Workplace Prof Blog

Analysis of Oral Argument Transcript in ERISA DuPont Case

The Supreme Court heard oral argument in the case of Kennedy v. Plan Administrator for DuPont Savings and Investment Plan this afternoon.  The case concerns whether a divorcing spouse may waive her rights to spousal pensions benefits without going through the qualified domestic relations order (QDRO) process set out in the exceptions to ERISA's anti-alienation rule.

What follows is analysis of that oral argument transcript based on my reading of the oral argument transcript in DuPont:

1.   Counsel for Kennedy argues that the Fifth Circuit erred in holding that the only way a divorcing spouse can waive the right to  pension benefits is by executing a QDRO.  In other words, counsel argues that the divorcing spouse's voluntary and knowing waiver should be enough even without filling out a formal QDRO without all the bells and whistles.

2.  There is also a separate argument that appears to go against the petititoner - and pointed out by Justice Kennedy - that there were means for participants and beneficiaries to make a change, and they weren't
followed here.

3.  Not a good sign that Justice Alito does not seem to be buying the voluntary waiver argument: "JUSTICE ALITO:  I'm not sure I'm getting  this argument.  There's not -- the argument isn't that there was a QDRO; the argument was that he could have  disposed of this through a QDRO.  And he could have done  that, and he could have named an alternate payee in the  QDRO.  He could have named his daughter, for example."

4.  Counsel for Kennedy responds: "the way pension planners understand it is that you use a QDRO for a
transfer of benefits, not for a bare waiver.  And that's where the U.S. Solicitor General supports our position
and reads this and says that's consistent with Treasury's own, now harmonized with Labor's, interpretation of the anti-alienation clause."

5.  Helpful as always, Justice Scalia provides Counsel with his argument: "JUSTICE SCALIA:  And your point is this has been no assignment or agency, so we don't need the QDRO exception.  There is nothing in here that violates  anything in the statute. MR. FURLOW:  I completely agree with that analysis."

6.  Both petitioner and the solicitor general supporting the pettitioner spend some time considering the argument that the plan documents control and allow the change in beneficiarty designation without a QDRO.  The Court is reluctant to hear that argument because it has not been fully briefed. In addition, the solicitor general does not agree with the petitioner that there should be a formulation of a Federal
common law rule on the matter.

7.  Respondents also believe the plan documents question is rightly before the Court and think the case could be decided as an alternative on this ground even though the court did not grant cert on it, but the parties and amici brief it.

8.  As to the QDRO issue, respondent DuPont takes the view that, "the rule of law that governs this case is that pension plan  administrators must pay benefits in accordance with a  qualified domestic relations order, and they may not pay benefits in accordance with a nonqualified order."

9.  Respondent says whether it is a waiver of the benefits and the benefits go anywhere is irrelevant. Instead, "It doesn't say anything about  where it goes.  It just says if it's a QDRO, you pay it,
and if it's not a QDRO, you don't pay it."  Counsel explains nicely the policy behind this straightforward rule: "It didn't want the plan  administrators to have to try and divine the intention of the parties, didn't want the plan administrators to  have to hold a factfinding hearing before it could pay plan benefits.  That is completely foreign to the  efficient and simple operation that Congress had in mind."

This is again one of these complicated ERISA cases concerning anti-alienation rules, beneficiary designation after marital dissolution, and the role waiver may or may not play.  I have to say this is one of the best explanation of the issues that I have seen from a counsel - in this case, the respondent counsel. Usually, it appears the Justices are one step ahead in their questioning and are just validating their views.
In this case, on the other hand, the Justices were really learning about a complex area of ERISA law from the skilled practitioner.

As such, I think that this is a case that might turn on the competence of counsel.  I foresee a 9-0 victory for the respondent and the view that benefits may only be paid in accordance with a qualified domestic relations order and the waiver in this case by the former spouse did not meet that standard.

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Issue Exhaustion and ERISA

Sticking with my theme of ERISA today, the Ninth Circuit has a decision of first impression concerning issue exhaustion and ERISA in the denial of benefits context.  In Vaught v. Scottsdale Healthcare (9th Cir 09/29/2008), the Ninth Circuit declined to impose an "issue exhaustion" requirement under ERISA.

Ross Runkel provides the details:

Vaught sued his healthcare plan under the Employee Retirement Income Security Act (ERISA), asserting (among other things) a claim challenging the plan’s decision denying his claim for benefits.  The trial court granted summary judgment in favor of the plan.  The 9th Circuit reversed as to that claim.

In court, Vaught asserted a theory that he had not presented during the course of the plan’s internal appeal procedure.  The plan argued that Vaught failed to exhaust his administrative remedies with respect to that theory and was therefore barred from relying on it in court.  The court rejected that argument, declining to impose an “issue exhaustion” requirement under ERISA.  The court noted that “[n]o ERISA statute precludes courts from hearing objections not previously raised to the Plan, nor does any ERISA statute or regulation require claimants to identify all issues they wish to have considered on appeal.”

The DISSENT argued that “the majority allows an ERISA claimant to engage in a court-sanctioned game of Texas Hold ‘Em against a Plan playing with all of its cards face up.”

