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Employee Benefits Law Report

Reporting on recent trends and developments affecting employee benefits

The first progeny of the Hobby Lobby decision

Posted in ERISA Fiduciary Compliance, Health Care Reform

As we noted in a previous blog entry, the United States Supreme Court recently ruled in two companion cases, Sebelius v. Hobby Lobby Stores and Conestoga Wood Specialties v. Sebelius (referred to hereafter as Hobby Lobby) , that regulations issued under the Affordable Care Act (the “ACA”) that compel closely held corporations to provide contraception coverage for their employees violated the Religious Freedom Restoration Act of 1993.  The Court concluded that closely held corporations cannot be required to provide contraceptive coverage if doing so would be contrary to sincerely held religious beliefs of the corporation’s owners.  The dispute over contraception coverage in Hobby Lobby arose from a provision in the ACA that requires heath care plans to offer free preventive care.  Under regulations issued by the Obama administration, the term preventive care was interpreted to include all contraception and sterilization measures approved by the United States Food And Drug Administration (the “FDA”).  The owners of Hobby Lobby, and Conestoga Wood Specialties challenged the ACA requirement that health care plans cover certain contraceptives.

The Obama administration has taken its first official action in response to the Hobby Lobby decision. In the form of a Frequently Asked Question (FAQ) regarding implementation of the ACA prepared by the Departments of Labor, Health and Human Services and the Treasury (available at http://www.dol.gov/ebsa/healthreform/), the agencies announced that any closely held corporations that intend to amend health care plans that are subject to ERISA to eliminate some or all of the forms of birth control approved by the FDA must inform their employees of that decision. The new FAQ, issued July 17, 2014, notes that Department of Labor regulations provide that a plan’s summary plan description must include a description of the extent to which preventive services (which as noted above includes contraceptive services) are covered.  It thus follows that if an ERISA-covered plan excludes some or all of the approved contraceptive services from coverage, then the plan’s summary plan description must describe the extent of that exclusion. For plans that reduce or eliminate coverage of contraceptive services after having provided such coverage, the disclosure requirements for material reductions in covered services apply. These disclosure requirements generally require disclosure not later than 60 days after the date of adoption of a plan amendment that affects the reduction or elimination. As an aside, the FAQ warns that other disclosure requirements may apply, including disclosure requirements under applicable state laws to the extent not preempted by ERISA.

This move by the Obama administration, which was not unexpected, comes as Congress appears deadlocked on proposed legislation that would override the Hobby Lobby decision. Of course, a deadlocked Congress hardly is news these days. Just this week, an effort by Democrats in the Senate to pass a bill to override the Court’s decision lost a procedural vote to precede (although prospects for passage in the House seemed extremely dim anyway). That vote fell 4 votes short of the 60 votes needed to move forward. Only three Republican senators (Sens. Susan Collins, Lisa Murkowski and Mark Kirk) voted in support of the bill, while all Democrats supported the bill (excluding Senate Majority Leader Harry Reid, who voted no for procedural purposes so that he could bring the bill up again for consideration sometime in the future). It seems like this issue in effect has moved from a legislative battleground to a political one—with all the usual in-fighting and grandstanding (both as common as deadlock in Washington, D.C. these days).

The health care reform shared responsibility excise tax missing link: employer rights

Posted in Health Care Reform, Tax Issues

Back in 2011, I mentioned a missing link in the health care reform Section 4980H shared responsibility employer excise tax scheme. 42 U.S.C. Section 18081 requires the establishment of an appeals and redeterminations process for penalty assessments, and acknowledges a problem with the provision itself. It requires the Secretary of Health and Human Services to consult with the Secretary of Treasury, study administration of employer responsibility, and provide a report to certain Congressional committees by January 1, 2013. This report was to address the procedures and/or legislative changes necessary to ensure the following rights are protected:

(A) The rights of employees to preserve their right to confidentiality of their taxpayer return information and their right to enroll in a qualified health plan through an Exchange if an employer does not provide affordable coverage.

(B) The rights of employers to adequate due process and access to information necessary to accurately determine any payment assessed on employers.

