Understanding Employee Benefits and key developments in the employee benefits field and items of interest to our clients. MORE

The United States Supreme Court recently held in Obergefell v. Hodges http://www.supremecourt.gov/opinions/14pdf/14-556_3204.pdf that all states must recognize and allow marriages between same sex partners. Depending on an employer’s current employee benefits plan, certain provisions may need to be changed in light of this ruling.

For those employers who already provide spousal benefits to same sex partners, no changes will need to be made to their benefits policies. However, tax reporting for those employers may be simpler. States that did not recognize same sex marriage prior to Obergefell will now recognize those marriages for state tax purposes, allowing employers to treat the spouses as married for both state and federal tax purposes.

For those employers who currently provide benefits only to opposite sex spouses and not same sex spouses, their benefits policies may need to be amended to provide same sex spouses with all spousal benefits to the extent mandated by law. Such changes for qualified retirement plans should have been made by the end of last year to provide federally required spousal benefits. This change was required as a result of the Supreme Court’s 2013 decision in United States v. Windsor finding the federal Defense of Marriage Act unconstitutional. (See our blog posts here https://benefitsnotes.com/2013/09/federal-agencies-issue-guidance-that-valid-same-sex-marriages-recognized-for-all-federal-tax-purposes/ and here https://benefitsnotes.com/2013/07/supreme-court-strikes-down-federal-defense-of-marriage-act-open-questions-for-benefit-plan-sponsors/ on Windsor.) Changes are now likely to be needed for state law benefits, such as leave laws, state health care continuation requirements and the like. Employers should also consider providing same sex spouses with all of the spousal benefits provided to opposite sex spouses, no matter if the spousal benefit is mandated by law. The federal Equal Employment Opportunity Commission’s current position is that disparate treatment based on sexual orientation is a form of sex discrimination under Title VII. Thus, employers covered under the federal nondiscrimination law who do not provide same sex spouses with all of the same benefits as opposite sex spouses risk potential liability under that law.

Finally, employers who currently provide benefits to non-spousal domestic partners may decide to reconsider those policies to provide benefits only to spouses. Such a change is not necessary but would simplify benefits administration because marriage is typically more easily documented than a domestic partnership.

Employers with questions about their obligations in light of the Supreme Court decision should consult with their benefits counsel about their alternatives.

** Thank you to summer associate Courtney Harrison who assisted with this post. **

I blogged in the past (here and here)about decisions in which taxpayers have used assets in their IRA to finance a new business. This structure is sometimes known as a ROBS or rollover for business startups. In 2013, the tax court held that an IRA engaged in a prohibited transaction, thereby subjecting the value of the IRA to immediate taxation, where a taxpayer rolled assets from a 401(k) plan to an IRA and then used the IRA proceeds as the startup capital for a business that then hired the taxpayer as its general manager. The taxpayer appealed the tax court’s decision to the Eighth Circuit Court of Appeals which in early June upheld the tax court’s decision.

The Eighth Circuit concluded that a prohibited transaction occurred because the payment of compensation to the individual was essentially an indirect payment by the IRA to the individual. The taxpayer directed the IRA to invest most of its assets in the company with the understanding that he would be hired as general manager. He then directed the business to pay him a salary. This was an indirect transfer of the income and assets of the IRA for the benefit of the individual outside the investment return that the individual was otherwise entitled to receive through the IRA. The court said that the wages could not be justified as reasonable compensation, which is an exception to the prohibited transaction rules, because the reasonable compensation exception is available only for services performed for the IRA or qualified plan. In this case, the services were performed for the business, not for the IRA itself, so the exception did not apply. Note that the salary amounts were modest ($9,754 in 2005 and $29,263 in 2006); it was the act of directing the salary payments, not the amount of those payments, that was the prohibited transaction.

When an IRA engages in a prohibited transaction, the entire value of the IRA becomes taxable to the IRA owner. If the owner is not yet age 59½, then the owner must also pay the premature distribution tax of 10%. These taxes and penalties, as well as an understatement penalty of 20% were imposed on this taxpayer and now affirmed by the court of appeals.

Individuals contemplating using this strategy to finance a business may wish to think twice before doing so and will want to work with competent counsel before deciding to use their IRA to finance their new business.

Employers who sponsor medical plans know that those plans can no longer impose lifetime limits on essential health benefits. One exception is for medical plans that cover fewer than two active employees. Retiree medical plans that are separate from the plan for active employees can meet that exception. A recent federal district court decision from California agreed: A retiree medical plan is permitted to impose a lifetime limit on benefits.

Employers wanting to impose lifetime limits under their retiree medical plans should make sure that the plans cover only retirees and are separate from the plans for active employees.

I recently blogged about the importance the standard of review can make when a court decides whether a claims decision made under an employer plan will be upheld. My recent blog post dealt with the standard of review under a top-hat plan, a plan for executives. Another recent case makes the same point in a long-term disability claim.

The case involves a Federal Express employee who made a claim for disability benefits under the FedEx plan. FedEx used Aetna as its claims administrator and Aetna denied the claim. The employee sued and won at the district court level. FedEx appealed and the appeals court upheld the decision.

