Category: Erisa

Yesterday’s U.S. Supreme Court ruling in Aetna Health Inc. v. Davila is dominating the news today. (Take a look at the Benefits Buzz at Benefitslink.com today and you’ll see that 12 out of the 18 articles posted pertain to the case.) So I would be remiss, I guess, if I didn’t highlight a few of the articles here. Just a few headlines that caught my eye are as follows:

From Forbes.com, “When Fighting HMOs, Shoot First.”

From USA Today.com, “HMOs win, patients lose, and Congress stays in coma.”

From the AZDailysun.com, “Supreme court: States can’t make up own laws about suing HMOs.” (Apparently, nine other states–Arizona, California, Georgia, Louisiana, Maine, New Jersey, Oklahoma, Washington and West Virginia–have laws similar to the Texas Health Care Liability Act which was at issue in the case.)

Also from USA Today.com, “Democrats renew push for patient bill of rights.”

The Kaiser Network.org reports on the case here, showcasing reactions to the case:

According to USA Today, the Supreme Court decision likely will “put more pressure on Congress to broaden ERISA to allow greater remedies for injured patients” (Biskupic, USA Today, 6/22). The decision also “may well reignite the political battle over the long-stalled patients’ bill of rights in Congress,” the Los Angeles Times reports (Los Angeles Times, 6/22). Congressional efforts to pass patients’ rights legislation “fizzled” in 2001, in part because some states had passed their own laws and because “health plans were already offering broader coverage and the ability to appeal decisions,” according to CQ Today (Schuler, CQ Today, 6/21).

SCOTUSblog has a listing of articles here as well.

The U.S. Supreme Court has issued an opinion in the important case of Aetna Health Inc. v. Davila, consolidated with Cigna Healthcare of Texas v. Calad. The court unanimously reversed and remanded the case in an opinion by Justice Thomas. Justice Ginsburg filed a concurring opinion that Justice Breyer joined. The Court held that respondents’ state causes of action fell within ERISA §502(a)(1)(B), and were therefore completely pre-empted by ERISA §502 and removable to federal court.

The New York Times is reporting–“Supreme Court Sides with HMO’s on Patient Suits“:

The Supreme Court said Monday that patients who claim their HMOs wouldn’t pay for needed medical care cannot sue for big malpractice damages, an issue at the heart of the long debate over efficiency versus service in managed health care. The court was unanimous in saying that two HMO patients in Texas cannot pursue big malpractice or negligence cases against their insurers, as they claimed a Texas patient protection law allowed them to do.

UPDATE: Lyle Denniston (via SCOTUSblog) has written about the case here.
You can also listen to his Audioblog post here.

More on the case later . . .

Jenner & Block has announced a new online resource center devoted to ERISA fiduciary issues pertaining to company stock. A highlight of the resource center for me is this list of ERISA Fiduciary and Company Stock Cases (with links to the actual cases). Also, for those wanting to know what the “Fiduciary Fishbowl” is, check this out.

Pepper Hamilton LLP has posted an article entitled: “ERISA Fiduciary Responsibility: CEOs and Directors In the Bull’s Eye.”

The IRS and Treasury issued this press release today:

Today, the Treasury Department and the IRS announced the withdrawal of proposed regulations on cash balance pension plans and cash balance conversions.

The regulations are being withdrawn to provide Congress an opportunity to review and consider a legislative proposal on cash balance plans that was included in the Administration’s Budget for Fiscal Year 2005. The legislative proposal would require a five-year “hold harmless” period for current employees following a cash balance conversion, would ban benefit “wear-away” after a cash balance conversion, and would clarify the legal status of cash balance plans and other hybrid plans.

What about all of those cash balance plans sitting at the IRS, waiting for determination letters to be issued? Announcement 2004-57 published with the press release contains the following statement:

Beginning September 15, 1999, cases in which an application for a determination letter or a plan under examination involved a cash balance conversion were required to be submitted to the Washington, D.C. office of the IRS for technical advice on the conversion’s effect on the plan’s qualified status. Many such cases were submitted and are still pending. Treasury and the IRS do not intend to process these technical advice cases while cash balance plan and cash balance conversion issues are under consideration by Congress.

