of ERISA

Further to yesterday's blog, the case of Funk v. Cigna Group Insurance, No. 10-3936 (3rd Circuit 2011) raised a third interesting matter. This issue was whether CIGNA could recoup from the plaintiff the long-term disability ("LTD") benefits it had paid to the plaintiff, to the extent that the plaintiff also received disability benefit payments from Social Security. A provision in the Plan and a related reimbursement agreement (the "Reimbursement Agreement") allow the LTD benefits paid by the Plan to be offset by Social Security disability benefits and recouped. The plaintiff had received $24,817 in Social Security disability payments (apparently less than the LTD benefits that the Plan had paid prior to the termination of the benefits by CIGNA-see yesterday's blog-and therefore subject to recoupment). The plaintiff had turned over $18,500 of that amount to CIGNA. The question is whether CIGNA can recoup the remaining $6,317.

The basis of the claim for recoupment is section 502(a)(3) of ERISA, which permits fiduciaries to obtain "appropriate equitable relief". The relief must fall within a category of relief that was typically available in equity. Here, CIGNA wants relief to enforce the offset/recoupment provisions of the Plan and the Reimbursement Agreement. GIGNA claims that those provisions give it an equitable lien over the $6,317 amount in question, since, in accordance with applicable Supreme Court decisions, the provisions identify specific funds (the Social Security disability benefits) and a particular share of those funds (the amount of overpayment) to which its lien attached. The Court agreed with CIGNA, and ruled that the Plan and Reimbursement Agreement gave rise to an equitable lien over those Social Security payments in question, and that the plaintiff must pay the $6,317 amount to CIGNA. Note that, according to the Court, the funds in question-once received- did not have to still be in the plaintiff's possession for this result to obtain.

August 15, 2011

ERISA-Third Circuit Rules That Administrator Complied With Plan Terms In Terminating LTD Benefits

The case of Funk v. Cigna Group Insurance, No. 10-3936 (3rd Circuit 2011) had two interesting issues. The first stemmed from the decision of defendant Cigna Group Insurance ("CIGNA") to terminate the plaintiff's long-term disability ("LTD") benefits. The benefits were being paid under a self-funded plan (the "Plan"), which was maintained by the plaintiff's employer, and for which CIGNA was the plan administrator. The question was whether, in deciding to terminate the plaintiff's benefits, CIGNA had complied with the terms of the Plan. Under those terms, the plaintiff would be "disabled", and thus entitled to receive LTD benefits, if he was incapable of performing the requirements of any job for any employer for which the individual is qualified or may reasonably become qualified, other than a job that pays less than 60 percent of his former pay. CIGNA's decision did not explicitly address salary or provide examples of suitable alternative 60% jobs. Does this cause CIGNA's decision to terminate the plaintiff's LTD benefits to fail to comply with the Plan's terms? The Court concluded that it did not. The Plan required CIGNA to determine whether the plaintiff was capable of working in any job that would pay him at least 60% of his former pay. CIGNA literally complied with that requirement when it determined that the plaintiff could, without restrictions, perform his regular occupation. It goes without saying that his former job would pay 100% of his former wage. It was unnecessary for CIGNA to discuss, in connection with its decision, any alternative 60% jobs.

The second issue was whether CIGNA-the plan administrator but not the benefit payor (the benefits of the self-funded plan being paid by the employer)-has a conflict of interest that-under Metropolitan Life Insurance Co. v. Glenn, 554 U.S. 105 (2008)- must be taken into account in determining whether CIGNA's decision to terminate the plaintiff's LTD benefits was arbitrary and capricious. The Plan gave CIGNA discretionary authority to grant or deny LTD benefits, so that its decision to terminate the plaintiff's LTD benefits is entitled to an arbitrary and capricious review. On this issue, the Court said that a party's status as a third-party plan administrator does not automatically encumber it with a material conflict of interest. While the Supreme Court in Glenn did say that, "for ERISA purposes a conflict exists" when-as here- a third-party plan administrator operates in a competitive market for the delivery of its services, the Court also acknowledged that this conflict may be of little or no practical significance. In this case, nothing suggests that CIGNA was operating under a meaningful conflict of interest. Thus, the Court concluded that the potential conflict should not be given significant weight in determining whether CIGNA's decision to terminate the plaintiff's LTD benefits was arbitrary and capricious.

