June 11, 2015

Employee Benefits-Eighth Circuit Rules That Taxpayer Engaged In A Prohibited Transaction, When He Used An IRA To Fund A Business Which Paid Him Wages

In Ellis v. Commissioner of Internal Revenue, No. 14-1310 (8th Cir. 2015), the taxpayers were appealing from the decision of the tax court finding a deficiency in their income taxes and imposing related penalties. Upon reviewing the case, the Eighth Circuit Court of Appeals (the "Court") concluded that taxpayer Mr. Ellis engaged in a prohibited transaction with respect to his individual retirement account (the "IRA"), and affirmed the tax court's ruling.

In this case, an attorney for Mr. Ellis formed CST Investments, LLC ("CST"), to engage in the business of used automobile sales in Harrisonville, Missouri. The operating agreement for CST listed two members: (1) a self-directed IRA belonging to Mr. Ellis (owing 98% of the company,), and (2) Richard Brown, an unrelated person who worked fulltime for CST (owning the remainder of the company). Mr. Ellis was designated as the general manager for CST and given "full authority to act on behalf of" the company. The operating agreement also stated that "the General Manager shall be entitled to such Guaranteed Payment as is Approved by the Members."

Mr. Ellis's IRA did not exist at the time CST was formed. Rather, he established the IRA with First Trust Company of Onaga ("First Trust") in June 2005. On June 22, 2005, he received $254,206.44 from a 401(k) that he had established with his previous employer, and he deposited the amount in his IRA. He then directed First Trust as the custodian of the IRA to acquire 779,141 shares of CST at a cost of $254,000. On August 19, 2005, Mr. Ellis received an additional $67,138.81 from his 401(k), which he again deposited into the IRA. He directed First Trust to acquire an additional 200,859 shares of CST at a cost of $65,500. Mr. Ellis reported the transfers from his 401(k) to the IRA as non-taxable rollover contributions. To compensate him for his services as general manager, CST paid Mr. Ellis a salary of $9,754 in 2005 and $29,263 in 2006. While not clear if these were guaranteed payments per the operating agreement, Mr. Ellis had, at all times, the power to have CST make payments to him.

On March 28, 2011, the Commissioner of the Internal Revenue Service sent the taxpayers, the Ellises, a notice of deficiency and related penalties, based on a determination that Mr. Ellis engaged in prohibited transactions under 26 U.S.C. § 4975(c) by (1) directing his IRA to acquire a membership interest in CST with the expectation that the company would employ him, and (2) receiving wages from CST. The notice explained that, as a result of these transactions, the IRA lost its status as an individual retirement account and its entire fair market value was treated as taxable income. See 26 U.S.C. § 408(e)(2). The Ellises filed a timely petition in tax court to contest the notice of deficiency. The tax court upheld the Commissioner's determination, and the Ellises appealed.

In analyzing the case, the Court said that Code section 4975 limits the allowable transactions for certain retirement plans, including individual retirement accounts under § 408(a). It does so by imposing an excise tax on enumerated "prohibited transactions" between a plan and a "disqualified person." 26 U.S.C. § 4975(a). Prohibited transactions include any "direct or indirect . . . transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;" or "act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account." § 4975(c)(1)(D), (E). If a disqualified person engages in a prohibited transaction with an IRA, the plan loses its status as an individual retirement account under § 408(a), and its fair market value as of the first day of the taxable year is deemed distributed and included in the disqualified person's gross income. 26 U.S.C. § 408(e)(2).

The Court continued by noting that, here, it is undisputed that Mr. Ellis was a disqualified person under § 4975(e)(2)(A) because he was a fiduciary of his IRA (as he can direct asset investment). The parties also agree that CST was a disqualified person because Mr. Ellis was a beneficial owner of the IRA's membership in the company. See id. § 4975(e)(2)(G)(i) (including as a disqualified person a corporation in which 50 percent or more of the stock is owned by a fiduciary); id. § 4975(e)(4) (stating that ownership includes indirect ownership). Therefore, said the Court, the only issue on appeal is whether the payment of wages to Mr. Ellis was a prohibited transaction. The record establishes that Mr. Ellis caused his IRA to invest a substantial majority of its value in CST with the understanding that he would receive compensation for his services as general manager. By directing CST to pay him wages from funds that the company received almost exclusively from his IRA, Mr. Ellis engaged in the indirect transfer of the income and assets of the IRA for his own benefit and indirectly dealt with such income and assets for his own interest or his own account. This results in a prohibited transaction by Mr. Ellis with respect to his IRA, and the IRA's loss of its status as such with the corresponding deemed distribution to the Ellises in an amount equal to the former IRA's fair market value.

