(Week 7) Two set of discussions questions to post for MBA level Business Employment Law Online!
CHAPTER 13: Benefits
Benefits are an important part of compensation. The availability of benefits, such as pensions and health insurance, matters a great deal to employees and is a hallmark of better jobs. For employers, benefit plans account for a significant portion of total labor costs and require considerable expertise to administer. Many employment and tax laws affect benefit plans. This chapter focuses on the Employee Retirement Income Security Act (ERISA), the principal federal law regulating benefit plans. Laws specifically regulating group health insurance plans will also be discussed, as will the application of general antidiscrimination statutes to benefit plans.
The law surrounding benefits is very much in flux. Significant public policy questions are being debated about how best to provide and pay for the health-care and retirement income needs of an aging population. Employer-provided benefits will likely remain central to how most people in the United States meet these basic needs, but employers are clearly seeking to control their benefit costs and to shift some of the risk and cost associated with them to employees and the public.
What Benefits Must Employers Provide?
Employers are required to make contributions on behalf of employees into several social insurance programs. These include Social Security, unemployment insurance, and workers’ compensation (for replacement income and medical expenses arising from workplace injuries). Leave provided under the Family and Medical Leave Act can also be thought of as a type of legally mandated benefit, although the FMLA does not require that any more paid time off be provided than is already available under an employer’s own leave policy. Even with the recent changes in federal law governing health insurance plans, employers are not, strictly speaking, required to offer group health plans, although larger employers may be subject to monetary penalties if they fail to do so.1The general rule is that employers are not legally required to provide health insurance, pensions, paid sick days, severance pay, or any other benefits. Thus, although the laws discussed in this chapter come into play after an employer decides to have benefit plans, employers generally get to decide which, if any, benefits they will offer to their employees and how generous those plans will be.
What Does ERISA Require?
Despite its name, the Employee Retirement Income Security Act (ERISA)2 governs benefit plans broadly and is not concerned only with pensions. ERISA covers most employer- and labor union–sponsored benefit plans, but not government employer plans. The social insurance programs mentioned earlier (e.g., Social Security) are also not covered by ERISA. Under ERISA, benefit plans are classified as either pension plans or welfare plans. Pension plans are designed to provide retirement income to employees or to otherwise defer income until after employment ends (e.g., defined benefit pensions, 401[k]s, ESOPs, profit sharing). Welfare plans are essentially any other benefit plans covered by ERISA that are not pension plans (e.g., health insurance, child-care subsidies, and prepaid legal services). There are a number of exclusions from this broad category. Without attempting to list them all, the exclusions center on premium pay (e.g., for shift, overtime, or holiday work), payment for nonwork time that comes out of general assets rather than a separate trust fund (e.g., sick pay and paid vacations), scholarship or tuition reimbursement plans, and occasional gifts (e.g., holiday gifts). Benefits that are excluded need not meet ERISA requirements.
Throughout this book, we have pointed to the important role that state laws play in our system of employment law. States often address issues not covered by federal laws or provide for greater protection of employees. In general, states are free to fill in where federal law is silent or to mandate greater protection of employees. However, such is not the case when it comes to benefit plans covered by ERISA. ERISA is unusual among employment laws in its sweeping preemptionlanguage. ERISA preempts (supersedes) state laws even remotely relating to the regulation of benefit plans. This technical legal issue has real consequences. Disputes that relate to benefits and depend on interpretation of benefit plans for their resolution have to be brought under ERISA. Breach of contract or other claims are generally preempted by ERISA.3 And because the remedies and requirements of ERISA, particularly those that apply to welfare plans, are quite limited, achieving uniformity across states in the legal rules for benefit plans sometimes comes at the price of less employee protection.
ERISA is a complex law that contains four main parts (titles). It combines provisions relating to employee rights with rules relating to the treatment of benefit plans under the tax code. Although the United States relies very heavily on employer-provided benefits (as opposed to government-provided benefits such as national health insurance), employee benefit plans are heavily subsidized through tax deductions. “Qualified” plans receive favorable tax treatment, which provides employers with a strong incentive to conform to ERISA’s requirements.
The following overview of ERISA’s requirements focuses on the employee rights provisions of Title I. Under ERISA, employers are required to inform employees about their benefits, deliver promised benefits, provide claims and appeals procedures, manage plans wisely and in employees’ interests, and refrain from interfering with or retaliating against beneficiaries.
Inform Employees About Their Benefits
Eligibility criteria and the terms and conditions of benefit plans are often complex. A basic premise of ERISA is that informing employees about their benefits helps ensure that employees actually receive the benefits to which they are entitled. Benefit plan administrators are required to periodically (and at no charge) provide employees with reports and respond to employee requests for other information about their benefits. Required reports include the Summary Plan Description (outlining the basic terms of benefit plans), Summary of Material Modifications (listing changes in plans), Summary Annual Report (giving financial data on pension plans), Individual Benefit Statement (covering individual employees’ pension accruals), and Disclosure Notice (alerting employees of certain funding problems with their pension plans). U.S. Department of Labor (DOL) regulations also require that 401(k) plans provide plan participants and beneficiaries with both plan-wide and individual fee and expense information.4
Summary Plan Descriptions (SPDs) are important documents. SPDs must be provided to employees within ninety days of their becoming covered under benefit plans. Typically distributed in booklet form (or online), SPDs must be written with a minimum of legalese and be sufficiently comprehensive and accurate to inform employees about their rights and obligations. In general terms, SPDs must identify the plan administrator, conditions for benefit eligibility, benefits offered, and procedures for claiming benefits and appealing denials of benefits. Full disclosure of the circumstances under which participants will become ineligible for or lose benefits is particularly important. The SPD for a health insurance plan should specify any premiums, deductibles, or co-payments required of employees; annual or lifetime maximums; limits on coverage for experimental procedures or drugs; limits on choice of health-care providers; conditions for receiving emergency care; and requirements for preauthorization or review of the necessity of medical treatment.
JUST THE FACTS
An employee with a history of coronary artery disease underwent a difficult operation for her condition. Several weeks later she was re-hospitalized, suffering from a severe staph infection in the area of the incision from her earlier surgery. She became seriously ill and is now disabled. She applied for benefits under her employer’s long-term disability plan, but she was rejected on the grounds that her claim was “caused by, contributed to by, or resulting from [a] pre-existing condition.” The plan defines this as a condition for which medical treatment is received in the three months just prior to becoming covered under the plan and where the disability begins in the first twelve months after coverage begins. Her disability did, in fact, occur within a year after she became covered under the plan. She had also received treatment for her coronary artery disease in the three months prior to becoming covered under the plan. The in-house review of the decision to deny benefits took one day to complete and produced a one-paragraph decision noting that “medical records from this period could further strengthen this opinion.” The report acknowledged that the staph infection was not a preexisting condition but asserted that it resulted from surgery for her preexisting coronary problem. Did the plan administrator violate ERISA by denying disability benefits to this woman? Does it matter that the disability benefits would have come directly out of the profits of the insurance company that denied her claim?
Apart from reports provided to employees, ERISA requires that employers detail their benefit plans in written plan documents. In cases involving disputes over whether promised benefits were provided, courts strongly prefer written plan documents over statements made by company representatives incorrectly advising employees that they were entitled to certain benefits. As one court has put it, “We have made clear … that the oral representations of an ERISA plan may not be relied upon by a plan participant when the representation is contrary to the written terms of the plan and those terms are set forth clearly.”5 Thus, employees take risks when they seek and rely on statements about expected benefits. At the same time, employers who misrepresent the terms of benefit plans to employees potentially run afoul of ERISA. Employers should be careful in advising employees regarding their benefits and refer them to SPDs and other plan documents.
Deliver On Promised Benefits
Employers are required to provide the benefits they promise. Employees have the right under ERISA to sue their employers for denial of benefits. For example, a health plan might refuse to authorize treatment or decline to pay for care already received because it is deemed “not medically necessary” or “experimental.” If a denial of benefits case ends up in court, the nature of the review depends on whether the plan gives its administrator discretionary authority to determine eligibility for benefits and to interpret the terms of the plan.6 Because plan documents typically provide plan administrators with such authority, courts most often confine themselves to determining whether plan administrators abused their discretion by making decisions in an arbitrary and capricious manner, rather than substituting their reading of plans for that of administrators. This is known as an abuse of discretion standard. The relevant question under this standard is whether the plan administrator’s decision was unreasonable, not whether it was correct. Questions about the appropriate standard for review also arise because there is sometimes a conflict of interest, such that the entity administering the benefit plan has a direct financial stake in limiting access to benefits. The Supreme Court has said that courts are entitled to weigh such conflicts of interest as a factor when considering whether plan administrators have violated ERISA by denying promised benefits, but that abuse of discretion is still the relevant standard.7 The Court has also held that even when a plan administrator is found to have abused its discretion in an initial benefits determination, subsequent interpretations are still entitled to deference.8
This abuse of discretion standard commonly used in ERISA denial-of-benefits cases is deferential to plan administrators but does not give them license to unreasonably withhold benefits. A health plan’s decision not to authorize high-dosage chemotherapy (HDCT) for an employee with breast cancer was found to be arbitrary and capricious.9 ERISA was violated because the administrator demanded evidence that HDCT is superior to more conventional treatments not to exclude it as an experimental treatment, even though the plan documents required only that a proposed treatment be recognized by the medical community and have demonstrated effectiveness to be covered. The administrator also erred by ignoring expert medical testimony favorable to the employee. In another case in which the administrator of a health plan abused its discretion, coverage for inpatient treatment in a psychiatric facility was denied despite the fact that the treating physician saw it as essential to the patient’s health. The decision to deny coverage was made by another doctor who had never met the patient and who based her decision on old medical records.10
In Helton v. AT&T, the court must decide whether plan administrators abused their discretion in denying a former employee’s claim for retroactive pension benefits.
Helton v. AT&T
709 F.3d 343 (4th Cir. 2013)
OPINION BY CIRCUIT JUDGE WYNN:
After first learning in 2009 that she had been entitled to begin collecting her full pension benefits nearly eight years earlier, plaintiff Francine Helton contacted her pension plan seeking to recoup her lost benefits. The pension plan denied Helton’s claim, and Helton, in turn, brought this action under the Employee Retirement Income Security Act of 1974 (“ERISA”) against defendants…. Following a bench trial, the district court found that AT&T unreasonably denied Helton’s claim and failed to adequately notify her of a material change to its pension plan that allowed her to collect full benefits earlier than she had originally understood. The court awarded Helton $121,563.90 plus interest, reflecting the benefits she would have received from November 2001, when she became eligible to collect her pension benefits, until September 2009, when she was informed of her eligibility.
* * * For the reasons set forth below, we hold that the district court properly considered limited evidence outside of the administrative record but known to AT&T when it rendered Helton’s benefits determination; correctly determined that AT&T breached its statutory and fiduciary duties to Helton; and did not err in awarding Helton her lost benefits. Accordingly, we affirm.
Helton … began working for AT&T in 1980…. In April 1997, Helton took paid vacation time and, after her paid vacation was exhausted, an unpaid leave of absence from AT&T to open a home-cooking restaurant. She formally resigned from the company on May 31, 1997. At the time she left, Helton was a deferred vested pensioner of the Legacy AT&T Management Program of the AT&T Pension Plan (the “Pension Plan”) and believed, at that time correctly, that she was not eligible to receive benefits under the Pension Plan until she turned sixty-five. AT&T both funds and, for ERISA purposes, serves as plan administrator of the Pension Plan.
