Category: Erisa

A victory for IBM and cash balance plans in general: “Kathi Cooper v. IBM Personal Pension Plan and IBM Corporation.”

Some readers may enjoy the more casual tone of this opinion written by Circuit Judge Frank Easterbrook. (Read more about Judge Easterbrook here from How Appealing.) Here are some notable quotes from the opinion:

(1) “. . . [The district court’s] approach treats the time value of money as age discrimination. Yet the statute does not require that equation. Interest is not treated as age discrimination for a defined-contribution plan, and the fact that these subsections are so close in both function and expression implies that it should not be treated as discriminatory for a defined benefit plan either. The phrase “benefit accrual” reads most naturally as a reference to what the employer puts in (either in absolute terms or as a rate of change), while the defined phrase “accrued benefit” refers to outputs after compounding. That’s where this litigation went off the rails: a phrase dealing with inputs was misunderstood to refer to outputs.

(2) “Nothing in the language or background of §204(b)(1)(H)(i) suggests that Congress set out to legislate against the fact that younger workers have (statistically) more time left before retirement, and thus a greater opportunity to earn interest on each year’s retirement savings. Treating the time value of money as a form of discrimination is not sensible.”

(3) “Our conclusion that “benefit accrual” (for defined-benefit plans) and “allocation” (for defined-contribution plans) both refer to the employer’s contribution rather than the time value of money between contribution and retirement has the support of regulations that the Treasury Department proposed. (Appropriations riders have prevented the Treasury from taking final action on the draft regulations, but they still help to inform our understanding of the statute.)”

(4) “As far as we can see, ours is the first appellate decision to address the status of cash-balance plans under §204(b)(1)(H)(i). The class directs our attention to two decisions from other circuits that it says supply helpful analysis. Miller v. Xerox Corp. Retirement Income Guarantee Plan, 447 F.3d 728 (9th Cir. 2006); Esden v. Bank of Boston, 229 F.3d 154 (2d Cir. 2000). As the class reads them, these opinions stand for two important propositions. First, that an “accrued benefit” in a cash-balance plan is an annuity at normal retirement age. Second, that there is a “fundamental” distinction between defined-contribution and defined-benefit plans. Both of these propositions are correct, and both of them are irrelevant.”

(5) “. . . [A] plaintiff alleging age discrimination must demonstrate that the complained-of effect is actually on account of age. One need only look at IBM’s formula to rule out a violation. It is age-neutral.”

(6) “An employer is free to move from one legal plan to another legal plan, provided that it does not diminish vested interests—and this transition did not.”

(7) “Litigation cannot compel an employer to make plans more attractive (employers can achieve equality more cheaply by reducing the highest benefits than by increasing the lower ones). It is possible, though, for litigation about pension plans to make everyone worse off. After the district court’s decision IBM eliminated the cash-balance option for new workers and confined them to pure defined-contribution plans. . . Whether that is good or bad (for employees or society as a whole) is not for us to say. What we can and do conclude, however, is that the decision may again be made freely, governed by private choice rather than legal constraint.”

While the Pension Protection Act of 2006 passed by Congress last week (discussed here) contains some relief for cash balance plans, the relief is only prospective. Thus, this decision handed down by the Seventh Circuit is highly significant.

(Hat Tip: Benefitslink.com)

The 907-page Pension Protection Act of 2006 passed last week by Congress is sure to keep benefits lawyers busy for years to come. I have compiled a collection of links pertaining to the Act, some of which I am hoping to house permanently over in a sidebar section on the right:

• Text of the Act
• Technical Explanation of H.R. 4, the “Pension Protection Act of 2006,” prepared by the Joint Committee on Taxation
• From the White House: President Looks Forward to Signing Pension Reform Legislation
• U.S. Secretary of Labor and PBGC Board Chairman Elaine L. Chao’s Statement regarding the Act
• House Ways & Means Committee Webpage devoted to the Act
• GovTrack.us’s Webpage on the Act
• ERIC’s Statement regarding the Act
• ASPPA’s Summary of the Act
• CCH’s Summary of the Act
• Deloitte’s Summary of the Act
• Pension & Benefits Weblog’s Linked Version of the PPA (still under construction)

See also the following articles from the Wall Street Journal:

• Pension Bill Clears After Estate-Tax Effort Fails
• The 401(k) of the Future
• Pension Measure To Enact Changes Over Several Years
• Pension Bill Bolsters 529s

The Retail Industry Leaders Association won a victory last week when a federal district court ruled that Maryland’s Fair Share Health Care Fund Act was preempted by ERISA. Access the opinion here: Retail Industry Leaders Association v. James D. Fielder, Jr., Maryland Secretary of Labor, Licensing, and Regulation.

