Category: Erisa

At yesterday’s seminar–“From an HR Perspective: What To Expect From an IRS Audit” (mentioned here)–both of our speakers from the IRS, one from the employment tax division and the other from the employee plans division, discussed how in an audit IRS agents will most always examine worker classification issues, i.e. to determine whether individuals who should be classified as “employees” have been wrongly classified instead as “independent contractors.” Reclassifying the individual as an employee can not only have unpleasant consequences for the employer, but also for the individual who is no longer being treated as an independent contractor. That is what happened in this surprising Tax Court decision–Levine v. Commissioner, T.C. Memo 2005-86–in which the IRS was seeking to deny an individual a deduction for a SEP contribution, claiming the individual was an employee of the State Department and not an independent contractor. The Tax Court sided with the individual, holding the individual was indeed an independent contractor. (When you read the facts of the case, it seems rather amazing that they reached that conclusion.)

One of the interesting aspects of the case, however, was the discussion of benefits and how the “[r]eceipt of employee benefits is an important factor in determining whether an employer-employee relationship exists” (citing Packard v. Commissioner, 63 T.C. at 632). The court pointed out that the State Department’s provision of annual leave for the individual as well as reimbursement for 50% of the individual’s health insurance costs pointed towards “employee” status, while the absence of retirement benefits, or other employee benefits, e.g., death benefits or transit checks, was indicative of an “independent contractor” relationship.

Two things to note here:

(1) Employers should beware of reclassifying employees as “independent contractors” just to avoid coverage under benefit plans. Such actions can lead to ERISA section 510 claims as well as problems with the IRS in an audit, which can impact both the employer as well as the individual being reclassified.

(2) An individual or a business may ask the IRS to determine the whole matter of employment status by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. If a worker files for the determination, the IRS will then contact “all parties who could be affected by a determination of employment status” in an attempt to get information.

Some helpful IRS resources:

• IRS Publication 1779–Independent Contractor or Employee
• IRS Publication 15-A–Employer’s Supplemental Tax Guide

The Save More for Retirement Act of 2005 (S. 875) was introduced last week in the Senate by Senator Jeff Bingaman (D-NM). Here’s what he had to say on the Senate floor when he introduced the Bill:

S. 875. A bill to amend the Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 to increase participation in section 401(k) plans through automatic contribution trusts, and for other purposes; to the Committee on Finance.

Mr. BINGAMAN. Mr. President, I rise today to introduce the Save More for Retirement Act of 2005 with my colleagues Senator Snowe, Senator Lieberman and Senator Obama. This legislation is designed to achieve two important savings goals. First, it will encourage workers who are not currently participating in their employer’s retirement plan to do so. Second, it will encourage workers who are currently investing in 40l(k) plans to save even more. At a time when national savings is at a near all-time low, Congress needs to look at ways to expand retirement savings, particularly savings garnered through an employer-provided retirement plan. This legislation is a commonsense approach that is based on research undertaken and compiled by a host of retirement policy experts from both academia and business. It is imperative that the Congress continues to look for new and innovative ways to help workers save for their retirement through the existing employer-provided plan system. This legislation accomplishes that goal by creating incentives for employers to modify their existing plans to add features that have been proven to increase savings.

The first step is to encourage employers to add a feature to its 40l(k) or similar plans to enroll its employees in the plan upon being hired unless the employee notifies the employer that he or she does not want to participate in the plan. The decision to participate still rests entirely with the employees, as they can opt out before participation begins or at any time afterward. Although some employers do offer these types of plans now, most maintain a more traditional structure under which the employee must opt into participating. Studies have indicated that such a seemingly minor change in how employees are enrolled can dramatically increase participation rates. It has been reported that one large company experienced an increase in employee participation in their retirement plan of 50 percent once the features were changed to automatically enroll its employees. Clearly the first step towards increasing our national savings rate is to get more people saving.

