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Proskauer's ERISA Practice Center Blog

The View from Proskauer on Developments in the World of Employee Benefits, Executive Compensation & ERISA Litigation

IRS Confirms California “Waiting Time Penalties” Are Not Wages For Federal Income Tax Purposes

Posted in Damages, Taxable Wages

A recent IRS information letter confirms that “waiting time penalties” paid under California law are not wages for federal income tax withholding purposes. Section 203 of the California State Labor Code imposes penalties on employers that fail to pay final wages to terminated employees within a specified period of time. These penalties are paid to the terminated employees in amounts based on their wages. In Chief Counsel Advice Memorandum 201522004, and recently in IRS Information Letter 2016-0026, the IRS has clarified these penalties are not considered “wages” for federal income tax purposes, because they are intended to punish employers for failing to timely pay final wages; not to compensate employees for work performed. The IRS has now further clarified that these penalties should not be reported on Form W-2.  Instead, they should be reported on Form 1099-MISC in the same manner as other non-compensatory liquidated damages. This is significant for California-based employers for two reasons.  First, the guidance affects tax reporting.  Second, and on a related matter, the guidance clarifies that these penalty payments are not includable as wages for benefit plan purposes under a plan (like a 401(k) or pension plan) that calculates benefits based on “W-2 income.” For additional information, see Chief Counsel Advice Memorandum 201522004 and IRS Information Letter 2016-0026.

District Court Applies Dudenhoeffer “More Harm Than Good” Standard to Closely-Held Corporation

Posted in Stock Drop

A federal district court in Mississippi ruled for the first time that the “more harm than good” pleading standard established by the Supreme Court in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014), applied to employer “stock drop” claims brought against the fiduciaries of plans sponsored by closely-held corporations. Hill Brothers Construction Company, Inc. (“Hill Brothers”), a closely-held corporation, ceased operations and subsequently sent notice to all 401(k) plan (the “Plan”) participants that their retirement accounts were worthless. Plaintiffs, former employees of Hill Brothers, commenced a putative class action on behalf of all current and former participants and beneficiaries of the Plan alleging that the Plan fiduciaries breached their fiduciary duties to manage the Plan’s assets prudently and loyally and to monitor other fiduciaries adequately. In Dudenhoeffer, the Supreme Court held, in a case involving a publicly traded employer stock fund, that in order to state a claim for breach of fiduciary duty on the basis of inside information, a plaintiff must plausibly allege (among other things) an alternative action that could have been taken by the plan fiduciaries that would have been consistent with its obligations under securities laws and that a prudent fiduciary would not have viewed as more likely to harm the fund than to help it. The district court agreed that this standard applied to the allegations against the closely held corporation and dismissed the complaint upon finding that plaintiffs had failed to plead such an alternative course of action. The case is Hill v. Hill Brothers Construction Company, No. 14-213, 2016 WL 1252983 (N.D. Miss. Mar. 28, 2016).

District Court Rules Johnson Controls Retirees Not Entitled to Lifetime Health Benefits

Posted in Retiree Health Care Benefits

A district court in the Middle District of Pennsylvania held that, notwithstanding the Supreme Court’s decision in M & G Polymers USA, LLC v. Tackett, 135 S. Ct. 926 (2015), the Third Circuit’s rule that clear and express language was required for health benefits to vest was still good law. On that basis, it ruled that Johnson Controls, an employer, was not required by the applicable collective bargaining agreements (“CBAs”) to provide lifetime health benefits to its unionized retirees. Every few years, the UAW negotiated a new CBA with Johnson Controls or its predecessors providing health insurance benefits for employees and former employees. In 2009, Johnson Controls implemented a $50,000 lifetime cap on benefits for participants sixty-five and older, which resulted in some members being ineligible for future benefits. Plaintiffs, retirees who exceeded the lifetime cap, filed suit on behalf of themselves and similarly-situated groups of retirees. In plaintiffs’ view, the Tackett decision, including Justice Ginsburg’s concurrence in which she stated that clear and express language was not required to create vested rights to retirement benefits, prohibited presumptions for or against vesting. The district court ruled that Tackett had no effect on the Third Circuit’s “clear and express” standard, and that the rule is consistent with Tackett’s instruction to apply ordinary principles of contract law.  Applying the Third Circuit rule, the court then divided the CBAs into three groups. For the first group, the court held that the inclusion of the phrase “shall have the following benefits . . . continued” did not unambiguously indicate that the benefits would vest past the expiration date of the applicable CBA. For the second group, the court held that the statement that health coverage would be continued “until your death,” was not a promise to vest unalterable health benefits in light of the explicit durational clauses and other language in the CBAs indicating that the parties intended that the health benefits would terminate. Instead, “until your death” indicated that the retirees were entitled to benefits during the term of the CBA but the benefits terminated if a retiree died before the CBA’ s expiration. And, for the final group, there was a clear and unambiguous reservation of rights. The court thus granted defendants’ motion for summary judgment, finding that none of the applicable agreements created vested rights to retirement benefits. The case is Grove v. Johnson Controls, Inc., No. 12-2622, 2016 WL 1271328 (M.D. Pa. Mar. 31. 2016).

