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

ERISA lawyers know that employee benefit plans offered by state and local governments to their employees are not subject to ERISA, the federal law that generally governs benefit plans of private employers. However, other federal laws can reach government plans. For example, the Securities & Exchange Commission (SEC) recently announced a settlement with the State of Kansas concerning the state’s failure to disclose substantial underfunding of its pension plans in connection with a sale of state bonds.

It appears that the settlement involved no monetary sanction. However, the state agreed to provide more disclosure concerning its pension plans and to institute better procedures to capture material financial information relating to such plans.

Although the SEC does not have authority to force state and local governments to fund their plans, it does have the authority to enforce better disclosures of funded status if the government wishes to tap public markets for its bonds. Government entities may wish to keep that fact in mind as they make decisions about pension funding.

In a recent District Court opinion, a judge dismissed a COBRA claim against an employer based on the oral notice the employer gave a former employee of her right to continue coverage under COBRA. The court said that the statute does not specify the form the notice must take and the employer’s oral notification was sufficient.

While the statute does not specify the form that notice must take, the Department of Labor (DOL) has issued comprehensive regulations regarding COBRA notices that require employers to give COBRA qualified beneficiaries extensive written notice of their rights to continue coverage. In light of those regulations, employers are well advised to continue providing written COBRA notices in accordance with those DOL regulations.

The Department of Labor (DOL) recently entered into an agreement with GreatBanc Trust Company settling claims relating to its service as trustee of an employee stock ownership plan (ESOP) holding stock of a private company. The DOL had claimed that the stock of the company had been overvalued in a sale transaction. The settlement agreement describes the DOL’s view of the obligation of an ESOP trustee to evaluate an appraisal it receives for the private company stock held by the ESOP. According to the DOL, trustees must do more than simply look at an appraisal report and toss it in the file. Pages 13-22 of the Settlement Agreement outline the steps the DOL believes trustees should take in selecting a “valuation advisor” and analyzing the advisor’s work product before accepting it. Documentation of that analysis is also important.

In addition to agreeing to follow the process outlined in the Settlement Agreement, GreatBanc also agreed to pay more than $4,722,000 to the ESOP and $477,000 to the DOL as a penalty for a fiduciary breach relating to the improper stock valuation.

Individuals who serve as trustees of an employer’s ESOP may want to review and follow the DOL guidance in valuing the employer stock held by the plan.

[This article also appears in our Employment and Labor Law/Employee Benefits Executive Briefing: May 2014.]

Employers have been considering the impact on benefit programs, including the qualified retirement plans, of the U.S. Supreme Court’s decision recognizing the validity of same sex marriages. In September, 2013, the IRS issued guidance about the prospective impact of the decision on qualified plans. In April, 2014, the IRS issued guidance regarding the retroactivity of the decision.

In Notice 2014-19, the IRS concluded that qualified retirement plans were not required to recognize same sex marriages before June 26, 2013, the date of the Supreme Court decision. From June 26, 2013, through September 15, 2013, plans were required to recognize same sex spouses based upon the state of residency of the plan participants. Beginning September 16, 2013, plans must recognize spouses based upon the state of celebration of the marriage.

The 2014 Notice requires employers to amend their qualified retirement plans consistent with the above requirements, to the extent that a plan references the Defense of Marriage Act (DOMA), the statute held unconstitutional in the Supreme Court decision, or to the extent that the definition of “spouse” is limited to opposite sex couples only. Plans that do not define “spouse” in a way that limits same sex spouses from being recognized do not need to be amended. In determining whether an amendment is needed, employers may need to consider the plan provisions, if any, regarding choice of law. If the choice of law provision names a state that does not recognize same sex marriages, the employer will need to take that into account in deciding whether a plan amendment defining spouses to include same sex spouses is needed. Plan amendments must be made by December 31, 2014, or if later, the usual deadline for plan amendments for non-calendar year plans.

