June 2012 Archives

June 29, 2012

Executive Compensation-IRS Provides Sample Language For Making a Section 83(b) Election

In Revenue Procedure 2012-29, the Internal Revenue Service (the "IRS") provides sample language that may be used (but is not required to be used) for making an election under section 83(b) of the Internal Revenue Code (the "Code"). Also, the Revenue Procedure provides examples of the income tax consequences of making such an election.

Section 83(a) of the Code provides, generally, that if in connection with the performance of services, property is transferred to the service provider, then the fair market value (the "FMV") of the property is included in his/her gross income as of the first time that the service provider's rights in the property are transferable to another person or are not subject to a substantial risk of forfeiture, whichever occurs earlier. Section 83(b) of the Code, and Treas. Reg. Sec. 1.83-2(a), generally permit the service provider to elect to include in gross income the FMV of the property at the time of transfer to him/her (e.g., instead of waiting until a substantial risk of forfeiture no longer exists). Why would you make the election? The FMV of the property is likely to be less at the time of transfer than later on when the property value would otherwise be included in gross income under section 83(a), so income taxes can be saved by making the section 83(b) election.

Under section 83(b)(2), an election made under section 83(b) must be made in accordance with the regulations thereunder, and must be filed with the IRS no later than 30 days after the date that the property is transferred to the service provider. Under Treas. Reg. Sec.1.83-2(c), an election under section 83(b) is made by filing a copy of a written statement with the IRS office with which the service provider files his/her return. In addition, the service provider is required to submit a copy of such statement with his or her income tax return for the taxable year in which such property was transferred. Treas. Reg. Sec. 1.83-2(d) requires the service provider to submit a copy of the section 83(b) election to the service recipient. Under Treas. Reg. Sec. 1.83-2(e), the election must be signed by the service provider, indicate that an election is being made under section 83(b) and contain certain information specified in the regulation. The sample language in the Revenue Procedure (modified as needed since this language specifically relates to transferred common stock) can be used to make a section 83(b) election.

June 28, 2012

Employee Benefits: Breaking News-U.S. Supreme Court Upholds Health Reform, Including Individual Mandate To Buy Health Insurance

The case is National Federation of Independent Business v. Sebelius, decided today. In a nutshell, in this case the Supreme Court upheld the 2010 Patient Protection and Affordable Care Act (the "Act"), including the provisions requiring individuals to purchase health insurance. As a very narrow exception to upholding the Act, the Court held it would be unconstitutional for Congress to take away state funding for Medicaid-as permitted by the Act- if the state did not participate in a program established under the Act. More on the case and its implications later.

June 28, 2012

ERISA-Ninth Circuit Rules That, Despite Express Plan Terms, Appropriate Equitable Relief Under Section 502(a)(3) Is Determined By Using Traditional Equitable Principles And Defenses

In CGI Technologies and Solutions Inc. v. Rose, Nos. 11-35127, 11-35128 (9th Cir. 2012), the defendant, Rhonda Rose ("Rose"), was appealing the district court's grant of summary judgment to the plaintiff, CGI Technologies and Solutions Inc. ("CGI"), in its action seeking "appropriate equitable relief" under section 502(a)(3) of ERISA.

In this case, Rose was employed by CGI, which provides to its employees and their dependents a self-funded welfare benefits plan ("the Plan") governed by ERISA. The Plan includes a subrogation and reimbursement clause that expressly: (1) gives to CGI the right to full reimbursement for medical expenses paid on behalf of the beneficiary from any funds recovered by the beneficiary from a third party tortfeasor, (2) exempts CGI from responsibility for attorneys' fees paid in any such recovery, expressly disclaiming the application of the common fund doctrine; and (3) requires full reimbursement to CGI regardless of whether the beneficiary is made whole by the recovery. In 2003, Rose was seriously injured in a car accident with a drunk driver, and consequently she had nerve damage and neck and back injuries that required surgical intervention. From this accident Rose also suffered several types of damages including past and future medical expenses, past and future loss of wages, and pain and suffering. The parties stipulated that her personal injury claim was at least $1,757,943.08. Eventually, Rose recovered a combined total of $376,906.84 from an action against the third party tortfeasor and from her underinsured motorist claim with her automobile insurance provider. The parties stipulated that this recovery represents only 21.44% of Rose's total damages.

Between 2007 and 2010, the Plan paid, on Rose's behalf, about $32,000 in medical expenses incurred as a result of her injuries related to the accident. After Rose's recovery of the damages partially compensating her for her injuries, CGI asserted a first priority of payment and demanded to be reimbursed for the full amount the Plan had paid in medical expenses on Rose's behalf. Rose refused to make the reimbursement, and instead placed the disputed amount in trust. CGI then filed this suit in district court, seeking "appropriate equitable relief," under § 502(a)(3) of ERISA in the form of a constructive trust and/or an equitable lien. The question for the Ninth Circuit Court of Appeals (the "Court"): is CGI entitled to this relief as to the $32,000 in benefits under the Plan's subrogation and reimbursement clause, and is the relief reduced by Rose's proportional attorney's fees for collecting $32,0000 from the tortfeasor?

