Employee Benefits

Employee Benefits Developments 5/3 to 5/14 2004

Agency Rulings, Opinions, Etc.

New Guidance on Interaction of HSAs, Health FSAs and HRAs. The Internal Revenue Service (IRS) issued new guidance May 11 addressing ways health savings accounts (HSAs) may be used in conjunction with flexible spending arrangements (FSAs) or health reimbursement arrangements (HRAs). HSAs, which allow individuals to accumulate funds for medical expenses on a tax-favored basis, produce these tax results only if they are linked to high-deductible health plans (HDHPs). HDHPs are individual health care policies with deductible limits of at least $1,000 for individuals and $2,000 for families. Revenue Ruling 2004-45 confirms an individual who is covered by a traditional health FSA and an HRA that reimburses Internal Revenue Code (IRC) § 213(d) medical expenses generally is not eligible for an HSA, even if covered by an HDHP. However, the guidance also describes four circumstances under which an individual who is covered by a health FSA or HRA (such as through a spouse’s policy) and an HDHP is permitted to make contributions to an HSA.

PBGC Proposes Expanded Enforcement and Fines, and Institutes Compliance Program for Failure to Inform Participants of Underfunding. The Pension Benefit Guaranty Corporation (PBGC) recently proposed expanding its enforcement of the requirement that a plan administrator notify participants of plan underfunding. A new penalty structure would change the guideline to a per-participant, rather than per-day formula, with penalties ranging from $5 to $100. At the same time, the PBGC instituted a voluntary correction program (VCP) for those plan administrators who missed giving the notices or missed deadlines for the 2002 and 2003 plan years. The PBGC also reminded defined benefit plan sponsors that the new interest rates permitted for funding are not to be used for determining whether a plan must give participants notices of underfunding. As a result, a plan may not be underfunded for contribution purposes yet still may be required to give participants notices of underfunding. The proposed rules may be found at www.pbgc.gov. The model notice specifically is at www.pbgc.gov/laws/Model_VCP_Corrective_Notice.pdf.

PowerPoint® to the 204(h) Rescue. A plan sponsor’s Microsoft PowerPoint® presentation at employee meetings satisfied the written notice requirements of § 204(h) of the Employee Retirement Income Security Act (ERISA), according to IRS Private Letter Ruling (PLR) 200407021. A plan sponsor is required to provide a specific notice to participants when reducing benefits under certain pension plans, under ERISA § 204(h). The facts in this ruling are clear and specific, including that the employees were offered printed copies of the presentation, there were a series of meetings, and the plan sponsor took appropriate steps to make sure most employees attended the meetings. Note a PLR is valid only for the taxpayer requesting it and cannot be relied on as precedent.

Businesses May Use Statistical Sampling to Determine Deductible Expenses. Providing welcome relief to businesses with large entertainment expenditures, the IRS released guidance May 3 that permits taxpayers to use statistical sampling to establish the amount of expenses that may be excepted from the deduction disallowance for meal and entertainment expenses. Under IRC § 274(n), business deductions for meals and entertainment are limited to 50% of the expense. However, the limit does not apply to certain expenses, such as de minimis fringe benefits and certain tickets to charitable sports events. The guidance provides detailed explanations of the standards and methodology for statistical sampling that may be used to determine the amounts not subject to the 50% deduction limit. (Rev. Proc. 2004-29)

Cases

DOL Proposes Settlement in Enron, Participants Back in the Hunt in Textron Case. In the almost weekly saga of lawsuits involving employer stock in qualified plans, the Department of Labor (DOL) proposed a $66.5 million settlement of both the DOL’s and plaintiffs’ cases in the Enron Corporation (Enron) IRC § 401(k) and employee stock ownership (ESOP) plans. The settlements, which would resolve the cases against the plans’ administrative committee and outside directors, must be approved by the federal district court. Enron itself, the inside directors and executives would continue in the case. As part of the settlement, the outside directors are barred for five years from assuming fiduciary responsibility under ERISA. (Chao v. Enron Corp., S.D. Tex., proposed settlements filed May 11, 2004)

