Month: July 2005

On May 25, 2005, the IRS published proposed regulations under Section 415 of the Internal Revenue Code dealing with limitations on benefits and contributions for qualified plans. Here are some helpful resources pertaining to the regulations:

• Special Edition of the IRS Employee Plan News with comments by Marty Pippins, Manager of EP Technical Guidance and Quality Assurance
• Highlights of the 415 Regulations featuring more comments from Marty Pippins
• Submit Your Comments on the Proposed Regulations: Deadline is July 25, 2005

Derrin Watson had some interesting things to say about the new regulations at Benefitslink.com in these Q & As 279 and 280. Excerpt:

One of the most fascinating points about these new rules is their proposed effective date. The 415 regs as a whole are proposed to go into effect for limitation years starting in 2007. But we are told that taxpayers can rely on these post-severance compensation rules now. Mr. Marty Pippins, Manager of EP Technical Guidance, is quoted as saying “This portion of the regulations is proposed effective for limitation years beginning on or after January 1, 2005.” This is fascinating because I cannot find that date anywhere in the proposed regulations. But apparently it behooves practitioners to assume the rules are in effect now.

See also:

• From Trucker Huss: “Treasury Department Issues Proposed Section 415 Regulations.”
• From Buck Consultants: “IRS Issues Proposed Regulations on Limitations on Benefits and Contributions under Qualified Plans.”

The following case–Ruttenberg v. United States Life Insurance Company–illustrates the great struggle that courts are having with these long-term disability cases which fall under the purview of ERISA. The facts of the case involved an individual (“plaintiff”) who worked as an independent commodity trader at the Chicago Board of Trade and Mercantile Exchange. The district court opinion (Ruttenberg v. United States Life Ins. Co., 2004 US Dist. Lexis 3676 (ND Ill. March 10, 2004) states that, in general, such floor trading required extensive use of one’s vocal cords including “screaming and yelling to gain the attention of other Traders and Brokers” and also involved “frequent exposure to pushing and shoving.” According to the opinion, plaintiff was, at times, making over $30,000 a month in profits, and paying premiums on a disability policy which assured him of $10,000 a month if he became disabled. Plaintiff allegedly could no longer function in his work due to vocal cord disfunction and filed for disability.

While the facts of the case demonstrate how the progression of plaintiff’s claim quickly evolved into a battle of medical opinions, the case is worth noting for other reasons:

(1) The case illustrates a consistent problem that many of these disability plans have–and that is that there are basically no plan documents. As the Seventh Circuit so aptly said in the case of Health Cost Controls of Illinois v. Valerie Washington (opinion written by Judge Posner):

“This kind of confusion is all too common in ERISA land; often the terms of an ERISA plan must be inferred from a series of documents none clearly labeled as “the plan.”

Generally, a court reviews de novo an ERISA plan denial of benefits unless the plan grants to the plan administrator the discretionary authority to construe plan terms. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989). When there are no plan documents, it is hard for the plan administrator to argue that it has the necessary Firestone discretion to avoid a de novo review. In this particular case, the insurance company tried to argue that a ““Master Policy Application” was part of the “plan document” and contained the necessary Firestone language, but neither the district court nor the Seventh Circuit bought that argument, so the court reviewed the denial of plaintiff’s claim de novo. While the following excerpt from the district court case may seem long and tedious to some, it illustrates the predicament that many courts find themselves in when looking for plan documents and the legal gymnastics that they must go through to piece together a plan document (It sort of reminds me of the search for Waldo in the children’s book entitled “Where’s Waldo?“, only here the quest is “Where’s the plan document?”):

. . . [T]he issue concerns whether the necessary language was placed in an appropriate location to grant the administrator discretion. Case law requires reference to the “language of the plan,” see Postma v. Paul Revere Life Ins. Co., 223 F.3d 533, 538 (7th Cir.2000), but that in and of itself is a nebulous concept. . . Ruttenberg points to a summary plan description (“SPD”) provided to the participants and beneficiaries in the plan, and that SPD clearly does not contain any language reserving discretion to the administrator. United States Life points to a document entitled “Master Application for Employee Benefits” that SMW submitted to United States Life. That document contains a section stating that, if the insurance contract compromises a part of an employee benefit plan, the United States Life Insurance Company is granted sole discretionary authority to determine eligibility, make all factual determinations and to construe all terms of the policy. The United States Life Insurance Company has no responsibility or control with respect to any other benefit which may be provided beyond this contract or any other plan of benefits. . . According to United States Life, this document must be considered part of the ERISA “plan” and is sufficient to notify any participants or beneficiaries that the plan administrator has the sole discretionary authority to determine eligibility.