In analyzing the case, the Court said that, when granting "appropriate equitable relief" under § 502(a)(3), a court should apply traditional equitable principles and may consider traditional equitable defenses-such as the make-whole doctrine and the common fund doctrine- notwithstanding express terms in the Plan disclaiming the application of such defenses. The Court felt that this rule is consistent with a Third Circuit decision, but contrary to the Fifth, Seventh, Eighth and Eleventh Circuit decisions. The Court left it up to the district court to determine the dollar amount to which CGI would be entitled as appropriate equitable relief in this case, and therefore remanded the case back to the district court on this issue.

June 27, 2012

ERISA-9th Circuit Overturns District Court's Dismissal Of ERISA Claim For Benefits, Based On Failure To Exhaust Administrative Remedies, And Of Grant Of Insurer's Counterclaim For Restitution of Overpaid Benefits

In Bilyeu v. Morgan Stanley Long Term Disability Plan, No. 10-16070 (9th Cir. 2012), the plaintiff, Leah Bilyeu ("Bilyeu"), was appealing: (1) the district court's dismissal of her claim challenging the termination of her long-term disability ("LTD") benefits under ERISA and (2) the summary judgment in favor of the insurer, First Unum Life Insurance Company ("Unum"), on Unum's counterclaim for restitution of overpaid LTD benefits.

As to issue (1), the Ninth Circuit Court of Appeals (the "Court") overturned the district court's dismissal of Bilyeu's claim. It ruled that the administrative exhaustion requirement should have been excused, because Bilyeu acted reasonably in light of Unum's ambiguous communications and failure to engage in a meaningful dialogue. Here, the district court abused its discretion in failing to excuse Bilyeu.

As to issue (2), the Ninth Circuit likewise overturned the district court's grant of Unum's counterclaim for reimbursement of overpaid LTD benefits. The Court said that equitable relief is the only form of remedy available to Unum (see section 502(a)(3)(B) of ERISA). Here, Unum has not shown that it is seeking equitable relief because it has not satisfied the elements for an equitable lien by agreement, which is the only form of equitable relief Unum has asserted. These elements are not satisfied because the particular fund subject to the lien, having been dissipated, is no longer in Bilyeu's possession. Unum thus seeks only the imposition of personal liability against Bilyeu, to be paid out of her general assets. That is quintessentially legal, rather than equitable, relief, and is therefore not allowed under ERISA.

June 26, 2012

Employee Benefits-IRS Discusses Vesting And Breaks In Service In A Defined Contribution Plan

In Employee Plans News, June 8, 2012, the Internal Revenue Service (the "IRS") reviewed a question involving vesting and breaks in service in a defined contribution plan.

The question: Our 401(k) plan uses a 6-year graded vesting schedule for matching contributions and forfeits the nonvested portion in a terminated participant's matching contribution account after a cash-out or 5 consecutive 1-year breaks in service. Recently we rehired, on a full-time basis, a former employee who had 2 years of vesting service when he was cashed out in 2008. When he quit, he was 20% vested in his matching contribution account, and during his absence, he accrued 3 consecutive 1-year breaks in service. Must we give him credit for those 2 years of vesting service?

The answer: Because the employee was rehired prior to having 5 consecutive 1-year breaks in service, his 2 pre-break years of service must be counted for vesting of his matching contribution account. If he repays the entire amount of the cash-out distribution, the amount forfeited when he was cashed out will be restored.

More information:

Breaks in service. Plan participants have a 1-year break in service for any year in which they do not complete the minimum hours of service required by the plan's terms (for example, 501 hours).

5-year break-in-service rule. Your plan uses the special break-in-service rule where an employee's post-break service is counted for vesting in pre-break accounts only if the employee is rehired prior to having 5 consecutive 1-year breaks in service.

Vest of pre-break account. Although your plan distributed the employee's entire vested account balance in 2008, it must give him the opportunity to repay his entire distribution to the plan within 5 years of being rehired because he didn't have 5 consecutive 1-year breaks in service. If the rehired employee repays the entire distribution to the plan, then you must reinstate the amount he
forfeited and vest him in the reinstated amount based on both his pre and post-break years of service.

Vesting of post-break account. Your employee was 20% vested when he left your company in 2008. He was rehired after having only 3 consecutive 1-year breaks in service (2009 - 2011). Therefore, your plan must credit his 2 pre-break years of service for vesting.

Post-break waiting period. A plan may require an employee to complete up to 1 year of vesting service after being rehired to receive vesting credit for
his pre-break years of service. If your plan has a post-break waiting period, your rehired employee must complete another year of service before he would be credited with 3 years of service (his 2 pre-break years plus his 1-year waiting period).