How does an employer have access to information necessary to accurately determine any payment assessed, when the statute prohibits the agencies from sharing any taxpayer return information with the employer, except “whether or not the employee’s income is above or below the threshold by which the affordability of the employer’s health insurance coverage is measured?” The statute provides that whether or not the coverage is affordable is determined based upon household Modified Adjusted Gross Income, and I am not entirely sure what “the threshold” means.

There seems to be a presumption that the IRS is going to start assessing Section 4980H excise taxes against employers in mid-2016. But the Fifth Amendment to the Constitution prohibits the federal government from depriving persons of property without due process of law, and as the United States Supreme Court just reminded us in Hobby Lobby, employers are persons, too.  Is it even possible to craft procedures that will protect employers’ rights in accordance with the Constitution and the provisions of the statute? I don’t think so.  If the Secretary’s report was ever provided to the committees, that has not been publicized. And IRS Q&As (#27 and 28) gave us a peak at penalty assessment, but noticeably absent is any explanation about how the IRS is going protect employers’ rights. It appears the IRS may literally need an act of Congress before it can collect these excise taxes.

The illusion of an available job for the disabled: The Sixth Circuit’s decision in Kennard v. Means Industries, Inc. addresses long-term disability determinations

Posted in ERISA Litigation, Fringe Benefits

Many thanks to our summer clerk, Ryan Graham, for his significant contribution to this blog.

A farmer was having a tough time understanding why his chickens were producing less eggs than in previous years. He wrote a letter to the local university, asking for guidance on increasing his chickens’ egg production. The university handed the project off to its top theoretical physicist. The physicist quickly returned to the farmer and said “I have a solution to increase the production of your eggs, but it only works for spherical chickens in a vacuum.”

Some solutions are illusory, or at least that is what the Sixth Circuit determined in Kennard v. Means Industries, Inc., its recent decision concerning the denial of an ERISA claim for disability benefits based on the administrator’s determination that “employment” was available.

Facts

Kennard began work at Means Industries in 1983. In 1990, he inhaled toxic fumes from a batch of synthetic oil and permanently damaged his lungs. Following the accident, Kennard required a ‘clean air environment,’ meaning he could not be around perfumes, dust mites, mold, and many other common airborne irritants found in office spaces.

Means Industries accommodated Kennard and provided him with a clerical position in a fume-free area. The company also warned other employees in Kennard’s area not to wear perfumes, burn candles, or perform any other activity that might aggravate Kennard’s condition. Despite these accommodations, irritants continued to shorten Kennard’s breath, causing him to frequently leave work early.

Kennard stopped working in 2006 and filed a claim to receive Social Security benefits. The Social Security Administration (the “SSA”) provided a written report finding “there are no jobs in the national economy that [he] could perform.” Applying the SSA’s standard for disability, the administrative judge found that Kennard was unable to “engage in any substantial gainful activity.” After receiving his approval for Social Security benefits, Kennard applied for disability benefits under Mean Industries’ long-term disability (the “Plan”).

Under the Plan, a participant is “permanently disabled” “(a) if he has been totally disabled by bodily injury or disease so as to be prevented thereby from engaging in any occupation or employment for remuneration or profit, and which condition constitutes total disability under the federal Social Security Act; and (b) after such total disability shall have continued for a period of six consecutive months, and, in the opinion of a qualified physician chosen by the committee. . . it will be permanent and continuous during the remainder of his life.”  The Plan required that Kennard undergo two physical examinations from independent doctors to assist with the determination.

The key issue that emerged was whether Kennard was able to engage in any occupation or employment.  The examining doctors determined that Kennard could work, but he would have to work in a clean air environment and limit his time spent sitting or standing.  Specifically, one of the examining doctors stated that he “would recommend no prolonged sitting or standing.”  And the other doctor indicated that “[Kennard was] employable as long as he could be guaranteed that we would be placed in an absolute clean air environment with absolutely no noxious fumes or inhalants . . . .”  According to the second doctor, if this type of environment was available, Kennard could be employable in a clerical position; if not, then he would be considered disabled.  Ultimately, the Plan administrator denied Kennard’s claim for disability benefits, citing solely to these portions of the doctors’ medical reports that stated that he was capable of work under certain specific, and substantially limited conditions.

