May 2013 Archives

May 30, 2013

ERISA-Eighth Circuit Rules That Entitlement To Benefits Under An Individual Employment Agreement Does Not Create Jurisdiction For A Federal Court

In Dakota, Minnesota & Eastern Railroad Corporation v. Schieffer, No. 12-1807 (8th Cir. 2013), the following transpired. In December 2004, the Dakota, Minnesota & Eastern Railroad ("DM&E") and its President and CEO, Kevin Schieffer ("Schieffer"), entered into an Employment Agreement to encourage his retention following an anticipated change of control. In October 2008, with a merger imminent, DM&E terminated Schieffer without cause, triggering the Employment Agreement's severance provisions. When disputes arose over the amounts owed, Schieffer filed a demand for arbitration under the Employment Agreement. DM&E then filed this action in federal court to enjoin the arbitration, asserting federal question jurisdiction under 28 U.S.C. § 1331, on the basis that the underlying severance agreement dispute arises out of an employee benefit plan governed by ERISA. The question for the Eighth Circuit Court of Appeals (the "Court"): does a federal court have jurisdiction over this case?

In analyzing this question, the Court noted the rule that, where federal subject matter jurisdiction is based on ERISA, but the evidence fails to establish the existence of an ERISA plan, the claim must be dismissed for lack of subject matter jurisdiction. Here, earlier litigation established that the Employment Agreement is not an ERISA plan. However, parts of the Employment Agreement may be subject to ERISA, and jurisdiction may be had if Schieffer is seeking to recover benefits owed to him under the terms of one or more plans or arrangments subject to ERISA (see 29 U.S.C. § 1132(a)(1)(B)), rather than under an independent contract that is not an ERISA plan.

The Court said that Schieffer's demand for arbitration alleged that DM&E has breached its obligation to provide employee benefits under the Employment Agreement in various respects. None of DM&E's ERISA plans provide benefits to a terminated employee of the nature and extent Schieffer seeks; only the Employment Agreement would allow a judgment for those levels of benefits. As such, Schieffer's arbitration demands are those made under a free-standing single-employee contract that simply pegged DM&E's payment obligations to amounts that would have been due under ERISA plans. Consequently, the Court ruled that there is no ERISA plan involved, and thus no federal subject matter jurisdiction.

May 29, 2013

Employee Benefits-IRS Says That Cash Settlement Of (Nontaxable) Health Benefits Is Taxable

In Letter No. 201319015, the Internal Revenue Service ("IRS") faced a case in which the employer was providing cash, in lieu of the health benefits that it should have provided. The IRS said that, even though the health benefits themselves may have been excludable from gross income, the cash payments are not. These payments are regular wages reported on Form W-2.

The IRS noted that lump-sum payments to taxpayers in settlement of lawsuits against former employer concerning employer's proposed termination of contributions to hospital-medical benefits plan did not fall within provisions of the Code section 106, which excludes contributions by employer to accident or health plans from gross income, since the statute did not provide exemption for payments made by employer directly to employees. It said that, based on case law, a payment that is specifically made subject to taxation is not rendered exempt from tax simply because it is made in settlement of an obligation which, had it been paid, would not have been taxed.

May 28, 2013

Employee Benefits-IRS Waives 60-Day Deadline For IRA Rollover, Since IRA Owner Did Not Receive 402(f) Rollover Notice

In a private letter ruling (an "LTR"), the Internal Revenue Service (the "IRS") waived the 60- day deadline for rolling over amounts into an individual retirement account (an "IRA"), since the IRA owner did not receive the 402(f) rollover notice.