Types of contributions. Participants are always 100% vested in their salary deferrals. The plan's 6-year graded vesting schedule applies only to the employer matching contributions.

June 21, 2012

Employee Benefits-IRS Lists Issues Found in Defined Benefit Plans Audited For PPA 2006

In Employee Plans News, June 8, 2012, the Internal Revenue Service (the "IRS") discussed current defined benefit plan issues.

By way of background, the IRS said that the Pension Protection Act of 2006 (the "PPA") made significant changes to funding requirements and administrative
practices for defined benefit plans, including cash balance plans. Internal Revenue Code ("IRC") section 430 describes the new funding requirements under PPA. One of the goals of PPA was to strengthen defined benefit plan funding levels. Consequently, the new law imposes restrictions via IRC section 436 on benefit payments, benefit increases and accruals when a plan is underfunded beyond certain thresholds. In addition, IRC section 401(a)(29) was added to provide that plans not in compliance with the new restrictions under IRC section 436 may be disqualified.

The IRS continued by saying that some initial audits on defined benefit plans for PPA compliance revealed the following issues:

• Annual funding notices made late or not dated (PPA section 501(a); ERISA section 101(f))

• Elections to use or reduce prefunding and/or carryover balances made late/not dated (Treas. Regs. sections 1.430(f)-1(e) and (f))

• Elections to use prefunding and carryover balance to meet quarterly contributions made late or elections not specifying the dollar amount(s)

• Late Adjusted Funding Target Attainment Percentage certification (Treas. Regs. sections 1.436-1(f) and -1(h))

• Actuarial increase for late retirement benefits not made

• Assets valued differently for IRC section 430 versus IRC section 436

• Relative value disclosure notices didn't satisfy Treas. Regs. section 1.417(a)(3)-1(c)(1)(iv)

• Late contribution payments resulting in liquidity shortfalls
• Late quarterly contributions - IRC section 430(j)(3)

• Inappropriate inclusion of premiums for life insurance policies in target normal cost as plan expenses

• Funding in excess of IRC section 404(o) limitation

• Compensation for purposes of determining the accrued benefit in the valuation doesn't match the definition per plan terms

• Compensation for benefit purposes not defined in the plan

• Service incorrectly calculated for benefit purposes

• Incorrect interest rates used for calculating benefits distributions for payment options that are subject to IRC section 417(e)(3)

The IRS added that many of the identified issues are failures to comply with the funding rules and consequently, do not threaten the qualified status of the plan, but may result in assessment of excise tax or penalties. However, some of the issues do result in qualification failures, such as a plan not operating in accordance with its specific written terms or in compliance with the requirements of IRC section 401(a)(29). Resolution of the qualification failures have been addressed using the appropriate correction program (i.e., SCP or Audit CAP), and applying the basic correction principles discussed in Revenue Procedure 2008-50.

June 20, 2012

Employment-Supreme Court Rules That Pharmaceutical Outside Salesmen Are Exempt From FLSA Overtime Requirements

In Christopher v. Smithkline Beecham Corp. (S. Ct. June 18, 2012) , the U.S. Supreme Court faced the issue of whether outside salesmen of a pharmaceutical company are exempt from the overtime requirements of the Fair Labor Standards Act (the "FLSA").

The Court said that the FLSA requires employers to pay employees overtime wages (29 U. S. C. §207(a)), but this requirement does not apply with respect to a worker employed in the capacity of an outside salesman (§213(a)(1)). The Department of Labor ("DOL") regulations elaborate on the meaning of "outside salesman". Primarily, they define the term to mean any employee whose primary duty is making sales within the meaning of FLSA §203(k) (29 CFR §541.500). FLSA § 203(k), in turn, states that sale or sell includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition. The DOL provided additional guidance in connection with its promulgation of these regulations, stressing that an employee is an "outside salesman" when the employee in some sense, has made sales (69 Fed. Reg. 22162).

In this case, the plaintiffs were employed by Smithkline Beecham Corp. ("Smithkline") as pharmaceutical sales representatives for roughly four years. During that time, their primary objective was to obtain a nonbinding commitment from physicians to prescribe Smithkline' s products in appropriate cases. Each week, each of the plaintiffs spent about 40 hours in the field calling on physicians during normal business hours and an additional 10 to 20 hours attending events and performing other miscellaneous tasks. They were not paid time-and-a-half wages when they worked more than 40 hours per week. The plaintiffs filed this suit, alleging that Smithkline violated the FLSA by failing to compensate them for overtime.

The Court ruled that the plaintiffs qualify as "outside salesmen" under the FLSA and are thus exempt from its overtime requirements. The Court said that the plaintiffs made sales under the FLSA and thus are exempt outside salesmen within the meaning of the DOL's regulations. The plaintiffs obtain nonbinding commitments from physicians to prescribe Smithkline' s drugs. This kind of arrangement comfortably falls within the catchall category of "other disposition" in the applicable definition of "sale". That the plaintiffs bear all of the external indicia of salesmen provides further support for the Court's conclusion.

