April 2012 Archives

April 30, 2012

Employee Benefits-IRS Discusses The Tax Consequences of Plan Disqualification

Plan disqualification! Employers and plan administrators talk of it often, and spend a lot of time and effort avoiding it. But what are the tax consequences of a plan disqualification? The Internal Revenue Service (the "IRS") discusses these consequences in Employee Plans News, March 20, 2012. Here is what the IRS said.

Tax Consequences of Plan Disqualification

When an Internal Revenue Code section 401(a) retirement plan is disqualified, the plan's trust loses its tax-exempt status and becomes a nonexempt trust. Plan disqualification affects three groups:
1. Employees
2. Employer
3. The plan's trust

Example: Pat is a participant in the XYZ Profit-Sharing Plan. The plan has immediate vesting of all employer contributions. In calendar year 1, the employer makes a $3,000 contribution to the trust under the plan for Pat's benefit. In calendar year 2, the employer contributes $4,000 to the trust for Pat's benefit. In calendar year 2, the IRS disqualifies the plan retroactively to the beginning of calendar year 1.

Consequence 1: General Rule - Employees Include Contributions in Gross Income
Generally, an employee would include in income any employer contributions made to the trust for his or her benefit in the calendar years the plan is disqualified to the extent the employee is vested in those contributions.

In our example, Pat would have to include $3,000 in her income in calendar year 1 and $4,000 in her income in calendar year 2 to reflect the employer contributions paid to the trust for her benefit in each of those calendar years. If Pat was only 20% vested in her employer contributions in calendar year 1, then she would only include $600 in her calendar year 1 income.

Exceptions: There are exceptions to the general rule (see IRC section 402(b)(4)):

• If one of the reasons the plan is disqualified is for failure to meet either the additional participation or minimum coverage requirements (see IRC sections 401(a)(26) and 410(b)) and Pat is a highly compensated employee (see IRC section 414(q)), then Pat would include all of her vested account balance (any amount that wasn't already taxed) in her income. A non-highly compensated employee would only include employer contributions made to his or her account in the years that the plan is not qualified to the extent the employee is vested in those contributions.

• If the sole reason the plan is disqualified is that it fails either the additional participation or minimum coverage requirements, and Pat is a highly compensated employee, then Pat still would include any previously untaxed amount of her entire vested account balance in her income. Non-highly compensated employees, however, don't include in income any employer contributions made to their accounts in the disqualified years in that case until the amounts are paid to them.
Note: Any failure to satisfy the nondiscrimination requirements (see IRC section 401(a)(4)) is considered a failure to meet the minimum coverage requirements.

Consequence 2: Employer Deductions are Limited

Once the plan is disqualified, different rules apply to the timing and amount of the employer's deduction for amounts it contributes to the trust. Unlike the rules for contributions to a trust under a qualified plan, if an employer contributes to a nonexempt employees' trust, it cannot deduct the contribution until the contribution is includible in the employee's gross income.

• If both the employer and employee are calendar year taxpayers, the employer's deduction is delayed until the calendar year in which the contribution amount is includible in the employee's gross income.

• If the employer has a different taxable year than the employee (a non-calendar fiscal year), the employer cannot take a deduction for its contribution until its first taxable year that ends after the last day of the employee's taxable year in which the amount is includible in the employee's income.

For example, if the employer's taxable year ends September 30 and a contribution amount is includible in an employee's gross income for the employee's taxable year that ends on December 31 of year 1, the employer cannot take a deduction for its contribution until its taxable year that ends on September 30 of year 2.
Also, the amount of the employer's deduction is limited to the amount of the contribution that is includible in the employee's income and whether a deduction is allowed depends on whether the contribution amount is otherwise deductible by the employer. Finally, if the plan covers more than one employee and it does not maintain separate accounts for each employee (as may be the case with a defined benefit plan), then the employer is not able to deduct any contributions.

In our example, assuming both the employer and Pat are calendar year taxpayers, the employer's $3,000 deduction in calendar year 1 and $4,000 in calendar year 2 would be unchanged because that is when Pat would include these amounts in her income. However, if Pat were only 20% vested, then the employer would only be able to deduct $600 in calendar year 1 (the vested part of her employer contribution) which is the amount Pat would include in her calendar year 1 income.

Consequence 3: Plan Trust Owes Income Taxes on the Trust Earnings
The XYZ Profit-Sharing plan's tax-exempt trust is a separate legal entity. When a retirement plan is disqualified, the plan's trust loses its tax-exempt status and must file Form 1041, U.S. Income Tax Return for Estates and Trusts (instructions), and pay income tax on trust earnings.

Revenue Ruling 74-299 as amplified by Revenue Ruling 2007-48 provides guidance on the taxation of a nonexempt trust.

Consequence 4: Rollovers are Disallowed

A distribution from a plan that has been disqualified is not an eligible rollover distribution and can't be rolled over to either another eligible retirement plan or to an IRA rollover account. When a disqualified plan distributes benefits, they are subject to taxation.
Consequence 5: Contributions Subject to Social Security, Medicare and Federal Unemployment (FUTA) Taxes

When an employer contributes to a nonexempt employees' trust on behalf of an employee, the FICA and FUTA taxation of these contributions depends on whether the employee's interest in the contribution is vested at the time of contribution. If the contribution is vested at the time it is made, then the amount of the contribution is subject to FICA and FUTA taxes at the time of contribution. The employer is liable for the payment of FICA and FUTA taxes on them. If the contribution is not vested at the time it is made, then the amount of the contribution and its earnings are subject to FICA and FUTA taxation at the time of vesting. For contributions and their earnings that become vested after the date of contribution, the nonexempt employees' trust is considered the employer under IRC section 3401(d)(1) who is responsible for withholding from contributions as they become vested.

Calculating Specific Plan Disqualification Consequences

Calculating the tax consequences of plan disqualification depends on the type of retirement plan. For example, the tax consequences for a 401(k) plan differ from the consequences for a SEP or SIMPLE IRA plan.

How to Regain Your Plan's Tax-Exempt Status

Generally, if a plan loses its tax-exempt status, the error that caused it to become disqualified must be corrected before the IRS will re-qualify the plan. You may correct plan errors through the IRS Voluntary Correction Program. However, if your plan is under examination by the IRS, you must correct the errors through the Audit Closing Agreement Program.

Note: This is a general overview of what happens when a plan becomes disqualified for failure to meet qualification requirements (see IRC section 401(a)). These examples provide general information and you should not rely on them as legal authority as they do not apply to every situation. For more information, see Rev. Rul. 74-299 and Rev. Rul. 2007-48 (and the law and regulations discussed in those rulings).

Author's Comment: This is some pretty complicated stuff-stay qualified!

April 27, 2012

Employee Benefits-IRS Issues Proposed Regulations On New Fee Imposed On Self-Insured Health Care Plans

On April 12, 2012, the Internal Revenue Service (the "IRS") issued proposed regulations on the new fee imposed on self-insured health care plans. The proposed regulations are here.

