Arkansas Insurance Department Issues Directive Pertaining to AWP Law

The Arkansas Insurance Department has issued a directive in connection with an Eigth Circuit ERISA preemption case discussed in a previous post here. Read about it in this article from the Insurance Journal: "Arkansas Clarifies Changes to Any Willing Provider…

The Arkansas Insurance Department has issued a directive in connection with an Eigth Circuit ERISA preemption case discussed in a previous post here. Read about it in this article from the Insurance Journal: “Arkansas Clarifies Changes to Any Willing Provider Law.”

Arkansas Insurance Department Issues Directive Pertaining to AWP Law

The Arkansas Insurance Department has issued a directive in connection with an Eigth Circuit ERISA preemption case discussed in a previous post here. Read about it in this article from the Insurance Journal: "Arkansas Clarifies Changes to Any Willing Provider…

The Arkansas Insurance Department has issued a directive in connection with an Eigth Circuit ERISA preemption case discussed in a previous post here. Read about it in this article from the Insurance Journal: “Arkansas Clarifies Changes to Any Willing Provider Law.”

Pennsylvania Legislative Developments

Pennsylvania legislators have effectively overturned the controversial Commonwealth Court decision in Ignatz v. Commonwealth of Pennsylvania, 2004 WL 1057453 (Pa. Commw. May 12, 2004) through enactment of House Bill No. 176. (You can read the text of the bill here.)…

Pennsylvania legislators have effectively overturned the controversial Commonwealth Court decision in Ignatz v. Commonwealth of Pennsylvania, 2004 WL 1057453 (Pa. Commw. May 12, 2004) through enactment of House Bill No. 176. (You can read the text of the bill here.) The bill was approved by Governor Rendell on July 7, 2005. Buchanon Ingersoll has a great summary of the development here.

Also, legislation was passed in Pennsylvania removing a state law mandate which was a barrier to insurers offering high deductible health plans in connection with health savings accounts. The legislation, House Bill 107, was approved by the Governor on July 14, 2005. (Access the text of the legislation here.) The bill also provides that the following shall be exempt from taxation in Pennsylvania:

    (1) any income of a health savings account;
    (2) any amount paid or distributed out of a health savings account that is used exclusively to pay the qualified medical expenses of the account beneficiary; and
    (3) any amount paid or distributed out of a health savings account that is used exclusively to reimburse an account beneficiary for qualified medical expenses.

Please note that individual or employer contributions to health savings accounts unfortunately do not appear to be exempt from state income tax in Pennsylvania. This article here reports that “[u]nder the original legislation, contributions to HSAs by employers and employees would not have been taxable for state income tax purposes.” The article goes on to explain that “under pressure and threat of veto from the Rendell administration, the tax exclusion language for contributions was stripped from the bill immediately prior to its passage.”

Read more about the impact of state law mandates on health savings accounts in this previous post here.

District Court’s Denial of Proposed Settlement in EDS ERISA Litigation

The District Court for the Eastern District of Texas recently rejected a settlement submitted to the Court for approval in the case of In Re Electronic Data Systems Corp. ERISA Litigation. You can access the Memorandum Opinion and Order of…

The District Court for the Eastern District of Texas recently rejected a settlement submitted to the Court for approval in the case of In Re Electronic Data Systems Corp. ERISA Litigation. You can access the Memorandum Opinion and Order of the Court rejecting the settlement here [pdf]. The plaintiff-participants had sued EDS and its officers and directors for various fiduciary breaches and alleged, in general, violations of ERISA pursuant to a “stock-drop” scenario.

