September 2012 Archives

September 28, 2012

ERISA-First Circuit Rules That Plaintiff's Claim For Reinstatement of Disability Benefits Is Time-Barred

In Santaliz- Ros v. Metropolitan Life Insurance Company, No. 11-1279 (1st Cir. 2012), the district court found that the plaintiff's claim, which was for reinstatement of disability benefits, was time- barred. It dismissed his claim, and the plaintiff appealed.

In this case, the plaintiff, Luis Arturo Santaliz-Ros ("Santaliz- Ros"), was a participant in his employer-sponsored welfare benefit plan (the "Plan").   Metropolitan Life Insurance Company ("MetLife") insured the Plan and served as claims administrator, adjudicating claims of disability and paying benefits. On September 17, 2001, Santaliz- Ros left his job because of a mental disability.   The Plan's insurance policy with MetLife covered mental or nervous disorders or diseases. It provided that disability benefits for those conditions are limited to twenty-four months, unless the disability results from, inter alia, bipolar disorder.   Santaliz- Ros became eligible for monthly disability benefits from the Plan on December 16, 2001.   He received the benefits until December 16, 2003, when the twenty-four-month payment period expired.

At the expiration time, Santaliz- Ros requested reconsideration of the decision to cease paying disability benefits, arguing that he suffered from bipolar disorder and thus the twenty-four-month cap on payments should not apply to him.  MetLife denied his request for reconsideration on February 27, 2004. Santaliz- Ros filed a claim against Metlife in state court in 2004, but he subsequently withdrew that claim, and the claim was dismissed by that court with prejudice on June 20, 2005. On May 28, 2010, Santaliz- Ros filed this case for the reinstatement of his disability benefits in district court in Puerto Rico, under section 502(a)(1)(B) of ERISA (the section allowing participants to sue for benefits) . The question for the First Circuit Court of Appeals (the "Court"): is Santaliz-Ros's claim time barred?  

In analyzing the case, the Court noted that Congress has not established a limitations period for ERISA claims brought under section 502(a)(1)(B) of ERISA.   Therefore, in adjudicating ERISA claims under that section, federal courts borrow the most closely analogous statute of limitations in the forum state. In Puerto Rico, the default limitations period applicable to contract claims is fifteen years. However, where the contract at issue itself provides a shorter limitations period, that period will govern as long as it is reasonable. In this case, the Plan's policy had a 3-year period of limitation for bringing claims against MetLife. The Court found that this 3-year period is reasonable. This period started no later than by June 20, 2005, when the case he filed in state court in 2004 was dismissed without prejudice . Santaliz- Ros did not file this case in the district court until 2010. Since Santaliz- Ros did not file his claim within the required 3-year period , the Court concluded that his claim is time-barred, and it affirmed the district court's dismissal of the claim.

September 27, 2012

ERISA-Seventh Circuit Rules That Plaintiff Cannot Bring Suit For Disability Benefits In Court Under ERISA Because She Failed To Exhaust Administrative Remedies

In Schorsch v. Reliance Standard Life Insurance Co., No. 10-3524 (7th Cir. 2012), the district court granted summary judgment against the plaintiff, on the grounds that the plaintiff failed to exhaust her administrative remedies under ERISA. In this case, plaintiff Deborah Schorsch ("Schorsch"), was covered under an employer-provided long-term group disability insurance plan (the "Plan"). The Plan was insured and administered by Reliance Standard Life Insurance Company ("Reliance"). In 1992, Schorsch suffered a contusion and spinal cord damage in a car accident, which caused her to become disabled. Schorsch began receiving long-term disability benefits under the Plan on January 29, 1993. Under the Plan, after 60 months, to continue to receive the disability benefits, Schorsch could not be able to perform the material duties of any occupation as reasonably allowed by her education, training, or experience.

On May 19, 2006, at Reliance's request, Schorsch underwent an independent medical exam to determine if she continued to meet the unable to perform any occupation standard of the Plan. The report of the examiner concluded that she did not meet this standard. Reliance notified Schorsch, by letter dated June 13, 2006, that it would terminate her disability benefits on June 29, 2006, based on this report. The letter stated that Schorsch could request a review of this termination by writing to Reliance within 60 days after the receipt of the letter. Schorsch did not request the review within that 60- day period. Schorsch subsequently brought this suit under ERISA to reinstate her disability benefits. The question for the Seventh Circuit Court of Appeals (the "Court"): did Schorsch's failure to request the review of Reliance's decision to terminate her disability benefits constitute a failure to exhaust her administrative remedies under ERISA, so that she is barred from filing suit for her benefits in court?

