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

A recent Eighth Circuit Court of Appeals decision involved high ranking executives who participated in a company’s long-term incentive plan. Under the plan agreements, executives who did not continue employment for a three year performance period forfeited benefits under the plan unless they qualified for a pro-rated award. A pro-rated award was available for participants who were involuntarily terminated without cause or who retired.

The agreements governing the plan expressly gave the executive compensation committee of the board of directors the authority to interpret and administer the plan. The plan specified that the committee is to be composed of two or more non-employee directors.

The executives terminated employment when the office at which they worked was closed. They had been offered positions in a different location. One declined; the other worked from the new location briefly before terminating employment.

Although the agreements required the board committee to make determinations under the plan, the senior vice president of administrative services, a member of the company’s benefit plan committee, alone determined that the executives were not entitled to pro-rated payments. The committee with authority under the plan documents never considered the question.

The district court determined that the executives were entitled to pro-rated benefit and the Eighth Circuit Court of Appeals affirmed. The Eighth Circuit determined that no deference was to be accorded the decision that was made since it was not made in accordance with the terms of the plan documents. The court then made its own determination that the participants had “retired” (although they were ages 47 and 49 when they terminated employment) and therefore were entitled to benefits under the plan. The court also concluded that the payments that were owed would constitute “wages” under the applicable state law (Nebraska) so that the state statute providing for attorney’s fees in wage claim suits would also apply. Thus, the executives could recover not only the benefits under the plan but also their attorneys’ fees in bringing the suit.

Lesson from the case:  Read the claims procedure of the applicable plan or agreement and follow those procedures in deciding claims. The result for this employer might have been different had the employer followed that advice.

In a recent federal district court case, Whirlpool Corporation closed a factory and notified a number of former employees about the status of their pensions, including their years of credited service. The corporation’s records differed from the service records maintained by the union. Approximately five years after the factory closed, some of the participants asked for information that would enable them to determine whether their pension benefits had been calculated properly. The corporation failed to provide the requested information and ultimately sent a letter denying that request. The participants sued for the information.

Under ERISA, a plan administrator is required, upon written request, to furnish a copy of the latest summary plan description, annual report, plan documents, “or other instruments under which the plan is established or operated.” The corporation contended that the request for specific information about service credit did not fall under the category of “instruments under which the plan is established or operated.” The district court disagreed. The court said that the disclosure provisions of ERISA are intended to be broad and that Congress intended ERISA’s disclosure provisions to guarantee plan participants access to the information they need to protect their interests in a plan.

The case was before the court on a motion to dismiss. The court concluded that the case could proceed because the participants would have been entitled to the requested documents.

Plan administrators who do not comply with these requests for documents under ERISA can be fined up to $110 a day for each day of delay if the documents are not provided within 30 days of a request. Given the number of people involved and the length of time that the documents had not been provided, the plan administrator could be facing a substantial penalty for having withheld the documents. Employers confronted with plan document requests may wish to consult with counsel before deciding to withhold requested documents.

The Department of Labor recently updated its self-compliance tool for plan sponsors and plan administrators of group health plans. The self-compliance tool contains questions relating to requirements on issues such as limitations on preexisting conditions, certificates of creditable coverage, special enrollment rights, HIPAA nondiscrimination rules, wellness programs, Mental Health Parity and Addiction Equity Act, Newborns’ and Mothers’ Health Protection Act, Women’s Healthcare and Cancer Rights Act, GINA (Genetic Information Nondiscrimination Act) and Michelle’s Law (termination of coverage of dependent students on medical leave). The self-compliance tool contains 57 questions on these and other topics and is a good summary of the Department’s view of the requirements of those laws. Employers can use this tool as a compliance check for their plans.