August 13, 2011

ERISA-Seventh Circuit Rules That Employer May Amend Its Health Care Plan To Require Retirees To Pay The Entire Cost of Their Health Care Coverage; Decision Influenced By CIGNA Corp. v. Amara

In Sullivan v. CUNA Mutual Insurance Society, No. 10-1558 (7th Cir. 2011), the defendant CUNA Mutual Insurance Society ("CUNA Mutual") had been maintaining a health care plan for its retirees (the "Plan"). CUNA Mutual had paid a portion of the cost of the health care coverage under the Plan for each retiree. Further, beginning in 1982, CUNA Mutual gave retirees credit toward their share of the cost of coverage under the Plan, if they had any unused sick-leave balances. CUNA Mutual calculated how much each retiree's unused sick-leave days would be worth at his or her daily wage. A retiree who had been covered by a collective bargaining agreement while at work (a "Union Retiree") could choose between taking that sum in cash or applying it toward the cost of his or her health care coverage under the Plan. Any other retiree did not have this option, and that retiree's sick-leave balances would automatically be applied toward the cost of his or her health care coverage under the Plan.

At the end of 2008, CUNA Mutual amended the Plan, so that it stopped paying any portion of the cost of retiree health care coverage, and stopped providing the credit toward the cost of coverage by applying unused sick-leave balances. One exception-under the amendment, each Union Retiree was automatically treated as having taken his or her unused sick leave in cash, and then investing that money in an account to be administered by the Plan. A Union Retiree's account balance was applied to pay 100% of the cost of his or her health care coverage under the Plan (until the account is exhausted). A class of retirees then filed this suit under ERISA. The class representatives were four retired executives who never had an option to take their sick-leave balances in cash, plus one Union Retiree. The district court granted summary judgment to CUNA Mutual, and the plaintiffs appealed. The issue for the Seventh Circuit Court of Appeals (the "Court"): did ERISA prevent CUNA Mutual from amending the Plan in the manner described above?

In analyzing the case, the Court noted that the Plan is a welfare benefit plan. As a general matter, benefits under a welfare benefit plan do not vest, so that the employer is free to reduce or terminate those benefits as it pleases. As an exception, an employer may create vested welfare benefits-which the employer may not change-by contract. In this case, the Plan does not promise vested benefits, and contains a clause reserving the employer's right to modify or eliminate the benefit. For example, the 1995 version of the Plan provides: "The Employer expects the Plan to be permanent, but since future conditions affecting the employer cannot be anticipated or foreseen, the Employer must necessarily and does hereby reserve the rights to amend, modify or terminate the Plan . . . at any time by action of its Board." Language of this kind permits amendments.

The Court noted that, in this case, much of the communications to employees pertaining to the Plan (e.g., enrollment forms) did not contain any reservation of rights clause permitting the employer to change the Plan. However, the Court said that this omission would matter only if an employer must show, not only that the right to amend had been reserved, but also that this reservation was known to all workers. The Court said that this is not the employer's burden. As the Supreme Court itself has said in CIGNA Corp. v. Amara, 131 S.Ct. 1866 (2011), a summary plan description about some feature of a pension plan does not override language in the plan itself, and even if a summary plan description contradicts the full plan, the terms of the full plan continue to govern participants' entitlements. Similarly, other employee communications cannot be used to change the terms of the pension plan. As such, the Court concluded that ERISA does not prevent CUNA Mutual from making the Plan amendments in question, and affirmed the district court's grant of summary judgment.

Note the influence of CIGNA Corp. v. Amara. We expect to see a lot of this in future cases involving ERISA.

August 12, 2011

Employment-Ninth Circuit Rules That FMLA Leave Is Not Available To An Individual Who Did Not Request The Leave While An Employee

In Walls v. Central Contra Costa Transit Authority, No. 10-15967 (9th Cir. 2011), the Plaintiff, Kerry Walls ("Walls"), was appealing the district court's grant of summary judgment in favor of the defendant, Central Contra Costa Transit Authority ("CCCTA").

