December 2011 Archives

December 29, 2011

Employment- Seventh Circuit Rules That An Employee Need Not Be Paid Overtime For Work Performed Prior To The Start Of Her Work Shift

In Kellar v. Summit Seating Incorporated, No. 11-1221 (7th Cir. 2011), the plaintiff, Susan Kellar ("Kellar"), alleged that she is entitled to overtime, under the Fair Labor Standards Act (the "FLSA"), for work performed prior to the official start of her work shift. The district court granted summary judgment in favor of her employer, defendant Summit Seating Incorporated ("Summit"), and Kellar appealed.

Kellar claimed that she regularly arrived at Summit's factory (they made seats for buses and other vehicles) between 15 and 45 minutes before the start of her 5:00 a.m. shift. Upon arrival, Kellar-a sewing manager-said that she would spend: (1) about 5 minutes unlocking doors, turning on lights, turning on a compressor, and punching in on the time clock, (2) about 10 minutes preparing coffee for the rest of Summit's employees, drinking coffee herself and smoking a cigarette, (3) 5 to 10 minutes (or longer) reviewing schedules, and gathering and distributing fabric and materials to her subordinates' workstations, and (4) her remaining pre-shift time performing "prototype work" (preparing models for production), cleaning the work area, or checking patterns. According to Kellar, no one told her that she had to come in before her shift. In February 2009, Kellar voluntarily resigned, and brought this suit under the FLSA for overtime for her pre-shift work.

The Court found that Kellar's pre-shift activities were not non-compensable "preliminary" activities under the Portal-to-Portal Act of 1947. Rather, Kellar's activities were "principal" , and compensable and eligible for overtime, since they were integral and indispensable to the work that Kellar performed as a sewing manager, even if they occurred before the beginning of Kellar's work shift. The Court found further that Kellar's pre-shift activities were not "de minimis", and did not fail to be compensable and eligible for overtime on that basis. Kellar's activities involved a substantial amount of time. In contrast, work is de minimis only when it constitutes a few seconds or minutes of work beyond the scheduled working hours that cannot administratively be accounted for without extreme difficulty.

However, the Court found that Summit had no actual or constructive knowledge of Kellar's work. The FLSA does not require an employer to pay for work that it did not know about, and had no reason to know about. Her time cards showed she had punched in early, but that does not prove that she was working prior to the start of her shift. During her 8 years of working for Summit, she never told the owners, or any of the other managers, that she was working overtime. Further, Kellar was aware of Summit's policy prohibiting overtime work absent express permission. Again, no one had given her permission to do the pre-shift work. The Court concluded that, without the employer's knowledge about Kellar's pre-shift activities, those activities were not compensable or eligible for overtime, and the Court affirmed the district court's summary judgment in Summit's favor.

December 27, 2011

Employee Benefits-IRS Reminds Taxpayers To Plan Now To Get The Full Benefit of The Tax Saver's Credit

In IR-2011-121, the Internal Revenue Service (the "IRS") reminds taxpayers that low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2011 and the years ahead. Here is what the IRS said.

The saver's credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Eligible workers still have time to make qualifying retirement contributions and get the saver's credit on their 2011 tax return. People have until April 17, 2012, to set up a new individual retirement arrangement or add money to an existing IRA and still get credit for 2011. However, elective deferrals must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2012 contributions soon so their employer can begin withholding them in January.
The saver's credit can be claimed by:

• Married couples filing jointly with incomes up to $56,500 in 2011 or $57,500 in 2012;

• Heads of Household with incomes up to $42,375 in 2011 or $43,125 in 2012; and

• Married individuals filing separately and singles with incomes up to $28,250 in 2011 or $28,750 in 2012.

Although the maximum saver's credit is $1,000, $2,000 for married couples, it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers. A taxpayer's credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver's credit, and its instructions have details on figuring the credit correctly.

Although the maximum saver's credit is $1,000, $2,000 for married couples, it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers. A taxpayer's credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver's credit, and its instructions have details on figuring the credit correctly.

Other special rules that apply to the saver's credit include the following:

• Eligible taxpayers must be at least 18 years of age.

• Anyone claimed as a dependent on someone else's return cannot take the credit.

• A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.

• Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2011, this rule applies to distributions received after 2008 and before the due date, including extensions, of the 2011 return. Form 8880 and its instructions have details on making this computation.

• More information about the credit is on

December 23, 2011

Employee Benefits-IRS Will No Longer Rule On Discrimination Testing As Part Of The Determination Letter Process For A Qualified Plan

According to Announcement 2011-82, the Internal Revenue Service (the "IRS") will no longer rule on elective demonstrations that a plan has satisfied coverage and nondiscrimination requirements as part of the determination letter process for tax-qualified retirement plans. Thus, an employer will not be able to rely on a determination letter as to whether the plan satisfies the requirements of section 401(a)(4), 401(a)(26), or 410(b) of the Internal Revenue Code (the "Code"). This change is effective for applications for determination letters filed on or after February 1, 2012, in the case of plans under a 5-year remedial amendment cycle (other than terminating plans) (generally individually designed plans), and on or after May 1, 2012, in the case of terminating plans and plans under a 6-year remedial amendment cycle (generally pre-approved plans).

