October 2011 Archives

October 31, 2011

ERISA-EBSA Provides Guidance On Leases Of Office Space Between Multiemployer Plans And Unions

As noted in my blog of October 17, 2011, the Employee Benefits Security Administration (the "EBSA") has issued F&Qs which provide guidance to fiduciaries of multiemployer plans on violations of ERISA's prohibited transaction rules which may arise in leasing or service provider arrangements. A "multiemployer plan" is an employee benefit plan maintained pursuant to a collective bargaining agreement between a labor union and more than one employer. In particular, the F&Qs say the following on a lease of office space between a multiemployer plan and a union whose members participate in the plan.

A. The Prohibited Transaction

Section 406(a)(1)(A) of ERISA prohibits a trustee of a multiemployer plan from causing the plan to engage in, among others, the leasing of office space between the plan and a party in interest. Similarly, section 406(a)(1)(D) of ERISA prohibits the trustee from causing the plan to engage in a transaction constituting a transfer to, or use by or for the benefit of, the plan's office space by a party in interest. The union is a party in interest, since its members participate in the multiemployer plan. Thus, a prohibited transaction will arise under section 406(a) of ERISA whenever the multiemployer plan leases office space in a building it owns to the union, or the union leases office space in a building it owns to the multiemployer plan.

Section 406(b)(1) of ERISA prohibits a trustee of the multiemployer plan from dealing with the plan's assets in his own interest or for his own account (i.e., self-dealing). ERISA section 406(b)(2) prohibits the trustee from acting on behalf of a party whose interests are adverse to the plan's interests. Accordingly, the lease of office space between a multiemployer plan and a union violates ERISA section 406(b)(1) when a trustee of the multiemployer plan has interests in the lease that may lead the trustee to structure the lease in a manner that benefits the union. The lease of office space also violates ERISA section 406(b)(2) when the trustee has divided interests because he or she acting on behalf of another party to the transaction as well as the plan.

As an example, assume that the trustees of a multiemployer plan who are officers of the union participate in a decision to lease office space in a building owned by the union to the plan. The participation by these trustees in this decision would raise self-dealing issues under ERISA section 406(b)(1). In addition, as lessor and lessee, the union and the plan have interests that are adverse to each other. The trustees, in acting on behalf of both the union and the plan in the transaction, would violate ERISA section 406(b)(2). The same results would obtain if those trustees participated in a decision to have the plan lease office space to the union.

B. Relief Provided by Statutory and Administrative Exemptions

Under ERISA, statutory and administrative exemptions provide relief from penalties and other adverse consequences for certain transactions that, although prohibited under sections 406(a) or (b), are beneficial to multiemployer plans. These exemptions are described below. Keep in mind that each of the exemptions has conditions that must be complied with in order to obtain the relief.

Statutory exemption under section 408(b)(2) of ERISA: This statutory exemption and the regulations thereunder allow a multiemployer plan to, among other things, contract or make reasonable arrangements with the union for office space. This exemption would allow the plan to lease office space from the union, but would not allow the union to lease office space from the plan. Further, relief is provided from ERISA section 406(a)(1)(A) and (D), but not from ERISA section 406(b)(1) or (2).

Prohibited Transaction Exemption (PTE) 76-1: This administrative class exemption allows a union to, among other things, lease office space from the multiemployer plan. It does not allow the plan to lease office space from the union. As above, relief is provided from ERISA section 406(a)(1)(A) and (D), but not from ERISA section 406(b)(1) or (2).

C. Steps To Avoid Non-Exempt Prohibited Transactions

Depending on the particular facts of each case, fiduciaries may avoid the penalties and adverse consequences of non-exempt prohibited transactions involving leases between multiemployer plans and union as follows.

--For leases of office space from a union to a multiemployer plan, where there is no trustee conflict of interest ( e.g., the trustees are not officers of the union), the trustees should comply with the statutory exemption in ERISA section 408(b)(2).

--For leases of office space from a multiemployer plan to a union, where there is no trustee conflict of interest, the trustees should comply with the conditions of PTE 76-1, Part C.

--For leases of office space between a multiemployer plan and a union that also involve a trustee conflict of interest which could lead to a violation of ERISA sections 406(b)(1) and/ or (2), the trustees should comply with the applicable exemption described above. In addition, any trustee with a conflict of interest should either recuse himself or herself from any involvement in the decision-making process, or the parties should seek an individual prohibited transaction exemption from EBSA's Office of Exemption Determinations.

D. Problems Found By The EBSA In Connection With Leases

The EBSA has found the following issues in connection with leases between multiemployer plans and unions:

• Failure to meet the "reasonableness" requirements in the applicable exemptions, e.g., the failure to establish that the rent paid or that the terms of the lease was reasonable. The use of an out-of-date appraisal for the building in which the leased office space is located could lead to an unreasonable amount of rent being paid.

