Category: Erisa

From the Wall Street Journal–“Maryland Votes To Override Veto Of Wal-Mart Bill“:

Maryland legislators voted to become the first state to enact a law forcing large employers — namely Wal-Mart Stores Inc. — to pay a penalty if they fail to spend a certain amount of their payrolls in the state on health insurance for their workers.

The Senate voted 30-17 to override Republican Gov. Robert Ehrlich’s veto of the bill last year. The Maryland House followed suit last night with an 88-50 vote for the override.

The bill proposed requiring employers with more than 10,000 workers in Maryland to pay a penalty to the state’s health-insurance program if they fall short of paying an amount equal to 8% of their payroll in the state for health insurance for those employees. . .

The debate could continue in the courts. The Maryland Chamber of Commerce has argued that the potential new law will conflict with federal employment law, namely the Employee Retirement Income Security Act. Supporters counter that it isn’t pre-empted by ERISA.

Access a summary of the bill here and the text of the bill itself here.

Important links regarding the debate:

• Maryland Attorney General J. Joseph Curran Jr. (D) has opined that that the bill is not preempted by ERISA. Access his letter here.
• The Maryland Chamber of Commerce says that ERISA does preempt the legislation. You can access the letter here, prepared by Smith & Downey, in support of the Chamber’s view.
• Phyllis Borzi, a professor at the George Washington University School of Public Health and Health Services, has written a letter here opining that ERISA does not preempt the Fair Share Health Care Fund Act. (A summary of Borzi’s position from this article here: “Since 1995 the Supreme Court has adopted a more narrow interpretation of the pre-emption clause in the federal act, striking down state laws less frequently than before, said Borzi, who until 1995 served as employee benefit counsel for the U.S. House Committee on Education and Labor. She said ERISA would not pre-empt the fair share bill. “It’s just a tax, just like states can tax employers for anything,” she said, noting the assessment imposed by the legislation would be on employers, not on the benefits plan.”)
• Lots of links about the bill at the Maryland Chamber of Commerce Blog.
• The Wall Street Journal Law Blog has a post on the subject, and provides a link to a CNBC clip “of a heated exchange between lawyer Richard Berman and Chris Kofinis, of the United Food and Commercial Workers International Union, debating the Maryland bill.”
• University of Mississippi law professor Paul Secunda and author of Workplace Prof Blog provides his thoughts on the bill here.

This article from CNNMoney.com–“Maryland bill a big blow for Wal-Mart? Other states also considering bills that penalize companies for falling short on healthcare plans“-gives a run-down of the states that have tried to pass similar legislation:

Although the efforts failed in Arizona, California, Connecticut, New Hampshire and Tennessee, and was vetoed by Maryland’s and Vermont’s governors, the measure is still alive in five other states.

They include New York, Massachusetts, Minnesota, Oregon, Pennsylvania and Washington.

The TaxProf Blog has a link to a Tax Notes article here summarizing the tax-related opinions written by Judge Alito. The article includes a section on “Employee Benefits” cases. The TaxProf has also published his own list of cases here (prepared by his research assistant) which include some benefits-related cases as well.

(Previous post here discusses Judge Alito’s dissent in a memorable ERISA case.)

For those who can’t wait to read it, I am posting a copy of the Memorandum issued by the court in the Sandra Register vs. PNC Financial Services Group Inc. case. The decision, which addresses the issues involved in cash balance plan conversions, was rendered on November 21, 2005 by the Federal District Court for the Eastern District of Pennsylvania. The court granted the defendants’ motion to dismiss. PlanSponsor.com has a summary of the case here: “Cash Balance Plan Foes Lose in PA Federal Court.”

The US Supreme Court has again decided to shed some light on the issue of an ERISA plan’s ability to obtain reimbursement from a participant who recovers a settlement from a third party. The Court announced November 28th that it will decide the issue in Sereboff v. Mid Atlantic Medical Services – a case from the Fourth Circuit Court of Appeals. Ross Runkel’s Employment Law Blog has a good summary of the case and the issues here. The DOL had filed an Amicus Brief in the case which you can access here.