Notable quotes from the opinion written by Federal District Judge J. Frederick Motz:

1. “The fact that two local jurisdictions, New York City and Suffolk County, have enacted “fair share” legislation of their own highlights the uniformity problem. Unless such legislation is deemed to be preempted, nationwide employers potentially will face not only fifty different requirements imposed by the States, but also a virtually limitless number of requirements that local subdivisions in each State may enact.” (From footnote 13).

2. “My finding that the Act is preempted is in accordance with long established Supreme Court law that state laws which impose employee health or welfare mandates on employers are invalid under ERISA. See, e.g., Greater Washington Bd. of Trade, 506 U.S. 125; Shaw, 463 U.S. 85. The Secretary contends, however, that these authorities are not controlling because a trilogy of cases, Travelers, 514 U.S. 645, Dillingham, 519 U.S. 316, and DeBuono v. NYSA-ILA Medical and Clinical Services Fund, 520 U.S. 806 (1997), have “changed the landscape of ERISA preemption analysis.” The short answer to this contention, of course, is that this court has no authority to disregard Supreme Court precedent on the basis of the prediction that the Court would overrule its decisions. . . Moreover, the Secretary over-reads the cases upon which he relies.”

3. “Although, as the Fourth Circuit noted in Coyne & Delany Co. v. Selman, 98 F.3d 1457, 1466-67, 1468 (4th Cir. 1996), the Supreme Court in Travelers “narrow[ed]” its “interpretation of the scope of ERISA preemption” and “adopted a pragmatic approach” to determining whether a state law “relate[s] to” an employee benefit plan, nothing in Travelers or its progeny suggests that the Court would now uphold a state statute or local ordinance mandating that an employer provide a certain type or monetary level of welfare benefits in an ERISA plan.”

4. “Of course, I am expressing no opinion on whether legislative approaches taken by other States to the problems of health care delivery and its attendant costs would be preempted by ERISA. For example, the Commonwealth of Massachusetts has recently enacted legislation that addresses health care issues comprehensively and in a manner that arguably has only incidental effects upon ERISA plans. In light of what is generally perceived as a national health care crisis, it would seem that to the extent ERISA allows, it is strongly in the public interest to permit states to perform their traditional role of serving as laboratories for experiment in controlling the costs and increasing the quality of health care for all citizens.” (From footnote 15)

4. “The Secretary’s third argument is that the Act by its terms does not require an employer to spend a certain amount on health care costs but rather simply provides that if the employer does not do so, it shall pay to the Secretary an amount equal to the difference between its actual health care expenditures and the required amount. Again, while this is theoretically true, it does not even approximate reality. If employers are faced with the choice of paying a sum of money to the State or offering an equal sum of money to their employees in the form of health care, no rational employer would choose to pay the State. While repeatedly emphasizing that employers have a “choice,” the Secretary does not offer a single reason why an employer would pay the State rather than generate good will with its work force by increasing its employees’ benefits. The “choice” here is a Hobson’s choice. See Travelers, 514 U.S. at 664 (noting that a Hobson’s choice “would be treated as imposing a substantive mandate”).”

5. “Second, the Secretary contends that an employee could comply with the Act by spending an amount equal to the requisite percentage of its payroll on first aid facilities. This contention is based upon 29 C.F.R. §2510.3-1(c)(2), which excepts from the definition of ERISA plans “[t]he maintenance on the premises of an employer of facilities for the treatment of minor injuries or illness or rendering first aid in case of accidents occurring during working hours.” While the Secretary’s argument may evidence the active imagination of his lawyers, it is utterly out of line with reality.”

Previous posts on the legislation are here and here. See also Professor Paul Secunda’s thoughtful post on the opinion here.

