Retirement Plan Distributions to Pay Premiums for Health Insurance Are Taxable. Revenue Ruling 2003-62 holds distributions from a qualified retirement plan applied to pay health insurance premiums or reimburse medical expenses under a cafeteria plan are includible in the retiree’s gross income. The Internal Revenue Service (IRS) based its decision on the general rule that the use of funds to pay for employees’ medical insurance or for medical care expenses incurred by an employee or participant are taxable to the participant under Internal Revenue Code (“Code”) § 402(a). (Rev. Rul. 2003-62, 2003-25 IRB 1034, June 23, 2003.)

CASES

Labor Department Sues Enron, Executives to Recover 401(k) and ESOP Losses. The Department of Labor (DOL) filed a lawsuit against Enron, its top executives, its former board of directors, and the former administrative committee overseeing its plans, seeking to recover losses to employee 401(k) plan and employee stock ownership plan (ESOP) accounts. Former Enron chief executive officers Kenneth Lay and Jeffrey Skilling were accused of failing to monitor the administrative committee and withholding from the committee adverse information about the company’s financial health. Lay also was accused of encouraging employees to invest in the company’s stock while fully aware that accounting practices were putting the company on the verge of implosion. The administrative committee was faulted for never monitoring, questioning, or halting the plan’s investment in company stock, which remained an investment option in the 401(k) plan and the sole vehicle for the company’s matching contributions even after the stock began to slip and more dire warnings began to emerge. Cindy Olson, an executive vice president who sat on the plans’ administrative committee, allegedly failed to disclose to participants and the rest of the committee the August 2001 warnings of grave accounting improprieties made by whistleblower Sherron Watkins. More than a dozen members of the former board of directors were named as defendants, in this lawsuit in federal district court in Texas, for failing to appoint an independent trustee to manage the ESOP’s holding in company stock. (Chao v. Enron Corp., S.D. Texas, docket number unavailable, 6/26/03.)

WorldCom Employee Claims Survive Summary Judgment. The U.S. District Court for the Southern District of New York held that employees properly alleged former WorldCom chief executive officer Bernie Ebbers made misrepresentations and withheld negative information about the company’s finances in violation of the Employee Retirement Income Security Act (ERISA). The court dismissed ERISA claims against company directors and employees who were not fiduciaries, and the company’s auditor, Arthur Andersen LLP. However, ERISA claims against Ebbers, WorldCom’s employee benefits director Dona Miller, and Merrill Lynch, a trustee of the company’s 401(k) plan, were not dismissed. The ERISA suits charge Ebbers and others breached their fiduciary duty by hiding the company’s perilous fiscal condition and continuing to offer WorldCom stock as part of benefit plans for employees. A second claim against Ebbers—that he failed to monitor other fiduciaries and failed to disclose material facts about the company’s worsening financial condition—also survived, despite Ebbers’ claim his duty to disclose arose under the securities laws and not under ERISA. The court disagreed, saying “Ebbers’ potential liability to employees who invested in WorldCom stock through the Plan for violations of the federal securities laws cannot shield him from suit over his alleged failure to perform his quite separate and independent ERISA obligations.” (In re WorldCom Inc. ERISA Litigation, Master File 02 Civ. 4816.)

Former WorldCom Executive Must Repay Retention Bonus. Kevin Boyne, a former executive of WorldCom subsidiary UUNET Technologies Inc., was ordered by the U.S. Court of Appeals for the Fourth Circuit to repay a $900,000 retention bonus. The retention bonus was given to Boyne as an incentive to stay with the company for an additional two-year period. In a somewhat unusual situation, the retention amount was paid at the beginning of the two-year period in exchange for his personal commitment to stay with the company, which he did not do. Several executives with similar arrangments had testified they understood they had a repayment obligation if they did not continue employment with the company throughout the period. The court concurred with the lower court that Boyne breached the retention agreement by leaving the WorldCom subsidiary seven months after he received the retention bonus. The court rejected Boyne’s argument that WorldCom acted with “unclean hands” by integrating UUNET’s operations into WorldCom after it paid him the retention bonus, because nothing in “Boyne’s retention package suggested that the commitment hinged on non-integration.” (WorldCom Inc. v. Boyne, 4th Cir., No. 02-1479, unpublished opinion, June 25, 2003.)

Question of Fact Exists as to Whether On-Call Employee was Covered by Accidental Death Plan. Irene Lifson was employed by MONY Life Insurance Co. as a software engineer and was a participant in her company’s travel accident plan. Lifson, who was on call on February 29, 2000, left her office at the MONY Life Insurance Co. and was struck by a car as she crossed the street on her way to a parking garage. She died the next day. The U.S. District Court for the Northern District of New York held Lifson was not on business when she was killed, and, therefore, her widower was not entitled to benefits under the accidental death plan. The U.S. Court of Appeals for the Second Circuit vacated the judgment and remanded the case to the district court for further proceedings, because there was a question of fact as to whether Lifson was on business or in the course of business at the time of her death because of her on-call status. Because the plan terms were unclear on this matter, the court held summary judgment was inappropriate. (Lifson v. INA Life Insurance Co. of New York, 2d Cir., No. 02-9147, June 25, 2003.)

Disney Directors May Be Liable for Fiduciary Breach. Declining to dismiss a shareholder derivative action against Disney’s directors, the Delaware Court of Chancery ruled Walt Disney Co.’s board of directors may have breached their fiduciary duties to shareholders when they “blindly” approved the hiring and compensation of the company’s president. The shareholders’ complaint argued the directors “consciously and intentionally disregarded their responsibilities” by allowing chief executive officer Michael Eisner to hire and single-handedly determine the compensation of Michael Ovitz, who served as Disney’s president from October 1995 to December 1996. The court held the business judgment rule did not protect the directors from liability because the complaint did not merely allege gross and negligent decision making. The complaint stated the directors failed to exercise any business judgment and failed to make any good faith attempt to fulfill their fiduciary duties to Disney and its stockholders. The court also held Ovitz may be liable to shareholders for negotiating such a lucrative executive compensation package with Eisner, a close friend, when he was aware he was not well-qualified to serve as Disney’s president (Ovitz allegedly left Disney with nearly $140 million in severance pay and stock options). (In re Walt Disney Co. Derivative Litigation, Del. Ch., No. 15452, May 28, 2003.)

Aggregated Expenses Not Subject to ERISA Disclosure Rules. William Shaver, a fund participant, and William Dereschuk, a fund beneficiary, asked a multiemployer pension fund’s trustees to provide them with an itemization of the $1.6 million in expenses the fund incurred in a ten-year period. When the trustees refused, Shaver and Dereschuk brought a lawsuit alleging the trustees violated their ERISA disclosure obligations, as well as their ERISA fiduciary duties, by not supplying them with the requested information. Upholding the decision of a lower federal court, the U.S. Court of Appeals for the Ninth Circuit found ERISA does not require pension plans to disclose to plan participants and beneficiaries certain expenses plans include on their annual IRS Form 5500 filings. According to the court, IRS Form 5500 allows plans to aggregate, rather than itemize, certain fund expenses. The aggregated expenses must be less than $5,000 individually, the court noted. However, a majority of the court found the trustees may have violated their fiduciary duties by not keeping adequate records of the aggregated expenses. A failure to keep records sufficient to verify the plan’s annual reports “would be a breach of both the duty to keep records imposed by Section [107] of ERISA and the common-law fiduciary duty to keep records,” the majority said. (Shaver v. Operating Engineers Local 428 Pension Trust Fund, 9th Cir. No. 01-16922, June 18, 2003.)