In analyzing the case, the Court noted that courts have interpreted ERISA as requiring exhaustion of administrative remedies as a prerequisite to bringing suit under the statute. Courts may excuse a failure to exhaust administrative remedies where there is a lack of meaningful access to review procedures, or where pursuing internal plan remedies would be futile. However, the Court found no such lack of access or futility here. It said that Schorsch did not show: (1) reasonable reliance on any alleged failure of Reliance when she failed to request a review of its decision to terminate her disability benefits, or (2) that any of Reliance's alleged missteps denied her meaningful access to a review. The Court ruled that Schorsch failed to exhaust her administrative remedies by failing to request a review of Reliance's decision to terminate her benefits, with no excuse for such failure, and therefore she cannot bring suit under ERISA. Accordingly, the Court affirmed the district court's summary judgment against Schorsch.

September 25, 2012

ERISA-Sixth Circuit Rules That A Claims Administrator Is A Fiduciary Under ERISA, And Is Liable For Unpaid Medical Claims Resulting From Its Breach Of Fiduciary Duties

In Guyan International, Inc. v. Pritchard Mining Company, Inc., No. 11-3126/3640 (6th Cir. 2012), the plaintiffs each established and administered an employee benefit plan (each a "Plan"; collectively, the "Plans") that provided health benefits for their employees. The plaintiffs hired Professional Benefits Administrator ("PBA") as a claims administrator to pay medical providers for claims incurred under the Plans. Although PBA was contractually obligated-by agreement with the plaintiffs (the "Agreement")-to use the funds it received from the plaintiffs solely to pay these claims, PBA instead used the funds for its own purposes, causing hundreds of thousands of dollars of medical claims to go unpaid. The plaintiffs sued PBA for, among other things, breaching its fiduciary duties under ERISA. The district court granted summary judgment to the plaintiffs on this issue and awarded damages to the plaintiffs on behalf of the Plans, in the amount of the unpaid medical claims (e.g., plaintiff Permco was awarded $501,380.75 on behalf of its Plan). PBA appealed.

In analyzing the case, the Court said that the first issue is whether PBA was a fiduciary under ERISA when it managed or disposed of plan assets. ERISA provides, in pertinent part, that a person is a fiduciary with respect to a plan to the extent 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 (29 U.S.C. § 1002(21)(A)). As such, the Court concluded that PBA was a fiduciary under ERISA because it exercised authority or control over Plan assets. PBA had the authority under the Agreement to write checks on the Plan accounts and exercised that authority. Moreover, PBA had control over where Plan funds were deposited and how and when they were disbursed. PBA commingled Plan assets by depositing these funds into its general account rather than into the Plaintiffs' separate accounts as the Agreement required. And then PBA used these Plan funds for its own purposes, again contrary to the dictates of the Agreement. The fact that PBA used Plan funds in ways contrary to how it had agreed to use them demonstrates that PBA had practical control over Plan funds once it received them from the plaintiffs.

Having determined that PBA was a fiduciary under ERISA, the Court then concluded that PBA breached its fiduciary duty. ERISA requires fiduciaries to act solely in the interest of the Plan participants and beneficiaries, and prohibits a fiduciary from dealing with the assets of the Plans in his own interest or for his own account. (29 U.S.C. §§ 1104(a)(1) and1106(b)(1). The Court ruled that PBA blatantly violated these statutory requirements by using Plan assets for its own purposes-a classic case of self-dealing- and causing hundreds of thousands of dollars of claims to be unpaid. As a result, the Court upheld the district court's award of damages in the amount of the unpaid medical claims.

September 24, 2012

ERISA-EBSA Provides A 401(k) Fee Disclosure Website

According to a News Release, dated September 19, 2012, the Employee Benefits Security Administration (the "EBSA") has now made available a new 401(k) fee disclosure website as a resource for consumers. The new site, found at, offers information on disclosures that, for the first time, will help workers with 401(k)-type retirement plans see what they are paying to invest their savings. It also includes new tips and tools on making smart retirement investment decisions.

The News Release says that, as a result of a rule published by EBSA (specifically, the new participant fee disclosure regs), workers investing in 401(k)-type plans began receiving fee disclosures from their employers this summer, marking the first time that employers have been required to provide this information. Research has shown that paying just 1 percent more in fees can lead to a 28 percent decrease in a 401(k) account balance over the course of a career. Workers in employer-sponsored health and retirement benefit plans who have questions about benefits laws can contact an EBSA benefits advisor at or by calling 866-444-EBSA (3272).

September 21, 2012

Employee Benefits-Eighth Circuit Rules That Health Plan Cannot Use Its Subrogation Provision To Recover Benefits From Beneficiary's Attorney

In Treasurer, Trustees of Drury Industries, Inc. Health Care Plan and Trust v. Goding, No. 11-2885 (8th Cir. 2012), Sean Goding ("Goding") was a beneficiary of an employer-sponsored health care plan (the "Plan"). The Plan was administered by Treasurer, Trustees of Drury Industries, Inc. Health Care Plan and Trust ("Drury"). Goding sustained injuries in a slip and fall accident and received $11,423.79 in benefits from the Plan. Goding also obtained compensation through the settlement of a civil suit related to those injuries. Pursuant to a subrogation provision in the Plan, Drury attempted to secure reimbursement from Goding for the benefits the Plan had paid, but was unable to do so after Goding declared bankruptcy. Drury then attempted to obtain that reimbursement, under the Plan's subrogation provision, from the law firm that represented Goding, namely, Casey & Devoti, P.C. ("Casey").

