Category: Erisa

Each year, the Joint Committee on Employee Benefits (JCEB) of the American Bar Association meets with officials of federal agencies in Washington, D.C., to discuss issues of interest to employee benefits practitioners. Question and answer transcripts are then prepared and posted on the ABA’s website. The responses reflect the unofficial, individual views of the government participants as of the time of the discussion. You can access the Q & A’s for 2004 at this link as well as Q & A Archives going all the way back to the year 2000 at the same link. (Thanks to Benefitslink.com for the pointer.) These Q & A’s are very interesting reading since the questions presented are generally ones for which there are no clear-cut answers and agency responses are sometimes very enlightening–like this one from the 2004 DOL Q & A’s:

Is a Health Savings Account (HSA) with employer contributions a welfare benefit plan or a pension benefit plan?

Proposed Answer: While an employee can defer distributions from an HSA until termination of employment or beyond, the HSA should not be a pension benefit plan because there is no deferral of income, since the distributions will be tax-free unless the individual uses them for non-covered medical expenses which is expected to be incidental to the health expense purpose of the HSAs. Instead, it should be a welfare plan since the primary purpose is for the provision of health benefits.

DOL Response: The Department expressed the view in Field Assistance Bulletin 2004-01 that HSAs generally will not constitute “employee welfare benefit plans” for purposes of the provisions of TItle I of ERISA. If employer involvement with the HSA is limited as described in the FAB, employer contributions to the HSA of an eligible individual will not result in Title I coverage. To the extent that employer involvement is sufficient for a particular HSA to be an ERISA plan, or part of a large plan, the Department would view an HSA that meets the conditions of the Internal Revenue Code as an employee welfare benefit plan.

The DOL has issued this press release: “U.S. Secretary of Labor Elaine L. Chao Announces Settlements for Global Crossing Retirement Plans.“

The LA Times reports: “Global Crossing Executives Settle Retirement Suit.”

Also, the Wall Street Journal reports–“Labor Department Settles With Former Global Crossing Executives“:

The Labor Department said Tuesday that Global Crossing founder and former Chairman Gary Winnick will pay $25 million from an irrevocable escrow account and former officers and directors, including Mr. Winnick, former Chief Executive Thomas Casey and former members of the employee benefits committee, will pay an additional $54 million from insurance policies, if the court approves the settlement.

“Fiduciaries have a significant responsibility to protect the long-term pension security of their workers,” said Secretary of Labor Elaine Chao. “I hope this lesson gets through to others.”

In March, Global Crossing had settled a related private lawsuit with shareholders, workers and employees for $325 million (read about it here) but, according to the Wall Street Journal report, a clause in the settlement allowed plaintiffs to back out of the agreement if the Department of Labor’s investigation was not resolved to their satisfaction. Back in March, plaintiffs’ lawyers were calling it “the first of [the] leviathan-sized cases to come to a successful close.”

You know, sometimes it just takes awhile for the message to get through. That is what I was thinking as I read Bill Sweetnam’s comments about cash balance plans in this great article from Plan Sponsor entitled “One Bad Apple.” The article provides stories of three companies and their successful implementation of hybrid plans and then provides comments from Bill Sweetnam concerning the present uncertainty that plan sponsors feel with respect to the “legal limbo” over cash balance plans:

William Sweetnam, benefits tax counsel at the US Department of the Treasury, understands the feeling. “You have got one court that says they are inherently age-discriminatory, and you have Congress not letting us finalize the regs and saying this is not age-discriminatory,” he says. “It is not surprising if plan sponsors look at that and say, ‘I am uncomfortable because it is an open issue out there.’”

Treasury had put out proposed regulations stating that cash balance plans are not inherently age-discriminatory, but it cannot finalize those rules until Congress blesses hybrid plans. So, in June, the agency announced that it was withdrawing the proposed regulations to give Congress a chance to review the Bush administration’s cash balance proposals and come up with legislation. . .

Moreover, while some in Congress and elsewhere may question Treasury’s authority to deem the plans not age-discriminatory, “We do have the authority to say that,” Sweetnam contends, “because we interpret the age-discrimination laws for defined benefit plans. They just do not like our interpretation.”

