Category: Benefits

Blogging time has been consumed by a project. See you later in the week here . . .

I guess there could always be a sequel to the saga. . . The Philadelphia Inquirer has this article–“EEOC says health benefits can be cut“–which alludes to the fact that there could be even more legal battles ahead for companies as they grapple with the retiree health benefit challenge:

Advocates for seniors said yesterday that more than 12 million retirees age 65 and older who have employer-sponsored health coverage could see those benefits cut or dropped after the Equal Employment Opportunity Commission found that doing so would not violate federal age-discrimination laws.

Officials at the AARP, the nation’s largest seniors group, said they would work with government agencies and private employers – and in court if necessary – to preserve the benefits despite the EEOC’s finding.

“We think we have a very good legal case, and we think we can win in court. And we’re prepared to take that step if necessary,” said Michael Naylor, AARP’s director of advocacy.

The Wall Street Journal reported in an article yesterday: “U.S. Investigates Funds Over 401(k)s“:

Federal regulators at the Labor Department have begun auditing some large investment companies and interviewing company officials as part of a probe into whether fee arrangements and market-timing practices hurt participants of employee-benefit plans. Regulators are focusing mostly on “a couple of handfuls” of the largest financial institutions that deal with the employer-sponsored plans, according to Assistant Labor Secretary Ann Combs.

According to the article, the DOL declined to name the companies under scrutiny, but said they could include investment providers, banks, broker-dealers and third-party administrators. The article notes that even though the DOL does not have authority over mutual funds, it does enforce ERISA which regulates retirement programs such as 401(k) plans in which participants invest through mutual funds. The article quotes Combs as saying that “complexity of the possible abuses and the size of the institutions involved mean that some audits may not be completed by the fiscal year ending in September.” However, once the audits are completed, the article states that “the agency can file civil actions against fiduciaries that oversee a retirement plan or its assets, and take steps to recover any misappropriated funds.”

Recent Law Firm Publications:

• Gardner Carton & Douglas: “Further Guidance on 401(k) and 403(b) Automatic Enrollment (and a Word on Default Investments)”
• The Groom Law Group: “Complying with New ‘Relative Value’ Disclosure Rules”
• Ice Miller: “Employment Applications: Employers Must Be Vigilant”
• Pepper Hamilton LLP: “Subpoenas: First Comply with HIPAA & State Privacy Laws”
• Proskauer Rose: “Retirement Plans Must Revise QJSA Explanations To Comply With New IRS Rules”
• Reish Luftman Reicher & Cohen: “Company Directors: Time to Buckle Down and Do Your Job” and “CLIENT ALERT: Corporate ID Numbers Obtained over the Internet”
• Seyfarth Shaw: “Who is a Spouse? Changing Marriage Laws Impact Employee Benefits”

Law Firm Publications Discussing New FLSA Exemption Regulations:

• Epstein Becker & Green P.C.: “DOL Issues Revisions to FLSA Exemption Regulations PDF”
• Ford & Harrison LLP: “DOL Issues “Fair Pay” Regulations Revising White Collar Overtime Exemptions”
• Jackson Lewis LLP: “Department of Labor Issues Final FLSA Overtime White Collar Exemption Regulations” and “What Employers Need to Know and Do About the Labor Department’s Final Regulations on Overtime Exemptions”
• Ogletree Deakins: “Historic Overtime Regulations For Exempt Employees Released”

Has the Erie County saga finally come to a close? Yes, according to the EEOC which yesterday issued this press release–“EEOC Approves Proposal to Exempt Retiree Health Plans From Age Discrimination in Employment Act“:

During a public meeting today, the U.S. Equal Employment Opportunity Commission (EEOC) voted to approve a proposed final rule that would permit employers, under the Age Discrimination in Employment Act (ADEA), to lawfully coordinate retiree health benefit plans with eligibility for Medicare or a comparable state-sponsored health benefit. This common and long-standing employer practice was called into question in 2000, when the U.S. Court of Appeals for the Third Circuit (Erie County Retirees Association v. County of Erie) held that the federal statute requires employers to assure that pre- and post- Medicare eligible retirees receive health benefits of equal type and value.