In August 1997, AT&T amended the Pension Plan through a “Special Update,” which, among other provisions, allowed certain participants, including Helton, to elect benefits at age fifty-five without facing any benefit reduction. AT&T attempted to notify eligible individuals about the Special Update in at least two ways: (1) through an April 28, 1997 letter from then AT&T Executive Vice President Harold Burlingame to active management employees and (2) in the Pension Plan’s January 1, 1998 Summary Plan Description (“SPD”), which also was mailed to active management employees. Helton testified that she did not receive either of these communications. * * *
On July 31, 2009, Helton, who was approaching her sixty-fifth birthday, contacted the Pension Service Center to find out how much she would receive when she became eligible for her pension. AT&T records indicate that, in response to Helton’s request, it mailed pension materials to Helton on July 31, 2009, August 18, 2009, and August 31, 2009. However, Helton testified that she only received the materials sent on August 31, 2009. In that mailing, Helton received a commencement of benefits packet stating that she was immediately eligible to begin collecting her full pension benefit, despite the fact that she had not yet turned sixty-five. After learning about the Special Update from the Pension Service Center, Helton contacted AT&T’s Pension Plan administrator, AON Consulting, and requested pension benefits dating back to her fifty-fifth birthday. The administrator denied Helton’s request on December 16, 2009, stating that, under the Pension Plan’s terms, benefits are payable on a “forward going basis and there is no provision in the Plan for retroactive pension payments.”
On December 29, 2009, Helton appealed the administrator’s denial of benefits to AT&T’s Employee Benefits Committee (the “Benefits Committee”), stating that she never received the 2001 commencement package or the Burlingame letter. ***Christine Holland, an AT&T employee and secretary of the Benefits Committee, prepared the materials for the committee to consider in reviewing Helton’s appeal. The administrative record Holland assembled included a brief statement of facts regarding Helton’s claim, a timeline, a copy of the Burlingame letter, excerpts from the version of the Pension Plan in effect in 1998, excerpts from the 2004 SPD, a screen shot of Helton’s address in AT&T’s employee masterfile, and copies of correspondence between AT&T and Helton regarding her claim.
After reviewing the record, the Benefits Committee, which was composed of five AT&T human resources vice presidents, denied Helton’s appeal on March 22, 2010, affirming the administrator’s decision that “retroactive” benefits are unavailable under the terms of the Pension Plan. The Benefits Committee also determined that Helton was appropriately notified of the Special Update because she was an “active management employee” on August 28, 1997, when the Burlingame letter was mailed, and her “address has remained the same since at least 1988 and there was no indication that mail has been returned to [AT&T] as undeliverable from [Helton’s] address.” * * *
First [on appeal], AT&T challenges the factual findings and legal conclusions underlying the district court’s holding that Helton is entitled to retroactive pension benefits under [the section of ERISA] which authorizes a plan participant or beneficiary to bring a “civil action … to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.”
This Court reviews de novo a district court’s review of a coverage decision by an ERISA plan administrator, applying the same standard of review as the district court applied. The scope of a district court’s review in an action challenging an administrator’s coverage determination … turns on whether the benefit plan at issue vests the administrator with discretionary authority. If a plan does not give the administrator discretionary authority, a district court reviews the coverage determination de novo. However, when “an ERISA benefit plan vests with the plan administrator the discretionary authority to make eligibility determinations for beneficiaries, a reviewing court evaluates the plan administrator’s decision for abuse of discretion.” Under this standard, this Court should affirm a discretionary decision of a plan administrator if it is the result of a “deliberate, principled reasoning process” and is supported by “substantial evidence,” even if we would reach a different decision independently.
Here, the Pension Plan states that the Benefits Committee “shall have sole and complete discretionary authority and control to manage the operation and administration of the Plan, including, but not limited to … interpretation of all Plan provisions [and] determination of the amount and kind of benefits payable to any Participant….” Because this language gives AT&T discretionary authority in administration of the Pension Plan, we review AT&T’s decision to deny Helton retroactive benefits for abuse of discretion. * * *
First, we address the district court’s decision to consider limited evidence outside of the administrative record prepared by AT&T. Generally, consideration of evidence outside of the administrative record is inappropriate when a coverage determination is reviewed for abuse of discretion. * * * AT&T contends that in Sheppard, in which we set out our current approach to consideration of extrinsic evidence on abuse of discretion review, we established an absolute bar to considering evidence outside of the administrative record. However, a closer review of our precedent demonstrates that we have taken a more nuanced approach to consideration of extrinsic evidence on deferential review, rather than embracing an absolute bar. In particular, in discussing what evidence may be considered, we generally have focused on whether evidence was known to the administrator when it rendered its decision, not whether it was part of the administrative record. * * * By contrast, we have refused to consider extrinsic evidence only in cases in which a plaintiff seeking benefits sought to first introduce evidence in federal court that was unknown to the administrator. * * *
Had Sheppard allowed plan administrators the unchecked opportunity to pick and choose what evidence in their possession to include in the administrative record, as AT&T argues, we would have effectively surrendered our ability to review ERISA benefits determinations because plan administrators could simply omit any evidence from the administrative record that would suggest their decisions were unreasonable. As the Seventh Circuit explained in Hess, “[t]he fact that [a plan administrator] did not bother to read pertinent evidence actually before him cannot shield [the plan’s] decision from review.”
* * * [W]e have long recognized that certain types of extrinsic evidence often are necessary for a court to assess whether an administrator abused its discretion in denying a plan member’s request for benefits. In Booth v. Wal-Mart Stores, Inc. Associates Health & Welfare Plan, which was decided after Sheppard, we identified eight nonexclusive factors for courts to consider in evaluating whether a plan administrator abused its discretion:
(1) the language of the plan; (2) the purposes and goals of the plan; (3) the adequacy of the materials considered to make the decision and the degree to which they support it; (4) whether the fiduciary’s interpretation was consistent with other provisions in the plan and with earlier interpretations of the plan; (5) whether the decision-making process was reasoned and principled; (6) whether the decision was consistent with the procedural and substantive requirements of ERISA; (7) any external standard relevant to the exercise of discretion; and (8) the fiduciary’s motives and any conflict of interest it may have.
* * *As is facially apparent, a district court in many cases may not be able to adequately assess a number of the Booth factors in the absence of evidence from outside the administrative record. For example, the fourth factor requires a court to consider whether the coverage determination at issue is consistent with earlier interpretations of the plan. Because the administrative record focuses on the coverage determination at hand, courts would have to look at extrinsic evidence concerning the plan administrator’s prior coverage determinations to assess this factor. Similarly, one can envision many circumstances in which a court would need to look to extrinsic evidence to evaluate the adequacy of the administrative record, as is required by the third factor, or the impact of a plan fiduciary’s conflict of interest, as is required by the eighth factor. * * *
In sum, under Sheppard, a district court may consider evidence outside of the administrative record on abuse of discretion review in an ERISA case when such evidence is necessary to adequately assess the Booth factors and the evidence was known to the plan administrator when it rendered its benefits determination. * * *
Turning to the case at hand, * * * [w]e hold that the district court properly considered this [extrinsic] evidence, with the exception of the trial testimony of Adam, who oversaw the mailing of Pension Plan communications for AT&T contractor Universal Mailing Services, and Banwart, who was employed by AON as a director of operations at AT&T’s Pension Service Center. We do so, first, because the district court considered this evidence in the course of determining whether the Benefits Committee relied on adequate materials in denying Helton’s appeal, one of the eight Boothfactors. Second, all of this evidence, with the exception of Adam’s and Banwart’s testimony, was known to, or in the control of, AT&T when the Benefits Committee made its decision. * * * However, the district court should not have considered Adam’s and Banwart’s testimony. Both Adam and Banwart stopped working with AT&T in 2007 and therefore had no relationship with AT&T when the Benefits Committee rendered its decision in 2009. Accordingly, AT&T was free to interview Adam and Banwart as part of its review of Helton’s claim but cannot properly be charged with knowledge of their testimony.
Next, keeping in mind which pieces of evidence are properly considered on deferential review, we must decide whether the district court erred in holding that AT&T abused its discretion in denying Helton’s request to recoup her lost benefits. * * *All eight Booth factors need not be, and are not, in play in this case. Those factors that do apply convince us that AT&T’s decision to deny Helton’s claim was unreasonable.
First, the decision was not supported by the language of the Pension Plan, as required by the first Booth factor, nor was it consistent with other terms in the Pension Plan, as required by the fourth factor. Specifically, in denying Helton’s claim, the Benefits Committee pointed to language in two documents that it contended precluded the award of retroactive benefits: Section 4.06 of the Pension Plan version in effect when AT&T provided the Special Update and the 1998 SPD. Section 4.06(d) provides:
the failure of an Employee and Spouse to consent to a distribution while a benefit is immediately distributable, within the meaning of Section 4.06(c), shall be deemed to be an election to defer commencement of payment of any benefit sufficient to satisfy this Section 4.06(d).
This provision does not address, much less preclude, retroactive recovery of benefits, particularly in cases of administrative error. While the administrator is entitled to discretion in interpreting the terms of its plan, those interpretations must be reasonable. Here, the administrator’s interpretation was not reasonable.
The 1998 SPD states that pension benefits are “payable on a forward-going basis only.” While this language might be read as precluding the award of retroactive benefits, an SPD does not constitute the terms of a plan for purposes of determining whether a plan participant is entitled to a particular form of relief. Therefore, neither the terms of the Pension Plan nor the 1998 SPD precluded awarding Helton retroactive benefits. Moreover, Section 22.7.1 of the Pension Plan version in effect at the time Helton sought to recover her lost benefits explicitly allows for the Pension Plan administrator to grant “restorative” benefits:
Plan provisions to the contrary notwithstanding, if an error has occurred in connection with the Plan … as a result of human or systems error, data, recordkeeping, or other administrative error, the Plan Administrator may correct the error to the extent reasonably practicable by taking any action it deems appropriate to effect such correction.
Thus, Section 22.7.1 gives the Pension Plan administrator broad authority to remedy past errors—like the failure to adequately inform Helton of a material plan change. Accordingly, the Benefits Committee’s interpretation of Section 4.06(d) as precluding the award of retroactive benefits was inconsistent with Section 22.7.
Regarding the third Booth factor, AT&T failed to compile an adequate record to render its decision. As the district court noted, neither Holland nor the Benefits Committee inquired into the reliability of AT&T’s mailing process for pension materials, despite the fact that the two failed mailings to Helton in 2009 should have put the Benefits Committee on notice of potential problems with the mailing system generally, and the mailing of pension materials to Helton in particular. The Benefits Committee also did not inquire into or address whether Helton’s unofficial leave of absence in April 1997 would have affected whether AT&T mailed the Burlingame letter to her. In fact, the Benefits Committee failed to investigate any of Helton’s reasonable explanations for why she might not have received the Burlingame letter or 1998 SPD. Additionally, AT&T withheld from the administrative record highly relevant pieces of information subsequently produced in discovery….