• The absence of a formal, written lease at the time the lease commences, even if the lease is subsequently formalized two years later. This makes it difficult for the plan trustees to establish that the lease was always in compliance with PTEs 76-1 (and PTE 78-6), if applicable.

• Failure of trustees with conflicts of interest to recuse themselves from the decision making process. The applicable statutory or class exemptions cited above do not provide relief from ERISA sections 406(b)(1) and (2).

October 28, 2011

ERISA-Eleventh Circuit Upholds Termination Of Participant's Long-Term Disability Benefits

In Ray v. Sun Life & Health Insurance Company, No. 10-14693 (11th Cir. 2011), the plaintiff, Myra Ray ("Ray"), was appealing the district court's affirmation of a decision to terminate her long-term disability ("LTD") benefits . Ray was covered at work under an LTD plan (the "Plan"). The Plan was administered by the defendant, Sun Life & Health Insurance Company ("Sun Life"). Ray claimed LTD benefits under the Plan, on the grounds that she had become totally disabled due to a heart condition. The claim was approved by Sun Life, and she was awarded the LTD benefits.

However, Ray was advised that periodic medical updates would be required to verify that she remained totally disabled. Ray's doctor confirmed her disability in statements sent to Sun Life. But the doctor's office notes often were inconsistent with the disability statements submitted to Sun Life. The office notes suggested that Ray's condition was much improved, that she suffered far fewer symptoms than was represented to Sun Life, and that she was capable of -- and engaged in -- much more activity than the disability statements disclosed. Sun Life ordered surveillance of Ray's activities on two separate dates. The surveillance videos showed Ray engaged in activities with a fluidity of movement, without need of assistance, and without apparent effort. The video contradicted Ray's own doctor's representations of Ray's limitations in the disability statements he submitted to Sun Life. Sun Life engaged two physician of its own to evaluate Ray's medical records and the surveillance information. Although they did not physically examine Ray, both physicians concluded that Ray was capable of returning to her own occupation. Prior to Sun Life's rendering its final decision, Ray was awarded disability benefits by Social Security.

Based on the foregoing, Sun Life concluded that, notwithstanding the Social Security determination, Ray was not totally disabled within the meaning of the Plan. Therefore, it decided to terminate Ray's LTD benefits, and this suit ensued under ERISA. The question for the Eleventh Circuit Court of Appeals (the "Court"): can it disturb Sun Life's decision to terminate Ray's LTD benefits?

Since the Plan gave it discretionary authority to determine benefit claims, Sun Life's decision to terminate the LTD benefits is entitled to a deferential review. However, in analyzing the case, the Court said that the district court had concluded that Sun Life's decision was not even de novo wrong. The Plan defines totally disabled as "unable to perform all the material and substantial duties of your regular occupation." The items and reports in the case's record (discussed above) establish that Ray was not disabled, as so defined, and even Ray's own doctor's office records contradict his conclusion of disability. Sun Life's own doctors-two medical experts- both opined that Ray was capable of returning to her own occupation. The opinion of a plaintiff's own treating physician is not entitled to special weight. While approval of social security benefits may be considered, it is not conclusive on whether a plaintiff is also disabled under the terms of an ERISA plan. The Court agreed with the district court that Sun Life's decision to terminate the LTD benefits was not de novo wrong. Accordingly, the Court upheld Sun Life's decision and the district court's affirmation of it.

October 27, 2011

ERISA- Ninth Circuit Rules That Case Must Be Remanded So The District Court Can Reconsider Whether The Administrator Abused Its Discretion In Denying A Claim For Long-Term Disability Benefits

In Kluda v. Quest Disability Plan, No. 10-16035 (9th Cir. 2011) (Unpublished Memorandum), the plaintiff, Richard Kluda ("Kluda"), was appealing the summary judgment granted by the district court to the defendant, the Qwest Disability Plan (the "Plan"), concerning Kluda's long-term disability ("LTD") benefits. The Plan's administrator is Qwest Disability Services ("QDS"). QDS had denied Kluda's claim for the LTD benefits.

In analyzing the case, the Ninth Circuit Court of Appeals (the "Court") found that QDS committed two procedural errors when it denied Kludka's claim. First, it failed to comply with 29 C.F.R. § 2560.503-1(g)(1)(iii), which requires that it describe "any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary." QDS's generic reproduction of the Plan's terms in its denial letter did not explain to Kludka what specific information was needed and why. Second, although QDS had notice that Kludka was receiving Social Security benefits, it failed to request the relevant records or "explain why it reached a different conclusion than" the Social Security Administration.

