Category: Erisa

The U.S. Department of Labor’s Employee Benefits Security Administration today announced that it has launched a Web site providing contact information on employee benefit plan sponsors whose operations have been disrupted by Hurricanes Katrina and Rita. Employers who sponsor benefit plans are being encouraged to update their contact information with the department if it has changed so that “employees, plan participants and their families, as well as the many other support organizations assisting victims of the hurricanes, to reach plan administrators with questions and information related to their retirement and health benefits.”

The Website will include a searchable data base that lists pre-hurricane contact information garnered from the Form 5500 Annual Reports filed previously by all employee benefit plans located in the affected disaster areas. Employers/plan sponsors who wish to update or correct their contact information included on the database may do so by calling toll free 1.866.444.EBSA (3272) and submitting a Verification of Contact Information Form.

Also, the IRS has provided a summary of laws governing Hurricane Katrina relief under KETRA: “Tax Favored Treatment for Early Distributions from IRAs and other Retirement Plans for Victims of Hurricane Katrina.”

From Newsday.com, City rebuffs large retailers in health care bill. Excerpt:

New York City became the first place in the nation yesterday to approve a law, a version of which is on the verge of becoming adopted in Suffolk County, that requires large, non-unionized retailers such as Wal-Mart to set aside money for employees’ health care costs

The New York City Council voted 40-2 (with two abstaining and seven absent) yesterday to override Mayor Michael Bloomberg’s veto of the bill, the Healthcare Security Act, which requires certain retailers to contribute to their employees’ health care costs. They would have to pay the average amount that others in the industry pay per employee.

More from the New York Times here:

In a separate vote, the Council overrode another mayoral veto, passing a law that requires larger groceries and stores with food departments to provide a set level of health care benefits to their workers. It has been called an anti-Wal-Mart measure, based on criticism that Wal-Mart’s employee health benefits are inadequate. Bloomberg administration officials said the Council overstepped its authority because federal law prohibits municipalities from regulating the terms of employee health care plans.

The Philadelphia Inquirer reports:

Other places may follow suit.

Maryland lawmakers passed a bill this year requiring companies with more than 10,000 employees to either spend at least 8 percent of their payroll on health-care benefits, or pay more into a state health-care fund. The proposal was vetoed by Gov. Robert Ehrlich, but backers believe they have the votes to override it this winter.

The AFL-CIO has been promoting a tweaked version of the Maryland bill elsewhere and expects versions of it to debut in 35 to 40 state legislatures next year, said the labor federation’s legislative issues coordinator, Naomi Walker.

Lawmakers in Suffolk County, N.Y., on Long Island, also recently approved an ordinance that would require large grocery retailers to give workers a health-care benefit worth at least $3 an hour. The plan is awaiting approval from Suffolk County Executive Steve Levy, who is “leaning toward supporting it,” according to his spokesman, Ed Dumas.

The question raised is whether such laws will survive an ERISA challenge. See some great resources here from the California Health Care Foundation discussing the interplay of ERISA and a California law mandating health coverage which would have gone into effect if voters in California had not struck it down.

For those of you interested in the developing law pertaining to ERISA fiduciary responsibility of directed trustees, please note this recent federal district court opinion from the Eastern District of Virginia–DeFelice v. US Airways. Plaintiffs in the case had brought a class action lawsuit against US Airways and Fidelity, the directed trustee, seeking to recover losses to the Plan resulting from the diminution in value of US Air Group stock between August 1, 2001 and August 11, 2002, the date of the bankruptcy filing.

One of the key facts of the case as cited by the court was that “the Company Stock Fund remained an investment option available to Plan participants throughout the period of US Airways’ descent into bankruptcy.” The court noted that “[d]uring most of the pre-bankruptcy period, in fact, the Company Stock Fund regularly increased its holdings in US Air Group stock.” Also, of note, was the fact that the Company hired an independent fiduciary in 2002 which immediately upon appointment ceased purchasing the stock and began liquidating the “shares then held to the extent possible without adversely affecting the stock’s market value stock.”

The court framed the issue before the court as “whether a directed trustee under ERISA

What follows is a more detailed summary of KETRA’s provisions pertaining to retirement plans, as taken from the JCT’s Technical Explanation of H.R. 3768, The “Katrina Emergency Tax Relief Act of 2005” as passed by the House and the Senate on September 21, 2005. If you want to compare the summary with the text of the legislation, you can access the text of the legislation here (from the Ways and Means Committee web page devoted to KETRA).