In analyzing the case, the Eighth Circuit Court of Appeals (the "Court") found that Drury could not obtain the desired reimbursement from Casey, because Casey had not agreed to the Plan's subrogation provision-even though it had knowledge of it- and consequently was not contractually bound by it. The Court also found that Drury could not maintain a suit against Casey in equity, since Casey no long held any of the funds in question, having paid them to Goding. Further, the Court ruled that Drury could not bring a state cause of action for conversion against Casey, since ERISA preempts such a claim.

September 20, 2012

Employment-Sixth Circuit Rules That Severance Payments Made To Employees Involuntarily Terminated When The Employer Closed Its Business Are SUB Payments, Which Are Not Subject To FICA Tax

In United States of America v. Quality Stores, Inc., No. 10-1563 (6th Cir. 2012), the Sixth Circuit Court of Appeals (the "Court") faced an appeal by the U.S. of a district court decision granting Quality Stores, Inc. ("Quality Stores") a refund of $1,000,125 in taxes paid under the Federal Insurance Contributions Act ("FICA") on severance payments made to terminated employees.

In this case, Quality Stores and had closed its corporate office, stores and distribution centers, and had terminated, involuntarily, all of its employees. Quality Stores made severance payments to the terminated employees. The U.S. and Quality Stores agree that these severance payments resulted directly from a reduction in force or the discontinuance of a plant or operation. The severance payments were made under two plans: (1) the Pre-(Bankruptcy) Petition Severance Plan, under which the amount of the payment was based on job grade and management level in the organization, and (2) the Post-Petition Severance Plan, under which the amount of the payment was based on position in the organization, and was received if the employee completed his or her last day of scheduled service. Under both plans, the receipt of severance pay was not tied to the receipt of state unemployment compensation or the provision of any particular services. Quality Stores treated the severance payments as being included in employees' gross income. It paid and withheld FICA taxes on the severance payments, but subsequently sought a refund on those taxes. The issue for the Court: are the severance payments-which constitute supplemental unemployment benefit ("SUB") payments- "wages" and thus subject to FICA tax?

In analyzing the case, the Court noted that the SUB payments in this case will be subject to the FICA tax if they are "wages". However, the FICA statute (which is part of the Internal Revenue Code or the "Code")) does not expressly include or exclude SUB payments in or from being "wages" for FICA purposes. The applicable Treasury regulations do not address the subject. For purposes of federal income tax withholding, a SUB payment is treated "as if it were a payment of wages" (Code section 3402(o)(1)). This indicates that Congress did not think that SUB payments are actually wages. Also, the SUB payments in this case fit the definition of SUB payments for tax withholding purposes (see Code section 3402(o)(2)(A)) -and therefore, again, are not the type of payment that Congress thinks are wages. Based on this, the Court concluded that the SUB payments in this case should not be treated as "wages" for FICA purposes. Accordingly, the Court upheld the district court's ruling and Quality Stores' entitlement to the refund of the FICA taxes.

Note: This Sixth Circuit decision appears to be at odds with a decision from the Federal Circuit, CSX Corp. v. United States, which indicates that SUB payments are subject to FICA tax. This FICA tax issue is a candidate for review by the Supreme Court.

September 19, 2012

Employee Benefits-IRS Says That Recharacterizing Taxable Wages As Nontaxable Reimbursements Does Not Meet The Accountable Plan Rules, And Thus The Wages Remain Taxable

In Revenue Ruling 2012-25, the Internal Revenue Service (the "IRS") provides guidance for employers under section 62(c) of the Internal Revenue Code and the applicable regulations. The ruling clarifies that an arrangement which recharacterizes taxable wages as nontaxable reimbursements or allowances does not satisfy the business connection requirement of the accountable plan rules under section 62(c) and the applicable regulations. The result is that those wages remain taxable. The Revenue Ruling includes four situations. Three of the situations illustrate arrangements that impermissibly recharacterize wages, such that the arrangements are not accountable plans. The fourth situation illustrates an arrangement that does not impermissibly recharacterize wages, where an employer prospectively alters its compensation structure to include a reimbursement arrangement.

September 19, 2012

Employment-Seventh Circuit Reverses Itself, And Now Rules That The Assignment Of A Disabled Employee To An Open Position Is A Reasonable Accommodation Under the ADA

In EEOC v. United Airlines Inc., the Seventh Circuit Court of Appeals had ruled that, for purposes of the Americans with Disabilities Act (the "ADA"), a reasonable accommodation does not include the assignment of a disabled employee to an open position. However, following a poll of all Seventh Circuit judges, the Seventh Circuit decided to reverse its decision, and to issue a new decision, found here.