You can read about the important procedural issues which have developed in this case in a previous post here. The Fifth Circuit had granted the defendants’ petition for interlocutory appeal under Rule 23(f) of the Federal Rules of Civil Procedure. However, after presenting oral arguments to the Fifth Circuit in April of 2005, the parties apparently engaged in a “day-long mediation session” that resulted in a proposed settlement. However, the Court rejected the settlement, stating as follows:

The Court concludes that this settlement is not in the best interests of the proposed class members. Under the proposed settlement the class members would only receive two or three cents on the dollar of their losses. For example, a plan participant who had a $10,000 loss under the settlement proposal would receive only $200 to $300, a mere pittance of his or her actual loss. The Court is of the opinion that such a plaintiff would consider the risk of an adverse ruling by the Fifth Circuit to be a risk worth taking in comparison with the small benefit to be received from the settlement. This is particularly true in the present case, given that a class member would not be much worse off losing the appeal and receiving nothing than he would be receiving the de minimis recovery that each Plan participant would receive under the proposed settlement. This may be a good settlement for Plaintiffs’ counsel in that they would recoup 100% of their $5.0 million in attorneys’ fees and expenses, and it may be a good settlement for EDS in that for a relatively nominal sum it would remove whatever risk it has, but it is not a fair settlement for the Plaintiff class who would only be receiving a few pennies on the dollar. Given the Court’s skepticism that class members would ultimately find the proposed settlement to be fair to them, the Court believes issuing a notice and holding a final fairness hearing would be an expensive and unjustifiable effort.

Although not a factor in determining whether the proposed settlement is fair, reasonable, and adequate, the Court is also of the opinion that broader interests of justice would be served by denying preliminary approval. There is a vacuum of precedent on 502(a)(2) issues in the Fifth Circuit, as well as other circuits. The Fifth Circuit recognized this in Milofsky and, implicitly, in taking the unusual step of granting an interlocutory appeal under Rule 23(f). See Milofsky v. Am. Airlines, Inc., 404 F.3d 338, 345 (5th Cir. 2005) (refusing to “speculate on every possible situation” yet to be answered). In light of the de minimis settlement before the Court, it is therefore in the interests of justice to push forward in this dispute, so issues can be resolved by the Fifth Circuit and procedural clarity can be brought to ERISA litigation surrounding defined contribution plans.

Furthermore, approving this settlement could send the wrong message to the United States Department of Labor, the administrative agency charged with overseeing and enforcing pension plans. The United States Department of Labor is presently investigating this Plan and has clearly stated its position in its amicus curiae brief at the Fifth Circuit. The Court believes that investigation should run its due course and not be prematurely influenced by the Court approving what it has found to be an unfair de minimis settlement to the class members.

You can access the following amicus briefs filed in the appeal:

For Your Benefit has comments on the case here.

UPDATE: See also this recent article from the Washington Legal Foundation entitled “ERISA-Related Securities Litigation Imposes Undue Burden on Pension Plans and Participants.”

District Court’s Denial of Proposed Settlement in EDS ERISA Litigation

The District Court for the Eastern District of Texas recently rejected a settlement submitted to the Court for approval in the case of In Re Electronic Data Systems Corp. ERISA Litigation. You can access the Memorandum Opinion and Order of…

The District Court for the Eastern District of Texas recently rejected a settlement submitted to the Court for approval in the case of In Re Electronic Data Systems Corp. ERISA Litigation. You can access the Memorandum Opinion and Order of the Court rejecting the settlement here [pdf]. The plaintiff-participants had sued EDS and its officers and directors for various fiduciary breaches and alleged, in general, violations of ERISA pursuant to a “stock-drop” scenario.

You can read about the important procedural issues which have developed in this case in a previous post here. The Fifth Circuit had granted the defendants’ petition for interlocutory appeal under Rule 23(f) of the Federal Rules of Civil Procedure. However, after presenting oral arguments to the Fifth Circuit in April of 2005, the parties apparently engaged in a “day-long mediation session” that resulted in a proposed settlement. However, the Court rejected the settlement, stating as follows:

The Court concludes that this settlement is not in the best interests of the proposed class members. Under the proposed settlement the class members would only receive two or three cents on the dollar of their losses. For example, a plan participant who had a $10,000 loss under the settlement proposal would receive only $200 to $300, a mere pittance of his or her actual loss. The Court is of the opinion that such a plaintiff would consider the risk of an adverse ruling by the Fifth Circuit to be a risk worth taking in comparison with the small benefit to be received from the settlement. This is particularly true in the present case, given that a class member would not be much worse off losing the appeal and receiving nothing than he would be receiving the de minimis recovery that each Plan participant would receive under the proposed settlement. This may be a good settlement for Plaintiffs’ counsel in that they would recoup 100% of their $5.0 million in attorneys’ fees and expenses, and it may be a good settlement for EDS in that for a relatively nominal sum it would remove whatever risk it has, but it is not a fair settlement for the Plaintiff class who would only be receiving a few pennies on the dollar. Given the Court’s skepticism that class members would ultimately find the proposed settlement to be fair to them, the Court believes issuing a notice and holding a final fairness hearing would be an expensive and unjustifiable effort.

