ERISA Exchange

ERISA Exchange

Practical Solutions for Compensation & Benefits Issues

Reviewing Fiduciary Investment Decisions – Tussey v. ABB

Revenue Sharing - Investment Policy Statements. The 2012 Tussey vs. ABB Inc. decision garnered headlines and provided fodder for seminars on ERISA fiduciary liability as it was the first reported decision to tag rank and file employees with huge ERISA fiduciary liability. The case involved two 401(k) profit sharing plans maintained by ABB Inc. with $1.4 billion in assets and 14,000 employees. Based on ERISA fiduciary breaches, the court awarded damages of $35 million against the plans’ investment committee, $1.7 million against Fidelity Investments for retaining “float” income on trust investments, and more than $13 million in legal fees. The bulk of this award was rendered against ABB employees who were responsible for day to day 401(k) plan administration. For more background, see our bulletin here and our blog here.

Breach of Fiduciary Duties. In the trial, the district judge ruled that the investment committee had acted imprudently and breached its fiduciary duties:

  1. The committee did not know what fees the plan was paying through revenue sharing. It was unaware of normal market rates for such services.
  2. The committee ignored the requirements of its investment policy statement in selecting investment funds.

In so ruling, the district court evaluated the conduct of the plan fiduciaries based on its interpretation of the law. Their judgments were given no deferences.

Deferential Standard of Fiduciary Review. The Eighth Circuit Court of Appeals disagreed with this approach and has adopted a deferential standard for reviewing fiduciary conduct in plan administration. Other circuits have, so far, limited deferential review to claims for benefits. Under the court’s new standard, if a fiduciary’s decisions are reasonable based on what the fiduciary could have known at the time, they are to be upheld, even if the judge might have reached a different conclusion. The court announced it was joining “most” of the appellate courts that have addressed this issue. Presumably, there are still federal circuits that will give no deference to these kinds of fiduciary decisions.

The victory may be short-lived. The court did not approve the conduct of the investment committee but returned or “remanded” the case to the trial judge to re-evaluate the facts under this deferential standard of review. The investment committee could still be liable if the district judge finds that the committee acted unreasonably in the way it selected investments or monitored plan expenses.

Plan Assets – Trustee Float Income. Fidelity received $1.7 million in “float income” over the period being reviewed based on overnight investment of cash paid by the plan to purchase mutual fund shares. The shares would be credited to the plan on one day but there was usually a lag between the purchase and the transaction clearing date. Fidelity simply invested the cash in a short-term or “overnight” investment and earned income on the cash until the trade was cleared with the investment fund. The court ruled that this cash was not an asset of the ABB plans and that Fidelity was permitted to retain the float income.

What A Fiduciary Should Do Now

Although the fiduciaries may have gained temporary or partial relief, an investment committee must demonstrate that it acted reasonably in discharging its obligations. Going forward, fiduciaries should:

  • Ensure that the plan documents expressly grant full discretionary authority to the retirement plan committee (or similar body) in all actions regarding the investment and administration of the plan. The deferential standard of review will not apply unless the plan includes the “magic” language.
  • Review and revise the investment policy statement to eliminate detailed procedures and hard-wired triggers. Fiduciary conduct appears more reasonable if it is not contrary to the investment policy statement.
  • Learn how revenue sharing and fees paid by the plan are used to pay for services. Due to recent ERISA regulations, this information is provided annually to plan fiduciaries.
  • Select an independent investment advisor who specializes in the retirement plan market and has the expertise to stay abreast of a complex and evolving      market.
  • It might be unreasonable to rely solely on investment information given by fund managers and affiliated third-party administrators who have a proprietary interest in the funds selected for the plan.
  • Periodically benchmark expenses. Fiduciaries should know how their plan compares to the marketplace. A full-scale RFP is not needed or advisable for this purpose.
  • Obtain specific ERISA indemnification from your employer through an indemnity agreement or board action. This may take some effort and legal assistance. ERISA fiduciary insurance may also be desirable.

FSA Carryovers and Health Savings Accounts

Last year the IRS published Notice 2013-71 allowing the carryover of up to $500 in a flexible spending account (FSA) from one year to the next. However, this Notice created uncertainty about the effect of such a carryover on eligibility for health savings accounts (HSAs).

In response to this uncertainty, the IRS has released a Chief Counsel Memorandum addressing carryovers of unused health FSAs and eligibility for HSAs.  The memorandum confirms that carryover to a general purpose health FSA will result in an individual being ineligible for contributions to an HSA.  However, the Memorandum states that an individual may elect to have unused amounts from the general purpose health FSA carried over to an HSA-compatible health FSA.  There is no requirement that the unused amounts in the general purpose health FSA only be carried over to a general purpose health FSA.  Further, a cafeteria plan that offers both a general purpose health FSA and an HSA-compatible health FSA may automatically treat an individual who elects coverage in a high deductible health plan (HDHP) for the following year as enrolled in the HSA-compatible health FSA and carry over any unused amounts from a general purpose health FSA to the HSA-compatible health FSA for the following year.