The most interesting comment, in my opinion, came in response to a question about the possibility of Congress passing legislation in 2004 to address the legal uncertainty. Sweetnam responded with optimism, pointing to recent Congressional hearings as an “indicator that lawmakers may be willing to move forward” and seemed to indicate that the message might be finally getting through:

“Some people are realizing that plan sponsors can terminate their plans [or] freeze their plans,” he says.

You can read more about the cash balance plan controversy here or here at Benefitsblog. You can also access previous comments here that Mr. Sweetnam made in November 2003 that were not quite as optimistic.

There are some very interesting statistics provided by Bradley Belt, executive director for the PBGC, at BusinessWeek.com in this online extra–“Q & A with the PBGC’s Bradley Belt“:

Q: Much of what has come out of the PBGC in terms of congressional testimony and published reports seems to reflect concern over the state of the corporate-sponsored defined-benefit system. But some argue the worse may be past. Is that true?
A: By our calculations, total underfunding in the defined-benefit system is still around $400 billion, the largest amount ever recorded and eight times higher than the $50 billion we saw in 2000. Of that $400 billion, more than $80 [billion] is in pension plans sponsored by companies with junk-bond credit ratings, which are at higher risk of defaulting on their obligations. . .

And:

Q: The steel industry restructured itself in large part by removing a lot of its pension obligations through the PBGC. Is that the way the PBGC was intended to function?
A: You won’t find anything in ERISA [the Employee Retirement Income Security Act] that says the PBGC should help particular industry sectors. However, if you look at PBGC’s claims, fully 72% have come from just two industries, airlines and steel.

Those industries represent less than 5% of insured participants. The result is that companies with well-funded plans are supporting the pension obligations of companies whose plans the PBGC has trusteed.

Last week the Committee on Education and the Workforce held a hearing entitled “Examining Cash Balance Pension Plans: Separating Myth from Fact.” Plan Sponsor has an excellent summary of the hearing here.

Don’t have time to read it all? Here are some important excerpts from testimony at the hearing:

Opening Statement by Rep. John Boehner (R-OH), Chairman:

The recent wave of litigation surrounding cash balance plans has raised concerns from employers, workers, and policymakers alike. One well-documented court case involves IBM, but the initial ruling runs counter to existing law and a large body of other court decisions. In this case, the judge found the cash balance plan design inherently age discriminatory because equal pay credits for younger workers have a longer period of time to earn interest and accrue benefits before retirement than the same pay credits for older workers. This interpretation essentially means it would be age discriminatory to make equal contributions on behalf of workers with different ages. This is inconsistent with every other pension design and this logic would make a basic savings account, 401(k) plans, and even Social Security benefits automatically age discriminatory. We’re not here to debate the IBM case, but we also need to make sure cash balance plans aren’t forced into extinction at the expense of the interests of workers.

Most courts have ruled no age discrimination occurs with cash balance plans if the pay and interest credits given to older employee accounts are equal to or greater than those of younger employees. The most recent ruling on this topic, issued just last month in the Tootle case, agrees that cash balance plans are not inherently age discriminatory.

Testimony of James M. Delaplane, Jr., Partner, the Benefits Group of Davis & Harman LLP, Special Counsel, American Benefits Council:

Disregarding the interpretation contained in the proposed regulations and other legal authorities, one federal district court judge dramatically shifted the focus of the debate surrounding hybrid plans by declaring in July 2003 in the case of Cooper v. IBM that hybrid plan designs were inherently age discriminatory. According to the court’s flawed logic, simple compound interest is illegal in the context of defined benefit pension plans. Under the Cooper court’s reasoning, a pension design is discriminatory even if the employer makes equal contributions to the plan on behalf of all its workers and, ironically, even in many instances where the design provides greater contributions for older workers. Such a conclusion flies in the face of common sense. It would hold all 1,200 plus hybrid pension plans, regardless of whether adopted as new plans or through conversion from traditional plans, to be in violation of the pension age discrimination laws.

The conclusion that all hybrid plan designs are inherently age discriminatory begs the question why the Internal Revenue Service issued favorable determination letters for fifteen years blessing hybrid plan designs and issued proposed regulations providing that the cash balance plan design is not inherently age discriminatory. It is surprising, at a minimum, that the Cooper decision completely ignored this history. .