U.S. District Judge Catherine Blake for the federal district court in Maryland has provided her opinion on the whole cash balance plan controversy in Tootle v. ARINC, Inc., et al., holding that a company’s cash balance plan did not discriminate against employees because of their age.

Facts of the Case. The company’s defined benefit plan (“DB Plan”) was converted to a cash balance pension plan (“CB Plan”), effective January 1, 1999. Employees who were eligible to participate in the DB Plan at the time of the conversion and who were transferred to the new CB Plan received initial credits to their cash balance accounts equal to the lump sum value of the benefits they had accrued under the DB Plan, as well as bonus “transition credits.” A group of almost 300 employees were offered a choice between continuing under the DB plan or switching to the CB plan. Under the CB plan the percentage of the employee’s salary that was to be credited to the account (the “contribution credit”) increased with the employee’s age. For example, an employee under age 25 would receive a contribution credit of 3% of salary, while an employee age 60 or over would receive a contribution credit of 16% of salary.

The plaintiff was offered a choice between the two plans and agreed to the switch. When he was terminated in March 2002, he elected to take a lump sum distribution of $94,772.24 for his accrued benefits under the CB Plan. An actuary for ARINC had calculated that if the plaintiff had remained under the DB Plan until his termination, he would have been entitled to a lump-sum equivalent of $80,438.42. (The court stated that the “difference of over $14,000 in these two figures may be attributed in part to the transition credits of $11,466 which [plaintiff] received when he switched to the cash balance plan.”) The plaintiff brought suit under the Age Discrimination in Employment Act and ERISA and sought class certification for all participants who “suffered age discrimination due to the conversion” of the plans. The plaintiff claimed that the conversion constituted unlawful age discrimination under ERISA, saying that the manner in which accrued benefits were calculated under the CB Plan favored younger workers.

What the Court Had to Say About Cash Balance Plans

1. “The claim of age discrimination arises because money contributed to a younger employee will be worth more (when expressed as an annuity starting at age 65) than the same amount of money contributed to an older employee, because the contribution to the younger employee will have more years to accrue interest before normal retirement age. . . Stated another way, if any employer contributes the same amount to an employee’s cash balance account every year, the value of those annual benefits (when expressed as an annuity starting at age 65) decreases with every passing year. . . This inevitably results in a declining benefit accrual rate as an employee ages, in apparent violation of ERISA. In other words, all cash balance plans per se violate the ERISA age discrimination provision, by virtue of their design (See Eaton, 117 F. Supp. 2d at 814-15, 823 (noting that if this argument is accepted “it is likely that hundreds of cash balance plans with millions of participants will be deemed illegal”).”

2. “The existing case law on this specific issue is sparse and divided. Compare Cooper, 274 F. Supp. 2d at 1022 (finding violation of ERISA), with Eaton, 117 F. Supp. 2d at 826 (finding no violation of ERISA); see also Campbell, 327 F.3d at 10 (noting problems with this theory of age discrimination). I agree with Judge Hamilton’s conclusion in Eaton that ERISA’s age discrimination provisions do not bar all cash balance plans. First, the legislative history and statutory language provide strong evidence that this aspect of ERISA is not intended to protect workers until after they have attained normal retirement age. See Eaton, 117 F. Supp. 2d at 826-29. Statutory headings in the text of the original enactment and in a parallel age discrimination provision in the Internal Revenue Code enacted at the same time both refer to accrual of benefits “beyond normal retirement age.” See id. at 826 (citing 26 U.S.C. section 411(b)(1)(H) and Omnibus Budget Reconciliation Act of 1986, Pub. L. No. 99-509, 100 Stat. 1874, 1975). Statements in the legislative history confirm that ERISA’s age discrimination provisions were enacted to protect employees after normal retirement age. See Id. at 827-29.”