Obviously the second step is to get those who are saving to set aside even more for their retirement years. For this reason, the legislation would encourage plans to add a feature that increases employees’ contributions annually until it reaches at least 10 percent of the employees’ compensation. Again, studies have repeatedly demonstrated that people are more likely to agree to save more in the future than they currently do. It has also been demonstrated that people are more likely to agree to save more in the future if they make the decision today and do not wait until future years to make that decision. In our legislation, the employee can stop a future increase or change the contribution rate. The employer has the discretion to tie these automatic increases to either an annual increase or to increases in salary or compensation. This is closely modeled on the Save More Tomorrow, SMarT, plan advocated by Shlomo Benartzi from UCLA and Richard Thaler from the University of Chicago. These behavioral finance experts claim that although participants in this plan may start saving at a lower rate–3.5 percent–than the average, within 4 years increases averaged 13.6 percent–a greater than 10 percent increase. Compared to the control group saving rate of slightly more than 8 percent of their compensation, the end result is quite extraordinary.

To encourage employers to make these two changes to the plan, the legislation creates a new safe harbor that, if all the criteria are met, treats the plan as being nondiscriminatory. In order to qualify for the safe harbor, the employer must provide either a nonelective match of 3 percent of the employee’s compensation or an elective match of 50 percent of the first 7 percent of the employee’s compensation. These criteria can be met also if the employer contributes a comparable amount to another qualified plan for the same employees. The employer must also allow its contributions to vest in either 2 years, if the employer enrolls the employees in its pension plan before the employees’ first paycheck, or in 1 year if the employer enrolls the employees within the first quarter of being hired. It is important to note that both of these vesting periods are shorter than current law allows and are comparable to what employers can do under the existing safe harbor.

Finally, in an effort to help ensure employees are invested wisely, the legislation directs the Department of Labor to provide guidance for employers in selecting “default” investments so that employers have options besides money market accounts and investment contracts. A default investment is the investment that is made when employees fail to indicate how they would like their retirement savings invested. Due to liability concerns, retirement plans tend to invest these funds in either investment contracts or money market accounts. The benefit of compounding interest that would occur with even modest returns in broad-based funds that have an equity component is lost. This guidance will not allow employers to make default investment decisions that are risky or put the employee’s retirement at risk. It is important to note that the employee always retains the ability to invest the funds differently in other investment options offered by the plan if they do not like the default investment offered by the employer.

I thank all of those who have done considerable research into the impact of human behavior on savings, which was quite instrumental to the drafting of this legislation. I look forward to continuing to work with them and others interested in this new approach to addressing our Nation’s savings problems.

I ask unanimous consent that the text of the bill be printed in the RECORD.

The American Benefits Council has provided talking points and a summary of the legislation.

The Profit Sharing Council of America has issued a press release lending support for the legislation.

Similar legislation was introduced in the House earlier in the month by Rep. Rahm Emanuel [D-IL] under a different name–“401k Automatic Enrollment Act of 2005 (H.R. 1508).“

Also, you can access the CRS Report for Congress (October 14, 2004) on the topic of automatic enrollment in 401(k) plans here.

Interesting article in the Missouri Bar Journal by Leslie A. Kulick: “What are the Limitations on QDROs?” Ms. Kulick argues that “ERISA qualified retirement plans were not meant to be a deep pocket of readily available funds for use by state courts to right all domestic support wrongs” and that “[i]n the case where the spouse was not a plan participant during the marriage, or where the settlement split the property, leaving each party with their individual property, a domestic order should not be considered a qualified one under ERISA.”

Tax Analysts is reporting:

Flying in the face of those who believe the current tax reform movement will produce little more than incremental reform of the current tax system, Treasury Secretary John Snow said April 4 that he expects to be making a hard push for “far-reaching” reform legislation by next year.

However, not wanting to step on the toes of the presidentially appointed commission currently considering reform alternatives, Snow declined to speculate on the specifics of the package he might be pushing.

“Knowing this president — who doesn’t like doing little things, he likes doing big things — if we come up to him with a little tax package, he’s probably going to send us back to the drawing board,” said Snow, appearing at a gathering of the Tax Executives Institute in Washington.

(Source: RothCPA.com.)

There has been a great deal of discussion here about legal issues that can arise under ERISA and other areas of the law when employers try to reclassify employees as independent contractors to avoid various costs that can arise, such as benefits costs. Such actions can give rise to employee lawsuits and claims under section 510 of ERISA. (See related posts on the topic: ERISA Temporary Worker Lawsuit Settles and Outsourcing: Traps for the Unwary.)