In LTR 201308037, the taxpayer received a distribution of benefits, net of federal income taxes, from a tax-qualified defined benefit retirement plan (the "Plan"). The taxpayer used a part of the benefits to pay living expenses, and deposited the remainder of the benefits in a money market account at a bank. More than 60 days after receiving the distribution, when the taxpayer met with his accountant to prepare his income tax returns, the accountant informed the taxpayer that the entire amount of the benefits was subject to federal income taxation, as well as the penalty for early withdrawal under IRC Sec. 72(t). The accountant advised the taxpayer that the taxpayer should have received a notice from the Plan, under IRC Sec. 402(f), explaining that the benefits could be rolled over, thereby avoiding immediate tax and the penalty. The accountant further advised the taxpayer to ask the IRS to waive the 60-day IRA rollover deadline, which the taxpayer did.

In the LTR, the IRS said that any amount distributed from the Plan is generally taxable, unless the amount is rolled over into an IRA (or other eligible retirement plan) within 60 days of the distribution. The 60-day deadline is found in IRC Sec. 402(c) (3)(A). However, under IRC section 402(c)(3)(B), the IRS may waive the 60-day deadline, when the failure to waive would be against equity or good conscience, including the happening of a casualty, disaster, or other event beyond the reasonable control of the distribution recipient. Rev. Proc. 2003-16 discusses how the IRS will handle a waiver request. In this case, the IRS concluded that the failure to meet the 60-day deadline was due to the failure of the Plan to provide the 402(f) notice. Therefore, the IRS granted the waiver of the 60-day deadline for the amount of the benefits that had been deposited in the money market account. This gave the taxpayer the opportunity to avoid tax and penalty on this amount by now (within 60 days of the date of the LTR) depositing the amount in an IRA.

May 22, 2013

Executive Compensation-Tax Court Determines That Compensation Paid Was Reasonable And Deductible

In K & K Veterinary Supply, Inc. v. Commissioner of Internal Revenue, T.C. Memo. 2013-84, the Tax Court faced the question, among others, of whether amounts paid as compensation to officers and certain employees were reasonable, within the meaning of IRC section 162(a)(1), and therefore tax deductible.

In this case, the corporation in question, K & K Veterinary Supply, Inc. (the "Company"), claimed the following tax deductions for salary, which the Commissioner challenged:

2006 2007


J. Lipsmeyer $732,300 $559,100
M. Lipsmeyer 134,400 133,500
________ ________
Total 866,700 692,600


D. Lipsmeyer 590,500 470,000
Stewart 183,000 192,700
_______ _______
Total 773,500 662,700

In reviewing this case, the Tax Court noted that IRC section 162(a)(1) allows as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered. A taxpayer is entitled to a deduction for salaries or other compensation if the payments were reasonable in amount and are in fact payments purely for services. Sec. 1.162-7(a), Income Tax Regs. Whether the compensation paid by a corporate taxpayer to an officer or employee was reasonable is a question of fact. The following 10 factors may be taken into account:

1. Employee qualifications. An employee's superior qualifications for his or her position with the business may justify high compensation.

2. Nature, extent and scope of employee's work. An employee's position, duties performed, hours worked, and general importance to the corporation's success may justify high compensation.
3. Size and complexity of the business. Courts consider the size and complexity of a taxpayer's business when deciding the reasonableness of compensation paid to its shareholder-employees. The Tax Court has considered a company's sales, net income, gross receipts, or capital value in determining a company's size, as well as the number of clients, the number of employees, growth in these areas and compliance with government regulations.

4. General economic conditions. General economic conditions may affect a company's performance and thus show the extent of the employee's effect on the company. Adverse economic conditions, for example, tend to show that an employee's skill was important to a company that grew during the bad years.

5. Comparison of salaries paid with gross and net income. Compensation as a percentage of a taxpayer's gross and net income has been considered in deciding whether compensation is reasonable. In most cases the comparison of salaries to net income is more probative.

6. Prevailing rates of compensation. A comparison of the compensation under consideration and the prevailing rates of compensation paid to those in similar positions in comparable companies within the same industry is a very significant factor.

7. Salary policy of the employer as to all employees. Courts have considered the taxpayer's compensation policy for its other employees in deciding whether compensation is reasonable. This factor focuses on whether the entity pays top dollar to all of its employees, including both shareholders and nonshareholders.

