In light of health care reform, we anticipate ERISA preemption cases to start popping up more frequently. Two recent decisions demonstrate that ERISA preemption is complicated, except when it isn’t. In Liberty Mutual Ins. Co.v Donegan, Second Circuit Judge Dennis Jacobs explains the complicated nature of ERISA preemption. This opinion may be helpful for anyone to develop a better understanding of the topic and its history. (Shameless plug alert: you also may want to see the preemption chapter that I edit in ERISA: A Comprehensive Guide.)
Then there is the decision that demonstrates when preemption isn’t complicated. Seventh Circuit Court of Appeals Judge Richard Posner is blessed with the gift of being able to make even an ERISA opinion an interesting read, especially when he is annoyed. In Kolbe & Kolbe Health and Welfare Benefit Plan v. Medical College of Wisconsin, Inc., a plan paid $1.7 million for a child’s health care treatment, before concluding the child was not a dependent of the employee plan participant. Asserting both ERISA claims and state law breach of contract claims, the plan sought repayment. The district court dismissed the suit, and awarded attorneys’ fees to the hospital as Rule 11 sanctions for filing what the judge considered to be frivolous claims.
The 7th Circuit appellate court affirmed the dismissal of the ERISA claims, but reversed the dismissal of the breach of contract claim because it disagreed with the district court’s conclusion that the claim was preempted by ERISA. The appellate court also reversed the imposition of sanctions, on the grounds that the claims were colorable and had been made in good faith, and remanded the case for consideration of the breach of contract claim.
On remand, the district court issued summary judgment in favor of the hospital. The plan appealed, and this is where the hospital crossed a line: it cross-appealed, complaining about the district court’s refusal to sanction the plan under Rule 11 after the plan established that the breach of contract claim was preempted by ERISA. In other words, it ignored the appellate court’s ruling. As Judge Posner explained:
The hospital defied us. It is the hospital that is lucky to escape being sanctioned.
While we chose these cases to tee up the topic of ERISA preemption, there is another point we want to make with Kolbe & Kolbe. Clients want aggressive litigators. We get that. But if you are going to play in the litigation sandbox, you need to know when it is time to pick up your toys and go home. The hospital got to keep $1.7 million, and demanding Rule 11 sanctions here was like throwing sand in the other kid’s face.
When I first started practicing law, a veteran in this area told me that the only way to make sense of the Internal Revenue Code was to understand that each provision existed so that Congress could make money. Does that explain why, as we reported last year, the American Taxpayer Relief Act of 2012 allowed any amount in a non-Roth account in eligible retirement plans (401(k) plans, 403(b) plans, and governmental 457(b) plans) to be converted to a Roth account in the same plan, whether or not the amount was distributable? Previously, plans could allow participants to convert their pre-tax accounts to Roth accounts only with respect to amounts the participants had a right to take out of the plan. Well, by taxing the amounts so converted from pre-tax to Roth, this change in the tax law is expected to produce an extra $12 billion in revenue for the federal Treasury. Does that make participants who convert their pre-tax amounts to Roth amounts suckers? Not at all.
While it’s easy to be cynical about Congress, let’s give Congress credit for understanding the policy reasons for wanting to allow more flexible tax planning. This type of change has been long supported by the employee benefits community because of the flexibility it gives participants in choosing when to recognize taxable income under their retirement plans. The problem was that without guidance from the IRS, plan sponsors were reluctant to amend their plans to adopt such a feature.
Recently, the IRS published Notice 2013-74 (the “Notice”), which provides additional guidance that plan sponsors had been seeking. The guidance gives plan sponsors much flexibility in how they offer an in-plan Roth conversion feature. In many cases, the flexibility will be the greatest if plan sponsors amend their plans by December 31, 2014. As such, we recommend that plan sponsors consider whether an in-plan Roth conversion feature will be attractive to participants, and if so, act sooner rather than later to amend their plan documents. This blog will explain in more detail why participants may value such a feature and the flexibility that the IRS gave plan sponsors in the Notice.
If you are a board member or senior executive of a company that is rapidly failing, what do you about employee benefits? No one has ever liked my answer: freeze the benefits. This is counterintuitive advice for someone who is trying to keep the company afloat, and who would be personally affected by the loss of benefits. But let me explain why this is so important, using a complaint that was recently filed by the DOL, and the facts as they were alleged.