Kennard appealed the Plan administrator’s denial to the federal district court, claiming that the administrator’s denial was arbitrary and capricious because the SSA had already found that there were no available jobs. The trial court disagreed with Kennard and affirmed the decision of the administrator, relying on the independent doctors’ reports. Kennard then appealed to the Sixth Circuit.

The Court’s Decision

On appeal, the Sixth Circuit reversed the trial court and ruled that Kennard was “disabled” as defined under the Plan and, consequently, was entitled to Plan benefits.

The Sixth Circuit determined that there was inadequate support for the Plan administrator’s conclusion that Kennard could engage in any occupation or employment.  The Court held that a valid denial of benefits based on a determination that Kennard could engage in any occupation or employment would need to include evidence of the “existence of the absolute-clean-air jobs available to Kennard.” While the Plan administrator need not rely on the SSA’s legal standard for disability, the Court concluded the decision must be grounded on a reasoned explanation.  According to the Court, to deny the claim based on allegations of “a job that exists only in theory, that interpretation is in error.” The Court also quipped that an available job would have to be gainful employment, which excluded nominal employment or hypothetical employment.

In Kennard, the Sixth Circuit appears to have instituted a two-part review of plan administrators’ decisions to deny disability benefits based on a finding that the participant can engage in any occupation or employment.  First, plan administrators must ground their decision on a reasonable, principled basis supported by evidence.  To meet this requirement, plan administrators’ decisions must offer specificity. Simply attaching a prefabricated denial letter to medical reports which does not clearly evidence employability will not meet the Sixth Circuit’s standard, especially when the medical reports include phrases such as “may be able to return to work on a limited basis” or “could return to work with some restrictions.” Second, the administrator must articulate in his or her denial that a workable job exists in reality, and the job must be gainful employment, as opposed to “selling peanuts or pencils.”

Takeaways

There are four notable takeaways from the Sixth Circuit’s Kennard decision.

First, plan administrators should continue to monitor this issue to see how it develops. The limits of Kennard remain unclear. The Sixth Circuit may rely on Kennard to narrow the ‘arbitrary and capricious’ review standard by requiring more specific reasoning from plan administrators.  Or it may distinguish Kennard from future cases because of Kennard’s unusual facts (namely, the lack of any no real practical evidence in either the medical reports or the claim denial evidencing Kennard’s employability). This is an open question, but the safest approach for plan administrators is to (1) become familiar with the terms of their plans before denying disability benefits, especially when the denial is based on a finding of employability; and (2) consult with counsel to ensure that the decision is supported by the plan document and, if the claim is denied, that the supporting rationale will withstand judicial scrutiny.

Second, consideration should be given on how to define the term “disability” in the formal plan document.  If the Plan incorporates the SSA’s definition, plan administrators should take note of the SSA determination, as this is clearly persuasive upon judicial review (especially where the SSA determination directly contradicts the claim determination).  And, if the definition incorporates an employability standard, plan administrators need to take this standard seriously and fully examine this issue when making claims determinations.

Third, plan administrators must articulate grounded reasons for denying benefits. This requires an understanding of the plan terms and clear reasoning in any claim denial. The Sixth Circuit will not accept conjecture, theoretical possibilities, or speculation.  In short, the Sixth Circuit does not want to hear about spherical chickens in a vacuum tube.  This is clearly true when denying claims based on employability.  While plan administrators do not need to go out and find the claimant a job to support a finding of employability, simply denying a claim based on vague medical reports that do not clearly state that an individual is employable will not suffice.  Rather, administrators should set forth reasoned, practical support for any denial.

