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Employee Benefits

Employee Benefits Developments 1/27 to 2/7 2003

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IRS/DOL Rulings, Opinions, Etc.

Pension and Welfare Benefits Administration (PWBA) Now Known as Employee Benefits Security Administration (EBSA). Pursuant to Secretary’s Order 1-2003, the Department of Labor announced the name change of PWBA to EBSA. The order also redesignated the title and position of Assistant Secretary of Pension and Welfare Benefits to Assistant Secretary for Employee Benefits Security. The order took effect on February 3, 2003.

Cash Balance Proposed Regulations Face Increased Scrutiny. The proposed cash balance regulations issued by the IRS in December, 2002 may change upon review by the new Secretary of Treasury, John Snow. Several Senators had threatened to block the nomination of Mr. Snow as Treasury Secretary unless he agreed to take their concerns regarding the cash balance proposed regulations into consideration as Treasury works to finalize them. Therefore, it is possible that final regulations may be delayed and may be changed significantly.

Including LTD Premiums in Taxable Wages Makes Benefits Nontaxable. The IRS reviewed an employer’s modified long term disability (LTD) plan. Under the terms of the plan, an employee can make an irrevocable election prior to the beginning of the plan year to have the premium paid on a pre-tax or after-tax basis. If an employee elects an after-tax payment, the employer would pay the premiums and include that amount in the employee’s taxable wages for the year. The IRS held that LTD benefits received by an employee who made the after-tax premium election for the year in which he or she became disabled are excluded from income. Because at all times the coverage is funded solely by the employer or by the employee, the plan is not a contributory plan that would have required partial inclusion in income. (PLR 200305013.)

Treasury Promising Additional Actions to Be Taken on Abusive Benefit Plans. High ranking Treasury and Internal Revenue Service (IRS) officials have stated they will give very high priority to providing guidance on what they deem to be abusive insurance-funded defined benefit plans that misuse the provisions of Internal Revenue Code (Code) § 412(i). Code § 412(i) defined benefit plans are plans funded solely by annuities or insurance policies. Some abusive 412(i) plans have been promoted as offering extremely large contributions with a small tax at the time the contracts are distributed to participants. Other areas where the IRS indicates it will take action are (i) schemes under Code § 419A for welfare benefit plans funded with insurance involving multiple employers; (ii) funded welfare plans that attempt to take advantage of exceptions for collectively bargained employers where sham unions are being established; and (iii) abusive S corporation ESOPs. In the tax and benefits world, like the rest of life, if the sales pitch sounds too good to be true, it probably is.

Shareholders to Vote on Performance-Based Stock Options. The Securities and Exchange Commission’s (SEC) Division of Corporation Finance recently issued two no-action letters to Goldman Sachs Group Inc. and Texas Instruments Inc. denying relief to both companies. The companies sought to exclude shareholder proposals requesting their corporate boards adopt an executive compensation policy that all future stock option grants be based on performance such that the stock options have value only if the company stock price exceeds the indexed peer group performance level. (Goldman Sachs Group Inc., SEC No Action Letter, Jan. 3, 2003; Texas Instruments Inc., SEC No Action Letter, Jan. 8, 2003.)

Cases

Employee Who Made Disparaging Remarks Not Entitled to Benefits. The Second Circuit upheld a lower court’s ruling that a severance plan administrator did not act arbitrarily and capriciously in denying benefits to a discharged employee who made disparaging remarks about the company. Kirk, the employee, was eligible to receive severance benefits from the company dependent on her signing a waiver (which she did) that provided she would be denied benefits if she “acted in a manner detrimental to the best interests” of the company, including disparaging the company. The company discovered Kirk had made disparaging remarks about it to an incoming employee and subsequently denied her severance benefits. Kirk argued to the federal appeals court that the plan administrator acted under a conflict of interest because the plan administrator was also the company’s vice president of human resources and, as a result, the court should review the administrator’s decision under a de novo standard. The court held it was not an arbitrary and capricious decision of the plan administrator to have given greater credibility to witnesses who heard Kirk’s disparaging remarks than to the testimony of Kirk. Kirk v. Readers Digest Association, Inc. Severance Plan (2d Cir., Jan. 29, 2003).

