July 2012 Archives

July 31, 2012

Employment-First Circuit Rules That Firing Is Permitted By Collective Bargaining Agreement

In Cameron v. Idearc Media Corp., No. 11-2186 (1st Cir. 2012), the plaintiffs are former directory-advertising sales representatives in the Premise Sales unit of defendant, Idearc Media Corporation ("Idearc "). Each was discharged in July 2007. Idearc says they were let go for poor performance. The plaintiffs allege that the terminations were motivated by age discrimination in violation of the ADEA and a desire to negate pension benefits in violation of section 510 of ERISA. The plaintiffs also advance a retaliation claim under section 510 of ERISA. The district court rejected all of the plaintiffs' claims. The plaintiffs appealed to the Sixth Circuit Court of Appeals (the "Court"). The Court upheld the district court's ruling.

In this case, the applicable collective bargaining agreement (the "CBA") authorized Idearc to terminate under-performing employees. Under the CBA, employees were divided into three "channels"--Premise Sales, Senior Telephone Sales, and Telephone Sales--which were subdivided into seven "peer groups." Employees in each peer group were ranked within six-month periods by "percent net gain"--which was calculated by comparing a salesperson's revenues against the revenue produced by his accounts in the previous year. Until January 2005, the bottom 30th percentile of each peer group in any semester "failed" that semester unless the employee met an alternative company-set net gain objective. In January 2005, Idearc raised the "failing" figure to the 70th percentile and also lowered the alternative net gain objective target, making the latter figure much more important. The CBA allowed Idearc to terminate employees failing 4 out of 7 consecutive semesters.

The plaintiffs each qualified for termination under the CBA, as of the end of the first semester in 2007. Each plaintiff was over 40 years old at the time of termination, and each had between 18 and 28 years of service at Idearc. Two of the plaintiffs were about two years away from qualifying for service pensions that respectively vested after 20 and 30 years of service; a third was about 4.5 years from his service pension; and a fourth was 7 years from his service pension and less than 2 years from his deferred vested pension.

The Court found that the under-performing test in the CBA, which gave Idearc the grounds for terminating the plaintiffs, showed a legitimate business reason for the terminations. As such, the Court concluded that the plaintiffs' claims fail.

July 30, 2012

ERISA-Seventh Circuit Holds That A Doctor Is Not Entitled To Long-Term Disability Benefits

In Marantz v. Permanente Medical Group, Inc., No. 10-1136 (7th Cir. 2012), the plaintiff, Dr. Susan Marantz ("Dr. Marantz") sued her employer, the Permanente Medical Group, Inc. ("Permanente"), and the Life Insurance Company of North America ("LINA"), claiming that they violated ERISA by refusing to provide her with long-term disability ("LTD") payments as required under Permanente's disability insurance plan (the "Plan"). LINA-as plan administrator- denied that Dr. Marantz qualified for the benefits. The district court held that Dr. Marantz did not satisfy her burden of proving that in April 2005 she was entitled to LTD benefits under the terms of the Plan. On appeal, the Seventh Circuit Court of Appeal (the "Court") affirmed the holding of the district court.

Dr. Marantz was employed as a doctor by Permanente, and became covered under the Plan. At Permanente, she was chief of pulmonary care. In response to back pain, in 1997 Dr. Marantz underwent surgery to treat a herniated disc and degenerative disc disease, but the surgery did not eliminate her pain and, as of August 1999, she stopped working full time. On October 13, 1999, Dr. Marantz filed a claim with LINA seeking LTD benefits under the Plan, claiming that radiculopathy, pain, and paresthesia prevented her from performing her duties as chief of pulmonary care. The Plan stated, in pertinent part that "After Disability Benefits have been payable for 60 months, you are Disabled if your Injury or Sickness makes you unable to perform all the material duties of any occupation for which you may reasonably become qualified based on education, training or experience, or solely due to Injury or Sickness, you are unable to earn more than 80% of your Indexed Covered Earnings". LINA approved payment of the LTD benefits for 60 months, but then questioned if Dr. Marantz continued to be Disabled under the Plan. LINA determined that she was not, and stopped benefit payments. This suit ensued.

The Court reviewed the evidence in the case, including a surveillance video, a functional capacity evaluation, and reports and testimony of treating physicians and LINA's physicians. Based on this evidence, the Court concluded that Dr. Marantz was unable to prove that she was "Disabled" within the meaning of the Plan. Accordingly, the Court affirmed the district court's holding.