Fourth, administrators that apply a strict interpretation of plan provisions may receive more scrutiny from courts. In Kennard, the plan administrator and the district court both relied heavily on the plan provision that required a person be unable to work in any occupation or employment. The Sixth Circuit rejected this “hyper-literal” interpretation of the benefit provision, stating that not every form of earning money constituted an occupation or employment. Therefore, if a plan incorporates an employability standard, and a plan administrator opts to deny a claim based on this standard, plan administrators should have some reasonable idea of the working climate that will support the administrator’s decision.

It is a little too early to gauge the breadth of the Sixth Circuit’s decision in Kennard. However, there are steps you can take to provide a workable definition of “disability” in your plan and to ensure any reviews of disability claims comply with the standards set forth in this decision.

Corporations get religion — and maybe lose contraception coverage

Posted in Health Care Reform

The United States Supreme Court held in a 5-4 decision issued on Monday that regulations issued under the Affordable Care Act (the “ACA”) that compel closely held corporations to provide contraception coverage for their employees violated the Religious Freedom Restoration Act of 1993 (the “RFRA”). Two cases actually are involved in this opinion, including Sebelius v. Hobby Lobby Stores and Conestoga Wood Specialties v. Sebelius (referred to hereafter simply as Hobby Lobby). In an opinion written by Justice Samuel Alito, the court’s conservative block (all five of the so-called conservative justices appointed by Republican presidents) concluded that closely held corporations such as Hobby Lobby Stores Inc. and Conestoga Wood Specialties Corp. cannot be required to provide contraceptive coverage if doing so would be contrary to sincerely held religious beliefs of the corporation’s owners. For the first time, the Court has ruled that the RFRA covers corporations–or at least certain corporations. In yet another example of the partisan divide on the Court, the four so-called liberal justices (three of whom are women, and all of whom were appointed by Democratic presidents) did not support the majority opinion and, in doing so, warned of future efforts to use religious beliefs to trump the application of laws and regulations that are perceived to be undesirable. Presumably as an expression of her angst with the majority opinion, Justice Ruth Bader Ginsburg read a portion of the dissent that she authored from the bench when the decision was announced on Monday.

The dispute over contraception coverage in Hobby Lobby arose from a provision in the ACA that requires heath care plans to offer free preventive care. While means of contraception are not specifically referenced in the ACA, under regulations issued by the Obama administration the term preventive care was interpreted to include all contraception and sterilization measures approved by the United States Food And Drug Administration, including birth-control pills, intrauterine devices and the morning-after pill.

The owners of Hobby Lobby, an Oklahoma-based arts-and-crafts chain owned by founder David Green, an evangelical Christian, and other family members and the Mennonite owners of Conestoga Wood Specialties, a Pennsylvania-based cabinetmaker, brought actions to challenge the ACA requirement that health care plans cover certain contraceptives. Although not entirely clear, it appears that Hobby Lobby and Conestoga Wood Specialties did not object to all required contraception methods, but specifically rejected morning-after pills and intrauterine devices–that objection was the basis for their law suits. Notwithstanding this more narrow concern, the Court’s opinion (while limited in certain respects) seems broad enough to apply to other forms of contraception as well.

In Monday’s decision, closely held profit-making corporations were found to have a legal right under the RFRA not to be forced to include contraception coverage under their plans if doing so would be contrary to sincerely held religious beliefs of the corporations’ owners. Justice Alito tried to emphasize that this decision was limited in its breadth, and that it did not necessarily open the door to other challenges based on religious convictions. Moreover, the majority explained that the opinion only applied to closely held corporations. In a short concurring opinion, Justice Anthony Kennedy tried to reinforce the limited nature of this opinion. As a means to alleviate a resulting lack of contraception coverage, Justice Alito suggested in the majority opinion that the Obama administration offer to for-profit companies the same accommodation previously extended by the administration to religiously affiliated non-profits that also objected to contraception coverage in their plans. Under this accommodation (which applies to both insured and self-insured plans, although in different ways) insurers or third party administrators are required to provide contraceptive coverage without charging premiums to employers or copayments to covered individuals. Alternatively, the court stated that the federal government simply could pay for contraceptive coverage with a subsidy (although it is unclear whether that approach would be possible without enabling legislation). Surely the Obama administration already has begun consideration of alternatives to ensure contraception coverage. New White House Press Secretary Josh Earnest stated on Monday that the White House is reviewing the decision and determining its options, including pursing a legislative fix (although the legislative route seem quite unlikely in this tumultuous partisan place called Washington).