Further, the Benefits Committee’s decision was not supported by substantial evidence, as required by the third Booth factor. As the district court correctly explained, the administrative record includes “no physical records of any mailing, mailing lists, or other business records indicating that [the Burlingame letter and 1998 SPD] were mailed to Ms. Helton at all, and certainly no evidence specifically showing that the materials were sent to Ms. Helton at her home address, as [AT&T] claim[s].” Additionally, the Benefits Committee failed to address key pieces of evidence conflicting with its decision, including documents indicating the 1998 SPD was sent only to active management employees, not deferred vested pensioners like Helton, and the fact that some AT&T records indicated that it had not sent Helton a commencement package in 2001. While an administrator has the authority to weigh conflicting pieces of evidence, it abuses its discretion when it fails to address conflicting evidence. For these same reasons, it also is clear that AT&T failed to engage in a reasoned and principled decision-making process, as required by the fifth Booth factor.
Finally, regarding the last Booth factor, AT&T suffered from a conflict of interest because it served as Pension Plan administrator at the same time as it was responsible for funding the Pension Plan. This conflict of interest may have motivated the Benefits Committee, which was composed of five AT&T executives, to omit from the record unfavorable evidence in AT&T’s possession; fail to investigate Helton’s reasonable explanations for why she might not have received the Burlingame letter or 1998 SPD; and adopt an interpretation of the Pension Plan unsupported by its plain language and fatal to Helton’s claim.
In sum, examining the relevant Booth factors in light of the evidence the district court properly admitted leads us to conclude, as did the district court, that AT&T abused its discretion in denying Helton’s claim. * * *
[W]e next consider AT&T’s argument that the district court incorrectly found that AT&T had violated ERISA’s reporting and disclosure provisions. AT&T contends that the district court clearly erred in finding that AT&T failed to send Helton the 1998 SPD. We disagree.
ERISA requires that, in the event of a material change to a plan eligibility requirement, plan administrators furnish participants with a summary description outlining the change within 210 days of the end of the year in which the change was adopted. In cases in which ERISA requires a plan administrator to notify participants of a plan change, ERISA implementing regulations mandate that the administrator use measures reasonably calculated to ensure actual receipt of the material by plan participants. The parties agree that the Special Update constituted a material change to the Plan and thus AT&T was required to timely notify Helton, a participant, about the change.
At trial, the parties provided conflicting evidence regarding whether AT&T sent Helton the Burlingame letter and the 1998 SPD. In particular, there was conflicting evidence as to whether individuals on unapproved leaves of absence, like Helton, would have been sent the Burlingame letter. For example, Stoia testified that the letter was sent to individuals designated as “active management employees,” including deferred vested pensioners and “Leave of Absence Employees,” on January 1, 1997. Stoia admitted on cross-examination, however, that she did not know whether the letter had been sent to employees on unofficial leaves of absence, like Helton. Further, Helton testified she did not receive the Burlingame letter. She also emphasized that AT&T failed to produce any record indicating that the Burlingame letter had been mailed to her specifically, and that evidence regarding how Helton had been characterized in AT&T’s employee database at the time of the mailing had been destroyed.
The parties also presented conflicting evidence regarding whether the 1998 SPD was sent to deferred vested pensioners who were not active employees, like Helton. In particular, Stoia testified that the 1998 SPD had been sent to any individual with an interest in the Pension Plan, including deferred vested pensioners. By contrast, Helton reaffirmed that she did not receive the 1998 SPD and also introduced documentary evidence that the 1998 SPD was not sent to deferred vested pensioners like herself. And Adam, who was responsible for overseeing AT&T pension plan mailings in 1997 and 1998, testified that the 1998 SPD was not sent to deferred vested pensioners. Moreover, Helton emphasized—and AT&T conceded—that the company produced no records, such as physical records of mailings, mailing lists, or business records, showing that it mailed Helton the 1998 SPD.
Weighing this conflicting evidence, a task properly left to the district court sitting as fact-finder, the district court made the factual determination that the Pension Plan “did not distribute the 1998 SPD in a manner reasonably certain to ensure Ms. Helton’s actual receipt.” This finding is not clearly erroneous, and we therefore must uphold it.
CASE QUESTIONS
1.
What were the legal issues in this case? What did the appeals court decide?
2.
Why is the question of whether courts should consider “extrinsic evidence” significant in this type of case? What does the appeals court conclude about the consideration of such evidence?
3.
What factors does the court consider in deciding whether a plan administrator has abused his or her discretion in denying a benefit claim? How were these factors applied to the facts of this case?
4.
How were ERISA’s reporting and disclosure requirements violated in this case?
5.
Do you agree with the court’s decision? Why or why not?
Administrators of benefit plans must base benefit determinations on plan documents, have reasons for their decisions, and use all the current and relevant information available to them.
Provide Claims and Appeals Procedures
Employers are required to provide “reasonable” claims and appeals procedures for their benefit plans. This means meeting certain minimum procedural standards. The standards for handling claims for health benefits are more stringent than those that apply to claims for other types of benefits. To be “reasonable,” claims procedures cannot inhibit the filing or processing of claims, such as by imposing filing fees. Decisions on initial claims generally must be made within ninety days. However, benefit determinations under health plans must be made more quickly. Urgent care claims must be decided within seventy-two hours, whereas claims for treatment already received must be decided within thirty days. These and other time limits on benefit determinations can be extended under certain circumstances.
If a decision is made to deny a benefit claim, the specific reasons for the denial must be provided to the employee in writing. There must be a procedure for appealing adverse benefit determinations, and the procedure must allow at least sixty days (180 days under group health plans) for appeals to be filed. The results of these reviews must be communicated to employees within sixty days (more quickly for some health insurance claims).
Unlike most other employment laws, employees are generally required under ERISA to use their employers’ claims and appeals procedures before going to court to sue for denial of benefits. Thus, an employee was unable to sue his health plan for refusing to pay for a prescription drug that he needed because he had made only a single telephone inquiry about whether the drug was covered and had never used the appeals process.11 On the other hand, an employee did not fail to exhaust the internal appeals procedure when she sent a number of letters seeking severance pay but the letters were addressed to the wrong individual in the company’s human resources department.12 The letters could easily have been forwarded to the correct individual, and the employee was never given the correct information about the claims and appeals procedure. Likewise, an insurer’s failure to provide a response to an employee’s appeal of the decision to end her disability benefits within the time period specified by ERISA meant that she had exhausted the appeals process and was entitled to sue for denial of benefits.13
Manage Plans Wisely and In Employees’ Interests—Fiduciary Duties
In general, anyone who exercises discretionary authority or control over the administration of a benefit plan or its funds is considered a fiduciary. This usually includes such people as directors, officers, plan administrators, and trustees. Outside parties that regularly render investment advice for a fee are also fiduciaries. The people or entities that control and manage benefit plans have a number of important responsibilities or fiduciary duties. First and foremost, fiduciaries are responsible for managing benefit plans and funds solely in the interest of plan beneficiaries and for the purpose of providing them with benefits. Fiduciaries must manage benefit plans with skill, care, and prudence. They must ensure that plans operate in accordance with plan documents and the requirements of ERISA. With pension plans, fiduciaries are responsible for diversifying plan assets to minimize the risk of large losses, selecting proper investments, monitoring investment performance, and ensuring that plans can meet their obligations. Fiduciaries must also refrain from engaging in certain transactions that have the potential to create conflicts of interest.
The fiduciary duties of employers extend to information provided to employees regarding their benefits. An employer violated ERISA when it knowingly misled employees, inducing them to make a disadvantageous switch in benefit plans. The employer told employees that their benefits would remain secure if they voluntarily transferred to the benefit plans of its new subsidiary even though the employer knew full well that the subsidiary was already insolvent. The Supreme Court concluded that there was a clear breach of fiduciary duty: “To participate knowingly and significantly in deceiving a plan’s beneficiaries in order to save the employer money at the beneficiaries’ expense is not to act ‘solely in the interest of the participants and beneficiaries.’”14However, there was no breach of fiduciary duty when a mid-level “benefits administration manager” misinformed an employee about the pension consequences of participating in the employer’s workforce reduction program.15 Even though the former employee ended up with a much smaller pension than anticipated, the manager was not acting in a fiduciary capacity when he performed the administrative tasks of researching and informing the man about the expected value of his pension. Employers and other ERISA fiduciaries must provide accurate information about benefit plans and not withhold material facts that would likely affect the choices and interests of plan beneficiaries.
Refrain From Interference or Retaliation
ERISA prohibits discrimination against a benefit plan participant or beneficiary “for exercising any right to which he is entitled” under a benefit plan or “for the purpose of interfering with the attainment of any right to which such participant may become entitled” under a benefit plan.16 An employer must not, for example, fire an employee to prevent him from becoming entitled to receive a pension. Moreover, this protection applies to both pension and welfare plans.17 Although the statutory language appears relatively broad, courts have restricted this protection to cases in which an adverse employment decision was made for the express purpose of interfering with benefit entitlement. The mere fact that a loss of benefits accompanies a termination does not render that termination a violation of ERISA. Courts have also generally limited claims to cases involving discharges or discipline; refusal to hire or re-hire an employee, even if motivated by a desire to avoid benefit costs, is not prohibited by this section of ERISA.18 Additionally, some courts have declined to recognize claims brought by employees who were retaliated against after making unsolicited, internal complaints about problems with the administration of benefit plans, rather than for statements made in the course of formal enforcement proceedings.19
JUST THE FACTS
In 2000, the Ford Motor Company “spun off” its automotive parts subsidiary Visteon. This resulted in the transfer of some salaried employees from Ford to Visteon. In 2006, Visteon transferred some of its facilities back to Ford. In 2008, Ford conducted a major reduction in force. It offered severance pay to downsized salaried employees based on years of service with Ford. The plaintiffs in this case were salaried employees who had been transferred to Visteon and then returned to Ford. On their return to Ford, they were classified as “re-hired,” rather than as “reinstated,” and given new Ford employment service dates. Consequently, their severance pay was based only on their service since 2006. A confidential e-mail between high-level HR managers at Ford sent before the layoffs referred to the impending downsizing and suggested a desire to minimize the severance benefits of the former Visteon employees. Did Ford violate ERISA by classifying the employees as “re-hired” rather than reinstating them with their original Ford service dates? Why or why not?
Employers must not discharge or otherwise discriminate against employees because they have used benefits to which they are entitled or to prevent them from using benefits to which they are entitled.
Pensions
Imagine an employee nearing retirement and looking forward to doing nothing more ambitious than walking on the beach every morning. What if he suddenly learns that the pension he was counting on will not be there for some reason? Individuals depend on the income that is deferred into pension plans to provide for their retirements. If problems with a pension plan are not discovered until retirement is at hand, it is far too late to do anything about it. ERISA was created in large part to prevent such disasters, and it contains many requirements specific to pension plans. However, some types of pensions are more closely regulated than others. The less-regulated variety is now the most common.
Vesting and Participation
In general, employers are free to alter or discontinue benefit plans at any time. The reduction or elimination of any benefit can be detrimental to employees, but pensions present a particular problem. ERISA allows pension plans to be modified or terminated, but it requires that plan participants and beneficiaries retain the benefits accrued prior to these changes. Under ERISA, employers with pension plans are required to provide for the vesting of pension rights. Vestingmeans that after a specified number of years of service, employees covered under a pension plan acquire a nonforfeitable right to receive a pension. That period of time is usually either five years (for “cliff vesting,” in which vesting occurs all at once at the end of the fifth year of service) or seven years (for “gradual vesting,” in which the nonforfeitable portion increases in increments of 20 percent starting in the third year). Vesting pertains to an employer’s contributions to a pension plan. Any employee contributions vest immediately.
