Category: Erisa

I have always thought that it would be a great idea if someone could keep track of practitioners’ “war stories” about DOL and IRS audit activity in order to keep plan sponsors apprised of developments. Ilene Ferenczy has provided some great information about DOL audit activity going on in the Atlanta region in this email update entitled “DOL Working Hard in the Atlanta Area to Ferret out Fiduciary Breaches.” She notes in her article that the DOL examinations she has been involved with recently happen to be targeting small employers (3 – 5 employees) rather than large employers. In one case where the owner of the company was the trustee, she discusses how the DOL had taken issue with the fact that there were no investment policies and procedures in place.

Where can you learn more about the ERISA requirements for investment policy statements? Actually, there is no specific ERISA provision that mandates that a plan have an investment policy statement. However, the DOL has said the following in Interpretative Bulletin 94-2:

The maintenance by an employee benefit plan of a statement of investment policy designed to further the purposes of the plan and its funding policy is consistent with the fiduciary obligations set forth in ERISA section 404(a)(1)(A) and (B).

Also, at least one federal district court has gone farther than that and held that a failure to have an investment policy statement under the facts of the case before the court constituted a breach of fiduciary duty. Liss v. Smith, 991 F.Supp. 278 (S.D.N.Y. 1998). (Sorry, no link to the case that I can find.)

(By the way, Ilene is well-known in the benefits world for her treatise: “Employee Benefits in Merger and Acquisitions.”)

Benefitslink.com has this link here to a recent case in the Southern District of New York, in which Judge Harold Baer denied a motion to dismiss on an age discrimination claim involving a cash balance plan. Judge Baer disagreed with the conclusions reached by the Seventh Circuit in the IBM case:

Part of the Seventh Circuit’s decision relied on a finding that “‘benefit accrual’ (for defined-benefit plans) and ‘allocation’ (for defined-contribution plans) both refer to the employer’s contribution.” Id. at 639. Defendants in this case make a similar argument and they argue that Congress was saying the same thing when they used the term “allocation” in one provision and “rate of benefit accrual” in the other. The fact is accrual, using its dictionary meaning and in line with the structure of defined benefit plans, refers to what the employee accumulates (the outputs from the plan) whereas allocation, using its dictionary definition and in line with the structure of defined contribution plans, refers to what an employer puts into the account. As this Circuit has observed, “[w]hen Congress uses particular language in one section of a statute and different language in another, we presume its word choice was intentional.” U.S. v. Peterson, 394 F.3d 98, 107 (2d Cir. 2005). . .

Although it appears that this ruling may make it more difficult for companies to construct a cash balance plan that comports with ERISA requirements, Congress, not the Courts, is the place to turn for redress. The Second Circuit said as much in Esden¸ “[t]he issue is whether the Plan’s terms complied with the law. They did not.” Id. at 172.

Further, the age discrimination arises because this is a defined benefit plan and older workers accrue their retirement benefits at a slower rate than similarly situated younger workers. As directed by the Supreme Court, my role “is to apply the text, not to improve upon it.” Pavelic & LeFlore v. Marvel Entm’t Group, 493 U.S. 120, 126 (1989). That is the province of Congress, and it addressed some of the tensions that arise when the binary statutory framework is applied to cash balance plans at the time they passed the Pension Protection Act of 2006 this summer.

Many of us will fondly recall the discussion by Third Circuit Judge Edward Becker (1933-2006) on ERISA preemption in the case of DeFelice v. Aetna (which was eventually decided by the U.S. Supreme Court – read about it here and here). In that case Judge Becker discusses how trying to understand ERISA preamble is like a “descent into a Serbonian bog wherein judges are forced to don logical blinders and split the linguistic atom to decide even the most routine cases.” (I discussed Judge Becker’s opinion here.) While not related to the same issues as were decided in the DeFelice case, I was reminded of Judge Becker’s discussion when I saw that the Fifth Circuit had recently withdrawn its opinion pertaining to ERISA preemption in the case of Bank of Louisiana v. Aetna. You can access the prior opinion here and the latest opinion issued October 18, 2006 here. The case is interesting because it shows how, even in trying to resolve contract claims between employers and insurers, the whole tangled mess of ERISA preemption can be a real challenge.