Employers who sponsor 401(k) plans know that distributions from those plans can be made only on certain allowable events, such as separation from service. While an employee is still employed, distributions can be made after age 59½ or as a result of financial hardship. Defined benefit pension plans face similar restrictions on in-service distributions before age 62. The IRS recently issued a private letter ruling to the effect that employees who “retire” in order to qualify for a pension benefit with the explicit understanding that they will be immediately rehired have not in fact “retired” under qualified plan rules. A plan allowing a distribution under such circumstances could be disqualified.

In a recent Seventh Circuit Court of Appeals decision, an employer was faced with the situation of striking workers who quit in order to access their 401(k) balances. The employer then failed to reinstate strikers after the union made an unconditional offer to return to work. Generally speaking, under labor law, when a union makes such an offer the employer must rehire the striking workers who have not yet been permanently replaced and who have not permanently abandoned their positions. The employer refused to rehire those who had quit to access their 401(k) balances, arguing that such employees had permanently abandoned their jobs and that allowing them to be reinstated would violate the Internal Revenue Code and the employer’s fiduciary duty to follow the terms of the 401(k) plan.

The Seventh Circuit disagreed. According to the court, the question as to whether these strikers had permanently abandoned their employment was a factual question for the National Labor Relations Board to determine and the Board had determined that the employees did not intend to abandon their jobs. The Circuit Court was not troubled by the possible conflict with the tax code or ERISA. According to the court, whether the employee intended to abandon employment permanently is a factual question “distinct from the question whether an employee resigned for tax or ERISA purposes.” The court noted that the employer had not developed its argument in depth and did not cite to relevant regulations, revenue rulings or other authoritative statements addressing the particular situation before it.

Because this employer did not develop well the argument that an employee can receive a 401(k) distribution on termination of employment only if the employee does not have an expectation of rehire, it is possible that a future court might find in a similar situation that an employer does not need to rehire a striking worker who quits to access 401(k) balances. However, with this Circuit Court precedent on the books, an employer faced with striking workers who quit to access 401(k) balances could be placed between the proverbial rock and hard place, potentially violating either labor laws or tax laws. Employers faced with such a choice would want to consult with competent labor and benefits counsel.

Verizon Communications, Inc. sponsored a number of plans for its foreign employees. These employees were citizens of foreign countries who never worked in the United States. Because these employees never worked or resided in the United States, their employment income and the benefits from their retirement plans were foreign source income not subject to U. S. taxes.

Despite the fact that no U.S. income taxes should have been withheld, Verizon’s withholding agents nevertheless withheld taxes from payments made to the employees. When the employees complained, Verizon and the withholding agents promised to stop the withholding and issue a refund. However, the withholding did not stop and no refunds were forthcoming. On the other hand, the employees did not file tax refund claims with the IRS.

The employees sued under ERISA claiming it was a breach of fiduciary duty for employers to withhold taxes that were not owed. The U.S. District Court for the District of Illinois recently dismissed the claim based on a federal statute that prohibits lawsuits to restrain the assessment or collection of any tax. 26 USC § 7421. The court held that this statute precluded the employees’ suit even though the employer knew that the withholding was incorrect and promised multiple times to stop the incorrect withholding. The federal statute trumped both an action to recover the improperly withheld taxes and an injunction to prevent the withholding from continuing. Instead, the employees’ remedy was a refund suit with the IRS.

The court suggested that the result might be different if the withholding agent had not in fact remitted the taxes to the IRS but instead had pocketed the amounts. However, since the IRS had been paid the taxes, the court would not order the employer to stop the withholding. According to the court “It appears that Congress wanted employers (and other tax-collection agents) to be more afraid of the IRS than lawsuits from employees, and it gave them broad protection in the form of § 7422 to effect seamless tax collection.”

The lesson to employees is to make sure that they timely request a refund from the IRS of taxes improperly withheld from benefit plan payments. Although employers might on their own provide refunds, if they do not, an employee’s sole recourse is to the IRS.