July 27, 2012

Employee Benefits-Health Plans May Have To Offer Additional Coverage For Women's Preventive Care After July

Just a reminder: Group health care plans, if not "grandfathered" under the 2010 health care reform act, must offer additional coverage for certain woman's preventive care services, without any deductibles or other cost-sharing, for plan years starting after July, 2012. These services include provision of the following: contraceptive devices, drugs and counseling (except for certain religious employers such as churches and synagogues); well woman visits to her docs; gestational diabetes screening; breastfeeding support, supplies and counseling; HPV DNA testing; STI (sexually transmitted infections) counseling; HIV screening and counseling; and domestic violence screening and counseling.

The HHS discussion of these additional coverage requirements for preventive care are here.

July 26, 2012

Employee Benefits-IRS Issues Letter Allowing A Plan To Offer A Lump Sum Payment Option To Participants Already In Pay Status Without Violating Code Section 401(a)(9)

In a Letter Ruling, dated April 19, 2017, the Internal Revenue Service (the "IRS") faced the question of whether section 401(a)(9) of the Internal Revenue Code (the "Code") would be violated if a qualified defined benefit plan is amended to offer-once, for a limited period of time of no less than 60 days and no more than 90 days- a lump sum option to participants already in pay status, that is, participants already receiving annuity payments. Under the lump sum option, a participant who elects the lump sum would receive the remaining value of his or her annuity in a lump sum payment, in lieu of receiving any more annuity payments.

In analyzing this question, the IRS said that the proposed amendment would result in a change in the annuity payment period. The change is associated with the payment of increased benefits due to the lump sum. Those who elect the lump sum will be treated as having a new annuity starting date, which will be the first day of the month in which the lump sum is payable. Since the ability to select a lump sum option is available only during a limited window period, increased benefit payments will result from the proposed plan amendment, and as such are a permitted benefit increase under Treas. Reg. Sec. 1.401(a)(9)-6, Q & A-14(a)(4).

As a result, the IRS concluded that the amendment in question will not cause the plan to violate section 401(a)(9).

July 25, 2012

ERISA-Sixth Circuit Rules That Transfer Of Plan Investments Previously Selected By Participants To A QDIA Can Meet Safe Harbor For Fiduciary Relief In DOL Regulations

In Bidwell v. University Medical Center, Inc., No. 11-5493 (6th Cir. 2012), the plaintiffs were suing University Medical Center, Inc. ("UMC") for breach of fiduciary duty under ERISA in connection with the transfer of the plaintiffs' plan investments from a stable value fund to a Qualified Default Investment Alternative ("QDIA"), as defined by the Department of Labor ("DOL") in its new regulations. The district court granted summary judgment to UMC.

In 2007, the DOL promulgated new regulations, pursuant to the Pension Protection Act ("PPA"). These regulations created "safe harbor relief from fiduciary liability" for plan administrators that directed automatic-enrollment contributions, generally for which enrollees did not provide any investment direction, into QDIAs. In 2008, UMC sought to apply the new DOL regulation by making its default-investment vehicle under UMC's retirement plans the Lincoln LifeSpan Fund, and transferring existing investments in the prior default fund for the plans, the Lincoln Stable Value Fund, into the Lincoln LifeSpan Fund. Because UMC did not have records of which participants elected to invest in the Lincoln Stable Value Fund and which participants were investors by default, UMC sent notice of the change to all participants with one-hundred percent of their investment in the Lincoln Stable Value Fund. The notice advised the participants that all existing investments in the Lincoln Stable Value Fund would be transferred to the Lincoln LifeSpan Fund unless the participants gave instruction otherwise by July 16, 2008.

The plaintiffs had one-hundred percent of their UMC plan investment in the Lincoln Stable Value Fund. However, the plaintiffs maintain that they never received the notice of the transfer. As a result they did not respond by the deadline specified in the letter, and UMC transferred their investment from the Lincoln Stable Value Fund to the LincolnLifeSpan Fund without their knowledge. The plaintiffs first learned of the transfer upon receipt of their quarterly account statements, immediately contacted UMC on October 15, 2008 to inquire about the change, and then switched their investments back to the Lincoln Stable Value Fund. Due to market fluctuations in the interim, however, the plaintiffs suffered financial losses prior to the return of their funds to the Lincoln Stable Value Fund. The question for the Sixth Circuit Court of Appeals (the "Court"): Could UMC -as plan fiduciary- have liability for these losses under ERISA?