June 9, 2015

ERISA-Second Circuit Upholds Plan Administrator's Denial Of A Disability Pension, Based On The Plan Administrator's Discretion Granted By The Plan To Make Decisions

In Ocampo v. Building Service 32B-J Pension Fund, No. 14-0877 (2nd Cir. 2015), the plaintiff was appealing the district court's summary judgment against her, on the plaintiff's claim under an ERISA plan (the "Plan") for a pension based on her permanent disability. The plaintiff had alleged in district court that the denial of her claim by the plan administrator-here the Board of Trustees of the Plan- was arbitrary and capricious, because the plan administrator determined that her disability was not permanent on the sole basis that the Social Security Administration ("SSA"), in awarding her Social Security disability benefits, had stated that her eligibility for such benefits must be reviewed at least once every three years, rather than once every five years. The district court based its summary judgment against the plaintiff on the ground that the plan at issue conferred on plan administrator discretion to determine an applicant's eligibility for benefits and that defendants' reliance on SSA determinations, policies, and procedures in this matter was not arbitrary or capricious.

The Second Circuit Court of Appeals (the "Court") affirmed the summary judgment. It noted the plaintiff's argument on appeal that the plan administrator exercised no discretion of it's own, but instead essentially delegated to the SSA the determination of whether her disability was permanent, so that its decision should be reviewed de novo. However, the Court rejected this argument. It said that the Plan provides that the plan administrator with discretionary authority to make decisions. Consequently, the denial of benefits by the plan administrator in the exercise of its discretion is reviewable only under the arbitrary-and-capricious standard. Under the facts of the case, reviewed by the Court, the decision that the plaintiff is not eligible for a disability pension under the Plan was made by the plan administrator, rather than the SSA. Further, at least two factors considered by the plan administrator-the plaintiff's failure to demonstrate the permanence of her disability and her failure to show that she suffered a permanence of disability while working in covered employment-prove that the plan administrator's denial of the pension benefit was not arbitrary or capricious.

June 8, 2015

ERISA-Second Circuit Rules That Nunc Pro Tunc Orders Constitute QDROs, Even Though Issued After The Plan Participant's Death

In Yale-New Haven Hospital v. Nicholls, No. 13-4725 (2nd Cir. 2015), Yale‐New Haven Hospital brought this suit-an interpleader action under ERISA- to resolve competing claims by Barbara Nicholls and Claire Nicholls to certain funds of the late Harold Nicholls held in four retirement plans. In this case, Barbara Nicholls, the surviving spouse of Mr. Nicholls, argues that the funds are payable to her because she is the named beneficiary in the plan documents. Claire Nicholls, the former spouse of Mr. Nicholls, contends that a portion of those funds are instead payable to her. She argues that three state court orders--her divorce settlement agreement and two nunc pro tunc orders entered after Mr. Nicholls's death--constitute qualified domestic relations orders ("QDROs") within the meaning of ERISA and thus validly assign those funds to her. The district court granted summary judgment in favor of Claire Nicholls, on the ground that the divorce settlement constitutes a QDRO applicable to all four retirement plans, so that she is entitled to the portion of the funds she is claiming.

Upon reviewing the case, the Second Circuit Court of Appeals (the "Court") held that that the divorce settlement agreement does not constitute a QDRO, because the agreement fails to comply with the five requirements of 29 U.S.C. § 1056(d)(3)(C). The Court noted that three of the retirement plans were named in the nunc pro tunc orders, while the fourth retirement plan was not. The Court held, as to the three named retirement plans, that the nunc pro tunc orders-which comply with the requirements of § 1056(d), even though the orders were issued after Mr. Nicholl's death-constitute valid QDROs that assign funds to Claire Nicholls. As to the fourth, unnamed retirement plan, the Court held that the nunc pro tunc orders do not constitute valid QDROs, since the orders failed to name that plan. As such, the Court upheld the district court's summary judgment as to the three named retirement plans, granting Claire the funds claimed under those plans, but reversed the summary judgment as to the fourth, unnamed retirement plan, thereby denying Claire's claim.

