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

ERISA requires that plan assets be held in trust so that they are protected from claims of the employer. With pension plans, it is generally easy to determine when assets become plan assets and when they should be held in trust. For welfare benefit plans, such as health plans, the situation is more complicated. Employers often use their general assets to pay claims under a self-funded plan. While employee contributions are typically considered “plan assets,” the Department of Labor has a nonenforcement policy with respect to employee contributions that are made on a pre-tax basis under an employer’s cafeteria plan. Thus, many employers do not establish trusts for their welfare benefit plans.

A Ninth Circuit court of appeals case recently dealt with the trust requirement with a multiple employer plan established for firefighters in California. The plan was a long term disability plan funded by participant contributions deposited into a Wells Fargo checking account to which the officers of the third party administrator were the signatories. The checking account was not a formal trust account and there was no formal trust agreement. The Department of Labor claimed in a lawsuit that this violated the trust requirement of ERISA.

The Ninth Circuit said that the fact that there was not a formal trust did not mean that the assets were not held in trust. The court held that under federal common law, the third party administrator (Wells Fargo) held the assets in trust for the plan beneficiaries. No formal trust document was necessary and there was no violation of the trust requirement.

The Department of Labor was unhappy with this decision and asked for the Ninth Circuit to revisit it. The Ninth Circuit refused an en banc reconsideration but reissued its opinion reiterating that the assets were held in trust under federal common law even though there was no formal trust agreement in place.

One would expect that if the assets were held in trust, a form 5500 would need to be filed because the trust would then not be unfunded. Funded benefit plans must be audited and file a more comprehensive Form 5500 if there are more than 100 participants. However, the court also concluded that the plan was a totally unfunded welfare benefit plan because the benefits were paid from the general assets of the employee organization that sponsored the plan. Because the plan was unfunded, no summary annual report needed to be distributed.

The court also found that the third party administrator engaged in a prohibited transaction by paying itself fees from the plan assets even though the agreement with the sponsoring association authorized the third party administrator to pay its fees and expenses from the plan account.

So the court found that a trust held sufficient assets to make the third party administrator’s payment of its fee a prohibited transaction, but the plan was nevertheless unfunded for purposes of the summary annual report requirement. The court also found no violation of the trust requirement even though there was no formal trust. This is probably inside baseball for all but ERISA geeks. We will have to see if other circuits take similar approaches to ERISA trusts. However, in light of the Department of Labor’s dissatisfaction with this case, we would not recommend other plan sponsors rely on the common law in lieu of establishing a formal trust in situations in which ERISA requires a trust.

 

The Mental Health Parity and Addiction Equity Act (MHPA) requires health plans to treat mental health and physical health benefits in much the same manner and precludes restrictions on mental health benefits that are not also found to apply to physical health benefits. The regulations enforcing those provisions are technical and complicated. A recent Second Circuit decision does not get into the details of whether particular plan provisions violated the MHPA, but instead addresses who can be held responsible if the plan treats mental and physical health claims differently.

The plan in question was a self-funded medical plan and the entity being held responsible was the third party claims administrator. The third party administrator was responsible for deciding claims and so was the entity ultimately determining whether a particular benefit would be covered by the plan. Of course, because the plan was self-funded, the third party administrator did not actually fund the payment; instead, the employer was required to pay the claims.

The court found that the third party claims administrator could be responsible for a failure to comply with the MHPA because it was the one ultimately deciding the claims. In that regard, it acted as a fiduciary and its failure to comply with the MHPA could be a breach of that fiduciary duty.

Although the third party administrator may be found liable for violating the MHPA, the employer might be the one ultimately paying the bill. In many cases, the contract between the third party administrator and the employer requires the employer to indemnify the third party administrator if the third party administrator is required to pay a claim and may also indemnify the third party administrator for its legal fees in a suit brought to challenge a claim. To protect itself, an employer should make certain that its plan design meets the requirements of the MHPA.

 

I recently blogged about a case in which a plan had established a shorter period of time (one year deadline) for filing a lawsuit, rather than relying on the state statute of limitation (six years) which would otherwise have applied. As I said in that blog, although courts have generally upheld reasonable plan deadlines, those deadlines will not be upheld unless the plans remind the participants of the deadline in claim denial letters.

In a recent federal district court decision, a court prohibited a fully insured plan from establishing a deadline shorter than the state imposed deadline. The plan was a long term disability plan that was insured under Wisconsin law. The plan attempted to impose a shorter deadline for bringing claims than the three year period allowed under Wisconsin insurance law. The court held that because Wisconsin law precluded an insurance company from using a shorter limitations period, the three year time limit applied.

Employers may know that ERISA, the federal statute that governs many employee benefit plans, generally preempts state laws that apply to ERISA-governed benefit plans. However, there is an exception to preemption for state insurance laws. Therefore, employers whose plans are fully insured might not be permitted to shorten state established statutes of limitation.

 

So-called “Top Hat” plans are nonqualified deferred compensation plans for a select group of management or highly compensated employees. These executive compensation arrangements are exempt from many ERISA provisions, but are not exempt from ERISA’s claims procedure requirements. Therefore, top hat plans must provide a reasonable claims procedure.

ERISA compliant claims procedures can be written to provide discretion to the plan administrator to decide claims. If so written, then courts reviewing the decision typically give the plan administrator deference with respect to the decision made. Courts also generally require that the claimant exhaust the claims procedure before bringing a law suit. In a recent federal district court decision, the court applied these same principles to a top hat plan.