Walls is a former bus driver for CCCTA. He was terminated from employment with CCCTA on January 27, 2006. In anticipation of being rehired, on March 1, 2011, Walls requested a leave under the Family and Medical Leave Act (the "FMLA"). Walls was reinstated to employment with CCCTA on March 2, 2006, pursuant to an agreement executed over the course of a grievance process between Walls, his union representative, and CCCTA (the "Last Chance Agreement" ). On March 3, 2006, Walls incurred an unexcused absence that violated the attendance requirements of the Last Chance Agreement. As a result, CCCTA again terminated Walls on March 6, 2006. After grieving his termination, Walls brought this suit, claiming among other things that his March 6 discharge violated the FMLA. The district court granted summary judgment against Walls on his FMLA claim. The question for the Ninth Circuit Court of Appeals (the "Court"): did Walls have a viable FMLA claim?

In analyzing the case, the Court stated FMLA rights and benefits are contingent upon the existence of an employment relationship. Further, in order to establish an FMLA violation, the employee must demonstrate that the employer received sufficient notice of an employee's intent to take FMLA leave. Walls did request FMLA leave on March 1, 2006. However, Walls was not reinstated to his position as a CCCTA employee until March 2, when he signed and executed the Last Chance Agreement. Therefore, he was not an employee when he requested the leave. The Last Chance Agreement did not retroactively make Walls an employee for FMLA purposes on March 1. Since Walls was not an employee of CCCTA when he made his request for FMLA leave, he cannot invoke FMLA protection on the basis of this request. As such, the Court concluded that Wall's FMLA claim was not viable, and it affirmed the district court's summary judgment against him on the FMLA claim.

August 11, 2011

ERISA-Ninth Circuit Rules That An Insurer Can Be Sued For Plan Benefits Under ERISA

In Cyr v. Reliance Standard Life Insurance Company, 642 F. 3d 1202 (9th Cir. 2011), the Ninth Circuit Court of Appeals (the "Court") faced the question of whether an insurer could be sued in an action for benefits brought under Section 502(a)(1)(B) of ERISA. Some of the Court's earlier decisions indicated that only a benefit plan or its plan administrator could be sued under that provision.

In this case, the plaintiff Laura Cyr ("Cyr") was covered by a long-term disability plan at work (the "Plan"). The Plan was insured by defendant Reliance Standard Life Insurance Company ("Reliance"). In effect, Reliance controlled the decision whether to honor or to deny a claim for benefits under the Plan. However, Reliance was not identified as the plan administrator. Cyr filed a claim for long- term disability benefits under the Plan based on a back condition. Reliance approved the claim, based on Cyr's salary of $85,000, and paid those benefits thereafter. Cyr later sued her employer for gender discrimination based on unequal pay. Cyr and the employer settled the matter, raising Cyr's salary to $155,000. Cyr asked Reliance to increase her long-term disability benefits accordingly. When Reliance refused, this suit ensued under ERISA section 502(a)(1)(B) (the ERISA provision allowing a participant to sue for plan benefits). But could Cyr maintain this suit against Reliance, who was not the Plan itself or a plan administrator?

In deciding this question, the Court noted that there are no limits stated anywhere in section 502(a) about who can be sued, however. The Supreme Court has not found any limit as to who can be sued under that section. Thus, the Court concluded that the insurer (or any one responsible for paying plan benefits) can be sued under section 502(a)(1)(B).

August 10, 2011

Employee Benefits-IRS Provides Guidance On Hardship Distributions

The Internal Revenue Service (the "IRS") has provided some new guidance on the "Do's and Don'ts of Hardship Distributions" from qualified or tax-advantaged retirement plans. Here is what the IRS said.

To avoid jeopardizing the qualified or tax-advantaged status of the plan, employers and plan administrators must follow both the plan document and legal requirements before making hardship distributions. Some retirement plans, such as 401(k) and 403(b) plans, may allow participants to withdraw from their retirement accounts because of a financial hardship, but these withdrawals must follow IRS guidelines. A plan may only make a hardship distribution:

--if permitted by the plan;

--because of an immediate and heavy financial need of the employee and, in certain cases, of the employee's spouse, dependent or beneficiary; and

--in an amount necessary to meet the financial need.

Before making the hardship distribution:


1. Review the terms of the plan, including:
• whether the plan allows hardship distributions;
• the procedures the employee must follow to request a hardship distribution;
• the plan's definition of a hardship; and
• any limits on the amount and type of funds that can be distributed for a
hardship from an employee's accounts.