Although not a factor in determining whether the proposed settlement is fair, reasonable, and adequate, the Court is also of the opinion that broader interests of justice would be served by denying preliminary approval. There is a vacuum of precedent on 502(a)(2) issues in the Fifth Circuit, as well as other circuits. The Fifth Circuit recognized this in Milofsky and, implicitly, in taking the unusual step of granting an interlocutory appeal under Rule 23(f). See Milofsky v. Am. Airlines, Inc., 404 F.3d 338, 345 (5th Cir. 2005) (refusing to “speculate on every possible situation” yet to be answered). In light of the de minimis settlement before the Court, it is therefore in the interests of justice to push forward in this dispute, so issues can be resolved by the Fifth Circuit and procedural clarity can be brought to ERISA litigation surrounding defined contribution plans.

Furthermore, approving this settlement could send the wrong message to the United States Department of Labor, the administrative agency charged with overseeing and enforcing pension plans. The United States Department of Labor is presently investigating this Plan and has clearly stated its position in its amicus curiae brief at the Fifth Circuit. The Court believes that investigation should run its due course and not be prematurely influenced by the Court approving what it has found to be an unfair de minimis settlement to the class members.

You can access the following amicus briefs filed in the appeal:

For Your Benefit has comments on the case here.

UPDATE: See also this recent article from the Washington Legal Foundation entitled “ERISA-Related Securities Litigation Imposes Undue Burden on Pension Plans and Participants.”

JCEB 2005 Q & A’s Posted

The Joint Committee on Employee Benefits (JCEB) of the American Bar Association has posted transcripts of the 2005 Q & A Sessions with the following governmental agencies: Centers for Medicare and Medicaid Services (CMS) Equal Employment Opportunity Commission (EEOC) Health…

The Joint Committee on Employee Benefits (JCEB) of the American Bar Association has posted transcripts of the 2005 Q & A Sessions with the following governmental agencies:

Highlights of the IRS session include Q & As discussing Internal Revenue Code section 409A, health savings accounts, and automatic rollover provisions.

Note also this excerpt from the Health and Human Services session:

Question 5: Is a Health Savings Account (HSA) subject to the HIPAA privacy rules? If the answer is yes, who has the responsibility for ensuring that the HIPAA privacy requirements are met, the individual account owner, the custodian or trustee of the HSA, or an employer who maintains the related High Deductible Health Plan?

Proposed Answer 5: The privacy rules apply to “covered entities,” which include health plans, health care clearinghouses, and health care providers. The definition of health plan includes individual and group plans that provide or pay for the cost of medical care.

Although the definition of health plan is broad enough to include HSAs established by an individual with no involvement on the part of the individual’s employer, the privacy rules were not intended to apply in this context. The privacy rules serve, in part, to assure that individuals’ health information is properly protected while allowing the flow of health information needed to provide and promote high quality health care and to protect the public’s health and well being. As the Department of Labor noted in Field Assistance Bulletin 2004-1, “HSAs are personal health care savings vehicles rather than a form of group health insurance.” Furthermore, funds held in an HSA need not be used exclusively for the payment of medical care (although they may lose certain tax benefits if they are used for other purposes). HSAs were introduced as a means of promoting savings and assisting individuals with the high cost of health care. Subjecting HSAs to the burden of HIPAA compliance would discourage rather than promote savings because it would discourage trustees and custodians from offering such accounts and would add to the costs of maintaining them. In balancing the promotion of health care savings with the need to protect individuals’ health information, we believe the better approach is not to subject individual HSA accounts, nor the custodians or trustees that sponsor them, to the HIPAA privacy rules where there is no involvement by employers in the establishment or maintenance of the account.

