The ERISA Blog

New York District Court Allows Age Discrimination Claim Involving Cash Balance Plan to Proceed

Benefitslink.com has this link here to a recent case in the Southern District of New York, in which Judge Harold Baer denied a motion to dismiss on an age discrimination claim involving a cash balance plan. Judge Baer disagreed with the conclusions reached by the Seventh Circuit in the IBM case:

Part of the Seventh Circuit’s decision relied on a finding that “‘benefit accrual’ (for defined-benefit plans) and ‘allocation’ (for defined-contribution plans) both refer to the employer’s contribution.” Id. at 639. Defendants in this case make a similar argument and they argue that Congress was saying the same thing when they used the term “allocation” in one provision and “rate of benefit accrual” in the other. The fact is accrual, using its dictionary meaning and in line with the structure of defined benefit plans, refers to what the employee accumulates (the outputs from the plan) whereas allocation, using its dictionary definition and in line with the structure of defined contribution plans, refers to what an employer puts into the account. As this Circuit has observed, “[w]hen Congress uses particular language in one section of a statute and different language in another, we presume its word choice was intentional.” U.S. v. Peterson, 394 F.3d 98, 107 (2d Cir. 2005). . .

Although it appears that this ruling may make it more difficult for companies to construct a cash balance plan that comports with ERISA requirements, Congress, not the Courts, is the place to turn for redress. The Second Circuit said as much in Esden¸ “[t]he issue is whether the Plan’s terms complied with the law. They did not.” Id. at 172.

Further, the age discrimination arises because this is a defined benefit plan and older workers accrue their retirement benefits at a slower rate than similarly situated younger workers. As directed by the Supreme Court, my role “is to apply the text, not to improve upon it.” Pavelic & LeFlore v. Marvel Entm’t Group, 493 U.S. 120, 126 (1989). That is the province of Congress, and it addressed some of the tensions that arise when the binary statutory framework is applied to cash balance plans at the time they passed the Pension Protection Act of 2006 this summer.

The Confusing World of ERISA Preemption

Many of us will fondly recall the discussion by Third Circuit Judge Edward Becker (1933-2006) on ERISA preemption in the case of DeFelice v. Aetna (which was eventually decided by the U.S. Supreme Court - read about it here and here). In that case Judge Becker discusses how trying to understand ERISA preamble is like a "descent into a Serbonian bog wherein judges are forced to don logical blinders and split the linguistic atom to decide even the most routine cases." (I discussed Judge Becker's opinion here.) While not related to the same issues as were decided in the DeFelice case, I was reminded of Judge Becker's discussion when I saw that the Fifth Circuit had recently withdrawn its opinion pertaining to ERISA preemption in the case of Bank of Louisiana v. Aetna. You can access the prior opinion here and the latest opinion issued October 18, 2006 here. The case is interesting because it shows how, even in trying to resolve contract claims between employers and insurers, the whole tangled mess of ERISA preemption can be a real challenge.

(Also, it seems unusual to find folks arguing that they are ERISA fiduciaries, but that is exactly what happened in the Bank of Louisiana case where the insurer was trying to claim that ERISA preemption applied. See page 9 of the October 18th opinion.)

New Benefits Acronym: QDIA

What is a QDIA? A "qualified default investment alternative" as described in soon-to-be-issued proposed regulations from the Department of Labor which are referenced in this News Release here and outlined in this Fact Sheet here. The News Release states that the "proposed rule [will be] the first major regulation resulting from the Pension Protection Act signed into law by President Bush on August 17, 2006."

The Pension Protection Act of 2006 provides a safe harbor for plan fiduciaries investing participant assets in certain types of default investment alternatives in the absence of participant investment direction. EBSA will be proposing the regulations to implement "the default investment amendments made to ERISA by the Pension Protection Act."

The proposed regulation deems a participant to have exercised control over assets in his or her account if, in the absence of investment direction from the participant, the plan fiduciary invests the assets in a QDIA. According to the Fact Sheet, investments that would qualify as QDIAs would be:

• Life-cycle or targeted-retirement-date funds;
• Balanced funds; or
• Professionally managed accounts.

For more benefits acronyms, see the Benefits Acronym Lexicon.

