Mental Health Parity Law Extended. At the end of 2003, President Bush signed the Mental Health Parity Reauthorization Act of 2003, extending the existing Mental Health Parity Act (MHPA) provisions of the Employee Retirement Income Security Act (ERISA) and the Public Health Service Act until the end of 2004. Employer-sponsored group health plans already in compliance with MHPA will have no new obligations as a result of this new legislation. MHPA generally requires annual or lifetime dollar limits for mental health benefits to be no lower than the dollar limits for medical and surgical benefits offered by a group health plan. (Public Law 108-197.)

EBSA Releases Exemption for Settlement Transactions. The Employee Benefits Security Administration published a final class exemption in the December 31, 2003 Federal Register in response to concerns raised about the application of the prohibited transaction rules to litigation settlements between employee benefit plans and parties in interest. The exemption permits plans to engage in two types of transactions with parties in interest for the purpose of settling litigation:

a release by the plan or by a plan fiduciary of a legal or equitable claim against a party in interest in exchange for consideration, given by, or on behalf of, a party in interest to the plan in partial or complete settlement of the plan’s or the fiduciary’s claim; and
an extension of credit by a plan to a party in interest in connection with a settlement under which the party in interest agrees to repay, over time, an amount owed to the plan in settlement of a legal or equitable claim by the plan or a plan fiduciary against the party in interest.

The exemption is effective retroactively to January 1, 1975. (Prohibited Transaction Exemption 2003-39.)

IRS Attacks Abusive Roth IRA Contributions. It’s often said that if something sounds too good to be true, it probably is. Such is the lesson of Notice 2004-8, released on December 31, 2003, in which the Internal Revenue Service (IRS) strikes back at an abusive type of transaction that taxpayers have used to avoid the limitations on contributions to Roth individual retirement accounts (Roth IRAs). According to the IRS, the abusive transaction typically involves three parties:

an individual (the Taxpayer) who owns a pre-existing business (the Business);
a Roth IRA that is maintained for the Taxpayer, and
a corporation, substantially all the shares of which are owned or acquired by the Roth IRA (the Roth IRA Corporation).

The Business and the Roth IRA Corporation enter into certain transactions at less-than-fair value (e.g., the sale of account receivables at a reduced price; the contribution of property without a commensurate receipt of stock ownership) with the effect of shifting value into the Roth IRA. The IRS intends to challenge the purported tax benefits of these arrangements on a number of bases. For instance, in some cases, the IRS will contend that the substance of the transaction actually is a payment by the Business to the Taxpayer, followed by a contribution by the Taxpayer to the Roth IRA and a contribution by the Roth IRA to the Roth IRA Corporation. This recharacterization of the transaction, in turn, can result in a denial or reduction of a tax deduction for the Business; if the Business is a corporation, could require the Business to recognize gain on the transfer; and may require inclusion of the payment in the income of the Taxpayer. In addition to any other tax consequences, the amount of any contribution that exceeds the Roth IRA contribution limitation is subject to an annual excise tax until that excess amount is eliminated. (IRS Notice 2004-8.)

Cases

Advanced Notice of a Severance Plan Amendment Not Required. Prior notice of plan amendments, in most instances, is not required by the Employee Retirement Income Security Act (ERISA), and the plan document must clearly require advance notice of amendments before a court will impose an advance notice requirement. Ira Wallin was employed by Electronic Data Systems (EDS) from 1988 until 2001. Wallin was terminated October 11 and received his severance package materials in the mail one day later. Wallin claimed it was not until he received the severance package in the mail on October 12 that he learned that the EDS Severance Plan had been amended on October 5, 2001. As a result of the Severance Plan amendment, Wallin’s pre-amendment benefit of 26 weeks of severance pay was reduced to 4 weeks of severance pay. Wallin sued to have his pre-amendment benefit of 26 weeks severance pay reinstated. Wallin contended the amendment was invalid because proper notice was not delivered under the requirements of ERISA or under the specific terms of the Plan. The court rejected these contentions. ERISA does not require notice of a plan amendment to be delivered in the form of a summary of material modification until 210 days after the end of the plan year in which the amendment is made. Wallin was notified within seven days of the amendment. Wallin argued plan language stating that participants “will be notified of any important change” accelerated the notice requirement and obligated EDS to provide immediate notice of the Severance Plan amendment. The court noted the Plan language did not require notice of the Plan change within a specific period of time and could not be read in a manner that required immediate notice of the amendment. Wallin also alleged EDS breached its fiduciary duty and was actively engaged in an attempt to conceal the Severance Plan changes by “burying” the information on its intranet site. Given the fact that Wallin received the amended plan information one day after his termination, the court found this claim to be frivolous. (Wallin v. Severance Plan of Electronic Data Systems (3rd Cir. 2003).)