This Memorandum is very helpful for employers who sponsor HDHPs and wish to offer the $500 FSA carryover.  We expect the Memorandum will result in a wider adoption of the FSA carryover.

Enforcing Subrogation Rights

With medical costs increasing each year, human resource specialists are caught in a never-ending battle to keep costs down while providing competitive benefits to company employees.  One way to contain company costs is to enforce a health or disability plan’s subrogation rights.  A subrogation clause gives the plan the right to recover benefits from a claimant if the claimant is later paid by another source.  The following steps can ensure the enforceability of the plan’s subrogation rights.

  • Subrogation clauses should allow a full recovery and not exclude expenses incurred by the claimant, such as attorney fees.  Of course, the plan sponsor may later voluntarily waive a portion of the recovery in consideration of incurred attorney fees.
  • Because some courts have developed a default “make whole doctrine” in which the plan’s right to subrogation of any proceeds a claimant recovers against a third party is limited to the extent that the recovered funds exceed the claimant’s actual damages, each plan’s subrogation clause should specifically state that subrogation applies without regard to the make whole doctrine.
  • Before paying benefits, require a claimant to sign a separate subrogation agreement affirmatively recognizing the plan’s subrogation rights and agreeing to notify the plan of all recoveries or potential recoveries.
  • If the claimant is potentially covered by another insurance policy, send a letter to the insurance company explaining the plan’s subrogation rights.  Similarly, if the plan sponsor becomes aware that the claimant has brought a lawsuit with respect to his or her injuries, send letters to both the plaintiff’s and defendant’s attorneys informing them of the plan’s subrogation rights.  All letters should demand that the plan be paid before the claimant.
  • For companies that have outsourced the enforcement of subrogation rights, contact the third-party administrator at least annually to check on the administrator’s procedures for enforcing those rights.


“Extreme Deference” in ERISA Disability Claims Has Its Limits

Less than a month ago, the Sixth Circuit reaffirmed that the arbitrary and capricious standard of review under ERISA is “extremely deferential,” pushing back on attempts by plaintiffs to erode the level of deference given to plan administrators (see our January 31, 2014 review of McClain v. Eaton Corporation Disability Plan, et al.). On February 13, 2014, in Kennard v. Means Industries, Inc., a panel of the Sixth Circuit concluded that even extreme deference has its limits, reversing a ruling by the Eastern District of Michigan in favor of an employer’s disability retirement plan.

Kyle Kennard worked for Means Industries as a machine operator until 1990, when he inhaled chemical fumes and severely injured his lungs, rendering him “ultra-sensitive” to various fumes and able to work only in a “clean-air environment.” He performed clerical work for Means until 2006, apparently because Means could not provide him with a complete “clean-air” work environment. Kennard applied for, and was granted, Social Security disability benefits after the Social Security Administration concluded that “there are no jobs in the national economy that [Kennard] could perform.” Kennard next applied for disability retirement benefits under Means’ ERISA-governed plan. The applicable plan required Kennard to demonstrate that he was unable to perform “any occupation.” Means sent Kennard to two physicians, including a physician who examined Kennard’s lungs and concluded that he could work in a clerical position “as long as he could be guaranteed that he would be placed in an absolute clean air environment with absolutely no noxious fumes or inhalants….” Based almost exclusively on this conclusion, the plan administrator concluded that Kennard was not permanently disabled within the meaning of the plan, because he could work provided that the strict “clean air” restriction was met, and denied his disability retirement claim.

The Sixth Circuit acknowledged the “high burden” a plaintiff bears under arbitrary and capricious review, but then wasted no time concluding that Kennard met this burden. At the crux of its opinion, the Sixth Circuit concluded that it wasn’t enough for the plan administrator to deny Kennard’s claim based on a theoretical “clean air” position in which he could work – it needed to describe what jobs he could actually perform “in terms of a real American workplace.” In order for the denial on this basis to be considered valid, it should have included “evidence of the existence of absolute-clean-air jobs available to Kennard.” The Sixth Circuit’s skepticism that such a job actually exists is confirmed by its decision to grant Kennard benefits (with one dissent) rather than remand to the plan administrator.

This case is a reminder that, although the Sixth Circuit is loathe to disturb administrative decisions that are rationally based on the administrative record and the plan, there are still limits, and benefits denials based solely on theoretical jobs that do not appear on their face to reflect the “real American workplace” may be insufficient in the Sixth Circuit’s view to satisfy even the highly deferential bar under ERISA. What’s the upshot for plan administrators? When considering denying a claim based on a finding that a claimant can actually perform some occupation, identify a reasonably available “real life” job that the claimant could perform.


