Action Required by ERISA Fiduciaries in Recent Insurance Probe

Recent news of Spitzer shaking up the insurance industry has filled the news over the past week. However, yesterday's article in the Wall Street Journal (subscription required) entitled "Class-Action Threat Added to Challenges Facing the Insurers" discusses the impact of…

Recent news of Spitzer shaking up the insurance industry has filled the news over the past week. However, yesterday’s article in the Wall Street Journal (subscription required) entitled “Class-Action Threat Added to Challenges Facing the Insurers” discusses the impact of the probe on the employee benefits arena. (See also today’s New York Times article entitled “States Increase Their Scrutiny of Insurance Brokers” mentioned by Benefitslink.com.) The WSJ article states that “the insurance probe started by New York Attorney General Eliot Spitzer into kickbacks and other improper incentives in the insurance industry is widening into other states and moving toward the employee-benefits arena.” Excerpt:

In California, insurance regulators are hiring San Diego class-action law firm Lerach Coughlin Stoia Geller Rudman & Robbins LLP, home of high-profile trial lawyer William Lerach. The firm is expected to lead a legal fight against insurance brokers and insurers who the firm may accuse of cheating workers and other consumers by placing insurance and other benefits packages in the hands of insurers paying the biggest commissions, not providing the best prices and terms, a person close to the matter said.

The potential alleged victims include individual employees, who typically pay some or all of the cost of benefits sponsored by their employers. That would contrast with the picture so far painted by Mr. Spitzer, of insurance brokers cheating corporations as they bought sophisticated liability-insurance packages. Mr. Spitzer, too, has indicated that the employee-benefits sector is a coming front.

The New York Times article states that “[i]n Connecticut, Richard Blumenthal, the attorney general, stepped up his investigation into health insurance companies and those that sell employee benefits like group life and disability coverage” and that yesterday “regulators from 46 of the states huddled in a closed telephone conference and said in a cautious statement afterward that they were ‘assessing the adequacy of current laws or regulations.”’

Whether or not ERISA will be involved in the lawsuits spawned by the probe will depend upon whether or not the plans offering these types of benefits to employees are ERISA plans. (Read a previous post here on the subject of when a plan for voluntary benefits becomes an ERISA plan.) For those plans that are ERISA plans, I would think that fiduciaries for such plans should be taking a hard look at the insurance carriers and brokers through which the insurance has been offered and purchased, and have in place “prudent processes” for dealing with the recent investigations and lawsuits (similar to the types of processes utilized by 401(k) plan fiduciaries in the recent mutual fund scandals.) For starters, one could read again this guidance here issued by the DOL pertaining to the mutual fund investigations, and tailor it to the ERISA plan in question. For instance, fiduciaries will want to assess the impact of the investigations on their plans, conduct a review, and engage in a “deliberative process.” In cases where specific insurance carriers are implicated, fiduciaries will want to take an “appropriate course of action which will depend on the particular facts and circumstances” relating to the plan. Fiduciaries will also want to contact specific insurance carriers directly if information is needed and document their actions accordingly. Above all, fiduciaries will need to “act reasonably, prudently and solely in the interests of participants and beneficiaries.”

Unfortunately, many employers are already not up-to-speed in this area of compliance with ERISA when it comes to benefits such as life, health, and disability policies. Many do not even know that they have an ERISA plan, let alone think that there might be any fiduciary liability involved in the offering of such plans. (Post here contains information on this widespread lack of compliance, and the post here discusses a case where the employer didn’t know it had an ERISA plan, and an executive was held personally liable as a fiduciary.)

In this other WSJ op-ed entitled “Spitzer Investigation May Be Just the Start For Insurance Industry“, the author predicts that “the carnage has just begun” and that by the time “Mr. Spitzer is finished with the insurance industry, the mutual-fund scandal will look like child’s play.”