In analyzing the case, the Court said that the 2007 DOL regulation created a safe harbor from liability for plan fiduciaries who deposit participant contributions in a default-investment (see 29 CFR § 2550.404c-5). The plaintiffs did not claim that UMC failed to satisfy all requirements of the safe harbor. Rather, they argued that the safe harbor applies only to employer-selected investments made on behalf of participants who fail to elect an investment vehicle, and that neither plaintiff qualifies as such a participant because each specifically selected the Lincoln Stable Value Fund. Further, UMC had a duty to maintain records of which investors in the Lincoln Stable Value Fund were investors by election and which were investors by default,in order to allow investors by election to remain invested in the fund they selected. However, the Court noted that the DOL indicated, in the preamble to the regulations, that whenever a participant or beneficiary has the opportunity to direct the investment of assets in his or account, but does not direct the investment of such assets, plan fiduciaries may avail themselves of the safe harbor. The DOL was also clear that the opportunity to direct investment includes the scenario where a plan administrator requests participants who previously had elected a particular investment vehicle to confirm whether they wish for their funds to remain in that investment vehicle (the Court treated UMC has having provided the plaintiffs with the notice about the transfer-hence the plaintiffs received the "request"). As such, the Court ruled that the safe harbor was available, and in fact applied, to UMC, and it upheld the district court's summary judgment in UMC's favor.

July 24, 2012

ERISA-Sixth Circuit Rules That Defendant, Responsible For Sending Conversion Notices For Life Insurance, Is Not A Fiduciary Under ERISA

In Walker v. Federal Express Corporation, No. 11-5201(6th Cir. 2012)(Unpublished; discussed in yesterday's blog), one of the issues faced by the Court was whether one of the defendants, ADP, Inc. ("ADP"), was a fiduciary for ERISA purposes.

The Sixth Circuit Court of Appeals (the "Court") said that, under section 3(21)(A) of ERISA, a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.

The Court then said that, in this case, ADP had a limited role in administering the employer's benefit plans and was not directly involved in plaintiff's claim for life insurance benefits. ADP's role-as it pertains to the case- was limited to sending notices pertaining to the conversion of group life insurance offered under a plan to individual insurance. There was no evidence that this role involved more than performing administrative duties. ADP never attempted to insert itself in the appeal process pertaining to the plaintiff's claim. Additionally, an applicable agreement between ADP and the employer explicitly stated that ADP is not a fiduciary under ERISA. ADP did not have any authority to perform managerial functions with respect to the plan in question. Further, ADP did not perform any fiduciary function with respect to any aspect of its involvement with this plan. As such, the Court concluded that ADP was not a fiduciary for ERISA purposes.

July 23, 2012

ERISA-Sixth Circuit Rules That A Plaintiff Cannot Recover Life Insurance Policy Proceeds Under Section 502(a)(2) of ERISA

In Walker v. Federal Express Corporation, No. 11-5201(6th Cir. 2012) (Unpublished), the plaintiff, Frances Walker, filed the suit on behalf of her deceased spouse, Clyde Walker ("Walker"), alleging violations of ERISA.

Walker was hired by one of the defendants, Federal Express Corporation ("FedEx"), on November 17, 1983, and worked as a Senior Supply clerk for FedEx from 1994 until his death on June 9, 2002. As an employee with FedEx, Walker was participating in the company's group term life insurance policy (the "Plan"). After suffering a debilitating stroke, Walker requested a personal leave of absence and was granted time off by FedEx starting on October 24, 2001. In accordance with FedEx policy, while on leave, Walker continued to pay premiums under the Plan to maintain his life insurance coverage. FedEx terminated Walker's employment on March 24, 2002 after he failed to return to work from his illness. Walker did not exercise his right to convert the group life insurance coverage under the Plan to individual life insurance coverage. FedEx claims this right expired 31 days after May 1, 2002. The parties dispute as to whether FedEx gave Walker notice of his right to convert. Walker died on June 9, 2002. The Plan refused to pay any life insurance benefit on Walker's behalf, on the grounds that he did not convert. This suit ensued. The district court granted, among other things, summary judgment in favor of FedEx on the issue of whether any life insurance benefit may be payable with respect to Walker.

In analyzing the case, the Sixth Circuit Court of Appeals (the "Court") ruled that the plaintiff could not seek recovery under section 502(a)(2) of ERISA. Section 502(a)(2) allows a participant or beneficiary to sue a fiduciary for appropriate relief under section 409 of ERISA, and section 409 permits only recovery for the plan as a whole, not the individual recovery the plaintiff seeks. The plaintiff's claim-made with respect to a Plan offering life insurance coverage- is beyond the Supreme Court's decision in Larue v. Dewold, Boberg & Associates, Inc., which allows individual recovery under section 409 in the case of a defined contribution pension plan. As such, the Court upheld the district court's summary judgment in favor of FedEx on the issue of whether the life insurance benefit may be recovered.

July 19, 2012

Employment-IRS Provides Guidance On Additional Medicare Tax

On it's website, the Internal Revenue Service (the "IRS") has provided guidance, in the form of Q & As, to employers and payroll service providers on implementing the Additional Medicare Tax that becomes effective in 2013. The guidance is here. The IRS indicates that the Additional Medicare Tax applies to individuals' wages, other compensation, and self-employment income over certain thresholds, and that employers are responsible for withholding the tax on wages and other compensation in certain circumstances.