Can State Prompt Pay Statutes be Enforced Against Self-Funded ERISA Health Plans? The 11th Circuit Says No.

On Friday, a panel of the Eleventh Circuit Court of Appeals affirmed an order out of the Northern District of Georgia, enjoining the Georgia Insurance and Safety Fire Commissioner (“Commissioner”) from enforcing newly enacted “prompt pay” requirements under Georgia’s prompt pay statute against self-funded health plans and the third party administrators (“TPA”) that often administer them. “Prompt pay” laws typically require insurance companies to pay submitted claims in a set period of time (such as 30 days) or face penalties and interest. The case, America’s Health Insurance Plans v. Hudgens, garnered significant attention while pending in the district court, and following the Commissioner’s interlocutory appeal of the injunction, various groups lined up as amicus curiae on both sides. The U.S. and Georgia Chambers of Commerce filed briefs in favor of the injunction, arguing for ERISA preemption of the prompt pay requirements, while the American Medical Association and Medical Association of Georgia filed a brief in support of applying Georgia’s prompt pay requirements broadly to include self-funded ERISA plans.

Like many other states, Georgia enacted a prompt pay statute in 1999. When enacted, the statute by its terms applied only to insured ERISA plans and not self-funded ERISA plans. In 2011, based on the trend in recent years of more employers opting for self-funded plans, resulting in declining applicability of the prompt pay statute, the Georgia General Assembly enacted the Insurance Delivery Enhancement Act of 2011 (“IDEA”) which, among other things, amended the prompt pay statute to apply to self-funded ERISA plans and the TPAs that administer them. IDEA was set to become effective on January 1, 2013, however in August 2012, America’s Health Insurance Health Plans (“AHIP”) filed a lawsuit in federal court, seeking a judicial declaration that the prompt pay provisions as applied to self-funded health plans and their administrators or TPAs are preempted by ERISA. AHIP also filed a motion to preliminarily enjoin the Commissioner for enforcing the challenged statutes. On December 31, 2012, the district court granted the motion and enjoined the Commissioner.

The Eleventh Circuit affirmed the district court, concluding that the challenged provisions of IDEA are preempted by ERISA because they “relate to” ERISA-governed plans. The court rejected the Commissioner’s argument that ERISA governs only the relationships between “ERISA entities” like ERISA plans, beneficiaries, and fiduciaries, and not the relationship between medical providers and TPAs. The court concluded that “ERISA’s overarching purpose of uniform regulation of plan benefits overshadows this distinction.” The court also rejected the Commissioner’s argument that statutes only “relate to” ERISA plans if they conflict with “substantive” issues, like coverage determinations, and not “procedural” requirements, like how promptly a claim must be paid or notice of the reason for non-payment provided.

This case is the latest skirmish in recent years over the extent to which ERISA preempts state prompt pay statutes, and with the increased national focus on health insurance, this likely won’t be the last.


Affordable Care Act Déjà vu: Employer Mandate Postponed Again for Some Companies

Phase-In Approach Makes Significant Concessions to Mid-Sized and Large Employers

The Treasury Department and Internal Revenue Service released final regulations on Monday implementing — and again delaying parts of — the employer mandate of the Affordable Care Act.  The new enforcement timeline of the mandate tracks a three-tier approach:

  • Employers with 100 or more employees: Must offer 70% of employees coverage in 2015, and 95% in later years, or face penalties.
  • Employers with 50-99 employees: Must offer coverage in 2016 or face penalties (and must report on their workers and coverage in 2015).
  • Employers with fewer than 50 employees: Not required to offer coverage in any year.

According to Assistant Treasury Secretary for Tax Policy Mark J. Mazur, the final regulations “phase in the standards to ensure that larger employers either offer quality, affordable coverage or make an employer responsibility payment starting in 2015 to help offset the cost to taxpayers of coverage or subsidies to their employees.”

Today, the agencies issued questions and answers on the shared responsibility provisions, which were originally set to take effect last month.  (To be subject to these provisions for a calendar year, an employer must have employed during the previous calendar year at least 50 full-time employees or full-time equivalents.)

Other notable provisions in the final regulations — until further guidance is issued — include:

  • Local government agencies generally are not required to provide health insurance to “bona fide volunteers” who work as firefighters or emergency medical technicians.
  • Seasonal employees who normally work one half-year or less are generally not considered full-time employees.
  • In counting hours of service, colleges may assume that adjunct faculty members spend 75 minutes per week outside the classroom preparing lectures or grading examinations, for each hour teaching in the classroom.

With Republicans and Democrats sharply divided on the Obama administration’s tactics in implementing the law, be prepared to hear much more about the perceived impacts of delays in Affordable Care Act provisions leading up to this year’s mid-term elections.