I am with the majority on this one.  Absent textual or legislative historical direction that all theories must be exhausted at the internal appeal level, it does not seem this type of claim should be forbidden.  Also, considering the high hurdles that ERISA plaintiffs have to negotiated in these 502(a)(1)(B) cases, an additional procedural obstacle seems inconsistent with the primary purpose of ERISA, which is to protect and secure employees and their beneficiaries' benefits.

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Federal Income Taxation of Retirement Plans

Friend of the blog Alvin Lurie writes about a major new treatise just published by Lexis/Bender: Federal Income Taxation of Retirement Plans, for which Alvin served as General Editor.

Among the authors of the 22 chapters are ten law professors: Edward Zelinsky, Jayne Zanglein, Norman Stein, Susan Stabile, David Pratt, Kathryn Moore, John McFadden, Brant Hellwig, Jonathan Forman and Eric Chason. Its remaining chapters were written by well-known benefits practitioners.

The book is a 2-volume set, and covers ERISA, the Pension Protection Act, Section 409A, cash balance plans, fiduciary responsibilities, prohibited transactions, funding, and most of the other major aspects of the taxation of retirement  plans, as well as a survey of the principal forces that led to ERISA, and the legislation between ERISA in 1974 and the PPA in 2006. Semiannual updates are contemplated.

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9th Cir.: San Francisco Health Care Law Not ERISA Preempted

In a first in the health care reform context, and in opposition to the 4th Circuits holding in the Wal-Mart Bill case of RILA v. Felder, the 9th Circuit has ruled in Golden Gate Rest. Ass'n v. San Francisco, No. 07-17372 (9th Cir. 9/30/08), that the San Francisco health care law is not preempted by ERISA.

From the BNA Daily Labor Report this morning:

The Employee Retirement Income Security Act does not preempt a San Francisco ordinance that requires medium and large employers in the city to make minimum health care expenditures on behalf of covered employees, either by paying into their own employee benefits plans or into a fund maintained and administered by the city, the Ninth Circuit holds . . . .

Writing for the court, Judge Fletcher says ERISA preemption is limited in areas that historically are matters of local concern, that employers subject to the city ordinance law lacked the sort of discretion that would render the program an ERISA plan, and that the ordinance does not "relate to" a benefit plan covered by ERISA.

The case has been watched closely by employer representatives and employee groups, which predicted the decision could have wide-ranging implications for the future of health care funding. San Francisco Mayor Gavin Newsom in a statement calls the ruling ''a huge victory for this city and the 46 million Americans who don't have health insurance.'' Business groups, however, call the decision "devastating" for small business owners.

Over the years following this issue, I have reluctantly agreed with the findings of ERISA preemption against these types of laws (see here for an example).

However, I am now persuaded that the 9th Circuit's ruling is consistent with the Travelers precedent from 1995 that unless a law is historically a matter of local concern, there should be a presumption against finding ERISA preemption. It seems to me that courts have read ERISA incorrectly in this regard in past cases.

My epiphany came in writing my new paper on the intersectionality of ERISA preemption and remedial provisions.  In order for many plaintiffs not to be deprived of the remedy that they deserve, the preemption provision must be strictly construed according to the language in Travelers.  This reading will ensure that defendant employers are not able to inappropriately use ERISA as a shield against meaningful health care reform or appropriate types of relief in ERISA cases.

BTW, I think it is pretty safe to assume that because this case has been characterized as "devastating" to small employers, and also considering the economic turmoil this country finds itself in, that there will be an en banc (and potentially Supreme Court challenge) to this ruling.

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Health Insurance Costs Rise . . . Again

The Kaiser Family Foundation's Employer Health Benefits 2008 Annual Survey finds:

Premiums for employer-sponsored health insurance rose to $12,680 annually for family coverage this year – with employees on average paying $3,354 out of their paychecks to cover their share of the cost – and the scope of that coverage has changed, with many more workers now enrolled in high-deductible plans, according to the 2008 Employer Health Benefits Survey released today by the Kaiser Family Foundation and the Health Research & Educational Trust (HRET). Key findings from the benchmark annual survey of small and large employers were also published today as a Web Exclusive in the journal Health Affairs.

Premiums rose a modest 5 percent this year, but they have more than doubled since 1999 when total family premiums stood at $5,791 (of which workers paid $1,543). During the same nine-year period, workers’ wages increased 34 percent and general inflation rose 29 percent.

This year many workers are also facing higher deductibles in their plans, including a growing number with general plan deductibles of at least $1,000 – 18 percent of all covered workers in 2008, up from 12 percent last year. This is partly, but not entirely, driven by growth in consumer-directed plans such as those that qualify for a tax-preferred Health Savings Account.

Hat tip: Carol Furnish.

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Zelinsky on 401(k) Lessons from the Crash of 2008

Good piece here from Ed Zelinsky (Cradozo) on the 401(k) aspect of the 2008 economic collapse from Oxford University Press Blog:

Even as we contemplate the financial carnage of the Crash of 2008, the federal government sends a strong, paternalistic and, ultimately, misguided message to 401(k) participants: Invest your retirement savings in common stocks.