Action Required by ERISA Fiduciaries in Recent Insurance Probe

Recent news of Spitzer shaking up the insurance industry has filled the news over the past week. However, yesterday's article in the Wall Street Journal (subscription required) entitled "Class-Action Threat Added to Challenges Facing the Insurers" discusses the impact of…

Recent news of Spitzer shaking up the insurance industry has filled the news over the past week. However, yesterday’s article in the Wall Street Journal (subscription required) entitled “Class-Action Threat Added to Challenges Facing the Insurers” discusses the impact of the probe on the employee benefits arena. (See also today’s New York Times article entitled “States Increase Their Scrutiny of Insurance Brokers” mentioned by Benefitslink.com.) The WSJ article states that “the insurance probe started by New York Attorney General Eliot Spitzer into kickbacks and other improper incentives in the insurance industry is widening into other states and moving toward the employee-benefits arena.” Excerpt:

In California, insurance regulators are hiring San Diego class-action law firm Lerach Coughlin Stoia Geller Rudman & Robbins LLP, home of high-profile trial lawyer William Lerach. The firm is expected to lead a legal fight against insurance brokers and insurers who the firm may accuse of cheating workers and other consumers by placing insurance and other benefits packages in the hands of insurers paying the biggest commissions, not providing the best prices and terms, a person close to the matter said.

The potential alleged victims include individual employees, who typically pay some or all of the cost of benefits sponsored by their employers. That would contrast with the picture so far painted by Mr. Spitzer, of insurance brokers cheating corporations as they bought sophisticated liability-insurance packages. Mr. Spitzer, too, has indicated that the employee-benefits sector is a coming front.

The New York Times article states that “[i]n Connecticut, Richard Blumenthal, the attorney general, stepped up his investigation into health insurance companies and those that sell employee benefits like group life and disability coverage” and that yesterday “regulators from 46 of the states huddled in a closed telephone conference and said in a cautious statement afterward that they were ‘assessing the adequacy of current laws or regulations.”’

Whether or not ERISA will be involved in the lawsuits spawned by the probe will depend upon whether or not the plans offering these types of benefits to employees are ERISA plans. (Read a previous post here on the subject of when a plan for voluntary benefits becomes an ERISA plan.) For those plans that are ERISA plans, I would think that fiduciaries for such plans should be taking a hard look at the insurance carriers and brokers through which the insurance has been offered and purchased, and have in place “prudent processes” for dealing with the recent investigations and lawsuits (similar to the types of processes utilized by 401(k) plan fiduciaries in the recent mutual fund scandals.) For starters, one could read again this guidance here issued by the DOL pertaining to the mutual fund investigations, and tailor it to the ERISA plan in question. For instance, fiduciaries will want to assess the impact of the investigations on their plans, conduct a review, and engage in a “deliberative process.” In cases where specific insurance carriers are implicated, fiduciaries will want to take an “appropriate course of action which will depend on the particular facts and circumstances” relating to the plan. Fiduciaries will also want to contact specific insurance carriers directly if information is needed and document their actions accordingly. Above all, fiduciaries will need to “act reasonably, prudently and solely in the interests of participants and beneficiaries.”

Unfortunately, many employers are already not up-to-speed in this area of compliance with ERISA when it comes to benefits such as life, health, and disability policies. Many do not even know that they have an ERISA plan, let alone think that there might be any fiduciary liability involved in the offering of such plans. (Post here contains information on this widespread lack of compliance, and the post here discusses a case where the employer didn’t know it had an ERISA plan, and an executive was held personally liable as a fiduciary.)

In this other WSJ op-ed entitled “Spitzer Investigation May Be Just the Start For Insurance Industry“, the author predicts that “the carnage has just begun” and that by the time “Mr. Spitzer is finished with the insurance industry, the mutual-fund scandal will look like child’s play.”

Interesting Items Pertaining to Workforce Management

Michael Fox has two interesting items that I can't resist noting here: (1) The Mind Map of Employer/Employee Rights and Responsibilities-European Version. (Biz/ed is a "provider of Internet-based learning materials for the economics and business education community.") (2) From the…

Michael Fox has two interesting items that I can’t resist noting here:

(1) The Mind Map of Employer/Employee Rights and Responsibilities–European Version. (Biz/ed is a “provider of Internet-based learning materials for the economics and business education community.”)