June 4, 2015

ERISA-First Circuit Rules That Termination Of Long-Term Benefits Is Arbitrary and Capricious, And Upholds A Statutory Penalty For The Failure To Produce Documents

In McDonough v. Aetna Life Insurance Company, No. 14-1293 (1st Cir. 2015), the case was brought under ERISA and presented two issues. The first concerned the operation of an "own occupation" test within the definition of disability contained in a long-term disability ("LTD") plan (the "Plan"). The second concerned the operation of ERISA's penalty provision for late disclosure or non-disclosure of relevant plan documents. See 29 U.S.C. § 1132(c)(1)(B). Upon review, the First Circuit Court of Appeals (the "Court") vacated the district court's entry of summary judgment against the plaintiff, with respect to the termination of disability benefits, and remanded that issue for further consideration by the claims administrator, which was Aetna. At the same time, the Court affirmed the district court's imposition of a $5,000 penalty for the belated production of a plan document.

As to the "own occupation" test, to be considered disabled under the Plan, the individual must (among other things) be unable to perform the material duties of his own occupation solely because of disease or injury. The Court determined that the administrator, although entitled to a deferential review, was arbitrary and capricious in terminating the LTD benefits based on its determination that the plaintiff failed to meet this test. The Court found that the administrator's termination decision was not a reasoned one. The own occupation test depends on how the occupation is normally performed in the national economy, a fact which the administrator ignored. Since this is a close case-based on both voluminous and conflicting medical evidence-the remand to the administrator is warranted.

As to the $5,000 penalty, the district court imposed the penalty on Aetna for the late production of the applicable insurance policy. The policy was provided 1,157 days late, and amounted to about $4 per day. The Court upheld the amount of the penalty, finding that the district court had not abused its discretion in determining this amount. The district court had found that the lateness was attributable to inattentiveness, and not bad faith, and the plaintiff was not prejudiced by the late receipt of the policy.

June 3, 2015

Employment-Third Circuit Requires A Stay From One Day To The Next To Be Considered Inpatient Care Under The FMLA

In Bonkowski v. Oberg Industries, Inc., No. 14-1239 (3rd Cir. 2015), the plaintiff, whose employment had been terminated, was attempting to invoke the protections of the Family and Medical Leave Act (the "FMLA"). The district court had ruled that the plaintiff was NOT entitled to this protection, because he did not show that he had a "serious health condition" under 29 U.S.C. § 2611(11)(A), i.e., "an illness, injury, impairment, or physical condition that involves (A) inpatient care in a hospital, hospice, or residential medical care facility," and therefore was not entitled to leave (or protection) under the FMLA. The plaintiff appeals this ruling.

The crux of this case is an interpretation of the regulation at 29 C.F.R. § 825.114, which defines the terms "inpatient care"-for purposes of determining if a serious health condition exists- as "an overnight stay in a hospital, hospice, or residential medical facility, including any period of incapacity as defined in 29 C.F.R. § 825.113(b), or any subsequent treatment in connection with such inpatient care." The Third Circuit Court of Appeals (the "Court") concluded that "an overnight stay" under this regulation means a stay in a hospital, hospice, or residential medical care facility for a substantial period of time from one calendar day to the next calendar day as measured by the individual's time of admission and his or her time of discharge. The Court said that, since the plaintiff was admitted and discharged on the same calendar day, he did not have an overnight stay, and thus did not have a serious health condition. Accordingly, the Court affirmed the district court's ruling.

June 2, 2015

ERISA-Ninth Circuit Rules That An Appeal Of A Benefit Denial Is Timely When Filed On The Monday Following The Saturday On Which The 180-Day Period For Appealing Had Ended

In Legras v. Aetna Life Insurance Company, No. 12-56541 (9th Cir. 2015), a panel of judges in the Ninth Circuit Court of Appeal (the "Panel") reversed the district court's dismissal of an action challenging the denial of an application for continued long-term disability benefits under ERISA. The Panel held that the district court erred in dismissing the action for failure to exhaust administrative remedies. The plaintiff's internal appeal from the denial of his benefits application was denied as untimely under a 180-day appeal period. The Panel held that the plaintiffs' notice of internal appeal was timely because it was filed on the Monday after the Saturday on which the 180-day period ended. The Panel adopted this method of counting time as part of ERISA's federal common law.