The IRS will continue to determine whether a plan's benefit or contribution formula satisfies the requirements of a nondiscriminatory design-based safe harbor, and whether a plan's terms satisfy sections 401(k) and 401(m) of the Code, as part of the determination letter process.

December 22, 2011

Employee Benefits-IRS Issues 2011 Cumulative List of Changes in Plan Qualification Requirements

The Internal Revenue Service ("IRS") has issued Notice 2011-97. This Notice contains the 2011 Cumulative List of Changes in Plan Qualification Requirements (the "2011 Cumulative List"), described in section 4 of Rev. Proc. 2007-44. According to the Notice, the 2011 Cumulative List contains a list of the changes to plan qualification requirements, and is to be used by plan sponsors and practitioners submitting determination letter applications for plans during the period beginning February 1, 2012 and ending January 31, 2013. These plans will primarily be single employer individually designed defined contribution plans, including employee stock ownership plans (ESOPs), single employer individually designed defined benefit plans, and multiple employer individually designed plans that are in Cycle B. Generally, an individually designed plan is in Cycle B if the last digit of the employer identification number of the plan sponsor is 2 or 7.

The Notice reminds us that the list of changes in the Notice does not extend the deadline by which a plan must be amended to comply with any statutory, regulatory, or guidance changes. The general deadline for timely adoption of an interim or discretionary amendment can be found in section 5.05 of Rev. Proc. 2007-44.

December 20, 2011

ERISA-IRS Provides Relief To IRA Owners Who Have Entered Into Indemnification Agreements With Brokers or Other Financial Institutions

In Announcement 2011-81, the Internal Revenue Service (the "IRS") provides temporary relief to owners of Individual Retirement Accounts ("IRAs") in circumstances in which the owners have signed certain indemnification agreements, or granted certain security interests in accounts, that may have an effect on the IRAs.

By way of background, according to the Announcement, on October 20, 2011, the Department of Labor (the "DOL") issued Advisory Opinion 2011-09A, which indicated that an IRA owner's agreement to indemnify a broker in order to cover indebtedness of, or arising from, the IRA with the broker would be an impermissible "extension of credit," as described in § 4975(c)(1)(B) of the Internal Revenue Code (the "Code"), and that DOL class exemption PTE 80-26 would not provide any relief from this prohibited transaction. Subsequent to the issuance of Advisory Opinion 2011-09A, similar issues have been raised regarding the IRA owner's grant of a security interest among the non-IRA accounts and the IRA (referred to collectively as cross-collateralization agreements) with a broker or other financial institution. Previously, on October 27, 2009, the DOL issued Advisory Opinion 2009-03A, which held that the grant by an individual to a broker of a security interest in the individual's non-IRA accounts with the broker would be an impermissible extension of credit to the individual's IRA, as described in § 4975(c)(1)(B) of the Code. Under Advisory Opinion 2011-09A, PTE 80-26 does not provide relief for the prohibited transaction arising from such extensions of credit.

The Announcement said that the DOL has advised the IRS that it is considering further action with respect to the issues described above, including the consideration of a new class exemption to provide relief. Pending further action by the DOL, and until issuance of further guidance from the IRS, the IRS will determine the tax consequences relating to an IRA, without taking into account the consequences that might otherwise result from a prohibited transaction under § 4975 resulting from entering into any indemnification agreement or any cross-collateralization agreement similar to the agreements described in DOL Advisory Opinions 2009-03A and 2011-09A. This will obtain so long as there has been no execution or other enforcement pursuant to the indemnification or cross-collateralization agreement against the assets of the IRA account which is the subject of the agreement.

December 19, 2011

Employment-Ninth Circuit Rules That A Teacher Without Legal Authorization To Teach Is Not Protected By The ADA

In Johnson v. Board of Trustees of Boundary County School District No. 101, No. 10-35233 (9th Cir. 2011), the question for the Ninth Circuit Court of Appeals (the "Court") was whether a disabled teacher is a "qualified individual with a disability" under the Americans with Disabilities Act (the "ADA").

In this case the plaintiff, Patricia ("Trish") Johnson ("Johnson"), who had a history of depression and bipolar disorder, taught special education in the Boundary County School District No. 101 (the "District") in Idaho for a decade. Under state law, she was required to have a teaching certificate. Her certificate was set to expire prior to the start of the 2007-2008 school year, and at that time she was short three semester hours of college credit that was needed to renew. She was told by the District that, in order to teach during the 2007-2008 school year, she would need to petition the District's Board of Trustees ("Board"), the defendant in the case, to apply for provisional authorization to teach without the certificate. However, the Board denied Johnson's request for the authorization, and subsequently terminated Johnson's employment with the District. Johnson then filed suit against the District alleging, among other things, an ADA violation.