According to the Q&As, the Additional Medicare Tax goes into effect for taxable years beginning after 2012. The rate of the tax is 0.9 percent. An individual is liable for Additional Medicare Tax if the individual's wages, other compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the following threshold amount for the individual's filing status:

--married filing jointly, $250,000;

--married filing separately, $125,000; and

--single, head of household (with qualifying person), qualifying widow(er) with dependent child, $200,000.

All wages that are currently subject to Medicare Tax are subject to Additional Medicare Tax if they are paid in excess of the applicable threshold for an individual's filing status.

An employer is required to withhold Additional Medicare Tax on wages or compensation it pays to an employee in excess of $200,000 in a calendar year. This obtains even if the employee himself/herself is not liable for the tax because, e.g., the employee's wages and other compensation do not exceed the applicable threshold. The employer is required to begin withholding the tax in the pay period in which the pay for the year reaches the $200,000 threshold. The withholding requirement applies only to wages in excess of the $200,000 threshold. Any withheld Additional Medicare Tax will be credited against the individual's total tax liability on his/her Form 1040. There is no employer match for any Additional Medicare Tax that the employer withholds.

The Q& As also discuss the application of the Additional Medicare Tax to noncash compensation, tips, group-term life insurance in excess of $50,000, third-party sick pay and amounts deferred under a nonqualified plan of deferred compensation, and to certain other cases.



July 18, 2012

Employee Benefits-Article on The W-2 Reporting Of The Cost Of Group Health Plan Coverage

Further to yesterday's blog, I have been asked about the requirement in the 2010 health care act for reporting the cost of group health care coverage on Form W-2. The requirement first applies to Form W-2s for 2012, which will be furnished to employees in 2013 (earlier reporting was voluntary). Employers need to focus on this reporting requirement now, since employers should currently be capturing the costs to be reported on the 2012 Form W-2s. Helpfully, the reporting requirement does not apply to an employer, for a calendar year, if the employer filed fewer than 250 Form W-2s for the previous calendar year.

For those employers not excepted, I am making available an article that I have prepared on the Form W-2 reporting requirement for health care coverage costs. Please call me (516-307-1550) or contact me through the blog if you would like a copy. The article is based on IRS guidance in Notice 2012-9. Note that the IRS has also made available a chart showing the coverage costs that must be reported.

July 17, 2012

Employee Benefits-What Must Employers Do About Health Care, Now That The Supreme Court Has Upheld the 2010 Health Reform Act?

That is the title of the speech I gave yesterday at the HIA-LI Healthcare Committee. Call me (516-307-1550) or contact me through the blog for a copy of the outline I used. Among other things, the outline lists the requirements of the 2010 health care reform act that become effective in the next 18 months or so, and that employers should start implementing.

July 12, 2012

ERISA-Fourth Circuit Rules That Surcharge And Estoppel Remedies-Providing Monetary Relief- Are Available To A Plaintiff Under ERISA

In McCravy v. Metropolitan Life Insurance Company, Nos.10-1074, 10-1131(4th Cir. 2012), the plaintiff, Debbie McCravy ("McCravy"), had participated in her employer's life insurance and accidental death and dismemberment plan (the "Plan"). The Plan was issued and administered by the defendant, Metropolitan Insurance Company ("MetLife"). Under the Plan, an insured could purchase coverage for "eligible dependent children."

McCravy elected to buy coverage for her daughter, Leslie McCravy, and paid premiums, which MetLife accepted, from before Leslie's nineteenth birthday until she was murdered in 2007 at the age of 25. Following Leslie's death, McCravy, the beneficiary of the policy insuring her daughter, filed a claim for benefits. MetLife denied McCravy's claim, contending that Leslie did not qualify for coverage under the plan's "eligible dependent children" provision. Per the summary plan description, "eligible dependent children" are children of the insured who are unmarried, dependent upon the insured for financial support, and either under the age of 19 or under the age of 24 if enrolled full-time in school. According to MetLife, because Leslie was 25 at the time of her death, she no longer qualified as an "eligible dependent child." MetLife therefore denied McCravy's claim for benefits and attempted to refund the multiple years' worth of premiums MetLife had accepted to provide coverage for Leslie.

McCravy, however, refused to accept the refund check. Instead, she filed this suit. In her complaint, McCravy alleged, among other things, that it was represented to her by MetLife that Leslie had dependent life and accidental death and dismemberment insurance coverage under the Plan up to the time of her tragic death, and MetLife had accepted premiums for this coverage up until such time. To have done so, when Leslie in fact had no such coverage, according to the complaint, is a breach of fiduciary duty under section 404 of ERISA. The question for the Fourth Circuit Court of Appeals (the "Court"): is McCravy is entitled to recover for this breach under section 502(a)(3) of ERISA? The district court had ruled that McCravy could so recover, but that her recovery was limited, as a matter of law, to the premiums wrongfully collected and withheld by MetLife.