May 29, 2015

Employee Benefits-Departments Restate Their Position On Provider Non-Discrimination Under the Affordable Care Act

In FAQs about Affordable Care Act Implementation (Part XXVII), the Departments of Labor ("DOL"), Health and Human Services ("HHS"), and the Treasury (collectively, the "Departments") provide guidance on non-discrimination against service providers under the Affordable Care Act. Here is what the FAQs say:

Background. PHS Act section 2706(a), as added by the Affordable Care Act, states that a group health plan must not discriminate with respect to participation under the plan or coverage against any health care provider who is acting within the scope of that provider's license or certification under applicable State law. PHS Act section 2706(a) does not require that a group health plan contract with any health care provider willing to abide by the plan's terms and conditions. Further, nothing in PHS Act section 2706(a) prevents a group health plan from establishing varying reimbursement rates based on quality or performance measures. Similar language is included in section 1852(b)(2) of the Social Security Act and HHS implementing regulations.

On April 29, 2013, the Departments issued FAQs (specifically, FAQs about Affordable Care Act Implementation Part XV) which addressed, among other issues, provider nondiscrimination requirements under PHS Act section 2706(a). Subsequently, the Senate Committee on Appropriations issued a report dated July 11, 2013 (to accompany S. 1284) raising questions about the Departments' FAQs addressing provider nondiscrimination. The Departments published a request for information (RFI) on March 12, 2014, seeking comment on all aspects of interpretation of PHS Act section 2706(a). The RFI specifically solicited comments on access, costs, other federal and state laws, and feasibility. The Departments received over 1,500 comments in response to the RFI. The House Committee on Appropriations subsequently issued an explanatory statement dated December 11, 2014 (to accompany 113 H.R. 83) directing the Centers for Medicare & Medicaid Services to provide a corrected FAQ or provide an explanation.

The Departments are now issuing the following FAQs in response to the December 11, 2014 explanatory statement.

What is the Departments' Approach to PHS Act section 2706(a)? In light of the breadth of issues identified in the comments to the RFI, the Departments are re-stating their current enforcement approach to PHS Act section 2706(a). Until further guidance is issued, the Departments will not take any enforcement action against a group health plan, with respect to implementing the requirements of PHS Act section 2706(a), as long as the plan or issuer is using a good faith, reasonable interpretation of the statutory provision, which states:

"A group health plan ...shall not discriminate with respect to participation under the plan or coverage against any health care provider who is acting within the scope of that provider's license or certification under applicable State law. This section shall not require that a group health plan contract with any health care provider willing to abide by the terms and conditions for participation established by the plan .... Nothing in this section shall be construed as preventing a group health plan ... from establishing varying reimbursement rates based on quality or performance measures."

Specifically, Q2 in FAQs about Affordable Care Act Implementation Part XV, which previously provided guidance from the Departments on PHS Act section 2706(a), is superseded by this FAQ. The Departments will continue to work together with employers, plans, issuers, states, providers, and other stakeholders to help them comply with the provider nondiscrimination provision and will work with families and individuals to help them understand the law and benefit from it as intended.

May 28, 2015

Employee Benefits-Departments Provide Additional Guidance On Cost Sharing Limitations

In FAQs about Affordable Care Act Implementation (Part XXVII), the Departments of Labor ("DOL"), Health and Human Services ("HHS"), and the Treasury (collectively, the "Departments") provide additional guidance on cost sharing limitations under the Affordable Care Act. Here is what the FAQs say:

Background. Public Health Service ("PHS") Act section 2707(b), as added by the Affordable Care Act, provides that a non-grandfathered group health plan must ensure that any annual cost sharing imposed under the plan does not exceed the limitations provided for under section 1302(c)(1) of the Affordable Care Act. For plan years beginning in 2015, the maximum annual limitation on cost sharing under section 1302(c)(1) is $6,600 for self-only coverage and $13,200 for coverage other than self-only coverage. For plan years beginning in 2016, this maximum annual limitation is $6,850 for self-only coverage and $13,700 for other than self-only coverage. Thereafter, the limitation increases for inflation.

