ERISA provisions are like fruity rum drinks. A little inattention and they can sneak up on you with most unpleasant consequences.   No place is this more true than with severance pay.  Many employers still believe that if they make just a single payment to a departing employee, they have not created a plan subject to the Employee Retirement Income Security Act of 1974 (“ERISA”).  Employers who meet this test trust that the severance payment can be classified as an ERISA-exempt payroll procedure, rather than as separate and ongoing administrative scheme, i.e., an ERISA plan.  The Supreme Court in Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987) took the view that simply writing a check hardly constitutes the operation of a benefit plan.   Over the years, however, courts have chipped away at, polished, refined and in some cases disagreed as to the applicability of this decision.

A recent example is the 3rd Circuit district court case of Zgrablich v. Cardone Industries, Inc.  In that case, an executive was promised severance benefits payable over more than two years with the level of benefits varying based upon whether the termination was for cause, without cause or based on factors such as death or disability.  When the employer didn’t pay, the employee sued in state court and the employer removed the matter to federal court under the view that the severance agreement was governed by ERISA.

In finding that the severance agreement was an ERISA plan — and, accordingly, denying remand — the court cited these important factors:

First, the court found that from the surrounding facts one could determine the intended benefits, the beneficiaries, a source of financing and procedures for receiving benefits — all the factors necessary for an ERISA plan.

Second, the court looked for an administrative scheme — something more than just writing a check.  A scheme was found in the provisions that provided severance benefits could vary based on the reason for termination.  The court also found on-going administration in the fact that severance payments, including health and other benefits, could be terminated if there was a breach in the severance agreement’s non-compete and non-solicitation provisions.   Also, health coverage continuation could be terminated if coverage was obtained from a new employer.

Third, the court rejected the argument that because the severance provisions were contained in an individual agreement, they could not amount to a plan governed by ERISA.

Finally, the court found that ERISA applied because the dispute was over the right to payments — a claim that implicates coverage and benefits established under a plan — and not a contractual matter dealing with the mere computation or execution of the amount of such payments.

So, what is the take away from this case? If your severance benefit is more than two years’ pay or if payments extend over more than two years, the plan likely is beyond the ERISA severance pay exception.  If the plan involves more than one check which is easily calculated, don’t look back.  Get help.  You likely have an administrative scheme and, accordingly, ERISA provisions — including plan document, reporting and disclosure requirements — could be sneaking up on you.

We have been monitoring and reporting on several disquieting events which have occurred in the multi-employer pension plan world within the past few months.

In September 2015, the Central States Southeast and Southwest Area Pension Fund availed itself of the relief permitted under the Kline-Miller Multiemployer Pension Reform Act of 2014 (“Kline-Miller Act”) by applying to the Department of Treasury (“Treasury”) to reduce “core benefits” in light of the Fund’s “critical and declining” status. Within the succeeding three months, two other funds — the Iron Workers Local 17 Pension Fund and the Teamsters Local 469 Pension Plan — made similar applications.

Recently in the Central States situation, Special Master Kenneth Feinberg — appointed by Treasury to oversee the Kline-Miller Act — has been conducting a series of public meetings around the country to permit Teamsters — both active and retired — to voice their concerns over the cuts, thereby “putting a face” on this problem. The proposed cuts have been reported as ranging between 39.9% to 60.7%.  So, for example, a participant currently receiving a monthly benefit of $3,000 who suffered a 60.7% reduction would see his or her benefit decline to $1,179.99!  Reflecting uncertainty as to what to do, Treasury has once again extended the comment period concerning the reduction in core benefits to March 1, 2016.

It is not clear whether the relief sought by the three funds that have applied to the Treasury will be granted.

The situation is not limited to the three funds that have already sought relief. The Department of Labor reports that there are approximately nine other funds in “critical and declining status” that are also eligible to reduce core benefits.