Protection for Assets in SEP IRAs and Qualified Plans

When considering whether to sponsor a qualified retirement plan, such as a 401(k), or a Simplified Employee Pension plan (“SEP IRA”), one consideration is the protection offered to amounts held in the plan from creditors, civil litigation, and bankruptcy. While the law in this area is constantly evolving, both in terms of case law and Congressional action, currently, there are some differences in the level of protection offered to such amounts, as discussed below.

Qualified Plans

In general, the assets held in an account under a qualified retirement plan are protected by the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code (“Code”). Section 206(d) of ERISA contains an anti-alienation provision, which requires each retirement plan to provide that the benefits provided under the plan may not be assigned or alienated. A similar provision is found in section 401(a)(13) of the Internal Revenue Code, and the two provisions generally protect tax-qualified retirement plan accounts from the claims of creditors of plan participants and their beneficiaries. There are a few limited exceptions from this protection for (i) the division of retirement benefits in a divorce, (ii) federal tax levies and (iii) fiduciary violations or crimes by a plan participant against the plan.

Aside from these exceptions, however, funds held in a participant’s account under a qualified retirement plan are generally protected from creditors.  Specifically, assets held in a qualified plan account would be excluded from an individual’s bankruptcy estate (and therefore not subject to attachment by creditors), would not be subject to a civil judgment award against a participant, and should not be available to a participant’s general creditors. Note, however, that there is an argument that the protections offered to tax-qualified retirement plan accounts may not apply to qualified plans in which only business owners participate.


In contrast to qualified retirement plans, the anti-alienation protections offered under ERISA and the Code detailed above do not apply to assets held in a SEP IRA. However, certain protections are available in some cases, by other federal and state laws.

Bankruptcy: The federal Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) excludes assets held in a SEP IRAs from bankruptcy, with no limitation on amount. In general, this means that retirement assets held in a SEP IRA would not be factored into the amount available to pay bankruptcy creditors. However, note that non-SEP individual retirement accounts are protected only up to $1,000,000 (adjusted for inflation), and it is possible that, if an employee terminates employment with an employer who offers a SEP IRA, but leaves an account in that plan, his or her account may be viewed as a non-SEP individual retirement account and be subject to the more limited protection.

In addition, some practitioners have raised questions regarding whether BAPCPA protects retirement plans such as SEPs once assets are allocated from the SEP arrangement (the plan) to individual SEP IRA accounts, arguing that such individual accounts are not subject to ERISA’s anti-alienation provisions and therefore would not be excluded from a bankruptcy estate.  Accordingly, although it seems likely that BAPCPA would exclude assets held in a SEP IRA from bankruptcy, there is some uncertainty that they would in fact be protected under federal law. Keep in mind, though, that some state laws might offer bankruptcy protection to such assets and the application of these statutes likely would not be preempted by ERISA.

An additional caveat here is to check whether the IRA agreement in place for the SEP IRA has a “cross-collateralization agreement.”  This is a default provision found in some IRA agreements that would allow a loan owed in any other accounts maintained with the same recordkeeper to be covered by assets held in the IRA; in essence, these agreements pledge the IRA assets as collateral for a potential loan outside the IRA. This is technically a prohibited transaction under section 4975 of the Code, and would permit the bankruptcy shield under the Bankruptcy Code to be pierced, meaning that retirement funds could be accessed by bankruptcy creditors. A recent decision by the Sixth Circuit found that the mere existence of a “cross-collateralization agreement” wouldn’t disqualify the IRA from exempt status in and of itself, but the actual use of such an agreement could. Accordingly, some practitioners are suggesting removing cross-collateralization provisions altogether from an IRA agreement in order to avoid a possible issue.

Other Creditors: Generally, a SEP IRA would not be protected from the claims of other creditors or civil litigation judgments, unless protected by state laws. Protections for individual retirement accounts vary from state to state, and the applicable state law depends upon the state in which the account owner resides. Also, if an individual is in bankruptcy, some attorneys believe the trustee could elect to take a distribution and circumvent state law.

In summary, qualified retirement plans and SEP IRAs enjoy many of the same protections in bankruptcy and from creditors.  However, the protections offered to qualified retirement plans are more robust, and there are fewer open questions with respect to how the protections should be applied. Accordingly, many employers choose to use a qualified retirement plan to gain maximum protection for account assets from bankruptcy and the demands of other creditors. That being said, some employers are comfortable with the protections arguably offered by a SEP IRA in light of the ease of administration.