Leaving aside political intrigue (which the majority of Americans would be only too happy to do), the practical implications of the Hobby Lobby decision are uncertain. While it is not entirely clear how the Court would define a closely held corporation, based on recent studies a sizable percentage of small businesses are not even subject to the ACA mandates (including contraception coverage) because they have fewer than 50 full-time employees. Moreover, according to a study prepared by Mercer Human Resources Group, approximately 90 percent of all employers in the United States (regardless of size) already offered contraception coverage. Wholesale changes in the prevalence of contraception coverage even after this decision may well be unlikely.

It must be noted that employers also will have to review the possible application of any state laws that might require contraception coverage despite the holding in Hobby Lobby. Many states have enacted laws that require employers that offer prescription drug coverage to cover certain contraceptives as well. Since the Court’s decision in Hobby Lobby was based on the application of the RFRA, it does not invalidate those state laws (although employers that sponsor self-funded plans may be able to evade such state laws under ERISA’s preemption doctrine).

The Hobby Lobby decision certainly ended the Supreme Court’s term with a bang (and was announced as protestors on both sides of the issues demonstrated in front of the Supreme Court building in Washington, D.C.). Coming just two years after the Supreme Court held that the ACA was constitutional, even though the Court at that time invalidated the mandatory expansion of Medicaid, some will view this decision as both a legal and a political defeat for President Obama. Others will view the decision as a setback for women’s rights, even though the majority opinion (as well as Justice Kennedy’s concurring opinion) tried to frame this case as a matter of religious freedom and even then as a decision with a very narrow application. To no one’s surprise, the decision has set off a frenzied partisan debate that seems likely to play out through the November congressional elections and into the future over religious and reproductive rights. Both parties have launched fundraising initiatives based on the decision.

Perhaps the more significant but as yet unknowable legacy of the Hobby Lobby opinion will be its possible extension to other laws and regulations that might be considered to clash with religious beliefs held by owners of closely corporations–and whether these principles get extended to other forms of corporations. In her dissent, Justice Ruth Bader Ginsburg stated that she believed the Court inadvertently “ventured into a minefield.” Only time will tell if she is correct.

Dudenhoeffer update – The Supreme Court kills the Moench presumption but requires plausible pleadings

Posted in ESOPs

In a bit of a surprise, the United States Supreme Court declined today in Fifth Third Bancorp v. Dudenhoeffer to adopt the Moench presumption of prudence, which entitled fiduciaries of qualified defined contribution plans (including ESOPs) a presumption of prudence for continued investments in qualifying employer securities. In its holding, the Court did unanimously reverse the 6th Circuit’s ruling that a presumption of prudence exists only after the pleading stage. While the reversal itself may not come as a surprise, the Court’s rationale does, particularly given how the question accepted on certiorari was presented.

As noted in our prior blog posting on the case, the question on certiorari focused on whether plaintiffs must allege that a fiduciary abused its discretion in offering employer securities as an investment option in order to overcome the presumption that offering employer securities was reasonable. The Court seemed to reject the DOL’s request as Amicus Curiae to rule on whether the presumption of prudence exists at all. In today’s ruling though, the Court appears to have done just this in holding that “ESOP fiduciaries are not entitled to any special presumption of prudence…” and that “aside from the fact that ESOP fiduciaries are not liable for losses that result from a failure to diversify, they are subject to the duty of prudence like other ERISA fiduciaries.”