Answer: HHS stated that it is coming to the conclusion that HSAs are not health plans and therefore are exempt from the HIPAA privacy rule. HHS is trying to distinguish between HSAs, which function more like individual savings accounts, and group health plans. HHS may issue further guidance on this issue in fall 2005.

Please note that the JCEB website provides the following disclaimer:

The questions are submitted by ABA members and the responses are given at a meeting of JCEB and government representatives. The responses reflect the unofficial, individual views of the government participants as of the time of the discussion, and do not necessarily represent agency policy.

You can access previous year Q & A sessions here as well.

IRS Issues Proposed Regulations for Electronic Transmission of Employee Benefits Information

The Treasury and IRS have issued proposed regulations entitled "Use of Electronic Technologies for Providing Employee Benefit Notices and Transmitting Employee Benefit Elections and Consents." The press release summarizes the regulations as follows: The Treasury Department and IRS issued proposed…

The Treasury and IRS have issued proposed regulations entitled “Use of Electronic Technologies for Providing Employee Benefit Notices and Transmitting Employee Benefit Elections and Consents.” The press release summarizes the regulations as follows:

The Treasury Department and IRS issued proposed regulations today regarding the use of electronic media to provide notices to employee benefit plan participants and beneficiaries and to transmit elections or consents from participants and beneficiaries to employee benefit plans.

These regulations coordinate the rules in existing guidance for using electronic media for these purposes with the requirements of the E-SIGN statute (the Electronic Signatures in Global and National Commerce Act, Public Law 106-229). The regulations would allow a plan to use electronic media either under the E-SIGN consumer consent rules or under an alternative that is similar to the retirement plan rules for electronic transmission of plan information that were in effect before E-SIGN and that are both less burdensome on employers and as least as protective for participants.

Comments about the proposed regulations in general:

According to the preamble, the standards set forth in these proposed regulations would apply to any “notice, election, or similar communication” made to or by a participant or beneficiary under the following types of plans:

  • a qualified plan
  • a 403(b) plan
  • a SEP
  • a simple IRA plan under section 408(p)
  • an eligible governmental plan under section 457(b)
  • an accident and health plan under section 104(a)(3) or 105
  • a cafeteria plan under section 125
  • an educational assistance program under section 127
  • a qualified transportation fringe benefit program under section 132
  • an Archer Medical Savings Account under section 220
  • or a health savings account under section 223.

The regulations state that they are meant to constitute the “exclusive rules relating to the use of electronic media” to satisfy a requirement under the Code that a communication be in written form, but would also act as “safe harbor” with respect to any communication that is not required to be in written form. The preamble states specifically that these proposed regulations would apply to section 402(f) notices, section 411(a)(11) notices, and section 204(h) notices.

What notices or communications are not covered by the new rules? The preamble states that they would not apply to any notice, election, consent, or disclosure required under the provisions of Title I or IV of ERISA over which the DOL or the PBGC has interpretative and regulatory authority. For example, the preamble states that the rules provided in 29 C.F.R. 2520.104b-1 of the Labor Regulations (which require an employee benefit plan to furnish disclosure documents, such as summary plan descriptions or summary annual reports) would continue to apply. They go on to note that the proposed regulations would also not apply to the following:

  • Code section 411(a)(3)(B) (relating to suspension of benefits)
  • Code section 4980B(f)(6) (relating to an individual’s COBRA rights)
  • “or any other Code provision over which DOL and the PBGC have similar interpretative authority”
  • “other requirements under the Code such as requirements related to tax reporting, tax records, or substantiation of expenses”

As to the effective date for the new rules, the regulations state that they are to apply “prospectively” and will apply “no earlier than the date of the publication of the Treasury decision adopting these rules as final regulations in the Federal Register.” The regulations make it clear that they “cannot be relied upon prior to their issuance as final regulations.”