3. “Applying the ERISA provisions designed for traditional defined benefit plans to cash balance plans could lead to illogical results, as illustrated in this case. On its face the terms of the ARINC cash balance plan appear to favor older employees. All employees are entitled to regular interest credits at the same guaranteed rate, the regular contribution credits are based on a percentage of an employee’s salary that increases with age, and the transition credits were provided in terms slightly more favorable to older employees. The potential claim of age discrimination arises only by applying a definition for accrued benefits which does not fit with the way cash balance plans are structured. The more sensible approach is to measure benefit accrual under cash balance plans by examining the rate at which amounts are allocated and the changes over time in an individual’s account balance, as the ERISA provisions designed for traditional defined contribution plans would direct. Judge Hamilton followed a similar approach in Eaton, adopting the defendant’s suggestion to measure benefit accrual by the changes in an individual’s account balance from year to year. See 117 F. Supp. 2d at 832-33. Applying either the ERISA provisions for defined contribution plans or the approach taken in Eaton ARINC’s cash balance plan does not discriminate against employees because of their age.”

Comments: This case is very important in that it provides another federal district court’s “take” on the cash balance plan controversy, with the count now being 3 to 1 (with 3 courts generally holding that CB Plans do not violate ERISA, and the lone case of Cooper v. IBM et al. holding that they do.) It is interesting to note that Judge Blake in this recent case relied heavily on the reasoning in the Eaton case (holding CB plans did not violate ERISA). Oddly enough, the Eaton case was never even mentioned in the Cooper case which was decided last year.

This recent Tootle case also seems to be consistent with Treasury’s recent proposals which would “clarify that a cash balance plan satisfies the age-discrimination rules if the plan provides pay credits for older participants that are not less than the pay credits for younger participants, in the same manner as any defined contribution plan.”

You can read more about the cash balance plan controversy at this link. Also, PlanSponsor.com has a great article on the case here.

An important Information Letter from the DOL discusses the issue of whether or not an “affiliated service group” within the meaning of section 414(m) of the Internal Revenue Code is a “single employer” for purposes of the MEWA rules of section 3(40) of ERISA. Conclusion: “‘[A]ffiliated service group’ status under section 414(m) of the Code would not, in and of itself, support a conclusion that a group of two or more trades or businesses would be a single employer for purposes of section 3(40) of ERISA.”

Read the guidance for more details . . .

The U.S. Supreme Court has issued an opinion in Central Laborers’ Pension Fund v. Heinz, unanimously affirming a Seventh Circuit holding in the case that the “anti-cutback” rule of ERISA (29 U.S.C. 1054(g)(1)) prohibits “an amendment expanding the categories of postretirement employment that triggers suspension of payment of early retirement benefits already accrued under a pension plan.”

Facts of the case: Retired participants under a multiemployer pension plan (a defined benefit pension plan, referred to as the “Plan”) worked in the construction industry before retiring, and by 1996 had accrued enough pension credits to qualify for early retirement payments under the Plan. The Plan payed the participants the same monthly retirement benefit they would have received if they had retired at the usual age. The benefit was subsidized, meaning that monthly payments were not discounted even though they started earlier. The pension was subject to a condition that prohibited beneficiaries from “disqualifying employment” after they retired. The Plan provided that, if they accepted such employment, their monthly payments would be suspended until they stopped the forbidden work.

When the participants retired, the Plan had defined “disqualifying employment” as any job as “a union or non-union construction worker.” This condition did not cover employment in a supervisory capacity. The individuals took jobs as construction supervisors after retiring, and the Plan continued to pay their pension. However, two years after they retired, the Plan’s definition of “disqualifying employment” was expanded by amendment to include any job “in any capacity in the construction industry (either as a union or non-union construction worker).” The Plan interpreted this definition to mean that it covered supervisory work and warned the retired participants that if they continued on as supervisors, their monthly pension would be suspended. The participants kept working, and the Plan stopped paying.