Notably, neither party points to anything resembling the main section of the policy or plan (i.e., a document similar to the “Subscriber’s Service Agreement” in Health Cost). Both the certificate of insurance contained in the record (R. 0275) and the SPD attached to Ruttenberg’s Complaint (Ex. A pg. 2) state that these documents only serve as a “summary” of the “group policy provisions.” No group policy is identified in the record. In any event, if there is a group policy in the record, the court assumes that it does not have the language above contained in the “Master Policy Application” because, if it did, United States Life would have brought this rather important point to the court’s attention.

Nevertheless, United States Life argues that the “Master Policy Application” must be considered part of the plan documents and does sufficiently reserve the necessary discretion to the employer. It points to Plumb v. Fluid Pump Serv., Inc., 124 F.3d 849 (7th Cir.1997) and Cannon v. Wittek Cos., Int’l, 60 F.3d 1282 (7th Cir.1995). The court in Plumb was confronted with the issue of whether an insurance company was a fiduciary for purposes of ERISA. Id. at 854. The court noted that in making that determination the place to look was the plan documents. Id. Accordingly, the court examined a document entitled “Participating Employer Application and Agreement” in addition to the policy and certificate of insurance. Id. at 854-55. In Cannon the court considered whether a waiting period serving as a prerequisite to eligibility under a plan required consecutive days of employment. Id. at 1284. The court noted that nothing in the “plan” required such consecutive employment, although United States Life points out that the court did consider a “plan document” entitled “Supplement to the Benefit Application.” Id. at 1284-85.

Since neither Plumb nor Cannon dealt with the issue here of whether discretionary language contained in an application for benefits is sufficient to allow only arbitrary and capricious review of a plan administrator’s decision, the court views both cases as only providing limited persuasive value. Moreover, such limited persuasive value is lessened when one considers the reasoning in Herzberger. The court there made clear that an employee needed to be clearly told that a plan administrator was entitled to determine whether to pay an insured’s claim subject to only arbitrary and capricious judicial review. 205 F.3d 333 . This is because the more “discretion lodged in the administrator” the “less solid an entitlement the employee has and the more important it may be to him, therefore, to supplement his ERISA plan with other forms of insurance.” Id. at 331. Here, there is no basis whatsoever in the record to support the notion that this “Master Policy Application” would ever be shown or even made available to participants or beneficiaries in the Plan. The document itself consists mostly of information about the applicant of the Plan (i.e., SMW) and the alleged discretionary language is under a portion of the document entitled “Applicant’s Declaration.” There is nothing to suggest that this document clearly informed participants and beneficiaries under this Plan that the administrator reserved the discretion to deny benefits to any insured. The court, therefore, rejects United States Life’s argument that the “Master Policy Application” is part of the ERISA Plan itself. Moreover, since there is no evidence that any part of the ERISA Plan contains the required language reserving discretion to the administrator, this court’s standard of review in this case will be de novo.

(2) The case also illustrates how the fuzzy distinctions between worker classifications can wreak havoc with benefit plans. In this case, the plaintiff was being treated as an independent contractor for IRS purposes (as evidenced by the fact that his income was reported on a 1099), but for purposes of the disability plan, he was being treated as an “employee” because “employee” was defined under the Certificate of Insurance to include certain independent contractors.

The plaintiff tried to argue in the preemption phase of the case that he was an independent contractor and therefore not an “employee” under the plan for purposes of supporting his theory that his state law claims weren’t preempted by ERISA. However, the district court held, and the 7th Circuit agreed, that plaintiff was a “beneficiary” under the Plan, even if he wasn’t a “participant” for purposes of ERISA. Thus, his state law claims were preempted.