June 19, 2012

Employee Benefits-IRS Discusses 403(b) Plan Written Plan Failures And Audit Examinations

In Employee Plans News, June 8, 2012, Monika Templeman , Director of Employee Plans Examinations at the Internal Revenue Service (the "IRS"), discussed the temporary guidance that the IRS has given to examination agents auditing 403(b) plans for the 2009 plan year and forward.

She said that exam agents found themselves in limbo when starting these audits. The 403(b) final regulations require 403(b) plan sponsors to have a written plan in place starting January 1, 2009, and to follow the terms of their plan in operation.
Notice 2009-3 provided plan sponsors until December 31, 2009, to adopt a written 403(b) plan if they met the conditions outlined in the notice. In addition, the current Employee Plans Compliance Resolution System Revenue (the "EPCRS") Procedure 2008-50 doesn't offer relief for failing to comply with these new requirements. Therefore, the IRS developed temporary guidance for the exam agents' use until the IRS releases an updated EPCRS revenue procedure. If any 403(b) plan operational errors fall under the definitions of Revenue Procedure 2008-50, the agent works the examination under normal procedures.

Ms. Templeman continued by saying that, generally, if exam agents discover a failure to meet the requirements in Notice 2009-3, Ms. Templeman requested that they prepare an Audit Closing Agreement, but use a sanction closer to the fees that would be paid under the Voluntary Correction Program. The amount of the sanction depends on:

• How did the plan sponsor comply with the Notice 2009-3 requirements prior to being informed of the audit?

• Did the plan sponsor timely adopt the 403(b) written plan?

• Is the sponsor operating the plan according to the written plan requirements?

• Were there other failures?

Announcement 2009-89 provides a remedial amendment period for 403(b) plans that met the requirements of Notice 2009-3 or were new plans adopted after December 31, 2009. Generally, if the plan sponsor either adopts a pre-approved
prototype plan or applies for an individual determination letter, they have reliance that their document satisfies the 403(b) written plan requirements beginning on the later of January 1, 2010, or the plan's effective date. The plan sponsor must,
however, correct all form defects in the written plan retroactive to the applicable date.

If the plan falls under the remedial amendment period but has form defects, the agent will request an amendment to correct the form defect and help prevent operational defects. If the plan sponsor chooses not to make the amendment because its plan is in an open remedial amendment period, the agent will add the plan to a list for follow-up, which could be another examination.

A question that Ms. Templeman hears many times from plan sponsors is, "Should we wait to correct plan operational errors until the new EPCRS revenue procedure comes out?" She says that she always answers, "No. Correcting now goes a long way in showing good faith to fix your plan failures if the plan is audited." The agents and plan sponsors will follow the guidance of the new EPCRS revenue procedure when it is released. The IRS will also premier the new 403(b) Fix-It Guide on its website, which will assist the sponsor in finding, fixing, and avoiding the most common 403(b) plan errors.

June 18, 2012

ERISA-Sixth Circuit Rules That State Law Claims Against A Custodian Are Preempted By ERISA, And ERISA Claims Against The Custodian Are Dismissed

In McLemore v. Regions Bank, Nos. 10-5480/5491 (6th Cir. 2012), the Court faced an appeal arising out of the misconduct of Barry Stokes, an investment advisor who stole millions of dollars from the employee-benefits plans that he managed. Stokes and his company, 1Point Solutions, LLC ("1Point"), held the fiduciary accounts of the defrauded plans at defendant Regions Bank ("Regions"). Plaintiffs John McLemore, Stokes's bankruptcy trustee ("the Trustee"), and several former clients of 1Point (collectively, "EFS") allege that Regions negligently or knowingly allowed Stokes to steal from the fiduciary accounts held at Regions. The Trustee sued Regions for damages under ERISA, and both EFS and the Trustee brought state-law claims of: (1) negligence and recklessness, (2) unjust enrichment, and (3) violation of Tennessee's Consumer Protection Act. In 2008, the district court dismissed the Trustee's ERISA claims. In 2010, the district court found that ERISA preempted both plaintiffs' state-law claims and granted judgment on the pleadings in favor of Regions. The Trustee appeals the district court's 2008 dismissal of its ERISA claims, and both parties appeal the 2010 dismissal of their state-law claims.

As to the dismissal of the ERISA claims, the Court found that Regions was not a fiduciary of the defrauded accounts, and therefore could not be liable to them for damages under ERISA. The issue in determining whether Regions was a fiduciary is whether Regions exerted any authority or control respecting management of plan assets, within the meaning of section 3(21)(A) of ERISA. The Court concluded that the plaintiff's factual allegations failed to show that Regions exerted any such authority or control. It said that, in general, the complaint alleges that Regions maintained accounts for 1Point, received deposits to those accounts, withdrew funds from the accounts to collect its fees, and permitted Stokes and 1Point to transfer and withdraw money from these accounts. Stokes and 1Point maintained the accounts and directed all account activity. Regions merely held the funds on deposit and made withdrawals solely to collect its contractually owed fees. Custody of plan assets and collection of fees alone cannot establish control sufficient to confer fiduciary status.