To further worsen the situation, last week the director of the Pension Benefit Guaranty Corporation (“PBGC”) announced that the agency’s assistance to the United Mine Workers of America 1974 Pension Fund would be a “significant factor” in the PBGC’s multiemployer insurance program’s insolvency. In a September 2015 report, the PBGC reported that its multiemployer pension insurance program was projected to be insolvent by 2025.

These events underscore what has been recognized for years:  employers should not agree to begin contributions to a multiemployer defined benefit pension plan under any circumstances.  As reflected above, there are far too many factors over which the employer will have no control.

Those employers that are currently enmeshed in multi-employer pension plans should not remain passive. Rather, they should begin to consider strategies to exit these plans in future union negotiations.  A first step would be monetizing the withdrawal liability costs and comparing them to possible savings that could be achieved at the bargaining table if the pension fund contributions were to be eliminated.  In some instances, the comparison may reveal that it might be beneficial to negotiate out of the pension fund obligation.

We will continue to monitor the situation and keep you advised.

Does a benefit plan, to fall within the so-called “church plan exemption,” have to be directly established by a religious entity? Or is it enough for the benefit plan to be established by an organization, such as a medical institution, that is itself established by a religious entity?  That is the question that a number of courts are attempting to answer through their holdings in recent cases.

A church plan is defined in the Internal Revenue Code (Code) as a plan established and maintained for its employees or their beneficiaries by a church or by a convention or association of churches which is exempt from tax under Code §501.  Generally, a church plan is not subject to various requirements that apply to tax-qualified plans under the Code and Employee Retirement Income Security Act of 1974 (ERISA), such as ERISA’s rules governing reporting, disclosure, and fiduciary conduct.

For many years, it was the broad interpretation that seemed to rule due in part to IRS private letter rulings, which included in the church plan exemption plans sponsored by non-profit organizations that were controlled by or associated with a church (and not just plans directly established by a church).  Consequently, the IRS and DOL have issued hundreds of rulings to church-affiliated organizations exempting their plans from ERISA.  Recently, however, class actions have been filed across the country against religiously-affiliated healthcare institutions, challenging whether their benefit plans fall under the church plan exemption.

Specifically, on December 8, 2015, the U.S. District Court for the District of Colorado held in Medina v. Catholic Health Initiatives that the defined benefit pension plan sponsored by Catholic Health Initiatives, a Catholic non-profit health care system, qualified as a church plan under ERISA and was, therefore, exempt from ERISA. The court found that a plan does not need to be established by a church to qualify as a church plan; rather, such plans can also qualify as church plans if they are maintained by a tax-exempt organization controlled by or associated with a church whose principal purpose or function is the administration or funding of the benefits plan. The court then interpreted the church plan exemption under ERISA to apply to plans sponsored by church-affiliated non-profit organizations and administered by the organization’s plan committee if the principal purpose or function of the committee is administering the plan and the committee is controlled by or associated with a church.

In contrast, on December 29, 2015, the U.S. Court of Appeals for the Third Circuit upheld a decision of the U.S. District Court for the District of New Jersey in Kaplan v. Saint Peter’s Healthcare System, which held that a retirement plan sponsored by St. Peter’s Healthcare System was ineligible for the church plan exemption and must, therefore, comply with ERISA. In August 2013, the U.S. District Court for the District of New Jersey concluded that St. Peter’s Healthcare System could not establish an exempt church plan because it was not a church. St. Peter’s Healthcare System then appealed that decision to the Third Circuit. The Third Circuit stated that, as of 2012, religiously affiliated hospitals accounted for seven of the nation’s ten largest nonprofit healthcare systems and that applying the church plan exemption to these hospitals would defeat the purpose of ERISA.

Other district courts have sided with the narrow interpretation used in Kaplan:

In Stapleton v. Advocate Health Care Network and Subsidiaries, the U.S. District Court for the Northern District of Illinois held that the defined benefit retirement plan of Advocate Health Care Network is not a church plan under ERISA, and is instead fully subject to ERISA’s requirements. The court stated that although affiliated with the United Church of Christ and the Evangelical Lutheran Church in America, Advocate Health Care Network was not owned or financially supported by either church. Advocate Health Care Network has appealed that decision to the Seventh Circuit.