Once vested, an employee is entitled to a pension from the employer (or under certain circumstances, to roll the funds into another retirement fund) even if the employee goes to work for another company. This does not mean that a 28-year-old who works seven years for a company and then quits is entitled to a pension at that time. It only means that on reaching the plan’s minimum retirement age, the former employee is entitled to a pension. Because the size of a pension is closely related to length of service, the amount would probably be small in this case. Employers are required not only to vest the pension rights of employees but also to offer benefits to survivors of deceased employees.
Employers are also prohibited from making changes to pension plans that reduce pension benefits already accrued by employees. This is known as ERISA’s anti-cutback rule. Thus, an employer that declined to pay a cost of living adjustment (COLA) otherwise available under the pension plan to employees who opted to receive their benefits in a lump sum rather than as an annuity violated ERISA.20 The COLA was an accrued benefit that had to be considered in the actuarial calculations determining lump-sum payouts. But not all changes to pension plans that adversely affect participants run afoul of ERISA. A change made to Delta Air Lines’ pension plan that was unfavorable to employees who were not yet 52 years of age did not violate the anti-cutback rule because the plaintiff, although vested, was not yet 52 and had not yet earned the more favorable terms.21 Only her expectations about future benefits had been violated.
Application of the anti-cutback rule to a circumstance in which both pension and health benefits are intertwined is at issue in the Battoni v. IBEW Local Union No. 102 Employee Pension Plan case that follows.
Battoni v. IBEW Local Union No. 102 Employee Pension Plan
594 F.3d 230 (3d Cir. 2010)
OPINION BY CIRCUIT JUDGE SMITH:
This appeal requires us to consider the scope of the Employee Retirement Income Security Act’s (“ERISA”) Anti-Cutback rule. Certain current and retired members of a union challenged an amendment to their welfare plan (the “Disputed Amendment”) as an unlawful cutback of their accrued benefits under their pension plan. We must determine whether the Disputed Amendment, which conditions receipt of healthcare benefits under a welfare plan on non-receipt of an accrued benefit under a pension plan, violates the Anti-Cutback rule…. [W] e conclude that the Disputed Amendment violated the Anti-Cutback rule by constructively amending the pension plan in a manner that decreased an accrued benefit under that plan. Accordingly, we will affirm the District Court’s judgment in favor of the Battoni Plaintiffs.
In November 1999, the Local 675 and the Local 102 chapters of the International Brotherhood of Electrical Workers (“IBEW”) merged. * * * After the merger, the two pension plans were combined into one—the Local 102 Pension Plan. * * * [T]he Local 102 Welfare Plan was amended to include a new condition on the receipt of healthcare benefits. This amendment, the Disputed Amendment, conditioned a retiree’s receipt of healthcare benefits on the retiree’s not choosing the lump sum pension benefit offered under the Local 102 Pension Plan. The Disputed Amendment stated, in relevant part, that:
Retired employees who elect a lump sum pension benefit in lieu of periodic monthly benefits from [the] IBEW Local 102 Pension Plan and/or from another Local Union IBEW Pension Plan shall not be eligible for continued [healthcare] coverage.
Before the addition of the Disputed Amendment, a former Local 675 member could elect to receive the lump sum pension benefit provided under the Local 102 Pension Plan and still receive healthcare benefits under the Local 102 Welfare Plan. A group of current and retired members of the Local 102 chapter who were formerly members of the Local 675 chapter, the Battoni Plaintiffs, challenged the Disputed Amendment, alleging, among other things, that it violated the Anti-Cutback rule. * * *
To state a claim for violation of ERISA’s Anti-Cutback rule one must show (1) that a plan was amended and (2) that the amendment decreased an accrued benefit. The Union concedes that the lump sum pension benefit offered under the Local 102 Pension Plan was an “accrued benefit.” It argues that the Disputed Amendment lawfully amended a welfare benefit plan—such benefits are exempt from coverage under the Anti-Cutback rule—without disturbing the Battoni Plaintiffs’ rights to the lump sum pension benefit offered under the Local 102 Pension Plan. This argument cannot succeed in this case.
The first question that must be resolved is whether the Disputed Amendment, by conditioning the receipt of welfare benefits on a retiree not exercising her right to receive a lump sum pension benefit under the Local 102 Pension Plan, constituted an amendment to the Local 102 Pension Plan. Because the Disputed Amendment constructively amended the right to receive a lump sum pension benefit under the Local 102 Pension Plan, we conclude that the first requirement of an Anti-Cutback claim was satisfied.
* * * “ERISA recognizes two types of employee benefit plans: pension plans and welfare plans.” Welfare plans provide “medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment[.]” Pension plans provide retirement income to employees or result in a deferral of income by employees for periods extending to the termination of covered employment or beyond. According to the Union, the Disputed Amendment amended the welfare plan and thus was exempted from the Anti-Cutback rule. The Anti-Cutback rule, however, cannot be employed in such an overly simplistic, robotic fashion.
* * * The Disputed Amendment constructively amended the pension plan by adding a condition to the receipt of a benefit accrued under that plan. If a retiree elects to receive the lump sum pension benefit under the Local 102 Pension Plan she loses healthcare benefits under the Local 102 Welfare Plan. Thus, the Disputed Amendment necessarily, “by its express terms or as a result of surrounding circumstances,” amended the Local 102 Pension Plan. * * * Thus, even though the Disputed Amendment was added to the Local 102 Welfare Plan and certainly dealt with healthcare benefits, it also “function[ed]” to condition receipt of the lump sum pension benefit under the Local 102 Pension Plan on non-receipt of healthcare benefits under the Local 102 Welfare Plan.
Having determined that the Disputed Amendment amended the Local 102 Pension Plan, the next inquiry is whether the amendment decreased an accrued benefit. The Union argues that the Disputed Amendment merely restricts access to healthcare benefits and does not decrease any accrued benefit. But because the Disputed Amendment imposed a condition on the receipt of the lump sum benefit under the Local 102 Pension Plan, it decreased an accrued benefit. * * *
In Central Laborers’ Pension Fund, the Supreme Court considered “whether the [Anti-Cutback] rule prohibits an amendment expanding the categories of postretirement employment that triggers suspension of payment of early retirement benefits already accrued.” It held that such an amendment was prohibited in part because the imposition of a new condition on an accrued benefit decreased the value of that accrued benefit. Thomas Heinz, a retiree who participated in a pension plan administered by the Central Laborers’ Pension Fund, worked in the construction industry before retiring. Heinz’s pension plan contained a “disqualifying employment” provision that stated that monthly retirement payments would be suspended if he accepted work as a “union or non-union construction worker.” The provision did not cover work as a “construction supervisor.” After retiring, Heinz began working as a construction supervisor while receiving pension payments. Approximately two years later, the pension plan’s “disqualifying employment” provision was amended to include any job in the construction industry. Heinz was warned that he would lose his monthly pension payment if he continued to work as a construction supervisor. Despite the warning, Heinz continued to work as a construction supervisor and his monthly pension payments were suspended because of his ongoing violation of the amended “disqualifying employment” provision. Heinz sued the pension fund to recover the suspended benefits, alleging that the amended “disqualifying employment” provision violated the Anti-Cutback rule.
In its defense, the Central Laborers’ Pension Fund argued that it did not decrease an accrued benefit because Heinz’s monthly pension payments were merely suspended, not outright eliminated. The Supreme Court explained that the pension fund’s distinction between suspension and elimination “misse[d] the point” of the Anti-Cutback rule. The imposition of the condition itself was what devalued the accrued benefit:
The real question is whether a new condition may be imposed after a benefit has accrued; may the right to receive certain money on a certain date be limited by a new condition narrowing that right? In a given case, the new condition may or may not be invoked to justify an actual suspension of benefits, but at the moment the new condition is imposed, the accrued benefit becomes less valuable, irrespective of any actual suspension.
The same reasoning applies here. The Local 102 Pension Plan, like Heinz’s pension plan, imposed a new condition on the receipt of an accrued benefit. The Battoni Plaintiffs’ lump sum pension benefits accrued before the Disputed Amendment was added to the Local 102 Welfare Plan. Yet the Disputed Amendment conditioned the receipt of those accrued benefits on forfeiting healthcare benefits. This “new condition,” in and of itself, decreased the value of the lump sum pension benefit. * * *
Thus, we will affirm the District Court’s judgment that the Disputed Amendment violated ERISA’s Anti-Cutback rule.
CASE QUESTIONS
1.
What were the legal issues in this case? What did the court decide?
2.
As the anti-cutback provisions of ERISA apply only to pensions and not welfare plans, why did changing the conditions under which retiree health-care benefits were available run afoul of the anti-cutback rule?
3.
In what sense were the accrued pension benefits of these employees reduced?
4.
What should the benefit plan have done instead?
In addition to mandatory vesting, ERISA has participation requirements for pension plans aimed at broadening coverage. As a general rule, pension plans cannot exclude employees who are at least 21 and have at least one (if gradual vesting) or two (if cliff vesting) years of service. Limitations other than those based on age or years of service (e.g., division or occupation) can still be imposed. However, qualified pension plans enjoying tax-exempt status are subject to the additional participation requirement that the lesser of fifty employees or 40 percent of the workforce must be covered.
Types of Pension Plans
Under ERISA, pension plans are categorized as either defined benefit or defined contribution plans. Legal requirements vary depending on the type of plan, with defined benefit plans being subjected to greater scrutiny.
As the name suggests, defined benefit plans promise a specific pension benefit on retirement. The size of an individual’s pension is typically determined by a formula based on years of service and earnings. In establishing a defined benefit plan, an employer undertakes a long-term obligation to provide a specified level of retirement income to its employees. A pension fund is maintained separate from the employer’s other assets, and benefits are paid from the fund. No separate accounts or funds are set aside for individual employees. The employer bears the burden of providing funding sufficient to meet the plan’s obligations to its retired employees. If the investments made by the pension fund do well, the employer has to contribute less. If the investments do poorly, the employer has to make up the difference. In either case, the pensions received by employees remain the same.
Obviously, adequate financing is the key to the operation of a defined benefit plan. ERISA’s funding requirements for defined benefit pension plans are well beyond the scope of this book. Suffice it to say that there are many such rules, including minimum funding standards and financial penalties for underfunding. Defined benefit pension plans can be terminated or frozen (and many plans have been in recent years), but funding has to be maintained to pay the benefits that have already been accrued by vested employees and retirees. In cases where the employer is unable to meet its obligations to retirees, the Pension Benefit Guaranty Corporation (PBGC) intervenes. Employers with defined benefit pension plans pay termination insurance, and these funds are used by the PBGC to provide at least partial retirement benefits to retirees and vested employees. Failures of pension funds at large employers have placed a major strain on the finances of the PBGC and prompted Congress to enact more stringent rules for employer funding of defined benefit plans. One of the key objectives of the Pension Protection Act of 200622 was to place defined benefit plans on firmer financial footing. The Pension Protection Act (PPA) aimed to do this by, among other things, requiring that more realistic interest rate assumptions be used, increasing termination insurance premiums for companies with underfunded plans, further restricting the ability of underfunded plans to increase benefits, and (most directly) requiring full funding of (most) plans within seven years. But shoring up the pension system requires striking a delicate balance between pressuring employers to adequately fund their obligations while not further accelerating the trend toward termination of defined benefit plans.