As to the preemption of the state law claims by ERISA, the Court noted that state law (Tennessee's Uniform Fiduciary Act) already barred plaintiffs' claims, to the extent that the claims were based on negligence. As to the remainder of the state law claims, which were generally based on knowing conduct or bad faith, the Court said that Regions' liability arises out of the existence of ERISA-covered plans and the substance of ERISA. The Court concluded that the plaintiffs' state law claims are preempted by ERISA, since-even as applied to a nonfiduciary such as Regions- they would provide an alternate enforcement mechanism to ERISA. As such, the Court affirmed the district court's dismissals of the plaintiffs' ERISA and state law claims in the case.

June 15, 2012

Employee Benefits-IRS Gives Update On Employee Plans Determination Letter Program

According to Employee Plans News, June 8, 2012, the Internal Revenue Service (the "IRS") held the Employee Plans Determination Letter Program Update phone forum on March 30. At the phone forum, the IRS identified the following two changes to the determination letter program:

First, as of May 1, we only accept Form 5307, Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans, from volume submitter plan adopters that deviate from their pre-approved specimen document. Second, as of February 1 for plans with a 5-year remedial amendment cycle (other than terminating plans), and May 1 for terminating plans and plans with a 6-year remedial amendment cycle, we no longer accept accompanying Schedule Q or demonstrations as part of a determination letter application.

As to the second change, the IRS noted that a plan's allocation or benefit formula can often be quite complex. Demonstrations present information illustrating how benefits meet various qualification requirements, especially showing that the plan's formula is definite or predetermined. Although not having demos in the future will speed our work, without having this information, our analysis will be more difficult, and we may have some additional questions for the plan sponsor about how benefits are determined.

June 14, 2012

ERISA-Sixth Circuit Rules That A Company's Owner And Coordinator, Two Individuals, Are Not Fiduciaries Under ERISA, And Therefore Are Not Liable For Unpaid Plan Contributions

In Sheet Metal Local 98 Pension Fund v. Airtab, Inc., No. 09-3121 (6th Cir. 2012) (Unpublished Opinion), the Sheet Metal Workers Local 98 Pension Fund and Sheet Metal Workers Local 98 Welfare Fund (the "Funds"), and their trustees (collectively the "Plaintiffs"), had filed suit against several defendants, including AirTab, Inc. ("Air Tab"), Tina Hairston-Ileogben, the owner and president of AirTab, and Pius Ileogben, a "coordinator" at AirTab. The Plaintiffs alleged that the defendants failed to make contributions to the Funds, as required by the applicable collective bargaining agreement between AirTab and the union (the "CBA"). In particular, the Plaintiffs asserted several causes of action against Ileogben and Hairston-Ileogben ("the Individual Defendants"), including breach of fiduciary duty and breach of trust. The district court granted summary judgment to the Individual Defendants on Plaintiffs' claims of breach of fiduciary duty and breach of trust, concluding that the unpaid contributions did not constitute plan assets and that the Individual Defendants were not fiduciaries under ERISA.

One question for the Sixth Circuit Court of Appeals (the "Court"): was the district court correct in granting summary judgment on the breach of fiduciary duty/breach of trust issues?

In analyzing the case, the Court noted that, under ERISA, a person is a fiduciary with respect to a plan to the extent that he or she: (1) exercises any discretionary authority or discretionary control respecting management of such plan, (2) exercises any authority or control respecting management or disposition of its assets or (3) has any discretionary authority or discretionary responsibility in the administration of such plan.

As to this case, the Court said, first, that the Individual Defendants are not defined as fiduciaries in any documents; on the contrary, it is the trustees that have control over the Funds' assets according to the CBA and other contractual documents. In addition, at least one other circuit (meaning the Eleventh Circuit) has held that a person should not be attributed fiduciary status under ERISA and held accountable for performance of the strict responsibilities required of him in that role, if he is not clearly aware of his status as a fiduciary. Here, nothing indicates that the Individual Defendants were ever made aware of their potential status as fiduciaries. The Court said, next, that the Individual Defendants' alleged refusal to pay the funds as required under the CBA does not rise to the level of exercising discretionary control or authority such that fiduciary status attaches under ERISA. As such, the Court concluded that the Individual Defendants were not fiduciaries of the Funds under ERISA, so that the allegation of breach of fiduciary duty or trust must fail. It did not need to reach the plan asset issue, since, even if the unpaid contributions were plan assets, the Individual Defendants-who were not fiduciaries under ERISA-would not be responsible for them . The Court therefore affirmed the district court's summary judgment on the breach of fiduciary duty/breach of trust issues.