In analyzing the case, the Court noted that section 502(a)(3) of ERISA empowers plan participants "to obtain other appropriate equitable relief" to redress violations of ERISA or ERISA plans. In CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011), the United States Supreme Court recently made clear that section 502(a)(3) allows for remedies traditionally available at equity and that those remedies include surcharge and equitable estoppel-the remedies at the heart of McCravy's appeal-which could result in monetary relief. In light of Amara, Court concluded that such remedies are indeed available to McCravy in her suit against MetLife, and these remedies go beyond a mere return of the premiums that McCravy paid for the dependent coverage . Accordingly, the Court reversed the district court's decision holding otherwise and remanded the case back to the district court for further proceedings.


July 11, 2012

ERISA-District Court Imposes A Penalty of $37,510 For Failure To Provide SPD Upon Request

In Latimer v. Washington Gas Light Company, No. 1:11 cv 571 (GBL/TRJ) (E.D. Va. June 6, 2012), one issue before the Court was whether it should impose a penalty under ERISA upon the plan administrator for the failure to provide a summary plan description (an "SPD") on request.

In this case, the plaintiff, Leron Patrice Latimer ("Latimer"), was employed by Washington Gas Light Company ("WGL") from September 1992 until her retirement in October 2008. As a WGL employee, Latimer was a participant in, among others, a life insurance plan (the "Life Insurance Plan"), which was sponsored and maintained by WGL, and (to simplify the case) for which WGL was the plan administrator. Latimer sent letters to WGL on July 16, 2009 and December 8, 2009, requesting the SPD for the Life Insurance Plan. WGL failed to respond to these requests. On April 12, 2010, Latimer's attorney sent a letter to WGL demanding, among other things, disclosure of the requested life insurance information. WGL responded by sending Latimer life insurance plan documentation via email on April 15, 2010. The question for the Court: Should a penalty be imposed on WGL due to its failure to promptly send the Life Insurance Plan's SPD to Latimer?

In analyzing the case, the Court noted that section 104(b) of ERISA requires a plan administrator to provide a copy of the latest updated SPD to a participant within 90 days of becoming a participant and upon written request from the participant. Section 502(c)(1) of ERISA allows a court to impose a penalty of up to $110 a day on a plan administrator who fails or refuses to provide the SPD within 30 days of the request. Further, under section 502(c)(1), each failure or refusal to comply with a request for any information is to be treated as a separate violation. To be awarded the statutory penalty for a violation, a plaintiff need only show that the plan administrator did not comply with the statute. The amount of the penalty to be imposed, if any, is left to the discretion of the court. Two factors generally guide the court's discretion here: prejudice to the plaintiff and the nature of the plan administrator's conduct in responding to the participant's request. Harms such as frustration, trouble, and expense, including the trouble and expense of engaging an attorney to induce the defendant's compliance, are treated as being a prejudice to the plaintiff for this purpose.

As to the life insurance SPD, the Court said that there is no genuine issue of material fact concerning WGL's violation of ERISA section 104(b) with respect to Latimer's requests for the SPD. The Court said that the lack of any excuse for WGL's failure to comply with section 104 and the prejudice to Latimer-consisting of the frustration, trouble, and expense suffered by Latimer in seeking WGL's compliance- warrant the maximum penalty in this case. This maximum penalty is $110 per day from the dates a response was due for each of the letters sent to WGL in 2009. WGL's failure to respond to each letter is treated as a separate violation. WGL did not provide responsive documents to written requests made on July 19, 2009, and December 8, 2009, until April 15, 2010. WGL's response to Latimer's July 19, 2009, request was due on August 15, 2009, and was delayed beyond the 30-day period by 243 days. See section 502(c)(1) (providing 30-day period in which plan administrator may respond to requests in compliance with ERISA). WGLs' response to Latimer's December 8, 2009, request was due on January 7, 2010, and was delayed by 98 days. Thus, the Court entered judgment in favor of Latimer and imposed a total penalty in the amount of $37,510, $110 per day for 341 days, against WGL.

July 10, 2012

ERISA-District Court Uses Language in SPD To Identify The Plan Administrator, Despite Supreme Court's Decision In Amara

In Cone v. Walmart Stores, Inc. Associates' Health and Welfare Plan, Civil Action No. 7:12-cv-29 (HL) (M.D. Georgia, Valdosta Division, May 30, 2012), the court needed to identify the plan administrator of an employee benefits plan. The plaintiffs had filed a claim for statutory penalties under 29 U.S.C. § 1132(c). Section 1132(c) provides for penalties against a plan administrator if the administrator fails to supply requested information to ERISA participants within a certain period of time. Thus, the identity of the plan administrator is central to the outcome of the claim under § 1132(c).