In Rollins v. Dignity Health, the U.S. District Court for the Northern District of California ruled that a pension plan sponsored by Dignity Health was not a church plan exempt from the ERISA because it was not directly established by a church or convention of churches. The court rejected the IRS’s broad interpretation of the church plan exemption described above. Dignity Health has appealed that decision to the Ninth Circuit.

It is unclear how the circuit courts will rule in these cases. What is clear, however, is that there is disagreement between the government agencies and certain courts as to how to apply the church plan exemption — the effects of which could have hefty consequences for religiously-affiliated healthcare institutions and/or the participants in their benefit plans.

The United Food and Commercial Workers International Union (“UFCW”) National Pension Fund (which, according to its website has over 500 contributing employers and over 100,000 active participants) has adopted a new rule effective as of the plan year ending on June 30, 2014 which increases the risk that a participating employer will unknowingly create a partial withdrawal liability obligation for itself.

An employer participating in any multiemployer pension plan needs to be aware of when a reduction in force may trigger a partial withdrawal (which obligates the employer to make withdrawal liability payments on top of the contributions already being made). In short, ERISA § 4205(a) sets forth three scenarios for a partial withdrawal, including the 70% Decline Rule (the other two scenarios, which are not discussed further here, involve the “partial cessation of the employer’s contribution obligation” in the context of either a facility take-out or a bargaining unit take-out). Under the 70% Decline Rule, a partial withdrawal can occur when the employer’s contribution base units decline by at least 70% and remain at or below that level over a three-year testing period.

However, under the seldom utilized ERISA § 4205(c), a multiemployer pension plan that covers mostly employees in the retail food industry may be amended to provide that a partial withdrawal is triggered by only a 35% decline in contribution base units instead of a 70% decline. This is the provision that the UFCW National Pension Fund has taken advantage of, and which may ensnare some of its unsuspecting participating employers.

Here are some of the types of issues that cross my desk and upon which I advise:

• An HR manager allowed a 10 percent employer contribution into the 401(k) using inaccurate Box 1 W-2 amounts;

• Another HR manager failed to automatically enroll new employees who were part of a recent company acquisition;

• A 401(k) plan failed its Average Deferral Percentage (ADP) tests since 2010 and still has not corrected for the failure;

• A non-profit allowed terminated executives to make an employee deferral into the 403(b) plan off the settlement proceeds they received when they signed a general release at termination;

• A group of what seemed to be four unrelated employers turned out to be part of a control group, making them a “single employer” for ERISA/tax purposes (even for Affordable Care Act group health plan purposes, but we won’t discuss the implications here); one member had offered a 401(k) plan its employees, but the other members offered no retirement plan to their employees.

When plan fiduciaries eventually unravel these problems, they must also analyze whether — to preserve the plan’s tax qualification — they may simply self-correct and avoid the review and scrutiny of (and filing and application fee to) the Internal Revenue Service or whether they must submit an application under the voluntary correction program (VCP) that is part of the Employee Plans Compliance Resolution System (EPCRS), Rev. Proc. 2016-8 (Jan. 4, 2016) requesting approval of the correction.

Typically, an employer may self-correct if plan issues are “insignificant,” an analysis that examines the administration procedures in place, type of error, participants and dollars involved, how many years the mistake occurred, the reason behind the mistake. “Insignificance” tends toward issues where there has been a failure to follow the terms of the plan, exclusion of eligible participants, and improper allocations of contributions. Where issues are “significant” (which will always include plan document failures), however, the employer should consider the VCP route. In addition, Employers may generally self-correct both significant and insignificant failures if errors are corrected shortly after they occur.

