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

I blogged recently about a decision from a federal district court in Virginia (Eastern Distrct) involving a widow who sought to recover life insurance benefits from her late husband’s employer-sponsored group term life insurance plan. The employer had improperly allowed the late husband to enroll in the plan.  The court had found on summary judgment that the employer was a fiduciary with respect to enrollment and therefore had breached its fiduciary duty by enrolling the employee improperly. A recent decision from a different federal district court in Virginia (Western Distrcit) has reached a contrary conclusion.

The Western Distrct decision also involved a widow attempting to recover life insurance benefits from her late husband’s employer-sponsored group term life insurance plan. In that decision, the employee, who was on long term disability, had received a confirmation statement showing that the life insurance coverage was in force. The family paid premiums for some benefits and shortly after the employee’s death, the family submitted a check for all unpaid premiums. The employer had accepted the premiums despite the fact that the employee was not eligible for coverage because the employee had become disabled. The family claimed that the employer had a duty to inform the family that there was no coverage.

Unlike the case from the Eastern District of Virginia, the court in the Western District of Virginia concluded that the employer’s actions of accepting premiums and making statements about eligibility were not discretionary function and therefore did not make the employer a fiduciary with respect to the plan. The court noted that the insurance carrier had the right under the insurance policy to determine claims under the plan and that the plan was clear that the employee had no right to coverage. Therefore, the case was dismissed and the widow was unable to recover.

It is interesting that two district courts in Virginia have reached opposite conclusions on similar facts. One difference between the cases may be that in the case where the family won, the family had made explicit requests of the employer as to whether coverage continued and were told that it had. In the case where the family lost, the employer had simply failed to inform the family that the coverage did not continue. Both cases would be heard by the Fourth Circuit Court of Appeals if appealed. We will have to see if either case is so appealed.

These cases show that it can be difficult to predict how a court will rule in any particular matter.

The IRS recently issued a fact sheet containing tips for employers who outsource payroll duties. In the fact sheet, the IRS reminded employers that they remain responsible for paying withholding taxes even if the employer has paid the payroll provider, but the payroll provider has failed to pay the money to the IRS.

Among the suggestions:

•     Use the electronic federal tax payment system to make tax deposits and monitor payments through that website.

•     Use the employer’s address, rather than the payroll provider’s address. That way the employer will receive any notices of nonpayment from the IRS.

•     Do not ignore IRS notices.

While employers may not be able to stop an unscrupulous payroll provider from failing to pay the withholding taxes to the IRS, by following these suggestions, employers may be able to limit the damage.

This post deals with protecting IRAs in bankruptcy – and the IRA was ultimately protected – but the arguments made are ones that only an ERISA junkie might appreciate.

1. IRAs are protected in bankruptcy only if the IRAs are tax exempt.

2. IRAs are tax exempt only if they do not engage in prohibited transactions.

3. One prohibited transaction is the direct or indirect loan between the IRA owner and a party in interest, such as the bank or other financial institution that holds the IRA assets (IRA Custodian).

4. The Department of Labor (DOL) has the authority to decide what constitutes a prohibited transaction.

5. Recently the DOL declared that boilerplate provisions in IRA account documents that allow the IRA Custodian to offset amounts in the IRA against debts owed to the IRA Custodian by the IRA owner constitute a prohibited loan.

6. IRA Custodians and IRA owners were surprised at this ruling: Most account documents have this language so most IRA accounts would lose their tax exempt status. The DOL said that it would study the issue.

7. The IRS said that while the DOL was studying the issue, the IRS would not treat IRAs as violating prohibited transaction rules because of these statements in the account documents so long as no IRA assets are actually offset.

8. The DOL issued a proposed prohibited transaction exemption that will allow this language only until six months after the prohibited transaction exemption is issued in final form. By that date, the language must be removed from account documents.

9. A debtor with a rollover IRA account filed for bankruptcy. The IRA account contained the boilerplate language. The debtor had no other accounts with the IRA Custodian and the offset was never used.

10. Based upon the DOL’s position that the existence of the boilerplate language is a prohibited transaction, the bankruptcy trustee claimed that the assets in the IRA should not be protected in bankruptcy.

11. The Sixth Circuit Court of Appeals ruled that the IRA would be protected. The court concluded that because the debtor had no other account with the IRA Custodian, there was no way in which the improper offset could have occurred. The court also noted that the IRS had said that it would not revoke the tax exemption of IRAs with this provision during the time that the DOL was considering the issue.