The court noted that, under ERISA (specifically in 29 U.S.C. § 1002(16)(A)) the plan administrator is defined as:

(i) the person specifically so designated by the terms of the instrument under which the plan is operated;
(ii) if an administrator is not so designated, the plan sponsor; or
(iii) in the case of a plan for which an administrator is not designated and a plan sponsor cannot be identified, such other person as the Secretary may by regulation prescribe.

Here, the plaintiffs had argued that no person or entity is specifically designated by the terms of the plan instrument as the plan administrator, and thus, according to clause (ii) above, Walmart-the plan sponsor-should be treated as the plan administrator. The Court disagreed. It said that, according to clause (i) above, the plan administrator must be named in "the terms of the instrument under which the plan is operated." The plaintiffs had contended that this phrase refers only to the formal policy issued to plan participants. However, the Court said that the plan instrument includes more than the formal policy. Without explicitly naming all of the documents that should be considered part of the plan instrument, it is sufficient to say in this case that the Summary Plan Description ("SPD"), a document required under ERISA that informs plan participants of their rights and obligations in an easily understandable way, should be considered part of the plan instrument. In this case, the SPD identifies the plan administrator as being the "Walmart Administrative Committee Associates' Health and Welfare Plan." As such, the Court concluded that this plan-a named defendant-is the plan administrator.

Note: This case seems to be at odds with the Supreme Court's decision in CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011), which indicated that the terms of an SPD cannot be treated as the terms of the plan (or, as here, the instrument in question).The Court did not mention Amara.

July 9, 2012

ERISA-Fifth Circuit Overturns Dismissal Of Claim For Health Benefits Due To Ambiguity In The SPD

In Koehler v. Aetna Health Inc., No. 11-10458 (Fifth Cir. 2012), the plaintiff, Nancy Koehler ("Koehler"), was appealing the district court's summary judgment dismissing her suit under ERISA to recover health insurance benefits under a health plan (the "Plan").

The defendant, Aetna Health Inc. ("Aetna"), a Texas health maintenance organization (an "HMO"), provides and administers the Plan's health insurance benefits under an agreement giving Aetna discretion to interpret the Plan's terms. Aetna refused to reimburse Koehler for care she received from a specialist outside of the Aetna HMO to whom she had been referred by a physician in the HMO. Aetna denied her claim because the referral was not pre-authorized by Aetna. The district court found that, as a matter of law, Aetna did not abuse its discretion in denying coverage. However, the Fifth Circuit Court of Appeals (the "Court") found that the Plan is ambiguous and the need for pre-authorization was not clearly stated in Aetna's summary plan description (the "SPD") for the Plan. The Court ruled that, under the circumstances of this case, it cannot be said as a matter of law that Aetna did not abuse its discretion in denying coverage. As such, the Court reversed the district court's summary judgment and remanded the case for further proceedings.

As to the role of the SPD in the case, the Court said the following:

The parties agree that the relevant Plan provisions are found in the Plan's "Certificate of Coverage" (the "COC"), which sets forth the Plan's health insurance benefits. However, in addition to appearing in the Plan, the COC's text also constitutes the SPD which ERISA requires plan administrators to provide to participants and beneficiaries. Thus, although a plan summary is a separate document from the plan itself, in this case the summary's text is simply a verbatim copy of the underlying plan provisions.

Continuing, the Court found that the COC/SPD is ambiguous with respect to pre-authorization for outside services rendered on an ad hoc basis. Also, while the Plan gives Aetna discretion to resolve ambiguities in the Plan language in its favor (so that Aetna's decisions in its favor are entitled to a deferential review by a court), Aetna's discretion to resolve ambiguities in the Plan does not extend to the SPD, notwithstanding that in this instance the SPD is a verbatim copy of text in the Plan. Rather, ambiguities in an SPD are resolved in favor of the plan participant-here Koehler.

The Court noted that, in CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011), the Supreme Court held that the text of section 502(a)(1)(B) of ERISA does not authorize courts to enforce the terms of an SPD, because that provision only authorizes enforcement of the "`terms of the plan.'" However, the Supreme Court said further that Section 502(a)(1)(B) does allow courts to look outside the plan's written language in deciding what those terms are, i.e., what the plan language means. Further, even if the plan's language unambiguously supports the administrator's decision, a participant may still seek to hold the administrator to conflicting terms in the SPD through a breach-of-fiduciary-duty claim under § 502(a)(3).