In the new decision, the Court said the following on the reasonable accommodation issue: The ADA "does indeed" mandate that an employer appoint employees with disabilities to vacant positions for which they are qualified, provided that such accommodations would be ordinarily reasonable and would not present an undue hardship to that employer. We remand with instructions that the district court determine if mandatory reassignment would be reasonable in the run of cases and if there are fact-specific considerations particular to United's employment system that would render mandatory reassignment unreasonable in this case.

September 14, 2012

ERISA-Second Circuit Holds That An Employer May Withdraw From A Multiemployer Pension Plan In Critical Status

In Trustees of the Local 138 Pension Trust Fund v. Honerkamp Co. Inc., Docket No. 11-1322-cv (2nd Cir. 2012), the plaintiff, the Trustees of the Local 138 Pension Trust Fund (the "Fund"), were appealing the district court's summary judgment in favor of the defendant, F.W. Honerkamp Co. ("Honerkamp"). In this case, Honerkamp withdrew from the Fund-a multiemployer pension plan- after the Fund had reached "critical status" as defined by the Pension Protection Act of 2006 (the "PPA"), an amendment to ERISA, and after the collective bargaining agreements ("CBAs") requiring Honerkamp to contribute to the Fund had expired. The Trustees sued, arguing that the PPA prevented Honerkamp from withdrawing and required it to make certain ongoing pension contributions pursuant to the Fund's rehabilitation plan. The district court agreed with Honerkamp that the PPA did not forbid its withdrawal or require those contributions.

In analyzing the case, the Second Circuit Court of Appeals (the "Court") said that the PPA includes measures designed to protect and restore multiemployer pension plans in danger of being unable to meet their pension distribution obligations in the near future. The statute created two categories for such plans: "endangered" and "critical." Under the PPA, a pension plan is endangered if it is less than eighty percent funded, and it is in critical status if it is less than sixty-five percent funded. (ERISA § 305(b), 29 U.S.C. § 1085(b)). If a pension plan falls into critical status, the plan sponsor must notify the participating employers and unions (ERISA § 305(b)(3)(D), 29 U.S.C. § 1085(b)(3)(D)), and each participating employer must contribute an additional surcharge of five to ten percent of the contribution amount required under the applicable CBA. (See ERISA § 305(e)(7), 29 U.S.C. § 1085(e)(7)). Further, the plan sponsor must adopt a rehabilitation plan to restore the plan's financial health. The rehabilitation plan must include a default schedule, which sets forth the contributions an employer must make if the employer and union do not agree on any other schedule.

In this case, the Fund went into critical status and the rehabilitation plan was formulated. It was after the rehabilitation plan was completed, and the applicable CBAs expired, that Honerkamp withdrew from the Fund. The Trustees argue that, under the PPA, Honerkamp cannot withdraw, and must continue participating in the Fund while contributing in accordance with the rehabilitation plan's default schedule. (See ERISA § 305(e)(3)(C), 29 U.S.C. § 1085(e)(3)(C)).

After reviewing the PPA and its legislative history, the Court concluded that , in enacting the PPA, Congress did not intend to prevent employers from withdrawing from multiemployer pension plans in critical status. Thus, Honerkamp's withdrawal from the Fund is permissible. As such, the Court affirmed the district court's summary judgment in Honerkamp's favor.

September 13, 2012

ERISA- Second Circuit Rules That Trustees of a Multiemployer Pension Plan Are Not Fiduciaries, Under ERISA, When They Amend The Plan

In Janese v. Shakarjian, Docket Nos. 11-5369-cv(L), 12-80-cv(XAP) (2nd Cir. 2012), the Court faced the issue (among others) of whether the trustees of a multiemployer pension plan (the "Plan") act as fiduciaries for ERISA purposes when they amend the Plan. Multiemployer pension plans -including the Plan-may be amended by its trustees. The issue arose because the plaintiffs claim that certain amendments the trustees made to the Plan violated their fiduciaries duties under ERISA. If the trustees are not fiduciaries for ERISA purposes, however, they have no such duties and the plaintiffs' claim fails.

The Court noted that it (the Second Circuit Court of Appeals) has previously ruled that, with respect to multiemployer pension plans, the act of amending a plan should be treated as a fiduciary function. Chambless v. Masters, Mates & Pilots Pension Plan (1985). The Court repeated this ruling in Siskind v. Sperry Retirement Program, Unisys (1995). However, the Court then said that those two cases have been abrogated by the combined effect of three decisions of the Supreme Court: Curtiss-Wright Corp. v. Schoonejongen (1995); Lockheed Corp. v. Spink (1996), and Hughes Aircraft Co. v. Jacobson (1999). The Court indicated that, in those cases, the Supreme Court made it clear that employers and plan sponsors do not act in a fiduciary capacity when they modify, adopt or amend single employer plans. Nothing in the Supreme Court's decisions or ERISA itself creates a different rule for multiemployer pension plans. Thus, the Court concluded that-under law- the trustees in this case were not acting as fiduciaries for purposes of ERISA when they amended the Plan.