12. The technical argument loses.

Although the debtor in this case was able to protect the IRA, the reasoning of the case suggests that if the individual had had another account with the IRA Custodian,  perhaps the IRA would not have been protected. Since Congress allows IRAs to be protected in bankruptcy and since this boilerplate language has been in account documents for decades without any hint that the IRS would disqualify the account because of the provision, we can hope that other courts faced with this question will reach a similar conclusion and protect the IRA in bankruptcy.

I have blogged in the past about the reach of obligations to multiemployer plans and how other businesses owned by a participating employer can be held responsible for withdrawal liability based upon the common ownership. If one of the businesses is owned personally by an individual, the liability can be personal. A recent case from the bankruptcy court for the District of Massachusetts shows another way in which a business owner can be found to be personally liable for unpaid multiemployer plan contributions, even if the employer does not own other businesses and even if the business that owes the money is an entity that typically provides its owners with liability protection (corporation or LLC, for example). The case involved an individual who served as the president, treasurer and sole shareholder of a corporation. The corporation was required to contribute to multiemployer funds. Some of the required contributions were withheld from employee paychecks; the bulk of the contributions were not. As business conditions deteriorated, the shareholder decided to pay creditors other than the multiemployer funds. The funds sued the business and the owner and obtained a judgment for about $200,000. The owner filed for personal bankruptcy protection and sought to have the debt to the funds discharged in bankruptcy.

The business owner admitted that amounts withheld from the employees’ paychecks were held in a fiduciary capacity and therefore he was personally liable for those contributions. That debt could not be discharged. He claimed, however, that the remaining amounts were dischargeable as ordinary business debts.

Unfortunately for the business owner, the bankruptcy court determined that the failure to pay the contributions to the multiemployer funds was a “defalcation” so the owner’s debt was nondischargeable. The court reached this conclusion because the multiemployer fund agreements provided that “all contributions shall be considered and defined as plan assets including contributions that are properly due and owing but not yet paid to the fund by contributing employers.” In my experience, a number of pension funds are adding such provisions to their trust agreements. Based on that language, the court concluded that the unpaid contributions were assets of the funds that were not paid over to the funds. In this case, the business owner chose to pay other creditors in lieu of paying the funds. According to the court, the owner prioritized the payment of corporate expenses that were beneficial to him, such as bank loans that he had personally guaranteed or other personal loans, over payments to the multiemployer funds. That preference violated a duty of loyalty to the funds and constituted defalcation under bankruptcy rules. The obligation was therefore nondischargeable.

Employers experiencing financial difficulty should keep in mind their obligations under multiemployer fund agreements. Depending on the language of the fund agreements and the manner in which the employers manage the cash flow of the business, owners may find themselves personally liable for contributions the employers owe to those funds.

Recently the Employee Plans Compliance Unit (EPCU) of the Internal Revenue Service completed an informal compliance check of 401(k) plans conducted via an extensive written questionnaire sent to plan sponsors. The results of the compliance checks are being used to refine the focus of plan examination efforts.

This week, the IRS announced that it is commencing a similar effort with respect to non-qualified deferred compensation plans for select groups of highly compensated employees, managers, directors and officers of tax-exempt organizations (“Top Hat Plans”) under Code Section 457(b). The project will consist of sending tax-exempt employers a compliance check letter requesting information about the plan or plans. Selected employers which had filed Forms W-2 for 2011 indicating contributions to a 457(b) plan and which also filed Form 990 will be receiving the questionnaire.

According to the IRS Employee Plans News June 24, 2013, http://www.irs.gov/Retirement-Plans/Employee-Plans-News, the goals of the compliance check are to verify that these Top Hat plans are complying with the Internal Revenue Code requirements (including annual dollar limits); identify issues of non-compliance and to develop recommendations for employers on how to avoid non-compliance. Specific issues of focus include: a) verifying the deferrals reported as 457(b) relate to an actual 457(b) plan; b) verify that the employer is eligible to sponsor a 457(b) plan; c) confirming that participation is limited to a select group of highly compensated employees, managers, directors or officers (the Plan is not allowed to be available to a broad group of employees); d) determining whether the plan includes features not permitted in Top Hat Plans sponsored by tax-exempts, but that are permitted for governmental 457(b) plans, including loans, age 50 catch-ups and Code Section 457(g) trusts; and e) reviewing unforeseeable emergency distributions.