In January 2010, Home Valu ceased operations due to financial difficulties. Creditors then filed an involuntary petition for Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the District of Minnesota (Minneapolis). According to the complaint, Home Valu employees and beneficiaries incurred approximately a half million dollars of health care expenses that were not covered as of the filing. The company may purchase stop-loss coverage for large claims, but the coverage does not protect the employees from the company’s inability to pay.
Section 704(a)(11) of the Bankruptcy Code provides:
If, at the time of the commencement of the case, the debtor (or any entity designated by the debtor) served as the administrator (as defined in section 3 of the Employee Retirement Income Security Act of 1974) of an employee benefit plan, continue to perform the obligations required of the administrator.
Here, the bankruptcy trustee sought to recoup any payments the company made in its final three months, on the basis that the company was insolvent in its final months of operation, and the matter is still pending. This DOL filing suggests that the bankruptcy trustee has not helped these employees, which is a terrible result for people who believed they had medical coverage.
Register now for one or more webinars in our OFCCP series!
If you are a federal contractor or subcontractor, you will want to be sure your team is ready to handle its expanded affirmative opportunity requirements. Consider participating in Porter Wright’s upcoming OFCCP regulation webinars, or passing this invitation along to the person responsible for compliance.
Are You Ready for the New OFCCP Regulations?
Wednesday, January 15, 2014
2:15 p.m. EST
The most sweeping changes in federal affirmative action regulations in many years take effect in March 2014. The new regulations expand the affirmative action requirements for covered veterans and disabled persons. For the first time, federal contractors and subcontractors will be responsible for specific outreach, hiring and advancement efforts for covered veterans and disabled persons, and will be responsible to show good faith efforts to reach specific goals for those groups.
At this program, we will discuss the new regulations and provide you with tips for how best to come into compliance, including the necessary revisions for your written affirmative action plans (AAPs).
Two Additional Affirmative Action Compliance Programs
Also, because so many companies will be revising their AAP’s in the first quarter of 2014, we will have two additional webinar presentations that will give helpful tips for compliance with federal affirmative action laws, including best practices for revising your AAPs and for handling an audit by the OFCCP.
Tips for Developing and Updating Affirmative Action Plans
Wednesday, January 29, 2014
2:00 p.m. EST
At this session, we will discuss:
- Effective, reasonable and defensible steps to prepare the required statistical analysis for your AAP.
- Best practices for writing meaningful plans of action and narrative portions of AAPs.
- Incorporating the new obligations concerning disabled persons and veterans.
Tips For Handling OFCCP Audits
Wednesday, February 12, 2014
2:00 p.m. EST
At this session, we will discuss:
- Desk audit strategies for reducing the likelihood of onsite audits.
- Compensation analysis issues.
- Negotiating the best results when OFCCP makes adverse findings.
Register for all or some of these programs here.
I am not a fan of binding arbitration in the context of ERISA plans, and a new Sixth Circuit decision, Schafer v. Multiband Corp., demonstrates why.
Two individuals (Schafer and Block) founded a company. As part of a series of corporate transactions, two employee stock ownership plans (“ESOPs”) were formed. Schafer and Block were appointed as trustees of the ESOPs, and entered into indemnification agreements with mandatory arbitration clauses. While the DOL was investigating its suspicion that the ESOPs had purchased stock at inflated prices, and with knowledge of this, Multiband entered into a purchase agreement to buy the holding company. As part of the transaction, Multiband entered into indemnification agreements that contained essentially the same provisions as the prior agreements.
Subsequently, the DOL informed Schafer and Block that it believed they had breached their fiduciary duties by allowing the ESOPs to purchase stock at inflated prices, and offered to settle for $42 million. Schafer and Block asked Multiband to indemnify them in accordance with the agreements, and Multiband refused. Schafer and Block agreed to settle with the DOL, paying $1,450,000 each, and Multiband again refused to indemnify them.
Frommert v. Conkright, the Xerox “actuarial heresy” floor-offset plan case is back. This time, the Second Circuit has ruled that the new interpretation of the plan is unreasonable, and that ERISA’s “notice provisions” were violated.