One state–the state of Hawaii– is apparently “cracking down” on employers who misclassify workers as “independent contractors.” According to an article from Pacific Business News (Honolulu)–“State looks hard at ‘independent contractors’“–the state is seeking to reduce the number of individuals who are without health insurance. (Source for the article: Jottings by an Employer’s Lawyer in an April 4, 2005 post.) According to the article, a study by the Hawaii Institute for Public Affairs found that 1 out of 4 of the uninsured are actually eligible for insurance if they were not misclassified by their employers.

As indicated in this article here, the history behind the development is as follows:

Under the state’s Prepaid Health Care Act, companies are required to provide health insurance for employers working at least 20 hours a week for four consecutive weeks. Union and government workers are exempt; the government arranges to insure its own workers, while unions negotiate coverage in labor contracts.

Hawaii is the only state that has such a law. The Prepaid Health Care Act came into being in 1974, shortly before the federal Employee Retirement Income Security Act, or ERISA, which set uniform standards for employee benefits. ERISA does not require healthcare insurance for employees. Hawaii asked Congress for, and secured, an exemption to ERISA.

The penalty for not complying with the Prepaid Health Care Act is a maximum of $1 per employee per day of violation, plus medical costs incurred by workers who should have been covered, said Nelson Befitel, director of the state Department of Labor and Industrial Relations.

According to the Pacific News article, starting this month, the state will check businesses at random to see if they are providing benefits to workers who qualify. The article states that the “names of businesses are to be randomly generated by a computer” and the “department is looking especially hard at companies that are state contractors.”

The Pacific News article reports that a ruling in February by the Department of Labor and Industrial Relations ordered one company, a disability services provider, to classify its workers as “employees”, not “independent contractors”, and ordered the company to provide benefits such as workers’ compensation, health-care and temporary disability insurance for the employees. The action apparently “shook the approximately 50 companies that provide services for the elderly and disabled in Hawaii, many of whom have relied on temporary or on-call workers who can work flexible schedules.”

More on the development in an article from the Honolulu Advertiser.com: “Health insurance audits begin on local businesses.”

What would be the effect of such action on an employer’s retirement plans, such as 401(k) plans? Workers who are reclassified by the agency as “employees” might end up being inadvertently covered by the employer’s qualified retirement plans. However, see also this article from Milliman: “IRS Permits Plan Exclusion upon Employee Reclassification.”

This week EBSA announced that it was amending and restating the Voluntary Fiduciary Correction Program (“VFC”) which permits ERISA fiduciaries to correct certain violations that occur under ERISA. Generally, under the program, applicants are required to fully correct any violations, restore to the plan any losses or profits with interest, and distribute any supplemental benefits owed to eligible participants and beneficiaries. A “no action” letter is given to plan officials who properly correct violations.

Proposed amendments include:

• Three new eligible transactions dealing with delinquent participant loan repayments, illiquid plan assets sold to interested parties, and participant loans that violate certain plan restrictions on such loans;
• Simpler methods and an online calculator for figuring out the amount to be restored to plans;
• Streamlined documentation and clarified eligibility requirements, and
• A model application form.

Access the following:

DOL’s Press Release announcing expansion and simplification of the VFC program
Voluntary Fiduciary Correction Program; Notice 70 Fed. Reg. 17515 (Apr. 6, 2005)]
EBSA’s Fact Sheet
Proposed Amendment to Prohibited Transaction Exemption 2002–51 (PTE 2002–51) To Permit Certain Transactions Identified in the Voluntary Fiduciary Correction Program

Please note that the program only allows correction for certain enumerated violations (new ones added by the Notice are underlined):