Congress, in the Pension Protection Act of 2006 (PPA), directed the Secretary of Labor to promulgate regulations specifying the “default investments” to which 401(k) funds will be directed if participants fail to make their own investment choices . . . .

When one cuts through the bureaucratic verbiage, a strong message emerges: 401(k) funds, particularly the funds of younger participants, should be invested in common stocks . . . .

Surveying the wreckage of the Crash of 2008, this looks like misguided paternalism. Many investors who buy common stocks in the current bearish environment are likely do well in the long run. But, as they say, past performance is no guarantee of future success. And some, particularly smaller investors, may sincerely and (from today’s perspective) rationally prefer to avoid the volatility associated with common stocks . . . .

Before the Crash of 2008, such paternalism looked plausible. At an as yet unknown date in the future, such paternalism may look plausible again. Today, it looks misguided.

Right on point and yet another way of diminishing the on-slaught of ERISA stock-drop litigation associated with the 2008 Crash.   Less owned common stock, less pain felt by employee-participants, and less possible stock-drop litigation.

Furthermore, I think there is an important lesson that can be drawn from the securities class action lawsuits of yore and the Contract with America response to it, the Private Securities Litigation Relief Act of 1995 (PSLRA).   The PSLRA response to lawyer-driven lawsuits was almost the complete elimination of private attorney generals to regulate the financial industry.  The Enron debacle was egg on Congress' face and led to the passage of Sarbanes-Oxley in 2002.  SOX has proven largely ineffective in cleaning up the mess because it largely relies on internal stuctures of self-regulation.  Hence, the crash of 2008.

Instead, legislation to reform ERISA should focus on where the problems lies.  Not int the ability to bring private lawsuits under ERISA, but in the way Congress has provided incentives for employees to invest in their own company stock in their 401(k).  A common sense limit, like the one that exists for defined benefit plans at 10% common stock for those pension funds, makes a lot of sense in light of the 2008 crash and the proliferation of stock drop litigation cases.

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Disability Fraud at the LIRR

Here is a disturbing report from the New York Times yesterday concerning the awarding of disability benefits to former workers at the Long Island Rail Road:

During the workweek, it is not uncommon to find retired L.I.R.R. employees, sometimes dozens of them, golfing there. A few even walk the course. Yet this is not your typical retiree outing.

These golfers are considered disabled. At an age when most people still work, they get a pension and tens of thousands of dollars in annual disability payments — a sum roughly equal to the base salary of their old jobs. Even the golf is free, courtesy of New York State taxpayers.

With incentives like these, occupational disabilities at the L.I.R.R. have become a full-blown epidemic.

Virtually every career employee — as many as 97 percent in one recent year — applies for and gets disability payments soon after retirement, a computer analysis of federal records by The New York Times has found. Since 2000, those records show, about a quarter of a billion dollars in federal disability money has gone to former L.I.R.R. employees, including about 2,000 who retired during that time.

The L.I.R.R.’s disability rate suggests it is one of the nation’s most dangerous places to work. Yet in four of the last five years, the railroad has won national awards for improving worker safety.

Read the whole article.  Its details are sickening.

Clearly, there are two problems here: those awarding benefits are not doing the necessary review of the files and are granting benefits when they are not appropriate.  Second, there is a break down of oversight over this determination process by federal Railroad Retirement Board:

In a statement in response to the Times article, the L.I.R.R. said that no one from the railroad or the transportation authority “was involved in the granting of these disability pensions by the U.S. Railroad Retirement Board.”

Governor Patterson has already announced an investigation into this appalling situation and I would expect for many heads to roll and a lot less golf being played by these former LIRR workers.

Hat Tip:  Dana Nguyen

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Wall Street Collapse = ERISA Stock Drop Litigation

Not surprising development at all.  From BNA Daily Labor Report (subscription required):

As several heavy hitters in the financial world have come under pressure or have gone bankrupt in the past couple of months because of the subprime mortgage and lending crisis that has battered investment firms and banks, the employer "stock drop" cases that proliferated in the post-Enron Corp. and post-WorldCom Inc. age are on the rise.

Although the Employee Retirement Income Security Act claims raised in these stock drop cases have not been identical, there are two central claims that arise in these cases. The first claim typically raised is that the plan fiduciaries breached their duties by offering company stock as a plan investment option when the stock was an imprudent or unwise investment. The second claim focuses on the disclosure obligations of the plan fiduciaries and often alleges that the fiduciaries breached their duties by not telling plan participants of financial matters of the plan sponsor that made the sponsor's stock an imprudent investment.

Among firms that recently have been hit with stock drop lawsuits are Lehman Brothers Holdings Inc., American International Group Inc. (AIG), Bear Stearns, Wachovia Corp., UBS, IndyMac Bank, and Fifth Third Bancorp.

I have written abut this type of stock drop litigation before.  The issues at the forefront are how ERISA is overtaking securities as the litigation vehicle of choice by plaintiffs who suffer stock losses and how these cases almost never make it to trial because the firms being sued are forced to settle if certification of the class is granted by the court.

Given the financial pain being felt by everyone these days, and with little hope of an end being in sight, I would suspect courts to either cut down on certification of these classes or for a movement by the corporate lobby to amend ERISA to cut down on these types of suits.

