Category: Benefits

While everyone knows that outsourcing is here to stay, and that there are legitimate business reasons and advantages to outsourcing, what I have tried to do here is simply to highlight some of the ERISA litigation that has grown out of this trend in outsourcing. The reason I think it is important is that when employers contemplate outsourcing and hire advisers to help them through the process, many times they are not advised of the issues and risks that can arise in the benefits arena. (See previous posts: Outsourcing Can Lead To Costly ERISA Litigation and Outsourcing: Traps for the Unwary.) Another very recent case–Sheckley v. Lincoln National Corporation Employees’ Retirement Plan, Civil No. 04-109-P-C (D. Maine 2005)–provides some further insight into actions that can expose an employer to liability under ERISA in an outsourcing arrangement as well as actions that can, to some extent, reduce an employer’s exposure to liability under ERISA.

Facts: The employer in the case reorganized its information technology organization, and as a result, forty-nine positions were eliminated. In the course of various restructurings, the employer entered into outsourcing agreements. (The court defines outsourcing as “the practice of transferring job functions to third-party vendors who enter into contracts with the employer to provide the services formerly provided by employees.”) The employer notified twenty-six employees in the information technology department, including plaintiff, that their positions were being outsourced to another employer. Outsourced employees were required to apply for their position with the new employer. Apparently, in the process of outsourcing the employees, they were given a benefits summary which indicated that they would be vested in the prior employer’s retirement plan. However, after accepting the position, plaintiff was informed that his retirement account in the prior employer’s plan would not vest.

Section 510 Claims: When the employer responded to an inquiry from plaintiff about the benefits summary he received, the employer stated that it “contained an error about his pension” and that he was not entitled to vesting because his job was not eliminated, but rather “outsourced.” Plaintiff then made a claim and quasi-appealed the decision under the plan’s claims procedures, but to no avail, and then brought suit under ERISA section 510, claiming that the employer had characterized the action taken as “outsourcing” (versus “job elimination”) in order to deprive plaintiff of vesting under the employer’s pension.

A Magistrate Judge had found that, although the amended complaint alleged the necessary intent, the “mischaracterization of the job eliminations affecting [p]laintiff and the Class … [could not] reasonably be construed, even under the favorable standard applicable to motions to dismiss, to allege discrimination against plaintiff and other members of the putative class.” However, the federal district court in Maine disagreed, holding that the allegations were sufficient to state an ERISA section 510 claim, and denied the employer’s motion to dismiss.

Plan Limitation Period: There was another aspect of the case though which illustrates one technique that employers are seeking to use to reduce their exposure to liability under ERISA, and that was a six-month limitation period contained in the Summary Plan Description (“SPD”). The applicable portion of the SPD read as follows, describing a participant’s rights upon denial of a claim after appeal of the claim:

The decision upon review will be final. It will be communicated in writing and contain the specific reason(s) for the decision, will contain references to the pertinent Plan language upon which the decision was based, and will be written in a manner easily understood by the claimant. Claimants will not be entitled to challenge the LNC Benefits Appeals [and] Operations Committee’s determinations in judicial or administrative proceedings without first filing the written request for review and otherwise complying with the claim procedures. If any such judicial or administrative proceeding is undertaken, the evidence presented will be strictly limited to the evidence timely presented to the LNC Benefits Appeals and Operations Committee. In addition, any such judicial or administrative proceeding must be filed within six months after the Committee’s final decision.

The federal district court joined a number of other courts in holding that the plan’s six-month limitation was reasonable and should be enforced. The technique of including such a limitation in a plan document and SPD is normally utilized to seek to overrule statutes of limitation which would otherwise apply to lawsuits challenging a denial of a claim. A number of courts have recognized such limitation periods as being valid and enforceable under ERISA.

Failure to Adhere to Claims Procedures: Finally, an additional aspect of the fiduciaries’ actions in the case which fiduciaries in general should not emulate was the lackadaisical manner in which the claims procedures under the plan were implemented. The court found that the employer had failed to comply with DOL’s claims procedure regulations (29 C.F.R. § 2560.503-1(g) in two respects:

(1) The adverse benefit determination had failed to include a “statement that the claimant [was] entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim for benefits”; and

(2) It had also failed to include “a statement of the claimant’s right to bring an action under section 502(a) of the Act.”

Moreover, the court found that the claims procedures of the plan had contemplated a two-step process which involved the initial claim for benefits and then a right to appeal any denial of such claim. However, the fiduciaries had collapsed the process into a single review, in violation of the plan’s own written claims procedures. Even though the court recognized that, in general, failure of fiduciaries to follow the plan’s claims procedures can lead to “serious consequences”, the court surprisingly in this case held that there was no causal connection between the plan’s failure to follow the claims procedures laid out in the SPD and the plaintiff’s failure to file the action before expiration of the plan’s six-month limitation period had run.