Further, QDS had notified Kludka by letter that it denied his claim based on its conclusion that he was not disabled within the meaning of the Plan. The district court misread this letter, and had concluded-in support of the finding of no disability- that Kludka would be reinstated to his previous employment position with accommodations. This conclusion is erroneous. The Plan conceded that the previous employer has not offered to reinstate Kludka to his prior position. Instead, Kludka will have to search for a job on the open market. Also, a doctor who had interviewed Kludka concluded that he could work part-time, gradually increasing his work hours to full-time. If the district court had analyzed Kludka's situation under these conditions, instead of under the assumption that Kludka had a standing offer to return to his previous job with accommodations, the court may well have determined that he is "unable to engage" in meaningful employment (that is, he could not find a job due to his current inability to work full-time) and is thus disabled under the terms of the Plan.

Accordingly, the Court determined that the case should be remanded, so that the district court could reevaluate whether QDS abused its discretion in denying Kluda's claim for the LTD benefits, taking into account the procedural errors and the fact that the former employer had not offered to reinstate Kludka to his previous job with accommodations.

October 24, 2011

ERISA-Second Circuit Adopts Moench Presumption And Affirms Dismissal Of Claims That Plan Fiduciaries Imprudently Allowed Continued Investment In Employer Stock

In two companion cases, In re: Citigroup ERISA Litig., No. 09-3804-cv (2nd Cir. 2011) and Gearren v. McGraw-Hill Companies, Incorporated, Nos. 10-792-cv (L), 10-934-cv (Con) (2nd Cir. 2011), the Second Circuit Court of Appeals (the "Court") adopted the "Moench Presumption" . Under the Moench presumption, plan fiduciaries are presumed to have acted prudently, in accordance with ERISA, when the terms of the plan require or permit an investment in employer stock, and the fiduciaries have invested, or have permitted investment of, the plan's assets in employer stock under that requirement. In the Gearren case, the Court said the following about this presumption.

We adopt the Moench presumption and review defendants' decision to continue to allow Plan participants to invest in employer stock, in accordance with the Plans' terms, for an abuse of discretion. See Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995) ("[A]n ESOP fiduciary who invests the assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision."). Plan fiduciaries are only required to divest an EIAP [that is, an eligible individual account plan] or ESOP of employer stock where the fiduciaries know or should know that the employer is in a "dire situation." Edgar v. Avaya, Inc., 503 F.3d 340, 348 (3d Cir. 2007). "Mere stock fluctuations, even those that trend downward significantly, are insufficient to establish the requisite imprudence to rebut the presumption." Wright v. Or. Metallurgical Corp., 360 F.3d 1090, 1099 (9th Cir. 2004).

Basically, in Gearren and Citigroup, the plaintiffs were appealing from a dismissal of their claims by the district court. The plaintiffs had alleged, among other things, that the defendants-as plan fiduciaries- acted imprudently, in violation of ERISA, by continuing to include employer stock as an investment option in the companies' EIAP retirement plans after a significant stock drop. In both cases, applying the Moench Presumption, the Court ruled that the facts alleged by plaintiffs, even if proven, were insufficient to establish this ERISA violation. Those facts did not prove that the defendants knew or should have known that the companies were in dire situations. As such, in both cases, the Court upheld the district court's dismissal of the plaintiffs' claims.

The Second Circuit, along with the Third, Fifth, Sixth and Ninth Circuits, have now adopted and applied the Moench presumption.

October 21, 2011

Employee Benefits-IRS Announces The Pension Plan Limits For 2012

Its that time of year again! In IR-2011-103, which can be found here, the Internal Revenue Service (the "IRS") has announced the pension plan limits that will apply in 2012. These limits include the following:

--The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $16,500 to $17,000.

--The catch-up contribution limit for 401(k), 403(b) and 457(b) plans for those aged 50 and over remains unchanged at $5,500.

--The limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) of the Code is increased from $195,000 to $200,000.

--The limitation for defined contribution plans under section 415(c)(1)(A) of the Code is increased from $49,000 to $50,000.

--The annual compensation limit under sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) of the Code is increased from $245,000 to $250,000.

--The dollar limitation under section 416(i)(1)(A)(i) of the Code concerning the definition of key employee in a top-heavy plan is increased from $160,000 to $165,000.

--The limitation used in the definition of highly compensated employee under section 414(q)(1)(B) of the Code is increased from $110,000 to $115,000.

See IR-2011-103 for the more technical limits.


October 20, 2011

ERISA-Tenth Circuit Upholds Termination Of Disability Benefits By The Insurer/Administrator

In Lucas v. Liberty Life Assurance Company of Boston, No. 11-6056 (10th Cir. 2011), the plaintiff, Steven Lucas ("Lucas"), filed suit against Liberty Life Assurance Company of Boston ("Liberty"), on the grounds that Liberty had violated ERISA by terminating his long-term disability ("LTD") benefits.