8. Compensation paid in previous years. This factor applies when a corporation is deducting compensation in one year for services rendered in prior years.

9. Comparison of salaries with distributions and retained earnings. The absence of dividend payments by a profitable corporation is a factor that may be considered in addressing the reasonableness of compensation.

10. Whether the employee guaranteed the employer's debt. Courts have also considered whether an employee personally guaranteed the employer's debt.

Applying the foregoing factors, the Tax Court concluded that the officer's and employee's salaries was reasonable, and therefore upheld the claimed deductions,

May 20, 2013

ERISA-Sixth Circuit Holds That State-Law Claim For Tortious Interference With A Contract Is Not Completely Preempted By ERISA

In Gardner v. Heartland Industrial Partners, L.P., No. 11-2327 (6th Cir. 2013), the Court faced the question of whether the plaintiff's state-law claim of tortious interference with a contract, which happens to be a pension plan subject to ERISA, is "completely preempted" under ERISA § 1132(a)(1)(B).

In this case, one defendant, Heartland Industrial Partners, L.P. ("Heartland"), is a Delaware investment firm that formerly held an ownership interest in Metaldyne Corporation, an automotive supplier in Michigan. Defendant Timothy Leuliette is a co-founder of Heartland and was the CEO and Chairman of the Board of Metaldyne. Defendant Daniel Tredwell is likewise a Heartland co-founder and was a Metaldyne Board member.The plaintiffs are former Metaldyne executives.

In August 2006, Heartland agreed to sell its ownership interest in Metaldyne to another investment firm, Ripplewood Holdings. Less than two months later, Metaldyne submitted to the SEC a "Schedule 14A and 14C Information" report that detailed the terms of the acquisition. The report failed to mention, however, that Metaldyne would owe the plaintiffs approximately $13 million as a result of the sale to Ripplewood. That obligation arose under a change-of-control provision in Metaldyne's "Supplemental Executive Retirement Plan" ("SERP"), in which the plaintiffs were participants. The SERP is a plan subject to ERISA. Ripplewood threatened to back out of the deal when it found out about the $13 million SERP obligation.

In response, Leuliette and Tredwell persuaded Metaldyne's Board (of which they were Chairman and a Member, respectively) simply to declare the SERP invalid. The Board did so on December 18, 2006, though it did not notify the plaintiffs of that fact at the time. The Ripplewood deal closed less than a month later. Leuliette personally collected more than $10 million as a result of the deal. A month after the deal closed, Metaldyne notified the plaintiffs that it had invalidated the SERP. This suit ensued, with the plaintiffs pleading a single state-law claim against Heartland, Leuliette, and Tredwell, for tortious interference with contractual relations, due to their role in invalidating the SERP. The defendants removed the case to federal court, contending that the plaintiffs' claim was "completely preempted" under ERISA. The defendants also filed a motion to dismiss the case on that ground. The district court granted the defendant's motion to dismiss, and the plaintiffs appeal.

The specific issue before the Court is jurisdictional: whether the plaintiffs' complaint stated a federal question, thereby allowing the defendants to remove the case from state to federal court. The Court noted that, when a federal statute-such as ERISA- wholly displaces the state-law cause of action through complete pre-emption, the state claim can be removed. Section 1132(a)(1)(B) of ERISA has this effect, and a claim within the scope of that section will be completely preempted. A claim is within this scope if two requirements are met: (1) the plaintiff complains about the denial of benefits to which he is entitled only because of the terms of an ERISA-regulated employee benefit plan and (2) the plaintiff does not allege the violation of any legal duty (state or federal) independent of ERISA or the plan terms. Here, the defendants' duty not to interfere with the plaintiffs'SERP agreement with Metaldyne arises under Michigan tort law, not the terms of the SERP itself. Also, the defendants' duty is not derived from, or conditioned upon, the terms of the SERP. Thus, prong (2) is not met, so that the plaintiffs' claim is not completely preempted by ERISA. As such, the Court overturned the district court's dismissal of the plaintiffs' claim.