. . . The Commission’s prior policy, which was rescinded by a unanimous vote in August 2001, had concluded that coordinating retiree health benefits with Medicare eligibility constituted an illegal age-based distinction under the ADEA. A Notice of Proposed Rulemaking published in the July 14, 2003, Federal Register solicited public comments on the document discussed and voted upon today.

Here are the events leading up to this announcement:

(1) In August 2000, in Erie County Retirees Assoc. v. County of Erie, Pennsylvania, the Third Circuit Court of Appeals held that the ADEA applied to retirees and retiree health plans. The EEOC had filed an Amicus Brief in the case.

The county had a retiree medical plan that provided different coverage to pre- and post-Medicare eligible retirees. The Third Circuit ruled that the county’s retiree medical plan violated the ADEA, unless it met either the “equal benefit or equal cost” standard, under which an employer must either provide equal benefits to older and younger workers, or must incur the same costs for benefits on behalf of older and younger workers. The court then remanded the case back to district court to determine whether the plan satisfied the “equal benefit or equal cost” exception.

(2) On October 6, 2000, the EEOC adopted the Third Circuit’s position in its Compliance Manual, referencing Erie County for the premise that the ADEA applied to retirees and retiree health plans. The Manual stated that an employer could avoid liability for age discrimination on the basis of Medicare eligibility by showing either that (i) taking Medicare availability into account for those 65 and over, the total benefits available to older retirees were no less favorable than those the employer offered to younger retirees; or (ii) the employer expended an equal cost for benefits for older and younger retirees and the reductions in benefits for older retirees were actuarially justified.

(3) The case was appealed to the Supreme Court, which declined to hear it on March 5, 2001.

(4) On April 16, 2001, the district court on rehearing found that the retiree medical plan did not meet the equal benefits or cost safe harbor under the ADEA, and that benefits for older retirees were inferior to those for younger retirees. The court did not assess damages at that time.

(5) In August 2001, the EEOC rescinded those portions of the Compliance Manual that related to Erie County, retiree medical coverage and the ADEA. The EEOC also announced that it would stop pursuing cases involving retirees and health coverage, and would develop a new policy.

(6) On March 20, 2002, United States District Judge Sean McLaughlin approved a class-action settlement in Erie County Retirees Ass’n v. County of Erie, Pa., No. 98-CV-272 (W.D. Pa.). Under the settlement, the group of 114 Medicare-eligible retirees reportedly split roughly $205,000, which translated to about $1,800 per retiree. More importantly, though, the County redesigned its retiree health plan in an effort to equalize the Medicare-based benefit and premium differences that prompted the lawsuit. According to reports, the County basically tried to equalize benefits for pre- and post-Medicare retirees by “downgrading” the benefit structure for pre-Medicare retirees.

(7) On July 14, 2003, the EEOC proposed regulations that would allow employer-sponsored retiree health benefits to be changed, reduced, or eliminated when retirees become eligible for Medicare without violating the Age Discrimination in Employment Act (ADEA).

(8) The EEOC has now finalized these proposed regulations, as announced yesterday.

Reactions:

Committee on Education and the Workforce–“House Workforce Committee Leaders Praise Action by EEOC to Protect Important Retiree Health Benefits“:

House Workforce Committee leaders today praised the Equal Employment Opportunity Commission (EEOC) for moving forward a regulation to protect the retiree health care benefits for millions of American seniors. The EEOC regulation, supported by employers, workers, and organized labor, would correct a Third Circuit Court of Appeals decision in the Erie County Retirees Association v. Erie County case that could force employers to reduce or eliminate the health benefits for pre-Medicare eligible retirees in order to avoid potential age discrimination liability.

ERIC–“ERIC Applauds EEOC Approval of Rule to Exempt Retiree Health Benefits from ADEA“:

ERIC today lauded the Equal Employment Opportunity Commission (EEOC) for approving an exemption from the Age Discrimination in Employment Act (ADEA) that permits employers to coordinate post-employment health care coverage with Medicare, thereby providing relief from the Erie County court ruling by the Third Circuit Court of Appeals. . . ERIC also expressed concern over the continuing misperception of the economic effect of the Erie County case by AARP and others who continue to oppose the exemption.

