The Eighth Circuit recently concluded that an employer may violate the ADEA by terminating an older employee in order to reduce its health care premiums. Tramp v. Associated Underwriters, Inc., 2014 WL 4977396 (8th Cir. 2014). Plaintiff Marjorie Tramp brought claims of discrimination and retaliation under the ADEA, arguing that Defendant Associated Underwriters, Inc. terminated her to reduce its health care costs and in retaliation for her refusal to rely on Medicare benefits in lieu of employer-sponsored benefits. Continue Reading
Twenty-five years ago, the U.S. Supreme Court ruled that courts should review an ERISA participant’s claim for benefits under a de novo standard of review unless the plan gives the plan fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan. Since then, courts have considered what type of plan language suffices to grant plan fiduciaries discretionary authority to warrant the more deferential arbitrary and capricious standard of review.
The issue has garnered a fair amount of attention in the context of employer-provided disability insurance plans. Courts have been particularly focused on whether the requisite discretion is conferred when the plan requires that claimants present “proof satisfactory to us” (e.g., the plan administrator) to receive benefits. Four circuits [the Sixth, Eighth, Tenth and Eleventh Circuits] have ruled that such language clearly grants discretionary authority to the plan administrator, and claim denials in those cases have been subject to an arbitrary and capricious standard of review. However, six circuits [the First, Second, Third, Fourth, Seventh and Ninth Circuits] have held that such language does not provide a clear grant of discretionary authority to a plan administrator and thus claim denials in these cases were subject to de novo review by a court.
Whether a court reviews a benefit claim denial (i) de novo, thus empowering the court to substitute its own judgment for that of the plan fiduciary, or (ii) under the highly deferential arbitrary and capricious standard of review, can sometimes be outcome determinative. This article sheds some light on the reasoning behind each view and suggests steps that plan drafters can take to better ensure that claim denials are subject to deferential review by the courts. Continue Reading
On Thursday, September 18, 2014, the Internal Revenue Service (“IRS”) released Notice 2014-55, which expands the cafeteria plan “change in status” rules to allow plans to offer employees an option to revoke their elections for employer-sponsored health coverage to purchase a qualified health plan through a Health Insurance Marketplace (“Marketplace”). The notice is effective immediately and will appear in IRB 2014-41, to be published Oct. 6, 2014.
The notice addresses two specific situations in which a plan could allow an employee to revoke a cafeteria plan election (other than a health FSA election): due to enrollment in the Marketplace; and due to a reduction in hours of service. This should be a welcome relief to employers that may have been struggling with how to allow employees to change coverage from under the employer’s plan to a Marketplace or other group health plan. Continue Reading
The Federal Mental Health Parity and Addiction Equity Act (the “Federal Parity Act”), like many similar state parity laws, mandates that financial requirements (e.g., copayments, coinsurance, or deductibles) and treatment limitations (e.g., limitations on the frequency of treatment, number of out-patient visits, or amount of days covered for in-patient stays) applicable to mental health benefits generally can be no more restrictive than the requirements and limitations applied to medical benefits. These parity laws, which are enforceable under ERISA, have been at issue in an increasing number of cases. Three district courts, all of which are located within the Ninth Circuit, have released rulings over the past few weeks. Continue Reading
On August 15, 2014, California passed Senate Bill 1034, which repealed an insurance law (Assembly Bill 1083) that prohibited insurance companies from including waiting periods in excess of 60 days in their group health insurance contracts. The new law, effective January 1, 2015, prohibits California insurance companies from applying any “waiting or affiliation period” under a group or individual health benefit plan.