In analyzing the case, the Court said that Title I of the ADA prohibits "discriminat[ion] against a qualified individual with a disability because of the disability of such individual in regard to the hiring, advancement, or discharge of employees." (citing 42 U.S.C. § 12112(a)). Thus, to prevail on her ADA claim, Johnson first must show that she is a "qualified individual with a disability". The Court further said that the ADA defines "qualified individual" as "an individual who, with or without reasonable accommodation, can perform the essential functions of the employment position that such individual holds or desires." (citing 42 U.S.C. § 12111(8)). Under EEOC regulations, a "qualified individual with a disability" is one "who satisfies the requisite skills, experience, education and other job-related requirements of the employment position such individual holds or desires, and who, with or without reasonable accommodation, can perform the essential functions of such position." (citing 29 C.F.R. § 1630.2(m)).

The Court then said that the issue is whether Johnson's lack of legal authorization to teach disqualifies her from being a "qualified individual". The Court concluded that it did. In so concluding, the Court noted that the employer does not have to provide any reasonable accommodation -here providing the legal authorization-to help an employee meet job qualifications such as education and experience, as opposed to helping an employee perform essential job functions. Johnson does not challenge the need to obtain the legal authorization as itself being discriminatory against a disabled individual. Thus, the Court ruled that Johnson is not a "qualified individual with a disability", and therefore does not have a claim under the ADA.

December 15, 2011

ERISA-DOL Clarifies Guidance On Use of Electronic Media To Meet Participant Fee Disclosure Rules

The Department of Labor (the "DOL") has issued Technical Release 2011-03R (the "New Release"), which clarifies the guidance it provided earlier on the use of electronic media to meet the new participant fee disclosure rules (found at 29 CFR section 2550.404a-5) (the "Rules").

According to the New Release, on September 13, 2011, the DOL issued Technical Release 2011-03, which sets forth an interim enforcement policy regarding the use of electronic media to satisfy the disclosure requirements under the Rules. The New Release revises Technical Release 2011-03 to permit:

--disclosure through continuous access Web sites, if certain conditions of the New Release are met; and

--investment-related information, specifically the comparative chart information required by the Rules (in section 2550.404a-5(d), to be furnished-in electronic or paper form- as part of, or along with, a pension benefit statement described in section 105 of ERISA.

December 14, 2011

Employee Benefits-IRS Talks About Maximizing An Employee's Salary Deferrals in 2012

In Retirement News for Employers (Fall 2011), the Internal Revenue Service ("IRS") talks about how an employee can maximize his or her salary deferrals in 2012. Here is what the IRS says:

Does your employer's retirement plan allow you to make contributions from your salary? If so, you are likely to be asked to complete a salary deferral form (salary reduction agreement) now to indicate the amount you want to contribute to the plan from your salary in 2012.

To maximize your retirement savings, contribute as much as possible to the plan up to the 2012 allowed limits of: (1) $17,000 to 401(k) or 403(b) plans or (2) $11,500 to SIMPLE plans. If you are 50 or older by the end of 2012, your plan may allow you to make additional (catch-up) contributions of (a) $5,500 to 401(k) or 403(b) plans or (b) $2,500 to SIMPLE plans.

Remember, in addition to saving more for your retirement, there are other benefits of making salary deferral contributions to the plan. For example:

• you may reduce your taxable income by making pre-tax contributions;

• your employer may match your contributions to the plan (for example, your employer may contribute 50 cents for each dollar that you contribute to the plan, up to a certain amount); and

• you may qualify for the retirement savings contributions credit of up to $1,000 (up to $2,000 if filing jointly) for contributing to the plan and this credit may reduce your federal income tax liability.

If you decide to contribute less than the maximum allowed at this time, you may be able to increase your contributions by completing a new salary deferral form during 2012. Contact your employer for details about the retirement plan, including how much you can contribute from your salary, whether the employer also makes contributions on your behalf and whether you can change the amount of your contributions to the plan in 2012.

December 13, 2011

Employee Benefits-IRS Provides Guidance on Retirement Plan Distributions

In Retirement News for Employers (Fall 2011), the Internal Revenue Service ("IRS") provides guidance on distributions from tax-qualified retirement plans. Here is what the IRS said:

The method by which retirement plan benefits are distributed is determined by options available under the plan and elections made by participants and beneficiaries. Defined contribution plans, such as 401(k)s and profit-sharing plans, generally pay retirement benefits in a lump sum or installments. The normal method of distribution in defined benefit plans, on the other hand, is an annuity paid over the employee's life or the joint lives of the employee and his or her spouse, unless consent from the employee and, if married, the employee's spouse is obtained.