Articles on yesterday’s EEOC action:

• New York Times: “Commission to Allow Insurance Cuts for Retired Employees”
  

  Leslie E. Silverman, a member of the commission, said the appeals court decision had confronted employers with an all-or-nothing choice: “Give all of your retirees the exact same benefits, which is incredibly difficult, or eliminate your retiree health benefits altogether.” Several commission members said that employers were more likely to continue providing health benefits to retirees under 65 if they were allowed to reduce or eliminate benefits for those 65 and older. A preamble to the final rule says it “is not intended to encourage employers to eliminate any retiree health benefits they may currently provide.”

• The Wall Street Journal (subscription required): “EEOC Votes to Let Employers Cut Retirees’ Health Benefits”
  

  AARP’s policy director, John Rother, said it was hard to gauge the immediate impact of the rule. The reason: The new Medicare prescription-drug law provides billions of dollars in subsidies for employers who keep providing drug coverage to retirees on Medicare. So, employers who might have been inclined to drop coverage might opt to maintain it instead.

On March 31, the Financial Accounting Standards Board (FASB) published an Exposure Draft entitled, “Shared-Based Payment, an Amendment of FASB Statements No. 123 and 95.” Today, the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises held a hearing entitled “The FASB Stock Options Proposal: Its Effect on the U.S. Economy and Jobs.” Access the press release on the hearing here as well as prepared testimony at the hearing here. The press release notes the following statement from House Financial Service Committee Chairman Michael G. Oxley:

“The FASB proposal has great implications for shareholders, publicly traded companies, and the U.S. economy, so it’s entirely appropriate that it be reviewed by this Committee and by the SEC . . . People should understand that expensing, while it may have benefits, will not magically result in sound corporate governance.”

Yesterday, the DOL announced the issuance of final regulations governing overtime eligibility for “white-collar” workers under the Fair Labor Standards Act. The News Release is here. The DOL has set up a new website here. You can access the regulations here and the preamble to the regulations here.

Yesterday, the U.S. Supreme Court heard oral arguments in the case of Central Laborers’ Pension Fund v. Heinz. SCOTUSblog gives a good synopsis of the case here.

The LATimes.com reports on the oral arguments in this article: “High Court Takes Up Key Pension Case.” The article notes:

The court’s ruling in Central Laborers Pension Fund vs. Heinz will affect millions of workers and retirees covered by those plans. And some legal experts say the outcome could have an even broader effect if the court changed the “anti-cutback” rule for pensions in general. If the court were to adopt the government’s view, pension trustees would be permitted to suspend pension benefits for retirees who take new jobs.

The article provides some indication as to how some of the justices perceived the case:

“It seems to me utterly unrealistic” to say that a cutoff of benefits is not a reduction in benefits, Justice Antonin Scalia said.

“This is a sweeping authority you are asking for,” Justice Anthony M. Kennedy told a lawyer for the pension fund.

Benefitsblog celebrates its one-year anniversary this week! It’s a good time to express some appreciation to so many. Thanks to all of the readers, colleagues, and fellow bloggers who have made this such an enriching experience. Thanks to readers and bloggers for their kind comments and for all of the excellent material that has been sent to me from time to time. And thanks to all those who have linked to me and sent readers my way. Many blessings to you!

(By the way, you can go back in time and view an earlier version of Benefitsblog on June 15, 2003 at the WayBack Machine here. In the “about” section of the WayBack Machine, it states that the site “was founded to build an ?Internet library,? with the purpose of offering permanent access for researchers, historians, and scholars to historical collections that exist in digital format” and “to preserve society?s cultural artifacts.” It is nice to know that, regardless of the future of Benefitsblog, at least it has made it into a “historical collection” and perhaps has become a “cultural artifact.”)