September 12, 2012

ERISA-Second Circuit Holds That The Benefits Manager In The HR Department Is Not An ERISA Fiduciary

In Tocker v. Kraft Foods North America, Incorporated Retirement Plan, No. 11-2445-cv (2nd Cir. 2012), the plaintiff, Edward Tocker ("Tocker"), was appealing a summary judgment granted by the district court in favor of the defendants. The only issue Tocker raises on appeal is whether one Robert Varone ("Varone"), the Benefits Administration Manager in the General Foods Human Resources Department, acted in a fiduciary capacity under ERISA when Varone researched and communicated to Tocker the benefits he would receive under the General Foods Retirement Plan for United States Salaried Employees (the "Plan"), if Tocker participated in the General Foods Workforce Reduction Program ("WFRP").

In analyzing the issue, the Second Circuit Court of Appeals (the "Court") said that under the definition of "fiduciary" in section 3(21)(A) of ERISA, a person has fiduciary status only to the extent that he has or exercises the authority or responsibility described in that section (e.g., he has or exercises any discretionary authority or discretionary control respecting management or administration of the plan in question). A plan employee who performs ministerial tasks with respect to the plan, such as the application of rules determining eligibility for participation, preparation of plan communication materials, the calculation of benefits, and the maintenance of employee records, is not a fiduciary for purposes of ERISA. Those tasks do not require the exercise of discretionary authority and do not, therefore, implicate any fiduciary duty.

The Court said further that Varone was a middle-level manager without discretionary power, one of several employees who reported to the Director of Benefits, who in turn reported to the Vice President of Human Resources. In his capacity as Benefits Administration Manager, Varone's responsibilities were administrative and included leading a staff of case administrators who calculated pension benefits, answered employee benefit questions, ensured that employees received benefit information and enrollment materials, and received employee benefit elections and recorded them. These are exactly the sort of ministerial tasks which do not give rise to fiduciary status under ERISA. Further, Varone did not become a fiduciary because he personally determined that benefits to which Tocker was entitle under the Plan and the WFRP.

As such, the Court concluded that Varone was not acting as a fiduciary for ERISA purposes in this case, and it affirmed the district court's summary judgment.

September 11, 2012

Employment-New York Expands The Items Which May Be Deducted From Wages

In an amendment to section 193 of the New York State Labor law, the items which may be deducted from an employee's wages has been expanded. The amendment becomes effective on November 6, 2012 (and will expire on November 6, 2015 unless renewed by the State legislature).

Prior to the amendment, under section 193, an item could be deducted from an employee's wages if the deduction is either authorized by law or government regulation (for example, tax withholdings or Medicare contributions), or is expressly permitted by Section 193. In turn, section 193 permits a deduction from an employee's wages if the deduction (1) is expressly authorized in writing by the employee, (2) is for the employee's benefit, (3) and is one of the following: a payment for insurance premiums, pension or health and welfare benefits, a contribution to a charitable organization, a payment for United States bonds, a payment for union dues, or a similar payment (up to 10% of gross wages per payroll period) for the benefit of the employee.

The amendment to section 193 makes the following changes.

Additional Requirements For Employee Authorization In (1). Any deduction must be expressly authorized in writing by the employee. The authorization must be voluntary, and must be given following receipt by the employee of written notice from the employer. This notice must include all terms and conditions of the deduction and/or its benefits, and the details of the manner in which deductions will be made. If there is a substantial change in the terms or conditions of the deduction, such as a change in the amount or benefit of the deduction, the employer must, as soon as practicable but before any increased (or changed) deduction is taken, notify the employee of the change. An employee's authorization must be kept on file on the employer's premises while the employee remains employed by the employer, and for six years after such employment ends.

More Items Covered In (3). The type of deduction included in (3) above has been expanded to include deductions for:

--all insurance premiums and prepaid legal plans;

--fitness or health club and/or gym membership dues;

--cafeteria, vending machine and pharmacy purchases made at an employer's premises;

-- purchases made at an event sponsored by a charitable organization affiliated with the employer, if at least twenty percent of the profits from such event are contributed to that or another charitable organization;

-- discounted parking, or discounted passes, tokens, fare cards, vouchers, or other items that entitle the employee to use mass transit;

--purchases made at gift shops run by the employer, if the employer is a hospital, college or university;

--tuition, room, board and fees for pre- nursery, nursery, primary, secondary and post-secondary school;

--daycare expenses, before-and-after school expenses; and

--payments for housing provided at no more than market rates by non-profit hospitals or affiliates.