• Delinquent participant contributions and participant loan repayments to pension plans
• Delinquent participant contributions to insured welfare plans
• Delinquent participant contributions to welfare plan trusts
• Loans at fair market interest rate to a party in interest with respect to the plan
• Loans at below-market interest rate to a party in interest with respect to the plan
• Loans at below-market interest rate to a person who is not a party in interest with respect to the plan
• Loans at below-market interest rate solely due to a delay in perfecting the plan’s security interest
• Participant loans in excess of plan limitations
• Participant loans with duration in excess of plan limitations
• Purchase of an asset (including real property) by a plan from a party in interest
• Sale of an asset (including real property) by a plan to a party in interest
• Sale and leaseback of real property to the employer
• Purchase of an asset (including real property) by a plan from a person who is not a party in interest with respect to the plan at a price other than fair market value
• Sale of an asset (including real property) by a plan to a person who is not a party in interest with respect to the plan at a price other than fair market value
• Holding of an illiquid asset previously purchased by a plan
• Payment of benefits without properly valuing plan assets on which payment is based
• Duplication, excessive, or unnecessary compensation paid by a plan
• Payment of dual compensation to a plan fiduciary.

Also, with respect to the correction of delinquent participant contributions or loan repayments, the documentation requirements of the program have been simplified for breaches involving amounts below $50,000, or amounts greater than $50,000 that were remitted within 180 calendar days after receipt by the employer. Here’s what the Notice has to say about this simplified documentation requirement:

EBSA believes that introducing more simplified documentation requirements in certain cases rather than the detailed information and copies of accounting and payroll records required under the original VFC Program will streamline the application process, increase the efficiencey of EBSA’s reviewers, and be less burdensome for applicants making smaller corrections. Based on EBSA’s experience to date, the majority of VFC Program applicants, under the revised Program, would be able to avail themselves of this reduced documentation requirements.

Bruce Carton at the Securities Litigation Watch has been blogging for months about how as many as two-thirds of institutional investors continue to leave millions of dollars on the table by failing to complete the basic tasks of monitoring and filing claims in securities class action settlements. (Access his posts on the topic here, here, here, and most recently here.) He links to an article here entitled “Leaving Money on the Table: Do Institutional Investors Fail To File Claims in Securities Class Actions?” (by James D. Cox and Randall S. Thomas) which discusses the ERISA fiduciary implications of failing to file claims in securities class action settlements:

The fiduciary duty embodied in ERISA can be traced to the common law of trusts and therefore embodies the obligation to preserve and maintain fund assets. It is on this foundation that Professors Weiss and Beckerman extrapolate an obligation for fund managers to consider initiating suit where necessary to protect, maintain, or reclaim fund property that is the subject of their trust. Pursuit, however, is not mandated if the manager’s decision not to act is reasonably based. . .

. . .(T)o the extent there are nontrivial costs to an institution from petitioning to become a lead plaintiff, not to mention the uncertainty of whether the institution will be selected, these costs may weigh more heavily than the expected benefits to the institution from the suit, not to mention its participation in the suit. Thus, though the private pension fund’s managers may theoretically face liability for imprudently assessing whether to serve as a lead plaintiff for a securities class action claim, there would be many potential justifications for them to assume a posture of rational apathy. However, with respect to failing to submit a claim to an administrator in a settled action for proven losses, we think there would be far fewer instances in which apathy would be a reasonable response to its fiduciary obligations.

Also, Professors Thomas and Cox have written a more recent article which you can access–“Letting Billions Slip Through Your Fingers: Empirical Evidence and Legal Implications of the Failure of Financial Institutions to Participate in Securities Class Action Settlements.” The article presents data which the authors state “provides an inescapable and startling conclusion” that “financial institutions with significant provable losses fail at an alarming rate, approximately 70 percent, to submit their claims in settled securities class actions.” They go on to state that “not only are their losses significant, but the sums of money they likely would share in are both in the aggregate, and on an average individual fund basis, not trivial.”