Court Enforces Forum Selection Clause in ERISA Plan

Posted in Venue

A federal district court in New York enforced an ERISA retirement plan’s forum selection clause and transferred the case to the District of New Jersey. The plaintiff argued that the forum selection clause was invalid because it conflicted with ERISA’s venue provision, which provides that an ERISA action “may be brought in the district where the plan is administered, where the breach took place, or where a defendant resides or may be found.” ERISA Section 502(e). The court held that ERISA’s venue rule provides a set of options, but does not prohibit private parties from narrowing the options to one of the three enumerated venues through a forum selection clause (and deferred for another day whether a venue selection clause could specify a venue unrelated to ERISA Section 502(e)). The court noted that its holding was in line with the vast majority of courts to consider the issue. The case is Malagoli v. AXA Equitable Life Ins. Co., No. 14-CV-7180 (AJN), 2016 BL 92517 (S.D.N.Y. Mar. 24, 2016).

U.S. DOL To Issue Final Rule and Exemptions on Fiduciary Standards

Posted in Best Interest Contract Exemption, Broker-Dealer, Department of Labor, ERISA, Fiduciary, Investment Advice, Prohibited Transaction, Prohibited Transaction Exemption, Rulemaking

Today, the U.S. Department of Labor will release its highly-anticipated Final Rule and Exemptions addressing when a person providing investment advice with respect to an employee benefit plan or individual retirement account is considered to be a “fiduciary” under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code.  According to a Fact Sheet released in advance of the new rule’s publication, the “DOL has streamlined and simplified the rule to minimize the compliance burden and ensure ongoing access to advice, while maintaining an enforceable best interest standard that protects savers.”  According to the Fact Sheet:

  • The rule requires more retirement investment advisers to put their client’s best interest first, by expanding the types of retirement advice covered by fiduciary protections
  • The rule clarifies what does and does not constitute fiduciary advice
  • The exemptions will allow firms to accept common types of compensation – like commissions and revenue sharing payments – if they commit to putting their client’s best interest first
  • The rule and exemptions ensure that advisers are held accountable to their clients if they provide advice that is not in their clients’ best interest

Continue Reading

Sun Capital Court Finds Co-Investing Funds Part of Controlled Group and Liable for Portfolio Company’s Pension Liabilities

Posted in Controlled Groups, ERISA, PBGC, Pensions, Private Equity Funds, Sun Capital, Withdrawal Liability

As we previously reported, in Sun Capital, the U.S. Court of Appeals for the First Circuit held in 2013 that a private investment fund, pursuant to the so-called “investment plus” test first articulated by the Pension Benefit Guaranty Corporation (the PBGC), was engaged in a “trade or business” under the Employee Retirement Income Security Act of 1974, as amended (ERISA) and could therefore be part of a “controlled group” with one of its portfolio companies and potentially liable for the portfolio company’s underfunded pension liabilities.  The Sun Capital case was remanded to the U.S. District Court of Massachusetts for further proceedings on whether a related private investment fund that invested in the portfolio company was also engaged in a “trade or business” and whether the two funds were under “common control” with the portfolio company.  On March 28, 2016, the District Court determined that the second private investment fund was engaged in a “trade or business” and that the two funds’ co-investment in the portfolio company constituted a “partnership-in-fact” (resulting in the aggregation of their ownership interests in the portfolio company) that was also engaged in a “trade or business.” This determination resulted in both funds being treated as part of the portfolio company’s “controlled group.” Continue Reading

Anti-Assignment Provision Bars Surgery Center’s $3.3 Million ERISA Benefits Claims

Posted in Standing

A federal district court in California held that the ILWU-PMA Welfare Benefit Plan’s anti-assignment provision barred Brand Tarzana Surgical Institute’s claim for benefits and thus dismissed the Institute’s claim for benefits.  In so holding, the court rejected the Institute’s argument that the plan waived the right to assert the anti-assignment provision as a defense by failing to raise the argument during the claims administration process because the anti-assignment provision is “irrelevant to the denial of a claim in the first instance,” and only obtains significance once a party files suit or engages in conduct “so inconsistent with an intent to enforce the [anti-assignment provision] as to induce a reasonable belief that such right has been relinquished.”  The opinion is available at Brand Tarzana Surgical Institute, Inc. v. International Longshore & Warehouse Union-Pacific Maritime Association Welfare Plan, No. CV 14-3191 FML, slip op. (C.D. Cal. Mar. 8, 2016).

On Remand, District Court Rules for the Fiduciaries in Tatum v. R.J. Reynolds

Posted in Loss Causation, Stock Drop

The R.J. Reynolds defendants have again prevailed against allegations that they breached their fiduciary duties by divesting the RJR 401(k) plan of funds invested in Nabisco stock.  Following remand by the Fourth Circuit, the district court held that a hypothetical fiduciary “would” have divested the plan of the Nabisco investments in the same time and manner as defendants.