Those who draft subrogation provisions in plans and have had the occasion of researching the law in a particular jurisdiction with respect to this issue understand how confused the state of the law is, even after the Supreme Court’s decision in Great West. There are some great resources on the topic, however, a few of which are John H. Langbein’s article–“What ERISA Means by “Equitable”: The Supreme Court’s Trail of Error in Russell, Mertens and Great-West“, David Levin’s article–“Recovering Money Owed to Plans: Subrogation Agreements Can Be Enforced” and this one by James Zalewski –“Welcome to the Jungle.” (The title is very apropos.)

From Reuters.com, “US Senate approves pension bill with airline aid.” Excerpt:

Legislation aimed at strengthening traditional corporate pensions and shoring up the deficit-ridden pension insurance agency was easily approved by the U.S. Senate on Wednesday with a generous exemption for struggling airlines.

Senators gave distressed airlines up to 20 years to repair their underfunded pension plans, in addition to the seven years provided by the bill to all companies to fix pension shortfalls. . .

It passed 97-to-2 despite a White House warning of a veto if Congress does not produce a tougher version of the legislation that leaves out targeted relief for any industry.

The bill is S. 1783 – The Pension Security and Transparency Act of 2005. Text of the Legislation is here.

CRS Summary:

Pension Security and Transparency Act of 2005 – Amends the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC) to establish new minimum funding standards for single-employer and multiemployer defined benefit pension plans. Limits benefits under underfunded plans. Establishes additional funding rules for multiemployer plans in endangered or critical status. Requires measures to forestall insolvency.

Revises deduction limits for such plans. Revises deduction rules for combinations of defined contribution plans and defined benefit plans. Sets forth interest rate assumptions for determining lump sum distributions and for applying benefit limitations to such distributions.

Increases certain premiums to be paid to the Pension Benefit Guaranty Corporation (PBGC). Provides for phasing-in increases of: (1) the annual flat-rate premium paid by all single-employer plans; and (2) the additional risk-based premium, which is to be paid by all underfunded plans. Limits PBGC guarantee of shutdown benefits and other unpredictable contingent event benefits under single employer plans. Revises requirements for defined benefit plan funding notices. Requires additional disclosures in annual reports and to plan participants and beneficiaries.

Provides that defined benefit pension plans, including hybrid plans such as cash balance plans, may be deemed nondiscriminatory as to age if they comply with certain requirements, in cases of reduction in accrued benefits because of attainment of any age.

Requires defined contribution plans to allow employees to divest employer stock and diversify their pension asset investments. Sets forth participant protections, including diversification rights, under defined contribution plans. Revises requirements relating to: (1) portability and distribution rules; (2) information, including investment advice and retirement planning, to assist pension plan participants; (3) spousal pension protection under ERISA and the Railroad Retirement Act of 1974; (4) employee plans compliance resolution systems; (5) governmental and tribal pension plans; (6) black lung disability trust funds; (7) treatment of death benefits from corporate-owned life insurance; and (8) compensation and pensions of Tax Court judges.

The American Benefits Council website reports:

It is also possible that the House of Representatives could act on the Pension Protection Act (H.R. 2830), the pension funding reform bill developed by the House Committee on Education and the Workforce and recently approved by the House Ways and Means committee. The House bill contains similar reforms for defined benefit pension plans, as well as a number of provisions addressing defined contribution plans and flexible spending account rollovers.