In efforts to ease the financial burden of filing under the VCP, effective February 1, 2016 (this week), the IRS will charge significantly reduced compliance fees for certain issues under EPCRS, which is the IRS’s program for correcting plan document, demographic, and operational failures that retirement plans experience. The newly-reduced fees (not retroactive for submissions prior to the February effective date) reflect the IRS’s desire to encourage employers to self-audit their plans to self-disclose to the IRS the compliance issues encountered and the corrections the employer takes. The IRS already discounts fees for certain plan failures (e.g., if the plan fails to pay required minimum distributions, loan failures, late adoption of certain good faith/interim/optional law changes, and non-amenders). Submitting through VCP allows the IRS and the employer to collaborate on the corrections, with the common goal and hope of preserving the plan’s tax-qualified status.

The chart below compares user fees (pre-February 1, 2016) under Revenue Procedure 2013-12, as amended, to the new user fees in effect starting this week:

Number of Participants Old Fee New Fee Number of Participants
20 or fewer $750 $500 20 or fewer
21 to 50 $1,000 $750 21 to 50
51 to 100 $2,500 $1,500 51 to 100
101 to 500 $5,000 $5,000 101 to 1,000
501 to 1,000 $8,000
1,001 to 5,000 $15,000 $10,000 1,001 to 10,000
5,001 to 10,000 $20,000
More than 10,000 $25,000 $15,000 More than 10,000

What with self-correction always a possibility and lower fees when disclosure to and approval from the IRS is necessary, employers – and their plan fiduciaries — should seize the opportunity to identify and remedy plan failures.

Contact any member of the ERISA and Employee Benefits practice group at our firm if you need assistance related to corrections involving your retirement plan.

An employer can adopt what is called a “safe harbor” 401(k) plan. Such a plan requires an employer to commit to making a specific contribution to each plan participant. In doing so, the plan is deemed to pass the annual Actual Deferral Percentage (ADP), the Actual Contribution Percentage (ACP), and the Top Heavy tests, which generally are annually-required discrimination tests that ensure that contributions do not impermissibly favor highly-compensated employees.

An employer must define what type of contribution it will make (for example, at least a non-elective 3 percent of pay contribution to employees; a basic match; or an enhanced match). The safe harbor regulations under Treas. Reg. §§ 1.401(k)-(3) and 1.401(m)-3 require the employer to issue a notice to participants prior to the beginning of the plan year informing them of which safe harbor contribution the employer has selected, as well as other details about plan features that remain in effect generally over the 12-month plan year.

The IRS typically restricts an employer from making mid-year changes to amend a safe harbor plan, which has been a source of frustration for employers who need to make mid-year changes for business reasons, but IRS Notice 2016-16, to be published in IRB 2016-07 (Feb. 16, 2016), provides guidance on limited, but permissible, mid-year changes:

The notice provides that a mid-year change either to a safe harbor plan or to a plan’s safe harbor notice does not violate the safe harbor rules merely because it is a mid-year change, provided that applicable notice and election opportunity conditions are satisfied and the mid-year change is not a prohibited mid-year change, as described in the notice.

While the IRS Notice is technical, the examples offered seem to offer a clear view on what the IRS deems a permissible mid-year change in many of the examples. For instance:
Example 1 discusses an employer who chooses to raise its safe harbor non-elective contributions from 3 to 4 percent for all employees; employees receive an updated notice that describes the increased contribution (and an option for the employee to make a change to receive cash or alter deferred elections (“election opportunity”)).

Example 3 discusses an employer who, similar to Example 1, raises the safe harbor matching contribution from 4 to 5 percent (calculated no longer per payroll period, but rather on a plan-year period). The employer does this on August 31, with a retroactive effective date to January 1 of the same plan year and distributes an updated safe harbor notice (with the appropriate election opportunity).

Example 4 discusses an employer who makes a mid-year amendment to allow an age 59 ½ in-service withdrawal feature. The employer distributes the requisite updated safe harbor notice and election opportunity.

• It appears these above Example mid-year changes are permissible because the participants benefit with the plan amendments that the employer contemplates (and there is sufficient notice with the election opportunity). While an employer contemplating mid-year changes should evaluate the IRS Notice more closely, the rationale seems to borrow heavily from the anti-cutback analysis that the IRS uses to determine if a participant’s accrued benefits have been adversely affected under IRC § 411(d)(6)). The IRS Notice even makes reference to anti-cutback restrictions, general non-discrimination rules, and anti-abuse provisions.