No notification of Contractual Limitation: In addition, the court recognized a 9th Circuit case (Mogck v. Unum Life Ins. Co. of Am., 292 F.3d 1025, 1028-29 (9th Cir. 2002) which had held that a contractual time limitation on commencing legal proceedings under ERISA was not enforceable where the beneficiary was not informed in the claim denial, with the language used in the policy, that the contractual time limitation for legal proceedings would begin to run. Here there was no such notification, but again the court held surprisingly that there was no causal connection between a failure to notify the plaintiff of the contractual limitation and the plaintiff’s failure to file the action within the six-month time frame.

Tips for employers and fiduciaries from the case:

(1) Employers who outsource should seek to provide clear and accurate communications to affected employees.

(2) Employers and fiduciaries should make sure that the plan provides written claims procedures and that claims procedures are followed in the claims and appeals process.

(3) Employers should seek advice regarding whether they could utilize contractual limitation periods in their plan documents and SPDs. If they do so, employers and fiduciaries should bear in mind that a contractual limitation period may not be enforceable in a jurisdiction if claimants are not notified of the plan limitation period in an adverse benefit determination.

From Corporate Board Member–“Directors Who Blog (and How You Can Too)”:

What else should directors know about blogs? “I don’t see it as the role of the board member to be blogging,” says Dyson. But “it’s useful for board members to be reading the company blogs. They shouldn’t be discouraging blogs on principle.” Patrick agrees that directors should be conscious of what’s going on in the blogosphere—especially what employees are saying. “Board members need to be aware that this is a major new method of communication,” he says. “At the board level, companies should think about whether they have an acceptable-use policy for use of the Internet. Many do, but I’m sure many don’t.”

From MarketingProfs.com–“How To Write Compelling Blog Posts“:

Forget what you learned about business writing in school if you graduated before 1990. Go ahead! Start sentences with “and” or “but.” Don’t be afraid to break archaic rules. But, jeez, follow all grammatical rules that provide clarity to your content.

. . . Stiff, formal writing is only for lawyers. And you know what Shakespeare said about them. . .

The IRS has set up a new web page called the “EP Examination Process Guide” which provides links to a great deal of helpful information for practitioners and taxpayers who need to understand more about the Employee Plans examination process. Some highlights:

1. An EP examination flowchart.

2. EP Examination Guidelines providing “guidance on specific technical topics of particular interest relating to qualified retirement plans.”

3. Top Ten Issues identified during examinations of 401(k), 403(b), EPTA and multi-employer plans.

4. Compliance Monitoring Procedures which include examination tips, audit techniques, check-ups, publications and other guidance useful in determining if a plan is in compliance with the Internal Revenue Code and regulations.

(Source: Benefitslink.com)

Greenspan gave his thoughts on tax reform today in testimony before the President’s Advisory Panel on Federal Tax Reform which included comments about the baby-boom generation and the need to boost “greater national saving[s].” You can access his testimony here. Excerpts:

1. “Given the expertise on this panel and the ultimate responsibility of the Congress and the President for the tax system, I would not presume to suggest the best specific path for reforming the tax system. However, past experience suggests that as the panel’s work gets under way, one of the first decisions that you will confront is the choice of tax base; possibilities include a comprehensive income tax, a consumption tax, or some combination of the two, as is done in many other countries. As you know, many economists believe that a consumption tax would be best from the perspective of promoting economic growth–particularly if one were designing a tax system from scratch–because a consumption tax is likely to encourage saving and capital formation. However, getting from the current tax system to a consumption tax raises a challenging set of transition issues.“

2. “The choice of the tax base and other provisions of the code must also be taken in light of coming demographic changes. I believe that, as the baby boom generation begins to retire in a few years, it will become increasingly important for the nation to boost resources available in the future through greater national saving and enhanced incentives for participation in the labor force. The tax system has the potential to contribute importantly to those goals, and, at a minimum, tax reform should not hinder the achievement of those objectives.“

TaxProf Blog has more on today’s hearing at this link.

The DOL has announced a new page on their website devoted to the Bush administration’s proposal for pension reform:

As indicated in the President’s FY 2006 Federal Budget, this Web site hosted by the Department of Labor is the official location for all Administration documents pertaining to the President’s single employer defined benefit pension reform proposal. It will be regularly updated to include new documents from other Federal Agencies as well as the Department of Labor.

The website features testimony at today’s hearing before the Senate Finance Committee. More on the hearing here, including these spirited comments from Senator Grassley here.

In addition, access the Joint Committee on Taxation‘s 81-page report entitled the “Present Law and Background Relating to Employer-Sponsored Defined Benefit Pension Plans and the Pension Benefit Guaranty Corporation (“PBGC”).” (Source: The TaxProf Blog)

Don’t miss Kristen Carey’s post over at the Greater Valley Forge HR Law Link, discussing a recent development in Pennsylvania that is causing a flurry–“Pennsylvania Employers Must Be Represented By Legal Counsel At Unemployment Compensation Hearings.” The Commonwealth Court held that a tax consultant involved in the case had improperly engaged in behavior “encompassed within the scope of the practice of law.” (Query as to whether the case will have more far-reaching implications for the practice of law generally in Pennsylvania.)