The Government Accountability Office has issued its report on Cash Balance Plans:

• Abstract
• Highlights
• Report [pdf]

Concluding Remarks from the Report (“CB” stands for “cash balance, “DB” stands for “defined benefit” and “FAP” stands for “Final Average Pay”):

Our analysis illustrates one of the difficult choices facing the Congress in crafting comprehensive DB pension reform legislation, including the controversial issues surrounding the legal status of CB plans, and particularly CB conversions. The current confusion concerning CB plans is largely a consequence of the present mismatch between the ongoing developments in pension plan design and a regulatory framework that has failed to adapt to these designs. Although CB plans legally are DB plans, they do not fit neatly within the existing regulatory structure governing DB plans. This mismatch has resulted in considerable regulatory uncertainty for employers as well as litigation with potentially significant financial liabilities. For many workers, this mismatch has raised questions about the confidence they may have in the level of income they expect at retirement, confidence that has already been shaken by the termination of large pension plans by some bankrupt employers.

CB plans may provide more understandable benefits and larger accruals to workers earlier in their careers, advantages that may be appealing to a mobile workforce. However, conversions of traditional FAP plans to CB plans redistribute benefits among groups of workers and can result in benefits for workers, particularly those who are longer tenured, that fall short of those anticipated under the prior FAP plan. Our simulations suggest that grandfathering plan participants who are being converted can protect those workers’ expected benefits, and, in fact, such protections, in some form, are fairly common in conversions. Our simulations also show that without such mitigation, many workers can receive less than their expected benefits when converted from a traditional FAP plan, even in cases where the CB plan is of equal cost to the FAP plan it is replacing. As a result, as we noted in our 2000 report, additional protections are needed to address the potential adverse outcomes stemming from the conversion to CB plans. For example, requirements for setting opening account balances could protect plan participants, especially older workers, from experiencing periods of no new pension accruals after conversion while other workers continue to earn benefits.

Our simulated comparison of CB plans with the termination of a FAP plan leads to several important observations. First, the immediate vesting of all unvested workers requirement in a plan termination actually leads to a greater number of workers getting some retirement benefits and highlights the portability limitation of DB plans. Workers in an ongoing DB plan only receive benefits if they are vested. Appealing to a mobile workforce would seem to place an even greater significance on pension portability. Yet even CB plans, which often feature lump sum provisions in their design, do not address this issue because they typically have similar vesting requirements as traditional FAPs.

In our simulations, vested workers under either a typical or equal cost CB plan still fare better than if the FAP plan is terminated. We note further that some sponsors of CB plans have already exited the DB system, a system that has been declining in sponsorship and participation for several decades now. There is a crucial balance between protecting workers’ benefit expectations with unduly burdensome requirements that could exacerbate the exodus of plan sponsors from the DB system. Congress, as it grapples with the broader components of pension reform, has the opportunity not only to protect the benefits promised to millions of workers and eliminate the legal uncertainty surrounding CB plans that employers face, but also to craft balanced reforms that could stabilize and possibly permit the long-term revival of the DB system.

It is interesting that the media is going crazy over this report, noting that “Democratic lawmakers, who last year asked the GAO to examine the matter, [have] seized on the report as fresh evidence that the so-called cash balance pension plans hurt workers.” See Pension Plan Switch Hurts Employees. In addition, the article reports:

The GAO study “is further proof of the need to stop companies from slashing the pension benefits of older workers through cash balance schemes,” Rep. Bernie Sanders, I-Vt., said Friday in a statement.

However, that is not the main message of the report at all. See bolded portion above which states that a CB plan is far better than a terminated FAP plan, and that Congress should “eliminate the legal uncertainty surrounding CB plans” and do everything possible to keep plan sponsors from exiting the DB system. In other words, employers are always free to terminate their DB plans (freezing accruals as of the date of termination) without adopting any plan to replace it. Such a scenario is far worse for the employee than replacing it with the “controversial” cash balance plan, “warts and all.”

See also this Plan Sponsor article here with some success stories involving cash balance plans. (One could hardly call them “schemes.”)