It was not all bad news for plans holding employer securities, as the Court did find in remanding the case back to the 6th Circuit that a complaint cannot simply allege that the employer security offering was imprudent. Instead, plaintiffs must allege an alternative action that the fiduciaries could have taken that would have been legal and consistent with the prudent fiduciary standard, taking into account securities laws and the impact of a decision modify the offering of employer securities. Specifically, the court held that:

  • “Where a stock is publicly traded, allegations that a fiduciary should have recognized on the basis of publicly available information that the market was overvaluing or undervaluing the stock are generally implausible and thus insufficient to state a claim…” and
  • “To state a claim for breach of the duty of prudence, a complaint must plausibly allege an alternative action that the defendant could have taken, that would have been legal, and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it. Where the complaint alleges that a fiduciary was imprudent in failing to act on the basis of inside information, the analysis is informed by the following points. First, ERISA’s duty of prudence never requires a fiduciary to break the law, and so a fiduciary cannot be imprudent for failing to buy or sell stock in violation of the insider trading laws. Second, where a complaint faults fiduciaries for failing to decide, based on negative inside information, to refrain from making additional stock purchases or for failing to publicly disclose that information so that the stock would no longer be overvalued, courts should consider the extent to which imposing an ERISA-based obligation either to refrain from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements set forth by the federal securities laws or with the objectives of those laws. Third, courts confronted with such claims should consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”

These latter holdings are certainly beneficial for plans of publicly-traded sponsors holding qualifying employer securities in the standard “stock drop” scenarios. For plans of non-publicly-traded entities though – a group that would include a great majority of private company ESOPs – the outcome here is a little more murky.

More to come on the impact of this ruling. Stay tuned.

Sixth Circuit finds all anti-retaliation provisions are not created equal, but they are legal landmines. Watch your step

Posted in ERISA Litigation, Other Articles

Sexton v. Panel Processing, Inc. is a recent Sixth Circuit case that highlights that all anti-retaliation provisions are not created equal. And while not equal, there certainly are a lot of them. In fact, there are at least 40 federal anti-retaliation laws, and this does not even include all the various state statutory and common laws that prohibit an employer from taking adverse action against an employee for complaining about all sorts of various conduct. While the result in Sexton was a win for the employer, it should not give employers confidence against retaliation claims; rather, it should serve as a caution to employers to be very careful about what actions they take against an employee who has lodged a workplace complaint.

Facts

Brian Sexton worked as a general manager for Panel Processing and served as a trustee for the company’s employee retirement plan. In 2011, Sexton and another trustee, Robert Karsten, campaigned on behalf of two employees running for the company’s board of directors. The employees won the election, but the board refused to seat them on the grounds that it would violate the company’s bylaws, which limited the number of inside directors. At the same time, the board removed Sexton and Karsten as trustees of the retirement plan. Two days later, Sexton emailed the chairman of the board:

I believe that your actions … in refusing to seat [the employees] as directors of the company and removing Rob Karsten and me as Trustees of the [retirement plan] are violations of ERISA and [other] state and federal laws. I plan to bring these violations to the attention of the U.S. Department of Labor and Michigan Department of Licensing and Regulatory Affairs unless they are immediately remedied.

Neither the chairman nor anyone else responded to the email, and Sexton took no further action. About six months later, the company fired Sexton from his job as a general manager.

Sexton sued the company in state court for violating Michigan’s Whistleblower Protection Act and for breaching his employment contract. The employer removed the case arguing that ERISA pre-empted Sexton’s state-court claims and re-characterized Sexton’s state whistleblower claim as an ERISA claim. Sexton did not dispute this re-characterization (although he probably should have and he might not have had his claims thrown out) and the parties litigated in federal court as an ERISA retaliation claim.

The parties accepted the position that Sexton was fired because of his email to the chairman of the board and left the court to decide a single issue: Does ERISA’s anti-retaliation provision protect unsolicited employee complaints?

The issue is not a simple one. In fact, as the dissent pointed out, the Fifth, Seventh, and Ninth Circuits have interpreted ERISA’s anti-retaliation provision as protecting an employee’s “unsolicited internal complaint,” but the Second, Third, and Fourth Circuits have used a “plain meaning” reading of the statute to find that such complaints are not protected.