Do Severance Payments Under Union Contract Establish an ERISA Severance Plan? Unless a severance policy requires the establishment of a separate, ongoing administrative scheme to administer the benefits, an employer’s contractual obligation to provide severance benefits does not constitute, in and of itself, the establishment of an ERISA plan. The determination of whether there is a significant administrative component, however, can be controversial. The Sixth Circuit upheld a district court’s decision that a severance benefit payable under a union contract negotiated in anticipation of a plant closing does not constitute an ERISA plan because it did not require the employer to exercise sufficient discretion in the administration of the benefit. A dissenting opinion in the case, however, argues somewhat persuasively that the majority and the lower court got it wrong. The dissent, among other things, argues the union contract provides for substantial severance payments, the continuation of medical and life insurance coverage, and professional reemployment assistance, all of which place periodic demands on the employer’s assets. The dissent points out that the employer under the contract could be processing requests for benefits and making severance payments for up to 18 months after the plant closing. The dissent also points out that the severance benefit is payable under the contract only if the employees are terminated through no fault of their own, which involves a determination requiring some managerial discretion. Nonetheless, the plaintiff in this case lost his bid to enforce his benefit rights under ERISA. (Campbell v. International Paper (6th Cir. 2003).)

Denial of Appealed Health Plan Claim Unreasonable Where Reviewer Is Not Given Additional Evidence. Barbara Scorsone is the wife of a member of United Food and Commercial Workers Union Local 1245 (the “Union”) and is covered under the Union’s health plan. Barbara suffered from drooping eyelids and related complications and sought treatment for the condition, including the services of an ophthalmologist who specialized in plastic surgery. Surgery was performed to correct Barbara’s condition. The plan, however, refused to cover the surgery and issued a denial of benefits letter. In response to the denial letter, Barbara submitted additional information, including a letter from the surgeon explaining the medical necessity of the procedure. The plan, however, failed to provide this additional information to the reviewer, and denied the appeal. The federal appellate court reviewed the case and upheld the determination of the district court that the plan acted arbitrarily and capriciously in failing to supply the reviewer the additional information provided by Barbara and in denying the claim without obtaining further medical opinion. Barbara, accordingly, was awarded compensatory damages and attorneys’ fees. (Scorsone v. United Food and Commercial Workers Union Local 1245 (3rd Cir. 2004).)

Employer-Paid COBRA Coverage Is Adequate Consideration for Release of Employment Claims. Monica Knoll was terminated by Equinox Fitness Clubs on October 1, 2001. Following her discharge, Equinox sent Knoll a release agreement under which Equinox agreed to pay for the first six months of Knoll’s COBRA coverage. In exchange, Knoll agreed to waive her right to any claims she may have against Equinox. Knoll signed the release on November 1, after reviewing the release with her stepfather, an attorney, and engaging in some “back and forth” with Equinox on the release language. Despite the agreement, Equinox cancelled Knoll’s coverage as of October 31, 2001. The improper cancellation of the coverage was discovered in March, 2002, and Equinox took appropriate action to have the coverage reinstated as of November 1, 2001. Knoll nevertheless decided to sue Equinox, asserting various violations of state and federal employment laws, including ERISA, the Family and Medical Leave Act and the Americans with Disabilities Act. Equinox asserted that the release barred Knoll from bringing her lawsuit, and moved to have the court dismiss the lawsuit. The court sided with Equinox and granted its motion to dismiss. In granting Equinox’s motion, the court rejected Knoll’s argument that the release was invalid for lack of consideration, even though the court acknowledged Knoll may not have made the “best deal” for herself. The court also rejected Knoll’s several contentions, including that she was not given sufficient time to consider the release terms, that she was not able to consult an attorney, and that Equinox had rescinded the release when it inadvertently cancelled Knoll’s coverage. (Knoll v. Equinox Fitness Clubs (S.D.N.Y. 2003).)

Canadian Court Awards Retroactive Benefits In Finding Denial of Same Sex Survivor Benefits To Be Discriminatory. The Canada Pension Plan (CPP) is a universal social insurance program (not unlike the United States’ Social Security program) that has provided survivor benefits to bereaved Canadians since 1966, but not all Canadians. George Hislop and his partner, Ron Shearer, met in 1958 and lived together until Shearer’s unexpected death in 1986. At that time, Hislop learned he was ineligible for survivor benefits because he and Shearer were of the same sex. In July 2000, the CPP was amended to provide pension benefits to same sex survivors but only if their deceased partners died on or after January 1, 1998. Hislop and others, representing same sex survivors of partners who died before January 1, 1998, sued Canada, contending that they had been unlawfully denied survivor benefits. On December 19, 2003, the Ontario Superior Court of Justice ruled that the denial of benefits to same sex survivors was as unconstitutional before January 1, 1998 as it was on and after that date. It therefore ordered Canada to pay retroactive survivor benefits, plus interest, to representatives of the plaintiff class. (Hislop v. Attorney General of Canada (Ontario Sup. Ct. of Justice 2003).)