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Annuity Issues to Consider When Moving from Wife No. 8 to Wife No. 9

From Suzanne Wynn at the Pension Protection Act Blog:

Yesterday, the 9th Circuit Court of Appeals decided whether or not a participant in a plan with a Qualified Joint and Survivor Annuity (QJSA) may change the surviving spouse beneficiary after the participant has retired and the annuity has become payable. In [Carmona v. Carmona], No. 06-15938 (CA9 Sept. 17, 2008), the Court held that the “QJSA surviving spouse benefits irrevocably vest in the participant’s spouse at the time of the annuity start date - in this case the participant’s retirement - and may not be reassigned to a subsequent spouse.”

How did this case become an issue:

At the time of the annuity starting date, Mr. Caruso was married to his 8th wife, Janis Caruso. In 1994, Mr. Caruso and 8th wife decide to divorce, and before the entry of the formal divorce decreee, Mr. Caruso ask to remove 8th wife as his named survivor beneficiary. Both plan administrators refused to remove her as beneficiary since the designation became irrevocable at the time of his retirement and annuity starting date.

Who says employee benefits law cannot be fun?

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11th Cir. Follows Glenn in Denial of Benefit Case

In Doyle v. Liberty Life Assurance Co. of Boston, No. 07-10348 (11th Cir. Sept. 18, 2008), the Eleventh Circuit abandoned the heightened arbitrary and capricious review for denial of benefit claims under ERISA which have structural conflicts.

The move comes after the Supreme Court decided in Metlife v. Glenn this past term that benefit cases in which insurance companies both determine the right to benefits and pay out those benefits are in a structural conflict and that conflict must be considered as part of the court's review.  The Court refused to label that type of review as a type  of heightened review, instead saying that the court must review, in essence, the totality of the circumstances to determine whether the conflict amounted to arbitrary and capricious action:

We hold that the existence of a conflict of interest should merely be a factor for the district court to take into account when determining whether an administrator's decision was arbitrary and capricious. And we hold that, while the reviewing court must take into account an administrative conflict when determining whether an administrator's decision was arbitrary and capricious, the burden remains on the plaintiff to show the decision was arbitrary; it is not the defendant's burden to prove its decision was not tainted by self-interest.

Expect more courts to follow the 11th Circuit's lead in this regard in light of Glenn.

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ERISA Preemption and State Apprenticeship Laws

The Sixth Circuit decided an important ERISA preemption case yesterday, Associated Builders & Contractors, Saginaw Valley Area Chapter v. Michigan Dep't of Labor & Economic Growth, No. 07-1639 (6th Cir. Sept. 16, 08) ,concerning the continuing validity of state apprenticeship laws in light of ERISA. 

From the Daily Labor Report today (subscription required for full article):

The Employee Retirement Income Security Act does not preempt a Michigan law that sets ratio and equivalency requirements for apprentice electricians, the Sixth Circuit rules in lifting an injunction issued in 1992 that barred the state from enforcing the apprenticeship laws.

In ruling that the Michigan Department of Labor and Economic Growth can now enforce the ratio and equivalency requirements set out in the state's electrician apprenticeship law, the three-judge appellate panel finds that the state law imposed mandates on apprenticeship training programs, but those mandates did not affect ERISA-regulated concerns.

According to the appeals court, the policies underlying the ratio and equivalency rules, which were aimed at the safety of electrical apprentices, are "quite remote from the areas with which ERISA is expressly concerned." The court finds, among other things, that if ERISA preempted the apprenticeship law, it would result in states being prevented from regulating the safety of apprentices and the standards of electrical apprenticeship, areas that traditionally have been regulated by the states.

This case is an appropriate application of ERISA's modern ERISA preemption doctrine, which is closer to conflict preemption than field preemption. 

It also highlights something that I have been writing about a lot recently, which is that states have an important, complementary role to play in areas that are generally though to be occupied by federal labor relations law.  Jeff and I have a debate on PENNumbra coming out on October 1st on the role of state regulation of the workplace (more details to follow).

I will take this decision, Jeff, as the Sixth Circuit siding with my side of the debate.

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Disturbing Trend in HIPAA Wellness Programs

Today's Alexander Hamilton Institute (AHI) Benefits Alert describes what it characterizes as a disturbing trend: "some wellness program vendors are taking advantage of employers' increased interest by aggressively marketing programs that seem to skate very close to the legal line drawn by the Health Insurance Portability and Accountability Act (HIPAA)."

AHI first gives a good overview of how HIPAA treats wellness programs:

HIPAA splits wellness programs into two categories. In the first category are programs that reward employees just for participating. They include reimbursing employees for gym memberships; rewarding employees who participate in a diagnostic testing program; well-baby visits; reimbursing smokers for the cost of smoking cessation without regard to whether they actually quit; and rewarding employees who attend monthly health education seminars.

The second category includes programs that require participants to meet a health-related standard before they can collect their rewards. These types of wellness programs must meet five standards [including limits on the amount of rewards, must have reasonably-designed standards with some flexibilty, participants must be able to qualify at least once a year, reasonable alternative standards for receiving the award must be established in some circumstances, and wellness plans must the availability of a reasonable alternative standard.] . . . .