Read more about the the ERISA implications for fiduciaries settling claims in previous posts:

• Perils for Plan Fiduciaries: Deciding When and How to Sue For Losses
• Plan Settlements: Guidance for Fiduciaries in PTE 2003-39

Almost a year has gone by since the EEOC originally announced its approval of a proposal to exempt retiree health plans from the ADEA. Since that time, AARP filed suit seeking a preliminary injunction to stop the agency from issuing the exemption. The plaintiffs in AARP v. EEOC, No. 2:05-cv-00509, argued that the EEOC had exceeded its statutory authority to implement the exemption. The EEOC had agreed to a 60-day hold on issuing the final rule due to the litigation. The federal district court has now issued a ruling in the case which you can access from the American Benefits Council website via Benefitslink.com. The ruling states in part as follows:

Plaintiffs have not demonstrated that the EEOC’s proposed exemption is contrary to law or that the exemption is arbitrary and capricious. Accordingly, their motion for summary judgment should be denied, and for the reasons explained herein and in Defendant’s previous filings, judgment should be entered in favor of the EEOC. . .

Given that Congress has expressly authorized the EEOC to issue exemptions to permit activity that otherwise would be prohibited by the ADEA, the relevant inquiry for the Court is whether the proposed exemption is “reasonable” and “necessary and proper in the public interest.” 29 U.S.C. § 628. As is evident from the Administrative Record before the Court, the EEOC’s decision to establish an exemption for the practice of coordinating retiree health benefits with Medicare eligibility was reasonable and in the public interest, and therefore satisfied the requirements of Section 9. See Defendant’s Opposition to Plaintiffs’ Motion for Preliminary Injunction at 27-40 (“The EEOC’s Decision to Exempt from the ADEA the Practice of Coordinating Employer-Sponsored Retiree Health Benefits with Medicare Eligibility is Not Arbitrary and Capricious”). Plaintiffs’ claims to the contrary represent nothing other than their disagreement with the considered judgment of the EEOC.

For more background on the case:

• EEOC Announces Finalization of Erie Exemption from previous post here at Benefitsblog
• EEOC Rule Allowing Coordination of Retiree Benefits with Medicare Delayed for Sixty Days
  from Morgan, Lewis
• AARP Lawsuit Delays Final EEOC Ruling on Retiree Health Plans from Workforce Management

In a recent article–“Pennsylvania Employers Must Have Legal Counsel at Unemployment Compensation Proceedings“–Jackson Lewis has provided a report here on what is happening when employers appear unrepresented by an attorney before the Unemployment Compensation Board of Reivew, pursuant to the recent court ruling in Harkness v. Unemployment compensation Board of Review (PA. Cmwlth. 2005). (See previous post here.) The firm reports that the Pennsylvania Department of Labor and Industry is strictly interpreting the Commonwealth Court’s decision to prohibit any self-representation by employers at unemployment compensation proceedings by either “refusing to proceed with a hearing when an attorney is not present and continuing the hearing to a later date, or proceeding with the hearing but prohibiting the employer from offering any evidence other than testimony in direct response to questions by the unemployment compensation referee.”

For those of you following developments in the health care subrogation arena, the Third Circuit has issued an important opinion reversing a decision reached by a federal district court in New Jersey. The district court had ruled that a New Jersey statute which prohibited the enforcement of health care subrogation claims was saved from preemption under ERISA’s insurance savings clause. The Third Circuit decision–Levine v. United Healthcare Corp.–held that the statute was preempted under ERISA and not “saved” from preemption under the ERISA insurance savings clause. The decision will apparently impact several class action lawsuits which are pending against major health care insurers in New Jersey, brought by plan participants seeking to recover amounts that insurers had recovered from plan participants who in turn had recovered against tortfeasors. The Third Circuit utilized the new factors set forth in the Miller case, and held that the New Jersey statute was not “specifically directed toward entities engaged in insurance” so that it did not fall within the “savings” clause of ERISA:

To avoid ERISA preemption a state law must be “specifically directed” toward the insurance industry. The New Jersey statute is not. Because the New Jersey statute could be applied to any contributor in any civil action, it is merely a statute that has a significant impact on the insurance industry. As in Pilot, this is not sufficient.

There is a very interesting dissent in the case which argued that the New Jersey collateral source statute was a “law specifically directed towards the insurance industry that has some bearing on noninsurers.”

Read more about ERISA preemption in previous posts which you can access here.

Also, you can access the DOL’s Amicus Brief in yet another well-known subrogation case–the QualChoice case–here. This article here from Law.com indicates the QualChoice case is one the U.S. Supreme Court will consider as a possibility for review.