The many types of defined contribution plans include 401(k)s, profit-sharing plans, stock bonus plans, and employee stock ownership plans (ESOPs). In all these plans, contributions are made into individual employee accounts. The pension benefit that employees receive is not specified beforehand but depends instead on the amounts in these individual employee accounts at the time of retirement. In turn, those amounts are linked to choices about how much income to defer, whether employee contributions are matched by their employers, what investments are selected, and what the gains or losses are from those investments. Thus, with defined contribution plans, employers establish plans and define what their own contributions, if any, will be (e.g., match employee contributions up to specified amounts). They make no promises regarding the eventual payout to employees.
Clippings
The city of Detroit is seeking protection from its creditors under Chapter 9 of the federal bankruptcy code. These creditors include participants in the city’s public employee pension plan. Detroit is estimated to have some $3.5 billion in unfunded pension liability. Federal District Court judge Steven W. Rhodes has ruled that pension benefits are a contractual right that, like other forms of unsecured debt, are subject to reduction through the bankruptcy process. This is true even though Michigan, like a number of other states, has language in its constitution that expressly protects pension benefits. If the judge’s decision stands up on appeal, it will establish an important—albeit worrisome—precedent for other cities with large pension fund shortfalls.
SOURCE: Monica Davey, Bill Vlasic, and Mary Williams Walsh. “Detroit Ruling Lifts a Shield on Pensions.” New York Times(December 4, 2013), A1.
THE CHANGING WORKPLACE: Pensions and Inadequate Retirement Savings
In addition to Social Security, employer-sponsored pension plans are a major piece of the retirement savings puzzle. However, many employees do not have access to pension plans through their employers or decline to participate in them. For employees fortunate enough to have pensions, those plans increasingly take the form of 401(k)s and other defined contribution plans funded mainly through employees’ own pre-tax contributions, rather than professionally managed and largely employer-funded defined benefit plans. And regardless of whether there is participation in a pension plan, most Americans continue to save at very low rates and to be woefully unprepared for retirement.
As of March 2013, approximately 68 percent of U.S. workers had access to some kind of pension plan through their employment, with about 54 percent actually participating in such plans.1 Lower income workers, part-time workers, and employees of smaller companies are especially likely to be without pension coverage. Defined contribution plans have become the preeminent type of pension plan over the past several decades, particularly for nonunion, private sector employees. In 1983, approximately 62 percent of employees with pensions were covered by defined benefit plans only, 12 percent by defined contribution plans only, and 26 percent by both. By 2004, the situation had almost reversed itself. Just 20 percent of employees with pensions had defined benefit plans only, while 63 percent had defined contribution plans only, and 17 percent had both.2 In 2013, 16 percent of private sector employees participated in defined benefit plans, whereas 42 percent participated in defined contribution plans.3
The public sector remains a stronghold of pension coverage generally and defined benefit plans in particular. But even public retirement systems have seen reduced benefit levels and a small, but discernible, shift toward defined contribution or hybrid pension plans in recent years as the funding of government employee pensions has become a major policy issue.4 In the most extreme cases, cities like Pritchard, Alabama and Central Falls, Rhode Island (and Detroit—see Clippingsfeature)—citing unsustainable pension costs—have sought bankruptcy protection.5
For those private sector employers that continue to offer defined benefit pension plans, many have moved to a particular type of defined benefit plan (the “cash balance plan”) that is cheaper and offers employers more certainty regarding costs. Employers are also increasingly seeking to “de-risk” their defined benefit pension plans by offering lump-sum buyouts to plan participants (shrinking the plans and replacing lifetime streams of income with enticing, but easily dissipated, single payments) or purchasing group annuity contracts from insurers (which get employers out of the pension business while also effectively removing federal protection for the benefits).6
The increasing centrality of defined contribution plans like 401(k)s means that employees now bear much more, if not the entirety, of the pension funding burden. Employees, rather than expert fund managers, are responsible for setting aside sufficient funds for retirement and making wise investment choices. There is evidence that employees frequently err as managers of their own retirement funds, failing in many cases to even participate in available plans, to contribute the maximum allowable sums, to adequately diversify investments, and to roll over retirement funds rather than cashing them out when changing jobs.7 Although many arguments can be made for the superiority of defined benefit over defined contribution pension plans, that train has already left the station. The question is what legal responsibility employers have regarding these inherently risky arrangements that are now at the center of how the retirement income needs of employees are provided for.
Given these trends in coverage under employer-sponsored pension plans and the continuing difficult labor market, it should not be surprising that most workers are failing to save sufficiently for retirement. But the extent of that failure is alarming. One source summarizes the situation by saying “… the average U.S. working-age household has virtually no retirement savings.”8 Evidence supports this dismal conclusion. If all households are considered, including the approximately 45 percent that do not have retirement accounts of any kind, the median (50th percentile) retirement account balance for households headed by persons aged 25–64 was a mere $3000 in 2010. Considering only those households with retirement accounts, the comparable figure was $40,000. Of course, younger households would not be expected to have yet accumulated very substantial retirement savings. What about people who are presumably near retirement? The median retirement savings in 2010 for all families headed by persons 55–64 years of age was just $12,000. Considering only older households with retirement accounts, the median retirement savings was $100,000.9 The latter amount, although certainly helpful, provides relatively little extra monthly income when spread over a few decades of retirement and doesn’t begin to fill the gap between Social Security benefits—even assuming that these remain at something like their current level—and the total income needed to be secure in retirement.
1U.S. Bureau of Labor Statistics. “Table 2. Retirement Benefits: Access, participation, and take-up rates, civilian workers, National Compensation Survey.” March 2013 (http://www.bls.gov/).
2Alicia H. Munnell and Pamela Perun. “An Update on Private Pensions.” Issues in Brief (Center for Retirement Research at Boston College, August 2006), 5.
3U.S. Bureau of Labor Statistics. “Table 2.
4Alicia H. Munnell. State and Local Pensions: What Now? Washington, D.C.: Brookings Institution Press (2012), 196–200.
5Michael Cooper and Mary Williams Walsh. “Alabama Town Shows the Cost of Neglecting a Pension Fund.” New York Times (December 23, 2010); Mary Williams Walsh. “Cuts for the Already Retired.” New York Times (December 20, 2011), B1.
6Florence Olsen. “De-Risking Focuses on Business Issues; Retirement Security a Concern, Critics Say.” Daily Labor Report 213 (November 2, 2012), A-7.
7Munnell 2012, 188.
8Nari Rhee. “The Retirement Savings Crisis: Is It Worse Than We Think?” National Institute on Retirement Security (June 2013), 11.
9Rhee, 11–12.
© Cengage Learning 2013.
Policy makers have begun to respond to the reality of a pension system in which defined contribution plans are the norm. The Sarbanes-Oxley Act23 requires (among many other corporate governance measures) that employees receive a thirty-day notice of blackout periods (i.e., lockdowns) that would affect their ability to direct investments in or receive distributions from their 401(k)s. The law provides that corporate insiders will also be subject to any blackout periods, meaning that they will be unable to sell shares or exercise stock options when employees with 401(k)s are so restricted. The Pension Protection Act of 2006 also has many provisions affecting defined contribution plans (but not ESOPs). One of the most significant is that employees must be allowed at any time to divest themselves of their employers’ publicly traded stock when that stock was purchased with employees’ own contributions.24 Employer stock purchased through employer contributions can be divested after employees have reached three years of service. Employers are required to provide at least quarterly windows for divesting company stock and to offer at least three investment alternatives (each with different risk and return characteristics) to company stock. The basic purpose of these requirements is to promote greater diversification of the investments found in employees’ defined contribution accounts. This is important because many employees fail to adequately diversify the investments in their retirement plans, particularly by overinvesting in their own employers’ stock.25
The PPA also authorizes “qualified automatic contribution arrangements.”26 Subject to many stipulations, employers are permitted to automatically establish 401(k)s for employees, withhold between 3 and 10 percent of employees’ earnings, and place those funds in certain investments on employees’ behalf. Employers utilizing these arrangements are required to make certain matching contributions on behalf of their employees who are “not highly compensated.” Employees can still opt out and choose to have less or none of their earnings put into 401(k)s, but they have to take the affirmative step of notifying their employer to this effect. Under these arrangements, the default option is participation.
Recent changes in the law notwithstanding, defined contribution plans are not governed by the extensive funding and administrative requirements that apply to defined benefit plans. However, employers and other decision makers also have a basic fiduciary duty toward participants in defined contribution plans. Cases alleging fiduciary breaches by companies administering defined contribution plans are clearly a “growth” area in employment law. In one such case, the court found that defendants responsible for managing an employee stock ownership plan (ESOP) breached their fiduciary duty to plan participants by purchasing stock on behalf of the ESOP without investigating properly and by overpaying for the stock.27 Reliance on an outside expert to establish a fair market value for the stock was not sufficient evidence of prudence in this case because the expert was not supplied with complete and accurate information. Beyond the problem of the faulty stock valuation, the court summed up the case as follows:
[T]he facts demonstrate that the Hall Chemical ESOP was established in an environment where the trustees were unaware of what was going on, the trustees were not consulted on major decisions…, there was not negotiation as to the price of the … stock, there was more concern for the return on investment for the Master Trust, and the inconvenience of dealing with uneven numbers could justify charging the Hall Chemical ESOP an additional $44,900.00 for the stock it purchased. Such facts demonstrate not only the uniquely careless and haphazard manner in which the Hall Chemical ESOP was created, but also clear violations of defendant’s fiduciary duties.28
Many lawsuits have been brought in recent years by employees alleging breach of fiduciary duty when their employers continued to offer company stock as an investment option for retirement accounts and failed to inform them of known problems with that stock, resulting in large losses to the employees (these are known as “stock-drop” cases). Numerous companies have settled such claims (see “Clippings” feature). Other cases are slowly wending their way through the court system, with varying outcomes. Cases have been decided against companies whose officials remained heavily invested in company stock even though its value had fallen by nearly 80 percent because of regulatory changes that undermined the company’s business model;29 offered company stock as an investment while engaging in accounting gimmickry and serious mismanagement;30and permitted investments in company stock to continue while failing to divulge known information about manufacturing defects in one of the company’s main products.31
There are also many cases alleging breach of fiduciary duty in the administration of defined contribution plans that have gone against employees. For example, a group of employees sued under ERISA when their employer offered 401(k) plan participants an investment option (described by the employer as a “conservative” investment intended to return principal and interest) that was based on junk bonds and the investment subsequently lost money. After several rounds of litigation, the court concluded that the employer had not breached its fiduciary duties to offer prudent investments, diversify (the bad investment comprised 20 percent of the fund), or disclose material information to participants.32 The court stressed that it is the fiduciary’s conduct in arriving at an investment decision (e.g., conducting appropriate research before purchasing investments), and not the financial outcome, that establishes prudence. Likewise, participants in a U.S. Airways company stock fund were unsuccessful in a suit for breach of fiduciary duty, even though the airline’s stock was cancelled following a bankruptcy filing and many employees saw large losses in their 401(k)s.33 The court emphasized that “whether a fiduciary’s actions are prudent cannot be measured in hindsight” and that “an investments diminution in value is neither necessary, nor sufficient, to demonstrate a violation of a fiduciary’s ERISA duties.”34 The court was satisfied that the airline had acted prudently by offering multiple investment options, permitting the free movement of funds between investment choices, advising employees of the risk associated with the nondiversified company fund, monitoring the fund’s performance, meeting regularly to discuss the fund, seeking outside legal advice, and eventually, appointing an independent fiduciary for the company fund.