Plans are also permitted, but not required, to recognize same sex spouses before June 26, 2013, the date of the Supreme Court’s decision. Employers who choose that approach must amend their plans to do so, even if the plan’s definition of “spouse” is otherwise consistent with recognizing same sex marriages. Employers should consider all ramifications before adopting a retroactive amendment. All distributions made during the period of retroactivity would be required to be consistent with recognizing a same sex spouse. In addition, controlled group rules, under which a spouse is considered to own business interests held by the other spouse, should also be evaluated. If a marital relationship is recognized retroactively, it may be that businesses would be considered part of a controlled group for tax and ERISA purposes, which could affect plan nondiscrimination testing and liability for plan contributions in some cases. Employers would want to consult their benefits counsel before taking such an approach.

Safe harbor 401(k) plans can be amended during a safe harbor plan year only in limited circumstances. The IRS clarified in Notice 2014-37 that amendments to conform the plan’s definition of spouse to the Supreme Court’s decision are permitted (and in some cases required), as discussed above.

For background, see our article, District Court Rules Same-Sex Spouse has Right to Pension Benefit under ERISA, in the August 2013 Executive Briefing; U.S. Supreme Court Rules on Same-Sex Marriage: What Does This Mean for Employers? in the September 2013 Executive Briefing; and Department of Labor adopts, for ERISA purposes, “State of Celebration” Rule For Same-Sex Marriages, in the October 2013 Executive Briefing. For additional information about this article, please contact Angela M. Bohmann, (612) 335-1510, angela.bohmann@stinsonleonard.com.

Some months ago I blogged about an Eighth Circuit Court of Appeals decision involving high ranking executives participating in a company’s long term incentive plan where the executives won their suit under the plan, at least in part, because the employer had not properly followed the plan’s claims procedure. By not properly following those procedures, the employer’s decision under the plan was not reviewed under the favorable abuse of discretion standard, but rather was reviewed “de novo,” resulting in a win for the executives.

A recent case from the United States District Court for the Western District of New York is similar. This case involved retired participants who were cashed out of their benefits in a lump sum when the employer was acquired. The plan was funded through a trust that had millions of dollars in excess assets after the retirees had been paid. The parties disagreed about how the benefits should be valued and the employer did not do a good job of providing the participants with information about how the lump sum was calculated. The plan document contained a definition of “participant,” as well as a definition of “retired participant.” The executives argued that the provision allowing the cashout applied only to participants and not to retired participants, such as them.

The plan document stated that the plan would be administered by the vice president of human resources or by such other employees as the “committee” may from time to time designate. The “committee” was defined as the “Committee on Management of the Board of Directors.” The plan gave that committee the authority and discretion to interpret the plan and to the make the determinations deemed necessary or desirable for the administration of the plan.

Unfortunately for the employer, the decision relating to the cashout of participants and retired participants was not made by the committee. Because the employer was in the process of being acquired there was no formal committee at the time that the decision was made. The employer appointed a new committee to review the initial decision but the court concluded that since the initial decision had not been made by that committee, the decision and its review were not entitled to deference. The court then reviewed the language of the plan and the arguments of the parties and concluded that the retired participants should not have had their benefits cashed out on the change in control. Instead, benefits should have continued to be paid from the trust in the manner in which they had previously been paid.

As with the other decision, the lesson is the same:  Read the claims procedure of the applicable plan and follow those procedures in deciding claims. Had the initial decision been made by the committee based on a reasoned discussion of possible plan interpretations, the court’s decision might have been different. The employer will now owe increased benefits and attorney’s fees.

Much has been written about the impact of the Supreme Court’s decision last term declaring unconstitutional the provision of the Defense of Marriage Act (DOMA) that required federal law not to recognize same sex marriages. Since then, more states have recognized same sex marriages either by court order or legislation. The IRS has also issued guidance requiring the recognition of same sex marriages where spousal benefits are imposed under federal law, such as spousal benefit requirements under qualified retirement plans.