Recovery Of Wage Overpayments And Wage Advances. An employer may deduct an amount to recover (i) an overpayment of wages, when the overpayment was due to a mathematical or other clerical error by the employer or (ii) wage advances. Any such deduction must comply with regulations to be issued by the NYS Department of Labor.

Pre-Tax Deductions Permitted. The amendment permits deductions made under an employer-sponsored pre-tax contribution plan, approved by the IRS or other local taxing authority. Thus, deductions for 401(k) and cafeteria plans are expressly allowed (although they had always been allowed before the amendment).

Employer action required-if an employer will deduct any of the items allowed under (3)-as expanded-after November 5, 2012, the employer must prepare and provide employees with the notice described above.

September 11, 2012

Employee Benefits-IRS Provides Guidance For Identifying Full-Time Employees for Purposes of Health Care Act's Shared Responsibility Rules For Employers

In Notice 2012-58, the Internal Revenue Service (the "IRS") has provided guidance on how to determine whether an individual is a full-time employee of an employer, for purposes of the "Shared Employer Responsibility Rules" (sometimes called the "Play or Pay Penalty)", under section 4980H of the Internal Revenue Code (the "Code"), added by the Health Care Reform Act.

Section 4980H applies to "applicable large employers" , which generally are employers who employed at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year. Generally, section 4980H provides that, beginning in 2014, an applicable large employer is subject to an assessable payment if either: (1) the employer fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under its health care plan, and any full-time employee is certified to receive a premium tax credit or cost-sharing reduction under the Code, or (2) the employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential health care coverage, but the coverage is nevertheless not affordable or not adequate and one or more full-time employees is certified to receive a premium tax credit or cost-sharing reduction under the Code. In the case of (1), the assessable payment is equal to $2,000 times the excess of the number of full-time employees over 30. In the case of (2), the assessable payment is the lesser of the payment under (1) or $3,000 times the number of full-time employees receiving the premium tax credit or cost-sharing reduction.

Section 4980H(c)(4) provides that a "full-time employee" is an employee who is employed on average at least 30 hours of service per week. Thus, section 4980H requires an employer to identify, and determine the number of, its "full-time employees", to ascertain whether it is subject to section 4980H and possibly the assessable payment. The identification process can be difficult when some employees work a variable number of hours each week or there are seasonal employees.

The Notice describes safe harbor methods that employers may (but are not required) to use to identify its full-time employees. In so doing, the Notice:

--expands a safe harbor method previously provided to allow employers the option of using a look-back measurement period of up to 12 months to determine whether new variable hour employees or seasonal employees (as defined in the Notice) are full-time employees, without being subject to an assessable payment under section 4980H for this period with respect to those employees;

--provides employers with the option of using specified administrative periods (in conjunction with specified measurement periods) for ongoing employees and certain newly hired employees;

--facilitates a transition for new employees from the determination method the employer
chooses to use for them to the determination method the employer chooses to use for ongoing employees; and

--allows employers to rely, at least through the end of 2014, on the guidance contained in this Notice and on certain approaches described in prior IRS notices.

September 10, 2012

Employee Benefits-IRS Provides Guidance On The 90-day Waiting Period Limitation Under The PHS Act

In Notice 2012-59, the Internal Revenue Service (the "IRS") and other agencies provide guidance (or at least temporary guidance) on the 90-day waiting period limitation imposed under section 2708 of the Public Health Service Act (the "PHS Act"). The IRS says that this guidance will remain in effect at least until the end of 2014.

According to the Notice, PHS Act section 2708 provides that, for plan years beginning on or after January 1, 2014, a group health plan cannot apply any waiting period that exceeds 90 days. Under the Notice, a "waiting period" is the period of time that must pass, with respect to an employee or dependent otherwise eligible to enroll, before coverage can become effective under the plan. In turn, being eligible to enroll means that the employee or dependent has met the plan's substantive eligibility conditions (such as being in an eligible job classification).

The Notice clarifies the following. If an eligibility requirement consists of an amount of service (e.g., 1000 hours), coverage must begin by the 91st day after the requirement has been met. An eligibility condition, which is based solely on the lapse of a time period, is permissible for no more than 90 days. An eligibility condition cannot be designed to avoid compliance with the 90-day limit. A service requirement exceeding 1,200 is treated as being designed to avoid compliance. Also, if under the terms of the plan, an employee may elect coverage that would begin on a date (the "earliest coverage date") that does not exceed the 90-day waiting period limit , the 90-day waiting period limit is considered satisfied. Accordingly, the plan will not be considered to have violated the 90-day limit merely because an employee takes additional time to elect coverage. For example, such a plan will not be treated as violating the limit merely because an employee submits an election to be covered after the earliest coverage date, and his or her coverage does not begin until the election has been submitted.