June 13, 2012

Employment-New York State Anti-Bullying Legislation Goes Into Effect July 1

Employment related and very important:

The Dignity for All Students Act (the "Act"), which amended the New York State Education Law, and which should help prevent bullying and harassment of students at school, becomes effective on July 1, 2012. The Act will require all public school districts to amend their policies and Codes of Conduct to reflect the Act's requirements.

Guidance issued by the New York State Education Department says the following about the Act: The intent of the Act is to provide all public school students with an environment free from discrimination and harassment, as well as to foster civility in public schools. The Act also focuses on prevention of harassment and discriminatory behaviors through the promotion of educational measures meant to positively impact school culture and climate. Among the Act's provisions, is the requirement that all public school
districts and Boards of Cooperative Educational Services ("BOCES")
include provisions in their Codes of Conduct prohibiting the discrimination and
harassment against students by students and/or school employees on school
property or at a school function, as well as provisions for responding to acts of
discrimination and harassment against students by students and/or school
employees on school property or at a school function.

Let's all hope for a positive impact.

June 12, 2012

Employment-EEOC Wins (Rare) Summary Judgment Verdict in Title VII Retaliation Case

According to a Press Release, dated 5/29/12, the EEOC has won a rare summary judgment verdict in a Title VII retaliation case. The Press Release said the following.

Chief U.S. District Judge Michael P. McCuskey of U.S. District Court for the Central District of Illinois, in an opinion issued May 23, has ruled that-as a matter of law- Cognis Corporation, a German-based part of multinational chemical company BASF, unlawfully retaliated against an employee for refusing to waive his rights to file a discrimination charge. This violates Title VII of the Civil Rights Act of 1964. The court said that Cognis fired Steven Whitlow after he revoked his willingness to be bound by a "last-chance" employment agreement because it would have stripped him of his rights to seek relief for discrimination or to file a charge with the EEOC.

After the summary judgment verdict, the only issue remaining for trial, as to Whitlow, is the amount of damages due Whitlow from Cognis. Certain other issues, pertaining to the class of remaining employees of Cognis who signed last-chance agreements, will also proceed to trial.

June 11, 2012

ERISA-Sixth Circuit Rules That Plaintiffs Must Show A Net Loss To Bring A Stock-Drop Case

In Taylor v. KeyCorp, Nos. 10-4163/4198/4199 (6th Cir. 2012), plaintiff Ann Taylor was appealing the district court's dismissal of her complaint for lack of subject-matter jurisdiction. The case had been brought on behalf of participants and beneficiaries of the KeyCorp 401(k) Savings Plan (the "Plan"), under sections 409 and 502 of ERISA. The named defendants were KeyCorp ("Key") and numerous individually named fiduciaries of the Plan (the "defendants").

The plaintiffs asserted five claims, including breach of fiduciary duty under ERISA which caused inflation, and then a price drop, of Key stock (that is, a breach that led to a stock drop) . However, the Court focused on the issue of whether the plaintiffs had constitutional standing to bring this case. It said that, in order to establish standing, a plaintiff must allege: (1) injury in fact, (2) a causal connection between the injury and the conduct complained of, and (3) redressability. Here, the Court found that plaintiff Taylor failed to meet condition (1).
The Court found the facts to be as follows during the applicable period. As of December 31, 2006, Taylor owned 1,678.32 units of the Key stock fund held by the Plan. Taylor sold all of those units on January 11, 2007, when Key stock was trading at over $37 per share. Key stock reached its peak price of $39.90 per share on February 22, 2007. Following her sale of the fund units in January, 2007, Taylor never purchased another unit in the Key stock fund. She did acquire an additional 387.31 units in Key stock-presumably under the Plan- through Key's matching program. On February 22, 2008, she sold 268.01 of those units and sold the remainder of her 119.30 units of Key stock fund on June 25, 2008. Overall, through the Plan, Taylor sold her Key stock for more money than she actually paid for it, earning a net profit of $6,317. The Court said that, if the facts alleged in the complaint are true, Taylor benefitted from the defendants' alleged breach of fiduciary duty. There is no out-of-pocket loss. The Court specifically rejected the argument that loss could be shown based on the profit that could have been obtained by making alternative investments instead of buying and holding the employer stock.

Taylor argued that, even if the correct measure of her injury is out-of-pocket loss, there was an actual injury because she suffered a loss on the Key stock she obtained under the Plan through Key's matching program. The Court responded by saying that all of her purchases and sales of the Key stock under the Plan must be netted, since the complaint did not allege separate breach of duty causing separate damages. Here, taking all purchases and sales under the Plan into account, there was no net loss. Thus, Taylor had not been injured, and therefore had no standing to bring the suit. The Court affirmed the district court's dismissal of Taylor's complaint.

June 8, 2012

ERISA-DOL Discusses Exclusion Of 403(b) Plans From ERISA Coverage

In Advisory Opinion 2012-02A, the U.S. Department of Labor (the "DOL") discusses whether the exclusion of a 403(b) plan from coverage under ERISA, by the DOL's regulation at 29 C.F.R. 2510.3-2(f), would be adversely affected if the employer also maintains a qualified money purchase plan to which the employer makes contributions based on the employee's salary deferrals to the 403(b) plan.