Governmental Pension Plans and Sponsors Must Follow New Accounting Rules

New accounting rules for state and local governmental pension plans and the sponsors of those plans are going into effect. In 2012, the Governmental Accounting Standards Board (GASB) released new standards in Statements No. 67 and 68.  GASB Statement No. 67, Financial Reporting for Pension Plans, significantly revises the existing rules for the financial reports of most pension plans for state and local governments.  Similarly, GASB Statement No. 68, Accounting and Financial Reporting for Pensions, revises and establishes new financial reporting requirements for most state and local governments that provide their employees with pension benefits.

The significance, as well as the complexity, of these changes can hardly be overstated.  Prior accounting standards focused on pension plan funding.  The new guidance shifts from the funding-based approach to an accounting-based approach.  Under this new accounting-based approach, governments will be required to report the amount by which the total pension liability exceeds the pension plan’s net assets as a liability in their accrual-based financial statements.  GASB believes this approach will more clearly depict the government’s financial position, even though in many cases it will give the appearance that a government is financial weaker that it was previously.

Measuring the pension liability under the new standards involves three steps:

  1. Projecting future benefit payments for current and former employees and their beneficiaries;
  2. Discounting those payments to their present value; and
  3. Allocating the present value over past, present and future periods of employee service.

Special rules apply to cost-sharing multiple-employer plans.  Under the new standards, cost-sharing governments must report a net pension liability, pension expense and pension-related deferred inflows and outflows of resources based on their proportionate share of the collective amounts for all the governments in the plan.  Other special rules apply where a nonemployer contributing entity (such as a state government) is legally responsible for contributions directly to a pension plan that is used to provide pensions to the employees of another government (such as school districts located within that state).

Statement No. 67 takes effect for pension plans in fiscal years beginning after June 15, 2013.  Statement No. 68 will take effect one year later for employers and governmental nonemployer contributing entities in fiscal years beginning after June 15, 2014.  It is essential that public plan sponsors work closely with their actuaries, accountants and legal advisors on the impact of these new accounting standards.

The Sixth Circuit Reaffirms the “Extremely Deferential” Standard of ERISA Arbitrary and Capricious Review

On January 24, 2014, in McClain v. Eaton Corporation Disability Plan, et al., the Sixth Circuit dispensed with prevalent efforts by plaintiffs to erode the arbitrary and capricious standard of review under ERISA, and reaffirmed that the standard directs courts to be “extremely deferential” in their review of plan administrator decisions as long as those decisions aren’t “irrational.”

In this long term disability benefits case, the applicable plan language required the plaintiff, Karen McClain, to be unable to engage in “any occupation or perform any work for compensation or profit.” McClain injured her back at work, and after treatment, asserted that she was unable to return to her job. While the medical proof regarding her restrictions was not entirely clear in the administrative record, even under the most confining restrictions, McClain’s physicians concluded that she could perform part-time sedentary work. The plan administrator denied her claim because she was not unable to perform any work, and that determination was upheld on initial and final appeal. The district court held that the plan administrator’s decision was not arbitrary and capricious.

On appeal, McClain made two primary arguments that the plan administrator’s decision was arbitrary and capricious:

  1. variations in the specific restrictions the plan administrator relied upon amounted to “post hoc rationalization” in support of its initial determination; and
  2. McClain was effectively restricted from any real occupation because the part-time work she could have performed would have reduced her earnings to less than one-third of what she had earned previously.

The Sixth Circuit rejected both arguments, and in doing so, took the opportunity to explain in detail what “extreme deference” means and to address language from other circuits that appeared to have eroded the level of deference owed to plan administrators. The Sixth Circuit noted that ERISA plaintiffs in the Sixth Circuit had come to frequently rely on language out of several Seventh Circuit opinions, stating that arbitrary and capricious review is not without “some teeth,” and courts should not merely “rubber stamp” plan administrator determinations. Affirming the “extreme” level of “deference” required, the Sixth Circuit concluded that, “though the standard is not without some teeth, it is not all teeth.” As long as the plan administrator’s decision was not “irrational” under the terms of the plan, that decision is entitled to deference.

Within this context, the Sixth Circuit made quick work of McClain’s two primary arguments, concluding that variations in the restrictions given to her during the administrative process were not ad hoc rationalizations because her claim had been consistently denied because she did not meet the definition of disability, and concluding that a rational plan administrator could conclude that her ability to work part-time meant she was not unable to work in any occupation, even though she would have earned less than a third of her prior wages.

This opinion will be helpful for plan administrators in defending benefits decisions because, in reaffirming the deferential standard in ERISA, it neutralizes case law frequently relied upon by ERISA plaintiffs attempting to erode the standard of review. In addition, in rejecting McClain’s argument that earning less than a third of her prior wages was tantamount to no occupation at all, the Sixth Circuit once again confirms the importance of the plan language. Plan administrators who can rationally justify their decisions under the applicable plan language are well-positioned with this case. We expect to see this one cited frequently in ERISA cases where the arbitrary and capricious standard applies.