In fact, in Example 2, where an employer wishes to decrease its safe harbor non-elective contributions from 4 to 3 percent, unless that reduction is tied generally to the employer’s economic loss or reservation of a right to reduce or suspend safe harbor contributions under Treas. Reg. § 1.401(k)-3(g), then the plan is no longer a safe harbor plan and, accordingly, must meet the nondiscrimination tests. Moreover, if the reduction does not meet the treasury regulation’s criteria, the plan as amended will not meet the ADP test under IRC § 401(k)(3).

The IRS Notice seeks comments from those 401(k) plan sponsors interested in additional guidance regarding mid-year changes to safe harbor plans, with a particular emphasis on those who might need guidance in the mergers and acquisition context or with plans having automatic contribution arrangements.

Contact any member of the ERISA and Employee Benefits practice group at our firm if you need assistance related to this IRS Notice.

The third multi-employer pension plan since September 2015 has filed an application with the Department of the Treasury in which it is seeking to reduce core benefits under the Multiemployer Pension Reform Act of 2014 (“MPRA”). The Teamsters Local 469 Pension Plan (“469 Fund”) which is administered in Hazlet, New Jersey has now joined the Central States Southeast and Southwest Area Pension Fund (“Central States”) and the Iron Workers Local 17 Pension Fund (“Iron Workers Fund”) in efforts to cut retirees’ core benefits by asserting that it is in “critical and declining” status, the standard which was promulgated in the MPRA.

The demographics of the 469 Fund seem to be akin to those of the Iron Workers Fund as its 2014 Form 5500 reported current assets of $122.6 million and liabilities of $279.9 million. The application, if approved, would impact approximately 1,781 participants.

Notably, the Department of the Treasury still has not ruled on the first application that was filed by Central States.

This disturbing trend further underscores the importance of employers’ vigilance in monitoring the status of these multiemployer pension funds. For contributing employers, these applications only add insult to the injury of withdrawal liability because the benefits upon which employer’s withdrawal is being assessed will not even be paid to the participants!

We will continue to monitor the multiemployer fund landscape and keep you advised.

For the second time in Amgen Inc. v. Harris, the Supreme Court reversed the Ninth Circuit because of its failure to apply the proper pleading standard for claims alleging breach of the duty of prudence against fiduciaries who manage employee stock ownership plans (ESOPs). The Supreme Court’s opinion sets forth a specific, stringent pleading standard for such claims – though questions remain as to how strictly lower courts will interpret that standard. The opinion also shows that it will be strategically advantageous for defendants to attack claims against ESOP fiduciaries at the pleading stage.

The plaintiffs were former Amgen employees who participated in an ESOP holding Amgen’s common stock. After the value of Amgen’s stock dropped, the employee-stockholders filed a class action alleging that the plan’s fiduciaries had breached their duty of prudence under the Employee Retirement Income Security Act (ERISA). Specifically, they alleged that the plan’s fiduciaries had inside information that investing in Amgen’s stock was imprudent but nevertheless (1) allowed the plan’s participants to continue investing, and (2) failed to disclose the inside information to the public. The district court dismissed the complaint for failure to state a claim, but the Ninth Circuit reversed. The plan fiduciaries petitioned to the Supreme Court.

While that petition was pending, the Supreme Court issued its decision in Fifth Third Bancorp v. Dudenhoeffer, which addressed the duty of prudence owed by ERISA fiduciaries who manage ESOPs. In Dudenhoeffer, the Supreme Court held that ESOP fiduciaries are not entitled to a presumption of prudence. The elimination of this presumption was widely viewed as a negative development by those who manage and represent ESOPs. However, in Dudenhoeffer, the Supreme Court did include fiduciary-friendly language recognizing the unique challenges of ESOP fiduciaries who are blamed for failing to act on inside information about the employer’s stock. Specifically, the Supreme Court stated:

To state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.