The top hat plan in question contained a claims procedure and explicitly provided that participants had to exhaust it before bringing suit. The participants in the case did not exhaust the claims procedure but went directly to court. The court said that the participants could not proceed with their claim because they had not exhausted the claims procedure and sent the matter back to the plan administrator for decision.

Employers establishing top hat plans may wish to include in their claims procedures an explicit requirement that the claims procedure must be exhausted before a claimant can bring a law suit. The employer must then also follow that claims procedure carefully in deciding claims. By doing so, the employer is more likely to have its decision upheld in the event of a court challenge.

I recently blogged about a Seventh Circuit Court of Appeals decision that tagged a buyer of the assets of a company contributing to a multiemployer plan with withdrawal liability that the seller had not paid. A recent Ninth Circuit decision reached the same conclusion in a case where an owner shut down its business, which allowed one of the managers to establish a new business that continued to work with a number of the clients of the old business. The new business bought at the public auction approximately 30% of the tools, equipment and inventory of the old business. There was no formal purchase agreement between the owners of the old business and the owner of the new business and no formal transfer of customer lists or business name. The new business did not assume the lease of the old business but entered into a lease for the same space with the landlord. The new business used similar signage but did not use the old business’s name. The new business used independent contractors to install product, some of whom used to work for the old business. According to the district court, the new business did not employ a majority or even a substantial portion of the workforce of the old business, although a majority of the workers (five of eight) of the new business had previously been employed by the old business.

The court of appeals focused on the purpose of the imposition of withdrawal liability, concluding that multiemployer plans needed to be protected. In this case, the court was interpreting the rules surrounding an exception for withdrawal liability that applies in the construction industry. Under this construction industry exception, no withdrawal liability is imposed if a business shuts down and does not start work in the same jurisdiction within the next five years without again contributing to the plan. Because the old business had shut down, the old business relied on this exception to avoid withdrawal liability. However, the multiemployer plan assessed the liability against both the old business and the new business. For whatever reason, only the seller was involved in the lawsuit.

The district court found that the new business was not a successor employer; the court of appeals overturned that decision. The court of appeals focused on the fact that there was substantial continuity in the customers and business location. The case was remanded to the district court to look more closely at the continuity factors. Based on the discussion of the facts by the court of appeals, it is quite likely that the new business will be held liable for this withdrawal liability.

In other successor employer situations, the courts have noted that a buyer who is being tagged with successor liability could protect itself by indemnification or through a reduction in the purchase price. With the successor liability imposed in this case, the owner of the new business had no such opportunity. The owner did not actually purchase assets from the old business other than at public auction. There was no contract between the owners of the old business and the new business relating to the purchase of the assets.

On the other hand, the court noted that certain documents in the case were filed under seal, including the business plan of the new business. The court said that its opinion was based in part on facts contained in documents filed under seal and expressed in a footnote its concern about sealed documents making it difficult for others to determine why courts reached their decisions. It could be that there was some evidence of coordination or collusion between the old business and new business that would otherwise justify the decision. Absent such facts, it would seem the managers of a business that is shutting down who decide to start a similar business servicing the customers of the business that is closing could cause both the closing business and the new business to be responsible for withdrawal liability. Those wishing to start businesses under these conditions would need to be very careful about how they did so.

ERISA does not have a statute of limitations for lawsuits brought by participants to check claim benefits under the plan. Instead, courts borrow from similar state statutes of limitations. In a decision two years ago, the US Supreme Court upheld a disability plan’s one year limitations period, allowing the plan to impose that limitation rather than the longer period of time that state law would have allowed. In light of that decision, employers have added a limitations period to their claims procedures.

Employers who have done so should make sure to include the limitations period in the plan document, the summary plan description, and any claim denial letter. In a recent Third Circuit Court of Appeals decision, the employer had included the deadline for filing a lawsuit in the plan document but neglected to mention it in the claim denial letter which informed the participant that he could now file a lawsuit. The court said the plan deadline was not enforceable because it had not been included in the denial letter. Instead, the court applied the general six year statute of limitations borrowed from New Jersey law and held that a lawsuit brought 19 months after the claim denial was timely.

Employers wanting the benefits of a shorter deadline for filing lawsuits for plan benefits should make sure to reiterate that deadline in claim denial letters.

In a decision issued a couple of years ago, the United States Supreme Court held that a summary plan description that differed from the plan document could not be enforced as the plan document. The Court said that the summary plan description was supposed to describe the plan and it was the plan that should be enforced. If there was a difference between the summary plan description and the plan document, participants may be able to claim that the discrepancy constituted a breach of fiduciary duty by the plan administrator who wrote an incorrect summary plan description. The summary plan description itself could not be directly enforced.

While separate plan documents and summary plan descriptions are common with retirement plans, such as 401(k) plans, they are less common in welfare plans. Particularly with self-funded medical plans, the summary plan description and the plan document are often combined into a single document. Employers are concerned that differences in wording between the summary plan description and the plan document could lead to unintended coverage of medical costs and so wish to provide only a single document that describes the plan’s benefits.

Some commentators have suggested that this practice is not acceptable in light of the Supreme Court decision. However, in a recent Sixth Circuit decision, the court allowed the practice. The court distinguished the Supreme Court decision by saying that in that case there had been both a plan document and a summary plan description. Where both documents exist, only the plan document should be enforced. Where a single document operates as both the plan document and the summary plan description, that is the document that should be enforced. Thus, while the Supreme Court has not upheld the practice, there is still legal support for employers to combine plan documents and SPDs into a single document.

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. **