A topic that has been discussed here previously has been the dual claims filed by plaintiffs’ lawyers under ERISA and securities laws. Marc Mayerson in his blog, Insurance Scrawl, discusses a very interesting case–Federal Ins. Co. v. Raytheon Co. (1st Cir. Oct. 21, 2005)–which focuses on the topic of insurance coverage for such dual claims. Excerpt from “When ERISA Suits Tagalong to D&O Claims the Fiduciary-Liability Coverage Might Not:

The United States Court of Appeals for the First Circuit recently had the opportunity to address coverage for a tagalong ERISA claim that was made four years after a securities-law class action was filed. In a very troubling opinion, the court ruled that no coverage was available for the ERISA class action because the gravamen of the complaint echoed the allegations in the earlier securities class action. The basis of the court’s ruling was not that the policyholder had failed to disclose the early securities-law class action, but rather that a generic prior-and-pending litigation exclusion barred coverage.

The case serves as a reminder fto employers and fiduciaries as to the importance of having such policies reviewed by legal counsel prior to purchase of the policy.

As most have heard by now, President Bush has selected Third Circuit Judge Samuel A. Alito, Jr., as his nominee for the U.S. Supreme Court. The President’s announcement and Judge Alito’s remarks can be found here.

Interestingly enough, Judge Alito had been mentioned previously at The ERISA Blog in this post–“Memorable Benefits Quote: “Accrued Benefits Are Like Chalk Marks . . .“

Read more about the nomination here at SCOTUSblog.

From CBS MarketWatch.com, “House panel OKs pension-plan hike: Lawmakers wrangle over cutting $50 billion from budget.” Excerpt:

A House panel on Wednesday approved legislation that would boost premiums paid to the Pension Benefit Guaranty Corp. by more than $6 billion over the next five years.

The legislation, approved by the House Education and Workforce Committee by voice vote, would provide the agency with about $6.2 billion in additional premiums.

The article notes that the House proposal, authored by Workforce Committee Chairman John Boehner, R-Ohio, would phase in increases in employer-paid premiums, “first by increasing them from $19 to $30 per pension plan participant beginning in 2006.” The PBGC would then have the discretion to annually increase premiums by as much as 20 percent, “although Congress would have the right to vote down the proposed increases.”

You can access two press releases here and here on the proposal. See also A Plan for Fiscal Responsibility: Strengthening Higher Education and Protecting Retirement Security on Behalf of Students, Workers, Retirees, & Taxpayers [pdf] by Rep.Boehner (R-OH), especially Part Two: Strengthening the Financial Condition of the Pension Benefit Guaranty Corporation on Behalf of Workers, Retirees, & Taxpayers [pg.11]. Excerpt:

Just four years ago, the PBGC operated with an annual surplus. However, the agency’s financial health has been on a strikingly rapid decline ever since. Although the PBGC has enough resources to make benefit payments for the near future, the long-term outlook for the agency is anything but certain. With some $450 billion in pension plan underfunding among financially weak companies looming on the horizon, the PBGC’s deficit is expected to grow even further. In relatively short order, the PBGC has gone from a little-known agency among most Americans to one that is now consistently in the headlines – and for good reason. Taxpayers have a major stake in its long-term outlook. . .

Two important steps are essential to improving the financial condition of the PBGC and ensuring its long-term solvency: (1) reforming funding rules to ensure pensions are more adequately and consistently funded; and (2) increasing premiums paid by employers to the PBGC in a responsible fashion. The Pension Protection Act, which is expected to be voted on by the House later this fall, would take both of these steps. The budget reconciliation process presents an opportunity to accomplish the second of the two.

Text of the proposed legislation is here.

For those interested in the development of the law surrounding the standard of review applied to benefits denial cases, don’t miss Scott Hagen‘s article in the Utah Bar Journal (which you can access here [pdf] at pages 20-23) discussing the Tenth Circuit’s opinion in Fought v. Unum Life Insurance Company, 379 F.3d 997 (10th Circ. 2004). In Fought, the Tenth Circuit clarified the standard of review to be applied in ERISA cases where the plan administrator has been provided with the Firestone discretion, but is operating under a conflict of interest.

By the way, the Utah State Bar has a blog.