The defendants in the Textron ESOP case found themselves back in the suit when the federal appeals court reversed the lower federal court that had dismissed the lawsuit. The U.S. Court of Appeals for the First Circuit called the area of law where ERISA’s ESOP provisions and fiduciary duty intersect “arcane.” This area of the law is “neither mature nor uniform,” the opinion stated, and therefore the case requires the input of experts at the lower court level. The federal appeals court also noted the participants’ odds of succeeding “might be very long.” (Lalonde v. Textron Inc., 1st Cir. 2004)

Fighting the Bad Fight—Taxpayer Loses, Arguing for Flexibility in Inflexible Tax Laws. James Milner made an early withdrawal at age 53 from his company’s retirement plan. Withdrawals from a plan before 55 and separation from service (59½ otherwise and from IRAs) are subject to regular tax plus a 10% additional income tax. Milner argued he should not be subject to the 10% tax because he was forced to retire and it would create undue hardship. He took the funds to remodel his house. Among other changes in his life, his wife had a heart attack. The Tax Court, without commenting on his situation, rejected his plea. Milner argued the legislative history requires the law be liberally applied in favor of an employee who is forced to retire. The Tax Court concluded the legislative history of this penalty tax is that it is designed to discourage early distributions that frustrate saving for retirement. “We find no authority … that would provide for what would amount to an umbrella hardship exception,” the court concluded. (Milner v. Commissioner, Tax Ct. 2004)

Widow to Receive Retroactive Payment of Husband's Retirement Benefits. The widow of a union official who had neglected to apply for his retirement benefits before his death was awarded the full amount of her husband’s retroactive plan benefits in a recent Pennsylvania district court decision. When Robert Baird retired as an elected official of Teamsters Local No. 633 in 1985, he was eligible to receive a normal retirement benefit under the terms of his union pension plan. Over a period of eight years, the plan sent Mr. Baird four letters with application forms so that he might receive his benefits. Mr. Baird never responded or returned the forms. After Mr. Baird’s death, his widow discovered (from the union’s letter to her) her husband had been entitled to receive retirement benefits under the plan, but had never received them simply because he had failed to submit the required paperwork. Mrs. Baird requested retroactive payment of her husband’s unpaid benefits, but the plan denied the request and Mrs. Baird sued the plan. On a motion for summary judgment, the court found the plan had acted arbitrarily and capriciously in denying payment to Mrs. Baird and ordered retroactive payment of all her husband’s retirement benefits, plus interest and attorneys’ fees. The federal district court rejected the plan’s contention that denial of benefits was appropriate because the plan provided benefits are payable only on the filing of a written application. Noting the plan provides that normal retirement benefits offered under the plan are nonforfeitable once a participant reaches normal retirement age, the court determined nothing in the plan imposes the substantive requirement that eligibility, as opposed to the payment of benefits, is conditioned on application. According to the court, by seeking to impose this condition on eligibility for benefits, the plan “engaged in an impermissible attempt to write an extrinsic, arbitrary standard into the plan.” (Estate of Baird v. Teamsters Affiliates Pension Plan, W.D. Pa. 2004)