UPDATE: The Proposed Regulation has now been issued. Access it here.

IRS Reveals Plans for Cash Balance Plans In Limbo

At the recent ALI-ABA seminar on Retirement, Deferred Compensation, and Welfare Plans of Tax-Exempt and Governmental Employers, IRS officials stated that, due to the recent changes brought about by the Pension Protection Act of 2006, the IRS plans to start moving cash balance plans out of what the IRS referred to as "cash balance plan jail." "Cash balance plan jail" is the whimsical name given to the status of numerous cash balance plans (around 1200 plans) which have been submitted to the IRS for a determination letter over the past number of years, and which remain in a holding pattern, since the IRS had suspended the issuance of determination letters on all cash balance plans that had been converted from traditional defined benefit plans. The IRS said at the conference that one of its "high priorities" is to close out the cash balance plans waiting for a determination letter within a year from now (with governmental and nonelecting church plans not subject to section 411 of the Internal Revenue Code at the forefront of the movement). While this is good news for many, there was some bad news mixed in: officials said "some may not get a favorable determination letter."

Fifth Circuit Holds Merger Agreement Can Act as a Plan Amendment

It is fairly uncommon to see Circuit Court of Appeals cases where mergers and acquisition issues and benefits issues intersect. That is what happened in this recent Fifth Circuit case of Halliburton Company Benefits Committee v. Graves et al. which is a must-read for benefits lawyers who are involved in transactional work. The case holds that a merger agreement can act as a plan amendment of a benefit plan, even though it is not labeled as a plan amendment. The case also holds that the "no-third-party-beneficiary" clause which is standard in these types of agreements will not protect the surviving company from claims of participants since those claims are protected under ERISA.

Eleventh Circuit Relies on Sereboff in Two Plan Reimbursement Cases

What type of subrogation provision in a health plan can be enforced against a plan participant under the Supreme Court's recent ruling in Sereboff? (Read about Sereboff here.) The Eleventh Circuit in two recent cases--Popowski v. Parrott and BlueCross BlueShield v. Carillo (combined into one opinion)--interpreted Sereboff and held that one type of reimbursement/subrogation provision could be enforced while another could not.

The court upheld the plan's right to reimbursement in the Popowski case, but rejected the plan's right to reimbursement under the BlueCross BlueShield ("BCBS") case. What was the difference in the results? Plan language. Excerpt from the Popowski opinion:

The subrogation and reimbursement provision in the United Distributors Plan claims a lien “on any amount recovered by the Covered Person whether or not designated as payment for medical expenses.” PR1-1, Exh. G at 63. It further clarifies that “[t]he Covered Person . . . must repay to the Plan the benefits paid on his or her behalf out of the recovery made from the third party or insurer.” Id. (emphasis added). Thus, language essentially identical to the Supreme Court’s characterization of the plan language in Sereboff, specifies both the fund (recovery from the third party or insurer) out of which reimbursement is due to the plan and the portion due the plan (benefits paid by the plan on behalf of the defendant). Unlike in Knudson, a significant portion of the funds specified went directly into the Parrotts’ bank account and, thereby, was in their possession for purposes of this case. Thus, at the time they filed their suit, Popowski and the Commerce Group sought “not to impose personal liability on [Parrott], but to restore to the plaintiff[s] particular funds or property in [Parrott’s] possession.” See Knudson, 534 U.S. at 214, 122 S. Ct. at 714-15. Accordingly, we conclude that Popowski and the Commerce Group have stated a claim for “appropriate equitable relief” under § 1132(a)(3) and that the district court erred in dismissing the suit for lack of subject matter jurisdiction.

Contrast that with the court's decision in the BCBS case:

The subrogation and reimbursement provision in the Mohawk Plan, unlike that of the United Distributors Plan, claims a right to reimbursement “in full, and in first priority, for any medical expenses paid by the Plan relating to the injury or illness,” but does not specify that that reimbursement be made out of any particular fund, as distinct from the beneficiary’s general assets. BCBS Letter Br., Exh. B; BR1-1 at 3. Instead, it makes receipt of “a settlement, judgment, or other payment relating to the accidental injury or illness” a trigger for the general reimbursement obligation. Id. Further, in requiring reimbursement “in full”, it fails to limit recovery to a specific portion of a particular fund. Accordingly, we conclude that, because the Mohawk plan fails to specify that recovery come from any identifiable fund or to limit that recovery to any portion thereof, it fails to meet the requirements outlined in Sereboff for the assertion of an equitable lien for the purposes of 29 U.S.C. § 1132(a)(3). For this reason, we conclude that it was not error to dismiss BCBS’s claims.