IRS Agents Training For Code Section 409A Audits

RIA is reporting today that at a recent ALI-ABA session on Executive Compensation, Catherine Livingston Fernandez, Esq., Chief, Executive Compensation Branch in the IRS's Office of the Associate Chief Counsel and Keith Jones, Director, Field Specialists, Large and Mid-Size Business…

RIA is reporting today that at a recent ALI-ABA session on Executive Compensation, Catherine Livingston Fernandez, Esq., Chief, Executive Compensation Branch in the IRS’s Office of the Associate Chief Counsel and Keith Jones, Director, Field Specialists, Large and Mid-Size Business Division (LMSB) revealed that IRS agents are already receiving training in section 409A of the Internal Revenue Code, with the first wave of audits likely to begin in 2007. Excerpt:

Since it takes about two years for returns to be filed and audits to be initiated, the first wave of Code Sec. 409A audits would begin in 2007. Mr. Jones said that IRS agents plan to audit the 2005 transition year for compliance with Code Sec. 409A . In response to an audience question, Mr. Jones said that, despite suggestions from IRS that it would go easy in the transition year, issues on which the law was clear and regulatory guidance wasn’t needed would be subject to audit for 2005.

The article goes on to note that another compliance focus for the IRS is the “failure-to-deposit penalty” having to do with the one-day rule for depositing employment taxes. According to the article, Mr. Jones is quoted as saying that “penalties amounting to tens of millions of dollars will be imposed, particularly in connection with unpaid unemployment taxes on stock options.” Other focuses of compliance include high-income taxpayers (income of $100,000 and above), travel and entertainment, and reasonable compensation.

Read more about nonqualified deferred compensation rules under new section 409A of the Code in previous posts which you can access here.

Proposed 415 Regulations: Links

On May 25, 2005, the IRS published proposed regulations under Section 415 of the Internal Revenue Code dealing with limitations on benefits and contributions for qualified plans. Here are some helpful resources pertaining to the regulations: Special Edition of the…

On May 25, 2005, the IRS published proposed regulations under Section 415 of the Internal Revenue Code dealing with limitations on benefits and contributions for qualified plans. Here are some helpful resources pertaining to the regulations:

Derrin Watson had some interesting things to say about the new regulations at Benefitslink.com in these Q & As 279 and 280. Excerpt:

One of the most fascinating points about these new rules is their proposed effective date. The 415 regs as a whole are proposed to go into effect for limitation years starting in 2007. But we are told that taxpayers can rely on these post-severance compensation rules now. Mr. Marty Pippins, Manager of EP Technical Guidance, is quoted as saying “This portion of the regulations is proposed effective for limitation years beginning on or after January 1, 2005.” This is fascinating because I cannot find that date anywhere in the proposed regulations. But apparently it behooves practitioners to assume the rules are in effect now.

See also:

A Common Problem in “ERISA Land”: No Plan Documents and Worker Classification Confusion

The following case-Ruttenberg v. United States Life Insurance Company-illustrates the great struggle that courts are having with these long-term disability cases which fall under the purview of ERISA. The facts of the case involved an individual ("plaintiff") who worked as…

The following case–Ruttenberg v. United States Life Insurance Company–illustrates the great struggle that courts are having with these long-term disability cases which fall under the purview of ERISA. The facts of the case involved an individual (“plaintiff”) who worked as an independent commodity trader at the Chicago Board of Trade and Mercantile Exchange. The district court opinion (Ruttenberg v. United States Life Ins. Co., 2004 US Dist. Lexis 3676 (ND Ill. March 10, 2004) states that, in general, such floor trading required extensive use of one’s vocal cords including “screaming and yelling to gain the attention of other Traders and Brokers” and also involved “frequent exposure to pushing and shoving.” According to the opinion, plaintiff was, at times, making over $30,000 a month in profits, and paying premiums on a disability policy which assured him of $10,000 a month if he became disabled. Plaintiff allegedly could no longer function in his work due to vocal cord disfunction and filed for disability.