The Notice also: (1) provides guidance for the application of section 2708 to variable hour employees where a specified number of hours of service is an eligibility condition and (2) contains examples illustrating the application of the "designed to avoid compliance with the 90-day waiting period limitation".

September 7, 2012

ERISA-Sixth Circuit Holds That Retiree Health Benefits Are Vested, And Cannot Be Changed By The Employer, Despite A Reservation Of Rights Clause In The Summary Plan Description

In Moore v. Menasha Corporation, Nos.10-2171/2173 (6th Cir. 2012) (see yesterday's blog), the Sixth Circuit Court of Appeals (the "Court") ruled that the retiree health coverage provided through two collective bargaining agreements ("CBAs") was vested and could not be unilaterally changed by the employer, Menasha Corporation ("Menasha"). This obtained, even though the summary plan description ("SPD") describing the coverage had a reservation of rights clause (an "ROR "), and an ROR normally prevents vesting. What happened?

According to the Court, the ROR stated:

"The Company reserves the right to terminate the Plan at any time and for any reason. If the Plan is amended or terminated you and other active and retired employees may not receive benefits as described in other sections of this [SPD]. You may be entitled to receive different benefits under different conditions. However, it is possible that you will lose all benefit coverage. This may happen at any time, even after you retire, if the Company decides to terminate the Plan or your coverage under the Plan. In no event will you become entitled to any vested rights under this Plan."

The Court said that the Sixth Circuit has previously held that an ROR in an SPD may reserve an employer's right to unilaterally alter or terminate benefit coverage--even if (as here) the SPD was distributed after the CBA providing the coverage. However, the ROR must be interpreted in the same manner as any other extrinsic evidence; namely, the ROR cannot internally contradict other provisions of the SPD, nor can it contradict the terms of the CBA itself. If the SPD otherwise indicates that it is "subject to the provisions of the CBA," the SPD is deemed "unqualified" and cannot trump the parties' collectively bargained agreement. Likewise, if the CBA states that it is the fully integrated commitment of the parties or that it cannot be amended without signed mutual consent, the ROR will not trump the CBA. Only where the SPD states "an unqualified assertion of a unilateral right to end retiree medical insurance benefits without regard for existing or future CBAs," would the Court allow a later-issued SPD to trump the terms of a bargained-for CBA.

The Court concluded that the ROR in this case does not meet the foregoing standard. Here, the CBAs provide that "[t]his Agreement may be amended at any time by mutual agreement of the parties hereto." The Court stated that, because the parties agreed on the procedure to be used in amending their agreement, it would read that provision out of the contract to allow Menasha to unilaterally modify the terms by an alternate avenue, such as by using an ROR in the SPD. Moreover, allowing the ROR to trump the bargained-for procedure would vitiate a negotiated benefit of the contract. Thus, the ROR could not be applied to change or eliminate the retiree health coverage at issue.

September 6, 2012

ERISA-Sixth Circuit Holds That Retiree Health Benefits Are Vested And Cannot Be Changed By The Employer

In Moore v. Menasha Corporation, Nos.10-2171/2173 (6th Cir. 2012), the plaintiffs are a group of retired employees, their spouses, and their union, who allege that their former employer, the defendant Menasha Corporation ("Menasha"), violated (among other things) ERISA, the LMRA and the terms of two collective bargaining agreements ("CBA"s) by denying the employees and their spouses lifetime vested healthcare coverage following the employees' retirement. The district court ruled in the plaintiff's favor as to the employees, but in the defendant's favor as to the spouses. Both sides appealed.

Under the CBAs, when an employee retires, the employee and spouse continued to receive healthcare insurance from Menasha through a plan issued by Blue Cross Blue Shield of Michigan. While the retiree was between ages 62 to 65, Menasha paid 80% of the employee's and spouse's' healthcare insurance premium costs. When the retiree turned 65, Menasha assumed 100% of the premium costs. However, in mid-October of 2006, Menasha informed the plaintiffs it would no longer assume 100% of the premium costs at age 65, but would pay only a portion of the costs, according to a schedule that Menasha provided. This suit ensued.

In analyzing the case, the Sixth Circuit Court of Appeals (the "Court") said that, under ERISA and the LMRA, healthcare coverage is treated as being a purely contractual welfare benefit that an employer typically may alter or even terminate at its will. Nevertheless, the employer is free to limit its ability to alter or rescind healthcare coverage by contract. That is, the employer can promise-in a contract- to vest retirees in the healthcare benefits. Once vested, those benefits cannot be altered or terminated. Further, the Court said that, in deciding whether an employer has offered vested healthcare benefits under a CBA, a court (at least in the Sixth Circuit) will apply ordinary principles of contract interpretation. So long as that (Sixth Circuit) court finds explicit contractual language or extrinsic evidence indicating an intent to vest, that court applies the "Yard-man inference," which requires a nudge in favor of vesting. Extrinsic evidence is used when the contract language is ambiguous.