Testimony of Ellen Collier, Director of Benefits, Eaton Corporation, on behalf of the Coalition to Preserve the Defined Benefit System:

If Congress does not move quickly to provide legal certainty for hybrid plans, many Americans may soon lose valuable retirement benefits. The current legal landscape is ominous. One rogue judicial decision has made the threat of age discrimination class action litigation a very real concern for employers. Potential damage awards from such suits could reach astronomical figures — into the hundreds of millions or even billions of dollars – and the potential amounts of these awards continue to grow the longer the plans remain in effect. In Eaton’s case, the cost to modify our plan for alleged “age discrimination” in its design could curtail our ability to commit funds for other important functions, such as for research and development – and this is for a plan that has not yet been in existence for 3 years!

Testimony of Robert L. Clark, Professor, College of Management, North Carolina State University:

. . [P]olicy makers must remember that the pension system is voluntary and employers have many choices. A key concern is what is the appropriate counterfactual if conversions to cash balance plans are not allowed. If cash balance plans are not an option, firms my terminate their defined benefit plans and have no new plan, they might terminate their defined benefit plans and establish a new defined contribution plan, or they may retain the current plan but change the benefit formulas to reduce or eliminate the early retirement subsidies. Would the opponents of cash balance plans prefer one of these options? With this caveat in mind, regulations that are only aimed at preventing cash balance conversions would seem unwise and unlikely to achieve the desired result.

Testimoy of Robert F. Hill, Esq.:

. . . Congress has enacted very specific and very different legal frameworks for defined benefit plans and defined contribution plans. These rules were designed—with a recognition that taxpayers pay hundreds of millions of dollars to subsidize the private tax-qualified pension system–to assure that employees were treated fairly and to avoid abusive practices that undermine the promises made to employees and the employees’ reasonable expectations. The Joint Committee on Taxation has estimated that in 2004 taxpayers will pay about $89 billion in foregone taxes to subsidize the private tax-qualified pension system. It is only right and proper that Congress assure that the taxpayers’ monies provide a system that is fair to all workers, including older workers.

Testimony of Nancy M. Pfotenhauer, President, Independent Women’s Forum:

We believe the emergence of hybrid plans is encouraging news for many and a cause for particular hope among women. In fact, one benchmark study done in 1998 by the Society of Actuaries found that an amazing 77% of women do better under a cash balance approach. They are better off under a cash balance system because they move in and out of the workforce in order to balance family needs and because they cannot afford to take early retirement. Despite this promise, it is clear that controversy exists about how firms should transition to hybrid plans. Many have questioned the fairness of changing pension approaches for employees over 40 years of age.

An alternative perspective, and one that IWF believes has credence, is that any adoption of restrictions that effectively limit the ability of companies to transition to hybrid plans places the financial well-being of the relatively few employees who have had the luxury of staying with one company for a long period of time (decades), have the luxury of taking early retirement, and have the luxury of taking their pension benefit in the form of an annuity rather than as a lump sum, ahead of all of the employees who do not have these options.

The Wall Street Journal today (subscription required) contains this article: “401(k) Payoffs: Are They Legit?“:

Federal securities regulators, expanding their scrutiny of the mutual-fund industry, are examining whether some funds are paying retirement plans to be included in their lineup of available funds. Officials are concerned that the payments aren’t being disclosed and may result in retirement plans offering funds that aren’t in the best interest of investors. The Securities and Exchange Commission said it wants to know why mutual funds and their investment advisers make certain payments to 401(k) plans, what the money is used for and whether it creates an incentive for retirement plans to favor certain funds over others.

Also, from the New York Times: “S.E.C. Inquiry to Encompass 401(k) Plans.”

And from The McHenry Group, this alert: “SEC Launches Sweep Examination of Mutual Fund 401(k) Payments.” The alert inclues the list of twenty-five questions sent to mutual fund companies by the SEC over the past several weeks.

(Obviously, whatever the SEC finds here would also interest the DOL since, under ERISA, fiduciaries are obligated to select plan investment options under the ERISA standard of “solely in the interest of participants amd beneficiaries.”)

From Bloomberg.com, “MCI, WorldCom’s Ebbers Settle 401K Suit for $51 Mln.” According to the article, former executives of WorldCom have agreed to pay about $51 million to settle a class action suit by employees involving the 401(k) plan. The pact must be approved by U.S. District Judge Denise Cote and apparently leaves the 401(k) fund directed trustee as the only active defendant.

Read more about the lawsuit here.