Discussion: The participants sued to recover the suspended benefits on the ground that applying the amended definition of “disqualifying employment” so as to suspend payment of the accrued benefits violated ERISA’s anti-cutback rule. The District Court granted judgment for the Plan. The Seventh Circuit reversed, holding that imposing the new condition on rights to benefits already accrued was a violation of the anti-cutback rule. This was in direct conflict with the Fifth Circuit, which in the case of Spacek v. Maritime Association, I.L.A. Pension Fund, 134 F.3d 283 (5th Cir. 1998) had held that a post-retirement plan amendment which suspended a retiree’s early retirement benefits was not in violation of the anti-cutback rule. In Spacek, the Court had reasoned that the anti-cutback rule related to a reduction of benefits and not to a suspension of benefits.

The Supreme Court affirmed the Seventh Circuit’s holding in an opinion written by Justice Souter. A one-sentence concurrence was written by Justice Breyer, with the Chief Justice, Justice O’Conner and Justice Ginsberg joining in. The concurrence states that the Secretary of Labor or Secretary of Treasury should be allowed to issue regulations explicitly allowing plan amendments to enlarge the scope of “disqualifying employment” with respect to benefits attributable to already-performed services.

One of the most interesting parts of the case is that the Court notes a statement in the Internal Revenue Manual which had supported the position that the amendment could be made, and that the IRS had routinely approved amendments to plan definitions of “disqualifying employment.” However, the Court cited Treasury regulations under Internal Revenue Code section 411(d)(6) as creating a conflict with these provisions. The Court held that these Treasury regulations “flatly prohibit[ed] plans from attaching new conditions to benefits that an employee has already earned.”

In a footnote, the court states:

Nothing we hold today requires the IRS to revisit the tax-exempt status in past years of plans that were amended in reliance on the agency’s representations in its manual by expanding the categories of work that would trigger suspension of benefit payment as to already-accrued benefits. The Internal Revenue Code gives the Commissioner discretion to decline to apply decisions of this Court retroactively. . . [T]his would doubtless be an appropriate occasion for exercise of that discretion.

The court also states:

This is not to say that section 203(a)(3)(B) does not authorize some amendments. Plans are free to add new suspension provisions under section 203(a)(3)(B), so long as the new provisions apply only to the benefits that will be associated with future employment.

(This case could have far-reaching implications for the suspension of benefit rules even in the non-multiemployer setting. Query: Will the opinion affect IRS rules providing that, as noted in the briefs, no actuarial adjustment is required for benefits suspended under the suspension of benefit rules. As the Government’s Amicus Brief (filed in favor of the plan) states:

The regulations . . specify that, in computing the actuarial equivalent of the retirement benefit available at normal retirement age for the purposes of this provision, “[n]o adjustment to an accrued benefit is required on account of any suspension of benefits if such suspension is permitted under [ERISA] section 203(a)(3)(B).” 26 C.F.R. 1.411(c)-1(f). The Fifth Circuit correctly concluded in Spacek that, “because the reduction in total benefits paid over the lifetime of the plan participant as a result of the suspension need not be accounted for actuarially in computing the participant’s accrued benefit under [29 U.S.C.] § 1054(c)(3),” an amendment authorizing such a suspension “does not serve to decrease the participant’s accrued benefits, and thus cannot violate [the anti-cutback provision of] § 1054(g).” 134 F.3d at 291

Other Resources Pertaining to the Case:

Oral Argument Transcripts are here (via Appellate.net). Briefs are here and here with an amicus brief filed by the government on behalf of the Plan here.

A previous post about the case is here.

Articles:

• USA Today.com: “Supreme Court rules against pension plan”
• Reuters: “Court: Retiree Pension Benefits Can’t Be Cut”
• The New York Times: “Supreme Court Rules in Favor of Early Retirees Denied Pensions”

Regarding audioblogs highlighted here in this post, SCOTUSblog (a blog devoted to Supreme Court coverage) has a new Audio-Blog component which yesterday featured Lyle Denniston summarizing the rulings issued by the U.S. Supreme Court. Access it here.