…

[L]ower courts faced with such claims should also consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases—which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment—or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.

This pleading standard acknowledges that freezing investments into an ESOP and disclosing negative information about company stock to the public will usually do more harm than good. The Supreme Court intended the standard to separate plausible from meritless claims.

Following the issuance of Dudenhoeffer, in 2014 the Supreme Court granted the fiduciaries’ petition for review in Amgen I, vacated the judgment, and remanded for further proceedings consistent with Dudenhoeffer. On remand, the Ninth Circuit again reversed dismissal of the complaint against Amgen and denied rehearing en banc over a strong dissent by Judge Kozinski. The fiduciaries again petitioned for Supreme Court review.

In a short, per curiam decision (Amgen II), the Supreme Court on January 25, 2016, held that the Amgen complaint did not contain sufficient factual allegations to state a claim for breach of the duty of prudence against the ESOP fiduciaries. The Supreme Court emphasized that the Ninth Circuit did not correctly apply the Dudenhoeffer standard. The Ninth Circuit assumed it was plausible that freezing investments into Amgen’s ESOP would not harm plan participants. However, the complaint did not allege that a prudent fiduciary “could not have concluded” that freezing the investments into the ESOP would have done more harm than good. Accordingly, the Court reversed and remanded (again). The Supreme Court noted that the district court could decide whether to allow the plaintiffs to amend the complaint to attempt to meet this standard.

The plaintiffs on remand following Amgen II, as well as plaintiffs in other actions, might simply allege that a prudent fiduciary “could not have concluded” that alternative actions, such as freezing investments into the ESOP and public disclosure of negative inside information, would have done more harm than good. It remains to be seen whether such a conclusory allegation, devoid of a factual basis, will meet muster under Amgen II. There exists a strong argument that the Supreme Court intended to require the allegation of specific facts demonstrating how a prudent fiduciary could not have reached such a conclusion. Given that public disclosure of negative insider information (even if permitted by securities laws) and freezing ESOP investments will typically do harm by causing the value of the employer’s stock to drop, the lower courts will also have to decide what types of factual allegations and special circumstances will suffice under this stringent standard.

While decided in the context of an ESOP, Amgen I and II are also important decisions for 401(k) plans that offer employer stock as an investment option, particularly those plans with ESOP features. Although we will need to await future litigation for complete certainty, we expect that Amgen pleading standards will likely apply in 401(k) plan stock drop litigation. 401(k) plan fiduciaries should continue to carefully monitor company stock as a prudent investment option for their participants and be prepared to substantiate — through appropriate documentation and otherwise — compliance with the fiduciary duty to periodically review and update investment offerings and possible consideration of inside information in accordance with the securities laws.

The U.S. Supreme Court has narrowed, ever so slightly, the ever-changing definition of “appropriate equitable relief” under ERISA Section 502(a)(3). In Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan,[1] the high court addressed whether a plan fiduciary can recover medical payments made on behalf of a participant when the plan fiduciary has not identified third-party settlement funds still in the participant’s possession at the time the plan fiduciary asserts its reimbursement claim. Yesterday, the Supreme Court held in an 8-1 ruling that when a plan participant has spent — on nontraceable items such as fees for services or travel — all the settlement proceeds that could have been used to reimburse the plan, the plan fiduciary may not reach the participant’s other assets as a broader means of recovery.