For all those involved with qualified plan administration in some way, add this to your to-do list: print out or bookmark recently issued Private Letter Ruling 200426027 [pdf] and place it in your files for future reference. The PLR expresses the IRS’s views regarding many of the questions practitioners have had in connection with a recent phenomena in the benefits world–that of U.S. attorneys seeking to levy against qualified plan assets pursuant to the Federal Debt Collection Procedures Act of 1977 (“FDCPA”). Read about it in a previous post–U.S. Attorneys Seeking To Levy Against Qualified Plan Assets Under the FDCPA. In the previous post, I mentioned that Jim Holland, Employee Plans Group Manager (Actuarial 1) for the IRS had remarked at an ALI-ABA Annual Fall Employee Benefits Law and Practice Update that there were “still a great deal of unanswered questions regarding levies against qualified plan assets under the FDCPA.” The IRS has answered many of these “unanswered questions” in this PLR.

The IRS makes it clear in the PLR (courts could differ, I suppose) that the U.S. Government cannot garnishee or otherwise collect against a plan participant’s or beneficiary’s benefit until the participant or beneficiary has a right to a distribution under the terms of the plan at issue. In addition, the IRS states that the U.S. Government steps into the shoes of either the participant or beneficiary and can make an election on his or her behalf when such person is eligible for a distribution but has not elected the same. The government is also subject to the qualified joint and survivor annuity rules and other plan provisions to the same extent as either the participant or beneficiary.

Other nuggets of information in the PLR:

(1) Payments made pursuant to the garnishment are not subject to the 10-percent additional income tax imposed under section 72(t) of the Internal Revenue Code.

(2) Lump sum payments made pursuant to orders of garnishment obtained under the Act constitute eligible rollover distributions and are subject to the mandatory 20-percent tax withholding. If payments are in the form of periodic distributions, they are not eligible rollover distributions and are not subject to mandatory withholding.

Sometimes employers have difficulty finding “lost” participants. On the other hand, sometimes former participants have difficulty finding their “lost” pensions. This is a great article from the Journal of the Missouri Bar regarding a topic on which there has been very little written that I know of–“Tracking a ‘Lost’ Pension“:

Claiming a pension benefit for a retiree or older workers from a past employer or company no longer in business is difficult but not insurmountable. Federal law provides certain rights to pension claimants while federal and state agencies, along with the Internet, furnish records to help prove a claimant’s right to a pension. . . As the former director and managing attorney of the OWL Pension Benefits Project, I assisted individuals (usually age 65 and older and already receiving Social Security benefits) claiming pension benefits from a previous employer. Most of these retirement benefits were from defined benefit plans. Many of these companies had gone out of business, left the area, or merged with another entity. Moreover, many claimants did not keep documents evidencing past employment or participation in a pension plan. . .

Some of you may remember a post here at Benefitsblog last October entitled “ERISA preemption: a “Serbonian Bog” in which Judge Becker’s concurring opinion in the case of DeFelice v. Aetna was highlighted. It is interesting to note that Justice Ginsburg (joined by Justice Breyer) issued a concurring opinion in the Aetna Health Inc. v. Davila case decided yesterday by the U.S. Supreme Court (previous posts here and here), in which she refers to Judge Becker’s concurring opinion as follows:

The Court today holds that the claims respondents asserted under Texas law are totally preempted by §502(a) of the Employee Retirement Income Security Act of 1974 (ERISA or Act), 29 U.S.C. § 1132(a). That decision is consistent with our governing case law on ERISA’s preemptive scope. I therefore join the Court’s opinion. But, with greater enthusiasm, as indicated by my dissenting opinion in Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), I also join “the rising judicial chorus urging that Congress and [this] Court revisit what is an unjust and increasingly tangled ERISA regime.” DiFelice v. AETNA U.S. Healthcare, 346 F.3d 442, 453 (CA3 2003) (Becker, J., concurring).

She goes on to note that the Court “has coupled an encompassing interpretation of ERISA’s preemptive force with a cramped construction of the “equitable relief” allowable under §502(a)(3)” so that “a ‘regulatory vacuum’ exists”, emphasizing that “virtually all state law remedies are preempted but very few federal substitutes are provided.”

Her final words in the opinion were as follows:

“Congress … intended ERISA to replicate the core principles of trust remedy law, including the make-whole standard of relief.” Langbein 1319 [pdf]. I anticipate that Congress, or this Court, will one day so confirm.