Category: Benefits

I was surprised not to find anything in the news about this appellate decision–Millsap et al. v. McDonnell Douglas Corporation (issued May 21, 2004) after there was so much publicity around the lower court decision last year. (Previous post here.) The case is notable due to the fact that it represents one of the few ERISA section 510 plant closing cases where employees have prevailed. The 510 claims were brought by former employees in a class action suit against their employer, alleging that the employer closed one of its plants for purposes of preventing employees from attaining eligibility for benefits under their pension and health care plans.

ERISA Section 510. For those not familiar with ERISA section 510, it provides as follows:

It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan. . . or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan. . .

District Court Decision. After a ten day bench trial, the lower court (no link available) had ruled in favor of the former employees, holding that the employer had indeed violated ERISA section 510 in closing the plant. Some of the most damaging evidence used to prove the ERISA 510 claims were memos from the actuaries analyzing the reduction in benefits which would occur if the plant were closed. One such memo prepared by the actuaries considered “various ‘what if’ scenarios, analyzing the effect on costs and savings if the company decided to reduce heads.” The kinds of costs analyzed included “pension cost, savings cost, savings plan cost, health care cost, and just direct overhead cost.” (This previous post discusses the attorney-client privilege aspect of the decision.)

The lower court held that plaintiffs could recover backpay because the award constituted “equitable relief” under ERISA section 502(a)(3).

The Settlement. The parties subsequently entered into a “Stipulation of Settlement” compensating plaintiffs in the amount of $36 million for their lost pension and health care benefits. (The court awarded attorneys’ fees in the total amount of $8.75 million and costs in the amount of $1 million to class counsel.) However, the settlement stipulation required judicial resolution of the availability of backpay under ERISA section 502(a)(3). The district court approved the settlement and certified the controlling question of law for appeal.

On Appeal. The question before the court, as stipulated by the parties, was this:

[W]hether, in this ERISA section 510 case and as a result of Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), backpay (and, as a result, any other damages based upon backpay) are available as “appropriate equitable relief” to the class members pursuant to ERISA section 502(a)(3).

The controversy stemmed from the remedies provided under ERISA section 502(a)(3):

A civil action may be brought . . . by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of [Title I of ERISA] or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of [Title I of ERISA] or the terms of the plan[.]

On appeal, the Tenth Circuit reversed the district court and ruled that the award of backpay was not recoverable under the statute because it did not constitute “equitable relief.” In reversing the lower court, the Tenth Circuit emphasized that under ERISA section 502(a)(3), unlike Title VII section 706(g) and NLRA section 10(c), Congress did not specifically make backpay part of an equitable remedy. The court also noted that the remedial purpose of section 502(a) was not to make the aggrieved employee whole, as plaintiffs had argued.

Circuit Judge Lucero dissenting. The dissent states as follows:

Under the majority’s result, the class plaintiffs are entitled to neither reinstatement nor back pay. Not only does the majority’s holding fail to deter ERISA violations, it also encourages employers who violate ERISA to delay proceedings as long as possible, “lead[ing] to the strange result that . . . . the most egregious offenders could be subject to the least sanctions.” Pollard v. E.I. du Pont de Nemours & Co., 532 U.S. 843, 853 (2001). Because I disagree that Congress intended this result or that precedent demands it, I respectfully dissent. . .

The majority’s result is similarly disconcerting. Here, reinstatement would have been an appropriate equitable remedy had [the defendants] not so delayed proceedings as to make reinstatement impossible. Thus, through no fault of their own, the class plaintiffs find themselves devoid of the undeniably appropriate equitable remedy of reinstatement. Back pay, which was integral to the relief sought by the plaintiffs at the onset of this litigation, provides an appropriate equitable alternative.

Both the Department of Labor (here) and the AARP (here) filed Amicus Briefs in the case, arguing that backpay should be awarded. The United States Chamber of Commerce filed an Amicus Brief (here [pdf]), arguing that the lower court decision should be overturned and that backpay should not be awarded under ERISA section 510.

Some Memorial Day reminders:

• The President’s Memorial Day Proclamation
• From the Evangelical Outpost, “The Red Poppy.”
• From Winds of Change, an exhaustive list on “How to Support the Troops.”

One reason boomers aren’t saving is made clear in this article from the Houston Chronicle.com, “Credit card habit eating away at retirement“:

The number of consumers who pay off their credit card balances in full each month has dropped for three consecutive years — from 44.4 percent in 2000 to 38.3 percent in 2003, according to newly released data from cardweb.com. Experts attribute the trend in general to the country’s credit culture, and in particular to the baby boomers, the huge generation of Americans who set the pace on nearly every cultural phenomenon.