The News Release indicates that identified plans which are out-of-compliance will be subject to audit or in some cases, referral to the Voluntary Correction Programs. The Employee Plans Compliance Unit expects to send questionnaires to 400 organizations over the next two fiscal years. Sponsors who receive such a questionnaire may want to work with their benefits counsel as they complete the form.

I blogged recently warning employers to be careful when enrolling employees in plan benefits because the employer could be responsible to pay life insurance or disability benefits if an employee who is improperly enrolled incurs a claim. The increased liability comes from the recent Supreme Court decision, Cigna v. Amara,  allowing certain types of money damages to be considered equitable relief under ERISA, thereby opening the door to increased damage awards to harmed plan participants.

A recent Seventh Circuit decision involving health plan benefits is another example of this phenomena. The case involved an employee covered under a health plan who had had bariatric surgery 18 years earlier. She was experiencing some complications and an additional surgery was viewed as the best, although not the only, procedure to relieve her symptoms. Because she was not certain that her plan would cover the benefit, she called the plan’s call center as directed by her summary plan description for questions about coverage. She was told that the procedure would be covered. After she had the procedure, the plan refused to pay the claims, concluding that the procedure should not have been covered because the plan did not cover complications of bariatric surgery. Although these complications were arising 18 years after the initial surgery, they were nevertheless complications not covered under the plan. The health plan said that it was not bound by the statements made by the call center employee and denied coverage.

The claims were incurred in 2005 and the law suit has been moving through the court system for a number of years. The case had not been finally resolved by 2011 when the Amara case was decided. The employee added claims for relief based on the Supreme Court decision and the Seventh Circuit allowed those claims to proceed. The court concluded that it may be possible for the employee to prove that the health plan had violated a fiduciary duty to give true and accurate information about plan coverage. It appeared that the only advice the plan gave to participants who had questions was to contact the call center. The summary plan description did not say that participants should not rely on call center information nor did the summary plan description give any indication regarding how to receive a definitive answer to a coverage question.

The district court had granted summary judgment to the health plan. The Seventh Circuit reversed that decision and remanded the case to the district court for a trial to develop the facts further as to whether the health plan breached a fiduciary duty and whether that breach harmed the participant. The trial would also address the damages issue.

Among other arguments, the health plan contended that the employee would have chosen to have the procedure done in any case and so was not harmed by the fact that the plan did not pay for it. The employee, of course, claimed that she would not have undergone the procedure but would have continued with other alternatives that helped alleviate her symptoms although not as effectively. The court noted that the cost to her of the procedure without plan coverage was $77,000 while if it had been covered by the plan, with the discounts available for in-network plan providers, the cost would have been $35,000. According to the court, if the employee had known that the plan would not cover the procedure she at least could have negotiated a reduced rate if she had decided to proceed without coverage.

Like the case in my recent blog post, this case too will be worth watching. If the law develops to allow plan participants to be paid damages for improper coverage determinations, such mistakes may become more costly for plan sponsors.  Sponsors and insurance carriers must take care in making and communicating coverage decisions.

Over the years there have been a number of cases that have involved employers improperly enrolling employees in group life or disability insurance benefits. If the employee who should not have been enrolled dies or becomes disabled, the insurance carrier will deny coverage on the grounds that the employee should never have been enrolled. These enrollment problems often arise when an employee is not at work at the time that a new insurance policy is supposed to become effective since typically employees must be actively at work to become covered under the new policies. If the policy is life insurance and the employee dies, the beneficiaries are understandably upset when the carrier denies coverage. The employee has been paying premiums on the policy and in many cases the family has relied on the coverage in the event of the employee’s death. However, in many situations, courts have held that ERISA’s requirement that claims for relief be equitable in nature prevent the family from recovering money damages (the unpaid coverage amount) for the enrollment error.

The Supreme Court’s 2011 decision in CIGNA Corp. v. Amara has changed the landscape in that regard. In that case, the Supreme Court suggested that equitable remedies might include some that result in the payment of money to the claimants. Courts are now more likely to find remedies for these enrollment errors. A recent decision from the federal District Court in Virginia, may become an example of such a decision. In that case, the court held that an employer breached its fiduciary duty when it allowed an employee to enroll in the company’s life insurance plan, encouraging him to believe he was eligible for benefits, when the employer knew or should have known that he was not eligible to enroll in the plan. The situation involved an employee with a brain tumor who was working part time and receiving disability payments covering the hours that the employee was unable to work. When the employer changed life insurance carriers, the employee and his wife asked the employer questions about the employee’s eligibility for the coverage. The employer directed the questions to the carrier who responded to the employer that the employee would not be eligible unless the employee was working full time. The carrier suggested that the employee investigate continuing coverage with the carrier that was being replaced since the employee’s disability was incurred while the employee was covered under that policy. The employer did not pass this information along to the employee so the employee did not make those inquiries. The employer never told the employee that there was any problem with the coverage and in fact told the employee that the coverage was in place. When the employee then died, the carrier denied the claim for insurance benefits.