However, when determining whether the plaintiff was eligible for the plan in the first place, the insurance company tried to use this very same argument (that plaintiff had used in the preemption phase) to their advantage, i.e. they tried to argue that the plaintiff was not covered under the plan (even though the plaintiff had been paying premiums for coverage) because he wasn’t an “employee” and wasn’t “full time.” The Certificate of Insurance had defined “eligible employees” as “all full-time employees of the Participating Employer who are: managers and officers earning over $20,000 annually, traders who report earnings on their 1099 form, firm traders who report prior years on their 1099 DDE form, but not those who are temporary, part-time or seasonal.” In rejecting the insurance company’s argument and holding that the plaintiff was covered under the plan, the district court stated:

Since the Plan both states that only employees are eligible but nevertheless includes traders who report income on 1099 Forms, the best way to handle this apparent ambiguity in the policy is to simply construe the contract against the policy’s drafter . . . Accordingly, being an “employee” is not a necessary condition to coverage and traders who reported income on IRS 1099 Forms and who were affiliated with SMW (such as Ruttenberg) would be eligible for coverage, even if they are not considered “employees” of SMW.

The Seventh Circuit agreed:

The inclusion of form 1099 in defining the contractual term “employee” thus indicates that the term includes more than just common law employees, and that other workers may be eligible under the policy. Those other workers may include independent contractors like Mr. Ruttenberg, but the scope of the contractual term is ambiguous. . . Allowing Mr. Ruttenberg to purchase insurance for which U.S. Life now claims that he is ineligible constitutes the type of “trap for the unwary” that contra proferentem is meant to prevent. The district court correctly found the term “employee” to be ambiguous, and properly construed the term against the policy’s drafter, U.S. Life.

Please note that, from an IRS standpoint, inclusion of a worker in an employer’s benefit plans is actually one of the factors that the IRS will look to in determining whether or not a worker is properly classified as an “employee” or not. If a worker is included in the employer’s benefits plans, this factor would lean towards the worker being treated as an “employee” for IRS purposes, rather than an “independent contractor.” (The IRS looks to a number of factors though–not just this one–in making its determination.) See this previous post here discussing how “worker classification issues” are almost always examined in an IRS employment tax audit or employee plan audit.

Also, more posts on worker classification issues relating to benefits here.

Whenever Congress contemplates pension legislation, those approaching retirement often worry about how any proposed legislation might impact a lump sum payout from a pension plan. This article from SFGate.com discusses that very issue and provides some helpful info: “Pension bill could cut lump-sum payouts.” Excerpt:

Using current interest rates and some guesswork, Norman Stein, a law professor at the University of Alabama, estimates that a person taking a lump sum at age 60 would get on the order of 9 percent less under the Boehner bill. A person taking a lump sum at 55 would get roughly 12 percent less.

“The worst-case scenario is for people taking a lump sum at a younger age, ” says Ron Gebhardtsbauer, senior pension fellow with the American Academy of Actuaries. They would see “a fairly substantial drop in the lump sum.”

The proposal would not change the value of annuity payments.

See previous posts on the proposed pension legislation here.

Robert Powell for CBS MarketWatch has written an article which chronicles his search for a list of retirement-related blogs: “Open field for retirement blogs: Few Web logs track issues related to older Americans; top sites.” Thanks to both Powell and Nevin Adams of PlanSponsor.com (who recommended Benefitsblog to Powell) for referring readers to Benefitsblog.

I was also glad to learn about other retirement-related blogs from the article: Your Way Ahead, Kim Snider’s blog, as well as Nevin’s new blog here. The article also mentions Benefitslink.com.

Robert Powell is editor of Retirement Weekly — a service of MarketWatch — author of “20 Tips for Retirement Investors” and co-author of “Decoding Wall Street.”

UPDATE: Please make note of a new blog on benefits by another Philadelphia-based lawyer who recently emailed me about his endeavor. The blog is For Your Benefit written by Michael H. Rosenthal.