The case illustrates how those representing employers and/or health plans should review the plan document language and SPD language to ensure that it tracks the language of Sereboff in order to better ensure that the Plan will be in a position of recovering under the principles laid out in Sereboff.

It is interesting to note that in 2005 the DOL had filed an Amicus Brief in the BCBS case which you can access here.

President Bush Signs H.R. 4

From the White House: "President Bush Signs H.R. 4, the Pension Protection Act of 2006." Some comments from the President at the signing:

In a few moments, I will have the honor of signing the most sweeping reform of America's pension laws in over 30 years, the Pension Protection Act of 2006. . .

Americans who spend a lifetime working hard should be confident that their pensions will be there when they retire. Last year I asked Congress to strengthen protections for the pensions of our workers. Members of both parties came together to pass a good bill that will improve our pension system, while expanding opportunities. .

Today, we've taken an important step toward ensuring greater retirement security for millions of American workers. I want to thank the House and the Senate for their good work on this vital legislation. It's been hard work. It took a lot of pages to write that bill, as you can see. (Laughter.)

You can view a video of the signing by clicking here or a photo of the signing here. See also this Fact Sheet on the Pension Protection Act of 2006 here.

Some Recommended Reading in the Blogosphere. . .

Someone is compiling articles and links on stock option backdating here.

RothCPA.com talks about changes in the law regarding COLI insurance and charitable deductions under the Pension Protection Act here.

Professor Paul Secunda points out a new article by Professor John H. Langbein in a post at the Workplace Prof Blog: Langbein on Judicial Review of Benefit Denials under ERISA. (Professor Langbein has been mentioned in previous posts which you can access here.)

Seventh Circuit Opines: IBM's Cash Balance Plan Not Age Discriminatory Under ERISA

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

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

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

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

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

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

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

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

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

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

(Hat Tip: Benefitslink.com)

Compilation of Links Pertaining to the Pension Protection Act of 2006

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

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

See also the following articles from the Wall Street Journal:

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

District Court Opines That ERISA Preempts Maryland Fair Share Health Care Fund Act: Notable Quotes

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

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

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

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

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

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

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

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

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

Sixth Circuit Disregards Choice of Law Provision in Pension Plan To Decide Surviving Spouse Issue

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

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

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

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

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

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

A dissent written by Circuit Judge Merritt calls the majority opinion's analysis "convoluted":

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

(Who said ERISA cases are "dreary"?)

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

Prof Gives Chief Justice Roberts A+ for Opinion in the Sereboff Case

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

U.S. Supreme Court Issues Opinion in Sereboff

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

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

See a previous post on the Sereboff case here.

Veto Override

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

Issuance of Final Regulations Governing Orphan Plans

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

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

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

Issuance of Final Regulations Pertaining to EBSA's Voluntary Fiduciary Correction Program

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

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

Cash Balance Plan Decision

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

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

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

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

Summary of H.R. 4850, Massachusetts' Heatlh Care Reform Bill

Mintz Levin has provided a good summary (which you can access here) of the principal features of H.R. 4850, Massachusetts' Health Care Reform Bill. See previous posts on the legislation here.

Massachusetts Governor Romney Signs Health Care Bill

Massachusetts Governor Mitt Romney signed into law the health care bill previously reported on here. You can access a press release here and Governor Romney's comments here. He did veto some items in the bill, one of which calls for employers with 11 or more workers to provide health coverage or pay an annual fee of $295 per worker. The Boston Globe reports that "[t]he vetoes promise to be more symbolic than meaningful, because the House and Senate passed the bill overwhelmingly and are expected to override all the vetoes."

KaiserNetwork.org reports here.