(Also, it seems unusual to find folks arguing that they are ERISA fiduciaries, but that is exactly what happened in the Bank of Louisiana case where the insurer was trying to claim that ERISA preemption applied. See page 9 of the October 18th opinion.)

What is a QDIA? A “qualified default investment alternative” as described in soon-to-be-issued proposed regulations from the Department of Labor which are referenced in this News Release here and outlined in this Fact Sheet here. The News Release states that the “proposed rule [will be] the first major regulation resulting from the Pension Protection Act signed into law by President Bush on August 17, 2006.”

The Pension Protection Act of 2006 provides a safe harbor for plan fiduciaries investing participant assets in certain types of default investment alternatives in the absence of participant investment direction. EBSA will be proposing the regulations to implement “the default investment amendments made to ERISA by the Pension Protection Act.”

The proposed regulation deems a participant to have exercised control over assets in his or her account if, in the absence of investment direction from the participant, the plan fiduciary invests the assets in a QDIA. According to the Fact Sheet, investments that would qualify as QDIAs would be:

• Life-cycle or targeted-retirement-date funds;
• Balanced funds; or
• Professionally managed accounts.

(See the Fact Sheet for additional conditions that QDIAs must meet.)

For more benefits acronyms, see the Benefits Acronym Lexicon.

UPDATE: The Proposed Regulation has now been issued. Access it here.

Don’t miss Michael Fox‘s coverage here of a recent 5th Circuit case holding that a governmental employee can be held individually liable under the FMLA.

At the recent ALI-ABA seminar on Retirement, Deferred Compensation, and Welfare Plans of Tax-Exempt and Governmental Employers, IRS officials stated that, due to the recent changes brought about by the Pension Protection Act of 2006, the IRS plans to start moving cash balance plans out of what the IRS referred to as “cash balance plan jail.” “Cash balance plan jail” is the whimsical name given to the status of numerous cash balance plans (around 1200 plans) which have been submitted to the IRS for a determination letter over the past number of years, and which remain in a holding pattern, since the IRS had suspended the issuance of determination letters on all cash balance plans that had been converted from traditional defined benefit plans. The IRS said at the conference that one of its “high priorities” is to close out the cash balance plans waiting for a determination letter within a year from now (with governmental and nonelecting church plans not subject to section 411 of the Internal Revenue Code at the forefront of the movement). While this is good news for many, there was some bad news mixed in: officials said “some may not get a favorable determination letter.”

It is fairly uncommon to see Circuit Court of Appeals cases where mergers and acquisition issues and benefits issues intersect. That is what happened in this recent Fifth Circuit case of Halliburton Company Benefits Committee v. Graves et al. which is a must-read for benefits lawyers who are involved in transactional work. The case holds that a merger agreement can act as a plan amendment of a benefit plan, even though it is not labeled as a plan amendment. The case also holds that the “no-third-party-beneficiary” clause which is standard in these types of agreements will not protect the surviving company from claims of participants since those claims are protected under ERISA.

What type of subrogation provision in a health plan can be enforced against a plan participant under the Supreme Court’s recent ruling in Sereboff? (Read about Sereboff here.) The Eleventh Circuit in two recent cases–Popowski v. Parrott and BlueCross BlueShield v. Carillo (combined into one opinion)–interpreted Sereboff and held that one type of reimbursement/subrogation provision could be enforced while another could not.