In states where same sex marriage is recognized, it is likely that welfare benefits, such as life insurance (with respect to default beneficiaries) and health insurance (with respect to permissible enrollees), that are provided through insurance contracts will recognize same sex spouses. For example, if a health plan allows an employee to enroll a spouse, the insurance contract will probably be written to require that same sex spouses also be permitted to enroll. However, that may not be the case for a self-funded welfare benefit plan even in a state that recognizes same sex marriage.

A recent case from a New York federal district court reaches that conclusion. In that case, an employee sued Empire Blue Cross Blue Shield and her employer, wanting to add her same sex spouse to her employer’s self-funded medical plan. The court took into account both the Supreme Court decision declaring DOMA unconstitutional and the recent IRS guidance relating to retirement plans and concluded that neither mandated same sex spousal coverage under welfare benefit plans. According to the court, the discrimination rules with respect to race, sex, gender, etc. are not inherent in ERISA, but instead are applied through the federal non-discrimination laws, such as Title VII of the Civil Rights Act. The employee had brought her claim only under ERISA; therefore her case was dismissed.

Employers with self-funded plans can point to that case and to the fact that ERISA does not impose on employers a requirement that they cover spouses under their plans as support for excluding same sex spouses from plan coverage. Employers wishing to do so, however, should make certain that the definitions in their plans exclude same sex spouses and should keep in close touch with their plan advisors since the law in this area is changing rapidly.

Recently, the United States Court of Appeals for the Eighth Circuit released an opinion which highlights the importance of ensuring ERISA plan documents grant plan administrators the discretion to construe and interpret the terms of the plan. In Hall v. Metro. Life Ins. Co., the Appeals Court dealt with a case in which a widow, Jane Hall, was appealing a district court’s decision to uphold MetLife’s determination that Jane Hall was not a beneficiary of her late husband’s life insurance policy.

Dennis Hall obtained a life insurance policy from MetLife through an employee benefit plan offered by his employer. The plan expressly provided MetLife with “discretionary authority to interpret the terms of the Plan and to determine eligibility for and entitlement to Plan benefits in accordance with the terms of the Plan.” In 1991, Dennis Hall completed and submitted a beneficiary designation form to MetLife naming his son as the beneficiary of his policy. In November, 2010, Dennis Hall completed and signed, but did not submit, a beneficiary designation form naming his wife, Jane Hall, as the sole beneficiary of his policy. After Dennis Hall’s death in 2011, MetLife distributed the proceeds of Hall’s life insurance policy to his son, on the grounds that the 1991 beneficiary designation was the most recent valid document naming a beneficiary, as the terms of the plan explicitly provided that beneficiary designation forms must be submitted to MetLife within 30 days of signature. When MetLife denied Jane Hall’s claim for benefits from the life insurance policy, she sued.

After the district court granted MetLife’s motion for summary judgment, one argument Jane Hall advanced on appeal was that MetLife abused its discretion by denying her claim because her husband had almost satisfied the requirements for effecting a change of beneficiary, and therefore the District Court should have applied the federal common law doctrine of substantial compliance to deem the signed, but not submitted, beneficiary designation form operative. While the Eighth Circuit was unsure if Jane Hall could raise the substantial compliance doctrine in the first place, it unequivocally asserted that in situations where an ERISA plan administrator has discretion to interpret the terms of the plan, the substantial compliance doctrine would not impede a plan administrator from requiring strict compliance with the terms of the plan. The Eighth Circuit acknowledged that in certain circumstances, such as interpleader actions, where “an administrator is granted no discretion and a denial of benefits is reviewed de novo, a reviewing court may look to federal common law to construe disputed terms in a plan” (internal quotations omitted). While the substantial compliance doctrine may be appropriate in some situations, “the doctrine does not operate to interfere with discretion granted to a plan administrator by an ERISA plan” and the fact that “a court may decide as a matter of common law to excuse technical non-compliance with the terms of an ERISA plan does not mean that an administrator with discretion under an ERISA plan is forbidden to enforce strict compliance with plan requirements” (emphasis in original). Based in part on its analysis of Hall’s substantial compliance doctrine argument, the Eighth Circuit affirmed the district court’s decision.