In the final HHS Notice of Benefit and Payment Parameters for 2016 (the "2016 Payment Notice") (80 FR 10750), HHS clarified that under section 1302(c)(1) of the Affordable Care Act, the self-only maximum annual limitation on cost sharing applies to each individual, regardless of whether the individual is enrolled in self-only coverage or in coverage other than self-only (the "Self-Only Rule"). This application of this rule needs the clarification provided below.

The Self-Only Rule. PHS Act section 2707(b) applies the Self-Only Rule to all non-grandfathered group health plans, including non-grandfathered self-insured and large group health plans, and including high-deductible health plans ("HDHPs"). The Departments will apply the Self-Only Rule only for plan years that begin in or after 2016.

Example. The FAQs provide the following example-

Assume that a family of four individuals is enrolled in family coverage under a group health plan in 2016 with an aggregate annual limitation on cost sharing for all four enrollees of $13,000 (note that a plan is permitted to set an annual limitation below the maximum established under section 1302(c)(1), which is an aggregate $13,700 limitation for coverage other than self-only for 2016). Assume that individual #1 incurs claims associated with $10,000 in cost sharing, and that individuals #2, #3, and #4 each incur claims associated with $3,000 in cost sharing (in each case, absent the application of any annual limitation on cost sharing). In this case, because, under the clarification discussed above, the self-only maximum annual limitation on cost sharing ($6,850 in 2016) applies to each individual, cost sharing for individual #1 for 2016 is limited to $6,850, and the plan is required to bear the difference between the $10,000 in cost sharing for individual #1 and the maximum annual limitation for that individual, or $3,150. With respect to cost sharing incurred by all four individuals under the policy, the aggregate $15,850 ($6,850 + $3,000 + $3,000 + $3,000) in cost sharing that would otherwise be incurred by the four individuals together is limited to $13,000, the annual aggregate limitation under the plan, under the assumptions in this example, and the plan must bear the difference between the $15,850 and the $13,000 annual limitation, or $2,850.


May 26, 2015

ERISA-Seventh Circuit Dismisses Case Since Plaintiffs Failed To Exhaust Administrative Remedies

In Orr v. Assurant Employee Benefits, No. 14-2370 (7th Cir. 2015), the plaintiffs, Danielle and Hailey Orr, are the daughters of Daniel Orr, who died in a motorcycle accident on August 7, 2012. As Daniel Orr's beneficiaries, Danielle and Hailey filed claims seeking benefits payable under a Group Life Insurance Policy, which is governed by ERISA, and which Union Security Insurance Company ("USIC") issued to Daniel Orr's former employer, Modern 1 Group of Companies, LLC. USIC denied the claim, and the Orrs brought this suit. The district court granted summary judgment against the Orrs, on the grounds that they had failed to exhaust their administrative remedies prior to bringing the suit. The Orrs appeal.

Upon reviewing the case, the Seventh Circuit Court of Appeals (the "Court") agreed with the district court that the Orrs failed to exhaust their administrative remedies prior to filing suit. USIC's "Life Claims Denial Review Procedure" requires that a claimant seeking review of a claim denial complete two levels of internal review prior to filing a lawsuit. The Procedure unmistakably requires the claimant to submit a request for review in writing, which the Orrs failed to do. Also, the Orrs failed to show why the failure to exhaust administrative remedies should be excused. As such, the Court upheld the district court's summary judgment.

May 21, 2015

ERISA-Second Circuit Rules That Plan Administrator's Denial Of Benefits Claim Was Not Arbitrary Or Capricious

In Roganti v. Metropolitan Life Insurance Company, Nos. 13-4532-cv (L), 13-4684-cv (XAP) (2nd Cir. 2015), the plaintiff, Ronald Roganti ("Roganti"), was a successful executive with defendant Metropolitan Life Insurance Company ("MetLife") until 2005, when he resigned in the face of pay reductions that he claims were levied in retaliation for his opposition to unethical business practices. Roganti brought arbitration proceedings against MetLife before the Financial Industry Regulatory Authority ("FINRA"), seeking, among other things, wages that he would have been paid but for the retaliatory pay reductions, as well as compensation for the decreased value of his pension, which was tied to his wages. The FINRA panel awarded Roganti approximately $2.49 million in "compensatory damages," but its award did not clarify what that sum was compensation for. Roganti then filed a benefits claim with MetLife, arguing that the award represented back pay and that his pension benefits should be adjusted upward as if he had earned the money while he was still employed. MetLife denied the claim because the FINRA award did not say that it was, in fact, back pay. Roganti brought this lawsuit.