(2) From the WSJ via SFGate.com, “Bleeding indicators, other indexes gauge workplace health.” I especially liked the “Perk Deficit”:

Measures the drastic reduction in available workplace assets, ranging from free food and paper products to office supplies. . . “We went from a big hotel with a night of endless shrimp,” says marketing consultant Susan Johnson, “to an in-house pot luck with a colleague singing on the guitar.”

Chart on New Rules Governing Nonqualified Deferred Compensation Plans

I was wondering who would be the first to come up with a chart on the topic of the new nonqualified deferred compensation plan rules recently promulgated by Congress. Miller Chevalier has produced a good one here. (Thanks to Benefitslink.com…

I was wondering who would be the first to come up with a chart on the topic of the new nonqualified deferred compensation plan rules recently promulgated by Congress. Miller Chevalier has produced a good one here. (Thanks to Benefitslink.com for the pointer.)

ERISA Temporary Worker Lawsuit Settles

Law.com is reporting: "SmithKline to Pay $5.2 Million to Settle ERISA Suit." According to the article, the employer has agreed "to pay $5.2 million to settle an ERISA class action suit brought by workers who said they were improperly labeled…

Law.com is reporting: “SmithKline to Pay $5.2 Million to Settle ERISA Suit.” According to the article, the employer has agreed “to pay $5.2 million to settle an ERISA class action suit brought by workers who said they were improperly labeled ‘temporary’ and therefore denied pension benefits despite working full time for months or even years.” The lawsuit highlights the problematic issues that can arise with respect to benefits programs when a portion of the workforce is comprised of “temporary” or “leased employees.” (Previous posts on benefits issues pertaining to outsourcing and temporary employees are here, here and here.)

As reported, the class action was initiated by 1,290 workers who began their jobs as temporary workers provided by agencies such as Kelly Services or Olsten Temporary Services, but who were later hired on as regular employees. The employees brought claims for benefits under the employer’s retirement plans and claims for breach of fiduciary duty. The plaintiffs in the suit claimed breaches of fiduciary duty for (1) failure to calculate and award them vesting and eligibility credits under the employer’s retirement plans; (2) failure to keep track of their vesting and eligibility credits; (3) imposing a “burden shifting scheme” on the plaintiffs, requiring them to provide the information supporting their entitlement to vesting and eligibility credits; and (4) failure to notify the plaintiffs of their right to appeal SmithKline’s benefits decisions. (You can access the Memorandum and Order, granting in part and denying in part, Motions for Summary Judgment in the case; and the Memorandum and Order granting the plaintiffs’ motion for class certification.)

The obligation to credit a leased employee’s prior service with the employer once the employee is hired by the employer as a regular employee poses significant problems for employers. Many times employers don’t even know that they are required to credit such service. If they do know it, they may not have the records, nor can they get the records, to substantiate the service. Reish Luftman Reicher & Cohen has published a good article on the subject: “What Difference Does It Make If I Hire a Former “Leased” Employee?” The author states that he believes the case is important “because it highlights an issue often overlooked by plan sponsors, but which is clearly on the radar screen of the IRS.” As indicated above, the issue is on the radar screen of plaintiffs’ attorneys as well.

ERISA Temporary Worker Lawsuit Settles

Law.com is reporting: "SmithKline to Pay $5.2 Million to Settle ERISA Suit." According to the article, the employer has agreed "to pay $5.2 million to settle an ERISA class action suit brought by workers who said they were improperly labeled…

Law.com is reporting: “SmithKline to Pay $5.2 Million to Settle ERISA Suit.” According to the article, the employer has agreed “to pay $5.2 million to settle an ERISA class action suit brought by workers who said they were improperly labeled ‘temporary’ and therefore denied pension benefits despite working full time for months or even years.” The lawsuit highlights the problematic issues that can arise with respect to benefits programs when a portion of the workforce is comprised of “temporary” or “leased employees.” (Previous posts on benefits issues pertaining to outsourcing and temporary employees are here, here and here.)