Stating, “SPDs are central to ERISA,” the Court concluded that the SPD (summary plan description) did not satisfy 29 C.F.R. § 2520.102-3(l) because the SPD did not describe the offset provision in question in more detail. The Court held, “the Plan and its related SPDs violate ERISA’s notice provisions” and “Plaintiffs’ notice claims fall under Section 502(a)(3).” Frommert has been remanded to the district court, for consideration of what equitable relief might be available under Section 502(a)(3). If it finds no equitable remedy, it is to determine what interpretation of the plan is reasonable.
This two-step approach suggests that “notice provisions” refers not only to Section 102 SPD content requirements, but also to Section 204(h) notices to applicable individuals prior to an amendment to reduce their future benefit accruals. In this opinion, the Second Circuit referenced its 2006 ruling that an amendment takes place at the moment when employees are properly informed of a change through provision of an SPD that complies with other ERISA requirements. Subsequently, in CIGNA Corp. v. Amara, the U.S. Supreme Court reiterated the distinction between plan amendments made by plan sponsors, and summary plan descriptions prepared by plan administrators, even when the same entity fills both roles, and held that an SPD does not amend a plan. As the U.S. Supreme Court reminded us in Heimeshoff v. Hartford, the plan is the center of ERISA, and the focus on the written terms of the plan is the linchpin of the system.
Whether the plan administrator provided an SPD that satisfied the content requirements of Section 102, and whether the plan administrator provided a Section 204(h) notice in accordance with the plan sponsor’s plan amendment, are two different questions. Yet the 2006 and 2013 Frommert decisions do not discuss the Section 204(h) notice content requirements, just the SPD requirements.
As I mentioned in my Heimeshoff v. Hartford blog, the U.S. Supreme Court has agreed to review Dudenhoeffer v. Fifth Third Bancorp, now captioned Fifth Third Bancorp v. Dudenhoeffer. The Court granted certiorari on the question as originally framed:
Whether the Sixth Circuit erred by holding that Respondents were not required to plausibly allege in their complaint that the fiduciaries of an employee stock ownership plan (“ESOP”) abused their discretion by remaining invested in employer stock, in order to overcome the presumption that their decision to invest in employer stock was reasonable, as required by [ERISA], and every other circuit to address the issue.
Thus, the Court rejected the DOL’s request to reframe the question, rule that an ESOP is an investment that is subject to divestment and prudence review in the same manner as other investments, rule that the presumption does not exist at the initial state, and rule that the presumption of prudence does not exist, at all. (The Court did not take the second question, regarding the summary plan description.)
I have been blogging about ERISA basic principles and respect for boundaries, and just got a little help from the U.S. Supreme Court. In Heimeshoff v. Hartford Life & Accident Insurance Company, a unanimous decision, the Court upheld the three-year statute of limitations set forth in the terms of the ERISA benefit plan document. The Court held that while a cause of action does not commence until the plan issues a final denial in the claims appeal process, the plan and its participants can agree to commence the limitation period before that time (here, at the proof of loss due date).
The Plan Is at the Center of ERISA
In resolving the circuit split, the Court explained that under U.S. Supreme Court authority (Order of Unite Commercial Travelers of America v. Wolfe), a limitations period is enforceable provided it is of reasonable length and there is no controlling statute to the contrary. This approach necessarily allows the parties to agree to the length of a limitation, and its commencement.
Citing CIGNA Corp. v. Amara, the Court found this agreement approach particularly well-suited in the context of ERISA claims, given the “particular importance of enforcing plan terms as written in §502(a)(1)(B) claims.” The Court explained, “The plan, in short, is at the center of ERISA,” citing US Airways, Inc. v. McCutchen. Citing Curtiss-Wright Corp. v. Schoonejongen, the Court further explained that because the rights and duties are built around reliance on the face of written plan documents, the Court would not presume from statutory silence that Congress intended a different approach here. The Court further reminded us, “This focus on the written terms of the plan is the linchpin of a ‘system that is [not] so complex that administrative costs, or litigation expenses, unduly discourage employers from offering [ERISA] plans in the first place,’” citing Varity Corp. v. Howe, emphasis added. In other words, the United States (Department of Labor, et al.) as amicus curiae got it backwards with their argument that ERISA, not the plan, controls, and that the plan terms violated ERISA’s structure.
