U.S. Supreme Court Decision: Yates v. Hendon

The Sixth Circuit seems to have been in the limelight lately for its controversial bankruptcy decisions involving retirement plans. As you may recall, at the end of last year, the Sixth Circuit issued a controversial decision involving 403(b) plans and…

The Sixth Circuit seems to have been in the limelight lately for its controversial bankruptcy decisions involving retirement plans. As you may recall, at the end of last year, the Sixth Circuit issued a controversial decision involving 403(b) plans and bankruptcy which was the focus of a previous discussion at Benefitsblog (and also here at ERISAblog)–“403(b) Plans Take a Turn for the Worst in the Sixth Circuit.” The Sixth Circuit was at the helm again in another controversial bankruptcy case involving a retirement plan which has been reversed by the U.S. Supreme Court. The case is Yates v. Hendon, No. 02-458. You can access the case here.

The question presented in Yates was whether a working owner of a business is an ERISA plan “participant” and thus has the right to enforce the plan’s anti-alienation provisions against a bankruptcy trustee. The Sixth Circuit had said no to this question in this 2002 decision. The Supreme Court issued an opinion today that said yes (in a 9-0 decision) so long as the plan covers one or more employees other than the business owner and his or her spouse.

Under the facts of the case, a debtor in bankruptcy–a physician–was the sole owner of a professional corporation which maintained a profit sharing/pension plan. The plan had four participants, one of which was the physician. The debtor-physician borrowed $20,000 from the plan at 11 percent interest in 1989, was supposed to make monthly payments, but failed to. In June of 1992, the term of the loan was extended for five years. Still no monthly installments were paid. In mid-November of 1996, however, at a time when the physician was apparently insolvent, the physician used proceeds of a house sale to make payments to the plan in amounts totaling $50,467.46. This figure represented repayment of the loan in full, with accrued interest.

On December 2, 1996 – three weeks after the repayment – an involuntary bankruptcy petition was filed against the physician under Chapter 7, Title 11, of the United States Code. Eight months later the trustee in bankruptcy commenced an adversary proceeding against the plan and its trustee, asking the court to (a) set the repayment aside as a preferential transfer and (b) order that the money be paid over to the bankruptcy trustee. According to the Court, it was undisputed that the $50,467.46 transfer made to the plan in November, 1996, qualified as a preference under 11 U.S.C.

DOL’s Proposed Regulations: Safe Harbor for ERISA Fiduciary Responsibility Pertaining to Automatic Rollovers

As part of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), Congress enacted a provision requiring a plan to roll over the accounts of participants that exceed $1,000 (but do not exceed $5,000) and are distributable, if…

As part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), Congress enacted a provision requiring a plan to roll over the accounts of participants that exceed $1,000 (but do not exceed $5,000) and are distributable, if the participant does not elect to roll over the account directly or to receive the distribution. This EGTRRA provision, however, was not effective until the DOL issued guidance, and EGTRRA required the DOL to issue this guidance by June 7, 2004. In accordance with its directive, the DOL has issued proposed regulations providing this guidance and establishing a safe harbor pursuant to which a fiduciary of a pension plan subject to Title I of ERISA will be deemed to have satisfied his or her fiduciary responsibilities in connection with the provisions. Also, the DOL has issued a notice of proposed class exemption permitting a fiduciary of a plan, who is also the employer maintaining the plan, to establish, on behalf of its separated employees, an individual retirement plan at a financial institution which is the employer or an affiliate.

While there will be more on this later, a few observations are as follows:

(1) On January 7, 2003, the DOL published a notice requesting information on a variety of issues relating to the development of this safe harbor. In response, the DOL received 17 comment letters which you can access here.

(2) With respect to requirements of the USA Patriot Act (“Act”), commenters had pointed out that the customer identification and verification provisions (“CIP”) of the Act might preclude banks and other financial institutions from establishing individual retirement plans without the participation of the participant or beneficiary on whose behalf the fiduciary is required to make an automatic rollover. This is because in most of the situations where a fiduciary is required to make an automatic rollover to an individual retirement plan, the participant or beneficiary is unable to be located or is otherwise not communicating with the plan concerning the distribution of plan benefits.