Don’t miss RothCPA.com‘s commentary on this recent Tax Court case: Grossman v. Commissioner. Excerpt:

The tax law has a “timely-mailed, timely-filed” rule. If an item is postmarked by a filing deadline, the postmarked date is the filing date, even if it is received later than the filing date.

Not all postmarks are created equal. A hand-stamped postmark received at the post-office — like the one in the above picture — is golden. An office postage meter isn’t nearly as convincing, for obvious reasons. And there lies Mr. Grossman’s problem. . .

I received an email recently from an individual who claimed that a post here at Benefitsblog saved him almost $5,000 in penalties for filing a Form 5500 late. The individual stated that he had depended on the Form 5500 mailing to remind him to file the form each year, but one year apparently did not receive the form from the IRS and thus did not file it. After filing the form late, the individual received a bill from the IRS for $5625.00. The email continues:

Our accountant sent the IRS an appeal as our POA. A few days later the IRS told me the appeal was rejected.

At that point I went “on-line” and found your suggested procedure for reducing the fine. I gave it to our accountant and the DOL agrees we need only pay the limit of $750.00.

This was a learning experience for me and our accountant.

My hope is that, by mentioning the email here (permission was given to publish it), some of my CPA blogging friends might pass the info along so that more accountants can be made aware of the DOL’s amnesty program. The post which the email refers to is this one here which provides a link to this article–Resolving IRS (and DOL) Penalties for Late Form 5500 Filing–by SunGard Corbel, as well as links to the DOL’s Delinquent Filer Voluntary Compliance (“DFVC”) Program and this IRS Notice 2002-23.

Please note these important Q & As from the DOL website regarding the rules of the amnesty program:

Question: Prior to participating in the DFVC Program, a plan administrator was notified in writing by the Department that its plan’s filings are delinquent. Can the plan administrator participate in the DFVC Program?

Answer: No. The DFVC Program is only available to a plan administrator that complies with the requirements of the Program before the date on which the administrator is notified in writing by the Department [DOL] of a failure to file a timely annual report under Title I of ERISA.

Question: Does participation in the DFVC Program protect the plan administrator from other civil penalties that may be assessed by the Internal Revenue Service (IRS) or the Pension Benefit Guaranty Corporation (PBGC) for failing to timely file a Form 5500 Annual Return/Report?

Answer: Both the IRS and PBGC have agreed to provide certain penalty relief under the Code and Title IV of ERISA for delinquent Form 5500s filed for Title I plans where the conditions of the DFVC Program have been satisfied. See sections 5.02 and 5.03 of the DFVC Program Federal Register Notice and IRS Notice 2002-23.

From the Arkansas News Bureau, “Any willing provider law upheld, but won’t apply to self-insured, court rules .” The article discusses the Eighth Circuit opinion in the case of Prudential Insurance Company of America, et al. v. HMO Partners, et al. which held last week that Arkansas’ any willing provider law was not preempted by ERISA, except with respect to self-insured plans.

Background of the case:

(1) An Arkansas any willing provider law (“AWP law”) called the “Arkansas Patient Protection Act” was passed in 1995, but had been barred from being enforced in Arkansas after a federal district court issued an injunction, holding that the AWP law was subject to preemption under ERISA. The injunction was affirmed by the Eighth Circuit, in the case of Prudential Insurance Company of America, et al. v.National Park Medical Center, Inc.

(2) The U.S. Supreme Court in the case of Kentucky Association of Health Plans v. Miller decided in April of 2003 that an AWP law in Kentucky was not preempted by ERISA (discussed in previous posts which you can access here.)

(3) After the Miller case was decided, a case was filed in federal district court in Arkansas asking for “a judicial determination” on how the Miller case impacted the old Arkansas AWP law.

(4) The injunction issued in 1998 was lifted on February 12, 2004 by a federal district court in Arkansas, based on the Miller case, but the decision lifting the injunction was appealed to the Eight Circuit.

(5) The Eighth Circuit issued its opinion in the case last week upholding the lifting of the injunction as to insured plans and non-ERISA plans.

