U.S. Supreme Court Strikes Down Reverse Age Discrimination Claim Under ADEA. The Age Discrimination in Employment Act of 1967 (ADEA) forbids discrimination favoring the young at the expense of the old—old, for ADEA purposes, meaning anyone 40 or older. A 1997 collective bargaining agreement (the Agreement) between General Dynamic Land Systems, Inc. and the United Auto Workers eliminated the company’s obligation to provide health benefits to subsequently retired employees, except as to then-current workers who were at least 50. Employees who were then under 50 (but over 40) charged the Agreement violated the ADEA by virtue of reverse age discrimination (that is, favoring the old at the expense of the young). The Equal Employment Opportunity Commission agreed as did the Court of Appeals for the Sixth Circuit (which reversed an earlier dismissal by the federal district court), reasoning the ADEA’s discrimination prohibition against protected individuals “is so clear on its face that if Congress had meant to limit its coverage to protect only the older worker against the younger, it would have said so.” However, in a February 24 decision, the U.S. Supreme Court disagreed 6-3 that the ADEA’s prohibition covers all forms of discrimination against an individual due to age. To the contrary, Justice Souter, writing for the majority, noted “[t]his more expansive possible understanding does not … square with the natural reading of the [law], and in fact Congress’s interpretive clues speak almost unanimously to an understanding of discrimination as directed against workers who are older than the ones getting treated better.” As such, claims of reverse age discrimination may not be brought under the ADEA. (General Dynamics Land Systems v. Cline, US Sup. Ct. 2004)

IRS/DOL Rulings, Opinions, Etc.

Automatic Rollover Rules Proposed. Currently, a mandatory cash-out (i.e., a cash-out of less than $5,000) from a qualified plan is not rolled over to another eligible retirement plan unless the recipient specifically elects a rollover. But the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) enacted new automatic rollover rules that will require mandatory cash-outs exceeding $1,000 to be rolled over automatically. The recipient may elect a cash distribution instead of the “automatic” rollover. However, if the recipient does nothing, an automatic rollover will be required. In accordance with a directive in EGTRRA, the Department of Labor (DOL) just published proposed regulations providing guidance under which plan fiduciaries may satisfy their fiduciary responsibilities in connection with this automatic rollover to an individual retirement plan. The proposed regulations require the mandatory distribution to be rolled into an individual retirement plan (e.g. IRA) that is invested in products “designed to preserve principal and provide a reasonable rate of return, whether or not such return is guaranteed, consistent with liquidity.” The investment products’ fees also will be subject to certain limits and restrictions. Safe harbor investment products typically include money market funds, interest-bearing savings accounts, certificates of deposit, and “stable value products.” The proposed rules will require disclosure to participants and beneficiaries of plan procedures governing automatic rollovers.

In connection with these proposed rules, the DOL issued a notice of proposed class exemption permitting a fiduciary of a plan, who is also the employer maintaining the plan, to establish, on behalf of its separated employees, an individual retirement plan (e.g. IRA) at a financial institution which is the employer or an affiliate. Thus, banks and other financial institutions will be able to designate themselves as the individual retirement plan trustee. The DOL proposes to make the final safe harbor regulation effective six months after the date of publication in the Federal Register to afford plan fiduciaries adequate time to amend their plans, distribute required disclosures, and identify institutions and products that would afford relief under the final safe harbor regulation. (69 Fed. Reg. 9846; 9899)

Employee Must Recognize Income for Cancellation/Reduction of Note Given by Employee to Satisfy Option Purchase Price. The Internal Revenue Service (IRS) is clamping down on the use of debt financing by corporate insiders to exercise stock options. Typically, in the type of scenario that triggered this ruling, the corporate insider exercises options he or she holds by giving the company a recourse note. If the value of the stock later falls below the face amount of the note, the company may agree to reduce the insider’s debt. Some taxpayers have claimed this debt reduction does not result in taxable income. Revenue Ruling 2004-37, however, gives clear guidance that reduction of debt in these circumstances results in taxable income to the insider. The ruling also states the resulting compensation will be considered wages for income tax withholding, FICA and FUTA purposes. (Rev. Rul. 2004-37)