Clippings
In yet another “stock drop” case, airplane producer Textron settled a class-action lawsuit brought on behalf of participants in the company’s retirement plan. The plaintiffs alleged that the price of Textron stock was artificially inflated by company officials who failed to disclose material adverse information. This information included alleged bribes to Iraqi government officials that resulted in a $5 million dollar federal penalty and a decline in aircraft orders. The value of Textron stock subsequently plummeted by 81 percent over a three-year period, resulting in substantial losses to plan participants.
SOURCE: Matthew Loughran. “Court Oks $4.375M Stock-Drop Settlement in Textron Case; Attorneys Awarded $1.2M.” Daily Labor Report 30 (February 13, 2014), A–10.
A federal district court judge has given preliminary approval to a multimillion dollar settlement in a class-action lawsuit brought against Cigna by participants in the company’s 401(k) plan. The plaintiffs sued on the grounds that the company had breached its fiduciary duties by causing plan participants to incur unreasonable and excessive fees. The plaintiffs also alleged that Cigna had engaged in transactions prohibited by ERISA. Cigna allegedly used its own divisions and subsidiaries to manage plan investments and selected investment options with excessive fees to serve its own financial interests. The settlement covers tens of thousands of plan participants going back to 1999.
SOURCE: “Court Approves $35M Settlement in Excessive 401(k) Fees Case Against Cigna.” Daily Labor Report (July 5, 2013), A–3.
For many years, a major obstacle for plaintiffs in stock-drop cases was the strong presumption of prudence that had been adopted by many courts. Under this presumption, companies that offered their own stock as an investment option when the documents of the defined contribution plan called for that would generally be deemed to have acted prudently, even if there were problems with the stock.35 Only if plan fiduciaries ignored clear evidence of an impending collapse or other dire circumstances would their failure to divest the plan of company stock constitute a breach of fiduciary duty. However, in a recent case involving the employee stock ownership plan (ESOP) of a bank whose stock price plummeted because of the bank’s heavy involvement in subprime mortgages, the Supreme Court held that the managers of company stock funds have the same fiduciary duties under ERISA as do the managers of other benefit plans (but not the same duty to diversify plan holdings) and enjoy no special presumption of prudence.36 But, the Court also said that “where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.”37 And regarding non-public information indicating problems with a company’s stock, “a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”38 Given these qualifications, it remains to be seen whether the demise of the presumption of prudence will appreciably advance the cause of plaintiffs in stock-drop cases.
Although stock-drop cases have predominated, fees charged to retirement plan participants have drawn increasing judicial scrutiny—again, with varying outcomes.39 In Tussey v. ABB, Inc. the court considers whether an employer’s fee arrangements with an investment firm breached its fiduciary duty under ERISA.
Tussey v. ABB, Inc.
2014 U.S. App. LEXIS 5118 (8th Cir.)
OPINION BY CIRCUIT CHIEF JUDGE RILEY:
These consolidated appeals arise from a class action [brought on behalf of] … current and former employees of ABB, Inc. who participated in two ABB retirement plans governed by the Employee Retirement Income Security Act of 1974 (ERISA). After a sixteen-day bench trial, the district court entered judgment against the ABB defendants and the Fidelity defendants for breaching their fiduciary duties…. The ABB fiduciaries and Fidelity appeal the judgment, damages, and attorney fee award. Although the district court’s analysis was sound in many respects, the analysis was not without errors. We affirm in part, reverse in part, and remand for further proceedings.
i. Background
a. The Plan
To attract and retain quality employees, ABB sponsored the [401(k)] Plan, whose stated goal was “to encourage employees to provide additional security and income for their future through a systematic savings program.” Under the Plan, each participant decided how to allocate individual contributions among the investment options selected to be part of the Plan. ABB would match a portion of each contribution, up to six percent of the participant’s salary. The Plan, which had an open architecture—meaning investment options came from several sources—generally invested in mutual funds, including Fidelity funds. As of 2000, the Plan held more than $1.4 billion in assets and had more than 14,000 participants.
b. Revenue Sharing
Fidelity became the recordkeeper for the Plan in 1995…. Beginning in 2000, Fidelity primarily was paid through revenue sharing—a common method of compensation whereby the mutual funds on a defined contribution plan pay a portion of investor fees to a third party. Fidelity received a percentage of the income the Plan investment options received from the participants. By 2001, compensation for the non-union Plan came solely from revenue sharing, whereas ABB paid Fidelity $8 per participant and some revenue sharing for the union Plan.
c. Other Corporate Services
Over time, Fidelity provided additional administrative services to ABB unrelated to the Plan, including processing ABB’s payroll and acting as recordkeeper for ABB’s defined benefit plans and health and welfare plans. Fidelity incurred losses from these additional services, but made substantial profits from the Plan. In 2005, ABB and Fidelity negotiated a comprehensive agreement covering both Fidelity’s services to the Plan and the other corporate services Fidelity provided to ABB. During negotiations, Fidelity advised ABB that Fidelity provided services for ABB’s health and welfare plans at below market cost and did not charge for administering other ABB plans. An outside consulting firm advised ABB it was overpaying for Plan recordkeeping services and cautioned that the revenue sharing Fidelity received under the Plan might have been subsidizing the other corporate services Fidelity provided to ABB. ABB did not act on the information it received.
d. Plan Redesign
In 2000, a year after Cutler became director of the PTMG [Pension and Thrift Management Group], Cutler drafted and the PRC [Pension Review Committee] adopted an Investment Policy Statement (IPS), which was designed “to provide plan participants with a range of investment options that spanned the risk-return spectrum.” The IPS provided a framework for selecting, monitoring, and removing Plan investment options. The IPS contemplated investments in three tiers based on the Plan participants’ willingness and ability to make personal asset allocation decisions. Cutler recommended that the Plan offer participants a life-cycle or target-date fund. Such managed allocation funds are dynamically managed to diversify a participant’s portfolio across different funds and rebalanced to become more conservative as the participant nears a target retirement date. Cutler also suggested the PRC remove the Vanguard Wellington Fund, a balanced fund, from the investment platform as a result of “deteriorating performance and because participants would be empowered to create their own balanced fund.”
The PTMG considered three of the few target-date funds available at the time of the Plan redesign. Of the available funds, Cutler favored the Fidelity Freedom Funds because of their “glide path”—the manner in which the funds changed the asset allocation as the funds approached their respective target retirement dates. On the PTMG’s recommendation, the PRC replaced the Wellington Fund with the Freedom Funds. The PRC decided to “map” funds held in the balanced Wellington Fund to the age appropriate Freedom Fund. Mapping creates a default option for participants who do not specify a different investment option when an existing option is being removed. Those participants who chose a different investment option did not have their funds mapped to the Freedom Funds.
e. Float
When a Plan participant or ABB made a contribution to the Plan, Fidelity processed the contribution to the Plan investment option designated by the participant and credited the participant’s account with shares in that investment option based on the closing share price on the date of the contribution. The Plan became the owner of the selected investment option as of the date the contribution was made and the order was placed, entitling the Plan to any dividends or any other change in the fund that day. The contribution flowed into a depository account held at Deutsche Bank for the benefit of the Plan investment options. For logistical reasons, the contribution could not be distributed to the investment option until the next day. Money sitting in the depository account overnight before it is distributed to the Plan investment options is often described as “float.”
As is common practice for such accounts, Fidelity temporarily transferred the funds from the depository account overnight to secured investment vehicles to earn interest often called “float interest” or “float income.” The following day Fidelity transferred the principal back to the depository account. Fidelity used the float income to pay fees on float accounts before allocating the remaining income to each investment option choosing to receive it in proportion to the option’s share of the overnight account balance. The float income benefitted all the shareholders of the investment option receiving it. Fidelity did not receive the float or float interest.
f. Procedural History
* * * [T]he district court found the ABB fiduciaries and Fidelity “breached some fiduciary duties that they owed to the [] Plan[].” The district court summarized its findings as follows:
(1) ABB [fiduciaries] violated their fiduciary duties to the Plan when they failed to monitor recordkeeping costs, failed to negotiate rebates for the Plan from either Fidelity or other investment companies chosen to be on the [Plan] platform, selected more expensive share classes for the [] Plan’s investment platform when less expensive share classes were available, and removed the Vanguard Wellington Fund and replaced it with Fidelity’s Freedom Funds; (2) ABB[] and the [EBC] violated their fiduciary duties to the Plan when they agreed to pay to Fidelity an amount that exceeded market costs for Plan services in order to subsidize the corporate services provided to ABB by Fidelity, such as ABB’s payroll and recordkeeping for ABB’s health and welfare plan and its defined benefit plan; (3) Fidelity [] breached its fiduciary duties to the Plan when it failed to distribute float income solely for the interest of the Plan; and (4) Fidelity [] violated its fiduciary duties when it transferred float income to the Plan’s investment options instead of the Plan.
* * *Against the ABB fiduciaries, the district court awarded $13.4 million for failing to control recordkeeping costs and $21.8 million for losses the district court believed the Plan suffered as a result of mapping from the Wellington Fund to the Freedom Funds. The district court awarded $1.7 million against Fidelity for lost float income. The district court held the ABB fiduciaries and Fidelity jointly and severally liable for more than $13.4 million in attorney fees and costs. The ABB fiduciaries and Fidelity timely appealed.
ii. Discussion * * *
a. Fiduciary Discretion
The Plan gave ABB’s Plan administrator and its agents “sole and absolute discretion to determine eligibility for, and the amount of, benefits under the Plan and to take any other actions with respect to questions arising in connection with the Plan, including … the construction and interpretation of the terms of the Plan.” Such a broad grant of discretionary authority entitles the Plan administrator “to deference in exercising that discretion.” * * * Under an abuse of discretion standard, the Plan administrator’s “interpretation will not be disturbed if reasonable.” * * *
“ERISA represents a ‘careful balancing between ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans.’” Preserving that balance “by permitting an employer to grant primary interpretive authority over an ERISA plan to the plan administrator,” Firestone deference [i.e., the abuse of discretion standard of judicial review] (1) encourages employers to offer ERISA plans by controlling administrative costs and litigation expenses; (2) creates administrative efficiency; (3) “promotes predictability, as an employer can rely on the expertise of the plan administrator rather than worry about unexpected and inaccurate plan interpretations that might result from de novo judicial review”; and (4) “serves the interest of uniformity, helping to avoid a patchwork of different interpretations of a plan.”