2. Obtain a statement or verification of the employee's hardship as required by the plan's terms.

3. Determine that the exact nature of the employee's hardship qualifies for a distribution under the plan's definition of a hardship.

4. Document, as may be required by the plan, that the employee has exhausted any loans or distributions, other than hardship distributions, that are available from the plan or any other plan of the employer in which the employee participates.

5. If the plan's terms state that a hardship distribution is not considered necessary if the employee has other resources available, such as spousal and minor children's assets, document the employee's lack of other resources.

6. Check that the amount of the hardship distribution does not exceed the amount necessary to satisfy the employee's financial need. However, amounts necessary to pay any taxes or penalties because of the hardship distribution may be included.

7. Ensure that the amount of the hardship distribution does not exceed any limits under the plan and consists only of eligible amounts. For example, a plan could limit hardship distributions to a specific dollar amount and require that they be made only from salary reduction contributions.

8. If the plan's terms require that the employee is suspended from contributing to the plan and all other employer plans for at least 6 months after receiving a hardship distribution, inform the employee and enforce this provision.

If a plan does not properly make hardship distributions, it may be able to correct this mistake through the Employee Plans Compliance Resolution System (the "EPCRS").


August 8, 2011

ERISA-Second Circuit Holds That An Insurer Is Not A Plan Fiduciary With Respect To A Retained Asset Account

In Faber v. Metropolitan Life Insurance Company, No. 09-4901-cv (2nd Cir. 2011), the plaintiffs had brought suit under ERISA, alleging that defendant Metropolitan Life Insurance Company ("MetLife") had breached its ERISA fiduciary duties to them. The plaintiffs were owed life insurance proceeds as the beneficiaries under certain employee benefit plans that MetLife administered and insured (the "Plans"). Their complaint was that, through the use of "retained asset accounts" ("RAAs"), MetLife had retained and invested, for its own profit, those life insurance proceeds. An RAA is an interest-bearing account backed by funds that the insurer retains until the account holder writes a check or draft against the account.

Under the terms of the Plans, if the life insurance proceeds due a beneficiary exceed a specified amount (for example, $7,500), MetLife establishes an RAA, called a "Total Control Account" ("TCA"), in the name of the beneficiary, credits the TCA with the total amount of the proceeds, and issues the beneficiary a "checkbook" that he or she can use at any time to draw on the TCA for some or all of the account balance. If the life insurance proceeds do not exceed the specified amount, then the proceeds are paid to the beneficiary in a single lump sum. While the TCA remains open, MetLife retains the funds backing the TCA in its general account and invests those funds for its own profit, earning the spread between its return on that investment and the interest paid on the TCA. When the TCA holder writes a check against the account, MetLife transfers funds sufficient to cover the draft to the bank servicing the TCA.

The plaintiffs allege that, by using the TCA mechanism to retain and invest the life insurance proceeds due the beneficiaries, MetLife breached section 404(a)(1) of ERISA, which requires a fiduciary to act solely in the interest of plan participants and beneficiaries, and section 406(b)(1) of ERISA, which prohibits a fiduciary from self-dealing in plan assets. The plaintiffs sought disgorgement of MetLife's profits from the TCAs, as well as injunctive relief. However, the Second Circuit Court of Appeals (the "Court") ruled that MetLife met its ERISA fiduciary duties by furnishing the beneficiaries a TCA in accordance with the terms of the Plans, and did not retain plan benefits by holding and managing the assets that back the TCA. Once MetLife creates and credits a beneficiary's TCA with the life insurance proceeds and provides a checkbook, the beneficiary has effectively received a distribution of all the benefits that the Plan promised, and ERISA no longer governs the relationship between MetLife and the beneficiary. As such, MetLife is not acting in a fiduciary capacity when it invests the funds backing the beneficiary's TCA. Accordingly, the Court found that MetLife did not breach its ERISA fiduciary duties to the plaintiffs as beneficiaries of the Plans, and ruled that the case should be dismissed.


