Deadline Looms for IRA Heirs Who Want to Switch Payment Methods. Nonspouse heirs with inherited individual retirement accounts (“IRAs”) have a decision to make by December 31. After the death of an IRA owner, a nonspouse beneficiary may switch from the five-year rule requiring distribution of all inherited assets by December 31 of the fifth year after death. The beneficiary instead may choose to take distributions over the beneficiary’s life expectancy. The switch, allowed under final regulations issued in 2002, requires all amounts that would have been required to be distributed under the life expectancy rule to be distributed by the earlier of December 31, 2003 or the end of the five-year period. A nonspouse beneficiary who inherited an IRA from a person who died in 1998 through 2002 and who wishes to change to life-expectancy distributions must complete the switch by this December 31. An IRA heir should contact soon the financial organization holding the IRA to make certain the switch is permissible and that it makes sense.

CASES

Enron Judge Allows ERISA Suit to Go Forward. On September 30, a U.S. district court declined to dismiss a lawsuit by participants in the Enron Corporation’s retirement plans, charging the company, its officers and directors, Northern Trust Company, and Arthur Andersen with breach of fiduciary duty under ERISA. However, in a 327-page ruling, the court dismissed the civil racketeering and conspiracy claims against a larger group of defendants, including a number of investment banks. Among the claims that survived the defendants’ motion to dismiss is a claim the executives and officers breached their fiduciary duties of loyalty and prudence by aggressively promoting Enron stock to plan participants as an investment while they were aware of the financial difficulties of the company. The court also rejected the argument that federal securities rules prohibiting insider trading relieved the former officers and directors of a fiduciary duty to disclose information about Enron’s financial situation to plan participants. According to the court, the defendants could have fulfilled their fiduciary duties either by disclosing to the general public information regarding Enron’s true financial situation or by causing the plan to stop investing in Enron stock. Also surviving is the charge the defendants breached their fiduciary duties by instituting a month-long blackout period during which plan participants were prevented from selling Enron stock, despite complaints from participants facing plummeting stock values in their accounts.

Claims against Northern Trust, the directed trustee of the pension fund, raise warning flags for directed trustees. The court concluded a directed trustee retains a degree of discretion, authority, and responsibility that may expose it to liability. The court stated where a directed trustee knows, or should know, the employer company is in financial danger and its stock is greatly diminishing in value, it has a duty as an ERISA fiduciary to protect pension funds by investigating the directions it receives from the plan’s named fiduciary to ensure the directions are prudent and in compliance with ERISA and the terms of the plan. (In re Enron Corp. Securities, Derivative & ERISA Litigation (Tittle v. Enron Corp.), ___ F.Supp.2d ___, 2003 WL 22245394 (S.D. Tex. Sept. 30, 2003).)

Fiduciaries Advised to Read the Policies They Sign. Plan fiduciaries should be wary of relying solely on expert advice, in light of a recent Sixth Circuit decision, especially if the expert is not truly independent. Relying on the advice of a broker, the Transportation Workers Union of America selected a group term life insurance policy for its members and provided them with information about the policy. Information disclosed included statements that future premium increases would be minimal, age would not affect premiums, and coverage could be continued indefinitely after retirement. Not disclosed were terms that permitted the insurance company to terminate the policy after three years or whenever participation fell below 50 individuals. When the insurance company terminated the policy, the participants sued the union for failing to disclose relevant information and misrepresenting the terms of the policy. Reversing a lower court decision, the Sixth Circuit sent the case back to trial to determine whether the union officers breached their fiduciary duties by misleading beneficiaries and by relying too heavily on an advisor that was not independent because it was paid by the insurer. Noting the union officers were unfamiliar with the terms of the policy, the court found, although fiduciaries need not become experts in employee benefits and may rely on independent expert advice, it was not asking too much to expect them to at least read the policies they sign. The court also found once a fiduciary begins affirmatively providing information not required by ERISA, as when answering questions about the terms of the policy, the fiduciary must provide accurate and complete information and may not mislead potential participants, even if this means disclosing information the fiduciary would not otherwise need to disclose. (Greg v. Transportation Workers of America, 343 F.3d 833 (6TH Cir. Sept. 11, 2003).)

Overstating Pension Benefits Is Not a Fiduciary Breach. An employer that repeatedly and erroneously overstated an employee’s retirement benefits—until she retired—was not guilty of breaching its fiduciary duties, according to an unpublished opinion by the 2nd Circuit Court of Appeals. Mary Hart worked for Equitable Life Assurance Society 1961 to 1963 and then 1976 to 1999. Beginning in 1987, Equitable sent Hart benefit statements that incorrectly computed her benefits by stating her break in service extended from 1963 to 1966 instead of 1963 to 1976. Equitable’s statements contained an express disclaimer indicating the benefit amounts were estimates; the federal district court focused on the disclaimer and granted Equitable summary judgment. The statements showed Hart would have $1,500 per month in benefits, but when she retired in 1999, she was told she would receive only $500 per month. The higher court affirmed the district court’s holding for Equitable, but said it did so for somewhat different reasons. The 2nd Circuit said Hart failed to provide evidence Equitable was negligent in preparing the benefit statements, “in the absence of anything that might have alerted Equitable that its data was inaccurate.” (Hart v. Equitable Life Assurance Society, (2d Cir., Sept. 18, 2003 (not published).)