Employee Fired for Cell Phone Use Also Loses Severance Pay. An employer did not unlawfully interfere with an employee’s right to severance benefits when it fired him for excessive personal use of his cell phone just one month before his scheduled termination, according to the Court of Appeals for the Eighth Circuit, which recently upheld a lower court decision. Following a corporate reorganization of Aventis Pharmaceuticals, Inc., long-time employee Randall Koons declined an offer from the company to relocate from Kansas City to New Jersey. Koons was informed of severance benefits available to him under the reorganization and agreed to terminate his employment at the end of 2000. In June 2000, Koons’s termination date was advanced to November 15. As part of the new termination agreement, Koons was permitted to work from home and keep his company-paid cell phone until his termination date. Through July and August, Koons remained on the Aventis payroll, working from home and, with the approval of his supervisors, simultaneously pursuing a real-estate career. Although he was doing little work for Aventis during this period, Koons charged 3,321 minutes to his Aventis cell phone. Aventis also began receiving complaints from employees who had received notices advertising Koons’s real estate business. Koons had used a confidential company mailing list to obtain the names and addresses. Following an investigation, Aventis decided to terminate Koons’s employment on the basis of misconduct as of October 14, 2000, approximately one month before his scheduled end date. When Koons subsequently applied for severance benefits, his request was denied because of the circumstances of his termination. Koons sued under ERISA § 510, claiming Aventis chose to terminate him so that he could be denied his severance pay. The lower federal district court disagreed, concluding Aventis’s articulated reason for his discharge (i.e., that Koons had violated company policy) was not a pretext, and holding Aventis did not terminate Koons’s employment for the purpose of interfering with his severance benefits. The appeals court agreed, finding Aventis reasonably believed Koons had violated company policy and that the lower court did not clearly err in finding Koons was not terminated for the purpose of interfering with his future entitlement to severance benefits. It did not matter that Koons’s supervisors were aware when they fired him that he would lose his severance benefits, so long as they believed the loss of the benefits was a justified consequence of Koons’s misconduct. Evidence of personal animosity between Koons and his supervisor also did not sway the court, which pointed out that “ERISA does not prohibit employers from firing employees they don’t like, as long as their purpose is not to interfere with the employees’ benefits.” (Koons v. Aventis Pharmaceuticals, Inc., 8th Cir. 2004)

Liability for Attorneys’ Fees May go Either Way. Two recent cases demonstrate either participants or benefit plans may be found liable for attorneys’ fees depending on the circumstances. In the first case, a Maryland federal district court determined a participant must pay his health plan $19,045 in attorneys’ fees incurred by the plan when it pursued a reimbursement and subrogation claim against the participant and his wife after they received a $750,000 settlement from a car accident. The court earlier held the plan was entitled to recover from the proceeds of the settlement full reimbursement for the health care benefits provided the couple after the accident. In now also awarding attorneys’ fees to the plan, the court conceded the couple had not acted in bad faith, but apparently merely had followed their attorney’s advice on litigating the plan’s reimbursement claim. Nevertheless, the court imposed payment of the fees, partly because the couple could pay the fees out of the large settlement. (Mid Atlantic Medical Services Inc. v. Sereboff, D.Md. 2004)

The reverse situation prevailed in the second case, and a benefit plan was found liable for the attorneys’ fees of a deceased participant’s widow after the court found the plan administrator acted in bad faith. Here, the California Courts of Appeal upheld a lower state court decision awarding Linda Araiza-Klier over $130,000 in attorneys’ fees from the Teachers Insurance and Annuity Association and College Retirement Equities Fund (TIAA-CREF) in connection with Araiza-Klier’s request for death benefits under the terms of her deceased husband’s annuity contract. The plan administrator had denied the widow’s claim, on the basis that her late husband, George Klier, never removed his first wife as named beneficiary of the policy, despite the former wife’s waiver of all pension and retirement benefits at the time of their divorce. The court found TIAA-CREF acted in bad faith when it denied Araiza-Klier’s claim on the basis the benefits were payable to Klier’s first wife, even though it made no attempt to find her or file an interpleader action. In upholding the finding of bad faith, the state appeals court noted “the evidence supports a reasonable inference that TIAA-CREF’s denial of Araiza-Klier’s claim was, at least in part, motivated by a desire to avoid paying out any benefits by asserting the benefits were payable to a party who had made no claim for the benefits and had no notice of them.” (Araiza-Klier v. Teachers Insurance and Annuity Association of America, Cal. Ct. App. 2004)

This newsletter is a periodic publication of Hodgson Russ LLP and should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your own situation and any specific legal questions you may have.