As reported, the class action was initiated by 1,290 workers who began their jobs as temporary workers provided by agencies such as Kelly Services or Olsten Temporary Services, but who were later hired on as regular employees. The employees brought claims for benefits under the employer’s retirement plans and claims for breach of fiduciary duty. The plaintiffs in the suit claimed breaches of fiduciary duty for (1) failure to calculate and award them vesting and eligibility credits under the employer’s retirement plans; (2) failure to keep track of their vesting and eligibility credits; (3) imposing a “burden shifting scheme” on the plaintiffs, requiring them to provide the information supporting their entitlement to vesting and eligibility credits; and (4) failure to notify the plaintiffs of their right to appeal SmithKline’s benefits decisions. (You can access the Memorandum and Order, granting in part and denying in part, Motions for Summary Judgment in the case; and the Memorandum and Order granting the plaintiffs’ motion for class certification.)

The obligation to credit a leased employee’s prior service with the employer once the employee is hired by the employer as a regular employee poses significant problems for employers. Many times employers don’t even know that they are required to credit such service. If they do know it, they may not have the records, nor can they get the records, to substantiate the service. Reish Luftman Reicher & Cohen has published a good article on the subject: “What Difference Does It Make If I Hire a Former “Leased” Employee?” The author states that he believes the case is important “because it highlights an issue often overlooked by plan sponsors, but which is clearly on the radar screen of the IRS.” As indicated above, the issue is on the radar screen of plaintiffs’ attorneys as well.

IRS Acquiesces in a Ninth Circuit Bankruptcy Case

The IRS has announced [pdf] that it is acquiescing in the Ninth Circuit case of U.S. v. Snyder, 343 F3d 1171 (9th Cir. 2003) (via Findlaw.com). Not only is the case significant as it relates to tax liens, ERISA plans,…

The IRS has announced [pdf] that it is acquiescing in the Ninth Circuit case of U.S. v. Snyder, 343 F3d 1171 (9th Cir. 2003) (via Findlaw.com). Not only is the case significant as it relates to tax liens, ERISA plans, and bankruptcy, but the case also illustrates how the term “flip-flopping” is not just reserved for politicians.

The case involved the following facts:

The debtor was a vested participant in an ERISA-qualified pension plan and the plan contained the usual anti-alienation provision. The debtor’s interest in the defined benefit pension plan was about $200,000, with pay-out to begin when the debtor reached normal retirement at age 60, early retirement at age 55 through 59, total disability, or death. The debtor was 49 years old and had unpaid tax liabilities for the years 1983-1986, 1989-1995, and 1997. The IRS had made assessments and had duly recorded notices of federal tax liens for the taxes due in each of those years, except 1997. Federal tax liens had therefore attached by operation of law to the debtor’s interest in his pension plan.

The debtor filed a Chapter 13 bankruptcy petition listing the IRS as an unsecured creditor in the amount of $158,228. The IRS filed a proof of claim for roughly that amount, but claimed $145,664 as secured by virtue of its liens on debtor’s interest in the plan. The debtor objected to the secured portion of the IRS’s claim, arguing that his interest in the plan was excluded from the bankruptcy estate pursuant to 11 U.S.C. § 541(c)(2), and that the IRS liens on that interest therefore could not secure the IRS’s claim in bankruptcy. The bankruptcy court overruled the debtor’s objection and allowed the IRS’s claim as secured. The district court affirmed. Both courts held that the debtor’s interest in the plan became property of the bankruptcy estate for the limited purpose of securing the IRS’s claim.