Despite the fact that the policy gave the insurance carrier the right to determine eligibility for coverage for benefits under the plan, the court noted that the carrier never made such eligibility determinations. The court concluded that the carrier had no fiduciary duty with respect to enrollment. Rather, the employer made enrollment decisions and was responsible for the enrollment error. The court concluded that the employer had breached its fiduciary duty to the employee by misleading the employee about coverage.

The court did not decide damages for the employee’s family. There are likely still to be arguments about the types of damages available in such an ERISA case. However, since the carrier was determined to be not responsible for the error, the employer is now potentially liable for the amount of the insurance that the employee thought he had in place. The decision does not say how much is at stake. However, coverage was available to the employee for up to five times his salary.

In light of the Supreme Court decision expanding remedies in ERISA cases, employers will want to be careful when enrolling employees in disability and life insurance plans, particularly in situations in which employees have not been working full time. Employers may find themselves required to pay the benefits if insurance carriers deny coverage to employees whom the employer improperly enrolled in a plan.

HIPAA nondiscrimination provisions prohibit group health plans and health insurance issuers from discriminating against individual participants and beneficiaries in eligibility, benefits, or premiums based on a health factor.  Wellness programs offered in conjunction with group health plans must also be nondiscriminatory.

Final regulations issued on June 3, 2013, describe nondiscriminatory wellness programs.  The regulations amend wellness program regulations issued in 2006 and adopt many of the provisions of the proposed rule published last fall. These regulations are applicable to grandfathered group health plans, non-grandfathered group health plans and group health insurance coverage for plan years beginning on or after January 1, 2014. 

The final regulations divide wellness programs into two categories – participatory wellness programs and health-contingent wellness programs:

Participatory wellness programs either do not provide a reward or do not include any conditions for obtaining a reward that are based on individuals’ satisfying a standard that is related to a health factor (e.g., a program that reimburses employees for the cost of all or a part of membership in a fitness center or for attending a monthly, no-cost health education seminar).   Participatory wellness programs must be made available to all similarly situated individuals, regardless of health status. These wellness programs are not required to meet the requirements applicable to health-contingent wellness programs discussed below.

Health-contingent wellness programs require individuals to satisfy a standard related to a health factor to obtain a reward (e.g., having a certain cholesterol level or completing a fitness program). This category is further divided into activity-only wellness programs and outcome-based wellness programs.

•     Activity-only wellness programs require individuals to perform or complete an activity related to a health factor in order to obtain a reward, but don’t require individuals to attain or maintain a specific health outcome (e.g., walking, diet, or exercise program).

•     Outcome-based wellness programs require individuals to attain or maintain a specific health outcome in order to obtain a reward (e.g., completing a smoking cessation program, maintaining a cholesterol level <200).

The final regulations contain five requirements for health-contingent wellness programs (including activity-only and outcome-based wellness programs):

1.   Individuals must be given the opportunity to qualify for the reward at least once per year.

2.   The maximum reward cannot exceed 30 percent of the total cost of employee-only coverage under the plan (50% for health-contingent wellness programs designed to prevent or reduce tobacco use).

3.   The program must be reasonably designed to promote health or prevent disease.

4. The full reward must be available to all similarly situated individuals and offer reasonable alternative standards.

5. The availability of a reasonable alternative standard must be disclosed in plan materials, including contact information for obtaining the alternative and a statement that recommendations of an individual’s personal physician will be accommodated.

For activity-only wellness programs, a reasonable alternative standard for obtaining the reward must be provided for any individual for whom it is either unreasonably difficult due to a medical condition to meet the otherwise applicable standard, or for whom it is medically inadvisable to attempt to satisfy the otherwise applicable standard. Outcome-based wellness programs must offer a reasonable alternative standard or a waiver of the otherwise applicable standard to a broader group of individuals than is required for activity-only wellness programs.  A reasonable alternative standard must be provided to all individuals who do not meet the initial standard, to insure the program is reasonably designed to improve health and is not a subterfuge for underwriting or reducing benefits based on health status. This means every individual, no matter what health factors they have and what outcomes they obtain, must have a way to obtain the full reward each year.