One of the first issues the court had to decide was the appropriate standard of review. FedEx claimed that the plan document granted to its appeals committee authority to decide claims and that FedEx had delegated that authority to Aetna. If Aetna had the authority to decide claims, then the court should review Aetna’s decision under an abuse of discretion standard.

Unfortunately for FedEx, there was no proper delegation of authority to Aetna. Although the service agreement gave Aetna discretion to decide claims, the court found no provision in the plan documents that gave FedEx the authority to delegate that discretion. In the absence of proper delegation of decision-making authority to Aetna, the court reviewed the claim without deference to Aetna’s decision. The appellate court concluded that the district court properly found that the employee was disabled.

Note to Employers: Make sure your plan documents give you authority to delegate discretion to decide claims to the entity that is actually deciding the claims. Then make sure that any such delegation has been made properly in a manner consistent with the plan documents.

Employers know that they must prepare and distribute a summary plan description (SPD) for their ERISA benefit plans, including retirement benefits, health insurance, life insurance and disability insurance. Because of the length of such documents, employers may prefer to distribute the documents electronically. Some would like simply to post the SPDs to a company intranet. A recent district court decision from New York highlights the risk of only posting the SPD.  http://www.gpo.gov/fdsys/pkg/USCOURTS-nyed-1_09-cv-05029/pdf/USCOURTS-nyed-1_09-cv-05029-1.pdf

The New York case involved a life insurance claim relating to an employee who went out on disability and lost his group term life insurance coverage because he was no longer actively at work. The plan had a waiver of premium provision under which an employee who was disabled could request that life insurance coverage continue without premium payment during the period of disability. The employee did not ask for the waiver of premium and died after the life insurance coverage lapsed. The employee’s estate made a claim for the life insurance benefits, arguing that the coverage should be granted because the employee did not know that he needed to request the waiver of premium.

The employer said that the employee should have known from the SPD that the employee needed to request the waiver of premium. However, the only evidence of delivery of the SPD was the employer’s claim that the SPD was posted to the company intranet. The court noted that posting the SPD was considered insufficient delivery for ERISA plans under Department of Labor guidance. The court found that the employee’s estate was entitled to the death benefit. Because there was no waiver of premium, presumably the employer, rather than the insurance company, will be required to pay that benefit.

Employers may wish to check their procedures to ensure that they are properly delivering SPDs to plan participants and that they have evidence they have done so.

Many years ago the Supreme Court decided that qualified retirement plans that gave their fiduciaries discretion to determine plan benefits were entitled to have their decisions, reviewed by a court under a generous “abuse of discretion” standard. Although that standard may be limited in situations in which the plan administrator has a conflict of interest because the administrator is also the entity funding the benefit, nevertheless, the discretionary standard of review can be important. In many cases, the standard of review is the deciding factor in a case. Under an abuse of discretion standard, the decision does not need to be the correct decision or the decision that the court itself would have made in the first instance. Instead, it needs to be only a reasonable decision. http://media.ca1.uscourts.gov/pdf.opinions/14-2059P-01A.pdf

The Supreme Court case involved a qualified retirement plan and was based on trust law. Top hat plans, those nonqualified plans that apply to a select group of management or highly compensated employees, are exempt from many ERISA standards, including fiduciary standards. However, they are required to include a claims procedure.

A recent First Circuit Court of Appeals decision held that the abuse of discretion standard would apply to a top hat plan that incorporated the standard into its plan documents. The case involved a severance plan with the court reviewing whether the former executive had voluntarily retired or had been involuntarily dismissed. The standard of review was important. The plan gave discretion to the company to decide the claim and the court upheld the company’s decision that the executive had voluntarily retired and therefore was not entitled to severance benefits under the plan.

Employers wishing to take advantage of the favorable standard of review should make sure that their top hat plans include a claims procedure that gives them discretion to decide benefits.

My colleagues blogged on recent wellness guidance from the Equal Employment Opportunity Commission (EEOC) and the three agencies charged with enforcing the Affordable Care Act (ACA), the Department of Treasury, the Department of Labor, and the Department of Health and Human Services. The guidance from the EEOC reiterated that compliance with HIPAA requirements for wellness programs is not sufficient. Employers must also comply with the Americans with Disabilities Act and the Genetic Information Nondiscrimination Act.

The most recent guidance from the three agencies also mentioned that wellness programs must take into account the tax consequences of the program. The example the regulators used was the practice of subsidizing a health club or gym membership for employees who visit the facilities a minimum number of times during a month. As noted by FAQ XXV, that subsidy is taxable income subject to income tax reporting and withholding on an employee’s Form W-2.

Employers should take this guidance into account in evaluating the costs associated with including such a subsidy in a wellness program.

Richard Thomas embezzled nearly $20,000,000 from his employer. The employer then kept Thomas’s profit sharing account of about $21,000 as an offset against the embezzled amount. Of course, this violated ERISA’s anti-alienation provisions. Thomas sued his former employer for the money and won.