Speaking at the 49th CEO Summit of the Chief Executive Leadership Institute at the Yale School of Management, U.S. Secretary of Labor Elaine L. Chao had some strong words for CEOs regarding the topic of pension plan governance:

1. “With trillions of dollars in assets, our nation’s retirement plans are major players in the economy. Pension plans are significant institutional investors in the Fortune 500. Out of the $15.5 trillion in corporate stock currently outstanding, ERISA regulated pension plans hold $1.9 trillion or about 12 percent. State and local pension plans hold another $1.3 trillion. This means about 20 percent of all corporate stock is held by pension plans. The health of our nation’s pension assets and our nation’s private economy, therefore, is deeply intertwined.”

2. “In the course of recovering workers’ pension assets, we have seen a clear lack of understanding or appreciation of the fiduciary’s responsibilities under ERISA. Today, a CEO is much more than the manager of an organization. He or she is a steward of the vitality of our economy and the public trust. Executive decisions need to be made not only in the short-term interest of the organization, but with an eye to the long-term interest of the economy and the preserving the benefits of the free enterprise system. That’s why I am here today to discuss the need for corporate and organizational CEOs to be more aware and vigilant about the responsibilities of being pension fiduciaries and to review the steps that should be taken to ensure that retirement promises made to workers are kept.”

3. “To begin with, it is important for CEOs to be aware of who are the fiduciaries of their employees’ pension plans. Under ERISA, each plan must have a named fiduciary, designated in the plan documents. In many cases, the named fiduciary is the CEO or the Board of Directors. But it is permissible, in fact common, for the CEO or Board to designate someone else. Often, an administrative committee serves as the fiduciary and manages the operation of the plan. It is important to note, however, that designating another person or entity to manage a plan does not relieve the CEO—or other named fiduciary—of responsibility or liability. The CEO or designating official has a responsibility to monitor the performance of the fiduciary of the plan. That means reading their reports, holding regular meetings regarding the performance of the plan, and providing the designated plan managers with necessary information. It also means updating plan documents and taking action if the designated fiduciary makes imprudent decisions.”

4. “Updating plan documents may sound pretty obvious. But you would be surprised how many times the Department has audited plans and found inconsistent provisions or the failure to make amendments that reflect corporate changes. This is not just a clerical problem. Under the law, the plan must be administered in accordance with its terms. If its terms are inconsistent or unclear, a whole host of legal problems can occur.”

5. “. . . [I]t is more important than ever for CEOs to be aware of and pay attention to pension plan governance. The time has come to move the focus of pension plan governance out of the human resources department and beyond compliance with tax laws. The executive level suite needs to focus on pension plan governance itself, especially the responsibility and liability of pension plan fiduciaries.“

I was surprised not to find anything in the news about this appellate decision–Millsap et al. v. McDonnell Douglas Corporation (issued May 21, 2004) after there was so much publicity around the lower court decision last year. (Previous post here.) The case is notable due to the fact that it represents one of the few ERISA section 510 plant closing cases where employees have prevailed. The 510 claims were brought by former employees in a class action suit against their employer, alleging that the employer closed one of its plants for purposes of preventing employees from attaining eligibility for benefits under their pension and health care plans.

ERISA Section 510. For those not familiar with ERISA section 510, it provides as follows:

It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan. . . or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan. . .

District Court Decision. After a ten day bench trial, the lower court (no link available) had ruled in favor of the former employees, holding that the employer had indeed violated ERISA section 510 in closing the plant. Some of the most damaging evidence used to prove the ERISA 510 claims were memos from the actuaries analyzing the reduction in benefits which would occur if the plant were closed. One such memo prepared by the actuaries considered “various ‘what if’ scenarios, analyzing the effect on costs and savings if the company decided to reduce heads.” The kinds of costs analyzed included “pension cost, savings cost, savings plan cost, health care cost, and just direct overhead cost.” (This previous post discusses the attorney-client privilege aspect of the decision.)