The fee is governed by section 4376 of the Internal Revenue Code (the "Code"), and works as follows under that Code section. The fee is imposed on a "plan sponsor" of an "applicable self-insured health plan", for each plan year ending on or after October 1, 2012, and before October 1, 2019. The fee is two dollars (one dollar for plan years ending before October 1, 2013) multiplied by the average number of lives covered under the plan for the plan year. The fee may be increased, for plan years ending on or after October 1, 2014, based on increases in the projected per capita amount of national health expenditures.

The fee is paid by the "plan sponsor", generally defined as (1) the employer in the case of a plan established or maintained by a single employer, (2) the employee organization in the case of a plan established or maintained by an employee organization or (3) the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan, in the case of (a) a plan established or maintained by two or more employers or jointly by one or more employers and one or more employee organizations, (b) a multiple employer welfare arrangement (as defined in section 3(40) of ERISA) (a MEWA"), or (c) a voluntary employees' beneficiary association described in section 501(c)(9) of the Code (a "VEBA").

An "applicable self-insured health plan" is any plan which provides accident or health coverage, if (1) any portion of the coverage is provided other than through an insurance policy and (2) the plan is established or maintained, generally, by (a) one or more employers for the benefit of their employees or former employees, (b) one or more employee organizations for the benefit of their members or former members, (c) jointly by one or more employers and one or more employee organizations for the benefit of employees or former employees, (d) a VEBA, or (e) a MEWA not described above.

Author's Comment: This fee is found in section 4376 of the Code, which was added to the Code by the Patient Protection and Affordable Care Act ("PPACA"). The fate of PPACA, and thus the fee, will depend on a decision of the U.S. Supreme Court, which will probably be issued in June. Stay tuned.

April 26, 2012

Employment-EEOC Reissues Enforcement Guidance On Employer Use of Arrest and Conviction Records To Make Employment Decisions

According to a Press Release (4/25/12), the Equal Employment Opportunity Commission (the "EEOC") has revised its Enforcement Guidance, initially issued over 20 years ago, on employer use of arrest and conviction records in employment decisions under Title VII of the Civil Rights Act of 1964, as amended ("Title VII"). The EEOC has also issued a Question-and-Answer (Q&A) document about the guidance. The new Enforcement Guidance and Q&A document are available on the EEOC's website at www.eeoc.gov.

The Press Release says the following. While Title VII does not prohibit an employer from requiring applicants or employees to provide information about arrests, convictions or incarceration, it is unlawful to discriminate in employment based on race, color, national origin, religion, or sex. The new guidance builds on longstanding guidance documents that the EEOC issued over twenty years ago. The new Enforcement Guidance is predicated on, and supported by, federal court precedent concerning the application of Title VII to employers' consideration of a job applicant or employee's criminal history and incorporates judicial decisions issued since passage of the Civil Rights Act of 1991. The new guidance also updates relevant data, consolidates previous EEOC policy statements on this issue into a single document and illustrates how Title VII applies to various scenarios that an employer might encounter when considering the arrest or conviction history of a current or prospective employee. Among other topics, the new guidance discusses:

• How an employer's use of an individual's criminal history in making employment decisions could violate the prohibition against employment discrimination under Title VII;

• Federal court decisions analyzing Title VII as applied to criminal record exclusions;

• The differences between the treatment of arrest records and conviction records;

• The applicability of disparate treatment and disparate impact analysis under Title VII;

• Compliance with other federal laws and/or regulations that restrict and/or prohibit the employment of individuals with certain criminal records; and

• Best practices for employers.

April 26, 2012

ERISA-Fifth Circuit Upholds The Insurer's Decision To Deny Death Benefits Due Policy's Voluntary Ingestion Exclusion

In Smith v. Life Insurance Company of North America, No. 11-30540 (5th Cir. 2012), the defendant, Life Insurance Company of North America ("LINA"), was appealing the district court's grant of summary judgment in favor of the plaintiff, Stephen Smith ("Smith"). Smith was the beneficiary of an ERISA-governed life insurance policy (the "Policy") covering his deceased wife, Stephanie Smith. Stephanie had died of a drug overdose, under questionable circumstances. After she died, Smith had submitted a claim to LINA seeking to recover accidental death benefits under the Policy, which was issued and administered by LINA. LINA denied Smith's claim for the death benefits based on multiple policy exclusions, including exclusions for death caused by: (1) suicide; (2) sickness or disease (including mental infirmity); and (3) the voluntary ingestion (the "voluntary ingestion exclusion") of any drug unless taken in accordance with a physician's instructions. This suit ensued.

In analyzing the case, the Fifth Circuit Court of Appeals (the "Court") first said that LINA's decision to deny the accidental death benefits is entitled to a deferential review, overturned only upon an abuse of discretion, since the language of the Policy gave LINA the right to interpret the Policy and determine eligibility for benefits. Next, the Court said that eligibility for benefits under the Policy is governed by the plain meaning of the Policy language. In this case, due to the deferential review, the doctrine of contra proferentum-which provides that ambiguous terms are construed in favor of the insured-is inapplicable.

The Court then said that the evidence in the case and LINA's reasonable interpretation of the Policy's terms indicates that LINA, and not Mr. Smith, was entitled to summary judgment as a matter of law. The evidence undisputably shows that Mrs. Smith unilaterally ingested prescription drugs in a manner that greatly exceeded their prescribed dosages. Mrs. Smith also consumed two drugs, hydrocodone and tramadol, that had not been recently prescribed by a physician. It was reasonable, and within LINA's discretion, to conclude that a death caused by the unilateral misuse of powerful narcotic drugs-irrespective of the intent or lack thereof underlying the misuse (i.e. suicide, recreational enjoyment, remedying ailments, or accidental hallucination)-fell within the Policy's voluntary ingestion exclusion.

As such, the Court reversed the district court's summary judgment, and entered judgment in favor of LINA.

April 25, 2012

Employment- EEOC Asks for Teen Advice to Solve the Wage Gap

Here is an interesting idea!

According to a Press Release (dated 4/23/12), on April 26, 2012, the Equal Employment Opportunity Commission (the "EEOC") will recognize the 20th anniversary of Take Your Child to Work Day by inviting teenagers to its Denver Field Office to participate in a dialogue for solutions on how to bridge the gender wage gap in America (this gap is the difference in amounts paid to men and women). Suggestions from this forum will be sent to the National Equal Pay Enforcement Task Force in Washington, D.C. EEOC Chair Jacqueline Berrien is a member of that body, which is headed by Vice President Joe Biden.

I think something good and constructive will come out of this.