Massachusetts' Health Care Initiative

Another state is making some benefits history. Massachusetts has passed legislation (House No. 4850) that would require most of its citizens to purchase health insurance. The legislation would also require employers with 11 or more employees to contribute towards the cost. I am sure that the legislation will give rise to a lot of discussion over ERISA preemption issues just as the Maryland legislation did when it was passed late last year (discussed here and here).

The Wall Street Journal in an article yesterday provided this summary of the Massachusetts legislation:

Under the plan approved yesterday, uninsured residents who don't buy new, low-cost plans -- some subsidized by the state -- would face financial penalties beginning in July 2007. In the first year, those who don't buy insurance -- provided the state makes available one deemed affordable -- forfeit their personal state tax exemption, now worth about $150. In the second year, those who don't buy would have to pay a fine equal to half of the monthly premium cost of an affordable plan. For a full year, the fine could total about $1,200 for a young adult who would be eligible for an individual plan. There are no criminal penalties for not buying insurance.

In another provision that stirred unease among some businesses, the proposed law would require companies with 11 or more employees to provide health coverage or pay a per-employee annual fee of $295. In addition, employers whose uninsured workers make multiple use of emergency room care -- "free riders," in the bill's parlance -- would have to pay between 10% and 100% of the portion of those medical bills exceeding $50,000.

The Wall Street Journal also reports that "Massachusetts faced a July federal deadline to show that it was working to cover more of the uninsured or face losing $385 million in funding for Medicaid, the federal-state insurance plan for the poor and disabled" and that "[o]ther states -- schedules vary from state to state -- are expected to face similar pressure in coming years."

You can access links to the legislation at the website of the The 184th General Court of The Commonwealth of Massachusetts:

• Full text of legislation
• Conference Committee Report, Section-by-Section Summary
• Summary and Fact Sheet

One of the most interesting parts of the legislation is that every employer with 11 or more employees would be required to adopt a 125 plan. Employers who don't comply would be faced with a fine. Bill section 48 provides as follows:

Section 2. Each employer with more than 10 employees in the commonwealth shall adopt and maintain a cafeteria plan that satisfies 26 U.S.C. 125 and the rules and regulations promulgated by the connector. A copy of such cafeteria plan shall be filed with the connector.

If you are wondering what the term "Connector" means like I did, here's what the Fact Sheet says about that term:

The bill creates the Commonwealth Health Insurance Connector, to connect individuals and small businesses with health insurance products. The Connector certifies and offers products of high value and good quality. Individuals who are employed are able to purchase insurance using pre-tax dollars. The Connector allows for portability of insurance as individuals move from job to job, and permits more than one employer to contribute to an employee’s health insurance premium. The Connector is to be operated as an authority under the Department of Administration and Finance and overseen by a separate, appointed Board of private and public representatives.

Health savings accounts have also been allowed to play a roll in the legislation. The bill would apparently enable HMOs to offer coverage plans that are linked to health savings accounts.

Some pertinent links:

• Kaisernetwork.org reports here on the legislation.
• Professor Secunda discusses ERISA preemption at the WorkforceProf Blog.
• NCSL is keeping tabs on "Pay or Play" legislation here.
• More links at Affordable Care Today.

Article on ERISA Section 510

Kenni Merritt has written an article for the Oklahoma Bar Journal which is a primer on ERISA Section 510 claims: "Interference with ERISA-Protected Rights: Making a Federal Case Out of a Wrongful Discharge Action." Excerpt:

ERISA does not provide a statute of limitations for suits under Section 510. Therefore, courts select the most analogous state law limitations period. The courts that have considered ERISA Section 510 claims have almost unanimously concluded that the most analogous state law cause of action under Section 510 is wrongful termination or retaliatory discharge, state law causes of action encompassing an employee’s claim that he was discharged in violation of public policy. . . To reduce exposure to liability, some plan sponsors include a limitations period in their benefit plan documents and summary plan descriptions. A number of courts have recognized such plan-imposed limitation periods as being valid and enforceable under ERISA.

The whole March 11th issue of the Oklahoma Bar Journal is devoted to employment discrimination.

