IRS Threshold for Granting Waivers of the 60-Day Rollover Time Limit Coming Into Focus. Three recent private letter rulings (PLRs) offer further insight on what circumstances will move the Internal Revenue Service (IRS) to grant a waiver of the 60-day rollover time limit. In the first PLR, a waiver was granted because an employee of the individual retirement account (IRA) provider, contrary to the wishes of the IRA owner, mistakenly distributed more than the minimum required distribution. The IRA holder’s age, and the confusion surrounding certain family hardships and burdens encountered by the IRA holder (who had to travel across the state in harsh winter conditions following the divorce and relocation of the IRA holder’s son) indicate the IRA holder could not reasonably make the rollover within the 60-day period. In the second PLR, a waiver was granted because an IRA provider, contrary to the taxpayer’s intent, inadvertently credited the taxpayer’s rollover contribution to a non-IRA investment account. The rollover contribution was transacted during a “period of family trauma and confusion” (the taxpayer’s son-in-law died). The tax that would be imposed if the waiver were not granted would cause the taxpayer, who was retiring, a substantial hardship. In the last PLR, the IRS declined to grant a waiver of the 60-day rollover time limit. The IRS would not allow the taxpayer to redeposit amounts withdrawn from an IRA where the taxpayer intentionally made withdrawals to defray living and tuition expenses, during a period of intermittent unemployment. Using a distribution as a short-term loan to cover personal expenses is not consistent with Congressional intent to allow portability between eligible retirement plans, the IRS ruled. (PLR 200416015, PLR 200417034, PLR 200417033)

EEOC Approves a Proposed Final Rule Exempting Retiree Health Plans from ADEA Coverage. Several years ago, the U.S. Court of Appeals for the Third Circuit caused an uproar in the employee benefits community when it ruled the Age Discrimination in Employment Act (ADEA) applied to retirees. (Erie County Retirees Association v. County of Erie, 3d Cir. 2000). On April 22, however, the Equal Employment Opportunity Commissionn (EEOC) approved a proposed final rule under which employee benefit plans that provide retiree health benefits that are reduced, altered or eliminated when the retiree becomes eligible for Medicare or a comparable state health benefit plan are exempt from the ADEA. The EEOC previously had ruled these types of plans made an illegal age-based distinction under the ADEA. The EEOC, however, became concerned requiring employers to provide the same benefits to all retirees regardless of their age or eligibility for Medicare would have the unintended consequence of discouraging employers from providing benefits to retirees. The rule does not become final until an interagency review is conducted. (29 CFR Parts 1625 and 1627)

Cases

Look (at Your Policy) Before You Leap. Death benefits were denied to the beneficiaries of a parachutist under an accidental death and dismemberment plan because of a policy exclusion for activities related to aerial navigation. In April 2000, Michael Adams died from injuries suffered in a skydiving accident. At the time of the accident, Michael was employed by J.B. Hunt Transport, Inc., and was covered by the company’s accidental death and dismemberment insurance policy. Michael’s beneficiaries made a claim for a $300,000 death benefit. The insurance company, Continental Insurance Co., denied the initial death benefits claim and the appeal of the claim. The beneficiaries under the policy argued in federal court that skydiving did not fall under the policy’s general exclusion for loss resulting from “riding in any vehicle or device for aerial navigation” because parachuting did not involve steering, and because a parachute is “merely a conveyance used to slow the fall to Earth.” The federal appeals court, affirming the lower district court’s decision, found a skydiver has control over his or her direction both before and after deploying the parachute. Accordingly, it concluded parachuting involves navigation, and that the policy exclusion can be interpreted to apply to parachuting. (Adams v. Continental Insurance Co., 8th Cir. 2004)

“Full and Fair Review” of a Medical Claim Subject to More Stringent Standards Under Claims Procedure Regulations. Health plans that have not yet been updated for the newer claims procedure requirements specifically applicable to health plans, or are not observing those newer requirements, may want to take note of this case. Dr. Robert Steinberg performed a nerve conduction study for Aurora Aceves, a diabetic patient who was covered by the Railroad Maintenance and Industrial Health and Welfare Fund (the Fund). The Fund refused to pay Dr. Steinberg for the procedure. Dr. Steinberg sued, and claimed the Fund failed to provide a full and fair review of the benefit claim as required by the Employee Retirement Income Security Act of 1974 (ERISA). The claims procedure regulations under ERISA require a full and fair review of an adverse benefit determination including, among other things, the identification of the medical expert consulted in making the adverse benefit determination, and consulting a medical expert other than the expert who was consulted in connection with the original adverse benefit determination. Because the Fund relied on an earlier review made by another medical expert who concluded the nerve conduction study was not medically necessary and because the Fund did not identify the medical experts who reviewed the claim, the U.S. District Court for the Northern District of Illinois found a full and fair review had not been conducted. The Fund was ordered to pay the doctor $6,650 for the nerve conduction study. (Steinberg v. Railroad Maintenance and Industrial Health and Welfare Fund, N.D. Ill. 2004)

