Employee Benefits

Employee Benefits Developments 6/28 to 7/9 2004

Agency Rulings, Opinions, Etc.

Relative Value Regulations Postponed. Pension plan sponsors, especially of many defined benefit plans, can breathe a sigh of relief now that the Internal Revenue Service (IRS) has delayed the effective date of its proposed “relative value” regulations in many situations. Those regulations would require plans to give fuller explanations to participants on the relative values of different forms of benefits under plans offering qualified joint and survivor annuities (QJSAs). The effective date with respect to most QJSA explanations (under Treas. Reg. § 1.417(a)(3)-1) has been extended from October of this year to February 1, 2006. The later date is designed to coordinate these regulations with the regulations the IRS proposed this year on optional forms of benefits (under Internal Revenue Code (Code) § 411(d)(6)). Employers had urged a postponement of the relative value regulations and a coordination of the two sets of regulations. The earlier effective date (annuity starting dates after September 30, 2004) remains in place for Qualified Preretirement Survivor Annuities, and for QJSA explanations relating to single sums (e.g. lump sum distributions), installment payments, and benefit forms that are partially single sums or partially installment payments, if those sums or payments are less valuable than the QJSA. The IRS’s greatest concern is whether current explanations are adequate for the participant who is eligible for both subsidized annuity distributions and an unsubsidized single-sum distribution. (Announcement 2004-58)

DOL Sample Forms for § 401(k) Plan Fee Disclosure. The Department of Labor (DOL) recently updated and re-issued sample forms for plan sponsors to calculate and disclose § 401(k) plan fees. The forms, notes the DOL, “may assist you in making informed cost-benefit decisions with respect to your plan … [by] determin[ing] the total cost of the plan.” The forms are at www.dol.gov/ebsa/pdf/401kfefm.pdf.

Cases

ERISA Preemption Continues to Dominate Cases Involving Decisions on Medical Treatment and Affects Other Cases. In its June 22 decision in Aetna Health, Inc. v. Davila, the Supreme Court held the Employee Retirement Income Security Act of 1974 (ERISA) preempted claims by two health maintenance organization (HMO) subscribers who said their HMOs violated Texas law in refusing to cover certain medical services. In other words, where ERISA preempts state law, state law claims are dismissed. As a result of Davila, two cases already have been remanded, or sent back for reconsideration. Other cases are citing Davila, and as a result we may see even more ERISA preemption of state law.

Six days after Davila, the Supreme Court remanded to their respective appeals courts two medical malpractice claims against HMOs. In both cases, the federal appellate court had held the medical malpractice claims were not preempted by ERISA. In Vytra HealthCare v. Cicio the issue was the denial of treatment, deemed experimental, by a reviewer; Carmine Cicio later died. In the second case, CIGNA Healthcare of Florida v. Land, the issue was the overturning by the insurance reviewer of Robbie Lee Land’s doctor’s decision to treat him in the hospital. The U.S. Courts of Appeal for the Second and Eleventh Circuits, respectively, now must reconsider their decisions in light of Davila. Both Cicio and Land interpreted Pegram v. Herdrich, a 2000 Supreme Court case that dealt with mixed eligibility and treatment decisions.

In just the first few days after Davila, several courts cited the case in reaching decisions that ERISA preempted the case at issue and the matter could not be decided in a state court, but must be decided in a federal court. For example, Cheryl Mayeaux tried to refashion her claims and amend her complaint a third time to get her case out from under ERISA and federal jurisdiction. Citing Davila a week after it was handed down, the U.S. Court of Appeals for the Fifth Circuit ruled Mayeaux’s state-law claims against a health plan administrator and her physician, based on denial of a treatment the administrator considered experimental, were preempted. In an unusual move, the federal appellate court also denied Mayeaux her (ostensibly timely) request to amend her complaint a third time. (Mayeaux v. Louisiana Health Service & Indemnity Co.)

Although the ERISA preemption doctrine seems most difficult to apply in the medical malpractice and review area, it continues to dominate other situations as well. For example, the Ohio Court of Appeals held ERISA preempted a claim by five employees that their settlement with their employer over a policy on chronic beryllium disease (CBD) had been breached. The employees argued their claim was primarily a breach of contract, a state law claim. The state appeals court upheld the employer’s argument that the CBD plan is an ERISA plan and the employees’ claim related to that plan. (Fillmore v. Brush Wellman Inc.)

In fact patterns somewhat less complex, Kelly Renee Neumann, a former AT&T Communications Inc. employee, claimed the company retaliated against her for filing a claim for workers’ compensation benefits. The U.S. Court of Appeals for the Eighth Circuit reversed the lower court, determining Neumann was really complaining about the limits of coverage under the company’s accident and disability plan, an ERISA plan, and her complaint therefore related to an ERISA plan. As a result, any state law jurisdiction was preempted by ERISA. (Neumann v. AT&T Communications Inc.) And, a former CEO’s state law claims alleging his employer “induced” him to resign with promises relating to retirement plan benefits similarly were held preempted by ERISA, according to a Maryland federal district court that quoted the Davila opinion. (Miller v. U.S. Foodservice Inc.)