With these background rules in mind, AHI warns out to look out for the following when considering wellness programs if you are an employer:

Supplemental health plans that are provided under separate policies are excluded from HIPAA. However, most wellness programs aren't supplemental health plans under a Department of Labor safe harbor . . . .

Wellness programs that reward employees for achieving a health-related result must be reasonably designed to promote health and prevent disease, and provide reasonable alternatives for obtaining the reward if it's unreasonable for certain participants to attempt to satisfy the original standard. A program that assesses a participant's health once a year, and that provides only one appeal to be re-tested, may fail because it doesn't offer any reasonable alternatives.

In short, if a wellness program seems too good to be true, employers should seek legal advice before inadvertently violating HIPAA law in this area.

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Scope of ERISA Remedies Further Defined in Forced Retirement Case

In a case which may provide further insights into the scope of ERISA remedies, the Northern District of New has ruled in  Harris v. Finch, Pruyn & Co., No. 1:05-cv-951, (N.D.N.Y. Aug. 26, 2008) (no publication available yet) that back pay is unavailable under ERISA who were allegedly misled into retiring.

BNA Daily Labor Report explains:

A paper manufacturer does not owe back pay and lost benefits to 14 employees who were not reinstated after a strike and who allege they were misled into resigning and retiring so that they could access the benefits in their 401(k) plan accounts, the U.S. District Court for the Northern District of New York ruled Aug. 26.

Noting that there is a circuit split as to whether back pay is available under the Employee Retirement Income Security Act, Judge Frederick J. Scullin Jr. sided with courts that have found that back pay is not an equitable remedy under ERISA Section 502(a)(3) because it is measured by an employee's loss rather than an employer's gain.

The court found, however, that a genuine issue of material fact remained as to whether the 14 employees were entitled to have their retirements rescinded and their employment reinstated as forms of equitable remedies to address the alleged fiduciary breaches that led to their retirements.

In addition, the court said the employees had no legal remedy available under ERISA Section 502(a)(2). In so finding, the court rejected the employees' contention that the U.S. Supreme Court's recent decision in LaRue v. DeWolff, Boberg & Associates, 128 S. Ct. 1020, . . . allowed them to recover for their individual plan accounts rather than on behalf of the plan as a whole.

LaRue did not expand an ERISA Section 502(a)(2) claim to allow individual claims that are not based on losses to plan assets, the district court said. "Plaintiffs' alleged injuries--being induced to retire or resign--were solely individual in nature," the court said.

I couldn't disagree with the court more on the scope of equitable relief under Section 502(a)(3).  Back pay is an equitable, make-whole remedy and is consistent with types of relief which are available under the common law of trusts, upon which ERISA is based. 

On the other hand, I think the court may be trying to go out of its way to cabin the LaRue finding in the 502(a)(2) context to not allow individual claims in this type of case. But I do think the distinction between a fiduciary breach that cause an account to lose money and one that leads to a person cashing out of a plan makes some sense.

Here's hoping the 2nd Circuit provides some daylight to ERISA plaintiffs and reverses the district court on its 502(a)(3) holding.

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Another Nail in the Coffin for Age Discrimination, Cash Balance Plan Conversion Suits

It seems that the federal circuit court of appeals have coalesced around a finding that conversion from a traditional defined benefit plan to a cash balance plan is not age discriminatory.  The Ninth Circuti has the latest opinion finding such a conversion not age discriminatory (via Ross Runkel):

The 9th Circuit held that Employee Retirement Income Security Act (ERISA) pension plans utilizing a cash balance formula (cash balance plans) do not violate 1) an age discrimination provision set forth at 29 USC Section 1054(b)(1)(H) of ERISA; or 2) an "anti-backloading" provision set forth at 29 USC Section 1054(b)(1)(B) of ERISA.  The court also held that ERISA preempts an age discrimination claim under California's Fair Employment and Housing Act (FEHA), when the claim "relates to" an ERISA-covered employee benefit plan and relies upon conduct not prohibited by the Age Discrimination in Employment Act (ADEA).

The case is Hurlic v. Southern California Gas (9th Cir 08/20/2008). The Ninth now joins the 2nd, 3rd, and 7th in so finding (see here, here, and here). 

Well, Ed Z., it looks like Alvin Lurie was right after all on this.

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ERISA Advisory Council Seeks Comments on Retirement Issues

The ERISA Advisory Council will meet in Washignton, D.C. on September 9th through Sept. 11th.  The meetings are open to the public and comments are accepted on the retirement issues being discussed  through September 2nd. 

From the Employe Benefit Secuirty Administration of the DOL (and published in the Federal Register):

The focus of the Working Group meeting on September 9 will be on phased retirement, including issues facing employers who wish to create phased retirement plans, as well as the issues facing employees who wish to take part in phased retirement programs, and whether there are any legal impediments that discourage American workers from continuing to work in their retirement years.

The focus of the Working Group meeting on September 10 will be on spending down retirement assets, including the issues and barriers facing plan fiduciaries, plan sponsors, and plan participants as they attempt to evaluate approaches that guarantee periodic income levels at retirement.

