Employee Benefits

Employee Benefits Developments 12/16 to 12/27 2002

IRS/DOL Rulings, Opinions, Etc.

Postponement of Deadline for Defined Benefit Plan Amendments Reflecting Minimum Distribution Rules; Deadline for Defined Contribution Plans Not Affected. In April 2002, the Internal Revenue Service (IRS) issued final regulations on minimum distributions from most qualified plans and similar retirement arrangements. A regulation on minimum distributions from defined benefit plans was issued only in proposed form. Although the minimum distribution regulations generally are effective for plan years beginning after 2002, sponsors of defined benefit plans now have until the end of the EGTRRA (the 2001 tax act) remedial amendment period (i.e., the last day of the first plan year beginning after 2004) to amend their defined benefit plans to reflect these rules. The amendment deadline for defined contribution plans has not changed and remains the last day of the first plan year beginning after 2002. Until the effective date of final regulations on minimum distributions from defined benefit plans, a nongovernmental plan must satisfy in operation the requirements of the existing regulations, taking into account certain transition rules, regardless of whether the plan has been amended to comply with the regulations. Governmental plans may rely on a reasonable good faith interpretation of the rules until the effective date of final regulations. (Revenue Procedure 2003-10; Notice 2003-2.)

PWBA Issues New Advice on Selection of Annuity Providers. In 1995, the Department of Labor's Pension and Welfare Benefits Administration issued guidance on the fiduciary standards applicable to the selection of annuity providers in connection with benefit distributions from retirement plans. A new advisory opinion clarifies that the prior guidance is equally applicable to both defined benefit and defined contributions plans. The opinion also discusses the availability of additional protections through state guaranty associations, the use of qualified and independent experts, cost considerations, and reversion situations where a fiduciary selecting annuity providers has an interest in the sponsoring employer that may affect its judgment. (Advisory Opinion 2002-14A.)

Application of Increased Compensation Limit to Former Employees Does Not Violate Nondiscrimination Rules or Minimum Coverage Requirements. For plan years beginning after 2001, EGTRRA increased to $200,000 the amount of compensation that can be counted in calculating participant accruals and allocations. The IRS subsequently announced if a plan uses annual compensation for periods prior to the first plan year beginning after 2001 to determine accruals or allocations for a plan year beginning after 2001, the plan may provide the $200,000 compensation limit applies for those prior periods as well. The most recent ruling on this topic provides that an amendment applying the increased compensation limit to the benefits of former employees does not run afoul of either the nondiscrimination rules or minimum coverage requirements. (Revenue Ruling 2003-11.)

Elimination of Spouse’s Coverage Prior to Qualifying Event Ignored for COBRA Purposes. For COBRA (continuing medical coverage) purposes, if an employee eliminates the coverage of his or her spouse in anticipation of a divorce or legal separation, the elimination is disregarded in determining whether the divorce or separation causes a loss of coverage. If the elimination in anticipation of the divorce is ignored, the spouse would have remained covered until the divorce and then lost coverage because of it. Consequently, the divorce is a qualifying event and the spouse is a qualified beneficiary. (Revenue Ruling 2002-88.)

PBGC Assumes Responsibility for Bethlehem Steel Pension Plan. On December 18, the Pension Benefit Guaranty Corporation assumed responsibility for basic pensions owed to 95,000 Bethlehem Steel employees and retirees. The plan is currently underfunded by some $4 billion. The takeover is the largest in PBGC’s history.

Cases

Trustee May Repay ESOP Loan Without Breaching Fiduciary Obligations. Saint-Gobain Corp. paid cash for 95% of Furon Corp.’s stock, including stock held in Furon’s ESOP. Saint-Gobain, as the new owner of Furon, then elected to terminate the ESOP. The ESOP trustee, Key Trust Co. of Ohio N.A., properly disbursed to the ESOP participants their individual account balances and $4 million of the cash received from the sale of Furon stock to Saint-Gobain. Saint-Gobain claimed an additional $2 million in cash garnered from the stock sale that the trustee continued to hold. Saint-Gobain’s claim related to an unsecured loan made by Furon to the ESOP that permitted the ESOP to purchase Furon stock in the first instance. On these facts, the Sixth Circuit ruled the trustee could repay the loan without breaching its fiduciary obligations or the exclusive benefit rule. The federal appellate court opinion expressly rejected the position of the Department of Labor (which had intervened as amicus curiae). The DOL position was, in the absence of a determination that Saint-Gobain held a security interest in the ESOP securities, repayment of the loan would violate ERISA. (Benefits Committee of Saint-Gobain Corp. v. Key Trust Co. of Ohio N.A., ____ F.3d ____, 2002 WL 31794240 (6th Cir. 2002).)

Administrator of Prescription Drug Program Was Not Fiduciary. The New York State Teamsters Council Health and Hospital Fund engaged Centrus Pharmacy Solutions to administer the Fund. On Centrus’ recommendation, the Fund adopted a program offering participants a lower co-pay for using certain drugs. In implementing the program, however, Centrus incorrectly reduced the co-pay for both preferred and non-preferred drugs, resulting in losses to the Fund. The Fund sued, alleging Centrus breached its fiduciary obligations and engaged in prohibited transactions (i.e., by miscalculating co-payments, Centrus' charges to the Fund were unreasonable). The U.S. District Court for the Northern District of New York ruled Centrus was not a fiduciary, noting each of the duties imposed on the company was “purely ministerial and did not involve the exercise of discretion regarding the management or administration of the plan, the disposition of plan assets, or the rendering of investment advice for a fee or compensation.” The federal court further ruled Centrus had not engaged in prohibited transactions because it did not profit from its mistakes, but instead received a flat fee for each claim processed. (New York State Teamsters Council Health and Hospital Fund v. Centrus Pharmacy Solutions, ____ F.Supp.2d ____, 2002 WL 31844712 (N.D.N.Y. 2002).)

Sex Change Not Medically Necessary. Margo Mario suffered from gender dysphoria and transsexualism, and during the 1990s underwent several surgeries to become a man. Claims for coverage of those procedures under P&C Food Market Inc.’s self-funded health plan were denied by the plan administrator. Margo (now known as Marc) sued, and the Second Circuit affirmed the District Court’s dismissal of the lawsuit. Specifically, the federal appeals court found support for the plan administrator’s determination that there was substantial disagreement in the medical community about whether gender dysphoria was a legitimate illness and uncertainty as to the effectiveness of reassignment surgery. (Mario v. P&C Food Markets Inc., ____ F.3d ____, 2002 WL 31845877 (2d Cir. 2002).)

Plan Amendment Not Valid Where Procedures Not Followed. Harold Warren retired from Guy Gannett Publishing Company in 1988 and elected to defer the receipt of a monthly pension benefit until 1995. In the interim, the Guy Gannett Board of Directors approved resolutions authorizing increased pension benefits for both active and retired employees; memoranda were distributed to employees expressing this. However, the plan amendment drafted to reflect the increase expressly applied only to retirees who were then in pay status. After his plan distributions began, Warren submitted a claim for an enhanced benefit that was denied by the plan administrator, and litigation ensued. The District Court of Maine ruled the plan amendment was invalid to the extent the benefits increase was disallowed to deferred vested retirees. Retirees like Warren are entitled to the increased level of pension benefits described in the original authorizing resolutions, said the federal court. Plan procedures required a Board resolution to exclude the retirees in question, and none existed. (Warren v. Cochrane, ____ F. Supp.2d ____, 2002 WL 31859533 (D. Me. 2002).)