The courts have been busy in 2014, addressing a variety of issues in the employee benefits field in decisions that impact everyone from union travelers to ESOP fiduciaries. This advisory summarizes a selection of the 2014 decisions, to date, and the key lessons you should take away, including:
- Union travelers entitled to wrongfully withheld reciprocity pension contributions
- TPA engages in prohibited self-dealing by concealing fees
- Church plans should proceed with caution unless established and created directly by a church
- Employers have no cause of action against multiemployer trustees for negligent plan management
- U.S. Supreme Court rejects Moench presumption, adopts plausibility standard
- Include contractual time limit in denial of benefits
- Once-per-year IRA rule to be applied on aggregate basis
- Upcoming litigation
Union Travelers Entitled to Wrongfully Withheld Reciprocity Pension Contributions
In a case of first interpretation, the U.S. District Court for the Western District of Washington ruled on Sept. 11, 2014, that a multiemployer union pension plan in critical funding status may not withhold a part of reciprocity contributions due to travelers’ “home funds” in order to fund its own rehabilitation plan. In 2008, the trustees of the IBEW Pacific Coast Pension Fund (the “local plan”) adopted an amendment to allow the local plan to withhold a portion of all reciprocity contributions made on behalf of traveling union employees. Represented by Rich Birmingham, Mr. Richard Lehman, a traveling union employee, brought a suit on his own behalf and on behalf of those similarly situated, against the local plan’s trustees, alleging that the trustees violated the terms of the local plan document and ERISA Section 305 by withholding all or a portion of the reciprocity contributions made on his behalf and eliminating future accruals on such withholdings.
Although the local pension fund contended that the withholding of funds from the contributions made on Mr. Lehman’s behalf was required by Section 305 of ERISA, requiring the trustees to improve the local fund’s funding condition, the court disagreed, finding that the local plan was acting as an agent of Mr. Lehman’s home fund under a reciprocity agreement and had no independent right to the contributions. As a result, the court ordered the local plan trustees to transfer all wrongfully withheld reciprocity pension contributions to Mr. Lehman’s home fund and clarified his future right to such contributions.
Traveling employees who are signatories to a reciprocity agreement may receive increased pension benefits in their home funds if they perform work in the jurisdiction of a local plan that wrongfully withholds all or a portion of the reciprocity contributions made on behalf of traveling employees. Employers of such traveling union employees may want to make them aware of this right.
TPA Engages in Prohibited Self-Dealing by Concealing Fees
In Hi-Lex Controls, Inc. v. Blue Cross Blue Shield of Michigan, 2014 WL 1910554 (6th Cir. 2014), the court concluded that Blue Cross Blue Shield of Michigan (BCBSM), the third-party administrator (TPA) for the plan, was an ERISA fiduciary and had breached its fiduciary duty by engaging in self-dealing, and affirmed an award of $5 million plus pre-judgment interest. In Hi-Lex, BCBSM had served as the plan TPA from 1991 to 2011, pursuant to a written agreement. Although BCBSM disclosed and received an administrative fee, BCBSM also began adding additional mark-ups to hospital claims in 1993. According to Hi-Lex’s allegations, BCBSM misrepresented these additional fees in contract documents and assured Hi-Lex that no fees were charged other than the administrative fee. Upon learning about the additional fees, Hi-Lex sued, claiming that BSBSM violated ERISA by engaging in self-dealing. The district court agreed, awarding Hi-Lex over $5 million in damages and prejudgment interest of almost $914,241. On appeal, the 6th Circuit agreed on all points, concluding that (1) BCBSM served as a fiduciary because it held or controlled plan assets and exercised authority over covered assets; (2) the complaint was not time-barred because BCBSM’s actions triggered the six-year fraud and concealment statute of limitations; and (3) BCBSM’s use of fees it discretionarily charged for its own account is exactly the sort of self-dealing that ERISA prohibits fiduciaries from engaging in.
A TPA will be found to have discretionary authority over plan assets, and thus be a plan fiduciary, even if plan assets are not held in trust so long as plan documents, such as the summary plan description, support the position that plan beneficiaries have a reasonable expectation of a beneficial ownership interest in the funds held by the TPA. In addition, in cases of fraud or concealment, the statute of limitations shall be six years from the time the fraud or concealment is discovered, instead of the standard three-year statute of limitations.