May 17, 2013

Employee Benefits-IRS Waives 60-Day Deadline For IRA Rollover

In a private letter ruling (an "LTR"), the Internal Revenue Service (the "IRS") waived the 60- day deadline for rolling over amounts into an individual retirement account (an "IRA").

In LTR 201319034, the taxpayer initiated a transfer of Amount 1 from IRA A, maintained at Bank X, to Bank Y. However, even though the taxpayer intended to transfer Amount 1 to an IRA, Bank Y mistakenly deposited Amount 1 into a non-IRA account. The mistake was not discovered until more than 60 days after the transfer to Bank Y was initiated. Amount 1 was subsequently deposited into an IRA at Bank Y. The taxpayer then requested that the IRS waive the 60-day IRA rollover deadline.

If an amount is distributed from an IRA, including a transfer initiated by the IRA owner, the amount is generally taxable, unless the amount is rolled over into an IRA within 60 days of the distribution. IRC section 408(d)(1) and (3). Under section 408(d)(3)(L), the IRS may waive the 60-day deadline, when the failure to waive would be against equity or good conscience, including the happening of a casualty, disaster, or other event beyond the reasonable control of the distribution recipient. Rev. Proc. 2003-16 discusses how the IRS will handle a waiver request. In this case, the IRS concluded that the failure to meet the 60-day deadline was due to a mistake by Bank Y. Therefore, the IRS granted the waiver of the 60-day deadline for the distribution (i.e., transfer) of Amount 1.

May 16, 2013

Employment-New York City Employers Will Have To Provide Paid Sick Leave (Maybe)

The New York City Council has voted to require private-sector NYC employers with at least 20 employees to provide up to 40 hours of paid sick leave per year. The Council has sufficient votes to overcome a threatened veto by Mayor Bloomberg. The paid sick leave requirement will start to apply on April 1, 2014, provided that, on December 16, 2013, the NYC economy is performing at least as well as it was in January, 2012 (otherwise the requirement will not apply until after the NYC economy meets this threshold). The 20 employee threshold is decreased to 15 employees after the new law has been in effect for 18 months (that is, by October 1, 2015, if the April 1, 2014 effective date applies).

An employee who works in NYC for more than 80 hours in a calendar year is eligible for the paid sick leave. The employee would be entitled to one hour of paid sick leave, up to 40 hours in a calendar year, for every 30 hours worked. Leave first becomes available four months following the later of the effective date of the new law or the date of hire. Employees may carry over accrued but unpaid leave to future years, subject to the 40 hour cap per year, but the employer is not required to pay for any unused time at termination of employment. The employee may generally take paid sick leave for any mental or physical illness, injury or health condition. The employee may also take the leave to care, in certain instances, for family members.

The new law does not apply to certain manufacturers. Special rules apply with respect to domestic workers and union employees. Employers with less than 20 (or 15) employees must still provide them with up to 40 hours per year of unpaid sick leave, once the law goes into effect.

May 15, 2013

ERISA-First Circuit Rules That Administrator's Decision To Offest Disability Benefits Paid Under The Plan By Disability Compensation Paid Under The Veterans' Benefits Act Was Incorrect

In Hannington v. Sun Life and Health Insurance Company, No. 12-1085 (1st Cir. 2013), the plaintiff ("Hannington") had filed suit under ERISA against the defendant, Sun Life and Health Insurance Company ("Sun"). The suit challenged Sun's reduction of Hannington's disability payments under an ERISA-covered plan (the "Plan") due to his receipt of disability compensation under the Veterans' Benefits Act. The district court entered judgment for Hannington, and Sun appealed.