The facts of Montanile were mostly undisputed by the parties.[2] Plaintiff, Board of Trustees of the National Elevator Industry Health Benefit Plan (the “Plan”), was an employee welfare benefit plan, which reserved for itself in its summary plan description (“SPD”) “a right to first reimbursement out of any recovery.” Montanile, a plan participant, was injured in a car accident, and the Plan paid out more than $120,000 in medical expenses on his behalf.[3]

Meanwhile, Montanile retained counsel to pursue personal injury damages and ultimately settled for $500,000. When the Plan attempted to enforce its right to reimbursement and subsequent negotiations broke down, Montanile’s attorney notified the Plan that he would distribute the settlement funds to Montanile unless the Plan objected within 14 days. After the Plan failed to respond by the deadline, the funds were distributed to Montanile.  The Plan then waited six months before suing under Section 502(a)(3)(B) of ERISA to enforce an equitable lien on the settlement funds, during which time Montanile spent most of the money.[4]

The district court in Montanile was facing a situation where restitution could theoretically expose Montanile’s general assets to a judgment: the third party settlement funds earmarked to reimburse medical expenses paid by the Plan had either been spent or comingled by Montanile by the time the Plan filed suit. Acknowledging the lack of Eleventh Circuit authority on point, the district court found that the Plan had a right to reimbursement on the grounds that “a beneficiary’s dissipation of assets is immaterial when a fiduciary asserts an equitable lien by agreement.”[5] The Eleventh Circuit easily affirmed the decision in Montanile[6] relying on its recent holding in AirTran Airways, Inc. v. Elem, 767 F.3d 1192 (11th Cir. 2014).[7]

In the Supreme Court, the issue became whether spending settlement funds could destroy the enforcement of a lien. Justice Thomas, writing for the majority, explained that — where a defendant has already spent proceeds that are subject to reimbursement — a restitution claim may only be asserted where funds or property in the defendant’s possession are clearly traceable back to the proceeds that were subject to reimbursement[8] and, where such traceable funds or property exist, the plan can create and enforce an equitable lien over such funds or property.[9] Rejecting the Plan’s arguments that ERISA’s general objectives, concepts of fairness and the fact that the equitable lien was by agreement – by virtue of being set forth the in SPD – justified a recoupment, Justice Thomas clarified that enforcing an equitable lien over a participant’s general assets is not “typically available” relief under the principles of equity. The majority remanded the case back to the district court to determine “how much dissipation there was” and whether Montanile mixed the settlement funds with his general assets. So, there is still some possibility of recovery by the Plan.

From a public policy and legal theory perspective, the broad question put to the Court in Montanile — what is “appropriate equitable relief”? — was unlikely to spawn a new “tracing” rule for all types of reimbursement claims. Instead, the Montanile decision demonstrates that all but one of the justices — Justice Ginsburg, who dissented in the case — are unwilling to turn ERISA Section 502(a)(3) into a damages free-for-all. At the end of the decision, Justice Thomas explained that the Plan should have acted more expeditiously to secure the settlement proceeds before they were dissipated. That statement is the complete scope of Montanile: equitable tracing rules for plan reimbursement remain in place and plans need to act promptly if they want to be repaid.

What Does the Montanile Decision Mean to Plan Fiduciaries?
A narrow decision of this nature has two practical impacts for plan fiduciaries.

  • First, SPDs should include language that puts participants on notice of the plan’s reimbursement rights in the case of a tort recovery and the obligation of participants to guard and not spend any medical expense funds received in a tort recovery that may be subject to the plan’s claim for reimbursement.
  • Second, plan fiduciaries must anticipate the need to enforce and monitor the plan’s subrogation rights when plan assets are paid related to personal injury scenarios and should establish administrative procedures to carry out such enforcement and monitoring.

As an example of the importance of the second point, in AirTran, the plan only learned of the defendants’ full recovery — $425,000 instead of $25,000 — by accident when the defendants put a copy of the wrong check in the mail! It is incumbent upon plans to communicate with all parties in a tort suit, calendar important deadlines, and consult with outside counsel when third-party settlement funds are on the horizon.

Please follow this link to a comprehensive Jackson Lewis article concerning Montanile: http://www.jacksonlewis.com/publication/supreme-court-erisa-plan-cannot-recover-settlement-funds-have-already-been-spent

[1]               577 U.S. ___ (2016).

[2]               Board of Trustees of National Elevator Industry Health Benefit Plan v. Robert Montanile, No. 12-80746, 2014 U.S. Dist. LEXIS 36309, at *5 (S.D. Fla. March 17, 2014).