1. Tax-Favored Withdrawals from Retirement Plans for Relief Relating to Hurricane Katrina (sec. 101 of the bill):

The provision provides an exception to the 10-percent early withdrawal tax in the case of a qualified Hurricane Katrina distribution from a qualified retirement plan, a 403(b) annuity, or an IRA. In addition, as discussed more fully below, income attributable to a qualified Hurricane Katrina distribution may be included in income ratably over three years, and the amount of a qualified Hurricane Katrina distribution may be recontributed to an eligible retirement plan within three years.

A qualified Hurricane Katrina distribution is a distribution from an eligible retirement plan made on or after August 25, 2005, and before January 1, 2007, to an individual whose principal place of abode on August 28, 2005, is located in the Hurricane Katrina disaster area and who has sustained an economic loss by reason of Hurricane Katrina. The total amount of qualified Hurricane Katrina distributions that an individual can receive from all plans, annuities, or IRAs is $100,000. Thus, any distributions in excess of $100,000 during the applicable period are not qualified Hurricane Katrina distributions.

Any amount required to be included in income as a result of a qualified Hurricane Katrina distribution is included in income ratably over the three-year period beginning with the year of distribution unless the individual elects not to have ratable inclusion apply. Certain rules apply for purposes of the ratable inclusion provision. For example, the amount required to be included in income for any taxable year in the three-year period cannot exceed the total amount to be included in income with respect to the qualified Hurricane Katrina distribution, reduced by amounts included in income for preceding years in the period.

Under the provision, any portion of a qualified Hurricane Katrina distribution may, at any time during the three-year period beginning the day after the date on which the distribution was received, be recontributed to an eligible retirement plan to which a rollover can be made. Any amount recontributed within the three-year period is treated as a rollover and thus is not includible in income. For example, if an individual receives a qualified Hurricane Katrina distribution in 2005, that amount is included in income, generally ratably over the year of the distribution and the following two years, but is not subject to the 10-percent early withdrawal tax. If, in 2007, the amount of the qualified Hurricane Katrina distribution is recontributed to an eligible retirement plan, the individual may file an amended return (or returns) to claim a refund of the tax attributable to the amount previously included in income. In addition, if, under the ratable inclusion provision, a portion of the distribution has not yet been included in income at the time of the contribution, the remaining amount is not includible in income.

A qualified Hurricane Katrina distribution is a permissible distribution from a 401(k) plan, 403(b) annuity, or governmental 457 plan, regardless of whether a distribution would otherwise be permissible. A plan is not treated as violating any Code requirement merely because it treats a distribution as a qualified Hurricane Katrina distribution, provided that the aggregate amount of such distributions from plans maintained by the employer and members of the employer’s controlled group does not exceed $100,000. Thus, a plan is not treated as violating any Code requirement merely because an individual might receive total distributions in excess of $100,000, taking into account distributions from plans of other employers or IRAs.

Under the provision, qualified Hurricane Katrina distributions are subject to the income tax withholding rules applicable to distributions other than eligible rollover distributions. Thus, 20-percent mandatory withholding does not apply.

2. Recontributions of Withdrawals for Home Purchases Cancelled Due to Hurricane Katrina (sec. 102 of the bill):

In general, under the provision, a distribution received from a 401(k) plan, 403(b) annuity, or IRA in order to purchase a home in the Hurricane Katrina disaster area may be recontributed to such a plan, annuity, or IRA in certain circumstances.

The provision applies to an individual who receives a qualified distribution. A qualified distribution is a hardship distribution from a 401(k) plan or 403(b) annuity, or a qualified firsttime homebuyer distribution from an IRA: (1) that is received after February 28, 2005, and before August 29, 2005; and (2) that was to be used to purchase or construct a principal residence in the Hurricane Katrina disaster area, but the residence is not purchased or constructed on account of Hurricane Katrina.

Under the provision, any portion of a qualified distribution may, during the period beginning on August 25, 2005, and ending on February 28, 2006, be recontributed to a plan, annuity or IRA to which a rollover is permitted. Any amount recontributed is treated as a rollover. Thus, that portion of the qualified distribution is not includible in income (and also is not subject to the 10-percent early withdrawal tax).

3. Loans from Qualified Plans for Relief Relating to Hurricane Katrina (sec. 103 of the bill):

The provision provides special rules in the case of a loan from a qualified employer plan to a qualified individual made after the date of enactment and before January 1, 2007. A qualified individual is an individual whose principal place of abode on August 28, 2005, is located in the Hurricane Katrina disaster area and who has sustained an economic loss by reason of Hurricane Katrina.