To add to the employer’s misery, Thomas then sued to recover his attorneys’ fees. The case does not indicate the amount but says that the amount embezzled is hundreds of times more than the amount of the attorneys’ fees sought.

Courts are permitted to award attorneys’ fees to those who win ERISA cases and Thomas had won his case. The court evaluated the five factors typically used to decide whether to award fees and found that they slightly favored Thomas’s request. Nevertheless, the court refused to award attorneys’ fees, finding that stealing almost $20,000,000 that the participant will probably never be able to repay is a special circumstance that renders an award of attorneys’ fees to that participant unjust. Thus, the court did not add insult to the former employer’s injury and did not award Thomas his fees.

The president of the company had been found personally liable for the unpaid profit sharing account. The president would also have been personally liable for the attorneys’ fee award. Although the president did not have to pay for Thomas’s attorneys, the president undoubtedly had to pay his own counsel a substantial amount to fight the initial lawsuit and the attorneys’ fees request. The moral of the story is that an employer should not use qualified plan accounts to offset debts owed by the employee to the employer.

Clients sometimes like to ease the transition for employees who are retiring or whom the client would like to encourage to leave. One strategy is to continue the employee “on payroll” for a period of time with the expectation that all benefits will remain in place. However, the practice makes benefits lawyers nervous because the benefits that are supposed to continue may be offered under plans that do not recognize an employee who has stopped working as eligible for continued benefits.

Consider the situation of this recent federal appeals court decision. On November 3, Edward retired as an executive. He had accrued several weeks of PTO that the employer continued to pay through November 27. On November 8 he injured his back deplaning from his private aircraft and was later diagnosed with multiple myeloma. Edward applied for short-term and long term disability under the employer’s plan. The insurance carrier denied both claims on the grounds that Edward was no longer in “Active Service” at the time of the injury and so was not eligible for benefits. His “vacation” did not extend benefit eligibility.

Under the insurance policy, “Active Service” was defined to mean that the Employee was working on a full-time basis or was on a vacation or holiday if the Employee was working on the preceding regularly scheduled work day. Edward agreed that he was not working on the day of his injury, but said that he was on vacation and had worked on the preceding scheduled work day.

The insurance company had the right to decide claims under the policy and concluded that Edward was not on vacation. Rather, by November 8 he had retired. There was no expectation that he would return to work after the vacation so he was not in “Active Service” and did not have coverage for the injury.

I counsel my clients to remember that they typically do not provide benefits such as health, life, and disability on their own. There is typically an insurance carrier involved. Even if a health plan is self-funded, there is usually a stop loss carrier to pay high claims. Employers promising continued coverage to retirees or other terminating employees should make sure that the language of the insurance policies and plans support the promise. (Side note: Sometimes tax code provisions can also affect continued coverage. For example, a retirement like that described above is likely to be considered a “separation from service” under Section 409A of the tax code, which may affect when deferred compensation payments should begin.)

In this case, Edward did not recover from the insurance carrier and had not sued the employer. If the employer had promised continued benefit coverage, it is possible that the employer could have been found liable to Edward for the benefits that the carrier was not obligated to pay.

Lesson to employers: Do not promise benefits beyond what your plan documents and insurance policies provide. If you do, you may find yourself paying those benefits without the insurance coverage you were expecting.

Employers need to make sure that their employees know when benefits shift from one plan to another as illustrated by this case from Utah:

Martin Marietta Corporation (Martin) operated a cement plant that it later decided to lease to Southwestern Portland Cement Company (Southwestern). The employees operating the plant became covered by a Southwestern pension plan. When Martin later terminated the lease, many employees began working for Martin and became covered under the Martin pension plan. In connection with the lease termination, Southwestern and Martin agreed that Southwestern’s pension plan would transfer to Martin’s pension plan the assets and liabilities relating to employees who became employed by Martin. Although the pension transfer occurred, Southwestern plan participants were not notified of the transfer. Some years later, Martin employees went back to Southwestern, now owned by CEMEX, Inc. asking for their pension benefits. Southwestern said that the employees were not entitled to benefits because the assets and liabilities had been transferred to the Martin plan. In fact, some of the employees were already receiving benefits from the Martin plan, including benefits based upon their service with Southwestern. The employees then sued CEMEX, Inc., seeking their pension benefits.

The federal district court said that the Southwestern plan (now the CEMEX plan) had to pay benefits to the employees. Because the employees had been participants in the Southwestern plan and had not received notice of the transfer, the transfer was void with respect to them. Thus, participants may receive double benefits for some of their service.

CEMEX/Southwestern claimed that it was not required to give notice. However, CEMEX did not raise that question early in the litigation, relying instead upon an argument that the transfer of pension assets and liabilities was sufficient to terminate the employees’ rights under the CEMEX/Southwestern plan. The court expressed concern that the participants had no knowledge of what had happened to their benefits, noting that one purpose of ERISA was to ensure that participants knew where they stood with respect to a plan. The court refused to allow the employer to argue late in the litigation that notice to participants of a plan merger was not required.

The lesson for employers: If assets and liabilities of one plan are transferred to another plan, make sure the participants are given notice. Otherwise, an employer may find itself paying twice for the benefits.