April 25, 2012

Employee Benefits-IRS Summarizes Recent Revenue Rulings and Proposed Regulations On Lifetime Income Options

In Employee Plans News, March 20, 2012, the Internal Revenue Service (the "IRS") reminds us that, to encourage retirement plans to offer lifetime income options for benefit payments to participants, the IRS has released several revenue rulings and proposed regulations. Here is a summary:

1) Spousal annuity requirements for deferred annuities

Revenue Ruling 2012-3 clarifies when a plan that offers deferred annuity contracts is subject to the qualified survivor annuity requirements (under Internal Revenue Code sections 401(a)(11) and 417). Three examples illustrate when a profit-sharing plan that offers participants different election options regarding deferred annuity contracts may have to:

• provide the applicable survivor annuity written notification, and

• obtain a notarized spousal consent from a married participant if a different payout option is chosen.

2) Self-annuitization - rollover to a defined benefit plan

Revenue Ruling 2012-4 clarifies the rules that apply when an employer maintaining both a defined benefit and a defined contribution plan allows the DC plan participants to "purchase" annuities by rolling their lump sum distributions to the DB plan. The ruling intends to make it easier for the DC plan participants to "purchase" an annuity. Under the scenario described in the Revenue Ruling, the rollover does not cause the DB plan to violate IRC sections 411 and 415 if it converts the rolled-over DC account into an actuarially equivalent immediate annuity benefit using the actuarial basis required under IRC section 411(c), including using the interest rate and mortality table under IRC section 417(e) for certain calculations.

The plan can't use a less favorable actuarial basis (provide a smaller annuity) than required by IRC section 411(c) because that would cause an impermissible forfeiture of benefits. However, if the plan uses a more favorable actuarial basis (provides a larger annuity) than required by IRC section 411(c), then the excess over the 411(c) amount:

• may be forfeitable subject to the vesting provisions of the plan and IRC section 411, and

• must be included when applying the annual benefit limit that can be accrued or paid to a DB plan participant (see IRC section 415(b)).

3) Longevity annuities

REG-115809-11 - proposes allowing IRA owners and DC plan participants to use up to 25% of their account balance (up to $100,000) to purchase a qualified longevity annuity - an annuity which begins paying benefits at an advanced age, such as 80, but not later than age 85 - and having the value of the annuity excluded from the account balance when calculating the required minimum distributions before the annuity begins.

4) Partial annuities

REG-110980-10 - would make it easier for defined benefit plans to offer participants the option of receiving a portion of their plan benefits in a lump-sum and the remaining portion as an annuity. This option may encourage more participants to receive a portion of their benefits as a lifetime annuity rather than choosing to receive their entire benefit in a lump-sum. The proposed regulations would simplify the calculations for the partial annuity by providing that plans generally would need to apply the IRC section 417(e)(3) minimum present value requirements only to the portion of the benefit paid in a lump-sum (or other form subject to IRC section 417(e)(3)), and could apply the plan's regular conversion factors to the portion of the benefit paid as a partial annuity.

April 24, 2012

Employment-New York Court Of Appeals Rules That A Promised Bonus Constitutes "Wages" For Purposes Of NYS Labor Law § 190, So The Employer Cannot Withhold Payment

In Ryan v. Kellogg Partners Institutional Services, 2012 NY Slip Op 02248 (Court of Appeals of NY 2012), the plaintiff, Daniel Ryan ("Ryan"), received a job offer of floor broker from the defendant, Kellogg Partners Institutional Services ("Kellogg"), in early 2003. This job offer included a guarantee to pay Ryan a non-discretionary bonus of $175,000 in late 2003 or early 2004 in order to attract him from an established securities firm to Kellogg, a start-up venture at the time. Ryan accepted the job offer. In early 2004, the managing partner of Kellogg asked for and received Ryan's consent to delay this bonus payment for a year until late 2004 or early 2005 on the understanding that Ryan would remain at Kellogg through 2004.Kellogg fired Ryan in 2005. The question, among others, for the Court: does the bonus constitute "wages" for purposes of NYS Labor Law § 190 (1)?

The Court found that Ryan's bonus was expressly linked to his labor or services personally rendered, namely, his work as a floor broker for Kellogg. Further, Ryan's bonus had been earned and was vested before he was terminated by Kellogg. Its payment was guaranteed and non-discretionary as a term and condition of his employment. The bonus was not discretionary additional remuneration, as, for example, a share in a reward to all employees for the success of the employer's business. As such, the Court ruled that Ryan's bonus constitutes "wages" within the meaning of Labor Law § 190 (1). Consequently, under Labor Law § 193, Kellogg may not withhold payment of the bonus. Further, under Labor Law § 198 (1-a), Ryan is entitle to an award of attorney's fees for prevailing in this suit for a wage claim.

April 23, 2012

Employment-Ninth Circuit Finds That A Plaintiff Is Not A Qualified Individual For ADA Purposes If She Cannot Meet Her Employer's Attendance Requirements

In Samper v. Providence St. Vincent Medical Center, No. 10-35811 (9th Cir. 2012), the plaintiff, Monica Samper ("Samper"), was appealing the district court's summary judgment against her. Samper had been employed by Providence St. Vincent ("Providence") as a neo-natal intensive care unit ("NICU") nurse for eleven years. Since at least 2005, she has had fibromyalgia, a condition that limits her sleep and causes her chronic pain. Providence's attendance policy allowed only five unplanned absences in a twelve month period. Samper worked only part-time, but she regularly exceeded the allowed number of such absences. At one point, Samper sought permission from Providence to take an unspecified number of unplanned absences from her job. Her request was denied. Providence later terminated Samper due to the excessive absences.

This suit ensued. Samper claimed that Providence had violated the Americans with Disabilities Act (the "ADA"), by failing to provide her with reasonable accommodation for her illness. The issue for the Ninth Circuit Court of Appeals (the "Court"): was compliance with Providence's attendance policy an essential part of Samper's job, so that her inability adhere to the policy means that she cannot be a qualified individual for ADA purposes?

In analyzing the case, the Court said that, to establish a prima facie case for failure to accommodate under the ADA, Samper must show that (1) she is disabled within the meaning of the ADA, (2) she is a qualified individual able to perform the essential functions of the job with reasonable accommodation, and (3) she suffered an adverse employment action because of her disability. Prong (1) and (3) are met, particularly with the fibromyalgia, but does Samper meet prong (2)? The Court felt that prong (2) is not met, since regular attendance-which Samper did not have-is an essential function of the NICU nurse position.

The Court explained that NICU nurses must have specialized training, and it is very difficult to find replacements, especially for unscheduled absences. As a NICU nurse, Samper's job unites a trinity of requirements that make regular on-site presence necessary for regular performance: teamwork, face-to-face interaction with patients and their families, and working with medical equipment. This is not a job where it is possible to argue that workers were basically fungible with one another, so that it did not matter who was doing the job on any particular day. As to the possibility of a reasonable accommodation, Samper requests unlimited unplanned absences. She essentially asks for a reasonable accommodation that exempts her from an essential function-the job attendance. Thus, no reasonable accommodation had been identified. The Court concluded that Samper did not meet prong (2) for establishing her prima facie case, and affirmed the district court's summary judgment against her.