Church Plans Should Proceed with Caution Unless Established and Created Directly by a Church
A 2014 decision in federal trial court has muddied the waters for church plans established by tax-exempt organizations that are controlled by or associated with a church or a convention or association of churches as described in ERISA § 3(33)(C). The court in Kaplan v. Saint Peter’s Healthcare Sys., 2014 WL 1284854 (D.N.J. 2014) is the second court to reject the position that a plan established and maintained by a church-affiliated hospital is exempt from ERISA under the church plan exemption. The determination in Kaplan is contrary to the long-standing position taken by other courts, the IRS, and the DOL, and was made despite an IRS private letter ruling determining that the plan at issue was a church plan. The court concluded that while an exempt plan can be maintained by a church-affiliated organization, a plan cannot be a church plan unless established and created directly by a church.
Following closely on the heels of the Kaplan decision, a U.S. District Court reached the opposite conclusion, ruling in Overall v. Ascension, --- F.Supp.2d ---, 2014 WL 2448492 (E.D. Mich. 2014), that a pension plan sponsored by a church-affiliated, tax-exempt health care system is a church plan as defined in ERISA Section 3(33). In its determination, the district court looked at the plain language of the church plan exemption, interpreting the interplay between parts (A) and (C) differently than the court in Kaplan to reach an opposite conclusion.
The Kaplan decision, along with the decision in Rollins v. Dignity Health, 2013 WL 6512682 (N.D. Cal. 2013), casts doubt on a plan’s church plan status and whether a plan is exempt from ERISA’s reporting and disclosure, funding, trust and fiduciary rules. Although the Overall decision swings the pendulum back in favor of church-affiliated organizations, church plans not established and created directly by a church should still proceed with caution or consult a legal advisor. The proper interpretation of the church plan exemption will likely need to be resolved by the circuit courts.
Employers Have No Cause of Action Against Multi-Employer Trustees for Negligent Plan Management
In a recent decision, the 6th Circuit held that employers have no cause of action under the common law of ERISA for harm caused by multiemployer plan trustees’ negligent plan management. In DiGeronimo Aggregates, LLC v. Zemla, --- F.3d ---, 2014 WL 3953725, C.A.6 (Ohio), August 14, 2014 (NO. 13.4389), defendant Trustees terminated the Teamsters Local Union No. 293 Pension Plan after substantially all of the participating employers had withdrawn, triggering a mass withdrawal and subjecting DiGeronimo to $1.7 million in liability. In response, DiGeronimo filed a suit against the Trustees, claiming that their negligent management of the plan assets increased the withdrawal liability to DiGeronimo. Although ERISA Section 4301(a) entitled DiGeronimo to bring an action, the parties agreed that Section 4301 only identifies who can pursue a civil action to enforce the sections governing multiemployer plans. It does not confer any substantive rights. Therefore, DiGeronimo asked the court to recognize a common law right of employers to bring a negligence claim against plan trustees.
The district court dismissed the claim, refusing to recognize such a common law right. The 6th Circuit agreed, noting that it could find no case where a court has ever recognized the existence of a negligence claim in favor of contributing employers under the common law of ERISA.
In the 6th Circuit, employers who are concerned that funds are being mismanaged cannot challenge the trustees’ management in court. A participant, however, would be able to raise similar claims, provided that they can show damage.
U.S. Supreme Court Rejects Moench Presumption, Adopts Plausibility Standard
In Fifth Third Bancorp et. al. v. Dudenhoeffer, 134 S.Ct. 2459 (2014), the U.S. Supreme Court addressed whether ESOP fiduciaries are entitled to the presumption of prudence standard articulated in Moench v. Robertson, 62 F.3d 553 (3rd Cir. 1995). Former employees and ESOP participants filed a putative class action, arguing that the ESOP fiduciaries knew or should have known on the basis of public and nonpublic information that the company stock was overvalued and, as a result, breached the duty of prudence by continuing to invest plan assets in the ESOP. The 6th Circuit concluded that the presumption is evidentiary only and does not apply at the pleading state. Finding that the allegations in the complaint were sufficient to state a claim for breach of fiduciary duty, the 6th Circuit allowed the complaint to proceed.
