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Employee Benefits

Employee Benefits Developments 2/24 to 3/7 2003

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IRS/DOL RULINGS, OPINIONS, ETC.

New Compliance Assistance Program for Federal Health Laws Announced. The Department of Labor’s Employee Benefits Security Administration (EBSA) established a new source of compliance assistance under various federal health laws, such as the Health Insurance Portability and Accountability Act (HIPAA), the Mental Health Parity Act (MHPA), the Newborns’ and Mothers’ Health Protection Act, and the Women’s Health and Cancer Rights Act. The HIPAA Compliance Assistance Program, or H-CAP, provides: 1) publications designed to assist group health plans and employers, 2) a section on the EBSA Web site devoted to health law materials, and 3) sponsorship of compliance assistance workshops around the country. In the publications, you will find a self-audit checklist, a guide summarizing notice requirements, and tips for the unwary. The new Web page and publications are available at http://www.dol.gov/ebsa under Compliance Assistance, or by calling 1.866.444.EBSA (3272).

CASES

Failure to Deliver Summary Plan Description Results in Company Liability. Not ensuring that participants receive summary plan descriptions (SPDs) can be costly. The Second Circuit federal appellate court held AlliedSignal was required to pay $62,250 when it failed to ensure an employee actually received a copy of the SPD for the company’s life insurance plan.

Charles Leyda worked for Textron, Inc. 1989 through 1994. Leyda participated in Textron’s group life insurance plan, which provided coverage at a rate of three times his $40,000 salary. In 1994, AlliedSignal acquired Textron. AlliedSignal’s life insurance plan only provided coverage equal to one and a half times salary. After the acquisition, AlliedSignal mailed notices of meetings for former Textron employees to discuss the AlliedSignal benefit plans. At the meetings, AlliedSignal distributed SPDs, but did not take attendance at these meetings to ensure all former Textron employees obtained copies. Leyda alleged he never received a copy of the SPD for the life insurance plan. When Leyda died, the AlliedSignal plan paid Leyda’s surviving spouse a benefit equal to one and a half times his salary. The court determined ERISA requires that participants actually receive copies of SPDs, and AlliedSignal’s procedures for distributing the SPDs did not ensure each employee received them. As a result, the federal appellate court upheld the lower court’s award to the employee’s spouse, which was equal to the difference between what she received under the AlliedSignal plan and what she would have received under the Textron plan. (Leyda v. AlliedSignal Inc., __ F. 3d __, 2d Cir. No. 02-7408, 2/28/03.)

Extension of Severance Benefits to Salespersons Did Not Create or Modify an ERISA Plan. An employer’s attempt to play the “ERISA preemption” card to avoid a state law claim failed. American General Corp. shut down Independent Advantage, a company it acquired. Employees of Independent Advantage, other than commissioned salespersons, were eligible for severance benefits under the company’s ERISA-governed severance plan. American General notified the commissioned salespersons that, while they were not eligible to participate in the severance plan, they could receive a severance package in exchange for remaining with the company for a specified period. In this federal appellate court case, the salespersons said they believed the severance package would be based on a 10-month rolling average of their sales commissions, but shortly after they agreed to the package, American General decided to use a six-month average instead. American General attempted to have this breach of contract suit dismissed based on ERISA preemption. American General argued the severance package either constituted an amendment to the company’s existing ERISA severance plan or was a new ERISA severance plan. In rejecting the plan amendment claim, the 10th Circuit decision noted the company did not follow the existing severance plan’s procedures for amendment in implementing the new severance package. The court also rejected the argument that the package was a new ERISA plan because it determined the benefits were not offered “pursuant to an organized scheme.” (Winterrowd v. American General Annuity Insurance Co., __ F. 3d, __, 9th Cir., No. 01-57184, 3/5/03.)

State Claims Preempted by ERISA. In a case heard before the U.S. District Court for the Western District of New York, the judge dismissed a federal lawsuit by a former employee who alleged his employer breached an oral promise to include predecessor service in the calculation of his ERISA pension benefits. At the time of an acquisition, the employee claimed he was promised his years of service would be included in calculating his pension under the new employer’s pension plan. When the predecessor service was not included on his termination of employment, the employee sued. The allegations that the oral agreement supersedes the pension plan were dismissed by the court as state law claims (breach of employment contract) that are preempted by ERISA. Another claim by the employee that his agreement to a severance package was induced by fraud was permitted to continue. (Thresher v. Gulf States Paper Corp., W.D.N.Y., No. 02-CV6624 CJS, 2/14/03.)

Employer Prohibited From Conditioning Severance Benefits on Provisions Not in Plan. The 10th Circuit held an employer could not condition payment of severance benefits under an ERISA severance plan on execution of a nonsolicitation release of which the employee had no prior notice. David Cirulis was terminated by UNUM as the result of a merger. Cirulis was covered by UNUM’s ERISA-governed severance plan. Before his termination, Cirulis received for the first time a copy of a nonsolicitation release UNUM required him to sign to receive his severance benefits. After Cirulis refused to sign the release, UNUM informed him he was no longer eligible for the severance benefits. The court determined the employer, as plan administrator, acted arbitrarily and capriciously in denying Cirulis benefits. It noted the nonsolicitation clause did not appear on the face of the severance plan. Moreover, although the plan document referred to a release, it did not specify the conditions of the release. The court remanded the case to the lower federal district court to determine the amount of benefits Cirulis should receive. (Cirulis v. UNUM Corp. Severance Plan, __ F. 3d __, 10th Cir. No. 01-3362, 3/5/03.)

ESOP Tales. Look for more news following two recent developments relating to the United Airlines Employee Stock Ownership Plan (ESOP). A group of United employees began a class action lawsuit claiming the trustee of the ESOP breached its fiduciary responsibility by not selling its United stock before its value crashed. The suit was filed in Illinois federal court February 28, 2003. United announced on March 4 the company received a private letter ruling from the IRS permitting the independent fiduciary of the ESOP to sell a large portion of its company stock. The ESOP once held a 55% stake in the company. The litigation will add another chapter to the legal aspects of the tension between an employer’s ESOP objectives—designed to hold primarily company stock—and ERISA fiduciary obligations to act solely in the interest of plan participants and beneficiaries.

In another case, a group of executives was held not liable as parties-in-interest as a result of a sale by the executives to an ESOP set up by the company where the stock subsequently lost significant value. (Keach v. U.S. Trust Co., C.D. Ill., No. 01-1168, 2/24/03.)

The stakes can be high in any ESOP transaction, and participants look for defendants in lawsuits in which the company’s stock value drops significantly after the ESOP is established.