Employee Benefits Law Report

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

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.


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.”


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

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

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

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.


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

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

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

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

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.

Continue Reading

New wrinkle for the Delinquent Filer Voluntary Compliance Program—trap for the unwary

Plan administrators who fail to timely file Form 5500 annual returns/reports are subject to penalties under both Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code (the “Code”). The Department of Labor (the “DOL”) has the authority to assess civil penalties of up to $1,100 per day against plan administrators that fail to file complete and timely returns/reports. In addition, the Internal Revenue Service (the “IRS”) may impose further penalties of $25 per day up to a maximum of $15,000 per return against administrators that fail to file complete and timely returns/reports.

As a means to encourage voluntary compliance with ERISA’s annual reporting requirements, the DOL adopted the Delinquent Filer Voluntary Compliance (“DFVC”) Program. The DFVC Program was adopted by the DOL in 1995 and thereafter was updated in 2002. The DFVC Program allows plan administrators that fail to file timely returns/reports to pay reduced civil penalties. In 2002, the IRS formally embraced the goals of the DFVC Program with the issuance of IRS Notice 2002-23, which stated that the IRS would not impose penalties under the Code on any plan administrator that satisfies the filing requirements of the DFVC Program with respect to a late Form 5500 filing. Accordingly, filing with the DOL under the DFVC Program in effect got plan administrators off the hook both as to the DOL and the IRS—and things were good.

Things are becoming less good. Recently, the DOL updated the procedures for the DFVC Program again. Among other things, the procedures were updated to reflect final regulations from the DOL mandating electronic filing of annual returns/reports. The regulations were part of the overall transition to a wholly electronic ERISA Filing Acceptance System (“EFAST2”). Generally, the regulations became effective for filings made in 2010 and thereafter—and thus first applied to filings with respect to 2009 plan years. Accordingly, under the DFVC Program delinquent annual returns/reports since that time also had to be filed using EFAST2.

When updating the DFVC Program in 2013, the DOL also announced that late filers no longer would be permitted to submit information regarding terminated participants under the DFVC Program (even for 2008 and prior plan years). By way of background, before the 2009 plan year plan administrators had to report information regarding terminated participants on a Schedule SSA to a Form 5500. However, with respect to 2009 plan years and thereafter the IRS replaced Schedule SSA with Form 8955-SSA (“Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits”). Form 8955-SSA is designed to be filed separately with the IRS only.

The DOL’s position that information regarding terminated participants reported contained in Form 8955-SSA (or, for plan years before 2009, Schedule SSA) no longer could be submitted as part of a DFVC Program filing in effect forced the IRS to create a new procedure for obtaining needed relief from the late-filing penalties imposed under the Code. In IRS Notice 2014-32, the IRS acted to do that. Under this new notice, relief from penalties under the Code no longer is available only by completing a DFVC Program filing. A plan administrator that is required to file information regarding terminated participants now must also file a separate filing with the IRS. Notice 2002-23 was superseded by this new notice. Plan administrators will not be happy about this development.

According to the new notice, the IRS will not impose penalties for late filings if the following conditions both are satisfied:

(a) the plan administrator completes the requirements of the DFVC Program with respect to a delinquent report/return for a given year; and

(b) unless already provided to the IRS, the plan administrator files a complete Form 8955-SSA for that year (in the form and within the time prescribed by the notice) by the later of:

(i) 30 calendar days after the filer completes the DFVC Program filing, or

(ii) December 1, 2014.

This new filing requirement applies to all DFVC Program filings submitted under EFAST2 (i.e., generally all such filings on or after January 1, 2010). The fact that this new rule thus has retroactive application will make plan administrators even less happy.

In the category of “you can’t make this up,” a problem created because of a shift to electronic filing obligations can only be resolved by filing a paper copy of the Form 8955-SSA with the IRS. In IRS Notice 2014-32, the IRS explained that systems needed to allow a delinquent Form 8955-SSA to be filed electronically currently are not in place. When a paper copy of Form 8955-SSA is filed under this new rule, the filer must check the box on Line C, Part I (Special extension) of the Form 8955-SSA and enter “DFVC” in the space provided on Line C. Any late filer is not required to file a separate application for relief with the IRS.

So what does all of this mean practically? Here are some of the practical implications:

  • Plan administrators who were not required to file information regarding terminated participants as part of a delinquent annual return/report appear to be unaffected by the new rule.
  • Plan Administrators who already have obtained relief from the DOL penalties under the DFVC Program under EFAST2 (generally, filings made in 2010 and thereafter) and thus reasonably thought their work was done now must file an appropriate Form 8955-SSA in paper form with the IRS no later than December 1, 2014.
    • In some of these instances, it is possible that copies of the Form 8955-SSA already may have been filed with the DOL as part of the DFVC Program. While any such filing is not enough to guarantee IRS relief, it should at least make it easier for this form to be located in files and then submitted to the IRS in paper form.
  • Obviously, any plan administrators seeking to take advantage of the protections of the DFVC Program in the future must be careful to satisfy the separate filing obligation with the IRS, if applicable.

The $36,500 per employee, per year, per mistake PPACA penalty

And the gloves are off! The IRS has threatened employers with PPACA penalties of $36,500 per employee, per year, nondeductible. Makes those $2,000 and $3,000 penalties look like small potatoes, right?

The targets of this particular Q&A are employers who maintain “non-integrated” “employer payment plans.” These are new terms, which include reimbursement plans such as health reimbursement arrangements (HRAs, excluding retiree-only and excepted benefits HRAs). Those should generally have been eliminated by January 1, 2014, or amended to be integrated with group health coverage. The federal agencies dropped this bomb on employers on the cusp of open enrollment season last year, and many employers had to scramble into compliance. You could have done the math on the $100 per day excise tax. But the IRS puts this $36,500 figure into a Q&A for a reason: it wants to scare you. And employers need to know that a non-integrated employer payment plan is just one of many potential triggers of these potentially devastating excise taxes.

When I first blogged about health care plan self-audit, self-correction, and self-reporting compliance issues on Form 8928, no one seemed too interested. It’s time to get interested.