Proposed COBRA Rules Would Expand Notice Obligations. COBRA has once again bared its fangs. The Employee Benefits Security Administration (EBSA) published proposed regulations that set minimum standards for the timing and content of the notices required under COBRA and establish standards for administering the notice process. The regulations would require employers subject to COBRA to reexamine their COBRA procedures and administrative forms. Among other items, the proposed regulations would:

require the general notice given to employees and their spouses when they become covered by a plan to be furnished within 90 days after coverage begins;
include a revised model general notice to make it easier for plan administrators to comply with the notice requirements;
prescribe the required timing and content of an employer-provided notice of a qualifying event, such as loss of job, reduced working hours, death of the employee, or enrollment of an employee in Medicare;
mandate that plans adopt reasonable procedures for requiring employees and their families to give notice of divorce or legal separation and loss of dependent status;
require a COBRA election notice to describe available health plan options, premium payment requirements, the consequences of failing to elect COBRA, and how COBRA coverage could be extended due to disability or a second qualifying event; and
include a model election notice that plans could use to comply with the election notice requirement.

The regulations would also clarify that an employer that simultaneously serves as plan administrator has 44 days (and not 14 days, as many courts have ruled) in which to provide a COBRA election notice following a qualifying event. Once finalized, EBSA proposes to make the regulations effective as of the first day of the first plan year that occurs on or after January 1, 2004. (68 Fed. Reg. 31,831 (May 28, 2003).)

QDRO and QMSCO Expenses May Be Charged to Individual Participants. In revisiting how plan fiduciaries may permissibly allocate expenses among participants in a defined contribution plan, EBSA expressly superseded prior guidance in declaring that the reasonable costs associated with qualified domestic relations order (QDRO) and qualified medical child support order (QMSCO) determinations may be allocated to and charged against the accounts of the participant or beneficiary seeking the determination. Consistent with existing regulations, these charges would need to be disclosed in the summary plan description (SPD). Regarding the allocation of other expenses, EBSA stated fiduciaries must generally follow the allocation methodology set forth in the plan document, but if the document is silent, the fiduciaries may select any methodology, so long as it is prudent. Under the circumstances, prudence means careful consideration of the competing interests at issue and of how a particular scheme may impact each class of participants. EBSA posited, for instance, a pro rata approach might be defensible in certain cases (e.g., investment management fees), while a per capita approach could be justified in others (e.g., fixed administrative plan expenses). (Field Assistance Bulletin 2003-3, http://www.efast.dol.gov/ebsa/regs/fab_2003-3.html (May 19, 2003).)

Regulations Published on Deemed IRA Contributions to Qualified Plans. Our readers may recall the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) contained provisions allowing employees to make voluntary contributions to an account or annuity that is treated like an IRA but is established under a qualified employer plan. The IRS has just published proposed regulations relating to these so-called deemed IRAs. In their current form, the regulations provide that a qualified employer plan and a deemed IRA are to be treated as separate entities under the Internal Revenue Code (the Code), and each is subject to the rules generally applicable to that entity for Code purposes. Thus, a qualified employer plan (excluding the deemed IRA portion of the plan) is subject to the rules applicable to a qualified employer plan rather than those applicable to IRAs. Similarly, the deemed IRA portion of the plan is generally subject to the rules applicable to traditional and Roth IRAs and not the rules applicable to qualified employer plans. (68 Fed. Reg. 27,493 (May 20, 2003).)

CASES

Supreme Court Rejects Application of Treating Physician Rule to Disability Determinations. Kenneth Nord filed a claim for benefits under the disability plan of his employer, a subsidiary of the Black & Decker Corporation (Black & Decker). His treating physicians contended Nord was unable to work due to degenerative disc disease and chronic back pain, but an independent neurologist engaged by Black & Decker concluded Nord could perform sedentary work if aided by pain medication. Black & Decker rejected Nord’s disability claim, Nord sued, and the District Court found Black & Decker’s denial of the claim was not an abuse of discretion. The Ninth Circuit Court of Appeals reversed, finding Black & Decker had not provided adequate justification for rejecting the opinions of Nord’s own doctors, a regulatory mandate in Social Security disability cases to facilitate efficient administration of that program. On May 27, the United States Supreme Court vacated the Ninth Circuit’s “judicial installation of a treating physician rule for disability claims within ERISA’s domain.” Writing for a unanimous Court, Justice Ginsburg noted, “Nothing in [ERISA] . . . suggests that plan administrators must accord special deference to the opinions of treating physicians. Nor does [ERISA] impose a heightened burden of explanation on administrators when they reject a treating physician’s opinion.” (Black & Decker Disability Plan v. Nord, ___ S.Ct. ___ (2003).)

