Defined Benefit Funding Relief. On April 10, President Bush signed into law the Pension Funding Equity Act of 2004. This much-anticipated legislation provides a temporary replacement for 30-year Treasury bond rates by allowing use of a composite long-term corporate bond rate for plan years beginning in 2004 and 2005. The Internal Revenue Service (IRS) issued Notice 2004-34 announcing the new rate employers could use to calculate the quarterly contributions that were due as early as April 15. The new higher interest rate used to calculate required contributions reduces or eliminates certain additional contributions that otherwise would have been required. This funding relief is temporary and contributions will be calculated based on 30-year Treasury bond rates, if additional legislation is not passed.

Agency Rulings, Opinions, Etc.

HSAs Are Not Employee Welfare Benefit Plans Under Title I of ERISA. The Department of Labor (DOL) issued Field Assistance Bulletin 2004-1 that states health savings accounts (HSAs) generally will not constitute employee welfare benefit plans for purposes of the provisions of Title I of the Employee Retirement Income Security Act of 1974 (ERISA), whether the employee’s high-deductible health plan (HDHP) is sponsored by the employer or is obtained as individual coverage. Employer contributions to the HSA of an eligible individual will not result in Title I coverage where employer involvement with the HSA is limited. An HSA does not give rise to an ERISA-covered plan where the establishment of HSAs is completely voluntary on the part of the employees, and the employer does not (1) limit the ability of an eligible individual to move his or her funds to another HSA beyond restrictions imposed by the Internal Revenue Code (IRC), (2) impose conditions on use of HSA funds beyond those permitted under the IRC, (3) make or influence investment decisions with respect to funds contributed to an HSA, (4) represent the HSAs are an employee welfare benefit plan established or maintained by the employer, or (5) receive any payment or compensation in connection with an HSA.

IRS Provides Further Insight to Automatic 401(k) Enrollments. In 2002, the IRS announced it would allow automatic, or so-called “negative election,” enrollments in an IRC
§ 401(k) plan. An example cited in the Revenue Ruling 2002-8 used an automatic contribution amount of 3% of compensation. Many employers took this 3% example to be a safe harbor and were unwilling to provide a higher rate of automatic enrollment. In a March 17 information letter, the IRS indicated the automatic enrollment election in a 401(k) or IRC § 403(b) plan may be any percentage of compensation permitted in an affirmative election. The IRS stated there is no maximum or safe harbor automatic compensation reduction percentage.

Cases

Plan Provision Not a Defense for Claim of Breach of Fiduciary Duty. Participants in the Household International Inc. (Household) 401(k) plan received matching contributions in the form of stock. Household paid a $484 million settlement related to lending practices and needed to restate its earnings for several years. Participants alleged the value of Household stock declined because of this and that the 401(k) Plan Committee members failed to act prudently when they continued to offer Household stock as an investment under the plan. In its motion for summary judgment, the Plan Committee argued the terms of the plan did not provide the Plan Committee with discretion to choose to invest the matching contribution in other than Household stock. The U.S. District Court for the Northern District of Illinois rejected this argument, stating the Plan Committee cannot hide behind the provisions of the plan and allowed the action to continue. Further, the federal district court found the participants also may have a claim against Household for continuing to make matching contributions with stock. (Cokenour v. Household International Inc., N.D. Ill. 2004)

BellSouth Employees’ Breach of Fiduciary Duties Claim Survives Summary Judgment. A lawsuit involving a breach of fiduciary duty claim against BellSouth Corp.’s retirement savings plan survived a dismissal motion in the U.S. District Court for the Northern District of Georgia. The plaintiffs, BellSouth employees who are participants in the company’s retirement savings plan, also alleged the plan’s fiduciaries breached their duties by failing to disclose to BellSouth employees that the company overstated its revenues by $163 million. The plaintiffs, who invested in company stock, allege fiduciaries of the company’s plans breached their duty to prudently manage the plans by failing to remove BellSouth stock as an investment option. Although the BellSouth stock did not lose value as a result of the disclosure of accounting errors, the federal district court held the plaintiffs demonstrated a reasonably prudent person would have found this unexpected development to be sufficient to signal BellSouth stock was no longer a prudent investment. The district court recognized “the markets are more unwilling than ever to tolerate corporate misstatement of earnings.” (Hill v. BellSouth Corp., N.D. Ga. 2004)