* * * Given the grant of discretion in this case, the district court should have reviewed the Plan administrator’s determinations under the Plan for abuse of discretion. With that in mind, we now turn to the ABB fiduciaries’ substantive challenges to the district court’s judgment.
b. Recordkeeping
“ERISA imposes upon fiduciaries twin duties of loyalty and prudence, requiring them to act ‘solely in the interest of [plan] participants and beneficiaries’ and to carry out their duties ‘with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.’” “[ERISA]’s prudent person standard is an objective standard that focuses on the fiduciary’s conduct preceding the challenged decision”—not the results of that decision. “Even if a trustee failed to conduct an investigation before making a decision, he is insulated from liability if a hypothetical prudent fiduciary would have made the same decision anyway.”
Range of Investment Options
The ABB fiduciaries contend the fact the Plan offered a wide “range of investment options from which participants could select low-priced funds bars the claim of unreasonable recordkeeping fees.” In support, the ABB fiduciaries rely on [other recent federal appeals court decisions] which the[y] … propose “collectively hold that plan fiduciaries cannot be liable for excessive fees where, as here, participants in a self-directed 401(k) retirement savings plan that offers many different investment options with a broad array of fees can direct their contributions across different cost options as they see fit.”
The ABB fiduciaries’ reliance on … [these cases] is misplaced. Such cases are inevitably fact intensive, and the courts in the cited cases carefully limited their decisions to the facts presented. The facts of this case, unlike the cited cases, involve significant allegations of wrongdoing, including allegations that ABB used revenue sharing to benefit ABB and Fidelity at the Plan’s expense. Such allegations of wrongdoing with respect to fees state a claim for fiduciary breach.
* * *The district court did not condemn bundling services or revenue sharing, which are common and “acceptable” investment industry practices that frequently inure to the benefit of ERISA plans. Rather, the district court found the ABB fiduciaries breached their duties to the Plan by failing diligently to investigate Fidelity and monitor Plan recordkeeping costs based on the ABB fiduciaries’ specific failings in this case. The district court found, as a matter of fact, that the ABB fiduciaries failed to (1) calculate the amount the Plan was paying Fidelity for recordkeeping through revenue sharing, (2) determine whether Fidelity’s pricing was competitive, (3) adequately leverage the Plan’s size to reduce fees, and (4) “make a good faith effort to prevent the subsidization of administration costs of ABB corporate services” with Plan assets, even after ABB’s own outside consultant notified ABB the Plan was overpaying for recordkeeping and might be subsidizing ABB’s other corporate services. The district court’s factual findings find ample support in the record, and its legal conclusion that the ABB fiduciaries breached their fiduciary duties to the Plan was not in error. Any failure by the district court to afford discretion to the Plan administrator’s interpretation of the Plan with respect to recordkeeping and revenue sharing was harmless under the circumstances. * * *
c. Selection of Plan Investment Options and Mapping
* * * In determining the ABB fiduciaries breached their fiduciary duties with respect to selecting investment options and mapping from the Wellington Fund to the Freedom Funds, the district court relied heavily on its interpretation of the Plan and the provisions of the IPS. * * * According to the ABB fiduciaries, the district court erroneously substituted its own de novo interpretation of the Plan and view of the ideal Plan investments for the reasoned judgment of “those bodies legally charged with the actual exercise of discretion.” The ABB fiduciaries also contend the district court’s analysis reflects an improper hindsight bias as demonstrated by the district court “reason[ing] ex post that ‘between 2000 and 2008, the Wellington Fund[] outperformed the Freedom Funds.’” * * *
The ABB fiduciaries’ points are well taken. The district court’s opinion shows clear signs of hindsight influence regarding the market for target-date funds at the time of the redesign and the investment options’ subsequent performance. While it is easy to pick an investment option in retrospect (buy Apple Inc. at $7 a share in December 2000 and short Enron Corp. at $90 a share), selecting an investment beforehand is difficult. The Plan administrator deserves discretion to the extent its ex ante investment choices were reasonable given what it knew at the time. It is also not manifest the district court afforded any deference to the ABB Plan administrator’s determinations under the Plan documents…. As such, we vacate the district court’s judgment and award on this claim and remand for further consideration. * * *
d. Float
Fidelity appeals the district court’s conclusion that Fidelity breached its fiduciary duties of loyalty by failing to pay float income to the Plan. Fidelity asserts “Fidelity was not required to credit the Plan with income earned on overnight investments of float” because “[f]loat was not a Plan asset” within the meaning of ERISA and “Fidelity was paid nothing for the float”—“no fees” and “none of the float earnings.” Fidelity maintains that, as a matter of basic property rights, the investment options—not the Plan—owned the float and bore the risk of loss with respect to the float accounts and thus were entitled to any benefits of ownership. Fidelity’s appeal to basic property rights is persuasive on this record.
Although “ERISA does not exhaustively define the term ‘plan assets,’ … [t]he Secretary of Labor has repeatedly defined ‘plan assets’ consistently with ordinary notions of property rights.” Here, the participants failed to adduce any evidence the Plan had any property rights in the float or float income. To the contrary, the record evidence indicates that when a contribution was made, Fidelity credited the participant’s Plan account and the Plan became the owner of the shares of the selected investment option—typically shares of a mutual fund—the same day the contribution was received. The Plan received the full benefit of ownership—including
any capital gains or dividends from the purchased shares—as of the purchase date.
The participants do not rebut Fidelity’s simple assertion that “[o]nce the Plan became the owner of the shares, it was no longer also owner of the money used to purchase them,” which flowed to the investment options through the depository account held for their benefit. * * *
Because the participants have failed to show the float was a Plan asset under the circumstances of this case, the district court erred in finding Fidelity breached its fiduciary duty of loyalty by paying the expenses on the float accounts and distributing the remaining float to the investment options. * * *
iii. Conclusion
We affirm the district court’s judgment and award against the ABB fiduciaries with respect to recordkeeping, but vacate the judgment and award on the participants’ investment selection and mapping claims. We reverse the district court’s judgment against Fidelity, vacate the attorney fee award as to all defendants, and remand for further proceedings consistent with this opinion.
CASE QUESTIONS
1.
What was the legal issue in this case? What did the appeals court decide?
2.
In what ways did the plaintiffs contend that the employer and investment firm breached their fiduciary duties to plan participants?
3.
Why does the appeals court rule for the plaintiffs regarding the record-keeping fees paid to Fidelity? Why does the appeals court side with the defendants regarding the re-design of the plan?
4.
Department of Labor regulations state that “[T]he assets of the plan include amounts … that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution or repayment of a participant loan to the plan, as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer’s general assets.” Should the appeals court have relied on this regulation to conclude that the “float” was a plan asset improperly used by Fidelity? Why or why not?
5.
What are some practical implications of this decision?
Employers should do a few basic things regarding 401(k)s and other defined contribution plans. First, employers must invest the funds deducted from employees’ pay no later than fifteen business days after the end of the month in which deductions are made. Second, employers should carefully research investments, offer a range of investment types and investment companies from which to choose, and warn employees regarding the dangers of inadequate diversification. Obtaining independent financial advice is often prudent. Third, employers must provide regular opportunities for employees to divest themselves of company stock and place those funds in other investments. Fourth, employers should make impartial investment information available to employees. Fifth, employers should consider placing reasonable limits on the extent to which employee accounts comprise company stock and should remove company stock as an investment option when it is no longer a prudent investment. Finally, employers must not violate their fiduciary duty to manage plans in the best interests of employees by imposing lockdowns for illegitimate purposes.
Clippings
A class of over 700 former Visteon employees are entitled to payments from their former employer based on violations of their rights under COBRA. The employees’ health insurance coverage ceased at the end of 2004, but they were not given notice of their right to continuation coverage until April 18, 2005. The judge concluded that Visteon “was grossly negligent or willfully ignored the COBRA notice provisions” and that the company’s internal procedures were insufficient to ensure compliance.
SOURCE: Jacklyn Willie. “Visteon Must Pay $1.85 Million Penalty in Class Action on COBRA Notice Failure.” Daily Labor Report 123 (June 26, 2013), A–3.
Health Insurance
Health insurance is far and away the most important type of welfare plan covered by ERISA. Fundamental changes have been made to the law governing health insurance plans in recent years.
Health Insurance Reform
In 2010, the Patient Protection and Affordable Care Act (PPACA) was signed into law.40 This law is intended to ensure that most Americans will have adequate health insurance coverage. At the same time, the law includes a number of measures aimed at reining in the cost of health care. Some of the provisions of the PPACA most directly pertinent to employers are outlined in Figure 13.1.
FIGURE 13.1: Major Provisions of the Patient Protection and Affordable Care Act, as Amended
The PPACA is a complex statute. Its complexity stems from a number of sources. First, a policy and political judgment was made to build on the numerous existing sources of health insurance coverage rather than to create a single-payer system modeled after the Medicare program that serves as the primary health insurance for most older persons. Second, the many changes called for by the PPACA could not be implemented immediately and all at once. Instead, implementation of the law’s provisions was, by design, spread out over several years. By necessity, that implementation period has been further extended for some parts of the law. Even after the PPACA is fully implemented, there will still be different requirements depending on whether a particular health plan is “grandfathered.” Plans are considered grandfathered if they existed prior to enactment of the PPACA and no significant changes resulting in reduced benefits or increased cost to plan beneficiaries were made to the plans.41 Grandfathered plans are exempted from some requirements, although it is expected that over time, most plans will be altered in ways that will bring them under the full set of PPACA requirements. Employers contemplating changes to their health plans need to consider whether those changes will remove their plans from “grandfathered” status. A final source of complexity is the fact that the law contains different requirements for different types of health plans and sizes of employers. In many respects, the implications of the PPACA are more far reaching for the individual health insurance market than for employer-sponsored group plans.
Practical Considerations
Suppose that you are an employer with 110 employees and a group health plan. Is it worth your while to avoid making changes that affect the grandfathered status of your plan? Should you continue to offer a group health plan to your employees?
Health insurance reform has proven to be controversial and politically incendiary. Numerous lawsuits have been filed challenging the PPACA. In the most central legal challenge to date, the plaintiffs alleged that the federal government exceeded its authority under the Constitution by requiring that individuals purchase health insurance or pay a penalty (and by threatening states with the loss of all federal Medicaid funding if they did not avail themselves of heavy federal subsidies to expand Medicaid coverage for lower income persons).42 The Supreme Court majority agreed with the plaintiffs that the government did
not have the authority under the commerce clause “to compel individuals not engaged in commerce to purchase an unwanted product.”43 They also agreed that states could not be threatened with the loss of all Medicaid funds if they chose to not expand their programs. However, the PPACA was upheld as constitutional on the grounds that it amounted to a tax on the lack of health insurance. Thus, the individual mandate fell within Congress’s taxation powers. Objections have also been raised by some business owners on religious grounds to the law’s requirement that preventive services—including contraceptive drugs, devices, and counseling—be covered under health plans and at no cost to employees. Religious organizations are already exempted, so the question is whether secular businesses can claim that this requirement infringes on their religious freedom. The Supreme Court decided that, at least for closely held corporations, requiring business owners to pay for contraceptive services to which they object on religious grounds substantially burdens the free exercise of religion and is therefore not permitted.44 Challenges to the PPACA have also been brought on the grounds that the wording of the statute can be read to permit the payment of subsidies only when health plans are purchased on state-run exchanges, rather than by using the federal government’s exchange. Insofar as subsidies are critical to the PPACA’s goal of expanding health insurance coverage and most states have not created their own exchanges, this line of attack presents a serious threat to the viability of the law. Courts have thus far issued conflicting rulings on this issue.45
The legal and political ferment surrounding the PPACA is not likely to subside any time soon. Apart from court decisions, Congress might amend or repeal the law. Even if the PPACA remains intact, the decisions made in response to it by employers, employees, insurers, and healthcare providers will be critical in determining the law’s effects. But whatever twists and turns the story of health insurance reform takes in the future, the reality of ever-increasing health-care costs and our failure to provide adequate health care for all will not magically disappear.