When an employee terminates employment prior to normal retirement age, before a distribution can be made (except in the case of cash-outs described in Lump-Sums and Installments below), the employee must be given a written notice explaining the available benefit payment options under the plan, the right to delay payment until the later of the plan's normal retirement age or age 62, and the consequences of failing to delay payment.

A plan sponsor should know what forms of distribution are available to participants and beneficiaries under the plan, retain participant distribution election forms together with notarized spousal consents, if applicable, and communicate with the plan administrator about who provides the notice and consent forms, and who calculates and pays out benefits.

Lump-Sums and Installments. A plan can make a lump-sum distribution of a participant's or beneficiary's entire accrued vested benefit without consent (a cash-out) if the benefit is $5,000 or less. If the benefit is more than $5,000, a lump-sum distribution can only be made with the participant's (and spouse's, if applicable) written consent. Installment payments are made at regular intervals, for a definite period (such as 5 or 10 years) or in a specified amount (for example, $2,000 a month) to continue until the account is depleted.

Annuities. Annuity payments are made from a defined benefit plan or under a contract purchased by a defined contribution plan. Payments are made at regular intervals over a period of more than one year, depending on the type of annuity. If the participant is married prior to the first day of the period for which benefits are paid as an annuity, a plan subject to the spousal annuity requirements must pay benefits in the form of a qualified joint and survivor annuity (a "QJSA"). In this case, if the participant dies before the spouse, the plan pays the spouse a life annuity. A participant, with proper spousal consent, may waive the QJSA and chose another payment option. Plans subject to the QJSA rules may also have to offer participants a qualified optional survivor annuity (QOSA) that provides a surviving spouse an annuity equal to either 50% or 75% of the annuity payments to be made during the participant's life.

For a married, vested participant who dies before the annuity starting date, the plan must pay a qualified pre-retirement survivor annuity (a "QPSA") to the surviving spouse. A married participant, with spousal consent, may waive either the QJSA or QPSA annuities and choose an alternate form of distribution provided under the terms of the plan. An unmarried participant must receive a single-life annuity unless waived.

Plans Subject to QJSA/QPSA. Most defined contribution plans are not subject to the QJSA and QPSA rules. However, when a married participant dies, these plans must pay the entire remaining vested account balance to the participant's surviving spouse unless the spouse has consented to another beneficiary. Defined benefit, money purchase pension plan and target benefit plans must offer QJSAs and QPSAs if a participant's vested accrued benefit is more than $5,000, but may offer other payment options as well. Defined contribution plans must also offer QJSAs and QPSAs for account balances over $5,000 unless: (1) the participant doesn't choose a life annuity under the plan, (2) the plan pays the entire remaining vested account balance on the married participant's death to the surviving spouse unless the spouse has consented to another beneficiary and (3) the plan is not a transferee of a plan that was subject to QJSA/QPSA.

December 12, 2011

ERISA-Third Circuit Rules That Defendant Has Equitable Defenses Against A Claim For Subrogation

In U.S. Airways Inc. v. McCutchen, No. 10-3836 (3rd Cir. 2012), the defendant, James McCutchen ("McCutchen"), had suffered a serious automobile accident. An employee benefit plan (the "Plan") administered by the plaintiff, U.S. Airways ("Airways"), paid $66,866 for his medical expenses. McCutchen then recovered $110,000 from third parties, with the assistance of counsel. Airways, which had not sought to enforce its subrogation rights, demanded reimbursement of the entire $66,866 it had paid without allowance for McCutchen's legal costs, which had reduced his net recovery to less than the $66,866 that amount that Airways demanded. Airways filed this suit against McCutchen for "appropriate equitable relief" to collect the $66,866 amount, pursuant to section 502(a)(3) of ERISA. The district court granted judgment to Airways for the $66,866 amount .The issue for the Third Circuit Court of Appeals (the "Court"): may McCutchen assert certain equitable defenses, such as unjust enrichment, against Airways' claim.

The Court concluded that McCutchen may assert equitable defenses against Airway's claim. The Plan's summary plan description requires a participant to reimburse the Plan for any amounts that the Plan has paid out of any monies the participant recovers from a third party. There is no limitation based on the lawyer's fees the participant incurs to collect those monies. However, the Court said that it must exercise its discretion to limit a plan's equitable relief to what is "appropriate" under traditional equitable principles, in particular, in view of the unjust enrichment of Airways without the offset for lawyer's fees. Applying the traditional equitable principle of unjust enrichment, the Court found that the district court's judgment requiring McCutchen to provide full reimbursement to Airways constitutes inappropriate and inequitable relief. Because the amount of the judgment exceeds the net amount of McCutchen's third-party recovery, it leaves him with less than full payment for his emergency medical bills, thus undermining the entire purpose of the Plan. At the same time, it amounts to a windfall for Airways, which did not exercise its subrogation rights or contribute to the cost of obtaining the third-party recovery. Equity abhors a windfall. As such, the Court vacated the district court's order, and remanded the case for the district court to fashion "appropriate equitable relief."