In analyzing the case, the Second Circuit Court of Appeals (the "Court") noted that ERISA creates a private right of action to enforce the terms of a benefit plan. ERISA section 502(a)(1)(B). The pension plans covering Roganti plans vest interpretive discretion in the plan administrator, which means that the plan administrator's benefits decision is conclusive unless it is arbitrary and capricious. MetLife is the plan administrator. After a summary bench trial on stipulated facts, the district court determined that MetLife's denial of Roganti's claim was arbitrary and capricious because it was clear from the arbitral record that the award did represent back pay. The Court said that it did not agree. Instead, the Court concluded that MetLife's denial of Roganti's claim was not arbitrary and capricious, and that MetLife is therefore entitled to judgment in its favor as to his benefits claim.

Why this conclusion? The Court found that MetLife's rationale for denying Roganti's claim--i.e., that it was impossible to determine whether, or the extent to which, the FINRA award represented back pay--was not, in fact, unreasonable, and therefore met the arbitrary and capricious standard.


May 20, 2015

ERISA-Fifth Circuit Rules That Administrator Is Not An ERISA Fiduciary

In Humana Health Plan, Incorporated v. Nguyen, No. 14-20358 (5th Cir. 2015), the defendant, Patrick Nguyen ("Nguyen"), was appealing from the district court's order granting summary judgment in favor of the plaintiff, Humana Health Plan, Inc. ("Humana").

In this case, Nguyen was a participant in the API Enterprises Employee Benefits Plan (the "Plan"), an ERISA-governed employee welfare plan established by API Enterprises, Inc. ("API"). API had entered into a Plan Management Agreement ("PMA") with Humana, through which Humana had agreed to serve as "Plan Manager" and to provide various administrative services to the Plan. Two of Humana's tasks for the Plan were subrogation and recovery services. One issue arising in the case: is Humana an ERISA fiduciary with respect to the Plan under section 3(21) of ERISA(if not, it can't sue Nguyen under ERISA section 502(a)(3))? The Fifth Circuit Court of Appeals (the "Court") determined that Humana is not an ERISA fiduciary. Why?

In analyzing the case, the Court focused on the specific role that Humana undertook regarding subrogation and recovery services for the Plan, and whether API provided a framework of policies and procedures to guide Humana, and supervised Humana as it executed its task. First, the relevant language of the PMA pertaining to these services merely defines the range of potential disputes covered by the contract; it says nothing about who has the right to finally decide whether to investigate or pursue a claim. This language does not show that Humana had discretion over the Plan or its assets. As such, the subrogation and recovery language in the PMA does not show that Humana is an ERISA fiduciary of the Plan. Second, even if the Court interpreted the PMA to give Humana broad power, there is no explanation as to why Humana is not a ministerial agent, and thus not a fiduciary, or why it how Humana exercised discretion as described in section 3(21)(A)(i) and (iii).

May 19, 2015

ERISA-Supreme Court Rules That Fiduciaries Have A Continuing Duty To Monitor Plan Investments For Purposes Of Determining Whether ERISA's Statute Of Limitations Has Expired

In Tibble v. Edison International, No. 13-550 (U.S. Supreme Court 2015), in 2007, the plaintiffs, beneficiaries of the Edison 401(k) Savings Plan (the "Plan"), sued Plan fiduciaries, defendants Edison International and others, to recover damages for alleged losses suffered by the Plan from alleged breaches of the defendants' fiduciary duties. The plaintiffs argued that the defendants violated their fiduciary duties with respect to three mutual funds added to the Plan in 1999 and three mutual funds added to the Plan in 2002. They argued that the defendants acted imprudently by offering these six higher priced retail-class mutual funds as Plan investments, when materially identical lower priced institutional-class mutual funds were available.