However, the proposed regulation notes that, in response to these issues, Treasury staff, along with staff of the other Federal functional regulators, have advised the DOL that they interpret the CIP requirements of section 326 of the Act and implementing regulations to require that banks and other financial institutions implement their CIP compliance program with respect to an account, including an individual retirement plan, established by an employee benefit plan in the name of a former participant (or beneficiary) of such plan, only at the time the former participant or beneficiary first contacts such institution to assert ownership or exercise control over the account. The proposed regulation states that “CIP compliance will not be required at the time an employee benefit plan establishes an account and transfers the funds to a bank or other financial institution for purposes of a distribution of benefits from the plan to a separated employee.”

In January of this year, Treasury staff, along with staff of the other Federal functional regulators, issued guidance on this matter in the form of a question and answer, published in a set of “FAQs: Final CIP Rule,” which you can access here and here. The FAQs provide:

. . .[I]n light of the requirements imposed on the plan administrator under EGTRRA, as well as the requirements in connection with plan terminations, the former employee will not be deemed to have “opened a new account” for purposes of the CIP rule until he or she contacts the bank to assert an ownership interest over the funds, at which time a bank will be required to implement its CIP with respect to the former employee.

This interpretation applies only to (1) transfers of funds as required under section 547(c) of EGTRRA, and (2) transfers to banks by administrators of terminated plans in the name of participants that they have been unable to locate, or who have been notified of termination but have not responded, and should not be construed to apply to any other transfer of funds that may constitute opening an account.

(3) Commenters had raised issues concerning state escheat laws which would apply since ERISA does not govern IRA’s and thus would not preempt state escheat laws which could apply. The proposed regulation states that “[i]ssues raised by commenters concerning the possible application of state laws are beyond the scope of this regulation.”

(4) Many had hoped that the safe harbor would also apply to rollovers of amounts less than or equal to $1,000. (EGTRRA limited the automatic rollover provision to amounts in excess of $1,000 but less than $5,000.) The DOL declined to extend the safe harbor to distributions less than or equal to $1,000, stating that “[w]hile the Department agrees with the commenter that similar considerations may be relevant to such rollovers, the Department did not adopt this suggestion in light of Congress’ direction to provide a safe harbor for automatic rollovers of mandatory distributions described in section 401(a)(31)(B) of the Code.”

(5) The proposed regulations dictate that the mandatory distribution be invested in an “investment product designed to preserve principal and provide a reasonable rate of return, whether or not such return is guaranteed, consistent with liquidity” and that the investment product’s fees meet certain requirements. The DOL in its preamble notes that such safe harbor investment products would typically include money market funds, interest-bearing savings accounts, certificates of deposits, and “stable value products.” The DOL rejected suggestions made by commenters that the participant’s investment in the plan should be “mapped.”

(5) Please note that one of the conditions required to be satisfied in order to meet the safe harbor proposed in the regulations is that participants have to have been furnished with a summary plan description or summary of material modification that describes the plan’s automatic rollover provisions, including an explanation that (1) the mandatory distribution will be invested in an investment product designed to preserve principal and provide a reasonable rate of return and liquidity, as well as (2) a statement indicating how fees and expenses attendant to the individual retirement plan will be allocated, and (3) the name, address and phone number of a plan contact (to the extent not otherwise provided in the summary plan description or summary) for further information concerning the plan’s automatic rollover provisions, the individual retirement plan provider and the fees and expenses attended to the individual retirement plan. In other words, if the Summary Plan Description has not been updated or an SMM issued containing this information, the safe harbor requirements would not be met.

(Some background regarding the EGTRRA provision: EGTRRA amended section 401(a)(31) of the Code to require that, absent an affirmative election by the participant, certain mandatory distributions from a tax-qualified retirement plan be directly transferred to an individual retirement plan of a designated trustee or issuer. Specifically, section 657(a) of EGTRRA added a new section 401(a)(31)(B)(i) to the Code to provide that, in the case of a trust that is part of an eligible plan, the trust will not constitute a qualified trust unless the plan of which the trust is a part provides that if a mandatory distribution of more than $1,000 is to be made and the participant does not elect to have such distribution paid directly to an eligible retirement plan or to receive the distribution directly, the plan administrator must transfer such distribution to an individual retirement plan. Section 657(a) of EGTRRA also added a notice requirement in section 401(a)(31)(B)(i) of the Code requiring the plan administrator to notify the participant in writing, either separately or as part of the notice required under section 402(f) of the Code, that the participant may transfer the distribution to another individual retirement plan.)