DOL Announces New Mailing Address for DFVC and Extension of Mental Health Parity Provisions

DOL has announced:

• A new mailing address for the DFVC Program. Read the News Release here. The new address takes effect April 11, 2006.
• A technical amendment extending the interim final rules under the Mental Health Parity Act ("MHPA") to December 31, 2006. Late last year, the Employee Retirement Preservation Act (P.L. 109-151) extended MHPA's sunset date under ERISA, the Code, and the Public Health Service Act to December 31, 2006. This interim amendment conforms the regulatory sunset date to the new statutory sunset date.

(The MHPA requires that annual or lifetime dollar limits for mental heath benefits be no lower than the dollar limits for medical/surgical benefits offered by a group health plan. The act applies to group health plans or health insurance coverage offered by issuers in connection with a group health plan that offers both mental health and medical/surgical benefits. However, it does not require plans to offer mental health benefits.The MHPA provisions in ERISA generally apply to all group health plans other than governmental plans, church plans, and certain other plans.)

Ninth Circuit Holds MVRA Creates Statutory Exception to ERISA's Anti-Alienation Provision

The Ninth Circuit Court of Appeals has issued an opinion overturning a lower court decision and siding with the U.S. attorney in a case involving a writ of garnishment issued against a pension plan. The case is U.S. v. Novak and specifically holds that the Mandatory Victims Restitution Act of 1996 (“MVRA”), 18 U.S.C. § 3663A, in conjunction with 18 U.S.C. § 3613, constitutes a statutory exception to ERISA’s anti-alienation provision. The participant in the case had pleaded guilty to certain conspiracy charges and was ordered to pay restitution in the amount of $3,360,051.67. Of course, focus turned to a pension plan where the participant had accrued a sizable pension which was, however, a drop in the bucket compared to the total restitution ordered. At the government’s request, the Clerk of the district court issued a post-judgment writ of garnishment to the plan sponsor of the plan for amounts owed to the participant under the pension plan. The writ was issued pursuant to the garnishment provisions of the Federal Debt Collection Procedures Act (“FDCPA”), 28 U.S.C. § 3205. On March 5, 2004, the district court had issued an order quashing the writ of garnishment, which order was overturned by the Ninth Circuit. Excerpt from the opinion:

We determine that with the passage of the MVRA, Congress did what the Supreme Court in Guidry indicated it could do: enact a statutory exception to ERISA’s anti-alienation provision. We find that Congress enacted a statutory exception because (a) the MVRA is a specific collection statute designed to provide victims with restitution, and (b) Congress provided for restitution orders to be enforced like tax liens, which are enforceable against ERISA pension benefits.

Circuit Judge Fletcher issued a dissent in the case, arguing that, for there to be a statutory exception to ERISA's anti-alienation provisions, Congress must "issue a clear statement of its intent to abrogate ERISA." Fletcher noted that neither the MVRA nor 18 U.S.C. § 3613 contain such a directive:

This statutory scheme does not evidence a clear statement to abrogate ERISA’s anti-alienation provision. Although the statutory text does mandate restitution, it lacks any express statement (as it does for Social Security, see 18 U.S.C. § 3613(a)) that restitution owed to victims can be collected from ERISA pensions. And, as noted previously, there is nothing within ERISA calling for an exception for orders of restitution. Without an express directive in the restitution statute to seize ERISA pensions or a specific carve-out within ERISA’s anti-alienation provision, we should not create one through judicial fiat.

The majority's decision is consistent with IRS's view of the subject which you can read about in two previous posts: U.S. Attorneys Seeking To Levy Against Qualified Plan Assets Under the FDCPA and When the U.S. Attorney Comes Knocking . . . The majority also cites district court cases in Oklahoma, Virginia, Michigan, Louisiana, and North Carolina which are in accord with its decision. The U.S. Attorney, as well as plan sponsors, plan administrators and fiduciaries who would like to comply with such directives, but were concerned about the ERISA anti-alienation provisions, are now armed with this Ninth Circuit opinion as well.

(Query: Can payment be compelled prior to a participant's right to receive payment under the plan? The IRS had said in a PLR (as discussed in a previous post) that the U.S. Government cannot garnishee or otherwise collect against a plan participant's or beneficiary's benefit until the participant or beneficiary has a right to a distribution under the terms of the plan. The Ninth Circuit doesn't appear to address the issue in the Novak case.)