December 8, 2011

Employee Benefits-IRS Issues FAQs On New Form 8955-SSA

The Internal Revenue Service (the "IRS") has issued FAQs which provide guidance on new Form 8955-SSA. This form is to be used to report to the IRS retirement plan participants, who have separated from service with deferred vested benefits in the plan. It replaces Schedule SSA. According to the FAQs, Form 8955-SSA is to be used for Plan Year 2009 filings and thereafter. The due date for filing the 2009 and 2010 Forms 8955-SSA is the later of (1) January 17, 2012 or (2) the due date that generally applies for filing the Form 8955-SSA for the 2010 plan year (the last day of the seventh month after the close of the plan year (plus extensions)).

The FAQs note that:

-- the January 17, 2012 due date may not be extended by filing Form 5558 (but a Form 5558 may be filed to extend a due date that falls after January 17, 2012);

-- a Schedule SSA filed for Plan Year 2009 and/or Plan Year 2010 before April 20, 2011 will be treated as satisfying the applicable reporting obligations;

--Form 8955-SSA should be filed after April 20, 2011, even for years before PlanYear 2009; and

-- a participant's individual statement must be furnished to the separated participant no later than by the due date for filing the Form 8955-SSA on which he or she is being reported.

December 8, 2011

ERISA- Fourth Circuit Rules That Plan Administrator Did Not Abuse Its Discretion In Revoking Long-Term Disability Benefits

In Scott v. Eaton Corporation Long Term Disability Plan, No. 10-2124 (4th Cir. 2011)(Unpublished), the plaintiff, Statia Scott ("Scott"), brought suit under ERISA against the defendant, the Eaton Corporation Long Term Disability Plan (the "Plan"), for revoking Scott's long-term disability ("LTD") benefits from the Plan. The district court reversed the Plan's decision and awarded LTD benefits to Scott. The Plan appealed. The issue for the Fourth Circuit Court of Appeals: was the Plan's decision to revoke the LTD benefits, made by the plan administrator of the Plan, an abuse of discretion? If not, the decision must stand.

In this case, the plan administrator of the Plan was the employer, Eaton Corporation ("Eaton"). Scott's disability arose from right arm pain and rheumatism, coupled with anxiety and depression. After initially being awarded LTD benefits by the Plan, Scott's LTD benefits were later revoked and terminated by Eaton as plan administrator. Eaton's decision to revoke the benefits was based on the medical reports of seven physicians, solicited by the Plan, all of which concluded that Scott could work. Only Scott's own physician-one Dr. Riley- had concluded that Scott was disabled. Eaton discounted Dr. Riley's conclusions, based on the various inconsistencies among his diagnoses, his lack of objective findings, and his conclusions being contradicted by the Plan's seven reviewing physicians.

In analyzing the case, the Court noted that Eaton had discretion to interpret and apply the Plan's provisions, and to determine eligibility for benefits. As such, Eaton's decision to revoke the LTD benefits must be reviewed under an abuse of discretion standard. The Court concluded that Eaton did not abuse its discretion, because its decision-making process was sound and its ultimate decision was supported by substantial evidence. The record is clear that Eaton thoughtfully considered but rejected the views of Dr. Riley. Eaton had also taken into account the side effects of Scott's medicines. Also, the evidence in the record-primarily lack of objective evidence of disability-supports Eaton's decision. As such, the Court ruled to uphold Eaton's decision to revoke Scott's LTD benefits, and reversed the district court's judgment.

December 7, 2011

ERISA-EBSA Provides More Information To Protect The Public Against MEWAs

In its continuing effort to protect employers, employees and the public from MEWAs (see my blog of December 6), the Employee Benefits Security Administration (the "EBSA") has issued a comprehensive Fact Sheet. The Fact Sheet covers a number of topics (each with its own link) pertaining to MEWAs and health care in general. These topics include: what to do if your health coverage can no longer pay benefits, MEWAs under ERISA, MEWA enforcement, and the ERISA Public Disclosure System (a system for locating From M-1s, the forms filed annually by MEWAs).

One topic of general interest is how an employer may protect employees when purchasing health insurance. The Fact Sheet says the following on this matter:

--Compare insurance coverage and costs. Always compare the benefits and costs of multiple insurance products. If one product appears to offer similar benefits at a dramatically lower cost, ask questions.

--Confirm that the person offering the product is a licensed insurance agent with a proven record of reliability. Promoters of insurance scams often engage unlicensed insurance agents to market their product as a cheaper alternative to traditional insurance. Check out unknown agents with your state insurance department.

--Verify that any unfamiliar company, organization or product is approved by your state insurance department.