April 20, 2012

ERISA-District Court Upholds the Trustees' Decision To Disregard The Plaintiff's Self-Contributions In Calculating His Pension Benefit

Love v. Central States, Southeast and Southwest Areas Pension Plan, Case No. 1:11-cv-275-HJW (S.D. Ohio, Western Division, 2012), involved a pension calculation made by the Central States, Southeast and Southwest Areas Pension Plan ("the Plan"). The Plan is a multi-employer pension plan. It is maintained for the benefit of employees of contributing employers who have collective bargaining agreements with local unions affiliated with the International Brotherhood of Teamsters (the "Teamsters").

The plaintiff in this case (the "Plaintiff") was employed by Zenith Logistic, Inc. ("Zenith") beginning in 1980 and was a member of the Teamsters. The Plaintiff last worked for Zenith during the week of November 9-13, 2003. At that time, the Plaintiff had approximately 24 years of service towards his pension under the Plan. The Plaintiff, with the assistance of the Teamsters, negotiated with Zenith for the Plaintiff to be designated as being on "leave status" so that he could make self-contributions to the Plan in order to reach the 25-year mark necessary to obtain a larger pension. On January 22, 2004, the Plaintiff, the Teamsters, and Zenith signed a letter agreement, stating that Zenith would put the Plaintiff on a "terminal leave of absence", that the Plaintiff would not be eligible to return to work, and that the Plaintiff would be kept on the roster only as long as necessary during calendar year 2004 to qualify for retirement benefits (the "Letter Agreement"). Under this arrangement, the Plaintiff made 39 weeks of self-contributions to Zenith, which Zenith eventually forwarded to the Plan. Later, in a letter from Zenith to the Plan dated June 6, 2005, Zenith confirmed that the Plaintiff would not have returned to work at Zenith, even if capable, prior to his date of retirement (the "Zenith Letter").

The Plaintiff applied for his retirement pension in July of 2004. Payments began, but they were lower than expected, because the Plan recognized only 24 years of service for the Plaintiff (the monthly payments were $610, when Plaintiff was expecting about $1,500). Why? The Plan's Trustees decided to not recognize the Plaintiff's self-contributions, on the grounds that the Plaintiff had been terminated from employment, and was not on leave status, and was thus ineligible to make self-contributions. As such, the Trustees would not increase the amount of the Plaintiff's monthly pension payment. This suit ensued. The question for the Court: could it uphold the Trustees' decision to ignore the self-contributions?

In analyzing the case, the Court said that the "arbitrary and capricious" standard of review applies, since the Plan gives the Trustees discretionary authority to determine eligibility for benefits and to construe the Plan's terms. Further, where the plan administrator for a pension fund-here the Trustees- offers a reasonable explanation for its decision, and the decision is based upon the evidence, the decision is not arbitrary and capricious. Here, the Trustees' decision to disregard the Plaintiff's self-contributions is based on the Letter Agreement and the Zenith Letter. After reviewing these two letters, the Trustees concluded that the Plaintiff had not actually been on a leave of absence, but rather, had been terminated from his employment, and thus, was ineligible to make self-contributions. The Court concluded that the Trustees' decision was based on well-articulated reasons supported by substantial evidence in the administrative record and was not "arbitrary or capricious." Therefore, the Court upheld the Trustees' decision, ruling that the Plaintiff's pension payments should not be increased.

April 19, 2012

ERISA-Ninth Circuit Applies Amara Decision To Disallow Claim Based On An Omission From An SPD

After the Supreme Court's decision in CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2012) ("Amara"), it is unclear as to what happens to a plan term that is not included in the summary plan description (the "SPD"). Skinner v. Northrop Grumman Retirement Plan B, No. 10-55161 (9th Cir. 2012), has an interesting discussion of this issue.

In this case, the plaintiffs sued Northrop Grumman and the Northrop Grumman Retirement Plan B (the "Plan"), under ERISA § 502(a)(1)(B) and § 502(a)(3), to enforce their understanding of their rights under the Plan. The plaintiffs claimed that the defendants had reduced their retirement benefits under the Plan by applying an actuarial reduction that was not described in the Plan's summary plan description (again, the "SPD"), although it was included in the Plan's master document. The issue for the Ninth Circuit Court of Appeals (the "Court"): after Amara, can the plaintiffs rely on the SPD -which conflicts with the terms of the Plan document-to disregard the actuarial reduction when determining the amount of their retirement benefits under the Plan?

The Court stated that, in Amara, the Supreme Court ruled that an SPD is not part of a plan; the SPD provides communication to participants about the plan, but it's provisions do not constitute the terms of the plan for purposes of § 502(a)(1). Thus, the plaintiffs cannot rely on the discrepancy between the SPD and the Plan document, in this case, to disregard the actuarial reduction. As such, they may not obtain benefits under § 502(a)(1)(B) (which allows a participant to sue for benefits).

The question becomes whether there are any equitable remedies available under ERISA § 502(a)(3), which allows a participant "to obtain other appropriate equitable relief" to redress ERISA violations. In dictum, the Amara court stated that, under appropriate circumstances, § 502(a)(3) may authorize three possible equitable remedies: estoppel, reformation, and surcharge. These remedies may be disposed of as follows:

--The plaintiffs conceded that did not rely on the inaccurate SPD, so that they cannot claim estoppel.

--The Plan may be reformed to eliminate the actuarial reduction only in the case of mistake or fraud. Mistake requires that the Plan does not reflect the intent of its drafter, and there is no evidence of that here. Similarly, there is no evidence that the actuarial reduction appears in the Plan document due to fraud or any fraudulent inducement or misleading information. As such, reformation is not available.

--Surcharge would obtain upon a breach of fiduciary duty. Here a duty may have been breached, since the fiduciaries of the Plan had a statutory duty to provide participants with an SPD that was sufficiently accurate and comprehensive to reasonably apprise them of their rights and obligations under the Plan, that is, in this case, to clearly describe the actuarial reduction. However, under the surcharge remedy, the fiduciary is liable for benefits it gained through unjust enrichment or for harm caused as the result of its breach. Here, there were no such benefitsw, particularly because the plaintiffs conceded that they did not rely on the SPD. Thus, no surcharge.

The result-the Court found that the actuarial reduction-even though omitted from the SPD-may be taken into account in determining the plaintiffs retirement benefits under the Plan.

April 18, 2012

ERISA-District Court Rules That Kraft Could Alter Retiree Medical Benefits Which Are Subject To Collective Bargaining Agreements

In Kraft Foods v. Retail Wholesale and Department Store Union, No. 11 C 6498 (N.D. Illinois 2012), the plaintiff, Kraft Foods Global ("Kraft"), had maintained the Kraft Foods Global Retiree Medical Plan (the "Plan"), also a plaintiff in the case. The Plan offers retiree medical coverage to certain Kraft retirees, their eligible dependents and surviving spouses. In early 2011, Kraft changed certain retiree benefits offered under the Plan. Affected retirees (the "Retirees") felt that a series of collective bargaining agreements ("CBAs"), between Kraft and the unions representing its employees (the "Unions"), prevent Kraft from making these changes. Kraft and the Plan filed this suit against the Unions, seeking a declaratory judgment that the changes were permitted, and that Retirees from Battle Creek did not have vested rights to unchangeable retiree medical coverage.