Another “whipsaw” cash balance plan case to add to your reading list–West v. AK Steel Corporation Retirement Accumulation Plan, USDC So Ohio, 1:02cv0001. (No link available.) The issue presented in the case was whether the lump sum payments to plaintiffs complied with ERISA. The plan was paying out lump sum distributions equal to the hypothetical account balance. Plaintiffs contended that they should have been paid a higher amount equal to the actuarial equivalent of the annual benefit to which plaintiffs would have been entitled if they had remained in the plan until age 65.

The court held that the plan’s payment of lump sum distributions did not comply with ERISA and reiterated the positions espoused in other cases, upholding the resulting “whipsaw” effect. (The Treasury Department has defined this whole “whipsaw” problem in its recent cash balance plan proposals, issued in February of this year:

Three federal appellate courts have addressed the calculation of lump sum distributions under cash balance plans. Berger v. Xerox Corp. Retirement Income Guarantee Plan, 338 F.3d 755 (7th Cir. 2003); Esden v. Bank of Boston, 229 F.3d 154 (2d Cir. 2000), cert. dismissed, 531 U.S. 1061 (2001); Lyons v. Georgia-Pacific Salaried Employees Retirement Plan, 221 F.3d 1235 (11th Cir. 2000), cert. denied, 532 U.S. 967 (2001). All three courts held that a participant’s hypothetical account balance must be projected to normal retirement age using the plan’s interest crediting rate, converted to an annuity, and then discounted to a lump sum using the section 417(e) interest rate. If the plan’s interest crediting rate is the section 417(e) rate, the present value of the normal retirement age annuity will be the same as the hypothetical account balance. However, if the plan’s interest crediting rate is higher than the section 417(e) rate, the present value of the normal retirement age annuity – and the amount of any lump sum distribution – will be greater than the hypothetical account balance. This result is sometimes referred to as “whipsaw.”

These federal court decisions have followed an analysis set out in IRS Notice 96-8. Many plan sponsors have responded to whipsaw by limiting the interest crediting rate to the section 417(e) rate (or a deemed equivalent). This response effectively makes the section 417(e) rate a ceiling on plan interest credits.

While the West case is not a court of appeals decision, arguments which were rejected in the case are particularly noteworthy. (At one point in the opinion, the court goes so far as to call the defendant’s arguments as “creative.”) Of interest is the fact that the defendants in the case tried to argue that the “accrued benefit” under the plan was the hypothetical account balance, but the court noted that the plan document clearly defined it as a “single life annuity commencing at normal retirement age.” The court did indicate in dicta, however, that “[i]f the plan drafters had intended otherwise. . . they could have indicated that intent in the language of the Plan.”

The court went on to reject the defendant’s argument that, when projecting the benefit forward to an annuity at age 65 (for purposes of discounting back for the lump sum amount) the interest to be utilized should be governed by section 204(c)(3) of ERISA. Instead, the court held that the rate which should be utilized for projecting the benefit forward to an annuity at age 65 was the rate at which future interest credits would be calculated under the terms of the plan.

As far as the discount rate to be utilized in determining the lump sum benefit, the court relied on IRS Notice 96-8, Regulation section 1.411(a)-11(d), and previous cases which had upheld the Notice and Regulation, and rejected the defendant’s argument that Regulation section 1.411(a)-11(d) was invalidated when ERISA section 203(e) of ERISA was amended in 1994.

Please note that under the Bush administration’s cash balance plan proposals, whipsaw would be eliminated prospectively, as indicated in the 2004 Blue Book entitled “General Explanations of the Administration’s Fiscal Year 2005 Revenue Proposals.” :

The proposal would eliminate whipsaw, providing that a cash balance plan may distribute a participant’s account balance as a lump sum distribution as long as the plan does not credit interest in excess of a market rate of return. The Secretary would be authorized to provide safe harbors for what constitutes a market rate of return and to prescribe appropriate conditions regarding the calculation of plan distributions. This would permit plan sponsors to give higher interest credits to participants, resulting in larger retirement accumulations.

More cash balance plan reading:

An article by Dallas L. Salisbury, president and CEO of the Employee Benefit Research Institute from BenefitNews.com–“Will cash balance plans survive?“