Because ERISA requires a breach of fiduciary duty complaint to be filed no more than six years after "the date of the last action which constitutes a part of the breach or violation" or "in the case of an omission the latest date on which the fiduciary could have cured the breach or violation," under section 413 of ERSA, the District Court held that the plaintiffs' complaint as to the 1999 funds was untimely because they were included in the Plan more than six years before the complaint was filed, and the circumstances had not changed enough within the 6- year statutory period to place the defendants under an obligation to review the mutual funds and to convert them to lower priced institutional-class funds. The Ninth Circuit affirmed, concluding that the plaintiffs had not established a change in circumstances that might trigger an obligation to conduct a full due diligence review of the 1999 funds within the 6-year statutory period.

Upon its review of the case, the U.S. Supreme Court held that the Ninth Circuit erred by applying section 413's statutory bar to a breach of fiduciary duty claim based on the initial selection of the investments without considering the contours of the alleged breach of fiduciary duty. ERISA's fiduciary duty is "derived from the common law of trusts, which provides that a trustee has a continuing duty--separate and apart from the duty to exercise prudence in selecting investments at the outset--to monitor, and remove imprudent, trust investments. So long as a plaintiff's claim alleging breach of the continuing duty of prudence occurred within six years of suit, the claim is timely.

As such, the Supreme Court remanded the case back to the Ninth Circuit to consider the plaintiffs' claims that the defendants breached their duties within the relevant 6-year statutory period under section 413, recognizing the importance of analogous trust law.

May 18, 2015

Employee Benefits-DOL Provides Guidance On Coverage Of Preventive Services

In FAQs about Affordable Care Act Implementation (Part XXVI), the U.S. Department of Labor, the Department of Health and Human Services and the Treasury (the "Departments") provide guidance on rules pertaining to coverage of preventive services under the Affordable Care Act.

Background. The FAQs provide the following background. Section 2713 of the Public Health Service Act (PHS Act) and its implementing regulations relating to coverage of preventive services require non-grandfathered group health plans to provide benefits for, and prohibit the imposition of cost-sharing requirements with respect to, the following:

• Evidenced-based items or services that have in effect a rating of "A" or "B" in the current recommendations of the United States Preventive Services Task Force ("USPSTF") with respect to the individual involved, except for the recommendations of the USPSTF regarding breast cancer screening, mammography, and prevention issued in or around November 2009;

• Immunizations for routine use in children, adolescents, and adults that have in effect a recommendation from the Advisory Committee on Immunization Practices ("ACIP") of the Centers for Disease Control and Prevention ("CDC") with respect to the individual involved;

• With respect to infants, children, and adolescents, evidence-informed preventive care and screenings provided for in comprehensive guidelines supported by the Health Resources and Services Administration (HRSA); and

• With respect to women, evidence-informed preventive care and screening provided for in comprehensive guidelines supported by HRSA, to the extent not included in certain recommendations of the USPSTF.

If a recommendation or guideline does not specify the frequency, method, treatment, or setting for the provision of a recommended preventive service, the plan may use reasonable medical management techniques to determine any such coverage limitations.

Topics Covered by the FAQs. In summary, the FAQs say the following:

--Coverage of breast cancer testing: A plan MUST cover, without cost sharing, recommended genetic counseling and BRCA testing (that is, testing for breast cancer susceptibility genes) for a woman who has not been diagnosed with BRCA-related cancer, but who previously had breast cancer, ovarian cancer, or other cancer.

--Coverage of Food and Drug Administration ("FDA")-approved contraceptives: Plans must cover, without cost sharing, at least one form of contraception in each of the methods (currently 18) that the FDA has identified for women in its current Birth Control Guide. This coverage must also include the clinical services, including patient education and counseling, needed for provision of the contraceptive method. The Departments will apply this guidance for plan years beginning on or after the date that is 60 days after publication of these FAQs.

Further, if a plan covers some forms of oral contraceptives, some types of IUDs, and some types of diaphragms without cost sharing, but excludes completely other forms of contraception, the plan does NOT comply with PHS Act section 2713 and its implementing regulations. Also, if a plan covers oral contraceptives (such as the extended/continuous use contraceptive pill), it may NOT impose cost sharing on all items and services within other FDA-identified hormonal contraceptive methods (such as the vaginal contraceptive ring or the contraceptive patch).