Thanks to the Retirement Hour . . .

Thanks to Matt Hutcheson and Rick Meigs for inviting me to be a guest on the Retirement Hour last night! I enjoyed it very much. They have a great show, by the way, and you can listen in here on…

Thanks to Matt Hutcheson and Rick Meigs for inviting me to be a guest on the Retirement Hour last night! I enjoyed it very much. They have a great show, by the way, and you can listen in here on the East Coast at 7:00 p.m. every Thursday by accessing a link here. I will add a permanent link for the Retirement Hour over in the right-hand column in the near future.

(Access a previous post on the Retirement Hour here.)

Arkansas Federal District Court Lifts 1998 ‘Any Willing Provider’ Injunction

Thanks to a reader who left a comment yesterday in this previous post and alerted me to this development: "Federal court dissolves 'any will provider' injunction." In the previous post, I noted how an Arkansas any willing provider law ("AWP…

Thanks to a reader who left a comment yesterday in this previous post and alerted me to this development: “Federal court dissolves ‘any will provider’ injunction.” In the previous post, I noted how an Arkansas any willing provider law (“AWP law”) had been barred from being enforced after a federal appeals court in 1998 issued an injunction, concluding that the law ran contrary to ERISA. However, as many of you know, the U.S. Supreme Court case of Kentucky Association of Health Plans v. Miller, decided back in April of last year, held that Kentucky’s AWP law was not preempted by ERISA (discussed in previous posts which you can access here.) After the Miller case, Arkansas Blue Cross and Blue Shield filed suit in federal court back in August asking for “a judicial determination” on how the Miller case impacted the Arkansas AWP law. Certain providers had been writing Blue Cross, demanding access to the plans’ network and citing the Supreme Court case as authority for the proposition that the Arkansas law should be enforced.

According to this recent article, the injunction has now been lifted by a federal district court in Arkansas and “Blue Cross and Blue Shield of Arkansas may soon have to open up its massive statewide managed care network to “any willing provider,” or any provider willing to abide by its network rules.”

ERISA Rights Model Statements Not a Forum Selection Clause, According to the 7th Circuit

Jottings by an Employment Lawyer provides the following discussion of the case of Cruthis v. Metropolitan Life (7th Cir. 2/2/04) [pdf]: MetLife was no doubt shocked when it removed a claim for disability benefits under an employee benefit plan to…

Jottings by an Employment Lawyer provides the following discussion of the case of Cruthis v. Metropolitan Life (7th Cir. 2/2/04) [pdf]:

MetLife was no doubt shocked when it removed a claim for disability benefits under an employee benefit plan to federal court on the basis of a federal question and had it remanded to state court. The district court relied on language in the STATEMENT OF ERISA RIGHTS which provides in part, “If you have a claim for benefits which is denied or ignored, in whole or in part, you may file suit in a state or federal court.” Interpreting this as a contractual forum selection clause, the court held that MetLife was bound by an agreement that the case could be heard in state court. Since MetLife had copied a model form provided by the DOL for compliance with ERISA, it was less than pleased. Fortunately, the 7th Circuit had jurisdiction to hear the appeal of the remand since it was based on a choice of forum clause rather than a lack of jurisdiction.

On appeal, the 7th Circuit held that the statement was not a contractual agreement, but just a statement of rights, and sent the case back to the district court for a ruling on the merits, stating as follows:

We conclude that MetLife’s statement clearly was made to comply with ERISA’s disclosure requirements. Significantly, MetLife copied the model statement quoted above verbatim. Moreover, there is no evidence that the statement was intended to be part of the contract between the parties. The clause began with the capitalized title “STATEMENT OF ERISA RIGHTS” and the first sentence states that “[t]he following statement is required by federal law and regulation.” The statement further specified that “[u]nder ERISA there are steps you can take to enforce the above rights.” Thus, the plain language of the statement indicates that it is a disclosure of applicable law rather than a substantive contract provision.

Michael Fox notes the time, expense and attorneys fees caused by the erroneous opinion. While there is very little about the facts of the case in the opinion, it is interesting to note that this is one of those many “denial of disability benefits” cases which is making its way through the courts as discussed in this Workforce Management article.