In agreeing with the Second, Third, and Fourth Circuits “plain reading” methodology, the Sixth Circuit threw out Sexton’s case.  Continue Reading

Bankruptcy trumps protection for inherited IRA

Posted in Retirement Plans

The United State Supreme Court issued an opinion on June 12, 2014 in Clark v. Rameker dealing with a relatively simple issue at the intersection of bankruptcy law and retirement policy. The case dealt with the ability to exempt “retirement funds” as a category of assets from a bankruptcy estate when an individual files for bankruptcy. The question presented to the Court was whether funds in an inherited individual retirement account (“IRA”) qualify as “retirement funds” within the meaning of this bankruptcy exemption. With Justice Sonia Sotomayor writing the opinion, the Court held unanimously that they do not.

This case involved an IRA that petitioner Heidi Heffron-Clark inherited upon the death of her mother.  In 2000, Ruth Heffron established a traditional IRA and named her daughter as the sole beneficiary of the account. When Ms. Heffron died in 2001, her IRA (which had a balance of approximately $450,000 at the time of death) passed to Ms. Heffron-Clark and became an inherited IRA.[1]  In October 2010, Ms. Heffron-Clark and her husband filed a Chapter 7 bankruptcy petition, and in that process claimed that the inherited IRA (which had a balance of approximately $300,000 at that time) was exempt from the bankruptcy estate. The bankruptcy trustee and unsecured creditors of the estate, who were the respondents in this case, objected to the claimed exemption on the ground that the funds in the inherited IRA were not “retirement funds.”  The Bankruptcy Court agreed with the respondents and disallowed the exemption. The District Court reversed, concluding that the exemption covers any account containing funds originally accumulated for retirement purposes, but upon appeal the Seventh Circuit reversed the District Court’s judgment.

The relevant statute in the case is Bankruptcy Code § 522(b)(3)(C), which exempts retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code. While the parties agreed that the inherited IRA is exempt from taxation under one of those sections, the issue of contention was whether the inherited IRA in the hands of Ms. Heffron-Clark constitutes “retirement funds” for purposes of that subsection. Ms. Heffron-Clark argued that the inherited IRA should be exempt as retirement funds because it was set aside for retirement by her mother. The bankruptcy trustee argued that it the inherited IRA was not exempt because it no longer was retirement funds based on the notion that Ms. Heffron-Clark had the ability to withdraw the funds at any time without penalty.

The Court began by noting that the Bankruptcy Code does not define “retirement funds,” and so a normal meaning must be assigned to the term. In ruling against Ms. Heffron-Clark, the court concluded that the ordinary meaning of “retirement funds” refers to sums of money set aside for the day an individual stops working. In the Court’s view, three characteristics of inherited IRAs indicate that they do not contain such funds. First, the holder of an inherited IRA never may invest additional money in the account. Second, the holder of an inherited IRA is required to withdraw money from the account without regard to how far he or she is from retirement. Third, and as noted above, the holder of an inherited IRA may withdraw the entire balance of the account at any time—and use it for any purpose—without penalty.

The Court in essence concluded that its holding was consistent with the purpose of the exemption provisions within the Bankruptcy Code, which attempts to strike a balance between the interest of creditors to recover assets and the interest of the person filing for bankruptcy to satisfy personal needs. In the view of the Court, nothing about the characteristics of an inherited IRA prevents or discourages an individual from using funds within the account for current consumption. The mere possibility that a certain holder of an inherited IRAs can leave it intact until retirement and take only required minimum distributions does not mean that an inherited IRA bears the characteristics of retirement funds. By contrast, the Court notes that allowing debtors to protect funds in traditional and Roth IRAs helps ensure that those debtors will be able to satisfy their financial needs in retirement.

It seems the Court’s holding in this case was widely predicted (although these days any unanimous decision by the Court qualifies as a bit of a surprise). The decision will send estate planners back to the drawing board. Already some planners are suggesting that an individual with significant accumulated funds in an IRA may be better able to protect his or her heirs from creditors by establishing a spendthrift trust and designating that trust as the beneficiary of the IRA balance. Other alternatives may emerge as well.