Plan “Merger” Can Result in Increased Benefit Payable under a QDRO. Bet you didn’t know the “merger” of a nonqualified retirement plan into a qualified retirement plan can increase the benefit payable under a qualified domestic relations order (QDRO). Well, it can. Stuart Moore participated in both his employer’s qualified retirement plan and his employer’s nonqualified excess benefit plan. Stuart was divorced from his wife in 1978. As a result of the divorce, a California court signed a QDRO assigning a significant portion of Stuart’s qualified plan benefit to his ex-wife—but, the QDRO did not assign any portion of Stuart’s benefit under the nonqualified plan. In 2000, following statutory changes, the employer eliminated a cap under the qualified retirement plan that had limited retirement benefits payable by that plan. The U.S. District Court for the Northern District of Texas’s opinion suggests the employer “combined” the nonqualified plan into the qualified plan, but it does not make clear whether there was ever a formal “merger” of plan assets. Nevertheless, Stuart’s accrued benefit under the qualified plan immediately went up following the change to the qualified plan, his entitlement to a benefit under the nonqualified plan went down, and his ex-wife was effectively granted a portion of his nonqualified plan benefit under the terms of the existing QDRO. Stuart was unhappy and sued. The federal district court dismissed his lawsuit, ruling Stuart had not been denied any benefit in violation of ERISA and that the employer should not bear the burden of amending the QDRO to Stuart’s satisfaction. (Moore v. Raytheon Corp., N.D. Texas 2004)

Severance Benefits Not Limited to Current Employees … Duh! Joseph Gorini was terminated when Tyco Electronics, Inc. (Tyco) acquired his employer, AMP Incorporated. He sued for benefits under two severance plans Tyco maintained and, among other claims, asked the court to penalize Tyco for failing to supply requested information about the severance plans in a timely manner. In a split decision, the federal district court denied Gorini’s claim for benefits. It nonetheless ordered Tyco to pay a $160,780 penalty to Gorini for Tyco’s failure to provide the requested documents. Tyco appealed, contending it was not required to provide the requested documentation about the severance plans because Gorini was not a participant in either plan. The U.S. Court of Appeals for the Third Circuit disagreed. A plan administrator is required by ERISA to provide certain plan-related documents to both current and former employees who are, or may become, eligible for benefits, including any former employee with a colorable claim that he or she will prevail in a suit for benefits. Here, Gorini had made the requisite showing that he had a colorable claim to benefits under the plans, and the court was not required to consider the actual likelihood Gorini would succeed on the merits of his claim or the reasonableness of that claim. Tyco then offered the brilliant argument that the only people eligible for benefits under one of the severance plans were regular, full-time salaried employees, and Gorini made his request for benefits after Tyco terminated him. The federal appeals court responded, “Tyco’s position if adopted, would mean that only current employees could draw on severance plan benefits. That is inconsistent with the very concept of severance benefits.” So, despite not being eligible for a severance benefit, Gorini walked away with some of Tyco’s money. (Gorini v. AMP Inc., 3d Cir. 2004)

Suits for Fiduciary Breach May Continue Against Inside Directors. Qualified plan participants continue to sue corporate managers and directors for fiduciary breach where plan investments in company stock suffer losses. CMS Energy Corporation (CMS) and its subsidiaries (the Employers) maintain a retirement plan with two components (i.e., a 401(k) plan and an employee stock ownership plan), each allowing for investment in CMS stock. Beginning in mid-2000, CMS reportedly engaged in a questionable practice known as “round-trip” electricity trades in which purchases and sales of electricity occurred simultaneously with the same parties and at the same price. Though the trades did not affect net earnings, they may have artificially inflated the company’s buying and selling volume by some $4.4 billion. After CMS stopped making these trades in January 2002, an investigation of the practice began and CMS’s stock price allegedly dropped as a result. At no time had the Employers, the plan administrators, or inside directors (i.e., individuals serving as both company officers and directors) acted to restrict or otherwise suspend investment in CMS stock. As a result, lawsuits ensued against all three groups alleging various breaches of fiduciary duty. In a lengthy March 31 ruling, the U.S. District Court for the Eastern District of Michigan refused to dismiss most claims directed at the inside directors, observing the retirement plan does not delegate investment policy or decision-making power to an investment manager, plan administrator, or any other individual or committee “but in fact reserves the broadest administrative and management responsibility to the Employers.” Under the circumstances, the federal district court was “convinced it is premature to dismiss inside directors of the Employers as non-fiduciaries absent specific findings on what responsibilities were actually assumed by them.” In the same ruling, the district court also refused to dismiss claims against the Employers. (In re CMS Energy ERISA Litigation, E.D. Mich. 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.