The court upheld the plan’s right to reimbursement in the Popowski case, but rejected the plan’s right to reimbursement under the BlueCross BlueShield (“BCBS”) case. What was the difference in the results? Plan language. Excerpt from the Popowski opinion:

The subrogation and reimbursement provision in the United Distributors Plan claims a lien “on any amount recovered by the Covered Person whether or not designated as payment for medical expenses.” PR1-1, Exh. G at 63. It further clarifies that “[t]he Covered Person . . . must repay to the Plan the benefits paid on his or her behalf out of the recovery made from the third party or insurer.” Id. (emphasis added). Thus, language essentially identical to the Supreme Court’s characterization of the plan language in Sereboff, specifies both the fund (recovery from the third party or insurer) out of which reimbursement is due to the plan and the portion due the plan (benefits paid by the plan on behalf of the defendant). Unlike in Knudson, a significant portion of the funds specified went directly into the Parrotts’ bank account and, thereby, was in their possession for purposes of this case. Thus, at the time they filed their suit, Popowski and the Commerce Group sought “not to impose personal liability on [Parrott], but to restore to the plaintiff[s] particular funds or property in [Parrott’s] possession.” See Knudson, 534 U.S. at 214, 122 S. Ct. at 714-15. Accordingly, we conclude that Popowski and the Commerce Group have stated a claim for “appropriate equitable relief” under § 1132(a)(3) and that the district court erred in dismissing the suit for lack of subject matter jurisdiction.

Contrast that with the court’s decision in the BCBS case:

The subrogation and reimbursement provision in the Mohawk Plan, unlike that of the United Distributors Plan, claims a right to reimbursement “in full, and in first priority, for any medical expenses paid by the Plan relating to the injury or illness,” but does not specify that that reimbursement be made out of any particular fund, as distinct from the beneficiary’s general assets. BCBS Letter Br., Exh. B; BR1-1 at 3. Instead, it makes receipt of “a settlement, judgment, or other payment relating to the accidental injury or illness” a trigger for the general reimbursement obligation. Id. Further, in requiring reimbursement “in full”, it fails to limit recovery to a specific portion of a particular fund. Accordingly, we conclude that, because the Mohawk plan fails to specify that recovery come from any identifiable fund or to limit that recovery to any portion thereof, it fails to meet the requirements outlined in Sereboff for the assertion of an equitable lien for the purposes of 29 U.S.C. § 1132(a)(3). For this reason, we conclude that it was not error to dismiss BCBS’s claims.

The case illustrates how those representing employers and/or health plans should review the plan document language and SPD language to ensure that it tracks the language of Sereboff in order to better ensure that the Plan will be in a position of recovering under the principles laid out in Sereboff.

It is interesting to note that in 2005 the DOL had filed an Amicus Brief in the BCBS case which you can access here.

From the White House: “President Bush Signs H.R. 4, the Pension Protection Act of 2006.” Some comments from the President at the signing:

In a few moments, I will have the honor of signing the most sweeping reform of America’s pension laws in over 30 years, the Pension Protection Act of 2006. . .

Americans who spend a lifetime working hard should be confident that their pensions will be there when they retire. Last year I asked Congress to strengthen protections for the pensions of our workers. Members of both parties came together to pass a good bill that will improve our pension system, while expanding opportunities. .

Today, we’ve taken an important step toward ensuring greater retirement security for millions of American workers. I want to thank the House and the Senate for their good work on this vital legislation. It’s been hard work. It took a lot of pages to write that bill, as you can see. (Laughter.)

You can view a video of the signing by clicking here or a photo of the signing here. See also this Fact Sheet on the Pension Protection Act of 2006 here.

Someone is compiling articles and links on stock option backdating here.

RothCPA.com talks about changes in the law regarding COLI insurance and charitable deductions under the Pension Protection Act here.

Professor Paul Secunda points out a new article by Professor John H. Langbein in a post at the Workplace Prof Blog: Langbein on Judicial Review of Benefit Denials under ERISA. (Professor Langbein has been mentioned in previous posts which you can access here.)