--Coverage of sex-specific recommended preventive services: A plan may NOT limit sex-specific recommended preventive services based on an individual's sex assigned at birth, gender identity or recorded gender.

--Coverage of well-woman preventive care for dependents: If a plan covers dependent children, the plan is NOT required to cover (without cost sharing) recommended women's preventive care services for dependent children, including services related to pregnancy, such as preconception and prenatal care.

--Coverage of colonscopies pursuant to USPTF recommendations: The plan may NOT impose cost sharing with respect to anesthesia services performed in connection with the preventive colonoscopy, if the attending provider determines that anesthesia would be medically appropriate for the individual.

May 13, 2015

Executive Compensation-IRS Provides Guidance On Correction of Section 409A Failures

In an IRS Memorandum, the IRS dealt with the following issue: Does the correction of a failure to comply with section 409A(a) of the Internal Revenue Code, which correction applies only to compensation subject to a substantial risk of forfeiture, avoid income inclusion under section 409A if the correction is made before the compensation vests but during the service provider's taxable year in which it vests? And the IRS concluded that income inclusion is NOT avoided. Why?

The IRS said in the Memorandum that section 409A(a)(1)(A)(i) provides that, if a nonqualified deferred compensation plan fails to comply, or fails to be operated in accordance, with section 409A(a)(2), (3) and (4) "at any time during a taxable year," compensation deferred under the plan that is not subject to a substantial risk of forfeiture and that has not previously been included in income is includible in the service provider's gross income for the taxable year. Deferred compensation, which is subject to a substantial risk of forfeiture, is subject to the requirements of section 409A(a)(2), (3), and (4) at all times during a taxable year, though a deferred amount is not includible in income under section 409A if it is subject to a substantial risk of forfeiture at all times during the taxable year.

In contrast, if the amount is not subject to a substantial risk of forfeiture at all times during the taxable year (generally meaning the amount is vested as of the end of the taxable year), the amount is includible in income. The correction of a failure to comply with section 409A(a) during a taxable year indicates that a failure existed during the taxable year in which the correction is made. In accordance with section 409A(a)(1)(A)(i), a failure applicable to deferred compensation subject to a substantial risk of forfeiture that lapses during the taxable year results in income inclusion of the deferred amount under section 409A, regardless of whether the failure is corrected during the same taxable year but before the substantial risk of forfeiture lapses.

May 12, 2015

ERISA-Seventh Circuit Reverses Decision Pertaining To Benefit Calculation For Imprecision

In Reilly v. Continental Casualty Co., No. 14-2888 (7th Cir. 2015), Michael Reilly ("Reilly") had participated in a pension plan offered by Continental Casualty Co. ("Continental"). Continental administers its own defined-benefit plan, which provides that the pension depends on the highest average compensation in any 60-month period of employment. "Compensation" is a defined term: regular salary, incentive compensation, and deferred compensation deposited in §401(k) plans are in (as are some other items), while educational bonuses, referral bonuses, overseas allowances, and some other items are out.

In this case, when Reilly left Continental's employ in 1999, he received a statement of his qualifying compensation that implied a monthly benefit of about $5,400 starting in 2012, when he would turn 65 and become eligible. Come 2012, however, Continental sent Reilly a different calculation, showing lower compensation and entitlement to roughly $4,200 a month. When internal appeals did not avail him, Reilly filed this suit under §502(a)(1)(B) of ERISA. The district judge concluded that Continental's decision was arbitrary and capricious (which the parties agree is the governing standard), and the court ordered it to pay monthly benefits at the $5,400 level. Continental appeals, contending in this court that its calculation should have been sustained, and if not that the district court should have remanded for a new calculation rather than ordering payment at the rate projected in 1999.

In analyzing the case, the Seventh Circuit Court of Appeals (the "Court") said that the district court's decision cannot stand, because Reilly has not tried to show that $5,400 is the only possible outcome of a proper calculation process. All that has been established to date is that Continental's 2012 decision is unreliable. By working through the original compensation numbers, the parties may be able to agree what the right pension is under the Plan's terms. If agreement is elusive, the district court must remand this matter to Continental so that the administrator can make a fresh calculation, which then could be subjected to another round of judicial review. Accordingly, the Court reversed the district court's decision, and remanded the case for further proceedings consistent with its opinion.