The U.S. Supreme Court agreed to hear the case to resolve a split among the circuits as to whether fiduciaries are entitled to the Moench presumption of prudence. The Court agreed with the 6th Circuit that the Moench presumption is not an appropriate method of weeding out meritless lawsuits. However, rather than affirming the 6th Court’s decision, the Court adopted a plausibility standard and vacated the decision. The Court instructed that, on remand, the 6th Circuit should reconsider whether the complaint states a claim in light of the following considerations: (1) where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the stock was not properly valued are implausible as a general rule and thus insufficient to state a claim, and (2) to state a claim for beach of the duty of prudence based on insider information, plaintiffs must plausibly allege an alternative action that the fiduciary could have taken that would have been consistent with securities laws and that would not be viewed by a prudent fiduciary as more likely to harm the fund than to help it.
ESOP fiduciaries are not entitled to a presumption of prudence in determining whether it is prudent to purchase or hold publicly traded employer stock. However, a complaint alleging that it was imprudent for a fiduciary to hold or purchase publicly traded employer stock cannot survive at the pleadings stage in the absence of plausible allegations of special circumstances. The Supreme Court decision leaves a very narrow route for plaintiffs hoping to hold fiduciaries liable in these employer stock cases.
Include Contractual Time Limit in Denial of Benefits
In direct contrast to earlier decisions in the 4th and 5th Circuits, the 6th Circuit recently decided that denial of benefits letters must include the time limit for submitting a claim for judicial review. In Moyer v. Met. Life. Ins. Co, Case No. 13-1396 (6th Cir. August 7, 2014), the 6th Circuit concluded that an employee was entitled to bring suit against Metropolitan Life Insurance after the contractual limitations period in his ERISA-governed long term disability plan had expired. The majority held that because the claim administrator failed to include the time limit for judicial review in the benefit revocation letter itself, the letter was “not in substantial compliance with ERISA Section 503.”
Review benefit denial letters and ensure that the time limit for judicial review is enclosed, particularly if the plan has adopted a shortened time limit as allowed in last year’s Supreme Court case of Heimeshoff v. Hartford Life. It was not enough in Moyer that the denial letter included notice of the employee’s right to judicial review and the limitations period was stated in other plan documents available to participants upon request.
Once-Per-Year IRA Rule to be Applied on Aggregate Basis
In Bobrow v. Commission (TC Memo 2014-21), the Tax Court rejected the IRS’s long-standing interpretation of the once-per-year IRA rollover rule, holding that the rule must be applied on an IRA-aggregated basis rather than on an account-by-account basis. Under this decision, the holder of an IRA can only apply the 60-day rollover rule once in a one-year period (measured as 365 days from the date the first distribution occurred). This means that once an individual makes an IRA rollover from one IRA, he or she is precluded from making another rollover from both that IRA and from any other IRAs the individual may hold. The IRS announced that it will acquiesce to the Tax Court’s decision and, effective Jan. 1, 2015, any distribution from any IRA will invalidate subsequent rollovers within a 1-year period.
The IRA rollover limitation will apply on an aggregated basis, effective Jan. 1, 2015. Although the IRS announced that enforcement would be on a prospective basis, best practices indicate that an individual should wait 365 days to make a rollover after one is made in 2014. Note that IRA holders may continue to make as many trustee-to-trustee transfers between IRAs as they want.
The U.S. Supreme Court will consider the “Yard-Man inference,” reviewing whether courts construing collective bargaining agreements in Labor-Management Relations Act cases should presume that silence concerning the duration of retiree health benefits means that the parties intended for those benefits to vest for life. This decision will resolve a split between the Yard-Man 6th Circuit and other circuits that have required stronger plan language to support the conclusion that retiree health benefits are vested.
Other potential issues to be addressed by the Supreme Court include the scope of Firestone deference and whether deferential judicial review applies only to benefit denials or also to suits for fiduciary breach. Tibble v. Edison Int'l, 729 F.3d 1110 (9th Cir. 2013), a 9th Circuit case in which the court held that plan fiduciaries’ interpretation of plan terms was entitled to abuse-of-discretionary review, has been appealed to the Supreme Court. Although the Supreme Court has requested a brief from the Solicitor General, it remains to be seen whether the Supreme Court will hear the case. In light of the 5th Circuit’s recent unpublished decision in Futral v. Chastant, 5th Cir., No. 13-30856, unpublished 4/18/14, declining to extend Firestone deference to a suit for a breach of fiduciary duty, the Supreme Court’s decision is needed to resolve the growing split between the circuits.
Other benefits-related issues that parties are appealing to the Supreme Court, but that the Supreme Court has not yet decided to accept, include several cases challenging state prohibitions on same-sex marriage, and more challenges to the implementation of Health Care Reform.