In March 1999, RJR Nabisco spun off its tobacco business (RJR) from its food business (Nabisco), the primary purpose of which was to reduce the negative impact that tobacco litigation (and being affiliated with the industry in general) was having on RJR Nabisco’s stock price.  In conjunction with this transaction, the RJR Nabisco 401(k) plan spun-off its RJR-related assets and liabilities into a new RJR 401(k) plan.  The resulting plan contained three non-diversified stock funds:  two funds that invested in Nabisco stock, which were frozen to new investments, and one that invested in RJR stock.

It was subsequently determined that continued exposure to funds invested in Nabisco stock would be imprudent, and a decision was made to divest the RJR 401(k) plan of Nabisco investments.  After the divestment was complete, Nabisco’s stock price increased.

A group of participants subsequently filed a class action suit claiming that the RJR 401(k) plan fiduciaries breached their fiduciary duty of procedural prudence by failing to properly investigate the decision to divest the Nabisco stock investments.  Following a bench trial, the district found held that even though defendants breached their procedural duty of prudence, their decision to divest the RJR 401(k) plan of Nabisco investments was substantively prudent because a reasonable and prudent fiduciary “could” have undertaken the same action.

As we previously reported here, a divided panel of the Fourth Circuit reversed, holding that a plan fiduciary found to have breached its duty of procedural prudence may escape liability only if it proves by a preponderance of the evidence that an objectively prudent fiduciary “would” – not just that it “could” – have undertaken the same fiduciary action.

On remand from the Fourth Circuit, the district court again entered judgment in favor of the RJR 401(k) plan fiduciaries, and concluded that a reasonable and prudent fiduciary “would” have divested the plan of the Nabisco investments.  Crediting defendants’ expert, the court found that an objectively prudent fiduciary would have divested the plan of the Nabisco investments because the RJR 401(k) plan “included three single-stock funds, each of which is approximately four times as risky as a diversified portfolio of mutual funds, [and] two of which were non-employer single-stock funds,” and because of the “considerable” litigation and bankruptcy risk resulting from the pending class action.  The court discounted the relevance of favorable analyst recommendations as reflecting “[o]ptimism bias” in the general market, and as belied by the stock’s poor performance.  Finally, the court found that the six-month timeline for divestment, “while arrived at without investigation or research,” was objectively reasonable because it allowed the plan to notify affected employees and provide them an opportunity to reallocate their investments.

The case is Tatum v. R.J. Reynolds Tobacco Co., No. 1:02-cv-00373, 2016 WL 660902 (M.D.N.C. Feb. 18, 2016).

ACA Reporting Update – The Final Stretch

Posted in Affordable Care Act

After months of preparation and multiple iterations of (sometimes conflicting) IRS guidance, health coverage providers and applicable large employers are nearing the end of the 2015 reporting season under the Affordable Care Act (ACA). By way of background, the ACA added new Sections 6055 and 6056 to the Internal Revenue Code (the “Code”).  Code Section 6055 requires that health coverage providers file with the IRS, and distribute to covered individuals, forms showing the months in which the individuals were covered by “minimum essential coverage.”  Code Section 6056 requires that applicable large employers (generally, those with 50 or more full-time employees and equivalents) file with the IRS, and distribute to employees, forms containing detailed information regarding offers of, and enrollment in, health coverage.  These reporting requirements are, in most cases, satisfied using Forms 1094-B and 1095-B and/or Forms 1094-C and 1095-C, as applicable. Continue Reading

Sixth Circuit Rules that Employer Can Terminate Retiree Health Benefits

Posted in Retiree Health Care Benefits

The Sixth Circuit ruled that retirees of Moen Inc. were not entitled to lifetime health benefits upon finding that an underlying collective bargaining agreement (CBA) did not create vested rights to these benefits.  Moen and its predecessor were parties to several CBAs with a local affiliate of the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America until Moen shut down its operations and terminated the last CBA.  The closing agreement stated that healthcare coverage “shall continue” for retirees and their spouses as provided in the applicable CBA.  Moen later decreased health benefits and the retirees sued, arguing that their healthcare benefits had vested.  The district court certified a class of retirees and granted plaintiffs’ motion for summary judgment.

The Sixth Circuit, in a split decision, reversed the district court’s decision because the CBA did not promise lifetime, unalterable healthcare benefits.  Rather, the Sixth Circuit explained that, among other things:  (i) the term of each CBA was three years and contractual obligations ordinarily cease upon termination of the bargaining agreement, (ii) there were no specific durational limits, (iii) the CBAs explicitly vested pension benefits but not healthcare benefits, and (iv) the CBA included a reservation of rights clause that permitted the employer to unilaterally terminate benefits.  Notably, however, the Sixth Circuit rejected Moen’s argument that the Supreme Court’s decision in M&G Polymers USA, LLC v. Tackett, 135 S. Ct. 926 (2015) created a “clear-statement rule”, i.e., that in order to create a vested right to benefits, a CBA must contain a clear and explicit statement that health benefits are vested, and stated that courts can draw implications and inferences from the contract if they are grounded in ordinary principles of contract law.  The case is Gallo v. Moen Inc., No. 14-3633, 14-3918, 2016 WL 482196 (6th Cir. 2016).