[1] Given the size of the IRA upon creation, it seems likely the source of the funds to set up that IRA came from a rollover from a tax-qualified retirement plan, although this is not discussed in the opinion. Apparently, the source of the money used to fund the IRA that later becomes an inherited IRA is not relevant to the holding.

 

 

ERISA preemption of state law regarding multiemployer health, welfare and retirement benefits

Posted in ERISA Fiduciary Compliance, ERISA Litigation

The Pennsylvania General Assembly has given us another opportunity to expand our employee benefit plan boundaries discussion. This time, the discussion applies to multiemployer plans in the construction industry. It has been reported that Rep. William Keller, D-Philadelphia, introduced a bill in the General Assembly to amend the state’s Mechanics’ Lien Law to classify union benefit fund trustees as subcontractors allowed to pursue claims for nonpayment against employers and property owners. This action followed a Pennsylvania Supreme Court ruling that unions and benefit fund trustees do not qualify as subcontractors as a result of collective bargaining agreements with employers.

There is one small problem with this bill: the Employee Retirement Income Security Act (ERISA). ERISA sets forth the procedure for fund trustees to collect for nonpayment, and would seemingly preempt such a state law. Federal courts have exclusive jurisdiction over these cases, and there are many such cases filed every day. The law is very favorable to the fund trustees, incidentally.

What happens if the Pennsylvania General Assembly amends its state law to allow benefit fund trustees to pursue claims as subcontractors? Pennsylvania employers get into a boundary dispute with fund trustees regarding ERISA preemption, parties argue over whether the cases can be removed to federal court, and Pennsylvania state courts potentially issue erroneous rulings that fail to recognize ERISA preemption. In the last Pennsylvania state court ERISA preemption case I blogged about, it took 19 years to establish ERISA preemption. While I root for the Cleveland Browns and Johnny Football, I don’t wish that hardship even on Pittsburgh Steelers fans.

The ESOP sponsor / fiduciary boundary dispute, employer contribution edition

Posted in ERISA Fiduciary Compliance, ESOPs

As a follow up to our blog on the ERISA sponsor / fiduciary boundary dispute, here is another case, Coulter v. Morgan Stanley & Co. Inc., from the Second Circuit. The employer decided to make contributions in the form of company stock, rather than cash. Then the employer’s stock price plunged in conjunction with the economic downturn. Plaintiffs alleged the employer breached its fiduciary duty by making the investment in stock. The district court dismissed the claims on the basis of the Moench presumption of prudence.

The Appellate Court affirmed the dismissal of the claims, but on a simpler basis. The Court found that the employer acts as a fiduciary when administering a plan, but not when designing the plan or making business decisions about the plan, even if those decisions may impact negatively on participants. The employer’s stock and cash were not plan assets prior to the time they were contributed to the trust. Further, the employer does not have a conflict of interest when it is making a business decision because it does not have a fiduciary duty to the ESOP participants with respect to a business decision. These are hardly groundbreaking holdings, but they demonstrate the importance of recognizing and respecting boundaries with respect to ERISA plans, especially ESOPs.

The ESOP sponsor / fiduciary boundary dispute, accounting fraud edition

Posted in ESOPs

A common theme in many of our blogs is that of respecting boundaries. ERISA contains many examples of boundaries and compromises that are designed to balance on one hand the goal of encouraging employers to adopt employee benefit plans while on the other hand protecting the benefits of employees who participate in those plans. A common example of a boundary is the distinction between “settlor,” or general business decisions, and “fiduciary” decisions related to plan administration. Sometimes it is difficult to know which side of the boundary line a particular decision falls upon. When employers sponsor an ESOP, the boundary lines often become even more blurry. A recent decision from the District Court of Indiana provides an example of this issue. Malcolm v. Trilithic, Inc., 2014 WL 1324082; No. 1:13-cv-00073-SEB-DKL (S.D. Ind. Mar. 31, 2014)Trilithic does not raise any novel issue of law, but it provides a great example of how what otherwise would seem to be general corporate decisions risk becoming ERISA fiduciary decisions.  That discussion will be the focus of this blog.

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