Lucas had been an employee of the Coca-Cola Company, and was covered by its LTD plan (the "Plan"). Liberty was the insurer and administrator of the Plan. As administrator, Liberty had discretionary authority to determine eligibility for benefits. Lucas had suffered a work-related injury requiring spinal surgery and, after a short period back on the job, stopped working. He filed a claim for LTD benefits under Plan. Lucas was awarded LTD benefits under the Plan for 24 months. To be considered disabled and eligible to receive benefits after 24 months, the Plan requires that the participant be "unable to perform, with reasonable continuity, the Material and Substantial Duties of Any Occupation." Liberty decided to terminate Lucas' benefits after the 24 months, on the grounds that he was capable of performing some occupation. At the time this decision was made, Lucas was working as a teacher at a university. Lucas then filed this suit against Liberty. The question for the Tenth Circuit Court of Appeals (the "Court"): Was Liberty correct in terminating Lucas's LTD benefits after 24 months, based on the Plan's "any occupation" rule?

In answering this question, the Court noted that, since Liberty had discretionary authority under the Plan to determine benefit eligibility, Liberty's decision to terminate the LTD benefits will be overturned only if it is arbitrary and capricious. The Court concluded that Liberty's decision was not arbitrary and capricious, and therefore must be upheld. The Court found that Liberty's decision had a reasoned basis, which was supported by substantial evidence. In rendering its decision, Liberty had written three letters, which included extensive citation to medical records and reports, as well as to its own investigative surveillance. The Court said that the cited facts in the letters adequately support Liberty's position that Lucas was able to engage in other full-time work despite his impairment. The Court noted that Liberty had acknowledged that Lucas had been approved for Social Security disability income benefits and indicated that it had fully considered that ruling. But, as Liberty explained, the Social Security decision does not determine entitlement to benefits under the terms and conditions of the Plan. Liberty had also noted Lucas' job as a teacher in concluding that he was able to work. Finally, even though Liberty had a conflict of interest (under the Supreme Court's decision in the Glenn case), being both the administrator and insurer of the Plan , the Court found that Liberty undertook extensive measures to investigate whether Lucas was able to perform the duties of a gainful occupation for which he was reasonably suited. Thus, the conflict of interest has little weight.

October 19, 2011

ERISA-District Court Rules That ERISA Preempts State Law Claims Of Interference With A Contractual Relationship

In Hyde v. Hillerich & Bradsby Co., Civil Action No. 3:11-CV-422-H (W.D. Kentucky 2011), the plaintiff claimed to be a beneficiary of her spouse's pension benefits under a plan subject to ERISA. In seeking those benefits, the plaintiff brought suit for violations of ERISA, and for state law claims consisting of tortious interference with a contractual relationship, conspiracy to interfere with a contractual relationship, outrageous conduct, and punitive damages. The question for the district court (the "Court"): are the state law claims preempted by ERISA, and therefore subject to dismissal?

In analyzing the case, the Court said that ERISA preemption is limited to state common law or statutory claims that fall within the ERISA civil enforcement provision of section 502(a)(1)(B) of ERISA (the provision allowing a participant or beneficiary to sue for benefits under a plan). To determine whether preemption applies, courts apply a three factor test: (1) whether the plaintiff has standing to bring a claim under ERISA section 502(a); (2) whether the plaintiff's cause of action falls within the scope of an ERISA provision that the plaintiff can enforce via section 502(a); and (3) whether the court must interpret the plan in question to resolve the state court claim.

Further, the Court said that prong (1) is met since, as a beneficiary, the plaintiff has standing under section 502(a). Prong (2) is met since the plaintiff's cause of action falls within the scope of an ERISA provision that can be enforced via section 502(a). Namely, the plaintiff may bring an action against the defendants for breach of their fiduciary duties under ERISA and improper disbursement of the pension benefits earned by her spouse. As to prong (3) the determination of the plaintiff's state law claims will require inquiry into the retirement plan that covered her spouse . While the Court will not need to interpret the plan, the Court must look at its provisions to decide if punitive damages are appropriate, if the elements of outrage are met, and whether any changes made to the plan (in addition to other acts by the defendants) could amount to tortious interference with a contractual relationship or conspiracy thereof. The Court concluded that, since the three prongs are met, the plaintiff's state law claims are preempted by ERISA and must be dismissed.

October 18, 2011

Employee Benefits-IRS Announces Amendments To The Final And Proposed Regulations Applying To Cash Balance And Other Statutory Hybrid Plans

In Notice 2011-85, the Internal Revenue Service (the "IRS") announced its intention to amend the final and proposed regulations under sections 411(a)(13) and 411(b)(5) of the Internal Revenue Code (the "Code"), which contain rules for cash balance and other statutory hybrid plans, and which were issued on October 19, 2010.

The Notice indicates that:

--the proposed regulations, when finalized, will apply for plan years that begin on and after a date specified in the regulations, which will not be earlier than January 1, 2013.