After dealing with some technical issues, the Court noted that Kraft and the Unions had negotiated and entered into a series of successive CBAs. Pursuant to those CBAs, Kraft offered health insurance benefits to its active, hourly employees represented by the Unions. It also offered health insurance through the Plan to former employees who satisfied retiree medical eligibility requirements as of their retirement and during their retirement, and to their eligible dependents and surviving spouses. The CBAs do not state that employees have an unchangeable right to continue to receive medical benefits in retirement or that Kraft may not alter retiree medical benefits.

The CBAs, however, do refer to Summary Plan Descriptions ("SPDs") created by Kraft to communicate the terms and conditions of various Kraft-sponsored benefits plans. The SPDs have been revised over the years, but consistently included substantially similar "reservation of rights" language stating that Kraft may change or terminate the Plan at any time. The Court concluded that no language in the CBAs, or in the SPDs to which the CBAs refer, states that specific medical benefits are vested and cannot be changed. As such, the Court ruled that that Kraft's 2011 changes to medical coverages for retirees provided by the Plan did not violate any of the applicable CBAs, and that the CBAs did not give the Retirees from Battle Creek a vested right to a lifetime of unchangeable medical benefits. Therefore, the Court issued the declaratory judgment the plaintiffs sought.

April 17, 2012

Employee Benefits-IRS Provides Advice On Mid-Year Changes To SIMPLE IRA Plans

In Employee Plans News (March 20, 2012), the Internal Revenue Service (the "IRS") faced the question of whether an employer can amend or terminate its SIMPLE IRA plans in the middle of the year. Here is what the IRS said.

No. You can't amend or terminate your SIMPLE IRA plan mid-year. A SIMPLE IRA plan must be operated for the entire calendar year (or the remainder of the calendar year if started after January 1). Additionally, once you have given employees the annual notice describing the plan features for the coming year, you can't change any of those features during the year.

Example 1: On January 30, 2012, Acme Company decided it would like to change its SIMPLE IRA plan matching contributions from 3% to 1%. Acme's SIMPLE IRA plan notice to employees (given on November 2, 2011) stated that the match would be 3% for 2012. Acme must contribute 3% for 2012. The earliest effective date for Acme's change in matching contributions would be January 1, 2013. Acme must notify its employees during 2012 that it will reduce the matching contribution to 1% in 2013.

Example 2: The Bear Company's SIMPLE IRA plan contributions are deposited at a designated financial institution, as described in its Form 5305-SIMPLE document. On February 5, 2012, Bear Company decided it would like to change its SIMPLE IRA plan document to a Form 5304-SIMPLE so that plan contributions would no longer be sent to the designated financial institution but would be sent to SIMPLE IRAs at other financial institutions selected by plan participants. This change is an amendment to the Bear Company's SIMPLE IRA plan and can't be made mid-year. The earliest that this amendment can be effective is January 1, 2013.

To amend the plan, Bear Company should:

• complete and sign Form 5304-SIMPLE;
• indicate in Section VII of the form that the effective date will be January 1, 2013; and
• notify the employees by November 2, 2012, that they will need to select a financial institution to serve as the trustee, custodian, or issuer of their SIMPLE IRA.

Terminating a SIMPLE IRA Plan

If your SIMPLE IRA plan no longer fits your business needs and you'd like to terminate it, notify the SIMPLE IRA plan financial institution that you won't be contributing the next calendar year. You must also notify your employees by November 2 that you will discontinue the SIMPLE IRA plan effective the first day of the next calendar year. You don't need to notify the IRS that you have terminated the SIMPLE IRA plan.
Example 3: Acme Company decided on November 18, 2011, to terminate its SIMPLE IRA plan as soon as possible. The earliest effective date for the termination would be January 1, 2013. Acme must notify its employees during 2012 that it won't sponsor a SIMPLE IRA plan for 2013.

April 16, 2012

ERISA-District Court Rules That Plan Fiduciaries Are Liable For $36.9 Million For Breaches Of Duty

In Tussey v. ABB, Inc., Case No. 2:06-CV-04305-NKL (W.D. Mo. 2012), the plaintiffs had brought a class action law suit on behalf of present and former employees of ABB, Inc. who are participants in two retirement plans offered by the Company (the "Plans"). The Plans are 401(k) defined contribution plans which are subject to ERISA, and in which the participants can direct the investment of their accounts into certain pre-selected investment options (the "Investment Platform"). The plaintiffs' complaint named the following defendants: ABB, Inc., John W. Cutler, Jr., the Pension Review Committee of ABB, Inc., the Pension & Thrift Management Group of ABB, Inc., the Employee Benefits Committee of ABB, Inc. (collectively "ABB Defendants"), Fidelity Management Trust Company ("Fidelity Trust"), and Fidelity Management & Research Company ("Fidelity Research") (together "Fidelity Defendants"). The plaintiffs sought to recover damages and injunctive relief for breaches by the defendants of their ERISA fiduciary duties to the Plans.

The district court (the "Court") found that the defendants had breached their fiduciary duties to the Plans as follows: (1) the ABB Defendants violated their fiduciary duties to the Plans by failing to monitor recordkeeping costs, failing to negotiate rebates for the Plans from either Fidelity or other investment companies in the Investment Platform, selecting share classes for the Investment Platform that had higher expenses than other available share classes, and replacing the Vanguard Wellington Fund with Fidelity's Freedom Funds (violating duties of prudence and loyalty); (2) ABB, Inc. and the Employee Benefits Committee violated their fiduciary duties to the Plans when they agreed to pay to Fidelity an amount that exceeded market costs for Plan services in order to subsidize the corporate services provided to ABB, Inc. by Fidelity, such as ABB, Inc.'s payroll and recordkeeping for ABB, Inc.'s health and welfare plan and its defined benefit plan; (3) Fidelity Trust breached its fiduciary duties to the Plans when it failed to distribute float income solely for the interest of the Plans; and (4) Fidelity Research violated its fiduciary duties when it transferred float income to the investments in the Investment Platform instead of the Plans.

The Court said that, as to each of these breaches, the Plans must be compensated for its losses and any ill-gotten gains by defendants when they used the Plan's assets for their own benefit. As such, the ABB Defendants are jointly and severally liable for $13.4 million lost by the Plans due to the failure to monitor recordkeeping fees and negotiate for rebates, and $21.8 million lost by the Plans due to the mapping of the Vanguard Wellington Fund to the Fidelity Freedom Funds. The Fidelity Defendants are jointly and severally liable for compensating the Plans $1.7 million for lost float income.