--Examine the policy to determine the actual coverage and whether the promised benefits are fully insured by a licensed insurance company. Do not confuse representations about stop-loss coverage with a guarantee of group health benefits. Stop-loss coverage often protects only the issuer, not the insured individuals.

--Request references of employers enrolled with the provider and get information from employers about benefit payment history and claim turn around time.

--Ask about the allocation of premiums charged for commissions, fees and administration expenses. Allocation of a high percentage of the premiums to commissions, fees and administrative expenses may indicate a problem with the product or insurer.

--Contact your Regional Office of the EBSA through its toll-free number at 866.444.3272 or at to report problems.

December 7, 2011

ERISA-Second Circuit Rules That Participant Is Entitled To Recover An Amount That The Plan Erroneously Transferred Out Of His Account, Even Though the Plan Had Not Yet Recovered That Amount From The Payee

In Milgram v. Orthopedic Associates Defined Contribution Pension Plan, Nos. 10-1862-cv (L), 10-1893 (con) (2nd Cir. 2011), the plaintiff, Robert Milgram ("Milgram"), sought to recover, under section 502(a)(1) of ERISA, $763,847.93 that the defendant, the Orthopedic Associates Defined Contribution Pension Plan ("the Plan"), erroneously transferred from Milgram's account under the Plan to his ex-wife, Norah Breen ("Breen"), under a divorce settlement, plus interest on that amount from the time of transfer.

The district court had granted Milgram judgment against the Plan for the $763,847.93 amount plus interest, and also granted the Plan an equivalent judgment against Breen. On appeal, the Plan challenged the enforceability of the judgment against it, on the ground that requiring its payment before the Plan has fully recovered from Breen would violate, among other law, ERISA's anti-alienation provision, found in section 206(d)(1) of ERISA. After reviewing the case, the Second Circuit Court of Appeals (the "Court"), affirmed the district court's judgments, thereby ruling against the Plan's challenge. Morever, the Plan would have to pay the funds to Milgram, even if it could not collect any funds from Breen.

In upholding the enforceability of the judgment against the Plan, the Court noted that, under section 502(d)(1)-(2) of ERISA, an employee benefit plan may be sued, and that any resulting money judgment is enforceable against the plan. ERISA's anti-alienation provision, found in section 206(d)(1) of ERISA, under which plan benefits may not be assigned or alienated, does not change this result. The anti-alienation provision protects participants' benefits. However, the Court said that the undistributed assets of a plan-even a defined contribution plan as here- are not participants' benefits and therefore do not receive anti-alienation protection. A plan is required to pay its own debts, even if the payment comes out of plan assets, and reduces participants' accounts. The Court found the remaining arguments against the enforceability of the judgment against the Plan unpersuasive. As to the interest on the $763,847.93 principal amount, the Court said that Milgram's right to be compensated for the time value of the misdirected funds is a question of contract interpretation, to be decided under federal common law. The Court concluded that Milgram's entitlement to the interest is implicit in the Plan's terms, as so interpreted.

Thought: Unless something changes, like the Plan collects from Breen or the employer makes a compensating contribution, the judgment against the Plan will be paid out of, and correspondingly reduce, other participants' accounts in the Plan. They won't be too happy about that.

December 6, 2011

ERISA-EBSA Proposes Rules To Control MEWAs

According to a News Release dated 12/5/11, the Employee Benefits Security Administration (the "EBSA") has issued two proposed rules, under the Affordable Care Act, to protect businesses and workers whose health benefits are provided through a multiple employer welfare arrangement, often called a "MEWA".

The problem? According to the News Release, MEWAs frequently have been used by scam artists and criminals to defraud consumers, resulting in an inability to pay medical claims. When such MEWAs become insolvent, they may leave consumers with substantial unpaid medical bills. For employers or employee organizations that have paid premiums or made contributions to a MEWA, and thought they were doing the right thing for their workers and their families, the impact also can be significant. MEWA sponsors make the arrangement attractive by offering low premiums. However, they have often have taken advantage of gaps in the law to avoid state insurance regulations, such as a requirement to maintain sufficient funding and adequate reserves to pay the health care claims of workers and their families. In the worst situations, the sponsors have drained their assets through excessive administrative fees or outright embezzlement.

The News Release says that the proposed rules call for MEWAs to adhere to enhanced reporting requirements, so that employers, workers and their families will not unexpectedly be cut off from needed health care services. The rules also will increase the enforcement authority of the Department of Labor (the "DOL") to protect participants in such plans and allow the DOL to shut down MEWAs engaged in fraud or other activities that present an immediate danger to the public safety or welfare. According to the News Release, under the proposed rules:

• MEWAs must register with the DOL prior to operating in a state or be subject to substantial penalties. This step will allow the DOL to track MEWAs as they move from state to state and to identify their principals, which will provide the DOL with important information regarding potentially fraudulent MEWAs.
• The secretary of labor will be able to issue a cease and desist order when it appears that fraud is taking place or an arrangement is causing immediate danger to the public safety or welfare.
• The secretary of labor could seize assets from a MEWA when there is probable cause that the plan is in a financially hazardous condition.