Clippings
Problems in establishing the federal and state online marketplaces for purchasing health insurance (“exchanges”) were well-chronicled. However, the initial figures for the number of people signing up for health insurance turned out to be reasonably impressive. More than eight million people had signed up for health insurance through federal and state exchanges by the April 19 deadline. Additionally, some 4.8 million people became covered under expanded eligibility for Medicaid and the Children’s Health Insurance Program. Another 5 million people are believed to have purchased PPACA-compliant coverage outside of the exchanges. Twenty-eight percent of the sign-ups through exchanges were persons aged 18–34. Persons in this age bracket generally have fewer health insurance claims and their participation in significant numbers is seen as critical to keeping overall health insurance costs affordable. About two-thirds of persons purchasing plans on the exchanges selected the middle-of-the-road option “silver” plans. The states with the largest number of persons signing up for health insurance plans were California, Florida, Texas, New York, North Carolina, Pennsylvania, and Georgia.
SOURCE: Robert Pear. “A Late Rush to Sign Up for Insurance.” New York Times (May 2, 2014), A19.
Maintaining Coverage: COBRA
In any given year, large numbers of Americans go without health insurance. If the PPACA remains in place and works as envisioned, the problem of the uninsured should be greatly diminished (but not, even under the most optimistic projections, eliminated). A much earlier effort to deal with problem of the uninsured focused on circumstances that caused individuals to lose their coverage and provided them with a means of staying insured until they became covered under other group health plans. The Consolidated Omnibus Budget Reconciliation Act (COBRA)46 requires that employers who have group health insurance plans and at least twenty employees offer continuation coverage to employees (and other beneficiaries if there is family coverage) who experience qualifying events that would otherwise cause the loss of their health insurance. Qualifying events and the periods of time for which coverage (if chosen by an employee or beneficiary) must be maintained are as follows:
Continue coverage for up to eighteen months
• Voluntary or involuntary termination of employment for reasons other than “gross misconduct”
• Reduced hours of employment
Continue coverage for up to thirty-six months
• Divorce or legal separation
• Death of an employee
• Loss of dependent child status under the terms of the health plan
• Covered employee becoming entitled to Medicare
Practical Considerations
What specific steps should employers take to administer continuation of health insurance under COBRA?
If one of these qualifying events occurs, an employer must offer continuation coverage to the employee and other family members who have been covered under the employee’s health insurance. Employees cannot simply be “dropped” from health plans without following COBRA’s procedures. The continuation coverage must be the same coverage enjoyed by employees who have not experienced a qualifying event. There is a heavy emphasis under COBRA on providing proper notification. Information about COBRA rights must be provided to covered employees and their spouses and be included in health plan SPDs at the time health plan coverage begins. Employers must notify plan administrators of the occurrence of qualifying events within thirty days. Because employers would not necessarily know of divorces, separations, or loss of dependent child status, employees or other beneficiaries are responsible for bringing these events to the attention of plan administrators within sixty days. After they are alerted that a qualifying event has occurred, plan administrators have fourteen days to offer continuation coverage. Notice of the availability of continuation coverage should go to all adult beneficiaries and not just to covered employees. Beneficiaries must be given at least sixty days from when their health coverage ends or from when they are notified of their COBRA rights, whichever is later, to elect continuation coverage and an additional forty-five days to make the first payment.
Continuation coverage under COBRA is not free. Beneficiaries can be charged up to 102 percent of the cost to the employer of providing coverage under the group health plan. This is a major expense for most employees or their family members. With the opening up of the individual health plan market under the PPACA and the availability of subsidies in some cases for the purchase of plans through exchanges, COBRA coverage will probably become less common. If an employee elects continuation coverage, the coverage must continue for up to eighteen or thirty-six months unless the employee fails to make the payments,
the employer discontinues offering group health insurance to its employees, or the employee becomes covered under another group health plan (e.g., gets another job).
JUST THE FACTS
An employee was terminated in the aftermath of a change of ownership at a company. The employee’s wife had breast cancer at the time, and he wanted to maintain health insurance coverage for the two of them. He asked at the office whether he would be able to continue coverage after his termination. On his last day of work, he was informed verbally that his health insurance would be continued. However, when his wife sought medical treatment about nine months later, she was told that she had no insurance coverage. Did this employer violate COBRA?
Retiree Health Benefits
The need for medical care generally increases during a person’s retirement years. Medicare is designed to be the primary health insurance for retired persons, but it provides only partial coverage of medical costs and is not available to younger retirees. In the face of rapidly rising health costs, many employers have cut back on or completely eliminated health insurance coverage for their retirees. This has raised the question of whether employers are ever legally bound to continue providing health insurance coverage to retirees. The principal issue in these cases is whether the employer intended to confer an irrevocable right to receive health benefits on retirees. Unionized employees have had some success in arguing that retiree health benefits obtained through collective bargaining are not revocable, particularly in the absence of any clear contract language authorizing the employer to modify or terminate the benefits.47 An employer violated its fiduciary duty under ERISA by failing to make clear to its non-union employees that its promises of free or low-cost medical benefits throughout their retirements or lives were subject to change.48 But overall, retirees have had a difficult time convincing courts that their former employers should be bound to providing this or other welfare benefits that, unlike pensions, do not vest.49
Discrimination and Benefits
Some benefits, including life insurance, disability insurance, and health insurance, are more expensive to provide for older workers. The Older Workers Benefit Protection Act,50 which amended the ADEA, takes account of this fact. Employers are permitted to provide less extensive coverage for older workers so long as the amount spent to provide benefits to older workers is at least equal to the amount spent providing those benefits to other workers. This cost-equalization principle applies only to welfare plans whose cost is age related, and not to pension plans. Certain offsets or deductions from benefits received by older workers in exchange for other benefits (e.g., less severance pay in exchange for retiree health insurance) are also permitted. Employers that provide retiree health insurance can
lawfully reduce (or eliminate) health benefits for retirees when they turn 65 and become eligible for Medicare coverage.51 Regarding pensions, plans can establish minimum ages for receipt of pension benefits (e.g., employees must be at least 52 regardless of how many years of service they have) and “normal” retirement ages (e.g., 65). However, as a general rule, older workers must be allowed to participate in and continue accruing benefits under pension plans regardless of how old they are when first employed or whether their age now exceeds the normal retirement age under the plans.
Disabled persons have a particularly great need for health insurance. At the same time, this might provide some employers concerned about the rising cost of health insurance with an incentive to discriminate against them. Clearly, employers cannot refuse to hire or terminate disabled persons based on the assumption, or even fact, that they are more expensive to insure. Basing employment decisions on disability is disparate treatment and violates the Americans with Disabilities Act. Employers are also prohibited from discriminating against an employee because that employee is associated with a disabled family member who might be a heavy user of health benefits. An employer also violates the ADA by refusing to provide health coverage to employees with disabilities if health coverage is provided to non-disabled employees. Thus, the ADA was violated when an employer changed group health plans and the new insurer refused to cover an employee who previously had cancer and was currently afflicted with AIDS.52
Under the Health Insurance Portability and Accountability Act (HIPAA),53 group health plans are prohibited from denying eligibility for benefits or charging more for coverage based on any “health factor.” Health factor is defined broadly to include the health status, medical condition, claims experience, receipt of health care, medical history, genetic information, evidence of insurability, or disability of an employee or dependent. HIPAA had allowed for pre-existing condition exclusions (periods of time for which a health plan would not cover the treatment of conditions pre-dating enrollment in the plan) to be used in group health plans on a limited basis, but such exclusions are now entirely prohibited by the PPACA. Likewise, the new healthcare law incorporates HIPAA’s prohibition against discrimination on health factors but extends it to individual plans and further specifies that only age, tobacco use, family size, and place of residence can be considered in setting premiums. Wellness programs intended to lower health insurance costs by keeping employees healthier can run afoul of HIPAA’s nondiscrimination requirements insofar as they often tie financial incentives or penalties to achievement of health-related goals (e.g., reduced premiums contingent on smoking cessation or weight loss). Some wellness programs do not present the problem of discrimination based on a health factor because they merely dispense information (e.g., regarding nutrition), offer opportunities for physical activity, or provide screenings (with any incentive based on participation rather than outcomes). But to the extent that a wellness program bases rewards or penalties on satisfaction of a standard related to a health factor, employers must limit the size of those incentives or penalties, offer employees the opportunity to qualify for incentives at least once per year, provide reasonable alternative standards for employees whose medical conditions make it unreasonably difficult to satisfy the established standards, and disclose this information to employees. Consistent with its aim of reducing overall healthcare costs as well as increasing access to quality medical care, the PPACA increased
the allowable size of incentives or penalties to 30 percent of the cost of employee-only coverage under the health plan in question and 50 percent for incentives specifically tied to a reduction in tobacco use.
Group health plans and the issuers of health insurance coverage under group plans also must comply with the Genetic Information Nondiscrimination Act (GINA). This law requires that premiums and contribution amounts for groups must not be adjusted on the basis of genetic information. Additionally, group health plans and insurers offering them cannot request or require employees or their family members to undergo genetic testing and are prohibited from collecting in any way genetic information about employees prior to their enrollment in or coverage under a group health plan.54
Can group health plans provide less coverage or impose higher co-payments for mental health services or substance abuse treatment than for other medical services? Insurers had traditionally done so, but the Mental Health Parity and Addiction Equity Act requires that employers with fifty or more employees that choose to cover mental health and substance abuse treatment at all must do so at the same level and under the same terms as medical and surgical treatments.55
Finally, the Pregnancy Discrimination Act (PDA) also has implications for the design of health plans. The basic principle of the PDA is that pregnant employees are entitled to the same treatment as nonpregnant employees with similar ability to work. Health plans must cover expenses for pregnancy-related medical care on the same basis as for other medical conditions. An exception is that health plans can refuse to pay the cost of abortions where the life of the mother is not endangered. Not only must pregnancy-related medical costs be covered, but health plans are prohibited from imposing additional deductibles or co-payments for pregnancy-related treatments. Additionally, coverage of pregnancy-related treatment cannot be limited to married employees, and the same level of coverage must be provided for the spouses of male employees as is provided for the spouses of female employees.
JUST THE FACTS
A county government decided to establish a wellness program for its employees. The program included completion of an online health risk assessment questionnaire and a biometric screening including testing blood for glucose and cholesterol levels. Employees who did not complete the annual questionnaire and screening continued to be covered under the health insurance plan but incurred a $20 charge on each biweekly paycheck. Employees identified through the program as having asthma, hypertension, diabetes, congestive heart failure, or kidney disease are invited to participate in a disease management coaching program. The wellness program is administered by the county’s health insurer. The county receives only aggregate data, rather than results for individual employees. An employee objects to being coerced into providing medical information and sues. What should the court decide? Why?