On appeal, the Ninth Circuit reversed. In reaching its decision, the court noted the IRS’s inconsistent positions on the issue, pointing out that in some instances the IRS was motivated in its inconsistencies by the result it sought to obtain. The court stated as follows:

During the past decade, the IRS has taken inconsistent positions on the question before us. In In re Lyons, 148 B.R.88 (Bankr. D.C. 1992), a bankruptcy court held that an IRS claim secured by a federal tax lien on the debtor’s pension was secured in bankruptcy, even though that pension otherwise qualified for exclusion from the bankruptcy estate pursuant to § 541(c)(2). In 1996, in reaction to Lyons, the IRS issued a litigation bulletin, in which it took the opposite position from the position it takes today:
The Lyons approach is not consistent with section 506(a) of the Bankruptcy Code. Under section 506(a), a creditor’s rights in property are dependent on the bankruptcy estate’s interest in property; the determination of the estate’s interest is separate from and must precede the determination of the creditor’s interest. If the estate has no interest in the property at issue, as was the case in both the Patterson and Lyons situations, it is not possible for the claim of any creditor, including the [IRS], to be secured by that property under section 506(a). Therefore, Lyons is inconsistent with the statute, in that the Lyons analysis essentially gives one particular creditor (the [IRS]) an interest in property where the estate has no interest in that property. Accordingly, Lyons [is] viewed as legally unsound. I.R.S. Litig. Bulletin No. 431, 1996 WL 33105615 (Aug. 1996).

In 1998, in In re Persky, 1998 WL 695311 (E.D. Penn. Oct. 5, 1998), the IRS in litigation took the same position it took in the litigation bulletin in 1996. It was to the IRS’s advantage in Persky to increase the amount of the Perskys’ total unsecured debt so as to defeat their eligibility for Chapter 13 relief under 11 U.S.C. § 109(e). The IRS therefore argued that its lien on the debtors’ spendthrift trust was not a lien on property in which the estate had an interest under § 541(c)(2), and thus did not operate to secure the IRS’s claim in bankruptcy pursuant to § 506(a). See also Amy Madigan, Note, Using Unfiled Dischargeable Tax Liens to Attach to ERISA Qualified Pension Plan Interests After Patterson v. Shumate, 14 Bankr. Dev. J. 461, 490-93 (1998) (describing an unpublished case in which the IRS argued that an ERISA-qualified pension plan was excluded from the bankruptcy estate pursuant to § 541(c)(2), where exclusion was to the IRS’s advantage because it would permit the attachment of an unfiled dischargeable tax lien on the debtor’s pension plan).

Two years after Persky, the IRS took the opposite position. In April 2000, the Assistant Chief Counsel for the IRS wrote:

Not following Lyons leads to results that are straightforward: ERISA-qualified plans and similar interests are excluded from the bankruptcy estate with respect to the [IRS] and all other creditors. Because they are not property of the estate, they cannot be used in determining the value of the [IRS’s] secured claim. On the other hand, to the extent that the [IRS] has a lien that survives the bankruptcy, it can pursue collection outside bankruptcy. However, given the statutory framework of sections 541 and 506 and the Supreme Court’s reasoning in Patterson . . . , upon reconsideration we now believe that the holding in Lyons is correct. The wording of each section, on its face, supports the court’s reasoning. In addition, there is nothing in the legislative history that would call for a different result. I.R.S. Chief Couns. Advis. 200041029, 2000 WL 33120271 (Apr. 11, 2000).

Courts had split on the issue as well and the Snyder opinion gives a good run-down of all of the differing case law which had developed on the issue. In the end, the court adopts the view espoused in the group of cases which had aligned with the IRS’s position in its 1996 Litigation Bulletin, stating as follows:

We agree with the position taken in the first group of cases described above. That is, we agree with the position the IRS took in its 1996 litigation bulletin and in Persky, and disagree with the position it took in 2000.

The court goes on to state in dicta that, although exclusion of the debtor’s interest in the plan from the bankruptcy estate precludes the IRS from attaining secured status in the bankruptcy proceeding, the IRS’s liens against the debtor’s interest continue to exist, but outside of bankruptcy. This means that the IRS will be able to reach the assets in the plan upon the debtor’s retirement, when the debtor is entitled to payments from the plan. Since the life-span of a tax lien is only ten years from the date of assessment, potentially the lien might expire before the IRS is able to collect.

