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

I have blogged (here, here, here and here) in the past about situations where employers unexpectedly found themselves liable for withdrawal liability imposed by a multiemployer plan. We can add a recent case from the Seventh Circuit Court of Appeals to that list. Tsareff v. Manweb Services, Inc. involved a multiemployer pension plan and an asset sale. Old Company sold the assets of its business to Manweb, which generally continued the business without the obligation to contribute to the multiemployer plan. As a result of the sale, the Old Company ceased participating in the multiemployer plan and the plan assessed withdrawal liability. Old Company did not challenge the assessment, but also did not pay it. When Old Company failed to pay, the multiemployer plan sued Manweb, the purchaser of Old Company’s assets, claiming that Manweb was a successor employer and responsible for the withdrawal liability.

In most situations where successor liability is imposed, the liability arose before the successor employer has purchased the assets of the original business. Relying on those principles, Manweb claimed that it could not be responsible for Old Company’s obligation because the withdrawal liability did not arise until after the sale was completed. The Seventh Circuit noted that the doctrine of successor liability is one developed under federal common law to protect federal rights and to effectuate federal policies. The court concluded that the federal policy in this case was to provide protection to multiemployer plans in the event an employer withdraws. Although Manweb did not have notice of the exact amount of the withdrawal liability since that could not be assessed until after the withdrawal occurred, Manweb was aware that there was likely to be withdrawal liability. According to the court, Manweb could have protected itself by obtaining indemnification from Old Company or by negotiating a lower purchase price. The court observed that the purchase agreement included indemnification with respect to losses relating to excluded liabilities, one of which was withdrawal liability. Therefore, under federal common law, Manweb was a successor employer, responsible for Old Company’s withdrawal liability.

Old Company had failed to seek arbitration of the withdrawal liability assessment, the only method provided under the federal law for challenging such an assessment. At this point, Manweb also cannot arbitrate the assessment because the time limits for requesting arbitration have expired. Therefore, Manweb seems to be left with no defenses to the assessment and must instead try to collect on its indemnification with Old Company.

The multiemployer withdrawal liability rules contain provisions that allow buyers to assume the obligation to contribute to the multiemployer plan, thereby allowing sellers to avoid having to pay withdrawal liability when the assets of a business are sold. Courts have strictly enforced the requirements of those provisions against sellers wanting relief from withdrawal liability on a sale. In this case, the parties did not attempt to take advantage of that provision. Therefore, the seller should have expected the withdrawal liability assessment. However, the purchaser – who did not expect to have to pay the assessment – is the entity actually paying the liability.

Like many of the cases in this area about which I have blogged, this decision also highlights the need for employers to proceed with their eyes open when buying a business that has been participating in a multiemployer pension plan.

The United States Supreme Court recently held in King v. Burwell that the Affordable Care Act (ACA) permits individuals to receive health insurance premium subsidies through federally-facilitated exchanges (in addition to state-based exchanges). Because this decision is consistent with existing agency interpretation, the decision has little direct effect on employer-sponsored group insurance plans.

In the short term, employers should continue all efforts to comply with the ACA’s employer mandate.  In addition, employers should take care to ensure that all hours of service are accurately tracked and that all offers of coverage to full-time employees are properly reported in 2016.  In the long term, the Supreme Court’s decision has likely provided enough certainty about the future and stability of the ACA that agencies will begin to release additional ACA guidance.  Employers should continue to stay up to date on guidance as it is issued.

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

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.