Under the provision, the exception to the general rule of income inclusion is provided to the extent that the loan (when added to the outstanding balance of all other loans to the participant from all plans maintained by the employer) does not exceed the lesser of (1) $100,000 reduced by the excess of the highest outstanding balance of loans from such plans during the one-year period ending on the day before the date the loan is made over the outstanding balance of loans from the plan on the date the loan is made or (2) the greater of $10,000 or the participant’s accrued benefit under the plan.

Under the provision, in the case of a qualified individual with an outstanding loan on or after August 25, 2005, from a qualified employer plan, if the due date for any repayment with respect to such loan occurs during the period beginning on August 25, 2005, and ending on December 31, 2006, such due date is delayed for one year. Any subsequent repayments with respect to such loan shall be appropriately adjusted to reflect the delay in the due date and any interest accruing during such delay. The period during which required repayment is delayed is disregarded in complying with the requirements that the loan be repaid within five years and that level amortization payments be made.

4. Provisions Relating to Plan Amendments in Connection with Hurricane Katrina (sec. 104 of the bill):

The provision permits certain plan amendments made pursuant to the changes made by the provisions of Title I of the bill, or regulations issued thereunder, to be retroactively effective. If the plan amendment meets the requirements of the provision, then the plan will be treated as being operated in accordance with its terms. In order for this treatment to apply, the plan amendment is required to be made on or before the last day of the first plan year beginning on or after January 1, 2007, or such later date as provided by the Secretary of the Treasury. Governmental plans are given an additional two years in which to make required plan amendments. If the amendment is required to be made to retain qualified status as a result of the changes made by Title I of the bill (or regulations), the amendment is required to be made retroactively effective as of the date on which the change became effective with respect to the plan, and the plan is required to be operated in compliance until the amendment is made. Amendments that are not required to retain qualified status but that are made pursuant to the changes made by Title I of the bill (or regulations) may be made retroactively effective as of the first day the plan is operated in accordance with the amendment. A plan amendment will not be considered to be pursuant to changes made by Title I of the bill (or regulations) if it has an effective date before the effective date of the provision under the bill (or regulations) to which it relates.

CCH has published a good summary of KETRA’s provisions as well as IRS Katrina relief provided here.

In a recent case–DiGiacomo v. Teamsters Pension Trust Fund of Philadelphia and Vicinity, the Third Circuit grappled with the nuances of the vesting and accrual requirements of ERISA, and added its voice to an issue which has split the Circuit Courts. The court framed the issue before the court as follows:

In deciding this appeal, we must therefore examine the relationship between the vesting (§ 203) and accrual of benefit (§ 204) provisions of ERISA. As discussed more fully below, Congress in enacting these provisions has left us with a conundrum: § 203 specifically includes language permitting plans or employers to disregard pre-ERISA service time rendered before a break-in-service with regard to vested benefits; § 204, by contrast, contains no such language with regard to accrued benefits. While this appeal involves the accrual of benefits, as distinct from vesting, the Fund nonetheless urges us to read the relevant language in § 203 (allowing the disregard of service time prior to ERISA and prior to a break-in-service for vesting purposes) into the text of § 204 (lacking similar language for accrual of benefit purposes).

The District Court had granted the Fund’s motion to dismiss, holding that ERISA permitted the Fund to disregard DiGiacomo’s service time preceding his break-in-service, which occurred before ERISA’s effective date. However, the Third Circuit rejected the Fund’s argument, relying on the express language of the statute and held that the Fund was required to credit DiGiacomo with all years of credited service for benefit accrual purposes. In reaching its holding, the court acknowledged the split in the Circuits over the issue and rejected the Seventh Circuit’s stance in Jones v. UOP, 16 F.3d 141, 143 (7th Cir. 1994), siding then with the Second Circuit in McDonald v. Pension Plan of the NYSA-ILA Pension Trust Fund, 320 F.3d 151, 153 (2d Cir. 2003).

In his dissent, Third Circuit Judge Samuel A. Alito, Jr., provides us with this memorable benefits quote:

Observing that ERISA’s minimum standards for vesting and accrual differ, the majority concludes that “the Fund was required to credit DiGiacomo with ‘all years of service’ in computing his accrued pension benefits.” Maj. Op. at [[9]]. The majority seems to assume that ERISA also required the Plan to include all of his accrued benefits in the calculation of his pension, but ERISA says nothing of the kind. As the Supreme Court explained in Central Laborers’ Pension Fund v. Heinz, accrual is simply “the rate at which an employee earns benefits to put in his pension account.” 541 U.S. 739, 749 (2004). Accrued benefits, in other words, are like chalk marks beside the employee’s name. They are conditional rights that do not become “irrevocably his property” until they vest. Id. Only then do they become “legally enforceable against the plan.” ERISA § 3(19), 29 U.S.C. § 1002(19). Prior to vesting, accrued benefits can be, and in this case were, forfeited under the terms of a participant’s plan.