Lack of Knowledge Not a Defense to Serious Consideration Claim. Through the 1990s, Northeast Utilities adopted a series of early-retirement programs to allow employees 55 years and older with 10 years of service to receive additional retirement benefits. Northeast kept these deliberations confidential, and members of the human resources department were not made aware of the development of these programs. Several employees who retired before the programs were announced sued, claiming they should have been informed by the human resources department that an early retirement program was to be offered. Northeast argued the statements made by the human resources department could not be deemed misstatements because these individuals believed there was no early retirement program under consideration. The U.S. District Court for Connecticut rejected this argument, finding Northeast withheld information from the human resources department so members of the department would not technically lie to employees. The federal district court found “the fact the Human Resources employees accurately said ‘I don’t know’ does not absolve [Northeast Utilities] of liability.” (Broga v. Northeast Utilities, D. Conn., 2004)

Fiduciary’s Failure to Detect Double Sale of Viatical Contract Not a Breach of Fiduciary Duty. A bank serving as a directed trustee of a retirement plan that invested solely in viatical settlement agreements did not breach its fiduciary duty when it failed to recognize the double sale of a viatical contract, according to the U.S. District Court for the Eastern District of Pennsylvania. Frankford Trust Co.’s failure to detect the double sale does not give rise to the level of a breach of fiduciary duty, held the federal district court, because the evidence indicated most banking trust systems would not have detected the double sale of the policy. As reported in the March 10, 2003 to March 21, 2003 Employee Benefits Developments, the U.S. Court of Appeals for the Third Circuit held the bank was a fiduciary within the meaning of ERISA, because the bank did more than perform merely administrative and ministerial duties when it took control of the viatical settlement policy’s proceeds and distributed the proceeds to the wrong retirement plan in error. (Srein v. Frankford Trust Co., E.D. Pa. 2004)

Right to Challenge Plan Amendment Waived by Participant. The estate of a former law firm employee, who waived his right to contest the law firm’s amendment to its pension plan in a separation from employment agreement, cannot sue the pension plan asserting the plan violated ERISA, according to the U.S. Court of Appeals for the Second Circuit. While the deceased employee, Bennett Yablon, was employed at the law firm, the law firm made a series of amendments to its retirement and pension plans. Yablon later left the employment of the law firm and signed a separation agreement that released the firm from any liability of claims arising under ERISA. The executor of Yablon’s estate brought several claims against the law firm, including claims the firm never properly amended its defined contribution plan to eliminate the firm’s contribution obligations and the firm breached its fiduciary duty in failing to establish a funding policy and failing to follow a statement of investment policy. The Second Circuit affirmed the lower court’s decision to dismiss the lawsuit, finding the employee’s waiver of his ERISA claims against the plan had been made knowingly and voluntarily under the totality of the circumstances. The federal appellate court also held the lower district court correctly dismissed the plaintiff’s claims of breach of fiduciary duty with regard to funding and investment policies, because the defendant provided evidence that funding and investment policies were established and followed by the plans. (Yablon v. Strook & Strook & Lavan Retirement Plan and Trust, 2nd Cir. 2004 (unpublished))

Exxon Mobil Must Pay Severance Benefits Due to Omission Of Eligibility Provision in SPD. Mobil Corp. breached unilateral contracts when it refused to pay severance benefits to 52 Mobil Corp. employees who fell within a certain employee category or were transferred because of a divestiture of Mobil Corp., according to the U.S. District Court for the Eastern District of Pennsylvania. Mobil Corp. created a severance plan in 1998, prior to its merger with Exxon Corp. The severance plan provided enhanced benefits to Mobil Corp. employees who lost their jobs as a result of the Mobil-Exxon merger. In January 1999, Mobil Corp. issued a Summary Plan Description (SPD) for the severance plan that failed to state Tier 4 employees were ineligible for benefits under the severance plan. The federal district court held the omission of the exclusion of Tier 4 employees from the severance benefits in the SPD cannot be “characterized as a mere omission” because “a reasonable person would construe” the SPD language to apply to all employees who were terminated by Mobil Corp. and were not offered “comparable employment” with the merged company. The district court held because the SPD and plan provisions were in conflict, the employees’ contractual rights, as communicated to them in the SPD, vested when the merger (or change in control) occurred. (Hooven v. Exxon Mobil Corp., E.D. Pa. 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.