Employers should review wellness programs they offer before the end of the plan year to ensure that the program meets the requirements of these new regulations.

I have always been interested in the intersection of employment law and benefits law. Among those intersections is the extent to which employment law discrimination rules may apply to benefit plans. A recent Minnesota federal District Court decision addressed that issue in the context of an employee who added an opposite sex domestic partner to her employer-provided health plan although the employer only allowed same sex domestic partners to be covered. The employee completed an enrollment form that identified her partner as her spouse and a domestic partner affidavit that identified her and her partner as same sex adults. The employer fired the employee for dishonesty. Complicating the termination was the fact that the employee was pregnant at the time and had requested Family and Medical Leave Act (FMLA) leave. The employee argued that the employer terminated her employment to interfere with her FMLA leave or to retaliate against her for taking it.

The court determined that the employee was not fired because of the FMLA leave but instead was fired for the dishonesty.

The employee also challenged the employer’s domestic partner policy as discriminatory under the Minnesota Human Rights Act on the basis of sexual orientation and marital status because the policy provided coverage only for same sex and not for opposite sex domestic partners. The employer argued that such a claim had to fail because ERISA, the federal law governing benefit plans generally, would preempt the Minnesota state law with regard to discrimination based on sexual orientation and marital status.

Instead of ruling on the preemption matter, the federal district court instead ruled that the state human rights act did not prohibit the employer’s policy of providing health coverage only for opposite sex domestic partners. The court concluded that eligibility for domestic partner health care benefits did not turn on marital status. Both the same sex and opposite sex domestic partners were unmarried so there was no difference in marital status with respect to eligibility for domestic partner benefits. With regard to the sexual orientation discrimination, the court concluded that same sex and opposite sex domestic partners were not similarly situated because the same sex domestic partners could not lawfully marry in Minnesota. The employer had based its decision to offer benefits to same sex couples because of their inability to marry in the state. The court concluded that that reason was a legitimate nondiscriminatory basis to offer the benefit only to same sex domestic partners so the employee was unable to recover on a claim that the policy was discriminatory.

The court’s decision leaves unanswered several questions for employers. One unanswered question is whether ERISA would preempt the state law. If ERISA preempts the state law, then employers do not need to be concerned about the effect of the Minnesota Human Rights Act on the design of their benefit plans.

Another unanswered question is the impact of the decision after August 1, 2013, when same sex couples will be able to marry in Minnesota. If Minnesota law is not preempted, a court could find that an employer that allows only same sex domestic partners to receive benefits has discriminated based on sexual orientation because there is no legitimate nondiscriminatory reason (an ability to marry) that would support a difference in treatment between same sex and opposite sex couples. That would suggest that employers could no longer allow only same sex domestic partners to receive health benefits. However, employers offering the benefit may be reluctant to eliminate it effective August 1, 2013, the date same sex couples may marry in Minnesota. Although marriage is permitted effective August 1, 2013, same sex domestic partners may not be able nor may they want to plan a wedding for August 1. Although opposite sex couples are permitted to marry in every state, same sex couples are not. An employee may move to Minnesota from a state where same sex marriage is not allowed and so may also be unable to comply immediately with a requirement that couples be married in order to obtain medical coverage. If the Minnesota state law is not preempted, employers who provide only same sex domestic partner coverage and not opposite sex domestic partner coverage may need to reconsider their plan design.

Employers may find it less risky legally either to extend domestic partner benefits to both same sex and opposite sex couples or to eliminate domestic partner benefits for all couples on the theory that all couples can now marry. Although the legalities are not clear, employers may wish to provide a transition period for any new policy that is more restrictive to give same sex couples time either to marry or to find alternative medical coverage.

This is another developing area of the law that employers may need to monitor in light of the ability of same sex couples to marry in Minnesota. Employers with an interest in this topic can also review our earlier Alert on the impact of same sex marriage on employers and employees, linked here.

My colleagues on the employment side of our practice have written an Alert summarizing labor and employment laws enacted in the 2013 Minnesota legislative session. The first new law discussed in the Alert is an amendment to Minnesota statutes expanding the allowable uses of employee sick leave to cover illnesses and injuries of adult children, spouses, siblings, parents, grandparents and stepparents. Current law requires that sick leave be available to cover illnesses and injuries of (non-adult) children only.  The new law contains some limitations described in the Alert.  Minnesota employers will need to amend their sick leave policies by August 1, 2013, the effective date of the statute.