In a footnote, the majority directly responded to Alito’s analogy to “chalk marks” and stated:

To borrow Judge Alito’s helpful analogy, see dissenting opinion at 2, DiGiacomo’s 10.5 years of accrued benefit credit might be equated to chalk marks beside the employee’s name, but they are not necessarily erased merely because related marks in a separate category for vested benefit credits have been lost due to a break-in-service.

This article from Law.com—ERISA Bars Pension Plan’s ‘Break-in-Service’ Exclusion–also discusses the case.

I received a copy of the Order (access it here [pdf]) denying the defendants’ motion to dismiss in the cash balance plan litigation involving the Gannett Retirement Plan. The Order is too sparse in its analysis to provide any meaningful discussion here other than to say that the opinion seems to disagree with Eaton v. Onan Corp., 117 F. Supp. 2d 812, 817 (S.D. Ind. 2000) and Tootle v. ARINC, Inc., et al. (discussed here) on whether 29 U.S.C. section 1054(b)(1)(H) applies to employees who have not yet reached normal retirement age. That provision prohibits the reduction of the rate of a participant’s benefit accrual because of age and reads as follows:

. . .[A] defined benefit plan shall be treated as not satisfying the requirements of this paragraph if, under the plan, an employee’s benefit accrual is ceased, or the rate of an employee’s benefit accrual is reduced, because of the attainment of any age.

Read more about cash balance plan litigation and legislative developments at this link here.

In 2004, a district court in New Jersey held that certain plaintiffs could not recover damages for defendants’ alleged breaches of fiduciary duty because such recovery was really for individual participants rather than the plan. In re Schering-Plough Corp. ERISA Litig., 2004 WL 1774760 at 6 (D.N.J. June 28, 2004). The Third Circuit has now reversed and remanded the case in a landmark decision which you can access here. The opinion written by Third Circuit Judge Alarcon states the issue and holding as follows:

We must decide in this matter whether, under the Employee Retirement Income Security Act of 1974 (“ERISA”), the District Court erred in ruling that former employees, who were participants in a defined contribution plan, may not prosecute a derivative action on behalf of an employees’ savings plan to recover losses sustained by the savings plan because of alleged breaches of fiduciary duty. We conclude that the Plaintiffs may seek money damages on behalf of the fund, notwithstanding the fact the alleged fiduciary violations affected only a subset of the saving plan’s participants.

The defendants in the case had sought to rely on the Milofsky case, but the court distinguished Milofsky from the case at hand:

In a letter to this Court filed pursuant to Rule 28(j) of the Federal Rules of Appellate Procedure, the Defendants cited a recent decision of the Fifth Circuit, Milofsky v. American Airlines, Inc., 404 F.3d 338 (5th Cir. 2005) reh’g en banc granted, No. 03-11087, 2005 U.S. App. LEXIS 15122, (5th Cir. July 19, 2005) in support of their argument that a participant lacks standing to bring an action on behalf of an individual account pension plan if he or she does not seek plan-wide relief. . . The facts in Milofsky are clearly distinguishable from those in the matter sub judice. In Milofsky, the plaintiffs alleged that the value of their investments in the BEX plan decreased because of the failure of the defendants to transfer the funds to the American Eagle 401(k) plan. Id. at 351. Thus, this alleged loss occurred prior to the transfer of the BEX plan participants’ investments to the American Eagle 401(k) plan. In Milofsky, the plaintiffs sought damages on behalf of the BEX plan members, and did not seek to restore assets of the American Eagle 401(k) fund. Here, the Plaintiffs seek damages from the fiduciaries for their violation of their duty to a subclass which had transferred its funds to the trustee of the Savings Fund.

The DOL had filed an amicus brief in the case which you can access here. DOL had argued in the case that a breach of fiduciary duty did not need to harm the entire plan to give rise to liability under § 1109 and that holding so would have the effect of insulating fiduciaries who breach their duty so long as the breach did not harm all of a plan’s participants. The DOL went on to note that “[s]uch a result clearly would contravene ERISA’s imposition of a fiduciary duty that has been characterized as ‘the highest known to law.'”