Hannington was receiving disability benefits from the Plan. The Plan provides a disabled participant with sixty percent of his pre-disability salary. However, the Plan reduces this benefit by amounts received as "Other Income." Under the Plan, one type of "Other Income" is "any amount of disability or retirement benefits under: a) the United States Social Security Act . . .; b) the Railroad Retirement Act; or c) any other similar act or law provided in any jurisdiction." The Plan grants Sun-the claims fiduciary-the sole and exclusive discretion and power to construe any and all issues relating to eligibility for benefits. Sun had treated the disability compensation under the Veteran's Benefits Act as "Other Income" and reduced Hannington disability payments from the Plan accordingly. The question for the First Circuit Court of Appeals (the "Court"): was Sun correct in reducing the disability benefits being paid by the Plan?

In analyzing the case, the Court noted that, since the Plan gave Sun-the claims fiduciary- discretionary power to make benefit determinations, Sun's decision to reduce Hannington's benefit is entitled to a deferential review. However, to the extent that Sun is required, in the course of determining the meaning of the plan language, to interpret the law or other material outside the plan, the Court's review of the law or other material is de novo. Here, Sun's interpretation of the "Other Income" definition of the Plan depends wholly upon its interpretation of external, non-plan material: the Veterans' Benefits Act, the Social Security Act and the Railroad Retirement Act. The Court determined-under a de novo review- that the Veterans' Benefits Act is not similar to the Social Security Act or the Railroad Retirement Act, so that disability benefits paid under the Veterans' Benefits Act is not "Other Income" under the Plan. As such, the Court concluded that Sun's decision to offset Hannington" Plan disability benefits by the disability compensation paid under the Veterans' Benefits Act was incorrect, and it affirmed the district court's decision.

May 14, 2013

Employment-Reminder To Use Newly Revised Form I-9

As a reminder, as of May 7, 2013, employers must use the newly revised Form I-9, to meet federal requirements to document verification of the identity and employment authorization of each new employee. The revised Form I-9 and instructions are here.

Generally, the revised Form I-9 would not be completed for an employee who was hired before May 7 and for whom a Form I-9 is already on file, unless there is a particular need to reverify that employee (e.g., she is rehired or her work authorization expires).

May 13, 2013

Employee Benefits-DOL Issues Guidance/Model Notices For Notice To Employees on Health Insurance Marketplace

In Technical Release No. 2013-02, the U.S. Department of Labor (the "DOL") provided guidance on the requirement in the Affordable Care Act that a notice must be provided to employees about the Health Insurance Marketplace (the "Marketplace") that will be available in 2014. The DOL has also made available a model notice to help employers meet this requirement, and a revised COBRA election notice to reflect Marketplace options. Here is what the Technical Release says.

Background. Section 18B of the Fair Labor Standard Act (the "FLSA"), as added by section 1512 of the Affordable Care Act, generally provides that, in accordance with regulations promulgated by the Secretary of Labor, an employer subject to the FLSA must provide each employee at the time of hiring (or with respect to current employees, not later than March 1, 2013), a written notice:
1. informing the employee of the existence of the Marketplace, including a description of the services provided by the Marketplace, and the manner in which the employee may contact the Marketplace to request assistance;
2. if the employer plan's share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs, that the employee may be eligible for a premium tax credit under section 36B of the Internal Revenue Code (the "Code') if the employee purchases a qualified health plan through the Marketplace; and
3. if the employee purchases a qualified health plan through the Marketplace, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer and that all or a portion of such contribution may be excludable from income for Federal income tax purposes.

On January 24, 2013, the DOL postponed the March 1, 2013 deadline. The reqired written notice is referred to below as the "Notice of Coverage Options" or the "NCO".

Effect of the Guidance under the Technical Release. The DOL will consider an employer that follows the Technical Release as being in compliance with FLSA section 18B. The guidance provided by the Technical Release will remain in effect until the DOL promulgates regulations or other subsequent guidance.

Providing the NCO to Employees. Employers must provide the NCO to each employee, regardless of plan enrollment status (if applicable) or of part-time or full-time status. Employers are not required to provide a separate notice to dependents or other individuals who are or may become eligible for coverage under the employer's health care plan but who are not employees.