Also, regarding the ERISA rights statement, remember this case? Prescott v. Little Six, Inc., 2003 U.S. Dist. LEXIS 17484 (D. Minn. 2003)? According to the court in Prescott, an Indian tribal government entity waived its tribal sovereign immunity from lawsuits in federal court based upon language in the model statement of ERISA rights. In deciding that the tribal entity had waived its immunity, the court relied in part on several plans’ SPDs, each of which contained language from the model statement. The court keyed in on this language that a plan participant “may file suit in a federal court” if a benefit claim was denied, in holding that the tribal entity had waived its sovereign immunity.

Judge Patrick Murphy has issued a Memorandum and Order in the case of Cooper v. IBM Personal Pension Plan and IBM Corporation. The Memorandum and Order grants plaintiffs' motion to strike defendants' attempt to assert "an affirmative defense out of…

Judge Patrick Murphy has issued a Memorandum and Order in the case of Cooper v. IBM Personal Pension Plan and IBM Corporation. The Memorandum and Order grants plaintiffs’ motion to strike defendants’ attempt to assert “an affirmative defense out of time, or, in the alternative, to compel discovery and for extension of time.” IBM was arguing against the retroactive relief requested by plaintiffs based upon an argument that IBM was “blind-sided by what is characterized as a drastic change in the law.” IBM argued that the Court’s declaration that IBM’s 1995 PCF and 1999 cash balance plan violated the age discrimination prohibitions of ERISA section 204(b)91)(H) was a “startling new development in pension law” so that the “Court should exercise its discretion and grant only prospective relief.”

The Court says the following, in granting plaintiffs’ motion to strike:

. . . IBM is by no means in the sympathetic position of the employer in Manhart. Defined benefit plans are highly regulated and strictly scrutinized relative to defined contribution plans. The prohibition against age discrimination existed long before the appearance of cash balance plans. Indeed, the voluminous record in this case unequivocally shows that cash balance plans were a “response” to the long standing restrictive proscriptions that are the woof [warp?] and weave of a defined benefit plan. If this Court is correct, then the class is entitled to retroactive relief. There has not been a change in the law. All that has changed is IBM’s clever, but ineffectual, response to law that it finds too restrictive for its business model. . .

More on the Elapsed Time Regulations . . .

In a previous post, I discussed how the "elapsed time" regulations were recently challenged and upheld in a Ninth Circuit case. Thanks to Kirk Maldonado (of the well-known 1987 DOL plan expense Information Letter) for providing some helpful background for…

In a previous post, I discussed how the “elapsed time” regulations were recently challenged and upheld in a Ninth Circuit case. Thanks to Kirk Maldonado (of the well-known 1987 DOL plan expense Information Letter) for providing some helpful background for these regulations:

Express statutory authority for the elapsed time method of crediting service is lacking. The legislative history of the Employee Retirement Income Security Act of 1974 (ERISA) is also void of any reference to the elapsed time method, despite the fact that this method had been used by plans before ERISA (see Ryan School Retirement Trust, 24 TC 127 (1955)).

On the other hand, Service 410(a)(3)(C) grants authority to the Secretary of Labor to prescribe Regulations defining “hour of service.” This grant of authority can arguably be extended to promulgate equivalent methods of crediting “hours of service,” such as the elapsed time method.

The validity of the elapsed time Regulation was questioned in Automated Packaging Systems, Inc., 70 TC 214 (1978). In Automated Packaging the plan did not contain the service-spanning rules although it otherwise satisfied the elapsed time requirements. The taxpayer argued that these rules contravene Congressional intent because they required credit for time when the employee was not employed.

The Tax Court, citing the legislative history, held that it was consistent with the Congressional intent to provide for crediting service on a more liberal approach than required by the general method. However, the court explicitly refrained from deciding the validity of the Regulation where the elapsed time method would credit service on a less liberal basis than the general method.

Kirk also writes:

Not many people know that the proposed elapsed time regulations were drafted by the DOL. However, the DOL and the IRS realigned their jurisdictions over different employee benefit plan matters in the Reorganization Plan of 1978. That document explains, for example, why DOL has control over certain issues relating to prohibited transactions, while other issues remain with the IRS. Anyway, the responsibility for the elapsed time regulations was shifted to the IRS in the Reorg.