Those seeking information about SRI* will want to read this recent article by George R. Gay and Johann A. Klaasen from the Journal of Deferred Compensation–“Retirement Investment, Fiduciary Obligations, and Socially Responsible Investing.” Excerpt:

Whether motivated by the recent corporate scandals, by a desire not to profit from alcohol and tobacco, or by a growing concern for environmental sustainability, more plan participants are expressing a desire for a coherent system of selecting investments based on criteria beyond conventional analysis, with a focus on societal goals beyond investment returns. But in what circumstances, and to what extent, might such an investment strategy be permissible? May those charged with making decisions about retirement investments reasonably choose SRI?

The article goes on to conclude that “[c]onsiderations of fiduciary duty do not prevent retirement plan trustees from implementing basic SRI strategies in the plans for which they are responsible.”

Some additional resources:

• ERISA Opinion Letter 98-04A (May 28, 1998)
• Interpretive Bulletin 94-1, 29 C.F.R. section 2509.94-1
• Board of Trustees of Employees” Retirement System of City of Baltimore v. Mayor and City Council of Baltimore City, 562 A.2d 720, 317 Md. 72 (Md. 09/01/1989) (A case which is frequently cited in most articles on SRI, but which could not be found anywhere on the internet, so you can access it now from this website.)
• But see this recent DOL letter to the AFL-CIO (discussed in a previous post here) setting forth the DOL’s views regarding the ERISA violations that could occur if plan fiduciaries are involved in expending “plan assets to inform participants about the current public debate on Social Security” as well as the “hiring and firing of [plan] service providers based upon their opinions on Social Security reform.” DOL’s bottom line in that letter was that a “fiduciary may never increase a plan’s expenses, sacrifice the security of promised benefits, or reduce the return on plan assets, in order to promote its views on Social Security or any other broad policy issue.”
• See also The KLD Resource Page and this 2002 article from the Journal of Financial Planning–“Socially Responsible Investing: An Imperfect World for Planners and Clients” which lists resources.

(*Definitions of SRI or “Socially Responsible Investing”:

The article–“Retirement Investment, Fiduciary Obligations, and Socially Responsible Investing“–defines SRI as “investing in companies that meet certain baseline standards of social and environmental responsibility; actively engaging those companies to become better, more responsible corporate citizens; and dedicating a portion of assets to community economic development” and “the process of integrating values, societal concerns and/or institutional mission into investment decision-making.”

However, the article–“Socially Responsible Investing: An Imperfect World for Planners and Clients“–offers this comment regarding defining SRI:

Socially responsible investing—or more politically correct these days, socially conscious investing—started out as a protest in the early 1980s primarily against investing in South Africa during apartheid. Today, SRI has evolved into many permutations that can include not only the avoidance of the traditional “sin” stocks of gambling, pornography and alcohol, but tobacco, companies with bad records on employee relations or the environment, nuclear weapons, defense, and a variety of faith-based issues such as abortion or anti-family entertainment. Generally, it’s what people don’t want to invest in, versus what they do, though as Leonard’s client who wanted only women-led companies illustrates, that constraint can eliminate nearly everything.

Perhaps the most succinct, yet comprehensive, definition we heard came from Dennis Carpenter, CFP, whose Grapevine, Texas, planning firm of International Wealth Management specializes in biblically based investing: “Basically, it means making certain that your investment dollars and your beliefs are in concert with one another.

“Mission-based investing” is also a term used interchangeably by the industry, and is defined in this paper–“Introduction to Mission-Based Investing“–as “the incorporation of an institution

Important development to note here: “Texas Jury Finds Humana HMO Liable in Wrongful Death Lawsuit.”

Another article on the development: “Others may copy Humana suit: Insurer held liable over patient’s care.” Excerpt:

A $4.6 million judgment against Humana in a Texas wrongful-death case could lead to more suits against employer-sponsored health plans over patients’ care, legal experts say.

The jury found Humana didn’t live up to its promise to coordinate medical care for the woman, who died at 66 of kidney-failure complications.

Health-law experts say the case illustrates an opening left by a U.S. Supreme Court decision last year that shut the door on many damage suits against health insurers.

According to the article, a “key piece of evidence in the three-week trial was Smelik’s Humana member handbook, which said the insurer would identify cases of chronic disease and make treatment recommendations to the patient, family and doctor.”

The Philadelphia Inquirer is reporting that a settlement has been reached in the HealthSouth ERISA litigation: “HealthSouth settles lawsuits by workers.” (Access the 8-K filing describing the settlement here.)