So where does that leave California employers, who are permitted under federal law (the ACA) to have a one-month orientation period and up to a 90-day waiting period? Continue Reading
The Sixth Circuit recently held that ERISA did not preempt a plan participant’s claim for state law fraudulent inducement. McCarthy v. Ameritech Pub., Inc., No. 12-4510, 2014 WL 3930572 (6th Cir. 2014). Defendant-API’s decided to terminate Plaintiff’s employment and gave her two options: (1) she could leave and receive a lump-sum “termination payment”; or (2) she could enter API’s Employment Opportunity Pool, where she would receive priority consideration for another position while receiving reduced pay taken from her “termination payment.” Because Plaintiff’s husband was critically ill, Plaintiff’s decision depended on whether she had accrued enough employment service to retain her healthcare benefits upon leaving. Plaintiff’s supervisors falsely advised her that, notwithstanding the representations by API’s health and welfare plan administrators to the contrary, she was not entitled to retain her healthcare benefits unless she continued working for an additional nine months. As a result of Plaintiff’s decision to enter the employment pool, “API . . . received nine months of free labor from [Plaintiff].” Inter alia, the Sixth Circuit held that ERISA did not preempt Plaintiff’s state law fraudulent inducement claim because Plaintiff was not seeking any benefits due under the health and welfare plan, but rather fair compensation for the work performed for the nine months she was allegedly induced to remain at API.
On August 14, 2014, the U.S. Department of Labor (DOL) provided new guidance to plan fiduciaries of terminated defined contribution plans for locating missing and unresponsive participants in order to distribute their benefits. The guidance comes in the form of Field Assistance Bulletin (FAB) No. 2014-01, which replaces FAB No. 2004-02. As discussed below, the guidance may also prove useful in finding missing and unresponsive participants in other circumstances as well. Continue Reading
“As for those who might contemplate future service as plan fiduciaries, all I can say is: Good luck.”
That was the sentiment expressed in a blistering dissent by Fourth Circuit Judge J. Harvie Wilkinson in the latest ruling in a lawsuit challenging the decision by the fiduicaries of the RJR 401(k) plan to liquidate two stock funds that previously had been available to plan participants wishing to invest in Nabisco stock. Tatum v. RJR Pension Inv. Committee et al., No. 13-1360, 2014 WL 3805677 (4th Cir. Aug. 4, 2014). In a split decision, the panel ruled that, because plaintiff-participant Richard Tatum had proved that the plan fiduciaries acted imprudently by liquidating the stock fund without the benefit of a proper investigation, the burden of proof shifted to defendants to show that a prudent fiduciary would have made the same decision. In so ruling, the Court reversed the lower court decision, which had found in favor of defendants after a bench trial upon finding that they had demonstrated that a prudent fiduciary could have made the same decision.
The Fourth Circuit’s decision makes a number of significant statements and rulings on the burdens of proof related to loss causation, the meaning of “objective prudence,” and the standards for reviewing decisions pertaining to stock funds in the wake of the Supreme Court’s ruling in Fifth Third v. Dudenhoeffer. Some of the Court’s pronouncements are difficult to reconcile with existing case law. If not set aside on en banc or Supreme Court review and if adopted elsewhere, the decision could substantially impact the future conduct of fiduciary breach litigation, as well as plan practices in administering stock funds. Continue Reading
A federal district court in Pennsylvania concluded that Irene Najmola, a former employee of Chester County Hospital, sufficiently pled a retaliation claim under ERISA section 510 by alleging that her employment was terminated shortly after returning from short-term disability leave. In so ruling, the court determined that Najmola sufficiently pled that defendant had the specific intent to interfere with her attainment of ERISA benefits by alleging that she: (1) was an employee; (2) utilized her ERISA protected short-term disability plan; and (3) was terminated. In addition, the Court held that the temporal proximity between the exercise of her short-term disability leave and her termination were sufficient at the motion to dismiss stage to infer that defendants had the intent to interfere with or retaliate against plaintiff for utilizing ERISA protected benefits. The case is Najmola v. Women’s Healthcare Group of Pa., 2014 U.S. Dist. LEXIS 101583 (E.D. Pa. July 24, 2014).