The Court interprets CIGNA to require that the plan text ultimately controls the administrator's obligations in a § 502(a)(1)(B) action, but to not disturb pre-CIGNA case law under which: (1) ambiguous plan language must be given a meaning as close as possible to what is said in the SPD, and (2) SPDs must be interpreted in light of the applicable statutes and regulations . Those regulations require considerably greater clarity than the SPD provides in this case.

July 5, 2012

Executive Compensation-IRS Provides Guidance On Whether Dividend And Dividend Equivalents On Restricted Stock And Restricted Stock Units Are Performance Based Compensation

In Revenue Ruling 2012-19, the Internal Revenue Service (the "IRS") examined the question of whether dividends and dividend equivalents relating to restricted stock and restricted stock units ("RSUs"), which are qualified performance-based compensation under § 162(m)(4)(C) of the Internal Revenue Code (the "Code"), must separately satisfy the requirements under § 162(m)(4)(C) to be treated as qualified performance-based compensation (and therefore to be excluded from applicable remuneration for purposes of applying the Code § 162(m)(1) $1,000,000 limit on deductions).

The IRS posited the following facts. Corporation X and Corporation Y are publicly held corporations within the meaning of § 162(m)(2) of the Code. Both corporations maintain plans under which participating employees may be granted restricted common stock of the respective corporation or RSUs based upon the common stock of the respective corporation. The restricted stock and RSUs are qualified performance-based compensation.

The IRS then provided two situations. In Situation 1, Corporation X's plan provides that dividends and dividend equivalents otherwise payable to an employee, during the period from grant to vesting with respect to restricted stock and RSU awards granted to the employee, are accumulated and become vested and payable only if the related performance goals with respect to the restricted stock and RSUs are satisfied. All other requirements of Treas. Reg. § 1.162-27(e) are met with respect to the grant of rights to dividends and dividend equivalents. In Situation 2, Corporation Y's plan provides for payment to an employee, during the period from grant to vesting with respect to restricted stock and RSU awards granted to the employee, of dividends and dividend equivalents on the restricted stock and RSUs at the same time dividends are paid on common stock of Corporation Y, regardless of whether the performance goals established with respect to the restricted stock and RSUs are satisfied.

The IRS said that, under Treas. Reg. § 1.162-27(e)(2)(iv), the dividends and dividend equivalents under Corporation X's plan and under Corporation Y's plan are grants of compensation that are separate and apart from the related restricted stock and RSU grants. Therefore, the grants of the dividends and dividend equivalents must separately satisfy the requirements of Treas. Reg. § 1.162-27(e) to be qualified performance-based compensation. In Situation 1, under Corporation X's plan, participants' rights to restricted stock and RSUs are subject to performance goals that meet the requirements of Treas. Reg. § 1.162-27(e). Under the same plan, participants' rights to dividends and dividend equivalents vest and become payable only if the same performance goals that apply to the related grants of restricted stock and RSUs are satisfied. Therefore,
dividends and dividend equivalents under X's plan are qualified performance-based compensation. In Situation 2, the dividends and dividend equivalents under Corporation Y's plan fail to satisfy the requirements under § 162(m)(4)(C) and § 1.162-27(e) because the rights to these amounts do not vest and become payable solely on account of the attainment of preestablished performance goals. Thus, these amounts are not qualified performance-based compensation, regardless of whether the performance goals are met with respect to the related restricted stock and RSUs.

July 3, 2012

Employment-IRS Provides Guidance On FICA Taxation Of Tips

In Revenue Ruling 2012-18, the Internal Revenue Service (the "IRS") has provided guidance, in Q & A format, to employers and employees on the FICA taxes imposed on tips.

By way of background, the Revenue Ruling says that section 3121(a) of the Internal Revenue Code (the "Code") defines "wages", for FICA tax purposes, as all remuneration for employment, with certain exceptions. Section 3121(a)(12)(A) excludes from the definition of wages tips paid in any medium other than cash. Section 3121(a)(12)(B) excludes cash tips received by an employee in any calendar month in the course of the employee's employment by an employer, unless the amount of the cash tips is $20 or more in that month.

Under section 3121(q) of the Code, tips received by an employee in the course of the employee's employment are considered remuneration for that employment and are deemed to have been paid by the employer for purposes of the payment of the employer's share of FICA taxes. This remuneration is deemed to be paid when a written statement including the tips is furnished to the employer by the employee pursuant to Code section 6053(a) (this section expressly requires such reporting). Section 3111 of the Code generally requires the employer to pay its share of FICA tax on the amount of cash tips received by the employee. However, if the employee did not furnish the statement pursuant to section 6053(a) (or if the statement furnished was inaccurate or incomplete), then in determining the employer's liability to pay FICA taxes on tips, section 3121(q) provides that the remuneration is deemed to be paid by the employer on the date on which notice and demand for the taxes is made to the employer by the IRS.