A 403(b) plan would normally be covered by ERISA. However, a "safe harbor" regulation, at 29 C.F.R. 2510.3-2(f), prevents coverage for a 403(b) plan funded solely by salary reduction contributions, if the following four conditions are met: (1) participation of employees is completely voluntary, (2) all rights under the plan are enforceable solely by the employee, (3) the involvement of the employer is limited to certain specified activities, and (4) the employer receives no direct or indirect compensation, other than reasonable reimbursement to cover expenses incurred in performing its duties under the agreements by which the salary reduction contributions are made.

The DOL said that a 403(b) plan does not fail to comply with the "safe harbor" merely because the employer maintains a separate qualified retirement plan and takes employee participation in the 403(b) plan (including salary reduction contributions) into account in ensuring that employer contributions to the qualified retirement plan meet the tax qualification requirements in the Internal Revenue Code. However, the DOL further said that conditioning employer contributions to the qualified retirement plan on the employee making salary reduction contributions to the 403(b) plan would be inconsistent with the limited employer involvement permitted by condition (3) of the safe harbor, and would also conflict with the requirement in condition (1) of the safe harbor that employee participation in the 403(b) plan be completely voluntary. That is, so conditioning the employer contributions to the qualified retirement plan would probably make the safe harbor inapplicable to the 403(b) plan.

June 7, 2012

ERISA- New DOL Regulations On Disclosures Become Effective Soon

The effective dates of the new Department of Labor ("DOL") regulations on service provider disclosures and investment fee disclosures for retirement plans are almost here. The service provider disclosure regulations-which require the plan administrator to collect service and fee information from the plan's service provider-are effective July 1. The investment fee disclosures-which require the plan administrator to collect and distribute to participants performance and fee information on the plan's designated investments-generally become effective on August 30. There could be severe consequences for failing to comply with these regulations, such as AUTOMATIC prohibited transactions for not complying with the service provider disclosure rules by July 1.

To help you deal with the new regulations, I make available two documents- my article "The New Service Provider and Participant Fee Disclosure Rules-What They Are, When They Apply and How to Prepare for Them", which appeared in the BNA Pension & Daily (May 21, 2012) and a Summary of the Rules. The Summary is intended to let you know what is involved. If you are the plan administrator of a retirement plan, or have any responsibility to one, you really need to look at these docs. If you want copies and /or have any questions,please contact me through the blog, call me (516-307-1550) or email me (sbaum@lernerlawfirm.com).

June 6, 2012

ERISA-DOL Reviews Whether A Retirement Benefit Arrangement Is A Single Employee Pension Benefit Plan

In Advisory Opinion 2012-03A, the U.S. Department of Labor (the "DOL") faced the question of whether the NRP Plan, described below, constitutes a single "employee pension benefit plan" under section 3(2) of ERISA.

To take over abandoned retirement plans, National Retirement Plan, Inc. ("NRP") will establish the NRP Plan, and will serve as both the plan sponsor and plan administrator. NRP intends to merge unrelated, abandoned, individual account plans into the NRP Plan and thereafter manage and administer the NRP Plan as an ongoing individual account retirement plan. Many abandoned plans' records will not be complete and practical procedures will be needed to be developed to complete the mergers while protecting participant benefits. The participants in the NRP Plan will be able to elect to directly roll over the amounts in their accounts into individual retirement accounts ("IRAs"), take a distribution of those amounts (partial or total), or have their assets retained in the NRP Plan for investment and subsequent distribution. Participants who elect to remain in the NRP Plan will be able to direct the investment of their accounts among a diverse portfolio of investments.

The DOL said, to constitute a single "employee pension benefit plan" under section 3(2) of ERISA, the NRP Plan must be established or maintained by an "employer" within the meaning of section 3(5) of ERISA, by an "employee organization" within the meaning of section 3(4) of ERISA, or both.

Section 3(4) defines "employee organization", in pertinent part, as any labor union or any organization of any kind in which employees participate and which exists for the purpose, in whole or in part, of dealing with employers concerning an employee benefit plan, or other matters incidental to employment relationships; or any employees' beneficiary association organized for the purpose, in whole or in part, of establishing such a plan. The DOL said that NRP would not be an employee organization, as so defined, primarily because it does not exist for the purpose of dealing with employers, and it is not an employee beneficiary association because membership in the association must be limited to employees, and this would not be the case here.

Section 3(5) defines "employer", in pertinent part, as any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity. NRP would not be an employer, as so defined, since it would not be acting as an employer with respect to the participants in the NRP Plan. There is no group or association acting for an employer that would serve as the employer for the NRP Plan.