Form and Content of the NCO. The NCO must include items 1, 2 and 3 above in "Background".

Timing and Delivery of NCO. Employers are required to provide the NCO to each new employee at the time of hiring beginning October 1, 2013. For 2014, the DOL will consider an NCO to be provided at the time of hiring if the notice is provided within 14 days of an employee's start date. As to employees who are current employees before October 1, 2013, employers are required to provide the NCO not later than October 1, 2013. The NCO is required to be provided automatically, free of charge. The NCO must be provided in writing in a manner calculated to be understood by the average employee. It may be provided by first-class mail. Alternatively, it may be provided electronically if the requirements of the DOL's electronic disclosure safe harbor at 29 CFR 2520.104b-1(c) are met.

Model NCO. Model language for the NCO is available at There is one model for employers who do not offer a health plan and another model for employers who offer a health plan for some or all employees. Employers may use one of these models, as applicable, or a modified version, provided the notice meets the content requirements described above.

COBRA Election Notice. Some COBRA beneficiaries may want to consider and compare health coverage alternatives to COBRA continuation coverage that are available through the Marketplace. COBRA beneficiaries may also be eligible for a premium tax credit (a tax credit to help pay for some or all of the cost of coverage in plans offered through the Marketplace). The DOL has revised its model COBRA election notice to reflect these concerns. The revised model notice is found at A clean copy is available, as is a redline from the prior model notice to help employers identify the changes.

May 9, 2013

Employee Benefits-Third Circuit Upholds Penalty For Failure To Provide COBRA Notice

In Fama v. Design Assistance Corporation, Nos. 12-2414, 12-2474 (3rd Cir. 2013), the district court had granted the request of the plaintiff, Sarah Fama ("Fama"), for the imposition of a penalty on her former employer, Design Assistance Corporation ("DAC"), for failing to notify Fama of her COBRA rights under in a timely manner. However, Fama challenges the district court's decision to impose a penalty of only $10 per day.

In this case, Fama began to work for DAC in April 2008, as an administrative and personnel assistant. As a regular, full-time employee, she was entitled to group health insurance benefits under DAC's health insurance policy (the "Plan"). Fama resigned from employment with DAC, effective on September 30, 2008. COBRA requires that the employer inform the health care plan's administrator of a covered employee's termination of employment within thirty days, and then the administrator has fourteen days to notify the employee of the right to continued coverage under COBRA.

However, after Fama ceased to work at DAC, the company mistakenly continued Fama's health care coverage under the Plan for several months. Only in March 2009 did DAC realize its mistake, and it then cancelled Fama's coverage retroactively, effective January 1, 2009. But in June 2009, for reasons not entirely clear, DAC retroactively reinstated Fama's benefits effective January 1, 2009 to eliminate any gap in Fama's coverage. Finally, on September 3, 2009, almost a year after her resignation, Fama received notice of her eligibility for COBRA continuation coverage (the "Notice"). In the time between her resignation (September 30, 2008) and September 3, 2009, Fama paid for medical expenses that otherwise would have been covered by the Plan.

Under COBRA, Fama was eligible to receive a statutory penalty from DAC of up to $110 for each day that the notice of her eligibility for COBRA coverage was late. A court has discretion in determining the amount of the penalty to be imposed. The Third Circuit Court of Appeals (the "Court") found that Fama's resignation of September 30, 2008 constitutes a "qualifying event", notwithstanding that Fama's coverage under the Plan was erroneously allowed to continue. Thus, the period for providing the COBRA notice began to run on September 30, 2008, with the result that the Notice was provided late. The Court further found that-on the facts in the case record such as the Notice being furnished late but an absence of bad faith or malicious intent by the administrator- the district court did not abuse its discretion in imposing a penalty of $10 day.