Employer May Need to Disclose Merger Talks Under State Law Claim by Former ESOP Participant. The question of how much an employer must tell a departing employee was at issue for an employer in merger talks at the time a former employee was exercising his put option after taking a distribution of employer stock from the company’s employee stock ownership plan (“ESOP”). The 11th Circuit Court of Appeals reversed a lower federal court and permitted the employee’s claim to proceed in state court, holding there was no ERISA preemption to prevent the state law fiduciary claim. The participant’s claim here was not as a participant under the ESOP; he asserted his rights as a minority shareholder. (Ervast v. Flexible Products Co., __ F.3d __, (11th Cir., Sept. 24, 2003).)

PBGC Ordered to Pay $96 Million in Unfunded Plant Shut-Down Benefits. On September 30, a district court judge in Ohio ordered the Pension Benefit Guaranty Corporation (“PBGC”) to pay $96 million in unfunded shut-down benefits to workers participating in four defined benefit pension plans sponsored by Republic Technologies International LLC (“RTI”). In the late 1990s, RTI had negotiated new labor and pension agreements with the United Steel Workers of America that provided enhanced benefits, including pension shut-down benefits, in the event of plant closures. In light of the enhanced benefits, PBGC secured a pledge from RTI to make additional payments in excess of the statutory minimum. However, the payments were repeatedly deferred. Ultimately, RTI filed for bankruptcy and entered negotiations to sell the company. On June 14, 2002, PBGC issued a notice of termination for RTI’s pension plans and asked the court to rule the plans were terminated as of that date. A June 14, 2002 termination date would prevent the vesting of the unfunded shut-down benefits in the plans and the extension of PBGC’s guarantee to those benefits. RTI declared a shut-down of its facilities on August 16, 2002. Citing the participants’ heightened reliance on the shut-down benefits in this case, the court refused to permit a termination date that would prevent the vesting of the shut-down benefits. Acknowledging the assumption of an additional $96 million in unfunded guaranteed benefits will increase the liability of the PBGC insurance fund, the court said this was not an “unreasonable increase” prohibited by ERISA, because, at the time of the termination decisions, PBGC had a $7.7 billion surplus. The court said it was of no consequence that PBGC reported a $3.6 billion deficit in 2002. The court cautioned, however, its decision in this case does not mean PBGC is precluded in other situations from proposing a termination date that prevents participants’ shut-down benefits from vesting. The decision is expected to be appealed. (PBGC v. Republic Technologies Int’l., Inc., et al, ___ F. Supp. 2d ___ (N.D. Ohio 2003).)

Evidence of Gross Misconduct in COBRA Liability Suit Warrants Trial. Failure to notify a terminated employee of his rights under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) was just one of 15 separate employment-related claims brought by Adam Deutsch against his former employer, Kroll Associates, Inc. (Deutsch v. Kroll Associates, Inc., ___ F. Supp. 2d ___ (S.D.N.Y. 2003)). Deutsch had asked the court to rule in his favor on the count in a summary judgment motion. The court declined to award him summary judgment on the issue, however, because of evidence provided by his employer that the termination had been for gross misconduct. An employer is not required by COBRA to offer continuation of health benefits to an employee who has been terminated for gross misconduct. Here, the court found Kroll had presented sufficient evidence of behavior by Deutsch that a reasonable fact-finder could conclude constituted gross misconduct (including assaulting a co-worker and sending and receiving pornographic material from his office computer) that the issue could not be decided on summary judgment but must be resolved at trial. The underlying message to employers is, even if they legitimately fire someone for behavior that meets the standard of gross misconduct, if they deny COBRA coverage to the former employee on that basis and the decision is challenged, they may face lengthy litigation.

COLI Saga Continues With Widows’ Litigation. The problems of corporate-owned life insurance (“COLI”) purchased en masse—also known as “janitor COLI”—continue for employers such as Wal-Mart Stores Inc. (“Wal-Mart”). We’ve reported in past editions on court decisions generally (but not always) disallowing the deductions corporations have taken for these types of COLI programs. There are also federal legislative efforts to reign in COLI, though none have become law yet. The latest activity is a class action by widows of former New Hampshire Wal-Mart employees. The widows are challenging the program where Wal-Mart purchased COLI policies on the lives of more than 1,000 employees. In the latest round, a federal district court judge dismissed some of the widows’ many claims. Claims proceeding to trial under New Hampshire law include that Wal-Mart used the names and confidential medical information of employees in purchasing the COLI policies without the employees’ knowledge or consent, which resulted in a breach of fiduciary duty and unjust enrichment—taking benefits from the employees without their knowledge or consent. The widows seek to recover life insurance benefits paid to Wal-Mart under the program, premiums paid to the insurer, and any damages as a result of use of names and medical information. (Rice v. Wal-Mart Stores Inc., 2003 DNH 166 (D. N.H. Sept. 30, 2003).)

RECOMMENDED READING

The IRS’s 16-page Fall 2003 Employee Plan News is available through this link http://www.irs.gov/pub/irs-tege/fall03.pdf. This is a quarterly publication of the IRS’s Tax Exempt and Government Entities Division.

Department of Health and Human Services’s (“HHS”) frequently asked questions (“FAQs”) on the HHS Web page under the Office of Civil Rights contains several recently posted answers. The FAQs can be accessed at http://www.hhs.gov/ocr/hipaa.