Under section 3121(q) of the Code, for purposes of the employee's share of FICA taxes, tips that are properly reported to the employer pursuant to section 6053(a) are deemed to be paid by the employer at the time a written statement is furnished to the employer pursuant to section 6053(a). Unreported tips received by the employee are deemed to be paid to the employee when actually received by the employee.

The Q & As clarify the following (among other things):

--All cash tips must be reported to the employer, unless the cash tips received by the employee during a single calendar month while working for the employer total less than $20. Cash tips include tips received from customers, charged tips (e.g., credit and debit card charges) distributed to the employee by his or her employer, and tips received from other employees under any tip-sharing arrangement. Non-cash tips (i.e., tips received by an employee in any medium other than cash, such as passes, tickets, or other goods or commodities) from customers are not wages for FICA tax purposes and are not reported to the employer. All cash tips and non-cash tips are includable in an employee's gross income and subject to federal income taxes.

-- The employee must give the employer a written statement (or statements) of cash tips by the 10th day of the month after the month in which the tips are received. The statement may be furnished on paper or transmitted electronically.

--The employer withholds the employee share of FICA taxes on reported tips from the employee's wages or from other funds made available by the employee for this purposes. The employer pays both employer and employee shares of FICA taxes in the same manner as the taxes on employees' non-tip wages and includes the reported tips on Form W-2.

-- If an employee fails to report tips to his or her employer, then the employee becomes liable for the employee's share of FICA taxes on those unreported tips. Further, employees who fail to report tips to their employers are subject to a penalty under section 6652(b) of the Code. This penalty is equal to 50 percent of the employee's share of FICA taxes on the unreported tips, unless the employee can provide a satisfactory explanation showing that the failure was due to reasonable cause and not due to willful neglect.

--If an employee fails to report tips to his or her employer, then the employer is not liable for the employer's shares of FICA taxes on those unreported tips, until notice and demand for the taxes is made to the employer by the IRS. The employer is not liable to withhold and pay the employee's share of FICA taxes on the unreported tips.

July 2, 2012

Employee Benefits-U.S. Supreme Court Upholds 2010 Health Reform Act, Including Requirement That Individuals Buy Health Insurance

As indicated in my blog of June 28, in National Federation of Independent Business v. Sebelius (U.S. Supreme Court June 28, 2012), the U.S. Supreme Court has, with one narrow exception, upheld the constitutionality of the 2010 Patient Protection and Affordable Care Act (the "Act"), including the requirement that individuals acquire health insurance.

What specific provisions of the Act were the subject of this decision? There were two. The first is the "individual mandate", which requires most Americans to maintain "minimum essential" health insurance coverage (see 26 U. S. C. §5000A). For individuals who are not exempt from this mandate, and who do not receive health insurance through an employer or government program, this requirement must be satisfied by purchasing insurance from a private company. Beginning in 2014, those who do not comply with the mandate must make a "shared responsibility payment" to the Federal Government (§5000A(b)(1)). The Act provides that this "penalty" will be paid to the Internal Revenue Service with an individual's taxes, and will be assessed and collected in the same manner as tax penalties (§§5000A(c), (g)(1)). The Court upheld the constitutionality of the individual mandate, saying that Congress' taxing powers under the Constitution allows it to enact the mandate (even though the Constitution's commerce clause would not).

The second specific provision of the Act which was subject to this decision is the Medicaid expansion. The current Medicaid program offers federal funding to States to assist pregnant women, children, needy families, the blind, the elderly, and the disabled in obtaining medical care (see 42 U. S. C. §1396d(a)). The Act expands the scope of the Medicaid program and increases the number of individuals the States must cover. For example, the Act requires state programs to provide Medicaid coverage by 2014 to adults with incomes up to 133 percent of the federal poverty level, whereas many States now cover adults with children only if their income is considerably lower, and do not cover childless adults at all (see §1396a(a)(10)(A)(i)(VIII)). The Act increases federal funding to cover the States' costs in expanding Medicaid coverage (§1396d(y)(1)).But if a State does not comply with the Act's new coverage requirements, it may lose not only the federal funding for those requirements, but all of its federal Medicaid funds (§1396c). The Court upheld the constitutionality of the Medicade expansion, except it struck down, as unconstitutional, the provision (again in§1396c) under which a State could lose funding if it does not comply with the Act's new coverage requirements. The remedy is to preclude the government from applying §1396c to withdraw existing Medicaid funds from a State. The other provisions of the Act are not affected.

With the constitutionality of the Act upheld, employers should proceed to implement the Act's requirements (more on that later).