As such, the DOL concluded that the NRP Plan does not constitute a single employee pension benefit plan under section 3(2) of ERISA. Rather, the NRP Plan should be treated as a collection of separate, albeit apparently abandoned, employee benefit plans.

Comment: This is basically the same issue and same conclusion as in Advisory Opinion 2012-04A (see blog of June 1). One consequence of the conclusion of "no single plan" is that a Form 5500 must be filed for each separate plan. That is a lot of 5500s, in these cases! Also, a separate plan with at least 100 participants will need an audit, and each plan must procure its own ERISA section 412 bond. Further, the existence of separate plans could lead to fiduciary responsibility under ERISA for persons, e.g., the employers, now treated as sponsoring and operating those plans.

June 5, 2012

Employee Benefits-IRS Provides Guidance On $2,500 Health FSA Limit And Other Cafeteria Plan Matters

In Notice 2012-40, the Internal Revenue Service (the "IRS") provides guidance on the $2,500 limit on the amount of salary reduction contributions that may be made to a health flexible spending arrangement (a "health FSA") under § 125(i) of the Internal Revenue Code (the "Code") and the deadline for amending cafeteria plans to comply with that limit.

Specifically, the Notice provides that -

• the $2,500 limit does not apply for plan years that begin before 2013(that is, the limit applies to plan years starting after 2012);

• the $2,500 limit applies on an employee by employee basis;

• the term "taxable year" in § 125(i) refers to the plan year of the cafeteria plan, as
this is the period for which salary reduction elections are made and the period to which the $2,500 limit will apply (the $2,500 amount will be indexed for inflation for plan years starting after 2013) ;

• plans may adopt the required amendments to reflect the $2,500 limit at any time
through the end of calendar year 2014 (but the amendment must be retroactive to the effective date of the limit and the plan must be operated in accordance with the limit); and

• in the case of a plan providing a grace period for unused salary reduction contributions (which may be up to two months and 15 days), for plan years beginning after 2011, unused salary reduction contributions to the health FSA for a plan year, which are carried over into the grace period for that plan year, will not count against the $2,500 limit for the next plan year.

The Notice also provides relief for certain contributions that mistakenly exceed the $2,500 limit and are corrected in a timely manner. Finally, the Notice requests comments on whether to modify the use-or-lose rule that currently applies to health FSAs.

June 1, 2012

ERISA-DOL Provides Guidance On Whether A Retirement Savings Program Is A Single Employee Pension Benefit Plan Despite Participation By Multiple Employers

In Advisory Opinion 2012-04A, the U.S. Department of Labor (the "DOL") dealt with the issue of whether a certain retirement savings program constitutes a single "employee pension benefit plan", within the meaning of section 3(2) of ERISA, despite participation by multiple unrelated employers.

In the Opinion , the DOL reviewed the 401(k) Advantage LLC 401(k) Plan (the "Plan"). The Plan is operated and maintained by 401(k) Advantage LLC ("Advantage"), and is advised by TAG Resources LLC ("TAG"), a registered investment advisor. The Plan is intended to be a single "multiple employer" 401(k) profit-sharing plan, which covers employees of Advantage and other unrelated employers that adopt the Plan (there are currently 500 such employers). TAG is the "plan administrator", within the meaning of ERISA section 3(16), of the Plan. Advantage is the plan sponsor and named fiduciary. Advantage has the authority to amend the Plan. Advantage and TAG may, at any time, terminate the participation of any particular adopting employer. As named fiduciary, Advantage assumes the risk and liability associated with being a trustee, and removes every adopting employer from the liability associated with that role.

In analyzing the issue, the DOL said that, to be a single "employee pension benefit plan", under ERISA section 3(2), the Plan must be established or maintained by an "employer" within the meaning of ERISA section 3(5), an "employee organization" within the meaning of ERISA section 3(4), or both. In turn section 3(5) of ERISA defines "employer" as any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity. Section 3(4) of ERISA defines "employee organization", in pertinent part, as any labor union or any organization of any kind in which employees participate and which exists for the purpose, in whole or in part, of dealing with employers concerning an employee benefit plan, or other matters incidental to employment relationships; or any employees' beneficiary association organized for the purpose in whole or in part, of establishing such a plan.

In this case, based on the information provided to the DOL, the DOL concluded that neither Advantage or TAG, or any other entity such as an adopting employer, is an employer or employee organization, as so defined. In particular, Advantage and TAG are not acting like employers with respect to the employees of the adopting employers, and therefore do not fit the definition of employer in section 3(5). The adopting employers have no relationship to each other, except for this arrangement to provide retirement savings for their employees. On that point, the DOL said that where-as here- several unrelated employers merely execute identically worded trust agreements or similar documents as a means to fund or provide benefits to their employees, in the absence of any genuine organizational relationship between the employers, no employer group or association exists for purposes of ERISA section 3(5).

As such, the DOL concluded that the Plan is not a single employee pension benefit plan for purposes of ERISA. Rather, it is an individual plan of each adopting employer.