I blogged recently about an Eighth Circuit decision concluding that an agreement with a single employee cannot be an ERISA plan because a plan necessarily requires more than one participant. Other courts disagree. Recently the United States District Court for the District of Idaho in the case of Knoll v. Moreton Insurance of Idaho, Inc. concluded that an agreement with a single employee providing for severance did constitute an ERISA plan. The Court rejected the position of the Eighth Circuit, noting that a number of other circuit courts and the Department of Labor have found that an arrangement covering a single employee can constitute an ERISA plan.

This split in the courts makes it difficult for employers to determine whether certain arrangements would be covered by ERISA. Until the Supreme Court decides to answer the question, the application of ERISA to an employment agreement providing severance or deferred compensation may vary depending upon the location of the employer or employee – and which court decides any dispute between the parties. In some situations, we have filed protective top hat registration statements with the Department of Labor in the event that it is later determined that the executive’s compensation arrangement was an ERISA plan when it was unclear based on the facts and the conflicting federal cases.

In a recent District Court decision, a court held that non-qualified deferred compensation benefits being paid  to a participant under a “top hat” plan could be garnished by the participant’s creditor. Employers who sponsor plans covered by ERISA know that creditors cannot garnish a participant’s benefits under a qualified retirement plan. Any state laws that would allow for such a garnishment would be preempted by ERISA.

ERISA” top hat” plans are plans for a “select group of management or highly compensated employees.” Such plans are covered by ERISA, but exempt from many ERISA requirements, including the fiduciary requirements and the anti-assignment and alienation provisions of ERISA. The court concluded that because the anti-alienation provisions of ERISA did not apply to a top hat plan, benefits otherwise payable to a participant, could be assigned or alienated, in other words, garnished. Thus, a creditor was able to garnish payments under the plan and force the employer to pay over to the creditor a portion of the amounts that would otherwise have been paid to the participant.

Employers faced with a garnishment action on a nonqualified or top hat plan would want to check with counsel to determine whether and how to comply with such a garnishment.

The Departments of Labor, Treasury and Health and Human Services have the responsibility to administer and enforce the Mental Health Parity and Addiction Equity Act of 2008. The Departments recently issued two sets of FAQs, describing the guidance issued under the Act and restating some of that guidance in an accessible Q & A format.

The FAQs do not contain any real surprises. However, they are a good summary of the agencies’ positions with respect to this law.

The Departments of Labor, Health and Human Services, and Treasury have jointly issued another set of FAQs on the Patient Protection and Affordable Care Act (PPACA), the health care reform law. These are part nine of FAQs issued on different PPACA topics. This particular set discusses the Summary of Benefits and Coverage or SBC, about which we have previously blogged.

Many employer sponsors of group health plans will be relying on their vendors for compliance with the SBC requirement. Those vendors creating the SBCs will want to review the new FAQs.

Employers who use multiple vendors for their plan will need to work with those vendors to create an integrated SBC. The FAQs make clear that a plan administrator (often the employer, with respect to a group health plan) is responsible for preparing the SBC for the plan, even if the plan uses multiple vendors. For example, if a plan “carves out” certain coverages so that one vendor provides most of the health plan coverage, but another vender provides a particular benefit, such as prescription drug coverage, the plan administrator is responsible for providing a single SBC for the plan as a whole. The plan administrator may contract with one of its vendors to prepare the single SBC or may itself synthesize the information into a single SBC.

The Departments have provided some relief during the first year of applicability. During that first year, for enforcement purposes the Departments will permit plans to provide multiple partial SBCs describing different insured components of the health plan so long as the plan administrator takes steps, such as providing a cover letter or a notation on the SBC itself to the effect that the plan uses multiple insurers for its coverage and that participants needing assistance understanding how the coverage fits together should contact the plan administrator. Contact information for the plan administrator must also be included. The Departments also said in the FAQs that during the first year of applicability, they will not impose penalties on plans and insurers that are working diligently and in good faith to comply with the SBC requirement.

According to the Departments, the “first year of applicability” refers to SBCs provided with respect to coverage beginning before January 1, 2014.