The focus of the Working Group meeting on September 11 will be on hard to value assets and target date funds, including potential risks and the roles of fiduciaries, trustees, investment managers, accountants/auditors and participants when employee benefit plans invest in hard to value assets, a review of regulatory policy involving assets for which there is not a generally recognized market, and challenges and risks associated with plans' use of target date funds."

There is a growing concern on how to manage retiree assets in the coming days of the consumer driven, individual account plans. If you have ideas or thoughts on any of these issues, now is not the time to be shy.  There is likely to be much legislation in the employee benefits area during the next presidential administration.

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Feuer on A Curious ERISA Case Before the Supreme Court

Friend of the blog and prominent ERISA practitioner, Albert Feuer, has penned an indispensable commentary for anyone who is following the ERISA Supreme Court case of Kennedy v. Plan Administrator for Dupont Savings and Invest Plan. Kennedy is set to be argued in front of the Supreme Court this October.

In the Introduction, Albert writes:

The filings in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 497 F.3d 426 (5th Cir. 2007), cert. granted, 2008 U.S. LEXIS 1291 (U.S. Feb. 19, 2008) are complete, and oral argument is scheduled for October 7, 2008. 

The case, which is a dispute about who is entitled to a participant’s death benefits, has many curious elements.  In my view, neither party addresses the certified question which refers to the entitlements of an ERISA beneficiary rather than the payment obligations of an ERISA plan administrator.  The AARP amicus brief suggests that ERISA should no longer protect entitlements to retirement benefits after their distribution.  Under the approach of the amicus brief of the United States, that the Department of Treasury, the Internal Revenue Service, and the Department of Labor presented, for which the Solicitor General ("SG") was the counsel of record, divorcing spouses may not retain spousal survivor benefits with qualified domestic relations orders ("QDROs"), even though Congress introduced QDROs for this very purpose, because the United States approach limits QDROs to orders that transfer benefit rights and no right is transferred if rights are retained.

The result may be a Supreme Court decision or dicta that substantially change basic ERISA provisions with respect to benefit entitlements, benefit designations, the alienation prohibition and QDROs.

He concludes:

The core ERISA principle that plan terms determine ERISA benefit entitlements is at stake in this case.  This is the case whether or not the plan is subject to the administrator responsibility provisions that advocates of the importance of plan documents, including the Supreme Court, regularly cite.  The Petitioner and many circuits have rejected these provisions as a thin reed unable to withstand the common-law preference for waivers. Moreover, those provisions do not determine the extent of a person’s ERISA benefit entitlements.  If the Supreme Court rules in favor of the Respondent and cites benefit entitlements, as the certified question does, rather than administrator responsibilities, the core principle will be dramatically enhanced.  If the Supreme Court rules in favor of the Petitioner or remands, the principle will be seriously eroded unless the remanded issue is whether the waiver complied with the plan terms. 

It is most likely that the Supreme Court will rule in favor of the Respondent, but the incorrect assertions in the briefs may lead to dicta that in practice changes basic ERISA principles.

Albert's whole piece, A Curious ERISA Case Before the Supreme Court, can be found here.

It is by far the most comprehensive and compelling piece on this complex QDRO/anti-alienation/waiver subject, including all of the Amici briefs filed with the Court (you can find those Amici brief here (scroll down).  We are proud to be the first to publish it here on the Workplace Prof.

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Through a Mirror Darkly

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403(b)s are going to start looking a lot like 401(k)s on January 1.  Jerry Kalish has the details over at Retirement Plan Blog.

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1st Cir.: Intent Required in ERISA Retaliatory Discharge Case

Ross Runkel brings to our attention the case of Kouvchinov v. Parametric Technology (1st Cir 08/08/2008).

Ross explains:

Kouvchinov sued the employer for violation of ERISA alleging retaliatory discharge, and for tortiously interfering with an advantageous business relationship. The trial court granted the employer's motion for summary judgment. The 1st Circuit affirmed.

Kouvchinov argued that proof of the employer's specific intent to interfere with his ERISA benefits was not required in retaliatory discharge cases as compared to preemptive discrimination cases. The court rejected Kouvchinov's argument because, without the specific intent requirement, every discharged employee who had exercised his right to benefits would have a potential claim against the employer. The court stated this would destroy ERISA's carefully calibrated balance of rights, remedies, and responsibilities in the workplace. The 5th, 7th, and 9th circuits ruled similarly.

It seems to me that Section 510 of ERISA is written in a different manner that discrimination provisions in laws like Title VII and the NLRA that do require intent.   

Also, how can an interpretation of a non-ambiguous provisions destroy the balance of rights and remedies available under ERISA.  Isn't that putting proverbial cart before the horse.

I shouldn't be surprise since circuit courts have becoming to this conclusion in the Section 510 context for over a decade (see the 5th Cir. case of McGann v. H&H Music, but it represents yet another court buying into a narrow interpretation of remedies available for plaintiffs under ERISA.