UPDATE 2: Kirk has posted some good information here regarding the “elapsed time” regulations.

UPDATE 1: For those of you wanting to read the Maldonado Information Letter referred to above, continue reading. It is a DOL Information Letter to Kirk Maldonado, issued on March 2, 1987, and is not posted at the DOL’s website:

March 2, 1987

Mr. Kirk F. Maldonado

Stradling, Yocca, Carlson & Rauth

660 Newport Center Dr., Suite 1600

Newport Beach, CA 92660-6441

Dear Mr. Maldonado:

This is in response to your letter of July 16, 1986, and subsequent letters of August 26, 1986, and October 14, 1986, in which you request an advisory opinion on the application of the Employee Retirement Income Security Act (ERISA) to the payment of certain expenses by the Canoga Park Hospital Retirement Plan (the Plan).

You represent that the Plan specifies that it may pay certain administrative expenses incurred in the operation of the Plan which are explicitly set forth to include:

(1) Attorney’s fees incurred in connection with amending the plan to comply with legislative, case law and regulatory developments;
(2) Annual valuations of the sponsoring employer’s stock held by the Plan;
(3) Annual audit of the Plan performed by a certified public accountant;
(4) The fees of an outside consultant performed in connection with the administration of the Plan (e.g., preparation of benefit statements to participants): and
(5) The fees paid to members of the Committee. (Subject to the rule of ERISA section 408(c)(2), prohibiting payment of compensation by a plan to any individual who is receiving full-time pay from an employer whose employees are participants in the plan.)
You ask whether the above expenses authorized by the plan constitute

Treasury’s Cash Balance Plan Proposal

Yesterday, the Treasury Department released its legislative proposals regarding cash balance plans in response to a requirement Congress imposed in a recent Appropriations Act (which you can read about here.) The proposal is contained in the 2004 Blue Book entitled…

Yesterday, the Treasury Department released its legislative proposals regarding cash balance plans in response to a requirement Congress imposed in a recent Appropriations Act (which you can read about here.) The proposal is contained in the 2004 Blue Book entitled “General Explanations of the Administration’s Fiscal Year 2005 Revenue Proposals.” No actual statutory language has been published as yet.

You can read the Treasury Department‘s press release here. Remarks by Secretary John Snow: “This proposal will make sure that every company converting to a cash balance plan deals fairly with its older workers. Cash balance plans play an important role in achieving retirement security for millions of American workers and their families. But we must make sure that companies changing from a traditional pension to a cash balance pension include a fair transition for older workers. Cash balance plans can be a better option, particularly for today’s younger, more mobile workforce.”

By the way, Benefitslink has posted that portion of the Blue Book pertaining to the cash balance plan proposals entitled “Strengthening the Employer Based Pension System” here.

Response to the proposals:

The American Benefits Council: “Treasury’s hybrid pension plan proposal offers some good news, some cause for concern.”

The ERISA Industry Committee: “Administration Proposes Legislation for Hybrid / Cash Balance Plans.”

Towers Perrin in a press release: “Towers Perrin Says Treasury Department’s Proposed Legislation to Protect Defined Benefit Plans and Older Workers Reaffirms Legitimacy of Cash Balance Plans.”

Finally, a Summary of 2/2/04 Treasury Briefing on Bush Administration Legislative Recommendations Regarding Hybrid Pension Plans Prepared by the Benefits Group of Davis and Harman LLP from Benefitslink as well.

The Wall Street Journal has this article: “Pension Rules Proposed: Measure Aims to Protect Older Workers if Concerns Shift to Cash-Balance Plan.” The article reports: “The proposal, part of the Bush administration’s budget, is politically charged. Though intended to address concerns of both companies and their older workers, the plan has received only tepid support from employers, and also is drawing fire from employee advocates.”

The New York Times: “Treasury Dept. Plans New ‘Cash Balance’ Pension Regulations.”

Reuters via Forbes.com: “US Treasury offers new cash balance pension rules.”

The first Law Firm report on the proposal:

Faegre & Benson: “Treasury Proposes Legislation Approving Cash Balance Pension Plans Prospectively.”