An intriguing article on how blogs are taking hold in Japan from the Associated Press via the Seattle Times.com–“Japan’s rising Internet star preaches gospel of blogging“:

After developing some of the country’s hottest Net ventures, the 37-year-old entrepreneur [Joichi Ito] has a new mission: Making the journals known as Web logs, or blogs, not just a thriving business but also a key element of everyday life here. . . Ito believes blogging will one day prove as influential as the printing press. “Blogging will fundamentally change the (way) people interact with media and politics . . . ”

Tax Analysts is reporting here that the IRS is aware that Health Savings Accounts (“HSAs”) may constitute a possible source of abuse due to a loophole in the law. Remarks were made to that effect by Kevin Knopf, benefits tax counsel for the Treasury Department at a May 26 Silverstein and Mullens Tax Management Luncheon. The point of concern has to do with this: HSA account holders can spend funds accumulated tax-free solely for medical expenses until the age of 65. However, no one really monitors whether or not the money withdrawn is actually being spent on medical expenses. In other words, there is no requirement that trustees monitor the withdrawal of these moneys or that individuals substantiate their expenses before making withdrawals. Of course, taxpayers are always subject to audit, and agents will likely look into this matter when performing an audit.

Will HSAs be the target of audits in the future? Knopf’s answer is this:

“It’s up to your discretion as professionals whether you think the IRS has the resources to go after thousands and thousands of individuals to ensure that they are using this money solely for medical expenses,” he told the audience.

There is a brief critique of Benefitsblog in this article from Law.com–“Feeding Time.” (I will see if I can work on my “cryptic” headlines and my not-so-prominent RSS link button.)

Also, this article from the BBC News.com: “Gates backs blogs for businesses.”

Chubb Group of Insurance Companies has issued its results in the The Chubb 2004 Private Company Risk Survey. You can access the Fiduciary Liability Survey Results here. According to the survey:

• Only 5% of the private companies surveyed reported that a retired employee had brought a suit against the company, directors and officers, and/or benefits plan administrators and fiduciaries within the past few years.
• Almost 1 in 4 executives said that they thought it was likely that such suits would occur this year.
• Two-thirds of the private firms said that they planned to reduce employee benefits during 2004. (The Survey indicates that employee benefit reductions generally increase the risk of a fiduciary liability lawsuit.)
• Over a third of the companies appeared to be taking positive steps to ward off the threat of lawsuits against their companies and fiduciaries.

On the employment practices liability side of things, the Survey came up with these findings as reported in the press release:

One in four privately held companies has been sued by an employee or former employee in the past few years . . . Executives at as many as half the firms surveyed say it is likely that an employee may sue them, their board members and their companies and/or lodge a discrimination complaint with federal or state authorities in 2004. And nearly one-third believe that an allegation or actual case of wrongful termination, discrimination or harassment has the potential to inflict financial or other serious damage to their company.

Final COBRA Regulations have been issued by the Department of Labor. You can access the Press Release announcing the regulations here and the Model Notices here. Regarding the effective date, the DOL states:

In order to give plans enough time to modify their notice procedures, the new rules will be effective the first plan year that begins six months after publication of the rules in the Federal Register. [The publication date is May 26, 2004.] Before that date, plans may rely on either the proposed rules or the final rules (including the model forms as proposed or as finalized) to meet their COBRA notice obligations.

Legislation was passed in Kansas last week allowing health savings accounts to be utilized in that state. Apparently, according to this article, the problem was this: State law mandated that mental and nervous conditions be covered for 100 percent of the first $100 of expenses, 80 percent of the next $100, and 50 percent of the next $1,640. Thus, if an insurance carrier had to provide this first dollar coverage, the plan no longer would meet the federal definition of a “High Deductible Health Plan” (“HDHP”), meaning that health savings accounts could not be utilized in that state. The old Medical Savings Accounts were available in Kansas because the state exempted them from this requirement. The Kansas legislature was quick to remedy the problem by enacting legislation. Good for them.

Other states with similar issues should follow suit, enacting legislation to make HSAs viable in their states. Please note the following language in IRS Notice 2004-23 pertaining to mandated state law requirements:

Section 220(c)(2)(B)(ii) allows a high deductible health plan for purposes of an Archer Medical Savings Account to provide preventive care for this purpose. Section 223(c)(2)(C), for purposes of an HSA, does not condition the exception for preventive care on State law requirements. State insurance laws often require health plans to provide certain health care without regard to a deductible or on terms no less favorable than other care provided by the health plan. The determination of whether health care that is required by State law to be provided by an HDHP without regard to a deductible is “preventive” for purposes of the exception for preventive care under section 223(c)(2)(C) will be based on the standards set forth in this notice and other guidance issued by the IRS, rather than on how that care is characterized by State law.