Discounted Stock Options Targeted by IRS for 409A Violations

Stock Options ImageSutardja vs. United States illustrates the importance of complying with Section 409A of the Internal Revenue Code when granting stock options. The decision also shows the willingness of the IRS to pursue significant penalties against holders of stock options that allegedly fail to comply with Section 409A.

Section 409A of the Internal Revenue Code imposes rules for nonqualified deferred compensation. The IRS considers stock options to be deferred compensation subject to Section 409A if the fair market value of the stock at grant exceeds the option exercise price. In other words, if an option is granted “in the money,” the option must meet the myriad requirements of Section 409A. Failure to comply with Section 409A can result in immediate taxation, a 20% excise tax and significant interest payments.

Dr. Sehat Sutardja and his wife Weili Dai were co-founders and officers of Marvell Technology Group. Dr. Sehat and Ms. Dai were granted stock options covering 1.5 million shares of common stock at $36.50 per share. The couple later exercised the options and reported $4,849,791 in federal income tax.

The IRS subsequently determined that the options violated Section 409A and the couple owed additional taxes in excess of $3 million. The government argued that the stock options were granted with an exercise price that was less than the current fair market value and therefore were subject to the requirements of Section 409A. Dr. Sutardja made a number of counterarguments.

In the first reported case of its nature, the court in Sutardja agreed with the government’s position that discounted stock options are nonqualified deferred compensation subject to the requirements of Section 409A. The case was then set for trial on the factual issue of the actual fair market value of the stock on the date of grant.

This case is a real-world example of the dangers inherent in stock option grants, especially for private companies without an easily ascertainable stock value. Companies should take steps to ensure that each option’s exercise price is based on the fair market value on the date of grant. Clearly the IRS is prepared to pursue substantial penalties against employees for options that the IRS believes do not comply with the technical requirements of Section 409A.

The ACA This Week: Catholic Employers in Tennessee are Protected From the ACA’s Contraceptive Mandate, At Least for Now

The Affordable Care Act’s mandate that all employer-provided insurance plans provide coverage for contraception went into effect on January 1, 2014.  The ACA exempts religious employers from this mandate.  Other, non-profit “religiously-affiliated” employers, however, were not initially exempt.  Not surprisingly, many objected, and in response, the government created an accommodation to this requirement for non-profit religiously-affiliated employers –exempting them from providing contraception coverage, but requiring them instead to complete a form making their employees eligible for contraceptive coverage directly.

Earlier this week with the Wednesday deadline approaching, multiple Catholic-affiliated employers in the “religiously-affiliated” category sought temporary judicial protection from the contraceptive mandate (from both providing coverage and from completing the form as an accommodation), asserting that the mandate violates both the Religious Freedom Restoration Act (RFRA) and the First Amendment.  Various motions for injunctive relief were filed by Catholic employers across the country who had previously challenged the mandate in actions pending on appeal as of the January 1, 2014 effective date.  The results this week were varied.  The Seventh Circuit Court of Appeals denied an injunction requested by Notre Dame, and the D.C. Circuit granted an injunction requested by Priests for Life.

A divided panel of the Sixth Circuit granted the Catholic Diocese of Nashville, Aquinas College in Nashville, and several other Middle Tennessee Catholic organizations a temporary injunction pending their appeal of the contraceptive mandate accommodation’s application to them.  So for now, those Middle Tennessee organizations are not required to comply with the mandate.

What’s in store?  U.S. Supreme Court Justice Sonia Sotomayor granted a similar injunction for Little Sisters of the Poor, arising out of the Federal Circuit (for which she is the Supreme Court Justice assigned), and there is speculation that the U.S. Supreme Court may take up this issue this Spring, especially given the varying treatment across the Circuits.

Stay tuned.

Sixth Circuit Decision Substantially Expands Both the Claims and Remedies Available Under ERISA

For decades, federal courts have uniformly concluded that a plaintiff with a viable benefits claim was generally precluded from seeking “equitable relief” under ERISA. Plaintiffs could sometimes assert both benefit and equitable relief claims where there were independent acts challenged, such as a denial of benefits and an alleged misrepresentation by a fiduciary about available benefits, but that was about the only exception to the general rule. On December 6, 2013, however, in Rochow v. Life Insurance Company of North America, a panel of the Sixth Circuit Court of Appeals affirmed a district court’s award of both benefits and “disgorgement” of approximately $3.8 million on an “equitable relief” theory premised not on independent conduct, but on the denial of benefits itself. This marks a substantial departure from Sixth Circuit ERISA law.