Lessons for ERISA Fiduciaries from a Ninth Circuit Case

After an economic downturn such as the last two years, with week after week bringing more news of company lay-offs, the following case could have relevance for employers seeking to deal with the myriads of legal issues which can result…

After an economic downturn such as the last two years, with week after week bringing more news of company lay-offs, the following case could have relevance for employers seeking to deal with the myriads of legal issues which can result from such lay-offs: Johnson v. Gore & Associates decided January 23, 2004 by the Ninth Circuit. The case highlights the confusion surrounding the term “lay-off,” and how the use of this term can have significance in determining what terminated employees are entitled to under severance plans and retirement plans.

The Facts: The employer here (the “Employer”) announced that it was closing a plant and repeatedly described to employees that it was a “layoff.” However, the Employer also issued a WARN notice and stated that, due to a “business relocation,” employment with the Employer would be permanently terminated. The plan at issue here was called the “Associates Stock Ownership Plan” and credited service based on the elapsed time method of crediting service, had a five year “cliff” vesting schedule, and had an “employment on the last day” requirement for receiving an allocation of Employer contributions for the year. Employees who lost their job due to the plant closing joined in a class action, seeking credit for an additional year of service. Their benefits had not yet vested because they had worked for the Employer more than four, but less than five years. There was also an additional class of plaintiffs who were vested, but did not share in the Plan contribution for the year because they lost their jobs prior to the last day of the Plan year. The Employer sought a motion for summary judgment which was granted by the district court and affirmed on appeal.

A debate over the “elapsed-time” method of crediting service. Before we glean some lessons for ERISA plan fiduciaries from the case, it is worth noting that the Ninth Circuit ruled in the case that the “elapsed time” regulations do not violate ERISA. (We can all breathe a sigh of relief . . .) Now, I don’t know about you, but I have drafted many, many plans which provide for the “elapsed time” method of crediting service, and never given much thought to the issue of whether or not the regulations governing the drafting of these provisions violate ERISA. Nevertheless, the regulations were the subject of much discussion in the case, which gives a history of the regulations and then holds that they do indeed comply with ERISA.

(Can you imagine the stir that would have been created had the Ninth Circuit ruled that they did violate ERISA, i.e. 27 years after they were promulgated? I suppose it could have been worse than the stir created by the recent IBM case in which a district court held that a cash balance plan violated ERISA.)

For those of you not familiar with this intricate concept of “elapsed time”, the “elapsed time” regulations, initially promulgated by the DOL in 1976, provide for a method of crediting service under a plan that is an alternative to the traditional hours of service method (where employees are credited with a year of service when they work 1,000 hours during a 12-month period.) As the regulations provide, under this alternative method of crediting service, “an employee’s statutory entitlement with respect to eligibility to participate, vesting and benefit accrual is not based upon the actual completion of a specified number of hours of service during a 12-consecutive-month period” but “is determined generally with reference to the total period of time which elapses while the employee is employed (i.e., while the employment relationship exists) with the employer maintaining the plan.” Reg. 1.401(a)-7.

This alternative method set forth in the regulations is designed to enable a plan to lessen the administrative burdens associated with the maintenance of records of an employee’s hours of service, by permitting each employee to be credited with his or her total period of service with the employer, irrespective of the actual hours of service completed in any 12-consecutive-month period. However, under a 5-year cliff vesting schedule (0% vesting for less than 5 years of service, and then 100% vesting after reaching the 5-year mark), the “elapsed time” method can have a harsh result if employees terminate near the end of the fifth year of employment. This is what happened in the case at hand where employees, due to circumstances beyond their control, were suddenly cut-off from reaching the 5-year mark and achieving their goal of 100% vesting. (On the other hand as noted in the case, the “elapsed time” method can actually achieve a more generous result where employees would not otherwise meet the 1,000 hour requirement under an hours-based approach to crediting service, but do receive a year under the “elapsed time” method.)

It is likely this harsh result which has brought the issue to the attention of other circuit courts as noted by the Ninth Circuit:

Other courts have addressed the question of whether the elapsed-time method violates the vesting provisions of ERISA and have upheld the regulation. We agree with the Second Circuit in Swaida, the Seventh Circuit in Coleman v. Interco Inc. Divisions’ Plans, 933 F.2d 550, 552 (7th Circ. 1991), and the Eighth Circuit in Jefferson v. Vickers Inc., 102 F.3d 960, 964 (8th Circ. 1996), and hold that the elapsed-time regulation does not violate ERISA.