May 8, 2013

ERISA-Second Circuit Requires Specific Allegations To Establish A Claim Of Imprudent Investment

In Pension Benefit Guaranty Corporation v. Morgan Stanley Investment Management, Inc., Docket No. 10-4497-cv (2nd Cir. 2013), the Court considered the degree of factual detail needed in a complaint in order to establish a claim that a pension plan administrator purchased and continued to hold certain mortgage-backed securities imprudently and in violation of its fiduciary duties under ERISA.

In analyzing the case, the Court said that a claim of imprudence may be established if the complaint alleges facts that, if proved, would show that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident. In this case, however, the Court concluded that the plaintiff's complaint failed to allege facts supporting the plausible inference that the defendant knew, or should have known, that the mortgage-backed securities in question were imprudent investments.

The Court said that, in particular, the complaint relies on the decline in the market price of mortgage-backed securities generally, without specifying the securities at issue or presenting any facts to suggest that a reasonable investor would have viewed those particular securities as imprudent investments. A decline in market price of a type of security-even a precipitous one-does not, by itself, give rise to a reasonable inference that it was imprudent to purchase or hold that type of security. The complaint referred to "warning signs" that the price would decline, such as information about financial losses suffered by the issuers of the securities. However, the Court felt that none of these warning signs gave rise to a plausible inference that the defendant knew, or should have known, that the securities in question were imprudent investments, or that the defendant had breached its fiduciary duty by not selling those investments.

Based on the foregoing, the Court found that the plaintiffs failed to establish a claim of imprudent investment in violation of ERISA's prudence requirement.

May 6, 2013

Employment-Sixth Circuit Finds That Special Investigators At Nationwide Are Exempt From FLSA Overtime Requirements

In Foster v. Nationwide Mutual Insurance, No. 12-3107 (6th Cir. 2013), the plaintiffs, who are or had been special investigators ("SIs") at Nationwide Mutual Insurance Company ("Nationwide") ,were appealing the district court's judgment against them in their claim that, among other matters, Nationwide had improperly classified the SIs as exempt from the overtime requirements of the Fair Labor Standards Act (the "FLSA").

In this case, Nationwide is an insurance company in the business of providing a wide range of insurance products. It employs the SIs to investigate nonmeritorious claims against insurance policies. The Sixth Circuit Court of Appeals (the "Court") noted that the FLSA exempts from its overtime requirements any employee employed in a bona fide executive, administrative, or professional capacity. The Court further noted that the administrative exemption is the potentially applicable exemption here. Under the FLSA regulations, an administrative employee is one: (1) who is compensated at a rate of not less than $455 per week, (2) whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers and (3) whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. The Court said that condition (1) is met and not in issue here.

The Court concluded that condition (2) was satisfied, since an SI's work is office or non-manual. Also, claims adjusting is ancillary to Nationwide's general business operations, and the SIs' investigative work drives the claims adjusting decisions with respect to suspicious claims, so that such work is directly related to assisting with the servicing of Nationwide's business. The Court concluded that condition (3) was satisfied, since the Court agreed with the district court's conclusion, based on its factual findings, that the SIs'primary duty was to conduct investigations of suspicious claims with the goal of determining if fraud had occurred, and this involves the exercise of discretion and independent judgment with respect to matters that are significant to Nationwide. As such, the Court found that the administrative exemption applies to the SIs, and it affirmed the district court's judgment against the plaintiffs.

May 2, 2013

ERISA-Seventh Circuit Finds That An Individual Is Engaged In A Trade Or Business And Is Therefore Responsible For Withdrawal Liability

In Central States, Southeast and Southwest Areas Pension Fund v. Nagy, No. 11-3055 (7th Cir. 2013), Nagy Ready Mix ("Ready Mix") employed Teamsters labor and participated in the Central States, Southeast and Southwest Areas Pension Fund, a multi-employer pension plan (the "Plan") . In 2007, Ready Mix ceased employing covered workers and thus incurred $3.6 million in "withdrawal liability" to the Plan. Ready Mix was unable to pay the full $3.6 million amount. The question in this case is whether Charles F. Nagy ("Nagy"), its sole owner, is liable for the shortfall under ERISA. The answer turns on whether Nagy is engaged in an unincorporated "trade or business". If yes, he is engaged in a trade or business under common control with Ready Mix and is therefore personally liable for the withdrawal liability.

