Tips for Plan Fiduciaries: Selecting and Monitoring Pension Consultants. With a focus on independent advice and conflicts of interest, the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) jointly issued a set of 10 questions to assist pension fiduciaries in evaluating the objectivity of recommendations provided by a pension consultant. Services to pension plans are frequently financed through fee-sharing arrangements, wrap fees, distribution fees, and other asset-based revenue sharing arrangements. The questions are designed to bring these arrangements to light and disclose material conflicts of interest. Posing the questions to your pension consultant or plan financial advisor and reviewing the answers will help fulfill your fiduciary duties to monitor plan expenses and avoid prohibited transactions. The questions include:

Do you or a related company receive any payments from money managers you recommend, consider for recommendation, or otherwise mention to the plan for our consideration? If so, what is the extent of these payments in relation to your other income (revenue)?
Do you have any arrangements with broker-dealers under which you or a related company will benefit if money managers place trades for their clients with such broker-dealers?
Do you consider yourself a fiduciary under ERISA (Employee Retirement Income Security Act of 1974) with respect to the recommendations you provide the plan?

The SEC release, including the questions and some commentary, is found at the SEC website: http://www.sec.gov/investor/pubs/sponsortips.htm.

Domestic Partners Not “Spouses” Under IRC § 457(b) Plans. Two private letter rulings issued in June by the Internal Revenue Service (IRS) address the treatment of domestic partners as spouses in Internal Revenue Code (IRC) §457(b) eligible deferred compensation plans. The county requesting the rulings sponsors two collectively bargained IRC §457(b) plans and is subject to a state law providing that registered domestic partners have the same rights, protections, and benefits “under law” as granted to spouses. Rights applicable to former spouses and surviving spouses must also be extended to former domestic partners and surviving domestic partners. However, the statute also expressly provides that its provisions may not amend or modify federal law or the benefits, protections, and responsibilities provided by federal law. The county’s §457(b) plans contain a number of provisions that govern the benefits and rights provided under the plans to spouses, former spouses, and surviving spouses (e.g., the “spouse provisions” relating to domestic relations orders, rollovers, and financial hardships). In determining the applicability of the spouse provisions to domestic partners, the rulings draw upon the definition of spouse in the federal Defense of Marriage Act. The Defense of Marriage Act provides that the word “spouse,” for purposes of interpreting federal rules and regulations, “refers only to a person of the opposite sex who is a husband or wife.” Under the rulings, a registered domestic partner is not a spouse for purposes of §457(b). Accordingly, if the plans provide benefits to domestic partners under the spouse provisions, the plans will not be in operational compliance with §457(b). Priv. Ltr. Ruls. 200524016 and 200524017.

CASES

Fund Cannot Impose Conditions Not Described in Current Summary Plan Description. Paul Gorman was covered by the Carpenters’ and MillWrights’ Health Benefit Trust Fund (the fund), and filed a medical claim with the fund in September 2002 for injuries sustained in a motorcycle accident. The fund approved payment of Gorman’s medical claim but required him to sign its subrogation assignment contract (SAC) as a prerequisite to payment of benefits. The SAC imposed new requirements on Gorman that were not described in the summary plan description Gorman received from the fund (1999 SPD). Because of mounting financial pressures from medical bills, Gorman signed the SAC in January 2003, but he also brought a lawsuit challenging the fund’s right to use the SAC to impose new requirements on Gorman that were not described in the 1999 SPD. At trial, the fund argued its updated SPD (2003 SPD)—which was amended effective January 1, 2003, (although it was not distributed to participants until May 2003) to incorporate certain SAC provisions—should be the controlling document because Gorman signed the SAC after the 2003 SPD’s effective date. Both the federal district court and the U.S. Court of Appeals for the Tenth Circuit held that (i) the 1999 SPD is the controlling document because Gorman’s benefits had vested prior to the effective date of the 2003 SPD, and (ii) the SAC between the fund and Gorman was not enforceable because the new requirements described in the SAC were not stated in the 1999 SPD. Gorman v. Carpenters’ and MillWrights’ Health Benefit Trust Fund (10th Cir. 2005).

Good Defense Sacks Offense. Brent Boyd was an offensive lineman for the Minnesota Vikings for six years prior to his retirement in 1987. He subsequently experienced a host of health issues including knee problems, alcohol abuse, depression, and hypertension. In 1997 Boyd applied for football degenerative disability benefits from the NFL Retirement Plan, an ERISA-covered qualified plan. The claim was based on orthopedic joint problems and was denied. In 2000 Boyd made a second application for disability benefits from the NFL plan, this time based on brain problems resulting from a 1980 head trauma. Conflicting medical opinions were presented to the plan administrator regarding the second disability claim, and the plan relied on one opinion that concluded that Boyd’s 1980 head trauma was not directly connected with a major portion of his current disabilities. In a case that reaffirms the discretionary authority of a plan administrator who has been granted discretion under the plan document, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court decision upholding the plan administrator’s action. The lesson for plan administrators: make sure your plan document gives you sufficient discretion; then act on the basis of reasonable authority in making decisions. Boyd v Burt Bell/Pete Rozelle NFL Players Retirement Plan (9th Cir. 2005).