The Eigth Circuit’s holding, which was more involved than just upholding the district court’s lifting of the injunction, is as follows:

Pursuant to our analysis below, we hold that Miller mandates that we affirm the district court’s dissolution of the Prudential I injunction with regard to insured ERISA plans and non-ERISA plans. Miller, however, did not involve the issue of whether the Kentucky AWP statutes were preempted with regard to self-funded ERISA plans such as the Tyson plan. With regard to self-funded ERISA plans, we reverse the district court’s dissolution of the Prudential I injunction and remand to the district court to enter judgment consistent with this opinion. Finally, our holding that the Arkansas PPA can be enforced against insured ERISA plans compels us to consider, as a matter of first impression, whether ERISA’s civil enforcement provision completely preempts the civil penalties provision of the Arkansas PPA, Ark. Code Ann. § 23-99-207. Following the Supreme Court’s recent decision in Aetna Health Inc. v. Davila, 124 S. Ct. 2488 (2004), we hold that ERISA completely preempts the civil penalties provision of the Arkansas PPA as applied to suits that could have been brought under ERISA § 502, and we remand to the district court to enter judgment consistent with this opinion.

Please note that the Court, in holding that the AWP law was preempted by ERISA with respect to self-insured plans under the “deemer” clause analysis, rejected an argument that because the third party administrator for the self-funded plan contracts with insurance companies for access to their provider networks, “the Arkansas PPA can indirectly regulate the [self-funded] plan through those third-party insurance companies.” As support for this argument, the movants referenced the Supreme Court’s statement in Miller that non-insuring entities administering self-insured plans are engaged in the activity of insurance for the purpose of the savings clause (Miller, 538 U.S. at 336 n.1):

“[N]oninsuring HMOs would be administering self-insured plans, which we think suffices to bring them within the activity of insurance for purposes of [the savings clause].”

The Court, however, held that the movants had taken the Supreme Court’s statement about third-party administrators “out of context”:

The movants, however, take this statement out of context. The Miller Court’s discussion of third-party administrators came as a response to an argument against the application of the savings clause to the Kentucky AWP laws – namely that the application of those laws to non-insuring HMOs prevents the laws from being specifically directed toward entities engaged in insurance. Id. In Miller, the Supreme Court focused solely on the application of the savings clause. The movants’ argument here fails because it ignores the application of the deemer clause to self-funded ERISA plans, a non-issue in Miller, but the controlling issue in this case with regard to the [self-funded] plan.

The Supreme Court has noted repeatedly that because of the deemer clause, statutes that indirectly regulate self-funded ERISA plans are not saved from preemption to the extent such statutes apply to self-funded plans . . Thus, we hold that not only does the Arkansas PPA exempt the [self-funded] plan and other self-funded ERISA plans from direct regulation but also that ERISA preempts any indirect state regulation of those plans because of the deemer clause.

The Eighth Circuit then went on to discuss the civil penalties provision of the Arkansas AWP law which stated that “[a]ny person adversely affected by a violation of this subchapter may sue in a court of competent jurisdiction for injunctive relief against the health care insurer and, upon prevailing, shall, in addition to such relief, recover damages of not less than one thousand dollars ($1,000), attorney’s fees, and costs.” The Kentucky AWP law considered by the Supreme Court in Miller apparently did not contain such a provision. The Eighth Circuit, in holding that ERISA § 502 “completely preempts the civil penalties provision of the Arkansas PPA, Ark. Code Ann. § 99-23-207, with respect to any cause of action that could have been brought under ERISA” relied on the Supreme Court’s recent holding in Aetna Health Inc. v. Davila, 124 S. Ct. 2488 (2004). However, the Court offered no opinion as to the “exact scope of this preemption because the Arkansas PPA’s civil penalties provision extends to ‘[a]ny person adversely affected by a violation’ of the Arkansas PPA and invites a number of possible suits that would require speculation beyond the scope of this appeal.”

(You can access additional posts on the Arkansas AWP law here.)

In anticipation of celebrating July 4th, U.S. Secretary of Labor Elaine L. Chao is calling on young and old workers to “celebrate this Independence Day with a financial checkup.” Read the announcement here. (You can listen to the audio news release from a link here.)

Somehow I don’t think this is what the Secretary had in mind when it comes to “financial independence.” (Humor from the TaxGuru.)