In analyzing the case, the Seventh Circuit Court of Appeals (the "Court") noted two possibilities. First, Nagy owns the property on which Ready Mix conducts its operations and leases the property back to Ready Mix. This rental activity could qualify as a trade or business. Second, Nagy provided management services to a country-club venture. He may have done so as an independent contractor, which likewise would qualify as a trade or business.

The Court said that Nagy's leasing activity is categorically a trade or business for these purposes. As to the management services, the Court said that, if these services were rendered as an independent contractor, Nagy would be engaged in a trade or business; if these services were rendered as an employee, then the services are not a trade or business. Distinguishing between an employee and an independent contractor depends on an analysis of the following factors: (1) the extent of the employer's control and supervision over the worker, including directions on scheduling and performance of work; (2) the kind of occupation and the nature of the skills required, including whether skills are obtained in the workplace; (3) responsibility for the costs of operation, such as equipment, supplies, fees, licenses, workplace, and maintenance of operations; (4) the method and form of payment and benefits; and (5) the length of job commitment and/orexpectations. Based on these factors, Nagy is an independent contractor. This was particularly so, since the country-club reported Nagy's compensation on Form 1099. Nagy did not receive salary through a payroll system, as one would expect for an employee. Rather, the country-club paid Nagy an hourly rate and did not withhold taxes or provide fringe benefits. On his personal tax returns, Nagy reported his Wells Venture income on Schedule C, which covers "Profit or Loss from Business (Sole Proprietorship)."

As such, since Nagy was engaged in at least one-here two-unincorporated trades or businesses, the Court concluded that he is personally liable for Ready Mix's withdrawal liability.

May 1, 2013

Employee Benefits-IRS Provides Relied For Certain ESOP Amendments

As discussed in yesterday's blog, in Notice 2013-17, the Internal Revenue Service (the "IRS") provides relief from the anti-cutback requirements of section 411(d)(6) of the Internal Revenue Code (the "Code") for plan amendments that eliminate a distribution option, described in section 401(a)(28)(B)(ii)(I) of the Code, from an employee stock ownership plan or "ESOP" which becomes subject to the investment diversification requirements of section 401(a)(35) of the Code.

There is one more issue to be covered. An ESOP which satisfies the diversification requirements of section 401(a)(28)(B) of the Code, by distributing a portion of the participant's account in accordance with section 401(a)(28)(B)(ii)(I), is not prevented from making the distribution by the rules under section 401(a) or section 401(k)(2)(B) and Treas. Reg. Sec. 1.401(k)-1(d) that restrict the distribution of plan benefits.

However, an ESOP that becomes subject to section 401(a)(35), and that therefore ceases to be subject to section 401(a)(28)(B), must comply with the restrictions on distributions that apply before termination of employment (in the case of a pension plan), before the occurrence of certain other events (in the case of a profit-sharing or stock bonus plan), or before one of the events specified in section 401(k)(2)(B)(i) (in the case of amounts attributable to elective contributions and certain other amounts under a qualified cash or deferred arrangement). For such an ESOP, a plan provision allowing any of the foregoing distributions before the applicable event becomes a "disqualifying provision".

To provide relief, Notice 2013-17 says that, under section 401(b) of the Code and the Notice, any such disqualifying provision will not cause a plan to be disqualified, provided that a remedial amendment- which eliminates the provision- is adopted and put into effect under the plan generally by the last day of the first plan year beginning after 2012 (or if later by the deadline for adopting an "interim amendment" to the plan to satisfy section 401(a)(35)).