COBRA Claim Barred by One-Year Statute of Limitations “Borrowed” From State Law. In an unpublished decision, the U.S. Court of Appeals for the Fourth Circuit upheld a lower court judgment that a Consolidated Omnibus Budget Reconciliation Act (COBRA) notification claim brought in West Virginia was barred by a one-year statute of limitations. Nathan Harvey was fired by Mingo Logan Coal Company (the Company) in September, 2000. About five months later, Harvey was injured in a motorcycle accident, incurring more than $40,000 in medical expenses. Harvey was not covered by medical insurance at the time of the accident. Nearly two years after his termination, Harvey filed suit against the Company, claiming the Company failed to inform him he was eligible to purchase continuation coverage under the Company’s group medical plan after his termination and asserting he would have purchased the coverage had he been properly informed of his eligibility. The Company argued Harvey’s COBRA claim was time-barred, because it was filed more than one year after termination. Because COBRA does not contain a statute of limitations for notification claims, the U.S. District Court for the Southern District of West Virginia applied the limitations period of an analogous state statute, in this case, the West Virginia Unfair Trade Practices Act. On appeal, the federal appellate court upheld the district court’s ruling, confirming that where a federal statute has no expressly applicable period of limitations, courts “generally should borrow the most closely analogous statute of limitations from state law.” Although a one-year statute of limitations applied in this case, employers should be alert to the fact that longer periods of limitations may apply in other states. (Harvey v. Mingo Logan Coal Co.)

Early Retirement “Incentive” Violates ADEA. A provision in a collective bargaining agreement (CBA) that permitted certain teachers the choice between a $20,000 bonus if they retired early and a three-year salary increase if they elected to keep working was found discriminatory under the Age Discrimination in Employment Act (ADEA) in a recent decision by the U.S. Court of Appeals for the Second Circuit. Under an original CBA in effect from 1998 to 2001, between the Wappingers Falls Central School District and the Wappingers Congress of Teachers, teachers who met three designated service requirements were offered a $20,000 retirement incentive if they chose to retire in the first year they met all three criteria. In 2001, the union and the school district signed a new CBA, adding a second option. Under the new CBA, a teacher who met the same three eligibility criteria for the first time now had two options in the year of eligibility: (1) to retire early and receive the same $20,000 payment available under the old CBA, or (2) to continue working and receive a salary increase of $7,000 per year for three years, with no requirement that the teacher retire at a specific time. The second option was not available to teachers who had previously declined early retirement and the $20,000 bonus under the old CBA. The excluded teachers sued, alleging the school district and the union discriminated against them by not making the second option available to them. The first option was not challenged, because it had been available to the teachers when they first met the eligibility criteria. The Second Circuit held the teachers’ exclusion from the second option violated ADEA, however, because the exclusion was based on age. To be eligible for the option, a teacher had to qualify for a service pension under the state teachers’ retirement system by either attaining age 55 or completing 35 years of service under the system. As the court noted, it was “extremely unlikely that any teacher who had not yet reached age 55 would ever have accumulated the 35 years of service” otherwise necessary to qualify for a service pension.

The federal appellate court also held the second option did not qualify for the ADEA’s safe harbor exception for early retirement incentive plans, because the option did not supply an incentive to retire. On the contrary, the second option actually supplied the incentive to continue working, because a teacher who continued working would have extra years of income and a higher average salary for purposes of calculating his or her pension. The court emphasized a plan intended to qualify for the early retirement incentive exception “must, at a minimum, provide some incentive to retire. In other words, the plan must make retirement a relatively more attractive option than continuing to work.”

Finally, although the extra option was found to be discriminatory, the Second Circuit denied the teachers’ claim that the option must be made equally available to them, with an award of back pay. The federal appellate court upheld the lower district court’s determination that compliance with the ADEA could be achieved with the total elimination of the second bonus option. (Abrahamson v. Board of Education of Wappingers Falls Central School District)

New York Disability Policies May Offer Lesser Benefits for Mental Conditions. In a 7-0 decision issued July 1, New York State’s highest court ruled disability insurance policies are not required under state insurance law to offer equivalent coverage for mental and physical disabilities. The group long-term disability policy issued to Charlene Polan’s employer provided benefits for a disabled employee’s physical disabilities up to age 65. Coverage for disabilities caused by mental and nervous disorders, however, was limited to 24 months, unless the disabled employee was hospitalized or institutionalized.

In 1995, Polan, who suffers from a chronic psychiatric disability, was approved for retroactive long-term disability benefits. Although she continued to suffer from the disability, Polan’s benefits terminated in September 1996, because of the 24-month limitation. In 2000, Polan commenced a series of actions against her employer and the insurer, alleging the 24-month limitation violates state insurance law, which generally prohibits limitations on coverage “solely because of” a disability. Drawing upon legislative history, decisions in other states and federal court analyses of similar federal anti-discrimination provisions, the Court of Appeals found the state law does not mandate equivalent benefits for different disabilities. Rather, it merely forbids an insurer from limiting coverage by providing less generous benefits to a disabled individual than a nondisabled individual. In Polan’s case, the court found Polan was not discriminated against, because she was eligible for the same long-term disability coverage at the same premium as were all other employees participating in her employer’s group plan. (Polan v. State of New York Insurance Dept.)

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.