By the way, for those who aren’t familiar with the IRS’s “Action on Decision” procedure under which the Acquiescence was issued, the Tax Bulletin explains the procedure as follows:

It is the policy of the Internal Revenue Service to announce at an early date whether it will follow the holdings in certain cases. An Action on Decision is the document making such an announcement. An Action on Decision will be issued at the discretion of the Service only on unappealed issues decided adverse to the government. Generally, an Action on Decision is issued where its guidance would be helpful to Service personnel working with the same or similar issues. Unlike a Treasury Regulation or a Revenue Ruling, an Action on Decision is not an affirmative statement of Service position. It is not intended to serve as public guidance and may not be cited as precedent.

The Bulletin goes on to state that, prior to 1991, the Service published acquiescence or nonacquiescence only in certain regular Tax Court opinions and that the Service has expanded its acquiescence program to include other civil tax cases where guidance is determined to be helpful. The Bulletin explains that the “Service now may acquiesce or nonacquiescence in the holdings of memorandum Tax Court opinions, as well as those of the United States District Courts, Claims Court, and Circuit Courts of Appeal.”

What does this actually mean when the Service acquiesces with respect to an opinion? According to the Bulletin:

Both “acquiescence” and “acquiescence in result only” mean that the Service accepts the holding of the court in a case and that the Service will follow it in disposing of cases with the same controlling facts.

Please note: All links to the Bankruptcy Code are via the Cornell Law School’s Legal Information Institute. The site is a terrific resource for lawyers and others and is requesting donations from those who feel so inclined.

SEC Chairman Donaldson Shares His Views On Executive Pay

Thanks to CorpLawBlog for the link to this article from the Washington Post which discusses an interview with SEC Chairman William Donaldson who discusses the topic of excessive executive pay and retirement perks-"Donaldson Expects Rule Changes on Executive Pay." According…

Thanks to CorpLawBlog for the link to this article from the Washington Post which discusses an interview with SEC Chairman William Donaldson who discusses the topic of excessive executive pay and retirement perks–“Donaldson Expects Rule Changes on Executive Pay.” According to the article, Donaldson criticized “both the level of executive pay in the United States and the clarity with which businesses disclose compensation to shareholders, especially the lavish retirement packages that often hide in the small print of SEC filings, if they are disclosed at all.” The article notes that the SEC is considering new disclosure requirements that would require companies to disclose the “true costs of retirement packages and other forms of executive compensation.” Excerpt from the article:

Perhaps foremost among the possible changes would be to require more precise and easier-to-understand disclosure of executive pensions and supplemental executive retirement plans, or SERPs. Experts say companies can hide large SERP payments, in part because they are not required to disclose the yearly increase in value of such plans in compensation tables.

In addition, firms generally calculate pension plan payments based on an executive’s years of service. But in many cases, executives are given credit for many more years than they actually were on the job, something it can be hard for shareholders to figure out without wading through fine print or reading executive biographies to determine how long an individual actually has worked at a company.

The article goes on to say that Donaldson also “complained that big retirement payouts generally are unrelated to performance measures, meaning retired executives usually are entitled to every penny even if their companies performed poorly or collapsed after they left due to decisions they made on the job.”

SEC spokesman Matthew Well is quoted as saying that it is too soon to speculate about what the new disclosure rules might entail and that the new rules probably wont’ be in place until sometime next year at the earliest.

CorpLawBlog has some additional links here on the topic of corporate governance.

Tired of That Boring Computer Look?

How about Stretch Pets? They were offering a cow with spots, but the Trademark Blog is reporting that they were sued over it by Gateway for "trade dress infringement." (Don't miss Chris-Screen-gle and Humphry Frogart.)…

How about Stretch Pets? They were offering a cow with spots, but the Trademark Blog is reporting that they were sued over it by Gateway for “trade dress infringement.” (Don’t miss Chris-Screen-gle and Humphry Frogart.)