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Planning for Retirement

Richard Kaplan (Illinois) provides a practical guide to calculating when we should elect to begin receiving Social Security benefits.  His essay, just posted on SSRN, is entitled A Guide to Starting Social Security Benefits.  Here's the abstract:

When a person should begin taking Social Security retirement benefits is a critical question for planning one's retirement. This article explains the various factors at play in determining the optimum starting point, including: longevity considerations; spousal implications, whether for a previously employed or a previously unemployed spouse; the impact of post-retirement employment; the availability of health insurance prior to Medicare eligibility for the worker and the worker's spouse; alternative sources of retirement income, including distributions from retirement savings plan assets and lifetime liquidation of nonretirement assets (and the pertinent income tax ramifications); and anticipated investment strategies.

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Georgetown Employee Benefit Certificate Program

Nell Hennessy writes the Benefits Professor Listserv:

Georgetown has just restructured its Employee Benefits Certificate program so that students can obtain the certificate in the Fall semester. (Students would have to complete another semester to get their LL.M.)  As part of that revamp, we've added a new Introduction to Employee Benefits course that will kick off the semester over 2 weekends. Attached is the announcement. I thought some of you might have JD students or recent graduates who would be interested, particularly if they are working in DC.

The announcement is here.  Sounds like it will help to increase the employee benefits knowledge in our labor and employment law community.  A worthy goal, indeed, and one that I am proud for my law alma mater to undertake.

PS

Companies Raid Rank-and-File Pension Plans to Fund Executive Benefits

So reports Ellen Schultz and Theo Francis on page A1 of today's Wall Street Journal.  They explain:

At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives' retirement benefits and pay.

In recent years, companies from Intel Corp. to CenturyTel Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives' supplemental benefits and compensation . . . .  The maneuver, besides being a dubious use of tax law, . . . can drain assets from pension plans and make them more likely to fail.  Now, with the current bear market in stocks weakening many pension plans, this practice could put more in jeopardy.

For the complete story, see Companies Tap Pension Plans to Fund Executive Benefits (subscription required).

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Lurie's Recent Employee Benefits Articles

Alvin Lurie has been busy publishing articles on the ERISA and employee benefits front.

The first article, It's a PIP - Or Is It?, concerns "an idea that has been wafting about in legislative halls and hearing rooms, in print and electronic media, and in assorted other venues for several years is to make employers in small businesses set up a payroll deduction facility for their employees not covered by employer-sponsored retirement plans, for the purpose of easing the making of contributions to an IRA established by or on behalf of the employee."

The second one, All in the Family on Foley Square, Lurie discusses the 2nd Circuit's recent cash balance plan decision in Hirt v. The Equitable Retirement Plan:

The 2nd Circuit just resolved a family squabble among its dist rict court judges – five in the SDNY and three in the Connecticut district – involving  an age discrimination issue that has had the pension community across the    country in a tumult for five years. The appeals court affirmed the judgments of two courts of the Southern District of New York in separate cases, Hirt v. The Equitable Retirement Plan and Bryerton v. Verizon Communications, that had ruled that the cash balance plans at issue were not age discriminatory (2008 US App. LEXIS 14325). It thereby settled an issue that had split nine district cases in its circuit (5 in favor of the plans, 4 against), and in so doing sided with the three other circuit courts that had similarly upheld the plan sponsors positions, starting with the seminal decision of the 7th Circuit in the IBM case in 2006.

Finally, in the third one, Triple Play: Stevens to Roberts to Thomas or A View of LaRue, Lurie writes:

One thing that has distinguished employee benefits practitioners from the population at large in the US in the Spring of ‘08 is whom they prefer among the three – actually, what three they’re even talking about. For a remarkably large portion of the benefits community it’s not been McCain, Obama and Clinton, but Stevens, Roberts and Thomas, the latter three the Supreme Court justices who wrote the majority and two concurring opinions for a court unanimous only in its ultimate holding in the LaRue case1 decided this past February. Linda Greenhouse, writing in the New York Times recently on the pattern of recent rulings from the Supreme bench, said:

“The court is by nature an atomistic institution, its actions the aggregation of   determinedly individual decisions.”

If ever words fit actions, those words fit the actions of the justices in LaRue, and she wasn’t even writng about that case. In a supposedly unanimous opinion of the nine justices, they wrote three separate opinions, agreeing only on the ultimate question, but otherwise wildly diverging -- in cohorts of five, two and two – as to why and to what effect.

Alvin brings his mastery and provocative take on all of these issues in these three articles.  I'm quite sure he would like to hear individual's feedback.

PS

ERISA Reform Legislation Effort

Colleen Medill (Nebraska) writes us:

Professor Colleen Medill at the University of Nebraska College of Law has agreed to help the Amschwand family identify members of Congress who may be interested in sponsoring legislation to amend Section 502(a)(3)  of ERISA so that “equitable” relief includes monetary relief designed to make a plan participant or beneficiary whole for injuries caused by a breach of fiduciary duty. For those of you who need an update on the Amschwand and Goeres cases, where the Supreme Court recently denied certiorari, here is a recent news story:

http://news.yahoo.com/s/ap/20080705/ap_on_go_su_co/benefit_battles

As a starting point, Professor Medill is collecting:

1. Names of members of the Senate and the House of Representatives who may be      interested in learning more about this issue and possibly sponsoring reform legislation. Please include the full name, state and party affiliation.