This makes me feel so much better about the fact that the U.S. Supreme Court decided on Friday to review Dudenhoeffer v. Fifth Third Bancorp. In that case, the United States has made virtually the same argument, regarding plan provisions requiring investment primarily in employer securities that purportedly violate ERISA structure. Keep in mind, the Court knew on Friday that it was about to announce this unanimous decision. We can hope the Court decides this argument is backwards, too. But I digress.
In finding the provision reasonable, the Court observed that the vast majority of states require certain insurance policies to include three-year limitation periods that run from the date proof of loss is due. But the Court also rejected arguments about applying state law regarding statutes limitations, because the plan terms controlled.
During the most recent recession (some might say a mini depression), many employers requested greater flexibility to reduce or suspend safe harbor non-elective contributions to their 401(k) plans. They felt that a temporary reduction or suspension of contributions would be a better alternative than outright terminating their plans. Although the applicable regulations contained procedures for reducing or suspending safe harbor matching contributions, it wasn’t until Treasury issued proposed regulations on May 18, 2009, that a procedure was available to reduce or suspend safe harbor non-elective contributions. Recently, Treasury issued final regulations that revise the requirements for permitted mid-year reductions or suspensions of safe harbor non-elective contributions. Somewhat surprisingly, the final regulations also modified the procedures for mid-year reductions or suspensions of safe harbor matching contributions to 401(k) plans. They also suggested that some relief may be on the way with respect to other types of mid-year plan amendments.
One of the key considerations for sponsors of safe harbor plans will be whether to modify their safe harbor notices, and in some cases, send new notices in advance of the 2014 plan year. That will depend on the type of safe harbor contributions provided under the plan because different effective dates apply to plans with safe harbor non-elective contributions and safe harbor matching contributions.
In particular, employers who sponsor 401(k) plans that provide safe harbor non-elective contributions may want to consider resending their safe harbor notices in mid-December to include a statement that the employer may amend the plan to reduce or suspend the contributions mid-year. Employers who sponsor 401(k) plans that provide safe harbor matching contributions, however, should not need to add such a statement to their 2014 plan year notices and instead should be able to wait until sending the 2015 plan year notice to include such a caveat.
When you think about it, balance is really important. It is hard to imagine how we all stand steady on a planet that is rotating on its access and rotating around the sun. The last earthquake I experienced left me queasy afterward, and that is how I feel after reading a new decision. Curses (or thank you?) to Brian Hall, editor of our sister blog, employerlawreport.com, for forwarding.
Within days of writing the Dudenhoeffer v. Fifth Third Bank blog about a threat to ERISA’s delicate balance and importance of boundaries, we have yet another Sixth Circuit decision that blazes past boundaries and throws that delicate balance into a tailspin. The Sixth Circuit has, in the words of dissenting Judge McKeague, “taken an unprecedented and extraordinary step to expand the scope of ERISA coverage.” Under what was (I thought) clear U.S. Supreme Court and Sixth Circuit precedent, a claimant could not receive both an award under Section 502(a)(1)(B) for a benefit claim, and an award under Section 502(a)(3) for the same injury. However, the plaintiff in Rochow v. Life Insurance Company of North America (“LINA”) was awarded not only the amount of the benefits, but also an amount under 502(a)(3) that almost quadrupled the benefits amount. The problem with ignoring the crucial ERISA principle of making whole, not punishing, is that the plaintiff’s windfall punishes all the other participants in employer-sponsored health care, disability and life insurance plans, whose premiums could skyrocket to cover this new threat to clawback 10+ years of corporate return on equity. Combine this with health care reform, and the Dudenhoeffer assault on employee stock ownership plans, and I have to ask whether employer-sponsored plans will become dinosaurs, and I need to starting thinking about my career security.
Rochow involves an employee who was demoted in July 2001 and terminated in January 2002, one month prior to being hospitalized and diagnosed with HSV-Encephalitis, a rare and severely debilitating brain infection. Rochow had medical records from 2001 that stated he was suffering short-term memory loss. During the appeal process, LINA acknowledged that Rochow had experienced effects of the disease in 2001, but denied coverage on the basis that Rochow continued to work and was not disabled until February 2002, after he was terminated. After an employer representative stated that Rochow had not been able to perform all material duties of his job in 2001 due to his lack of memory, LINA denied the claim again, stating he filed his claim until after his termination date, and after he was no longer actively working. After another appeal, LINA denied his claim stating that Rochow had not presented medical records to support his inability to work prior to his termination date.