Pension plan overpayments to participants and their beneficiaries are an all-too-common occurrence. When overpayments occur, a plan administrator’s duties are fairly clear. Typically, the plan administrator must seek repayment of the overpayment, plus interest, from the affected individuals, and if recovery from the individuals cannot be completed, recovery must be sought from the employer or other party who caused the overpayments. This article briefly reviews the general options for the correction of overpayments and focuses on the tax implications of overpayment recoupments and repayments by the individuals who received the overpayments.
General Repayment Options
Before discussing the tax consequences of repayments, it is helpful to consider how repayment options generally work. Available repayment options for affected individuals include a one-time lump sum payment, structured repayments over a certain period of time, a reduction in future pension payments through an actuarial adjustment (i.e., “recoupment”), or some combination of the foregoing options. In addition, if the plan administrator’s reasonable efforts to secure repayment (or some plan for repayment) are unsuccessful and the plan provides for automatic recoupment, the plan administrator may be able to automatically reduce the affected individuals’ benefit payments on a prospective basis to reflect the overpayment. However, automatic recoupment is not possible in situations where the plan owes no further benefits to the affected individual (such as in the case of an overpaid lump sum).
If a plan administrator is unable to secure repayment from the affected individuals, the plan sponsor may need to contribute the overpayment amount, plus interest, to the plan. Single-employer plan sponsors also sometimes elect to make corrective contributions to the affected plan from the plan sponsor’s general assets in lieu of seeking repayment. However, not all plan sponsors are in a financial position to make corrective contributions. In addition, corrective contributions are generally not a viable option for the boards of trustees that sponsor multiemployer pension plans because the boards typically have no assets. As a result, plan administrators often turn to affected individuals for repayments of overpayments.
Tax Questions from Affected Individuals
Conversations with individuals regarding repayments can become tense, particularly because the affected individuals are often on fixed incomes and the overpayments were not necessarily their fault. However, plan administrators must press forward with repayment requests because of their fiduciary duties to their plans and to ensure that the plans have sufficient assets to satisfy benefits liabilities to all participants.
Typically, affected individuals already paid (or had withheld) federal income taxes from their overpayments. As a result, a common question during conversations about repayments is whether the individuals will receive some form of tax refund for the amounts that they repay to the plan. As a general matter, individuals who received overpayments are liable for repaying the full amount of their overpayment and interest, regardless of whether they can obtain tax refunds or deductions for the repayments. While plan sponsors, fiduciaries and administrators should not provide tax advice to individuals about their particular circumstances, it is useful to know the general tax implications of repayments for affected individuals.
What happens when overpayments are deducted or reduced from future pension payments?
Generally, participants and their beneficiaries are only taxed on amounts actually distributed to them from a pension plan. Typically, there are two options to reduce the amounts actually distributed to the affected individuals going forward.
The first option is to adjust the affected individual’s benefits on a prospective basis in a manner that reduces the actuarial present value of the benefits by the amount of the overpayment, plus interest. Going forward, the individual will only be liable for taxes on the adjusted pension amount that the individual actually receives from the plan. In other words, the individual is not subject to taxation on the amount of his or her benefit that is recouped for repayment. As a result, this is theoretically a tax-neutral solution for the individual. However, from a practical standpoint, it may not make the individual whole if the individual was in a higher tax bracket at the time of receipt of the overpayment. It is also important to note that the individual is not eligible for any deduction under Code Section 165(a) for the subsequent repayment of the overpayment.
In addition, if an individual elects to repay an overpayment with an actuarial adjustment and dies prior to full repayment of the overpayment, plus interest, the plan sponsor should not be required to make a corrective contribution for the outstanding repayment amount from a plan qualification standpoint. However, fiduciary considerations may still require a full restitution to the plan. Individuals sometimes push back on the amount of actuarial adjustments because they believe they will outlive the actuarial assumptions applicable to them and ultimately have their pension benefits withheld by more than the amount of the overpayment, plus interest.