The lower court held that plaintiffs could recover backpay because the award constituted “equitable relief” under ERISA section 502(a)(3).

The Settlement. The parties subsequently entered into a “Stipulation of Settlement” compensating plaintiffs in the amount of $36 million for their lost pension and health care benefits. (The court awarded attorneys’ fees in the total amount of $8.75 million and costs in the amount of $1 million to class counsel.) However, the settlement stipulation required judicial resolution of the availability of backpay under ERISA section 502(a)(3). The district court approved the settlement and certified the controlling question of law for appeal.

On Appeal. The question before the court, as stipulated by the parties, was this:

[W]hether, in this ERISA section 510 case and as a result of Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), backpay (and, as a result, any other damages based upon backpay) are available as “appropriate equitable relief” to the class members pursuant to ERISA section 502(a)(3).

The controversy stemmed from the remedies provided under ERISA section 502(a)(3):

A civil action may be brought . . . by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of [Title I of ERISA] or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of [Title I of ERISA] or the terms of the plan[.]

On appeal, the Tenth Circuit reversed the district court and ruled that the award of backpay was not recoverable under the statute because it did not constitute “equitable relief.” In reversing the lower court, the Tenth Circuit emphasized that under ERISA section 502(a)(3), unlike Title VII section 706(g) and NLRA section 10(c), Congress did not specifically make backpay part of an equitable remedy. The court also noted that the remedial purpose of section 502(a) was not to make the aggrieved employee whole, as plaintiffs had argued.

Circuit Judge Lucero dissenting. The dissent states as follows:

Under the majority’s result, the class plaintiffs are entitled to neither reinstatement nor back pay. Not only does the majority’s holding fail to deter ERISA violations, it also encourages employers who violate ERISA to delay proceedings as long as possible, “lead[ing] to the strange result that . . . . the most egregious offenders could be subject to the least sanctions.” Pollard v. E.I. du Pont de Nemours & Co., 532 U.S. 843, 853 (2001). Because I disagree that Congress intended this result or that precedent demands it, I respectfully dissent. . .

The majority’s result is similarly disconcerting. Here, reinstatement would have been an appropriate equitable remedy had [the defendants] not so delayed proceedings as to make reinstatement impossible. Thus, through no fault of their own, the class plaintiffs find themselves devoid of the undeniably appropriate equitable remedy of reinstatement. Back pay, which was integral to the relief sought by the plaintiffs at the onset of this litigation, provides an appropriate equitable alternative.

Both the Department of Labor (here) and the AARP (here) filed Amicus Briefs in the case, arguing that backpay should be awarded. The United States Chamber of Commerce filed an Amicus Brief (here [pdf]), arguing that the lower court decision should be overturned and that backpay should not be awarded under ERISA section 510.

Chubb Group of Insurance Companies has issued its results in the The Chubb 2004 Private Company Risk Survey. You can access the Fiduciary Liability Survey Results here. According to the survey:

• Only 5% of the private companies surveyed reported that a retired employee had brought a suit against the company, directors and officers, and/or benefits plan administrators and fiduciaries within the past few years.
• Almost 1 in 4 executives said that they thought it was likely that such suits would occur this year.
• Two-thirds of the private firms said that they planned to reduce employee benefits during 2004. (The Survey indicates that employee benefit reductions generally increase the risk of a fiduciary liability lawsuit.)
• Over a third of the companies appeared to be taking positive steps to ward off the threat of lawsuits against their companies and fiduciaries.

On the employment practices liability side of things, the Survey came up with these findings as reported in the press release:

One in four privately held companies has been sued by an employee or former employee in the past few years . . . Executives at as many as half the firms surveyed say it is likely that an employee may sue them, their board members and their companies and/or lodge a discrimination complaint with federal or state authorities in 2004. And nearly one-third believe that an allegation or actual case of wrongful termination, discrimination or harassment has the potential to inflict financial or other serious damage to their company.