While the facts of the case demonstrate how the progression of plaintiff’s claim quickly evolved into a battle of medical opinions, the case is worth noting for other reasons:

(1) The case illustrates a consistent problem that many of these disability plans have–and that is that there are basically no plan documents. As the Seventh Circuit so aptly said in the case of Health Cost Controls of Illinois v. Valerie Washington (opinion written by Judge Posner):

“This kind of confusion is all too common in ERISA land; often the terms of an ERISA plan must be inferred from a series of documents none clearly labeled as “the plan.”

Generally, a court reviews de novo an ERISA plan denial of benefits unless the plan grants to the plan administrator the discretionary authority to construe plan terms. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989). When there are no plan documents, it is hard for the plan administrator to argue that it has the necessary Firestone discretion to avoid a de novo review. In this particular case, the insurance company tried to argue that a ““Master Policy Application” was part of the “plan document” and contained the necessary Firestone language, but neither the district court nor the Seventh Circuit bought that argument, so the court reviewed the denial of plaintiff’s claim de novo. While the following excerpt from the district court case may seem long and tedious to some, it illustrates the predicament that many courts find themselves in when looking for plan documents and the legal gymnastics that they must go through to piece together a plan document (It sort of reminds me of the search for Waldo in the children’s book entitled “Where’s Waldo?“, only here the quest is “Where’s the plan document?”):

. . . [T]he issue concerns whether the necessary language was placed in an appropriate location to grant the administrator discretion. Case law requires reference to the “language of the plan,” see Postma v. Paul Revere Life Ins. Co., 223 F.3d 533, 538 (7th Cir.2000), but that in and of itself is a nebulous concept. . . Ruttenberg points to a summary plan description (“SPD”) provided to the participants and beneficiaries in the plan, and that SPD clearly does not contain any language reserving discretion to the administrator. United States Life points to a document entitled “Master Application for Employee Benefits” that SMW submitted to United States Life. That document contains a section stating that, if the insurance contract compromises a part of an employee benefit plan, the United States Life Insurance Company is granted sole discretionary authority to determine eligibility, make all factual determinations and to construe all terms of the policy. The United States Life Insurance Company has no responsibility or control with respect to any other benefit which may be provided beyond this contract or any other plan of benefits. . . According to United States Life, this document must be considered part of the ERISA “plan” and is sufficient to notify any participants or beneficiaries that the plan administrator has the sole discretionary authority to determine eligibility.

Notably, neither party points to anything resembling the main section of the policy or plan (i.e., a document similar to the “Subscriber’s Service Agreement” in Health Cost). Both the certificate of insurance contained in the record (R. 0275) and the SPD attached to Ruttenberg’s Complaint (Ex. A pg. 2) state that these documents only serve as a “summary” of the “group policy provisions.” No group policy is identified in the record. In any event, if there is a group policy in the record, the court assumes that it does not have the language above contained in the “Master Policy Application” because, if it did, United States Life would have brought this rather important point to the court’s attention.

Nevertheless, United States Life argues that the “Master Policy Application” must be considered part of the plan documents and does sufficiently reserve the necessary discretion to the employer. It points to Plumb v. Fluid Pump Serv., Inc., 124 F.3d 849 (7th Cir.1997) and Cannon v. Wittek Cos., Int’l, 60 F.3d 1282 (7th Cir.1995). The court in Plumb was confronted with the issue of whether an insurance company was a fiduciary for purposes of ERISA. Id. at 854. The court noted that in making that determination the place to look was the plan documents. Id. Accordingly, the court examined a document entitled “Participating Employer Application and Agreement” in addition to the policy and certificate of insurance. Id. at 854-55. In Cannon the court considered whether a waiting period serving as a prerequisite to eligibility under a plan required consecutive days of employment. Id. at 1284. The court noted that nothing in the “plan” required such consecutive employment, although United States Life points out that the court did consider a “plan document” entitled “Supplement to the Benefit Application.” Id. at 1284-85.