In other words, the IRS has stated it will not automatically consider state law mandated coverage to be “preventive” under the HSA requirements. As a result, plans that would otherwise be HDHPs could fail to qualify if they provide a state-mandated benefit that must be paid before the high deductible applies, unless that mandated benefit qualifies as “preventive” under the IRS safe harbor definition. The IRS has a whole laundry list of what constitutes “preventive” care in IRS Notice 2004-23 (in the Appendix). They have also asked for comments regarding other items which should be added to the list, indicating that the list may grow in the future.

Russell B. Korobkin of the University of California, Los Angeles – School of Law has written a paper on the use of self-insured plans and the purchase of “stop-loss insurance” to avoid state mandates and insurance risk through the “deemer clause” under 29 U.S.C. section 1144(b)(2)(B) of ERISA: “The Battle Over Self-Insured Health Plans, or ‘One Good Loophole Deserves Another.”‘ The paper suggests that states may through the loophole of the “savings clause” under 29 U.S.C. section 1144(b)(2)(A) of ERISA regulate such arrangements by prohibiting “insurance companies from selling any stop-loss coverage for losses associated with health care costs unless the underlying coverage includes the list of state mandated benefits that state insurance companies must provide.”

Thanks to the Securities Litigation Watch for the pointer to the opinion issued in this case–GSC Partners CDO Fund v. Washington, (3rd Cir. (N.J.) May 17, 2004) (NO. 03-2347) in which Third Circuit Court of Appeals Judge Richard D. Cudahy provides us with a rendition of the “classic corporate love story”:

The background of this case is the classic corporate love story. Company A meets Company B. They are attracted to each other and after a brief courtship, they merge. Investor C, hoping that the two companies will be fruitful and multiply, agrees to pay $50 million for the wedding. Nine months later, however, things begin to fall apart and the combined entity declares bankruptcy. Investor C feels misled. He believes that Company A knew that there were problems with Company B but that it made the oft repeated mistake of thinking that it would be able to change Company B for the better. Investor C files suit in the district court and after his complaint is dismissed, we find ourselves here. It is an old story but it never fails to elicit a tear.

From the Financial Times.com, “401(k) investors, prick up your ears“:

Dear reader, ask yourself: Have you ever looked at the roster of mutual fund offerings in your 401(k) and wondered, how. . . did this fund get in here? Now you know. Investors can be forgiven for suffering from scandal fatigue at this point, but they should prick up their ears on this one. No man can serve two masters, yet many pension consultants routinely do. . .

An op-ed from John Wasik for Bloomberg.com–“Many Questions, Few Answers on Pension Consultants.”

From Forbes.com, “Funds: Many investors neglect the key to retirement“:

In a study, the Employee Benefit Research Institute and the Investment Company Institute came up with surprising answers that suggest how individuals can boost their retirement prospects. . . Even if stocks match the returns of their worst 50-year period on record — 1929 to 1978 — workers with continuous 401(k) coverage would still be able to replace 72 percent to 92 percent of their pre-retirement income. So if you have a 401(k), take advantage of it.

From ABC Action News.com, “PA Workers in Retirement Rush”:

More than 1,400 state employees have announced their retirement this year, and officials say another 4,000 are expected to do so by the end of June. That way they’ll avoid paying more for health insurance. Employees who retire after July first will see a reduced benefits package, according to provisions in the 2003 state employees’ contract. That deadline has prompted one state worker in 14 to call it quits this year – and one in nine over the past 18 months

From Liz Pulliam Weston at MSN Money.com, “Is the new wave in health insurance for you?“:

Architect Robert Payne of Richmond, Va., signed up for a Medical Savings Account — the predecessor to the HSA — as soon as Congress made them available in 1997. He bought a high-deductible insurance policy that required him to pay the first $3,500 of medical expenses for himself and his wife each year, and put that much tax-deductible money into an investment account offered by Health Savings Administrators, also of Richmond. . . Most years, the Paynes haven’t had to take much out of their account, which is invested in low-cost Fidelity mutual funds. Even after back surgery last year, Payne still has a $30,000 balance. “When you’re self-employed, it really couldn’t be any better,” Payne said. “You can put away money, and it keeps compounding.”

From the blogosphere:

From the TaxProf Blog, “The End Of Tax As We Know It?“:

Six red-state Republican Senators (Brownback (Kan.), Craig (Idaho), Chambliss (Ga.), Crapo (Idaho), Graham (S.C.) & Inhofe (Okla.)) have introduced the Tax Code Termination Act (S. 2463), which would repeal the Internal Revenue Code as of January 1, 2010. The bill does not say what will take the place of the Tax Code. Instead, the bill directs that Congress enact a new “simple and fair” tax law by July 4, 2009. . .

From Roth CPA.com, “IRS: OZONE POLICE.”

If you are interested in the whole Atkins-diet phenomena, the Securities Litigation Watch has an interesting post worth reading, “Blaming Atkins, Part III: And We Have a Winner.”