--the amendments will postpone, until the date on which the finalized proposed regulations become effective, the effective and applicability date of those provisions of section 1.411(b)(5)-1(d) of the final regulations which interpret section 411(b)(5)(B)(i) of the Code and limit the plan's interest crediting rate to a market rate of return. It appears that the IRS is still reviewing how to apply this limit.

-- the amendments will postpone, until the last day of the plan year before the first plan year in which the finalized proposed regulations apply, the deadline for adopting an interim or discretionary plan amendment under Code section 411(a)(13) (other than section 411(a)(13)(A)) or 411(b)(5).

-- when the proposed regulations are finalized, relief from the anti-cutback requirements of Code section 411(d)(6) will apply for a plan amendment that eliminates or reduces a section 411(d)(6) protected benefit, so long as the amendment is adopted by the final day of the plan year starting before the first plan year in which the finalized proposed regulations will apply, and the elimination or reduction is made only to the extent needed to comply with Code section 411(b)(5).

--the IRS's review of an application for a determination letter for a cash balance or other statutory hybrid plan, submitted to the IRS between February 1, 2011, and January 31, 2012, will not consider the final regulations (other than with respect to Code section 411(a)(13)(A)), except to the extent that those regulations are effective for plan years that begin after December 31, 2010, and the plan has been amended to satisfy those regulations.

The Notice also contains a special timing rule for providing a 204(h) notice. But this rule applies only to an amendment adopted after November 10, 2009, and by the final day of the plan year starting after 2008.

October 17, 2011

ERISA-EBSA Provides Guidance On Multiemployer Plans Entering Into Leasing Arrangements

According to a News Release (dated October 13, 2011), the Employee Benefits Security Administration (the "EBSA") has provided guidance, in the form of Q&As, to help trustees of multiemployer benefit plans better understand how to avoid prohibited transactions when entering into common leasing arrangements. A multiemployer plan is an employee benefit plan maintained pursuant to a collective bargaining agreement between more than one employer, usually within the same or related industries, and a labor union.

The News Release says that the Q&As describe arrangements in which a multiemployer plan leases office space or classroom space to or from a sponsoring union (or another party who has a relationship to the plan), and the prohibited transaction rules that are violated by those arrangements. They also address the administrative and statutory exemptions that may apply, with an analysis of the specific prohibited transaction provisions that are covered by each exemption. The Q&As also describe the consequences to a plan fiduciary if a leasing arrangement is prohibited and does not qualify for an exemption.

The Q&As are here.

October 14, 2011

ERISA-Fifth Circuit Rules That Participant Does Not Have Standing To Sue For Life Insurance Benefits Under ERISA

In Caples v. U.S. Foodservice, Inc., No. 11-30120 (5th Cir. 2011), the plaintiff, Dana Caples ("Caples"), was appealing a summary judgment against her, and in favor of the defendants, U.S. Foodservice, Inc. ("USF") and Hewitt Associates, LLC ("Hewitt"). In this case, Caples had been married to David Caples ("Mr. Caples"), but they later separated and divorced. Mr. Caples had a son, Daniel, who was not Caple's biological child. Mr. Caples had life insurance coverage under an employer-sponsored plan (the "Plan"). Mr. Caples died in September 2007 of an apparent suicide. At the time of his death, he had not designated a beneficiary under the Plan. Hewitt was managing USF's employee benefits plans. Prudential Insurance Company of America ("Prudential"), the insurer and plan administrator under the Plan, was informed by USF through Hewitt that Mr. Caples had died without a designated beneficiary. According to the terms of the Plan, Prudential paid $56,000 to Daniel as Mr. Caples's sole surviving child. Due to the divorce, he had no surviving spouse.

Caples sued Prudential in state court for the $56,000, and Prudential removed to federal court. Caples amended to add USF and Hewitt as defendants and dismissed Prudential. The district court then had Caples submit her claim to Prudential for administrative review. Based on the evidence filed by all parties, Prudential found that it was correct to pay Daniel the $56,000 at issue. Her administrative remedies under ERISA exhausted, Caples brought this suit in district court under ERISA. The question for the Fifth Circuit Court of Appeal s (the "Court"): does Caples have standing to sue under ERISA?

The Court said that, to have standing, Caples must be a "beneficiary", which ERISA defines, for this purpose, as a person designated by a participant, or by the terms of an employee benefit plan, who is or may become entitled to a benefit thereunder (section 3(8) of ERISA). Here, Caples was not designated as beneficiary by the participant. Prudential had confirmed this, and had substantial evidence to support its findings (and, since it had discretionary authority under the Plan, Prudential's findings were entitled to a deferential review by the courts). Caples was not otherwise entitled to a benefit under the Plan's terms. Based on the foregoing, the Court concluded that Caples is not a beneficiary with standing to sue under ERISA. As such, the Court upheld the summary judgment against her.