At issue was a denial of a long term disability claim initially submitted by Daniel Rochow to Life Insurance Company of North America (“LINA”) in 2002. After exhausting the administrative process, Rochow filed an ERISA lawsuit in 2004, alleging both a denial of benefits and a breach of fiduciary duty in how his claim was reviewed. The district court ruled in Rochow’s favor, LINA appealed, and the Sixth Circuit affirmed and remanded. Back in the district court, Rochow (actually his Estate, as he had since passed away) filed a motion for an “equitable accounting and a request for disgorgement,” based on Rochow’s allegation that LINA had breached its fiduciary duties to him in the way it administered his claim, and in the interim, it had been unjustly enriched by holding on to the benefits owed him to the tune of $3.8 million. Rochow reached this number with a complex calculation presented by an “expert.”

LINA argued, consistent with the weight of authority, that disgorgement under ERISA § 502(a)(3) was unavailable because equitable relief is only available when there is no sufficient benefit remedy, and in this case, Rochow had already been awarded the benefit at issue.

The district court sided with Rochow, concluding that he could receive both the benefit and disgorgement, i.e., he could recover under both a denial of benefit theory and an equitable relief theory.

So what are the implications of this decision? First, LINA filed a petition for en banc review of the panel’s decision on December 20, 2013, so this may not be the final word from the Sixth Circuit. The petition lists as the first issue presented “whether the panel majority improperly held that Mr. Rochow could pursue a breach of fiduciary claim … based exclusively on the wrongful denial of benefits.” If this remains the law of the land, however, ERISA plans and plan sponsors can expect increases, and potentially substantial ones, in both the size of awards in ERISA cases and the cost to litigate them. Plaintiff’s attorneys will likely seek disgorgement of profits based on the delay in receiving an ERISA benefit as an additional remedy available above and beyond the value of the benefit. In addition, litigation costs will likely go up as well because adding ERISA § 502(a)(3) equitable relief claims to “garden variety” denial of benefits claims increases the discovery permitted. In addition to reviewing the administrative record, plaintiff’s attorneys seeking disgorgement as a remedy will likely want to discover the most advantageous calculation of the plan’s or sponsor’s alleged “unjust enrichment.”

Stay tuned to see where the Sixth Circuit, or other circuits, go from here.

Healthcare Reform and ERISA Retaliation Claims – While EVERYONE’S Talking About Healthcare Reform, Managers Are Well Advised to Watch What They Say at Work

A November 8, 2013 decision out of the district court for the Southern District of Ohio, Gaskins, et al. v. Rock-Tenn Corporation, confirms the importance of employers keeping employment decisions and discussions about benefits completely separate, and avoiding any commentary about the potential costs to a company of an employee’s benefits. This guidance is especially timely now, since the implementation of the Affordable Care Act has increased the cost of employee health coverage for many employers, healthcare reform has become part of the daily conversation, and it seems as though everyone has an opinion to share.

In this case, one of the plaintiffs, James Lang, worked for Rock-Tenn as a “Shipping/Receiving Coordinator,” and was responsible for overseeing hourly employees who unloaded and documented shipments. Lang had two daughters with cystic fibrosis, and by 2010, Lang’s family had been paid the $1.5 million maximum of health insurance benefits under company policy. Following the enactment of the Affordable Care Act, the lifetime maximum was eliminated, entitling Lang’s family to additional benefits. In early 2011, Lang told his management that one of his daughters was eligible for a double lung transplant. Lang estimated, but never told his managers, that the transplant would cost in the neighborhood of $2 million. In September of 2011, Lang was observed standing on the tines of a forklift, rather than putting a pallet on the tines first, as required by company safety policy. Lang was subsequently terminated for the safety violation.

Lang sued Rock-Tenn, alleging among other claims interference and retaliation claims under ERISA § 510, claiming that Rock-Tenn fired him to avoid the estimated $2 million in additional health benefits it would be on the hook for related to the anticipated lung transplant for Lang’s daughter. Lang claimed that the timing of his termination and his managers’ knowledge that he was hopeful his daughter would receive a lung transplant in the near future tended to show that avoiding the cost of those benefits was one of the “real” reasons he was fired.

The court ruled in favor of Rock-Tenn and dismissed Lang’s claims, due to the lack of evidence of any intent to interfere with Lang’s benefits or to retaliate against him for seeking them. Notably, none of his managers made any negative comments about the costs associated with his family’s healthcare (they had in fact thrown fund raisers for Lang’s family) or the cost to the company of providing employees health insurance. There was no evidence that anyone at the facility knew how much his family healthcare was costing the company (benefits were handled through Rock-Tenn’s corporate office), and all this amounted to a lack of proof of the “specific intent” to deny a beneficiary benefits necessary for an ERISA § 510 interference or retaliation claim.