Since neither Plumb nor Cannon dealt with the issue here of whether discretionary language contained in an application for benefits is sufficient to allow only arbitrary and capricious review of a plan administrator’s decision, the court views both cases as only providing limited persuasive value. Moreover, such limited persuasive value is lessened when one considers the reasoning in Herzberger. The court there made clear that an employee needed to be clearly told that a plan administrator was entitled to determine whether to pay an insured’s claim subject to only arbitrary and capricious judicial review. 205 F.3d 333 . This is because the more “discretion lodged in the administrator” the “less solid an entitlement the employee has and the more important it may be to him, therefore, to supplement his ERISA plan with other forms of insurance.” Id. at 331. Here, there is no basis whatsoever in the record to support the notion that this “Master Policy Application” would ever be shown or even made available to participants or beneficiaries in the Plan. The document itself consists mostly of information about the applicant of the Plan (i.e., SMW) and the alleged discretionary language is under a portion of the document entitled “Applicant’s Declaration.” There is nothing to suggest that this document clearly informed participants and beneficiaries under this Plan that the administrator reserved the discretion to deny benefits to any insured. The court, therefore, rejects United States Life’s argument that the “Master Policy Application” is part of the ERISA Plan itself. Moreover, since there is no evidence that any part of the ERISA Plan contains the required language reserving discretion to the administrator, this court’s standard of review in this case will be de novo.

(2) The case also illustrates how the fuzzy distinctions between worker classifications can reek havoc with benefit plans. In this case, the plaintiff was being treated as an independent contractor for IRS purposes (as evidenced by the fact that his income was reported on a 1099), but for purposes of the disability plan, he was being treated as an “employee” because “employee” was defined under the Certificate of Insurance to include certain independent contractors.

The plaintiff tried to argue in the preemption phase of the case that he was an independent contractor and therefore not an “employee” under the plan for purposes of supporting his theory that his state law claims weren’t preempted by ERISA. However, the district court held, and the 7th Circuit agreed, that plaintiff was a “beneficiary” under the Plan, even if he wasn’t a “participant” for purposes of ERISA. Thus, his state law claims were preempted.

However, when determining whether the plaintiff was eligible for the plan in the first place, the insurance company tried to use this very same argument (that plaintiff had used in the preemption phase) to their advantage, i.e. they tried to argue that the plaintiff was not covered under the plan (even though the plaintiff had been paying premiums for coverage) because he wasn’t an “employee” and wasn’t “full time.” The Certificate of Insurance had defined “eligible employees” as “all full-time employees of the Participating Employer who are: managers and officers earning over $20,000 annually, traders who report earnings on their 1099 form, firm traders who report prior years on their 1099 DDE form, but not those who are temporary, part-time or seasonal.” In rejecting the insurance company’s argument and holding that the plaintiff was covered under the plan, the district court stated:

Since the Plan both states that only employees are eligible but nevertheless includes traders who report income on 1099 Forms, the best way to handle this apparent ambiguity in the policy is to simply construe the contract against the policy’s drafter . . . Accordingly, being an “employee” is not a necessary condition to coverage and traders who reported income on IRS 1099 Forms and who were affiliated with SMW (such as Ruttenberg) would be eligible for coverage, even if they are not considered “employees” of SMW.

The Seventh Circuit agreed:

The inclusion of form 1099 in defining the contractual term “employee” thus indicates that the term includes more than just common law employees, and that other workers may be eligible under the policy. Those other workers may include independent contractors like Mr. Ruttenberg, but the scope of the contractual term is ambiguous. . . Allowing Mr. Ruttenberg to purchase insurance for which U.S. Life now claims that he is ineligible constitutes the type of “trap for the unwary” that contra proferentem is meant to prevent. The district court correctly found the term “employee” to be ambiguous, and properly construed the term against the policy’s drafter, U.S. Life.

Please note that, from an IRS standpoint, inclusion of a worker in an employer’s benefit plans is actually one of the factors that the IRS will look to in determining whether or not a worker is properly classified as an “employee” or not. If a worker is included in the employer’s benefits plans, this factor would lean towards the worker being treated as an “employee” for IRS purposes, rather than an “independent contractor.” (The IRS looks to a number of factors though–not just this one–in making its determination.) See this previous post here discussing how “worker classification issues” are almost always examined in an IRS employment tax audit or employee plan audit.

Also, more posts on worker classification issues relating to benefits here.