October 13, 2011

ERISA-Eighth Circuit Rules That Disability Benefits May Not Be Offset by Veterans Benefits

In Riley v. Sun Life and Health Insurance Co., No. 10-2850 (8th Cir. 2011), the sole question for the Eighth Circuit Court of Appeals (the "Court") was whether Sun Life, the insurer and plan administrator of an employer sponsored long-term disability ("LTD") benefits plan (the "Plan"), may offset the LTD benefits paid by the Plan to the plaintiff, James Riley ("Riley"), by the amount that Riley receives in Department of Veterans Affairs ("VA") benefits. The district court upheld Sun Life's decision to apply the offset.

Riley has multiple sclerosis ("MS"), and the parties do not dispute that he is entitled to monthly LTD benefits from the Plan. Also, Riley is a veteran of the Vietnam War and receives monthly VA benefits, under the Veteran's Benefits Act (38 U.S.C. section 101, et seq.) (the "VBA"), because of his MS. The armed services regarded Riley's MS as being a service-related disability contracted during a period of war. The Plan provides that monthly LTD benefits can be reduced by "other income," defined by the Plan as any amount of disability or retirement benefits under (a) the United States Social Security Act (the "SSA"), (b) the Railroad Retirement Act (the "RRA"), or (c) any other similar act or law provided in any jurisdiction.

The Court said that, although Sun Life must have ultimately determined that the VBA was similar to the SSA and/or the RRA, so that Riley's LTD benefits should be offset, the Court cannot find any evidence in the record that Sun Life undertook a meaningful analysis of the VBA in making this determination. Benefits under the VBA, for a wartime service-related disability, as a matter of statutory construction, do not derive from an act that is "similar to" the SSA or RRA. The SSA and RRA disability benefits programs are both federal insurance programs based upon employment, and the amount of an award under their terms depends upon how much has been paid in. Conversely, the VA benefits are not from an insurance program, but instead are considered obligatory compensation for injuries to service men and women during military duty. The VA benefits generally depend upon the extent of a veteran's injury, and are unrelated to length of service, rank, or amount of pay received while serving. They are funded by Congress through a budget, not by a tax on service people.There are other differences between the VBA and the SSA and RRA. As such, the Court determined that the VA benefits are not "other income", and should not offset Riley's LTD benefits under the Plan.


October 6, 2011

ERISA-Fifth Circuit Rules That A Fiduciary Breached Its Duties By Failing To Provide Plan Documents and a Rollover Election Form To A Participant

In Kujanek v. Houston Poly Bag I, Limited, No. 10-20664 (5th Cir. 2011), the plaintiff, Kenneth Kujanek ("Kujanek"), sued his former employer, Houston Poly Bag I, Ltd. ("Houston Poly"), under ERISA to recover retirement benefits that were allegedly withheld from him. During Kujanek's employment with Houston Poly, he accrued a significant amount of vested benefits in a profit-sharing plan that Houston Poly offered to its employees (the "Plan"). After resigning from Houston Poly, Kujanek made multiple attempts to obtain plan documents and the necessary forms for electing a "rollover" distribution of his benefits. When his attempts were unsuccessful, he brought this suit against Houston Poly. The district court granted summary judgment for Kujanek on his claims that Houston Poly breached its fiduciary duty of loyalty and violated ERISA's disclosure requirements. The district court also awarded Kujanek statutory penalties. Houston Poly appealed.

In analyzing the case, the Court noted that Houston Poly was the Plan Administrator of the Plan, and as such it had an obligation to provide Kujanek with the plan documents. Kujankek never made a formal, written claim for those documents. However, Houston Poly was aware that Kujanek sought information about the Plan and how he might obtain his benefits, and that Kujanek did not already have the crucial information and rollover election form in his possession. The Court held that, by withholding plan documents and the rollover election form, Houston Poly failed to act in Kujanek's best interest and for the exclusive purpose of providing benefits to participants, in breach of its duties under section 404(a)(1)(A) of ERISA. The loss and depreciation in Kujanek's Plan benefit (that is, the decrease in the value of his under the Plan) during the period that the documents and election form were withheld is the appropriate measure of relief.

As to the statutory penalties, under section 104(b)(4) of ERISA, upon written request, a participant may obtain from the plan a copy of the "bargaining agreement, trust agreement, contract, or other instruments under which the plan is established or operated." ERISA section 502(c)(1) provides the applicable remedy-in the form of a $110/day penalty- for the failure to provide those documents when requested. Here, Kujanek's written request for documents was in the form of a discovery request made during earlier, unrelated state court litigation. The discovery request is not a "written request", within the meaning of section 104(b)(4), so the section 502(c)(1) penalty cannot be imposed at this point. However, the Court remanded the case back to the district court for further findings on whether Houston Poly had failed to provide Kujanek with Plan documents, justifying the imposition of the penalty.