The implementation of the Affordable Care Act is increasing the costs of many employer-provided medical plans, while at the same time media coverage is making employees more aware of the inner workings of these plans, and sensitizing everyone to costs. Given this environment, we anticipate seeing more ERISA § 510 claims over the next few years. This most recent case is a good reminder of the importance of keeping employment decisions separate from benefits issues and minimizing (if not eliminating) workplace commentary by management employees about the costs associated with employee benefits, especially commentary addressing a particular employee. Had a manager or supervisor made an off-handed comment about what the company might have to pay for Lang’s medical benefits, the court might not have been as willing to dismiss on the company’s motion for summary judgment. In this case, it appears that management did it right, and prudent employers would be wise to follow suit. Reminding managers and supervisors to avoid unnecessary commentary about the cost of employee benefits in the current environment is of critical importance.


Institutional Shareholder Services on the Wane?

Institutional Shareholder Services (ISS) carries significant weight in decisions made in board rooms and C-level suites in publicly traded companies. ISS reviews proxies issued by publicly traded companies for their annual meetings and makes voting recommendations. Glass-Lewis offers a competing service in the US. These recommendations are purchased by institutional shareholders, like mutual funds, which rely on the recommendations for their proxy voting decisions.

NASDAQ made a petition to the SEC on October 7th (available here) to force ISS to make public its models and methodologies for determining recommendations. The petition was publicly announced in a Wall Street Journal Op-Ed.

Edward Knight: Raising the Curtain on Proxy Advisers [The Wall Street Journal]

NASDAQ claims that ISS and Glass-Lewis have outsized influence on the voting process and includes research references and examples. A few highlights:

  • Institutional ownership accounts for 75% of shares held in publicly traded companies.
  • Little is known about the policies and methodologies behind the recommendations. It is a black box that is deemed proprietary by ISS.
  • Negative recommendations are issued on the eve of the annual meeting, almost always without warning.

For issuers that wish to avoid a negative vote, ISS will evaluate the proposals for a substantial fee. This service is conducted separately and a number of companies have paid their money only to be stunned when ISS recommended a no vote to its institutional clients after the proxy was actually issued.

ISS grew to prominence after the SEC issued no-action advisory letters in 2003 under the Investment Advisors Act allowing fiduciary reliance on independent advisory services. If NASDAQ gets its way, such reliance would be conditioned on disclosure of the methodologies used for recommendations and of relationships that may create conflicts of interest.

There is other support for transparency. The European Securities and Markets authority has called for a proxy advisory code of conduct. This has been supported in public comments by SEC Commissioner Dan Gallagher. According to the Center on Executive Compensation, the SEC is currently considering the petition from NASDAQ. A congressional committee has held hearings on proxy advisory services where witnesses testified consistently with the information in the NASDAQ petition. The New York Stock Exchange posted an article titled “ISS’s Declining Influence in Shareholder Votes” in which the authors claim that shareholder clients like Blackrock and Vanguard are becoming skeptical of ISS’s approach.

ISS’s Declining Influence in Shareholder Votes [NYSE]

Perhaps in response to mounting pressure, ISS and Glass Lewis have created an industry group with their European counterparts that is evaluating best practices. These firms are not about to go out of business but their one-time enormous influence may be on the wane. MSCI, the corporate parent of ISS, announced on October 31 that it is looking for buyer for ISS.

Affordable Care Act vs. Obamacare: Jimmy Kimmel, the Individual Mandate and an Employee Relations Opportunity

A recent clip from Jimmy Kimmel Live illustrates (in albeit exaggerated fashion) the vast distance the Obama administration still has to go to inform the American public of the provisions of the Affordable Care Act (ACA).  Just this past summer (a year after the Supreme Court upheld the individual mandate under the ACA, almost half of uninsured Americans were unaware of the requirement to carry health insurance or pay a fine in 2014, according to a Gallup study.

In a follow-up survey conducted by the Commonwealth Fund from July to September and the companion report, only four in 10 Americans reported being aware of the new health insurance marketplaces opening on October 1 or the financial assistance available to help people with low or moderate incomes pay their health insurance premiums. In fact, the Commonwealth Fund survey concluded that the people most likely to benefit from the health insurance marketplaces and premium subsidies are often least likely to be aware of them.

All employers to which the Fair Labor Standards Act applies (not just “applicable large employers” under the ACA) were required to distribute health care exchange notices to their employees by October 1, 2013. For 2014, the DOL will consider a notice to be provided at the time of hiring if the notice is provided within 14 days of an employee’s start date.  In the meantime, the notices may have sparked many questions from employees to human resources departments regarding the exchanges and available benefits.

Against this backdrop may be a silver lining in the form of an employee relations and compensation strategy opportunity.  For example, communicating with employees about the individual mandate gives employers an opportunity to explain what coverage their company offers, the value of their benefits and compensation packages and their commitment to employee health and wellness.  Ultimately, developing an effective employee communications plan is a critical component of an employer’s long-term strategy for ACA compliance.