[3]               Id. at *7.

[4]               Id. at *8.

[5]               Id at *30-31.

[6]               Board of Trustees of the National Elevator Industry Health Benefit Plan v. Robert Montanile, 593 Fed. App’x 903, 907 (11th Cir. 2014).

[7]               In a curious case of certiorari leapfrog, Airtran’s petition is still pending before the Supreme Court and will most likely be denied based on the Montanile decision. The Supreme Court (most likely) chose to decide Montanile instead of AirTran because it could address the issue of dissipated, third-party settlement funds without getting mired in AirTran’s peculiar facts.

[8]               Great-West Life & Annuity Ins. Co. Knudson, 534 U.S. 204, 214 (2002).

[9]               Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356, 363 (2006); US Airways, Inc. v. McCutchen, 569 U.S. __ , 133 S.Ct. 1537 (2013).

Last month the IRS issued Notice 2015-87, providing further guidance for applicable large employers on the employer shared responsibility provisions of Code § 4980H. For federal contractors required to provide a certain amount of health and welfare fringe benefits to employees, the Notice brought some welcome relief, at least for the time being.

Employers with benefit obligations governed by the McNamara-O’Hara Service Contract Act (“SCA”) or the Davis-Bacon Act and related acts (“DBRA”) typically meet those obligations by providing employees working under government contracts with benefits, cash in lieu of benefits, or a combination of both. Federal contractors with fifty or more employees (full-time or full-time equivalents) in a calendar year are considered applicable large employers who are thus subject to the ACA’s employer shared responsibility provisions and employer informational reporting requirements concerning offers of minimum essential coverage.

Notice 2015-87 addresses how fringe benefits mandated under the SCA or DBRA may be treated for purposes of determining whether an applicable large employer has made an offer of affordable minimum value coverage under an eligible employer-sponsored plan. The Notice provides that for plan years beginning before January 1, 2017, such fringe benefits — including flex credits, flex contributions, or cash payments made in lieu of benefits — will be treated as reducing the employee’s required contribution for participation in the plan for purposes of the Code § 4980H(b) penalty to the extent the payment amount does not exceed the fringe benefit amount required under the applicable federal contract. Furthermore, these same amounts may be treated by the employer as reducing the employee’s required contribution for purposes of employer reporting obligations under Code § 6056 (Form 1095-C), to the same extent that the payment amount does not exceed the fringe benefit amount required under the applicable federal contract. However, individual taxpayers are not required to consider these amounts in reducing the employee’s required contribution for purposes of Code §§ 36B — concerning premium tax credit eligibility — and 5000A — concerning the individual mandate affordability exemption.

To illustrate, the Notice provided the following example:

Facts: Employer offers employees subject to the SCA or DBRA coverage under a group health plan through a § 125 cafeteria plan, which the employees may choose to accept or reject. Under the terms of the offer, an employee may elect to receive self-only coverage under the plan at no cost, or may alternatively decline coverage under the health plan and receive a taxable payment of $700 per month. For the employee, $700 per month does not exceed the amount required to satisfy the fringe benefit requirements under the SCA or DBRA.   Conclusion: Until the applicability date of any further guidance (and in any event for plan years beginning before January 1, 2017), for purposes of §§ 4980H(b) and 6056, the required employee contribution for the group health plan for an employee who is subject to the SCA or DBRA is $0. However, for purposes of §§ 36B and 5000A, that employee’s required contribution for the group health plan is $700 per month.

Employers subject to the SCA or DBRA must keep in mind that while monetary contributions to fringe benefits are taken into account for purposes of the “affordability” requirement under the ACA, applicable large employers must continue to meet the ACA’s mandate to offer minimum essential coverage that is affordable and provides minimum value to full-time employees in order to avoid ACA penalties.

For more information on the impact of this guidance outside the context of government contracts, see the recent Benefits Law Advisor article by Kathleen Barrow and Stephanie Zorn, here.