October 5, 2011

Employment-Ninth Circuit Rules That Plaintiff Has Raised A Triable Issue Of Age Discrimination

In Earl v. Nielson Media Research, Inc., No. 09-17477 (9th Cir. 2011), the plaintiff, Christine Earl ("Earl"), was appealing the district court's grant of summary judgment against her on, among others, her claim of age discrimination under California law against her former employer, Nielson Media Research, Inc. ("Nielson"). Earl had brought the suit after Nielson had fired her. The Ninth Circuit Court of Appeals (the "Court") ruled that reasonable jurors could find that Nielsen's proffered reason for firing Earl was a pretext for age discrimination. It therefore reversed the district court's grant of summary judgment on the age discrimination claim.

While working for Nielson, on several occasions, Earl had violated Nielson policies. As a result, Nielsen placed Earl on a Developmental Improvement Plan ("DIP"). A DIP is an informal, nondisciplinary tool that Nielsen uses to notify an employee that his or her performance fell below company standards. A DIP is distinct from a Performance Improvement Plan ("PIP"), which is part of Nielsen's disciplinary process. Whereas Earl's DIP stated that her failure to meet company expectations in the future may result in the implementation of the disciplinary process, a PIP states that failure to meet expectations may result in further disciplinary action up to and including termination. At no point during her time at Nielsen did Earl receive a PIP. Nevertheless, Nielson later fired Earl. She was 59 years old when terminated. She then filed this suit.

In analyzing this case, the Court said that California law prohibits employers from discharging or dismissing any employee over 40 years old based on the employee's age. Borrowing from the federal three-part McDonnell Douglas test, first, the plaintiff bears the burden of establishing a prima facie case of age discrimination. Second, once the plaintiff has done so, the burden shifts to the employer to articulate a legitimate, nondiscriminatory reason for its actions. Third, if the employer does so, the plaintiff must raise a triable issue that the employer's proffered reason is a pretext for age discrimination. In this case, the issue is whether the plaintiff, Earl, has met her burden in the third step and may therefore avoid summary judgment. The Court found that, here, Earl raises a triable issue by presenting evidence that :

--Nielsen treated younger, similarly situated employees more favorably- Nielsen did not terminate--and in one instance may not have even disciplined--younger "recruiters" in their 30s and 40s when those recruiters repeatedly violated Nielsen policies similar to those violated by Earl; and

-- in terminating Earl without first issuing her a PIP, Nielsen deviated from its normal disciplinary procedure.

As such, Earl may avoid summary judgment.

October 4, 2011

ERISA-District Court Rules That Withdrawal Liability May Be Imposed On A Corporate Controlled Group Member (A Trade Or Business), But Not On Individual Company Owners (Who Do Not Conduct A Trade Or Business)

Are you a trade or business? The answer to that question can have numerous legal implications. Here is an example.

In Central States, Southeast & Southwest Areas Pension Fund v. Messina Trucking, Inc., No. 10-CV-00355 (N.D. Ill. 2011), Messina Trucking, Inc. ("Messina Trucking") had withdrawn from the plaintiff, Central States, Southeast & Southwest Areas Pension Fund (the " Fund"), a multiemployer pension plan, thereby incurring about $3 million in withdrawal liability under ERISA. Messina Trucking was part of a controlled group of corporations, which consisted of itself , Auburn Supply Company, Inc., Utica Equipment Company and Messina Products, L.L.C. ("Products") (collectively, "Messina Controlled Group"). The defendants in the case are each member of the Messina Controlled Group, as well as Stephen L. Messina and Florence M. Messina, who together own at least 80% of each member of the Messina Controlled Group through certain trusts (the "Messinas"). However, the defendants argued, among other things, that neither Products nor the Messinas were a "trade or business". As such, they cannot be responsible for the withdrawal liability.

On this issue, the Court noted that ERISA imposes withdrawal liability on all "trades or business (whether or not incorporated) which are under common control." , whenever one such trade or business-here Messina Trucking-incurs withdrawal liability. Thus, each trade or business under common control becomes jointly and severally liable for the withdrawal liability. Here, the common control is conceded. But is Products and/or the Messinas a "trade or business"? On this issue, the Court applied the following test: to be a trade or business, an entity must engage in an activity (1) for the primary purpose of income or profit and (2) with continuity and regularity.