Plan Administrator’s Interpretation of “Illegal Acts” Held to Be Reasonable. The Second Circuit, reversing a lower court’s ruling, held a health plan administrator did not act arbitrarily and capriciously when it denied coverage for injuries sustained by a plan participant who  was cited for several traffic infractions after crashing into a tree. The plan participant was cited for operating an unregistered, uninsured, and uninspected motor vehicle; for operating a motor vehicle with improper license plates; for improper use of dealer license plates; for driving a vehicle on the left side of a double-yellow line on a highway; and for driving with four bald tires. The plan contained a provision that prohibited payment of benefits for injuries arising from participation in or in consequence of having participated in an illegal act. The plan participant argued New York traffic law violations are mere infractions and do not amount to illegal acts and that there was no causal link between his traffic violations and his injuries. The federal appeals court held traffic infractions prohibited under New York law may be encompassed within the plan administrator’s definition of “illegal,” even if the traffic infractions are not considered crimes in New York. Celardo v. GNY Automobile Dealers Health & Welfare Trust (2d Cir., Jan. 27, 2003).

Failure to Arbitrate Assessment Bars Federal Court Challenge. The Third Circuit held three owners of a business that ceased making payments to a multiemployer pension fund are precluded from challenging the fund's withdrawal liability assessment. The owners failed to arbitrate the issue of whether, at the time of withdrawal, they ceased to be an “employer” or a member of the “control group” within the meaning of the Multiemployer Pension Plan Amendments Act (MPPAA) because they owned less than 80 percent of the company’s voting stock. The federal appeals court found the owners should have challenged the assessment through arbitration, as required by the MPPAA. Trucking Employees of North Jersey Welfare Fund Inc. v. Bellezza Co. (3d Cir., Feb. 6, 2003).

Court Holds Certain Cost of Living Adjustments Not Part of Accrued Benefit. The Fourth Circuit held the elimination of certain cost of living adjustments (COLAs) did not illegally reduce the accrued benefit of certain retirees. In the case at issue, a cost of living feature was added to a plan in 1991. In 1995, the employer (who had underestimated the expense of providing the COLA) eliminated the COLA with respect to individuals who had retired prior to 1991, when the COLA was added to the plan. The IRS issued a technical advice memorandum indicating the employer’s amendment violated the anti-cutback rule of the Employee Retirement Income Security Act of 1974 (ERISA) § 411(d)(6). The employer bought a successful declaratory judgment action in the U.S. Tax Court challenging the IRS position. The federal appeals court, affirming the Tax Court decision, held benefits added after an employee has retired are not part of the “accrued benefit” for employees under ERISA. Board of Trustees of the Sheet Metal Workers’ National Pension Fund v. Commissioner of Internal Revenue (4th Cir., Jan. 31, 2003).

No Reimbursement for Plan Participant's COBRA Premiums. The U. S. District Court for the Middle District of Pennsylvania held a plan participant may not recover reimbursement for health plan continuation (COBRA) premiums because it is not permitted under ERISA. The district court said the plan participant’s recovery was limited to benefits “due under the terms of the plan” and there was nothing in the plan that indicated the plan participant had a right to collect for reimbursement for his COBRA plan premiums. Santasania v. Union Trowel Trades Benefit Funds of Central Pa. (M.D. Pa., Feb. 4, 2003).

Fiduciary Breach for Failure to Consider Proposed Plan Merger. The U. S. District for the Northern District of California upheld a federal bankruptcy court decision holding an employer breached its fiduciary duty when it decided to terminate its plans instead of investigating whether it should merge its pension plan with a multiemployer pension fund. The PACE International Union, which represented many of the plan participants, recommended that Crown, the employer, merge its plans into the union’s multiemployer pension fund. Crown’s board of directors did not consider the union’s merger proposal. Crown had the plan purchase an annuity to provide the benefits; as a result, approximately $5 million in excess assets remained in the plan. The union and two plaintiff plan participants argued to the bankruptcy court that Crown breached its ERISA fiduciary duties by failing to give serious consideration to the proposed plan merger. Crown argued its decision to annuitize the plan was a business judgment decision and as such was not subject to ERISA’s fiduciary standards. The federal district court held Crown’s decision to terminate the plans by purchasing an annuity was not a business judgment decision because a merger was an alternate method of terminating the plan that should have been considered by the fiduciaries. Beck v. PACE International Union (N.D. Cal., Jan. 10, 2003).