The Eighth Circuit’s interpretation of the law in Hall provides employers with a vivid example of the importance of ensuring their plan administrators are granted the discretion to interpret plan terms and determine eligibility for benefits. When plans explicitly provide administrators with such authority, the decisions of plan administrators will be granted much greater deference by the courts and increased protection from challenges based on federal common law.

A recent decision of the federal district court for the southern district of Ohio raises interesting questions under Employee Retirement Income Security Act of 1974 (ERISA) that might also affect employer liability under the Affordable Care Act (ACA). The case involved a challenge by a former employee who was originally hired as a part-time pharmacist. As a part-time employee, the employee was not entitled to participate in the employer’s group health plan. The employee claimed that he sought a full-time position because he wanted to participate in the group health plan and to receive other benefits. He was never hired on a full-time basis and eventually resigned from his part-time position. He sued the employer, claiming that he was denied a full-time position because of his age and a medical condition that affected his nervous system, which would have led to significant claims under the health plan, if he had obtained coverage. He claimed that the employer had violated the Americans with Disabilities Act, the Age Discrimination in Employment Act, and ERISA. He also claimed that he was constructively discharged.

The case was before the court on a motion to dismiss the ERISA claim. When deciding such a motion, the court must accept as true all of the factual allegations in the lawsuit.

The former employee said that the employer had violated ERISA by refusing to hire him for a full-time position because of its concern about the substantial medical expenses that would have to be paid by the group health plan. The former employee alleged that he had had good reviews and had been encouraged to apply for a full-time position that had become available. He also claimed that the employer had recommended that he obtain additional certification in order to help secure a full-time position, and that he did so. Not surprisingly, the employer said that the employee had no ERISA claim because the employee was never a participant in an ERISA benefit plan, and thus could not have an ERISA claim. The court said that construing the facts favorably to the former employee, the former employee reasonably expected to become employed full-time. Because that was his reasonable expectation, he met the definition of participant, which under ERISA includes employees who “may become eligible to receive a benefit of any type from an employee benefit plan.”

This case pre-dates the ACA and the changes employers are making to comply with those requirements. The standard for full-time employment under the ACA is an average of at least 30 hours per week, and some employers are moving their employees up or down in hours to make certain they are on one side or the other of the 30 hour a week line. Those employees who have their hours cut and even, under this case, those employees who are hired for positions that are less than 30 hours a week and not considered for full-time employment, may be able to bring suit challenging the employer’s actions. Commentators discussing the ACA have been warning employers about the risks of restructuring job requirements, and particularly, of changing employee hours, if the effect is to eliminate coverage under an ERISA plan. Based on this decision, employers may wish to heed that warning.

Sponsors of qualified retirement plans know that, generally speaking, plan benefits cannot be taken from a participant through legal process or otherwise be assigned to anyone other than the participant. There is an exception for payments in connection with a divorce under a qualified domestic relations order or QDRO. Qualified retirement plans must honor QDROs that meet statutory requirements. The QDRO must be an order relating to the “child support, alimony payments, or marital property rights” of a “spouse, former spouse, child or other dependent of a participant,” issued pursuant to a state domestic relations law.

A recent decision of the Supreme Court of Alaska concluded that a participant’s pension benefit under a multiemployer pension plan was subject to division between the participant and the woman with whom he had cohabitated for sixteen years and with whom he had raised children. The two had never married. The court cited a Ninth Circuit decision relating to Washington law but concluded that Alaska law also provided “marital property rights” to cohabitants and provided for property distributions when a cohabitant relationship dissolved. The court then concluded that the woman qualified as an alternate payee because she was a “dependent” of the participant. The court relied upon the definition of “dependent” in the tax code and noted that the participant and the woman had shared a residence and that the participant had claimed the woman as a dependent on his taxes at least some of the years they resided together.