April 13, 2012

ERISA-District Court Upholds Plan Administrator's Denial Of Disability Benefits

In Garvey v. Piper Rudnick LLP Long Term Disability Insurance Plan, No. 08 C 1093 (N.D. Illinois 2012), the plaintiff, J. Kevin Garvey ("Garvey"), had applied for long-term disability ("LTD") benefits from the defendant, the Piper Rudnick LLP Long Term Disability Insurance Plan (the "Plan"). Standard Insurance Company, the Plan's insurer and claims administrator with discretionary authority to determine entitlement to benefits ("Standard"), denied the application. Garvey then sued the Plan under § 502(a)(1)(B) of ERISA to challenge the denial.

Garvey was a partner in the real estate practice of the law firm, Piper Rudnick LLP (the "Firm"), for many years. On March 1, 2004, he began working part-time and collecting short-term disability benefits from the Firm's short-term disability plan. Garvey retired one year later, on March 1, 2005. Shortly before retiring, Garvey applied to the Plan for LTD benefits. He claimed to have mental disabilities (stress and anxiety), and physical disabilities (a herniated disc in his back, arthritis in his fingers, and elbow problems), all of which caused him constant pain and anxiety. As stated above, Standard denied the application. The Plan documents provide that you-the participant- are Disabled from your Own Occupation if, as a result of Physical Disease, Injury, Pregnancy or Mental Disorder, you are unable to perform with reasonable continuity the Material Duties of your Own Occupation.

In analyzing the case, the Court noted that Standard's decision to deny Garvey's application for the LTD benefits is entitled to a deferential review, since the Plan gives Standard discretionary authority to determine entitlement to benefits. The Court said that, in applying the deferential review, it looks to whether the plan administrator communicated specific reasons for its decision to the claimant, whether the plan administrator afforded the claimant an opportunity for full and fair review, and whether there is an absence of reasoning to support the plan administrator's decision. In this case, undisputed facts of record show that Garvey received a full and fair review of his LTD benefits claim, and that Standard provided ample and persuasive reasons for its denial. Standard sought the opinions of two consulting physicians regarding Garvey's psychiatric condition, and both concluded that the medical records did not support Garvey's submission that he became disabled by stress and anxiety. As for Garvey's back, elbow, and thumb ailments, Standard consulted three other physicians, each of whom concluded that those physical ailments would not prevent him from working as an attorney so long as he were allowed to change positions throughout the day and not required to frequently lift heavy objects.

The Court noted that Standard may have had a conflict of interest, since it is both the benefits payer and claims decider. However, facts in the record show that this conflict did not materially affect the outcome of the case. Based on the foregoing, the Court concluded that Standard's denial of Garvey's claim for LTD benefits was reasonable, and granted summary judgment in favor of the Plan.

April 12, 2012

Employee Benefits-IRS Provides Guidance On Salary Deferrals And The Annual Compensation Limit

In Employee Plans News, March 20, 2012, the Internal Revenue Service ("IRS") dealt with the following issues: We have a 401(k) plan and some employees' compensation will exceed the annual compensation limit this year. Should we stop their salary deferrals when their compensation reaches the annual compensation limit? How do we calculate the employee's matching contribution?

The IRS responded as follows: Unless your plan terms provide otherwise, the salary (elective) deferral limit is applied uniformly to the compensation that the employee receives throughout the year. Compensation and contribution limits are subject to annual cost-of-living adjustments. The 2012 annual limits are:

• salary deferrals - $17,000, plus $5,500 catch-up contributions if the employee is age 50 or older (IRC sections 402(g) and 414(v))
• annual compensation - $250,000 (IRC section 401(a)(17))
• total employee and employer contributions plus forfeitures - the lesser of 100% of an employee's compensation or $50,000, plus $5,500 catch-up contributions if age 50 or older (IRC section 415(c))

Example: Mary, age 49, whose annual compensation is $300,000 ($25,000 per month), elects to defer $1,417 per calendar month, up to $17,000 for the year. Mary may contribute to the plan until she reaches her annual deferral limit of $17,000 even though her compensation will exceed the annual limit of $250,000 in November.

Employer matching contributions

If your plan provides for matching contributions, you must follow the plan's match formula.

Example: Your plan requires a match of 50% on salary deferrals that do not exceed 5% of compensation. Although Mary earned $300,000, your plan can only use up to $250,000 of her compensation when applying the matching formula. Mary's matching contribution would be $6,250 (50% x (5% x $250,000)). Although Mary makes salary deferrals of $17,000, only $12,500 (5% of $250,000) will be matched. She must receive a matching contribution of $6,250 (50% x $12,500).

What does your plan say?

Although not common, a plan can specifically require that salary deferrals cease once a participant's compensation reaches the annual limit. If your plan specifies that salary deferrals be based on a participant's first $250,000 of compensation, then you must stop allowing Mary to make salary deferrals when her year-to-date compensation reaches $250,000, even though she hasn't reached the annual $17,000 limit on salary deferrals, and you must base the employer match on her actual deferrals.

April 11, 2012

ERISA-Fifth Circuit Dismisses Suit For Failure To File Before The Expiration Of The Statute Of Limitations

In Serton v. Lockheed Martin Corporation, No. 11-60513 (5th Cir. 2012) (Unpublished Opinion), the plaintiff, Bobby Serton ("Serton"), was appealing the district court's summary judgment disposing of his claim for disability benefits under his former employer's retirement plan. The district court rendered summary judgment on the grounds that Serton both failed to exhaust his administrative remedies and failed to file suit before the close of the statute of limitations period.

Serton started working for Lockheed Martin Corporation ("Lockheed") in 1984. In addition to regular retirement benefits, Lockheed's retirement plan provides a disability pension in the event an employee suffers a qualifying disability. In June 1997, Serton suffered a back injury while working. The injury forced Serton to stop working for Lockheed on January 31, 1998. On January 30, 1998, Serton submitted an application for a disability pension under the retirement plan. On or about February 12, 1998, Lockheed mailed a notice of denial to Serton's address. The notice stated a deadline for administrative appeal "within 60 days after the receipt of the notice of denial." The parties agree that Lockheed mailed the notice to Serton's address. But the record contains no further indication that it was received at that address, or that it ever came into Serton's personal possession. Serton never pursued an administrative appeal of the denial of his benefits. Seerton was later incarcerated, and then was released in August 2002. Serton filed the instant suit for the disability pension over seven years later, on November 24, 2009.