As to Products, its operating agreement states, in part, that the "Members have adopted a business plan for the development of properties and for the production, sale and marketing of gravel for road, subdivision, City and community development, both wholesale and retail." Moreover, Products' tax returns include a Federal Employer Identification Number and list Products' principle business activity as "real estate rental" as well as its income and expenses. The above constitutes strong evidence that Products is a trade or business. Further , Products has a President, Vice President and a Secretary. An employee of Messina Trucking handles Products' paperwork, prepares and files annual reports, and pays any bills. As such, the Court found that Products had continually maintained and operated what it self-proclaimed to be a real estate rental company. Products was not a passive investment or some other sporadic activity, such as a hobby, or an amusement diversion. Rather, Products was engaged in regular and continuous activity with the primary purpose of generating income or profit. Accordingly, the Court concluded that Products is engaged in trade or business and is jointly and severally liable for Messina Trucking's withdrawal liability.

As to the Messinas, their unincorporated activities must constitute a trade or business. The Messinas own certain property. They allowed Messina Trucking to operate its business from one such property. Messina Trucking had paid some rent for this use, but ceased paying rent after a certain date. At no time did a written lease exist for Messina Trucking's use of the property. In practice, with respect to the property, the Messinas paid the property taxes, while Messina Trucking paid the property insurance, utility bills, and all repairs and maintenance . Stephen Messina also owned two other properties. There are three homes located on these properties, which the Messinas rent out. The homes are all leased pursuant to written residential lease agreements. Either Stephen or his daughter, Anna, negotiate the terms of the leases. The rent is paid to the Messinas and deposited into their joint personal bank acount. Messina Trucking employees take care of the maintenance work, snow removal, and lawn care on the properties, but they are not paid extra for their time. Finally, the Messinas report the rental income from the homes they leased on Schedule E of their federal tax return and deducted expenses. The Court concluded that these activities do not constitute a trade or business under the test set out above. They more closely resemble a passive investment. Therefore, the Messinas cannot be held liable for Messina Trucking's withdrawal liability.


October 3, 2011

ERISA-Ninth Circuit Rules That Plan Administrator Abused Its Discretion When It Recalculated The Participant's Long-Term Disability Payments After He Was Awarded A Social Security Disability Benefit

In Elliot v. Elliot, Leibl & Snyder, LLP Long-Term Disability Plan, No. 09-56730 (9th Cir. 2011) (Unpublished Memorandum), the plaintiff, David Scott Elliot ("Elliot"), became permanently disabled and began receiving a long-term disability ("LTD") benefit from the defendant, the Elliot, Leibl & Snyder, LLP Long-Term Disability Plan (the "Plan"), in December 1999. The plan administrator of the Plan was Unions Security Insurance Company ("USIC"). Elliot was eligible to receive the maximum LTD benefit payable-$10,000 per month plus subsequent, annual cost of living adjustments ("COLA Adjustments"). This benefit had reached $10,716 per month by February 2003.

Elliot applied for a Social Security Disability ("SSD") benefit from the Social Security Administration in March 2004. In June 2006, he received an award of an SSD benefit retroactive to February 2003. The award totaled $72,954.50, for the period from February 2003 through April 2006, with a monthly benefit of $1,811/month starting in February 2003. Following Elliot's receipt of this award, USIC recalculated the LTD benefit payable to Elliot by the Plan from February 2003 onwards. This recalculation resulted in a permanent reduction of Elliot's LTD benefit going forward to $8,775/month, and the determination that USIC was entitled to a clawback of $79,384.15 in the LTD benefit paid to Elliot by the Plan between 2003 and 2006. This $79,384.15 clawback was greater than the $72,954.50 retroactive SSD award Elliot had received. The parties agreed that the Plan was entitled to reduce the LTD benefits on a "going forward" basis and to receive a clawback. The question for the Court: did USIC correctly calculate the amount payable by the Plan going forward from February 2003 and the clawback?

In analyzing the case, the Court noted that, since the Plan conferred unambiguous discretionary authority on USIC to determine plan benefits, USIC's decisions regarding plan benefits are reviewed for an abuse of discretion. Neverthess, the Court determined that USIC had abused its discretion when it recalculated the LTD benefit payable by the Plan. In calculating the "going forward" LTD benefit, USIC first subtracted Elliot's SSD monthly payment of $1,811 from the original 1999 $10,000 monthly payment from the Plan. This calculation resulted in a new monthly pre-COLA base payment of $8,189 from the Plan. Then, it multiplied that amount by a COLA Adjustment factor, resulting in $8,775/month. The Court said that, by decreasing Elliot's original $10,000 award, conferred in 1999-dollars, by the $1,811 SSD benefit conferred to Elliot in 2003-dollars, USIC mixed past and present dollar amounts in a single calculation, a computation which is mathematically unsound. Since Elliot did not receive an SSD benefit in the years prior to 2003, and since his SSD benefit was conferred in 2003-dollars, USIC should have subtracted his $1,811/ month SSD benefit from the $10,716 per month amount he was receiving from the Plan in 2003, with a resulting "going forward" amount of $8,905 /month. The Court remanded the case back to the district court to make additional calculations, including the amount of the clawback.