2. Law professors and ERISA attorneys who might (not a firm commitment required right now) be interested in working on proposed legislation and educating members of Congress on the need for reform.

Please send replies directly to Professor Medill at cmedill2@unl.edu.

PS

The Lack of Retirement Savings in the US

Just a tad alarming (from the BNA Daily Labor Report (subscription required):

The average projected postretirement income replacement needed among employees of large U.S. employers is 126 percent of final pay, a level only about 19 percent of employees are expected to satisfy, according to a Hewitt Associates report released July 1.

In fact, according to the report, Total Retirement Income at Large Companies: the Real Deal 2008, about 67 percent of the more than 1.8 million employees of 72 large U.S. employers tracked in the study are expected to have accumulated less than 80 percent of their projected needs at age 65.

Despite the gloomy projections, the report's authors concluded that employees can make a big difference in their retirement readiness by making small changes in their savings rates, investing smarter, paying lower fees, and delaying their retirement.

I think in particular the last point is what we are going to see more and more of: individuals working well into their 70's just to pay their bills and survive.

PS

The Skinny on the HEART Act

AHI's Benefit Alert provides some useful information on The Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) Act.  The Act provides benefits preferences to employees who are in the National Guard and Reserves. It may also impact 401(k) plans and health flexible spending accounts (FSAs).

Here are some of the HEART Act's highlights:

The HEART Act supplements [USERRA and the tax code].

Make-up contributions. Employees returning from military service must be allowed to contribute pre-tax make-up contributions into their 401(k) accounts. Special rules also apply to employer matching contributions and employee after-tax contributions. Under the HEART Act, for years beginning after December 31, 2008, military differential pay — the difference between employees' regular pay and military pay — must be treated as wages for these pre-tax make-up contributions, employer matching contributions, and employees' after-tax contributions . . . .

Distributions on account of severance of employment. Normally, employees can't take in-service distributions from their 401(k) plans. Under the HEART Act, employees who are called to active military service for a period exceeding 30 days are considered severed from employment. Employees, therefore, may receive distributions of their pre-tax amounts . . . .

Qualified reservist distributions. The 2006 Pension Protection Act allowed employees who are called to active military service for 180 days or longer, or for an indefinite time, to take penalty-free qualified reservist distributions from their 401(k) plans. The distributions must be made during the period that begins on the date employees receive their orders or call to duty and ends at the close of their active military service . . . . The HEART Act makes this provision permanent.

Survivor benefits and disability retirement benefits. The HEART Act adds new mandatory tax qualification requirements for 401(k) and other plans. Under the new requirement, plans can't discriminate in paying survivor benefits. If, for example, a plan accelerates vesting, ancillary life insurance benefits, or other survivor benefits that are payable upon an employee's death, those same benefits must be available to survivors when employees die during military service.

The HEART Act has additional provisions dealing with: benefits accrual under USERRA's retroactive benefits accrual rules, distributions from health flexible spending accounts, and mental health parity.

PS

2nd Cir: Pre-PPA Cash Balance Plan Not Age Discriminatory

BNA Daily Labor Report brings to my attention (subscription required) the following important cash balance plan decision from the 2nd Circuit, which was previously split on district level on the cash balance plan/age discriminatory issue.  In Hirt v. Equitable Retirement Plan, No. 06-4757 (2d Cir. July 9, 2008) (Westlaw subscription required), the court unanimously found that pre-Pension Protection Act (PPA) cash balance plan conversions are not age discriminatory in violation of ERISA:

The Second Circuit joins three other federal appeals courts that have ruled in recent years that cash balance plans do not reduce the rate of an employee's benefit accrual because of the attainment of age, and as such do not violate ERISA Section 204(b)(1)(H)(i). The long-awaited decision by the appeals court resolves a division among federal trial court judges under the jurisdiction of the Second Circuit who in recent years have come to different conclusions over whether cash balance plans violate ERISA's anti-age discrimination provisions. At least four judges from trial courts in the Second Circuit have found that cash balance plans are age discriminatory, but the majority of federal judges in that circuit have found that cash balance plans are not age-biased.

I think the decision by the 2nd Circuit, which is consistent with the findings of other circuit courts to decide this issue make Supreme Court review of this issue less likely.  Of course, all of that could change is the case is challenged en banc.

PS

Dell Cleared in ERISA Breach of Fiduciary Case

Plansponsor.com NewsDash has this report on a type of ERISA case that is becoming more frequently litigated:

DIRECT "SHUNS."  The U.S. District Court for the Western District of Texas ruled that fiduciaries of the Dell Inc. 401(k) Plan did not violate their duties under the Employee Retirement Income Security Act (ERISA) by allowing more than 50% of the plan's assets to be invested in Dell company stock.  In granting Dell's motion to dismiss the case, the court noted that the Dell plan is an eligible individual account plan (EIAP) and therefore exempt from ERISA's diversification requirements.

The District Court also agreed with Dell that since participants in the plan directed their own investments, the plan cannot create any duty to diversify assets by overriding participant investment choices - and said that if the plan became overinvested in Dell stock, this was the result of participant direc