In analyzing the case, the Fifth Circuit Court of Appeals (the "Court") noted that ERISA provides no specific limitations period for filing claims to enforce plan rights, and that the Court will apply analogous state statutes of limitation. The parties agree that the analogous statute of limitations is the three-year period found in Section 15-1-49 of the Mississippi Code. Mississippi's discovery rule will toll the statute of limitations until the plaintiff should have reasonably known of his cause of action. But, under Mississippi law, plaintiffs must exercise reasonable diligence in determining whether an injury suffered is actionable, in order to benefit from the tolling provided by the discovery rule. A cause of action for wrongful denial of benefits owed under an ERISA plan accrues when a request for benefits is denied. In this case, that happened in February 1998. The most generous possible application of the Mississippi discovery rule to the circumstances of this case would toll the start of the three-year limitations period until August 2002, when Serton was released from incarceration. He does not allege, much less supply evidence, that he made any effort to discover what became of his application for the disability pension during the seven years between his release and the filing of this suit in November 2009.

As such, the Court concluded that Serton failed to file his case before the expiration of the statute of limitations. The Court affirmed the district court's summary judgment on those grounds, without deciding the exhaustion issue.

April 10, 2012

Employee Benefits-IRS Provides Guidance On Application Of 10% Penalty For Early IRA Withdrawals

In Employee Plans News, March 20, 2012, the Internal Revenue Service ("IRS") faced the following question: Will I have to pay the 10% additional tax on early distributions if I am 47 years old and ordered by a divorce court to take money out of my traditional IRA to pay my former spouse? The IRS answered the question as follows.

Yes. Unless you qualify for an exception, you must still pay the 10% additional tax for taking an early distribution from your traditional IRA even if you take it to satisfy a divorce court order (see Internal Revenue Code section 72(t)). The 10% additional tax is charged on the early distribution amount you must include in your income and is in addition to any regular income tax from including this amount in income.

Unlike distributions made to a former spouse from a qualified retirement plan under a Qualified Domestic Relations Order, there is no "divorce" exception to the 10% additional tax on early distributions from IRAs. The only divorce-related exception for IRAs is if you:
• transfer your interest in the IRA to a spouse or former spouse, and
• the transfer is under a divorce or separation instrument (see IRC section 408(d)(6)).

However, the transfer must be done by:
• changing the name on the IRA from your name to that of your former spouse (if transferring your entire interest in that IRA), or
• a trustee-to-trustee transfer from your IRA to one established by your former spouse. Note: an indirect rollover doesn't qualify as a transfer to your former spouse even if the distributed amount is deposited into your former spouse's IRA within 60-days.

April 9, 2012

Employment-Eleventh Circuit Rules That A Manager's Complaint Is Not Protected By Title VII's Anti-Retaliation Provision, And Adopts The "Manager Rule" For Its Circuit

In Brush v. Sears Holdings Corporation, No. 11-10657 (11th Cir. 2012) (Unpublished Opinion), the plaintiff, Janet Brush ("Brush"), was terminated by her employer, defendant Sears Holding Corporation ("Sears"). Brush subsequently filed suit against Sears, under Title VII, alleging she was terminated in retaliation for certain actions she took as an investigator of a sexual harassment claim. The district court granted summary judgment against her. The question for the Eleventh Circuit Court of Appeals (the "Court"): does the anti-retaliation provision of Title VII protect Brush?

Brush had worked for Sears as a Loss Prevention District Coach. Her job was to minimize varieties of risk to the company. On or around September 15, 2007, Brush received a telephone call from an Assistant Store Coach. The Assistant Store Coach, whom the Court refers to as "Mrs. Doe," informed Brush that she was being sexually harassed by her Store Coach. Brush notified Sears of the allegation. Sears suspended the Store Coach accused of harassment and directed Brush and another Sears employee, one Scott Reuter, to meet with Mrs. Doe to investigate further internally. During the investigation, Mrs. Doe informed Brush that she had been raped multiple times by the Store Coach. However, Mrs. Doe asked that neither her husband nor the police be informed of the rape. Brush notified Reuter of what Mrs. Doe told her, and they subsequently reported the same to Sears. Brush stated that Sears needed to contact the police. Sears declined, although it terminated the employment of the Store Coach, the man who Mrs. Doe said harassed and raped her. Brush nonetheless continued to urge the reporting of the alleged rape. On November 20, 2007, Sears terminated Brush's employment, citing her violation of Sear's policy relating to the investigation of sexual harassment claims. This action ensued. Brush alleged that she had been terminated in retaliation for uncovering multiple rapes and complaining that Sears had done nothing about them.

In analyzing the case, the Court said that Title VII's anti-retaliation provision makes it unlawful for an employer to discriminate against an employee because she has opposed any unlawful employment practice (the "opposition clause"), or because she has made a charge, testified, assisted, or participated in any manner in an investigation, proceeding, or hearing under Title VII (the "participation clause"). For technical reasons, Brush could proceed only under the opposition clause. To make a prima facie showing of a retaliation claim based on the opposition clause, a plaintiff must demonstrate, among other things, that she engaged in statutorily protected activity. In this case, Brush's disagreement with the way in which Sears conducted its internal investigation into Mrs. Doe's allegations does not constitute protected activity. There is no evidence of Brush's opposition to any unlawful practice here, with the result that Brush does not have a claim under Title VII. Nonetheless, Brush argues that an investigative manager's role in reporting a Title VII violation-here the alleged sexual harassment- necessarily qualifies as a "protected activity" relating to a discriminatory practice. However, the Court noted that other circuit courts of appeal have created what is known as the "manager rule." In essence, the "manager rule" holds that a management employee that, in the course of her normal job performance, disagrees with or opposes the actions of an employer does not engage in protected activity. Instead, to qualify as "protected activity" an employee must cross the line from being an employee performing her job to an employee-such as Mrs. Doe- lodging a personal complaint. Brush's complaint involved the adequacy of Sear's internal procedure for receiving sexual harassment complaints, rather than an employment practice that Title VII declares to be unlawful. The Court adopted the manager rule for the eleventh circuit.

As such, the Court concluded that Brush did not engage in a statutorily protected activity, and therefore did not make out a prime facie case of retaliation under Title VII. Accordingly, the Court affirmed the district court's decision.

April 6, 2012

ERISA-DOL Provides Guidance On Using Plan Assets of Apprenticeship And Training Plans For Graduation Ceremonies And Marketing

In Field Assistance Bulletin No. 2012-01, the U.S. Department of Labor (the "DOL") discussed whether the plan assets of a union's apprenticeship and training plans may be used to pay for graduation ceremonies and marketing expenses, without violating ERISA's exclusive purpose rule and fiduciary duty requirements. Here is what the DOL said.

A union's apprenticeship and training plans are employee welfare benefit plans under section 3(1) of ERISA, subject to a few exceptions assumed not to apply here. As such, they are subject to ERISA, so that the plan fiduciaries must comply with the general fiduciary standards in Part 4 of ERISA. Such standards require that, among other things:

--the plan fiduciaries must discharge their duties solely in the interests of the plan's participants and beneficiaries, and for the exclusive purpose of providing apprenticeship or training benefits to participants and defraying reasonable expenses of administering the plan (ERISA § 404(a)(1)(A)) (the "exclusive purpose rule"); and

--those duties must be performed with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims (ERISA § 404(a)(1)(B)) (the prudence rule").