December 6, 2011

Employee Benefits-IRS Extends Deadline To Amend A Plan To Comply With Section 436; Provides Sample Amendment

In Notice 2011-96, the Internal Revenue Service (the "IRS") has extended the deadline to amend a plan to comply with the limitations on benefit accruals and payments imposed by section 436 of the Internal Revenue Code (the "Code") on an underfunded plan. The Notice also contains a sample amendment that may be adopted to meet section 436.

Section 436 contains the following limitations, which apply to a single-employer defined benefit plan. When a plan's adjusted funding target attainment percentage (the "AFTP") for a plan year is less than 60%, section 436(d)(1) prohibits the payment of certain "prohibited payments", including single lump sum distributions, and section 436(e)(1) requires benefit accruals to cease. Section 436(b)(1) prohibits the payment of an "unpredicatable contingent event benefit", such as a plant shutdown benefit, when the AFTP for a plan year is less than 60%, or would be less than 60% after taking the event into account. When a plan's AFTP for a plan year is less than 80%, but not less than 60%, section 436(d)((3) limits the portion of a benefit that may be paid in a single lump sum distribution or other prohibited payment. Section 436(c)(1) prohibits a plan amendment from taking effect if the amendment increases the plan's benefits and the plan's AFTP for the plan year is less than 80%, or would be less than 80% taking the benefit increase into account. Section 436 applies in plan years that begin after 2007, with a later effective date for collectively bargained plans.

When does a plan have to be amended to comply with section 436? Under the Notice, in general, the amendment must be adopted by the latest of:

--the last day of the first plan year that begins after 2011;

--the last day of the first plan year for which section 436 applies to the plan; or

--the due date (including extensions) of the employer's tax return for the tax year that contains the first day of the first plan year for which section 436 applies to the plan.

Caution: The filing of a determination letter application for an individually designed defined benefit plan may accelerate the deadline. In general, for any such application filed after January 31, 2012, the restated plan submitted with the application must have been amended to comply with section 436.

The extension provided by the Notice is conditioned on the amendment being effective as of the effective date of section 436 for the plan, and on the operation of the plan being in accordance with the amendment from and after the amendment's effective date. An amendment which eliminates or reduces a Code section 411(d)(6) protected benefit will not cause the plan to fail to meet the anti-cutback requirements of that section if the amendment is adopted by the deadline provided in the Notice, and the elimination or reduction is made only to the extent needed to comply with section 436.

December 5, 2011

ERISA-Second Circuit Rules That Plaintiff's Claim For Long-Term Disability Benefits Is Not Time-Barred By A Plan Provision

In Epstein v. Hartford Life and Accident Insurance Company, No. 10-3852-cv. (2nd Cir. 2011) (Summary Order), the plaintiff, Howard Epstein ("Epstein") was appealing the district court's grant of summary judgment for the defendant , Hartford Life and Accident Insurance Company ("Hartford"), on Epstein's claim for long-term disability ("LTD") benefits. Hartford had denied Epstein's claim for the benefits, and this suit ensued. The issue for appeal is whether Epstein's claim for the LTD benefits, which challenged the denial by Hartford, was time-barred by a limitation-of-actions clause in Hartford's long-term disability plan (the "Plan").

In analyzing the case, the Court noted that ERISA does not prescribe a limitations period within which claimants can challenge benefit denials in federal court. The applicable limitations period is that specified in the most nearly analogous state limitations statute, which in this case is New York's six-year limitations period for contract actions. However, New York permits contracting parties to shorten a limitations period if, as here, their agreement is memorialized in writing. In this case, the Plan provides that a claimant may not bring a legal action more than three years after the time written Proof of Loss is required to be furnished. Further, the Plan states that Proof of Loss must be sent to Hartford within 90 days after the start of the period for which Hartford owes payment. Also, the Plan provides for an "Elimination Period" of 182 consecutive days, which is the period for which a claimant must be disabled before benefits become payable.

In this case, Hartford calculated that Epstein exhausted the Plan's Elimination Period on October 22, 2005. That is the same date that Epstein, in his complaint, said that he originally became eligible for LTD benefits. Under the terms of the Plan, then, Proof of Loss for Epstein's LTD benefits claim was due on January 20, 2006, ninety days after the end of the Elimination Period on October 22, 2005. Thus, the limitations period would normally have begun to run on January 20, 2006. However, on November 20, 2006, Hartford made a post-denial request for additional Proof of Loss regarding Epstein's LTD benefits claim. This request extended the starting date of the limitations period to December 20, 2006, when-according to the request- such Proof of Loss was due. Epstein filed suit in the district court on June 18, 2009. That date was within 3 years of December 20, 2006. As such, the Court concluded that Epstein's claim was timely filed under the Plan's provisions, and it overturned the summary judgment granted by the district court to Hartford.