The second option is to structure repayments over a certain period of time in negotiated monthly increments and to withhold the repayment amounts from the individual’s pension benefits. If an individual elects this option and dies prior to full repayment of the overpayment, plus interest, the plan sponsor may need to make a corrective contribution to the plan for the unpaid amount.
What happens when repayments are paid in cash?
Other options for repayments from affected individuals do not entail any reductions from their rightful pension benefits. Instead, they typically entail a lump sum repayment or repayments over a fixed time period in cash. The tax treatment for these repayment options depends on whether they occur in the same year of the overpayment.
If cash repayments are made in the same year as the overpayment, they can generally be treated in the same way as a recoupment. In other words, the repayment would simply reduce the taxable amount received by the affected individual from the plan in the tax year.
If cash repayments are made after the year in which the overpayment occurred, the repayment may be treated as a loss deduction under Code Section 165(a). However, if the repayment is less than $3,000, the deduction must be treated as a miscellaneous itemized deduction. As a result, repayments of less than $3,000 are subject to the 2% adjusted gross income threshold for miscellaneous itemized deductions under Code Section 67(a).
If the repayment is over $3,000, the adjusted gross income threshold does not apply. Instead, the deduction is based on the rules for the restoration of a substantial amount held under a “claim of right,” which are set forth in Code Section 1341.
Generally, Code Section 1341 provides a refundable credit for repayment tax deductions in excess of $3,000 if the taxpayer “appeared” to have an unrestricted right to payment in the year of payment. In the absence of unusual facts and circumstances, the recipient of a pension overpayment likely “appeared” to have an unrestricted right to the payment in the year of receipt.
If Code Section 1341 applies for the repayment, the tax for the taxable year in which the repayment is made is the lesser of: 1) the tax for the taxable year in which the repayment is made computed with the full amount of the repayment (without regarding to the $3,000 cap), and 2) the tax for the taxable year in which repayment is made computed without any deduction for the repayment, minus the decrease in tax for the taxable year in which the overpayment was received which would result if the overpayment was excluded from gross income for the prior taxable year. If the application of Code Section 1341 results in a tax decrease that exceeds the tax liability for the taxable year of the deduction, the tax decrease can be used to generate a refund or tax overpayment.
When discussing repayments with individuals who received overpayments of pension benefits, plan sponsors, fiduciaries and administrators should never provide specific tax advice. That said, it is useful to bear in mind that tax deductions are typically available to affected individuals and it may be appropriate to provide general information to affected individuals, with the caveat that they should seek their own tax advice from an accountant or legal counsel. Although the available tax deductions may not truly make affected individuals whole for the taxes they paid on overpayment amounts, knowing that some recourse is available to them can often help cool heated discussions regarding the repayment of overpayments.
 Recoupments of overpayments do not violate the anti-alienation rule. Treas. Reg. § 1.401(a)-13(c)(2)(iii).
 Depending on the facts and circumstances, plan fiduciaries may determine that it is not prudent to seek repayments based on the hardship to the affected individual or the cost of collection efforts for the plan. Dep’t of Labor Op. Ltr. 77-08.
 26 U.S.C. § 402(a).
 Rev. Rul. 2002-84, 2002-2 C.B. 953.
 See, e.g., Rev. Rul. 79-311, 1979-2 C.B. 25 (finding that where employee repaid excess commissions in the same year as receipt, the repaid commissions were excludable from the employee’s gross income in the year of repayment).
 Rev. Rul. 2002-84, 2002-2 C.B. 953.
 There are a number of other technical requirements in connection with Code Section 1341 that are beyond the scope of this article.
 The appearance of an unrestricted right is generally the “semblance of an unrestricted right in the year received.” Rev. Rul. 68-153, 1968-1 C.B. 371. As a result, Code Section 1341 may not be available if the plan administrator sought repayment immediately prior to the end of a taxable year and actual repayment was not made until the following taxable year.
 26 U.S.C. § 1341(b)(1).