Payments Made by ESOP Sponsor to Redeem Stock Held by ESOP are Deductible as Dividends Paid. It would be very attractive if an ESOP sponsor could not only get a deduction for its contributions to the ESOP, but also could get a deduction for amounts it pays to redeem ESOP stock when an employee is paid out of the ESOP. Boise Cascade spent 10+ years litigating an $840 refund, but was successful in advancing its position that amounts it paid to redeem shares of ESOP stock held for the benefit of certain terminated participants were deductible as dividend payments. Boise Cascade sponsored a qualified retirement plan with an ESOP component that invested in convertible preferred stock. The court concluded the trustee (and not the ESOP participants) was the owner of the stock when the redemption occurred and the redemption did not result in a meaningful reduction of the ESOP’s proportionate interest in the corporation. Accordingly, the court concluded the redemption payments qualified under Code § 302 as dividend payments deductible under Code § 404(k). In reaching its holding, the court rejected the government’s primary argument that the ESOP participants were the beneficial owners because they had the right to instruct the ESOP trustee as to the manner in which to vote their shares of the convertible preferred stock and the right to instruct the trustee as to how to respond to tender or exchange offers for the stock. (Boise Cascade Corporation v. U.S., ___ F.3d ___ (9th Cir. 2003).)

Supreme Court Denies Certiorari in Tire Retirees Case. In 1981, the Armstrong Rubber Company (Armstrong) distributed an SPD advising employees their health plan coverage would continue post-retirement until Armstrong stopped paying premiums. The company, now known as Pirelli Armstrong Tire Corporation (Pirelli), purchased an Armstrong plant in 1988 and one year later issued its own SPD, reserving the right to modify or terminate the health plan at any time. Though Pirelli adopted an Optional Pension/Severance Plan (OPS) to encourage early retirement, employees were repeatedly told, in letters and at a series of meetings, their health benefits would remain intact, and many employees did, in fact, retire because of the company’s representations. But in 1993, Pirelli adopted a new plan that reduced employee and retiree health benefits. Twenty-three retirees sued. On May 19, in denying Pirelli’s request for review, the Supreme Court let stand a Sixth Circuit Court of Appeals holding that Pirelli had breached its fiduciary obligations by misleading the retirees and providing them inaccurate information in response to direct questions about future benefit changes. (James v. Pirelli Armstrong Tire Corporation, ___ S.Ct. ___ (2003).)

Claim Against Actuary for Professional Negligence Not Preempted by ERISA. The complicated jurisprudence surrounding the types of claims that may be brought against non-fiduciaries continues to evolve. The trustees of the Cement Masons’ Local 780 Pension Fund (the “Plan”), a multi-employer pension plan, engaged Savasta & Company, Inc. (“Savasta”) to serve as the Plan’s actuary. From 1994 through 1997, Savasta reported the Plan was overfunded and, in reliance on that information, participant benefits were increased. In 1998, however, Savasta reported the Plan’s assets would cover only about 70% of the projected liabilities. Savasta allegedly characterized the disparity between its 1998 findings and those in prior years as a “data correction,” and a correction beyond explanation because the records on which it based all previous calculations had mysteriously disappeared. The trustees sued Savasta, seeking a recovery of the anticipated shortfall. On May 19, reversing and remanding a District Court ruling, the Second Circuit Court of Appeals held, in the absence of a claim for restitution, the trustees lacked any basis under ERISA to redress their grievance, but a claim for malpractice against Savasta could continue as ERISA does not preempt “run-of-the-mill” state law professional negligence claims against non-fiduciaries. (Gerosa v. Savasta & Company, Inc., ___ F.3d ___ (2d Cir. 2003).)

ERISA Preempts New York’s Unrelated Business Income Tax. As New York recently learned, there are limits on the measures a state’s taxing authority may take in raising revenue. McKinsey & Company, Inc. (McKinsey) sponsored a profit-sharing plan and a money purchase pension plan for its eligible employees. Each year, the plans permitted participants to allocate and reallocate contributions among 15 proprietary investment funds. Five of these funds occasionally invested in limited partnerships. Debt-financed income earned by the limited partnerships was subject to unrelated business income tax (UBIT) at both the federal and state levels, one of several factors weighed by McKinsey in making investment decisions. On May 8, the New York Tax Appeals Tribunal ruled the Employee Retirement Income Security Act of 1974 (ERISA) preempts New York’s UBIT where imposed on the unrelated business income of ERISA-covered plans. The ruling does not affect similar UBITs imposed on the McKinsey plans by the federal government or other states. (In re McKinsey Master Retirement Plan Trust, DTA No. 817551 (N.Y. Tax App. Trib. 2003).)

Death Was Reasonably Foreseeable Consequence of Pipe Bomb Construction. Perhaps James Komperda should have collected stamps instead. Komperda died as the result of injuries he suffered when a pipe bomb he was constructing exploded prematurely. The carrier for the group insurance plan under which Komperda was a participant denied a claim for a $10,000 accidental death benefit because it found his death to be “a reasonably foreseeable consequence of his construction of a pipe bomb,” and thus not an accident. The court upheld the carrier’s determination, finding the carrier’s interpretation of what constitutes an “accident” was not arbitrary and capricious. (Komperda v. Harford Life and Accident Insurance Co. (N.D.Ill. 2003).)