Are the exclusive purpose and prudence rules violated if apprenticeship and training plans make payments: (1) for meals, gifts, entertainment, or other expenses associated with graduation ceremonies or (2) to market, advertise or promote the plan? In answering this question, the unique characteristics, educational objectives and mission of training workers of apprenticeship and training plans must be taken into account.

As such, the plan's payment of expenses associated with a modest graduation ceremony, which is attended by graduating apprentices, family, plan officials, and other persons connected with the program or an industry outreach, and which includes light refreshments, will not violate the exclusive purpose or prudence rule. This obtains only so long as: (a) the amount of the expenses is modest in relationship to the plan's assets, (b) the expenses were approved in accordance with internal accounting, recordkeeping, and administrative controls designed to prevent inappropriate, excessive, or abusive expenditures of plan assets, and (c) the expenses were for costs of the ceremony. For example, a graduation dinner for all attendees, valet parking, or payments for travel or hotel accommodations for graduating apprentices or guests would not be treated as permissible plan asset expenses. On the other hand, a modest graduation ceremony offering light refreshments with diplomas or certificates for apprentices and token awards/gifts for non-apprentices (e.g., plan instructors or persons that supported the program) would be permissible.

Similarly, the payment of certain marketing expenses with plan assets will not violate the exclusive purpose or prudence rule. These expenses must be for marketing or promotion of the apprenticeship or training plan itself (e.g., not for industry advancement or for sponsoring employers or employee organizations) and the amount of the expenses must be consistent with the fiduciaries' obligation to be prudent and economical in the use of plan assets. For example, t-shirts provided to apprentices bearing the logo of the apprenticeship or training plan may be appropriate plan expenses if the expenses are modest and the t-shirts are not purchased from parties in interest in prohibited transactions. Conversely, tickets to sporting and other entertainment events for apprentices, plan officials, trustees, and contributing employers would generally be unreasonable plan expenses.

Other important points:

-- Donations by an apprenticeship and training plan to favored charities, non-profit organizations, scholarship and memorial funds and other similar causes would never be permissible.

--Other impermissible payments and practices for apprenticeship and training plans include: lack of oversight of plan vehicles, equipment, and other inventory; unreasonable instructor salaries and bonuses; employee meal stipends that are excessive or not reasonably related to the provision or promotion of the plan's training program; and payments for staff holiday parties and flowers.

--Payments are not automatically permissible because they are consistent with the plan's tax-exemption under the Internal Revenue Code.

--The plan should establish, and payments should be made in accordance with, written expense policies and internal controls (including accounting, recordkeeping, and administrative controls designed to prevent inappropriate, excessive, or abusive expenditures of plan assets).

--The plan cannot make payments which are not permitted by the plan documents (since such payments would violate the "written plan document requirement" of ERISA § 404(a)(1)(D)).

Note: the need for a payment to be permitted by plan documents, and to be made in accordance with written policies and internal controls, applies to all payments made by an apprenticeship or training plan, not just those for graduation ceremonies and marketing. Unions might consider reviewing the plan documents, policies and internal controls on this point.

April 4, 2012

ERISA-Second Circuit Rules That Plaintiff's Claim Is Preempted By ERISA, Since It Arises Out Of A Pension Plan And Not A Separate Employment Agreement

In Arditi v. Lighthouse International, No. 11-423-cv (2nd Cir. 2012), the district court found that the claims of the plaintiff, Aries Arditi ("Arditi"), against the defendant, Lighthouse International ("Lighthouse"), were preempted by ERISA, since they arose under Lighthouse's Pension Plan (the "Plan") and not separately and independently out of Arditi's written employment agreement (the "Agreement"). The district court denied Arditi's motion to remand the case to state court, holding that Arditi's claims were preempted by ERISA and that his suit was therefore properly removed to federal court. The district court then dismissed the action for failure to state a claim. The question for the Second Circuit Court of Appeals (the "Court"): should Arditi's claims be preempted by ERISA?

In this case, from 1982 to 2000, Arditi was employed by Lighthouse as a "vision scientist." In 2000, Arditi left Lighthouse, accepting employment elsewhere. After his departure, Lighthouse amended the Plan, adding a "Rule of 85." This rule entitled any qualified employee to retire and collect his or her (unreduced) pension benefits before the age of 65, if the sum of the employee's age and years of vested service were equal to or greater than 85. On July 1, 2002, Arditi returned to Lighthouse, in part to take advantage of the Rule of 85 amendment. The Agreement, which was dated June 13, 2002 and signed by both parties, permitted Arditi to retire, when the sum of his age and years of vested service (including pre-2001 service) were at least 85 and receive the unreduced pension benefits under the Plan. However, on June 30, 2007, before Arditi's age and years of vested service reached 85, the Plan was frozen. The freeze stopped the accrual of service for all Plan members. Arditi ultimately retired on March 19, 2010. Due to the freeze, Arditi did not qualify for the unreduced pension benefits. Aditi filed suit against Lighthouse in state court, seeking a declaratory judgment and asserting two causes of action for breach of the Agreement. The suit was removed to the district court.

In analyzing the case, the Court noted that section 514 of ERISA contains broad preemption provisions. It provides that ERISA shall "supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan." According to the Supreme Court (see Aetna Health Inc. v. Davila, 542 U.S. 200 (2004)), ERISA preempts a claim where: (1) an individual, at some point in time, could have brought his or her claim under ERISA section 502(a)(1)(B) (authorizing a plan member to bring suit for benefits due) and (2) no other independent legal duty is implicated by a defendant's actions. Here, prong (1) is met, because Arditi could have brought his claims under ERISA. He is the type of party who can bring an ERISA claim, since he is a participant in, and is seeking benefits under, the Plan (specifically, under the Rule of 85 provision). Arditi's claims seek enforcement of specific provisions of the Plan, and can be construed as colorable claims for benefits. Prong (2) is also satisfied because no other independent legal duty is implicated by Lighthouse's actions. Lighthouse's obligations under the Plan are inextricably intertwined with the interpretation of Plan coverage and benefits and do not create a sufficiently independent duty. This obtains even though Arditi signed the Agreement. The Agreement did not establish a separate and independent promise; rather, Arditi's claims derived directly from the Plan.

As such, the Court concluded that Arditi's claims were preempted by ERISA, and upheld the district court's dismissal of his case.

April 3, 2012

Employee Benefits-IRS Provides Guidance On 2011 Reporting For 2010 Roth Rollovers And Conversions

In Employee Plans News, March 20, 2012, the Internal Revenue Service (the "IRS") provides guidance on how to report, on your 2011 tax returns, any Roth rollover or conversion that you made in 2010.

In 2010, you may have:

-- rolled over eligible distributions from a retirement plan to a Roth IRA;

-- converted (transferred) amounts from a non-Roth IRA to a Roth IRA; or

--made an in-plan Roth rollover (after September 27, 2010).

The guidance is here.