Reviewing the CBAs, using extrinsic evidence as appropriate (the extrinsic evidence here included SPDs, statements by HR people, various letters and insurance contracts), and applying the Yard-man inference, the Court concluded that Menasha had provided lifetime vested benefits for employees and their spouses, which Menasha could not alter. Further, the CBAs expressly provided that they (the CBAs) could not be amended, except by the signed, mutual consent of the parties. This provision further precluded Menasha from unilaterally altering the retiree health benefits. As such, the Court entered judgment for the plaintiffs, in favor of the employees and spouses.

September 5, 2012

Employment -Second Circuit Rules That Warehouse Captains Are Exempt From Overtime Pay Requirements

In Ramos v. Baldor Specialty Foods, Inc., Docket No. 11-2616-cv (2nd Cir. 2012), the plaintiffs were individuals who were working the night shift in a warehouse operated by defendant Baldor Special Foods, Inc. ("Baldor"). The plaintiffs were suing Baldor for (among other things) overtime pay under the FLSA and New York State law. The district court granted summary judgment for Baldor on the overtime issue, concluding that as "captains" employed in Baldor's warehouse, the plaintiffs fell within the FLSA's "executive exemption" and therefore were not entitled to overtime pay. The plaintiffs appealed.

In analyzing the case, the Second Circuit Court of Appeals (the "Court") said that the plaintiffs clearly satisfy all but one of the criteria for the FLSA's executive exemption. The criteria at issue is whether the teams of employees that plaintiffs supervise constitute "customarily recognized department[s] or subdivision[s]" of Baldor (29 C.F.R. § 541.100(a)(3)), defined by Department of Labor regulations as units with "a permanent status and a continuing function" (29 C.F.R. § 541.103(a)). After reviewing the record, the Court concluded that these teams of employees constitute units with a permanent status or function. The Court looked at all facts and circumstances, and based its conclusion on the following facts: each team has a defined membership; each captain leads the same team on each shift; members do not change teams without being transferred by the night warehouse manager, often at the request of a captain; at the start of every shift, each team meets at its assigned work area in the warehouse; and each captain is in charge of supervising his team, evaluating their work, and making promotion recommendations to the night warehouse manager. The Court reached its conclusion, even though the teams in question did not operate in different locations, work different shifts, or perform distinct functions from other teams.

As such, the Court ruled that the plaintiffs fall within the FLSA's executive exemption, and are not entitled to overtime pay. Consequently, the Court affirmed the district court's grant of summary judgment on the overtime issue to Baldor

September 4, 2012

ERISA-Sixth Circuit Rules That An Early Retirement Subsidy (If a Retirement Type Subsidy) Cannot Be Reduced By A Plan Amendment

In Fallin v. Commonwealth Industries, Inc. Cash Balance Plan, No. 09-5139 (6th Cir. 2012), plaintiff Donald Corley ("Corley") alleged that Commonwealth Industries' pension plan (the "Plan") had underpaid him, in violation of ERISA, when it did not include a subsidy for early retirement in its benefit calculations. The district court ruled in favor of the defendants, and Corley appealed.

In this case, until 1998, Commonwealth had a traditional defined-benefit pension plan. This plan allowed employees to retire early once they had completed five years of service and reached age 55. Employees taking that option would receive subsidized benefits: monthly payments beginning immediately that were nearly as large as (and, in the case of those age 62-65, the same as) those they would have received if they were 65. By 1998, Corley had performed five years of service, but had not reached age 55. That year, Commonwealth converted its plan into the Plan, which was a cash-balance plan. The Plan replaced defined-pension benefits with hypothetical individual accounts. The initial balance of each account was the value of the benefits the participant had accrued. However, Corley complained that the individual account did include credit for the value of the early-retirement subsidy described above. In ruling against Corley, the district court said that, as of 1998, Corley was not yet entitled to his early-retirement subsidy because he was then not yet 55. Therefore, the early-retirement benefit had not yet accrued, so that the amendment in question-the conversion to the cash balance plan-did not reduce any accrued benefit.

In analyzing the case, the Sixth Circuit Court of Appeals (the "Court") said that, under ERISA's anti-cutback rule, a plan amendment cannot decrease a participant's "accrued benefit" (29 U.S.C. § 1054(g)). Here, Corley had more than five years of service before the 1998 amendment. The subsidy he seeks was therefore attributable to his service before the amendment. And though Corley had not satisfied the age requirement by 1998, the statute allows him to do so-assuming that the subsidy in question is a "retirement-type subsidy"- either before or after the amendment (§1054(g)(2)). The Court ruled that, if this assumption is met, the benefits attributable to pre-amendment service-here the early-retirement subsidy- cannot be reduced by an amendment. To determine if the assumption is met, the Court remanded the case back to the district court.