(Interesting point to note here: The Swaida case mentioned was against IBM: Swaida v. IBM Ret. Plan, 570 F. Supp. 482 (S.D.N.Y. 1983), aff’d, 728 F.2d 159 (2d Cir. 1984).

Lessons for ERISA Plan Fiduciaries. Regarding lessons for plan fiduciaries, there are many:

(1) Make sure your plan document has the “magic” language of the Firestone case. While it is hard to imagine any plan not now containing this language, after benefits attorneys have hammered away at this point for many years, the Gore case represents one of those few cases where the plan document under review did not contain sufficient language so as to satisfy the requirements of Firestone. (See previous post on the subject here.) As you may recall, if the plan document gives the plan administrator discretionary authority to determine eligibility for benefits or to construe the terms of the plan documents, the decisions reached by the plan administrator will not be overturned by a court unless the decision was “arbitrary and capricious.” The court in Gore held that the Plan language did not provide the necessary “discretionary authority” under Firestone and therefore the court went ahead with a “de novo” review of the decision. The “defective” language contained in the Plan was as follows:

The Committee shall administer the Plan in a uniform, nondiscriminatory manner for the exclusive benefit of the Participants and their Beneficiaries. The Committee shall establish and maintain Accounts and records to record the interest of each Participant, Inactive Participant, and their respective Beneficiaries in the Plan. The Committee shall make such rules, regulations, interpretations, discussions, and computations as may be necessary. Its decision on all individual matters will be final . . .The Committee shall have all powers which are reasonably necessary to carry out its responsibilities under the Plan. It may act as provided herein and shall give instructions to the Trustee on all matters within its discretion as provided in the Plan and Trust Agreement.

(The court went ahead and upheld the plan fiduciary’s decision in spite of the de novo review.)

(2) In questions of ambiguity or areas needing clarity, seeking the advice of counsel can help to establish that the the plan fiduciaries employed “prudent procedures” in reaching a decision about the issue and can show that the fiduciaries are diligent in seeking to comply with the law. In the Gore case, the plan committee sought the advice of legal counsel on the interpretation of the phrase “lay-off” under the plan, and the court emphasized this advice in upholding the decision of the Plan committee:

The Committee did not ignore the facts and the law when it determined that a “layoff” under this regulation connotes a temporary absence. A memorandum from Plan counsel Brown (Brown Memorandum) to the Committee is clearly concerned with the meaning of the term “layoff” and cites several cases supporting the definition ultimately applied by the Committee. Most importantly, the Plan clearly states in section 21.1 that “The provisions of the Plan shall be construed, administered, and enforced according to the laws of the United State and the State of Delaware.” . . . Accordingly, we cannot say that the Committee’s decision is contrary to fact or law in light of the validity of the elapsed-time regulation and our holding that the term “layoff” in that regulation connotes a temporary absence.

(Of course, it goes without saying that such advice from counsel could also work the other way, showing that plan fiduciaries were “arbitrary and capricious” where the plan fiduciaries, for whatever reason, decide to ignore the advice given, and where such advice then becomes discoverable in a lawsuit.)

(3) Remember that informal discussions among committee members memorialized through emails may eventually be used against the committee members in a later lawsuit. The plaintiffs tried to use an email between Committee members as evidence that Committee members were influenced by a material conflict of interest, thereby meriting a de novo review. The email reflected a conversation that a Committee member had with outside counsel, in which the attorney advised that the term “leave of absence” could be stretched to include the employees who had lost their jobs due to the plant closing. Although the court held there should be a de novo review for other reasons, the case demonstrates how those internal memos can sometimes come back to haunt you. (You can read about another case where a “smoking gun” memo made a difference in a case here.)

(4) Even with “defective” plan language and grey areas of the law where reasonable persons could differ, plan fiduciary decisions will often be upheld by courts where “prudent procedures” were employed in reaching the decision. Here the “prudent procedures” employed by the fiduciaries involved seeking the advice of counsel who advised the fiduciaries regarding interpretation of the plan language, citing several cases supporting the decision reached by the plan fiduciaries.

(Note: My guess is that a “partial termination” and 100% vesting argument was not advanced by the plaintiffs due to the numbers of employees involved.)