If you like to follow ERISA cases, you won’t want to miss reading this interesting one here: Daimler-Chrysler v. Durden, 05-1662 (6th Cir., May 26, 2006). The case illustrates how the task of deciding who is the proper beneficiary of a pension, health or other benefit plan can sometimes be a tortuous process for the plan administrator as well as the courts. In this particular case, a participant named an individual (whom I will call “spouse #2”) as a beneficiary under the employer’s Pension Plan. After the participant’s death, another individual (“spouse #1”) appeared claiming that she was married to the participant and that her marriage to the participant had occurred prior to the alleged “marriage” of participant and spouse #2. Both spouses #1 and #2 claimed that they were the participant’s surviving spouse, entitled to benefits under the employer’s plans. There was quite a bit at stake, including a surviving spouse pension benefit, a life insurance benefit, and certain health care benefits.

The participant had named spouse #2 as beneficiary under the Pension Plan but had failed to list a beneficiary under the life insurance plan. Spouse #1 averred that the participant had never divorced her, and spouse #2 was unable to present any evidence that a divorce had occurred. The Pension Plan contained a typical choice of law provision which said that the Plan, in this case would be “construed, governed and administered in accordance with the laws of the State of Michigan except where otherwise required by Federal law.”

The lower court enforced the choice of law provision, and applied Michigan law in determing which marriage prevailed for purposes of identifying a surviving spouse under the Pension Plan, holding in favor of spouse #2. A divided Sixth Circuit reversed and applied Ohio law which was where the participant had lived during the existence of both relationships and where the participant was allegedly “married” to spouse #2. Holding in favor of spouse #1, the Sixth Circuit relied on the Restatement (Second) of Conflict of Laws, Section 187, in making its determination that it should disregard the choice of law provision contained in the Pension Plan.

Why was the choice of law so important in the case? Under Michigan law, there was a strong presumption of validity in favor of a later ceremonial marriage that was attacked on the ground that one of the parties was already married to another, and the presumption was particularly strong where there were children born of the later marriage. However, under Ohio law, Ohio placed the burden of proof on the second spouse to demonstrate that the first marriage was dissolved.

By the way, spouse #2 raised the ERISA preemption issue at the appellate level and the Sixth Circuit held that because the issue was never raised in the district court, it would not review the issue. However, the Sixth Circuit states in footnote 1:

Even if considered on the merits, Rita’s preemption claim would fail. ERISA provides that survivor’s benefits cannot be paid to someone named in a plan who is not a surviving spouse unless the surviving spouse has signed a written, notarized consent form. See 29 U.S.C. § 1055(a), (c)(2); Boggs v. Boggs, 520 U.S. 833, 843 (1997); Shields v. Reader’s Digest Ass’n, 331 F.3d 536, 542 (6th Cir 2003). There is no consent form in this case. Consequently, if Rita is not the surviving spouse, the Plan cannot effectively designate her as the beneficiary of survivor’s benefits. Therefore, the provisions of ERISA itself make it necessary to determine which claimant is the surviving spouse without reference to the Plan documents.

A dissent written by Circuit Judge Merritt calls the majority opinion’s analysis “convoluted”:

The Conflicts Restatement, relied on by my colleagues, does not take into account the overriding purpose and policy of uniformity behind the ERISA statute or behind the interpretation of ERISA benefits contracts. I, therefore, think that the Conflicts Restatement is of marginal value in the interpretation of this particular contract provision calling for the application of Michigan law. Moreover, the Conflicts Restatement provisions themselves are not entirely clear and are open to several interpretations leading to varying results in the resolution of this dispute. Instead of applying a uniform governing law to the ERISA benefits an employee and his family receive, the benefits will be distributed under the Court’s view according to a calculation based upon where the marriage occurred, marital domicile, etc. — a place that could be anywhere in the world for employees of a global automobile company. . . My colleague’s discussion of the various interests is interesting but I think overly complex and convoluted and seems to me to impair the explicit obligations concerning the governing law that the parties themselves wrote into their contract. Therefore, I would affirm the judgment of the district court.

(Who said ERISA cases are “dreary“?)

(Hat Tip: Decision of the Day, “Which Surviving Spouse Gets Bigamist’s Pension?“)

Read Colleen Medill’s analysis of the recent U.S. Supreme Court opinion in Mid-Atlantic Medical Services v. Sereboff at the Workforce Prof Blog: “Sereboff and the Future of ERISA Remedies.” Colleen is a Professor at the University of Nebraska College of Law.