December 2, 2011

ERISA-DOL Says That PTE 80-26 Does Not Provide Relief For IRA Transactions

In Advisory Opinion 2011-09A, the Department of Labor (the "DOL") provided its view on the applicability of Prohibited Transaction Exemption ("PTE") 80-26 to certain transactions involving individual retirement accounts ("IRAs").

The Advisory Opinion involves the following facts. The beneficial owner of an IRA (an "IRA Owner") may direct a trust company to open a futures trading account (an "Account") with a Broker, through which the IRA Owner may deposit and self-direct IRA assets. The Broker may require that, prior to the establishment of the Account, the IRA Owner effectuate an indemnification agreement (an "Indemnification Agreement"). This agreement secures a Broker against certain losses attributable to the Account, such as an investment-related loss and/or tax in connection with a futures contract. In some cases, the amount of this loss may exceed the amount of the IRA's assets (an "excess loss"). In that instance, the Indemnification Agreement will require the IRA Owner to provide the Broker with cash equal to the excess loss. This Indemnification Agreement therefore constitutes an impermissible "extension of credit" from an IRA Owner to his or her IRA, in violation of section 4975(c)(1)(B) of the Internal Revenue Code (the "Code"). The issue addressed by the Advisory Opinion: Does PTE 80-26 provide relief from this prohibited transaction?

The Advisory Opinion says the following on this issue. PTE 80-26 permits parties in interest-such as an IRA Owner- with respect to employee benefit plans (including IRAs) to make certain loans and extensions of credit to such plans. Relief is available under the PTE for extensions of credit described in Code section 4975(c)(1)(B), to the extent the conditions of the PTE are met. In the latter regard, the PTE requires that, among other things, the proceeds of such a loan or extension of credit may be used only: (1) for the payment of ordinary operating expenses of the plan, or (2) for a purpose incidental to the ordinary operation of the plan.

PTE 80-26 and the preamble to the original notice of proposed exemption for PTE 80-26 provide the following examples of "ordinary operating expenses": plan benefits, insurance premiums, and/or administrative expenses. In this case, the DOL takes the position that condition (1) is satisfied only to the extent that proceeds from an extension of credit by a party in interest to a plan are used to pay for an expense incurred by the plan in the course of an ordinary, operational plan activity. The investment performance of a futures contract entered into by an IRA is independent of, and unrelated to, any activity (ordinary or otherwise) attributable to the operation of the IRA. Therefore, an excess loss does not meet condition (1).

With respect to condition (2), PTE 80-26 and subsequent amendments thereto provide the following examples of a plan's use of proceeds for a purpose "incidental to the ordinary operation of the plan": bank overdrafts, the crediting of dividends or interest, plan liquidity problems and the transfer of a participant's account balance from one account to another. The Advisory Opinion notes that these examples are consistent with the plain meaning of the term "incidental," which is "occurring as a minor accompaniment" or "liable to occur in consequence of or in connection with something". The DOL takes the position that the Indemnification Agreement, which is required by the Broker in order for the IRA to engage in futures trading, is not "incidental" and does not meet condition (2).

The Advisory Opinion concludes that, in light of the above, relief under PTE 80-26 is not available with respect to an Indemnification Agreement or any extension of credit made in connection with an excess loss.

December 1, 2011

ERISA-District Court Rules That Employer Contributions, Not Yet Paid To The Plan, Are "Plan Assets" For ERISA Purposes

In West Virginia Laborers' Pension Trust Fund v. Owens Pipeline Service, LLC, Case No. 2:10-cv-00131 (S.D. West Virginia 2011), the Court faced the question of whether employer contributions (the "Contributions") and certain deductions from employees' wages (the "Deductions"), which were not yet paid (i.e., contributed) to the employee benefit plans at issue (the "Plans"), are "plan assets" of the Plans for purposes of ERISA.

As to the Deductions, the Court referred to Department of Labor regulations, found at 29 C.F.R. § 2510.3-102. Those regulations provide that unpaid deductions from employees' wages to be used as plan contributions-other than union dues- become plan assets as of the earliest date on which the deducted amounts can reasonably be segregated from the employer's general assets. However, in this case, the Deductions consisted entirely of union dues, which are expressly excluded from plan assets under the regulation. Accordingly, the Court concluded that the Deductions are not plan assets of the Plans.

As to the Contributions, the Court said that such contributions are not plan assets, unless the agreement between the plan and the employer specifically and clearly declares otherwise. Here, the governing agreements said that contributions due and owing to the Plans are considered and deemed to be trust funds. This "due and owing" language means that once a contribution is "due" to the Plans, based here upon the number of hours worked by union employees, the employer "owed" the money and the money was a plan asset. Thus, the Court concluded that the Contributions are plan assets of the Plans.