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Employee Benefits

Employee Benefits Developments 1/13 to 1/24 2003

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IRS/DOL/SEC Rulings, Opinions, Etc.

DOL Issues Final Rules on Civil Penalties/Notice of Blackout Periods. The Department of Labor’s Pension and Welfare Benefit Administration (PWBA) recently released final rules on blackout periods under the Sarbanes-Oxley Act. The first regulation (68 Fed. Reg. 3,715) provides guidance on furnishing written notice of blackout periods to affected participants and beneficiaries. The second (68 Fed. Reg. 3,728) addresses the assessment of civil penalties for failures or refusals by plan administrators to provide the notices. Both regulations became effective January 26, 2003. Look for a full report in our upcoming Employee Benefits Alert.

SEC Issues Regulation on Insider Trading During Blackout Periods. On January 15, the Securities and Exchange Commission (SEC) adopted final rules governing the insider trading prohibition imposed on publicly traded companies by the Sarbanes-Oxley Act during pension plan blackout periods. Blackout periods are periods during which plan participants and beneficiaries are prevented from buying or selling employer stock held in their accounts. Drawing on the well-established body of regulations covering the trading activities of corporate insiders under Section 16 of the Securities Exchange Act of 1934, the new Regulation Blackout Trading Restriction (BTR) clarifies the scope of the trading prohibition and addresses the entities and individuals affected, the transactions exempt from the prohibition, circumstances that trigger the prohibition for domestic issuers and foreign private issuers, remedies for violations, and notice requirements. Regulation BTR became effective January 26, 2003.

Inflation Adjustments to Civil Monetary Penalties Under ERISA. On January 21, the PWBA issued a new final rule that adjusts for inflation certain civil monetary penalties that may be imposed under ERISA. Only 3 penalties have been increased. The maximum penalty for failure or refusal to file information required of multiple employer welfare benefit arrangements under ERISA § 101(g) is increased by $100 to $1,100 per day. The penalty for failure to furnish SPDs or other documents to the Secretary of Labor on request, as required under ERISA § 104(a)(6), is increased from $100 to $110 per day, with a maximum penalty increasing to $1,100 per request, up from $1,000. The final rule applies to violations occurring after March 24, 2003. (Fed. Reg. 2,875.)

Cases

Health Plan’s Exclusion for Infertility Treatments Found Not Discriminatory. After Rochelle Saks was denied coverage for certain infertility treatments under Franklin Covey’s self-insured health plan, she sued her employer, claiming the plan’s exclusion of “surgical impregnation procedures” violated Title VII of the Civil Rights Act and the Pregnancy Discrimination Act. The Second Circuit disagreed, concluding the plan’s exclusion for certain surgical infertility treatments disadvantaged both male and female participants equally. According to the federal appellate court, because infertility afflicts men and women with equal frequency and the excluded surgical treatments are used to treat both male and female infertility, the exclusion did not discriminate on the basis of sex. (Saks v. Franklin Covey Co., 2003 U.S. App. LEXIS 549 (2d Cir. 2003).)

HMOs May Charge Copayments in Excess of Costs. Upholding a Massachusetts district court decision, the First Circuit ruled that several health maintenance organizations do not violate the terms of their plans or breach their fiduciary duties by requiring fixed copayments for prescription drugs that, in some instances, exceed the actual cost of the medication. The federal appellate court found the HMOs’ plans clearly described what beneficiaries had to pay and that there was neither a breach of fiduciary duty nor any affirmative misrepresentation associated with the payments. (Alves v. Harvard Pilgrim Health Care Inc., 1st Cir.,  No. 02-1817, January 21, 2003.)

No Requirement to Furnish Incomplete Plan Document. In an unpublished opinion, the Fourth Circuit ruled Compaq Computer Corporation did not violate ERISA when it failed to provide employee Debra Jolly with a comprehensive plan document relating to its short-term disability benefit plan, because the document was not completed at the time of the employee’s request. Because it was not completed, it was not an instrument under which the plan was established or operated. The federal appellate court also noted Compaq provided Jolly with a summary plan description in a timely manner and, upon its completion, a copy of the plan document. (Jolly v. Compaq Computer Corp., 4th Cir., No. 01-2281, unpublished, January 14, 2003.)

PBGC Finds 15,000 Owed $61 Million in Benefits; $80 Million to Go. The PBGC announced in January that it has located 15,000 people owed more than $61 million in pension benefits since launching its Pension Search Program in 199l. Another 22,000 who can claim almost $80 million in pension benefits from terminated defined benefit plans still are to be found. Searchers can email found@pbgc.gov or missing@pbgc.gov if they believe they are entitled to a benefit. Benefits range from $1 to over $120,000, averaging $6,540. New York has the most missing participants. (PBGC News Release No. 03-17, Jan. 22, 2003.)

Attorneys’ Fees Awarded Far in Excess of Plaintiff’s Recovery; One Small Step for… Almost $100,000 in attorneys’ fees were awarded in a federal district court case in Minnesota where the plaintiff (Julie Parke) recovered less than $700. The participant sued the plan administrator (First Reliance Standard Life Insurance Co.) of a long-term disability plan for delaying her benefit payments, arguing mainly over the “own occupation” provision of the LTD plan. The participant’s award was only the interest charge, or less than $700. The attorneys’ fees requested were slightly more than $100,000. The court awarded most of that, stating “Although plaintiff recovered only a small sum, she achieved significant success on her claim, and at the same time, answered an important question for ERISA beneficiaries.” The court rejected First Reliance’s argument that the fees were unreasonable because they exceeded the amount Parke recovered in benefits. (Parke v. First Reliance Standard Life Insurance Co., D. Minn., No. 99-1039, Jan. 8, 2003.)

Airline Pension Woes Take Center Stage. In bankruptcy court, a judge permitted the sale by United Airlines’ Employee Stock Purchase Plan (ESOP) of almost 13 million shares, bringing the ESOP’s ownership to 20%, a minimum threshold to retain tax benefits. As reported in our 12/2-12/13 Developments, the sale of all the ESOP’s shares had been halted by the court. The judge postponed until February Trustee State Street Bank & Trust of Boston’s request, opposed by the pilots’ union among others, to sell the remainder of the ESOP shares. United stock was $80 per share in January 2000 and as little as 64 cents in December. It now is less than $1.35 per share. The role of pension funds in the continued viability of airlines was the topic of many stories in the past 2 weeks, including an effort by US Airways, Pennsylvania Senators and the pilots’ union to stretch out $3 billion in funding liability for the US Airways pension plans. Northwest Airlines asked the Department of Labor to allow it to contribute subsidiary stock in lieu of cash to its pension plans. And a major financial reporter described the pension funding gap in the airline industry as approaching $18 billion, calling the industry “poised to become the primary focus” of the PBGC. (Rapid Descent: Pensions in the U.S. Airline Industry; 1/13 Fitch Ratings Report.)