I was delighted to receive a copy of Jim Wooten‘s recently published book entitled “The Employee Retirement Income Security Act of 1974: A Political History.” Jim is a professor at the SUNY Buffalo School of Law and states in the “Acknowledgements” that he spent more than ten years working on the book, compiling this rich resource for those wishing to understand the history behind ERISA. While I have not yet had a chance to read the whole book, what I have read so far convinces me that it belongs in every ERISA lawyer’s library.

With mandatory arbitration clauses becoming more and more popular with employers, it is predictable that issues will continue to arise in the courts regarding how these clauses are impacted by ERISA. The recent Sixth Circuit case of Simon v. Pfizer, 2005 U.S. App. LEXIS 2881 (6th Cir. 2005) provides some good background regarding the narrow issue of whether or not ERISA preempts arbitration under the Federal Arbitration Act (“FAA”), even though the court in the end declined to rule on the issue.

The ERISA plan in question was an “Enhanced Severance Plan”, or “ESP” for short. Plaintiff had been terminated from his employment and was seeking benefits under the ESP. The plan provided for a three-step claims review process after which an unsuccessful participant could then proceed to arbitration before the American Arbitration Association and the results would be binding on the participant and the employer.

The plaintiff had brought claims against the employer for retaliatory discharge and discrimination in violation of ERISA § 510, improper denial of benefits, breach of fiduciary duty, and failure to provide timely and proper notice of COBRA benefits. The employer filed a motion to dismiss seeking to dismiss all counts of the complaint based on the ESP’s mandatory arbitration provisions and on a failure on the part of the plaintiff to exhaust his administrative remedies.

The District Court denied the employer’s motion to dismiss with respect to all but Count III (breach of fiduciary duty) and refused to require exhaustion of administrative remedies as to plaintiff’s ERISA Section 510 (Count I) and COBRA (Count IV) claims on the basis that the claims were statutory and thus separate and apart from plaintiff’s claim under the ESP.

On appeal, the Sixth Court overturned the District Court’s decision denying the employer’s motion to dismiss with respect to the ESP claims, holding that a “compulsory arbitration provision divests the District Court of jurisdiction over claims that seek benefits under an ERISA plan, such as the ESP.” However, the Court upheld the District Court’s denial of the employer’s motion to dismiss with respect to the ERISA section 510 claim and the COBRA claim, holding that these claims were not subject to arbitration in the case. The Court held that, even though there was some “factual overlap” between the ERISA section 510 claim and COBRA claim and the wrongful denial of benefits claim, nevertheless the ERISA 510 and COBRA claims had “independent legal bases” and were not simply claims for violations of the ESP that had been recharacterized in order to avoid arbitration. The Court went on to state that, because plaintiff’s ERISA Section 510 and COBRA claims were not covered by the arbitration clauses at issue, it was not necessary to address the question of whether ERISA would pre-empt an arbitration clause that did cover those claims.

Nevertheless, despite the fact that the Court did not find it necessary to decide the issue in the Sixth Circuit, the Court did provide a helpful list of cases which had already reached a decision on the issue:

This narrow issue has not yet been addressed by the Sixth Circuit, see Eckel v. Equitable Life Assur. Soc. of the U.S., 1 F.Supp.2d 687 at 688 (noting that the Sixth Circuit had not yet addressed the issue); however, the majority of courts considering this issue have held that disputes arising under ERISA, including COBRA claims, are subject to arbitration under the FAA. See Kramer v. Smith Barney, 80 F.3d 1080, 1084 (5th Cir.1996); Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110, 1115-16 (3d Cir.1993); Bird v. Shearson Lehman/American Express, Inc. 926 F.2d 116, 122 (2d Cir.1991), cert. denied 501 U.S. 1251 (1991); Arnulfo P. Sulit, Inc. v. Dean Witter Reynolds, Inc., 847 F.2d 475, 479 (8th Cir.1988); Peruvian Connection, Ltd. v. Christian, 977 F.Supp. 1107, 1111 (D.Kan.1997); Fabian Fin. erv. v. Kurt H. Volk, Inc. Profit Sharing Plan, 768 F.Supp. 728, 733-34 (C.D.Cal.1991); Southside Internists Group PC Money Purchase Pension Plan v. Janus Capital Corp., 741 F.Supp. 1536, 1541-42 (N.D.Ala.1990); Glover v. Wolf, Webb, Burk & Campbell, Inc., 731 F.Supp. 292, 293 (N.D.Ill.1990).

Please note that employers who include such clauses in their plans may subject themselves to additional fiduciary obligations with respect to notifying participants of such provisions, as indicated in this Ninth Circuit decision here: Chapel v. Laboratory Corporation of America.

This article from CNN.com–“The Hidden Costs of Changing Jobs“–provides the following statement about the cost of benefits as it relates to an employee’s total compensation:

According to the Congressional Budget Office Special Studies Division, benefits represent anywhere from 24 to 50 percent of an employee’s total compensation package. And the plan offerings and value vary greatly from company to company based on the deal the organization negotiates with insurance carriers as well as the percentage of costs it chooses to pass along to employees.

When it comes to health insurance, for example, even among major companies the percentage of total costs employers pay ranges between 70 percent and 100 percent. Meaning your health care costs can vary from $150 to $2,000 from employer to employer.