August 5, 2011

Employment-EEOC Discusses Whether An Employer May Provide Financial Incentive For An Employee To Participate In A Wellness Program Without Violating ADA or GINA

In a letter dated June 24, 2011 (the "Letter"), the Equal Employment Opportunity Commission (the "EEOC") discusses whether an employer may -without violating the Americans with Disabilities Act (the "ADA") or the Genetic Information Nondiscrimination Act ("GINA")-provide financial incentive for an employee to participate in a wellness program. The Letter said the following.

Title I of the ADA allows an employer to conduct voluntary medical examinations and activities, including obtaining voluntary information about medical histories, as part of an employee wellness program. This obtains, so long as any medical information acquired as part of the program is kept confidential and separate from personnel records. For this purpose, an activity is "voluntary", if the employer neither requires it nor penalizes an employee for not participating in it. The EEOC has not taken (and is not taking in the Letter) a position on whether Title I of the ADA permits an employer to offer financial incentives for an employee to participate in a wellness program that includes disability- related inquiries or medical examinations (the issue being whether those incentives cause the program to fail to be voluntary).

Title II of GINA prohibits an employer from requesting, requiring or purchasing genetic information, subject to six exceptions. One exception is that the employer may acquire genetic information about an employee or his or her family when it offers health or genetic services, including a wellness program, on a voluntary basis. The employee must give prior voluntary, knowing and written authorization to the acquisition of this information. Also, the genetic information may be given to the employer only in aggregate form (that is, it cannot disclose the identity of any individual). Final regulations make it clear that the employer may not offer the employee any financial incentive to furnish the genetic information.

An employer may use the genetic information so acquired to guide the employee into an appropriate disease management program. The program may offer financial incentives for participation and /or for achieving certain health outcomes, provided that the program is open to employees with current health conditions and/or whose lifestyle choices put them at increased risk of developing a condition. For example, employees who voluntarily disclose a family medical history of diabetes, heart disease or high blood pressure on a health risk assessment that satisfies the GINA regulations (specifically Reg. Sec. 1635.8(b)(2)(ii)), and employees who have a current diagnosis of one or more of these conditions, are offered $150 to participate in a wellness program designed to encourage weight loss and a healthy lifestyle. This does not violate Title II of GINA.

Note: An employer should be careful when offering financial incentives in accordance with the Letter. There does not always appear to be a clear distinction between offering financial incentive " to furnish genetic information"-which is proscribed by GINA- and offering financial incentives "for participation and /or for achieving certain health outcomes" in a wellness program-which GINA allows.

August 4, 2011

ERISA-A Reminder About Who Can Sue

In Malkani v. Clark Consulting, Incorporated, No. 10-2008 (4th Cir. 2011) (Unpublished Opinion), the Fourth Circuit Court of Appeals reminds us about who can sue under ERISA. In this case, Plaintiffs Roma P. Malkani ("Malkani") and Information Systems and Networks Corporation ("ISN") had brought an action against Clark Consulting, Inc., Stratford Advisory Group, Inc., and Clark & Wamberg, LLC (together, the "Clark Group"), the administrators, for an alleged breach of their fiduciary duties to ISN's Employees' Pension Plan ("Plan") under ERISA. Specifically, Malkani and ISN brought their claims under ERISA section 502(a)(2). The district court granted the Clark Group's motion to dismiss, and the Plaintiffs appealed.

In this case, the district court based its ruling on its findings that:

--Malkani lacked standing to sue the Clark Group under ERISA, because she failed to show an injury in fact, as required for standing under Article III of the Constitution and the U.S. Supreme Court.

--ISN lacked jurisdiction to sue under section 502(a)(2) of ERISA, as it was Plan sponsor -- not a fiduciary of the Plan. An employer, such as ISN, has standing under section 502(a)(2) only if it is a fiduciary under ERISA and is asserting a claim in its fiduciary capacity.

The Fourth Circuit Court of Appeals agreed with the district court's findings, and affirmed the district court's decision.

August 3, 2011

Employee Benefits-HHS Expands List Of Preventive Services For Women

According to a News Release dated August 1, 2011, the U.S. Department of Health and Human Services (the "HHS") has issued new guidelines under the Affordable Care Act. These new guidelines expand the list of preventive services that must be made available to women by a group health plan (except if the plan is "grandfathered"), without charging a co-payment, co-insurance or a deductible (a "cost share").