Good Things Come to Those Who Wait … Plus a Tax Bill. Linda Lodder-Beckert stopped working in 1999 to attend college. For the previous 18 years, she was an employee of the University of Cincinnati and had participated in the Public Employees Retirement System of Ohio (PERS). Linda planned to use her PERS account to pay for her college education. When requesting a distribution, she was informed that the Ohio State legislature had legislation pending that would retroactively add amounts to her PERS account. The legislation was enacted with an effective date of December 13, 2000. By waiting for the legislation to pass, Linda’s account more than doubled. She then asked for her PERS account to be transferred to her individual retirement account (IRA) in early January 2001. In 2001, she withdrew $20,000 from her IRA. She used approximately $8,000 to pay higher education expenses she incurred in 2001. She used the remaining $12,000 to pay down credit card debts she incurred to pay her higher education expenses in 1999 and in 2000. When Linda filed her tax return she reported the $20,000 as taxable, but did not pay the 10% early withdrawal penalty claiming that the $20,000 was used to pay qualified higher education expenses. The IRS agreed with her with respect to the $8,000 of higher education expenses incurred in 2001. With respect to the $12,000 for 2000 and 1999 expenses, the IRS disagreed, pointing to the language in the IRC that requires use of the funds distributed to pay higher educational expenses incurred during the taxable year. The U.S. Tax Court, in reviewing this situation, agreed with the IRS that only amounts incurred in the year in which the distribution is taken qualify for the exception. Beckert v. Commissioner (Tax Court Memorandum Opinion, 2005).

COBRA: Protective Order Keeping Husband Away From Spouse Is Not a Qualifying Event. T.D. Williamson (TDW) issued a group health insurance policy to Zeda Simpson’s husband, a TDW employee. Simpson and her husband filed for divorce. During the divorce, the court entered three protective orders requiring the husband to stay away from Simpson and the marital residence. Prior to entry of a final divorce decree, based on correspondence from Simpson and the protective orders, TDW concluded a “legal separation” had occurred and that Simpson’s COBRA (Consolidated Omnibus Budget Reconciliation Act) rights were triggered. TDW sent Simpson a COBRA notice. Simpson objected to TDW’s determination, but nonetheless elected coverage. Neither Simpson nor her husband paid the COBRA premiums, and TDW notified Simpson that it canceled her health insurance for non-payment of COBRA premiums. The following month, Simpson notified TDW that the divorce court had entered a final divorce decree and now she wished to elect COBRA coverage. TDW replied that Simpson’s COBRA rights already had expired under her prior COBRA election due to nonpayment of premiums and could not be reinstated. Simpson filed suit in federal district court, alleging TDW denied her rights under COBRA. Affirming a decision at the trial court level, the U.S. Court of Appeals for the Tenth Circuit found a “legal separation,” and thus a COBRA “qualifying event,” occurs only upon entry of a final court decree adjudicating the parties’ legal rights and obligations but preserving the marriage bond. Accordingly, TDW’s notice to Simpson of her COBRA rights prior to entry of the final divorce decree was invalid. The federal appellate court also upheld the trial court’s awards to Simpson of out-of-pocket expenses, attorney fees, and a statutory penalty. Simpson v. T.D. Williamson Inc. (10th Cir, 2005).

Threatening Voicemails Cost a Participant His Severance Benefits. Richard Waksman was a participant in the IBM Separation Allowance Plan (the plan). When his employment with IBM ended, he was denied severance benefits under the plan. The plan included a provision under which a participant can be denied benefits if he or she engages in “threatening conduct.” The plan administrator determined Mr. Waksman was not entitled to severance benefits because of a series of threatening voicemail messages he had been leaving. While the plan administrator did not actually listen to the voicemail messages, the evidence before the plan administrator was that Mr. Waksman was detailed in the wording his “threats” (identifying a weapon and a mode of transport), and that he repeated substantially the same “threat” four times over two days. The U.S. Court of Appeals for the Second Circuit upheld the decision of the federal disctrict court, finding it had not been irrational for the plan administrator to construe Mr. Waksman’s statements as “threatening conduct,” even if he never seriously meant to convey a threat. Waksman v. IBM Separation Allowance Plan (2d Cir., unpublished 2005).

COBRA: When Does the Election Period End? A three-way dispute arose between an insurance company (Health Plus of Louisiana, Inc. (Health Plus)), an employer (Custom-Bilt Cabinet & Supply, Inc. (Custom-Bilt)), and a health care provider (Lifecare Hospital, Inc. (Lifecare)) over the proper length of the COBRA election period. After he became suddenly and severely ill in July 2001, Custom-Bilt terminated James Sloan’s employment in August 2001. In July, a distraught Mrs. Sloan met with Custom-Bilt about her husband’s insurance benefits. Custom-Bilt informed her about the necessity of her husband electing COBRA health insurance coverage. The only written information that Custom-Bilt provided to Mrs. Sloan was a COBRA enrollment form. The COBRA enrollment form was not immediately submitted. In December 2001, Sloan attempted to extend his health insurance coverage under COBRA. Health Plus, the private insurer Custom-Bilt had contracted with for its employees, refused to reimburse Lifecare for Sloan’s medical expenses because Sloan failed to make a timely COBRA election. The U.S. Court of Appeals for the Fifth Circuit ruled Sloan’s December 2001 COBRA election was timely, even though it was made more than 60 days after Custom-Bilt first gave Mrs. Sloan a COBRA enrollment form (i.e., July 2001). The federal appeals court found that because neither Custom-Bilt’s plan nor COBRA limits the election period, Sloan could elect COBRA coverage anytime within the 18-month maximum period allotted for continuation coverage. Lifecare Hospitals Inc. v. Health Plus of Louisiana Inc. (5th Cir. 2005).

This newsletter is a periodic publication of Hodgson Russ LLP. Its contents are intended for general informational purposes only and should not be construed as legal advice or legal opinion on any specific facts or circumstances. Information contained in the newsletter may be inappropriate to your particular facts or situation. Please consult an attorney for specific advice applicable to your situation. Hodgson Russ is not responsible for inadvertent errors in this publication.