The U.S. Supreme Court unanimously affirmed the Fourth Circuit in Sereboff v. Mid-Atlantic Medical, allowing the administrator for a health plan to obtain reimbursement under a subrogation clause from a participant who had recovered from a third party in a tort action. The opinion, written by Chief Justice Roberts, resolves a split in the Courts of Appeal. Excerpt from the opinion distinguishing the result reached in this case from the result reached in the Great-West case:

[The] impediment to characterizing the relief in Knudson as equitable is not present here. As the Fourth Circuit explained below, in this case Mid-Atlantic sought “specifically identifiable” funds that were “within the possession and control of the Sereboffs”—that portion of the tort settlement due Mid-Atlantic under the terms of the ERISA plan, set aside and “preserved [in the Sereboffs’] investment accounts.” 407 F. 3d, at 218. Unlike Great-West, Mid-Atlantic did not simply seek “to impose personal liability . . . for a contractual obligation to pay money.” Knudson, 534 U. S., at 210. It alleged breach of contract and sought money, to be sure, but it sought its recovery through a constructive trust or equitable lien on a specifically identified fund, not from the Sereboffs’ assets generally, as would be the case with a contract action at law. ERISA provides for equitable remedies to enforce plan terms, so the fact that the action involves a breach of contract can hardly be enough to prove relief is not equitable; that would make §502(a)(3)(B)(ii) an empty promise. This Court in Knudson did not reject Great-West’s suit out of hand because it alleged a breach of contract and sought money, but because Great-West did not seek to recover a particular fund from the defendant. Mid-Atlantic does.

See a previous post on the Sereboff case here.

The Massachusetts House on Tuesday voted “overwhelmingly” to override Governor Mitt Romney’s vetoes to the health care legislation discussed in previous posts here. KaiserNetwork.org reports here.

EBSA has issued final regulations providing guidance and procedures pertaining to abandoned plans (sometimes known as “orphan plans”). Summary of the regulations from the preamble:

The first regulation establishes a procedure for financial institutions holding the assets of an abandoned individual account plan to terminate the plan and distribute benefits to the plan’s participants and beneficiaries, with limited liability. The second regulation provides a fiduciary safe harbor for making distributions from terminated plans on behalf of participants and beneficiaries who fail to make an election regarding a form of benefit distribution. The third regulation establishes a simplified method for filing a terminal report for abandoned individual account plans.

You can access the final regulations here. EBSA has also finalized Prohibited Transaction Exemption 2006-06, a class exemption for services provided in connection with the termination of abandoned plans.

Last week, EBSA issued final regulations pertaining to its Voluntary Fiduciary Correction Program. See also its related Amendment to Prohibited Transaction Exemption 2002-51 (PTE 2002-51) to Permit Certain Transactions Identified in the Voluntary Fiduciary Correction Program.

EBSA only received six comment letters in response to the April 2005 VFC Program and related class exemption. (You can access the comment letters here.) EBSA states in the preamble to the PTE that it is modifying the exemption in accordance with IRS’s suggestions here.

You can access a copy of the the recent case of Richards v. FleetBoston Financial Corp here [pdf]. A federal district court in Connecticut has opined in that case that an employee could continue with a claim that the company’s cash balance plan violates the age discrimination prohibitions under ERISA.

(Comment: The old adage that “you can’t fit a round peg in a square hole” seems to apply here. Congress needs to fix this sooner rather than later. You can read about how things are going with pension legislation here.

I liked what House Education and the Workforce Committee Chairman Howard P. “Buck” McKeon (R-Calif.) had to say about hybrid plans on the floor of the House in early April:

“[H]ybrid pension plans represent an important component of worker retirement security. In fact, more than 9 million workers today rely on these benefits for a safe retirement. Unfortunately, some continue to paint a misleading picture about these pension plans. . .

Not only are hybrid plans especially advantageous for women and lower-paid workers, but they also comprise the only part of the defined benefit system that is growing. Hybrid plans now provide the PBGC with approximately 25 percent of its premium income. And because the total number of defined benefit plans has declined significantly over the last 20 years, it is now more important than ever to encourage employers to stay in the defined benefit system and offer these benefits. . . )