The News Release says that, last summer, the HHS released new rules under the Affordable Care Act, requiring all (non-grandfathered) group health plans to cover several evidence-based preventive services for woman, like mammograms, colonoscopies, blood pressure checks, and childhood immunizations, without imposing a cost share. The Affordable Care Act also made recommended preventive services free for people on Medicare. The new guidelines expands the foregoing list of women's preventive services to include:

--well-woman visits;

--screening for gestational diabetes;

--human papillomavirus (HPV) DNA testing for women 30 years and older;

--sexually-transmitted infection counseling;

--human immunodeficiency virus (HIV) screening and counseling;

--FDA-approved contraception methods and contraceptive counseling;
breastfeeding support, supplies, and counseling; and

--domestic violence screening and counseling.

The (non-grandfathered) group health plans must provide these services, without imposing any cost sharing, for plan years beginning on or after August 1, 2012. The rules in the regulations governing coverage of preventive services, which allow plans to use reasonable medical management to help define the nature of the covered service, apply to women's preventive services. Plans will retain the flexibility to control costs and promote efficient delivery of care by, for example, continuing to impose cost sharing for branded drugs if a generic version is available and is just as effective and safe for the patient to use.

August 1, 2011

ERISA-Third Circuit Rules That An Administrator Was Not Arbitrary Or Capricious In Denying A Claim For Long-Term Disability Benefits

In Baker v. Hartford Life Insurance Company, No. 10-2899 (3rd Cir. 2011) (Non Precedential Opinion), the plaintiff, Luciana Baker ("Baker"), brought suit under ERISA against the defendant, Hartford Life Insurance Company ("Hartford"), for denying her claim for long-term disability ("LTD") benefits under a plan maintained by her employer (the "Plan"). Hartford was the claims administrator and insurer under the Plan. The district court determined that Hartford's denial of the claim was not arbitrary or capricious, and granted summary judgment against Baker. Baker appealed.

Baker suffered from chronic back pain. She filed a claim for LTD benefits under the Plan due to this pain. The Plan stated that "Disability" means that during the Elimination Period and the following 24 months, Injury or Sickness causes physical or mental impairment to such a degree of severity that the claimant is: (1) continuously unable to perform the Material and Substantial Duties of her Regular Occupation; and (2) not Gainfully Employed. During Hartford's review of Baker's claim, Baker's employer produced a Physical Demands Analysis. The Analysis indicated that Baker's "typical work day entail[ed] seven (7) hours of sitting, a half-an-hour of standing (.5) total, and a half-an-hour of walking (.5)." The Analysis further indicated that Baker could "[a]lternate sitting and standing as needed." The employer also offered to modify Baker's work station "regarding sitting v. standing ratio." Shortly after its receipt of the Physical Demands Analysis, Hartford corresponded with Dr. Cooke. He confirmed that Baker's "only activity limitations and restrictions were to limit prolonged sitting and avoid heavy lifting." Hartford then denied Baker's claim for the LTD benefits, after concluding that she was able to perform the "essential duties" of her position.

In analyzing the case, the Third Circuit Court of Appeals (the "Court") noted that Hartford, as claims administrator, was vested with discretion to determine Plan eligibility and an employee's entitlement to benefits. As such, its decision to deny Baker's claim for LTD benefits may be reversed only if it was arbitrary or capricious, that is, if it was without reason, unsupported by substantial evidence or erroneous as a matter of law. The Court also said that, since Hartford both evaluates claims and pays benefits, Hartford has a conflict of interest which must be taken into account as a factor in determining whether Hartford was arbitrary or capricious.

The Court concluded that Hartford had not acted arbitrarily or capriciously in denying Baker's claim for LTD benefits. It said that, to be eligible for long-term disability under the Plan, Baker had to prove that she was continuously unable to perform the material and substantial duties of her regular occupation. As Dr. Cooke indicated, prolonged sitting was the central obstacle to Baker's resumption of her duties. Dr. Cooke, however, informed Hartford that Baker could return to work if she could avoid sitting for prolonged periods. Baker's employer was open to modifying Baker's work station so that the "sitting v. standing ratio" was more conducive to Baker's requirements. Baker did not carry her burden to show that, in spite of the modifications, she was unable to perform the necessary functions of her occupation. As such, the Court upheld the district court's summary judgment against Baker.