The definition of “dependent” in the Internal Revenue Code is much more complicated than the single section cited by the court requiring that an individual share a principal place of abode with a taxpayer and be a member of the taxpayer’s household to constitute the taxpayer’s dependent. In addition to meeting those requirements, the individual must also be supported by the taxpayer and cannot, in most cases, have income in excess of the dependency exemption. Those elements of the dependency definition were not mentioned at all in the court decision. On the facts given in the opinion, it is unclear whether the woman met the “dependent” definition under federal tax law with respect to the participant.

The decision addressed property to be divided under Alaska law when the cohabitants ceased living together. To that extent, the court is entitled to interpret Alaska law without regard to the technicalities of federal tax law. However, the court’s interpretation of Alaska law might not be an interpretation accepted by the pension plan, which would need to approve a QDRO before it was implemented. Perhaps recognizing that the pension plan may view the situation differently, the court included the following as a final footnote to its decision:

If there is concern that the pension administrator will refuse to honor the domestic relations order even in light of [the Ninth Circuit decision] discussed [above], the court may require an equalization payment from [the participant] to [the woman] reflecting the present value of her share of the union pension.

In other words, although the Alaska courts may take the value of the union pension into account in splitting the property, the court was not confident that the pension plan would allow the pension to be split with an alternate payee who had never been married to the participant. Absent better proof of tax dependency status, the pension plan may well be reluctant to approve a QDRO for former cohabitants.

I blogged recently about a tax court case in which a tax attorney failed to follow the strict rules for IRA rollovers and wound up with a large tax bill. I made the point in the blog that the position taken by the tax attorney was supported by an IRS publication. I also blogged on the IRS’s later announcement that it would revise its publication and issue regulations consistent with the tax court’s ruling in the case although not enforce its new position until January 1, 2015.

As I noted in blog number 1, in addition to losing on the merits, the tax attorney was also hit with an understatement penalty for taking a position without substantial authority. The tax attorney asked the tax court to reconsider its decision, particularly in the light of the IRS publication and an IRS proposed regulation that supported the taxpayer’s position. The American College of Tax Counsel, a membership organization of experienced tax practitioners, filed an amicusbrief, arguing that the accuracy-related penalty should be eliminated on the rollover issue because the proposed regulation provided substantial authority for the taxpayer’s position.

The tax court denied reconsideration for two reasons. First, the court noted that the parties had settled the matter so any motion to reconsider was moot. Second, the court noted that the IRS had agreed to extend the benefit of its announcement postponing enforcement of its new position on rollovers to the tax attorney in the tax court case. That reduced the attorney’s tax liability and the understatement penalty.

The court order went on to state that although not addressed in its decision, the court had been aware of the IRS publication before the court issued its opinion. The court did not address the publication in its opinion because neither party addressed the publication in their filings. The court went on to note that IRS publications are not binding precedent and that taxpayers rely on them at their peril. The court said that the IRS publication would not constitute substantial authority for a tax return position. The tax court order did not address the fact that proposed regulations also supported the taxpayer’s position and that Treasury Reg. § 1.6662-4(d)(3)(iii) provides that proposed regulations are substantial authority for positions taken on tax returns.

The IRS uses its publications to explain the tax rules to taxpayers who may not be tax experts. The case on which the tax court relied for the proposition that a taxpayer relies at the taxpayer’s peril on an IRS publication was not a case in which understatement penalties were at issue. Instead, it was a case in which the court found that the publication would not support the tax principle for which the taxpayer sought reliance. Other tax cases have reached similar results: statements in IRS publications are not statements of law and do not bind the IRS. While it is clear that taxpayers rely on IRS publications at their peril with respect to underlying tax principles, it is not at all clear that, for penalty purposes, taxpayers may not rely on the publications. The cases cited do not go that far. It is unfortunate that the tax court seemed to conflate reliance on an IRS publication for the substantive tax point and reliance on the publication for penalty avoidance. I would hope that the IRS would not assess a penalty against a taxpayer who followed guidance in an IRS publication.