A QDRO is a QDRO is a QDRO. Peter, an active participant in Northwest Airlines’ retirement plan (the Plan), divorced Alice. In 1997, he submitted a court order to the Plan assigning his ex-wife Alice a percentage of his pension benefits. The Plan determined the order to be a qualified domestic relations order (QDRO). In 2002, just prior to his retirement, Peter submitted to the Plan a new court order, stating the parties had agreed to reduce the portion of Peter’s benefits to be paid Alice in the future. The Plan, concerned that the new order could not permissibly reduce the benefits previously awarded to Alice, provisionally determined the new order was not a QDRO and sought advice from the DOL. Pending that advice, the Plan paid out benefits in accordance with the 1997 QDRO, stating that if the DOL ruled the 2002 order, indeed, could be a QDRO, the Plan would seek reimbursement from Alice of the interim overpayments. In a February 17 opinion, the DOL ruled a domestic relations order may be deemed a QDRO even if it supersedes or amends a pre-existing QDRO assigning the same participant’s benefits to the same alternate payee. However, noting the plan administrator took no steps to preserve the amounts that would be affected by the 2002 order during its consideration of that order’s qualified status, the DOL further ruled the Plan lacked grounds on which to seek the return of any overpayments from Alice and, therefore, the 2002 order would operate prospectively only. (DOL Adv. Op. 2004-02A)

Cases

U.S. Supreme Court Finds Working Owners Are Plan Participants Under ERISA. Raymond B. Yates, M.D. was the sole shareholder and president of a professional corporation, cleverly named Raymond B. Yates, M.D., P.C. The corporation maintained a profit-sharing plan, cleverly named the Raymond B. Yates, M.D., P.C. Profit Sharing Plan (the Plan). From the Plan’s inception, at least one person other than Yates and his wife was a participant. As required by both the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA), the Plan contained an anti-alienation provision which provided, in relevant part, “Except for … loans to Participants as [expressly provided for in the Plan], no benefit or interest available hereunder will be subject to assignment or alienation, either voluntarily or involuntarily.” In 1989, Yates borrowed $20,000 from a predecessor qualified plan but for several years failed to make a single monthly payment. The predecessor plan ultimately was merged into the Plan; yet Yates still failed to make any monthly payments. Then, all at once, Dr. Yates used the proceeds from the sale of his home to make two payments totaling $50,467.46 which paid off, in full, the principal and interest due on the loan. Three weeks later, several creditors filed an involuntary bankruptcy petition against Yates and sought to set aside the loan repayment as a preferential transfer. Yates sought to prevent recovery by raising the Plan’s anti-alienation clause as a defense. The Bankruptcy Court, however, held a self-employed owner of a corporate sponsor could not “participate” as an “employee” under ERISA and, therefore, could not use ERISA’s provisions to enforce any restriction on a transfer of his beneficial interest in the profit sharing plan. Both the federal district court and the Court of Appeals for the Sixth Circuit affirmed. On March 2, the U.S. Supreme Court, finding ERISA’s text “adequately informative,” reversed the lower courts in holding, “[W]e need not look outside ERISA itself to conclude with security that Congress intended working owners to qualify as plan participants.” (Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon, US Sup. Ct. 2004)

Excess Loss Carrier Must Cover “Experimental” Treatment. Computer Aided Design Systems Inc. (CADSI) maintains a self-insured group health plan (the Plan), and contracted with Safeco Life Insurance Company (Safeco) to provide excess loss insurance. A participant in the Plan was diagnosed with Stage IV breast cancer and her doctors recommended she undergo a form of stem cell transplant treatment. The participant submitted a preauthorization claim. The Plan’s independent medical review and utilization service concluded the treatment was medically necessary and not specifically excluded from coverage under the Plan. The Plan administrator also submitted the claim to Safeco’s excess loss referral assistance program for review and a determination of whether the claim would be covered. Safeco came to a different conclusion and determined the recommended treatment was not medically necessary and would be excluded from coverage as an “experimental procedure.” Given the conflicting determinations, the Plan administrator sought additional medical opinions and concluded the participant’s recommended treatment was medically necessary and not experimental. The participant proceeded with the treatment, and CADSI submitted excess loss claims of nearly $150,000 to Safeco. Not surprisingly, Safeco rejected the claim and CADSI sued. The Court of Appeals for the Eighth Circuit upheld a lower court’s summary judgment motion in favor of CADSI on the grounds the policy issued by Safeco to CADSI made no provision for Safeco to review whether claims were covered under the Plan. Instead, the policy fully incorporated the group health plan by reference, including those provisions in the Plan that gave the CADSI Plan administrator exclusive authority to decide whether to grant or deny claims. Ultimately, the federal appeals court found the Plan administrator’s decision was reasonable and not an abuse of discretion. (Computer Aided Design Systems Inc. v. Safeco Life Insurance Company, 8th Cir. 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.