Employee Benefits Law Cases and Casenotes
Colleen E. Medill, Introduction to Employee Benefits Law: Policy and Practice (Thompson West 2004).
Donovan v. Dillingham:
United States Appellate Court, 1982.
Statement of the Case:
Secretary of Labor brought suit under ERISA against trustees of Union Insurance Trust alleging they had a fiduciary duty under part 4 of Title I of ERISA when employees got health insurance through the organization.
Trial court dismissed for lack of SMJ.
Trust was developed to allow employers of small numbers of employees to secure group health insurance at favorable rates, but the trustees claim that there was not an ERISA fiduciary duty because it was not an insurance plan, just a buying and selling of insurance.
Whether there is a benefits “plan" recognized under ERISA, so that fiduciary duties exist, when the trustees claim that this was just the sale of insurance, not a “plan."
Remanded for determination of the issue.
- A welfare benefits plan requires:
- a “plan, fund, or program"
- established or maintained
- by an employer or an employee organization, or both
- for the purpose of providing medical, surgical, hospital care, sickness, accident, disability, death, unemployment, vacation benefits, apprenticeship, training programs, day care centers, scholarship funds, prepaid legal services, or severance benefits
- to participants or their beneficiaries
- ERISA does not require a formal, written plan, but a plan can be inferred by actions.
- Dillingham “Plan" Factors: A “plan, fund, or program" under ERISA is established if, from the surrounding circumstances, a reasonable person:
- can ascertain the intended benefits,
- a class of beneficiaries,
- the source of financing, AND
- procedures for receiving benefits.
Fort Halifax Packing Co. v. Coyne (1987): Supreme Court ruled that “ongoing plan administration" (such as determining eligibility for benefits, calculating benefit amounts, and monitoring plan funding) was another important factor to consider
Musmeci v. Schwegmann Giant Super Markets, Inc.:
United States Appellate Court, 2003.
Trial court ruled that the voucher plan fell under ERISA and the ?s were entitiled to money judgments.
Store operated with over 5000 employees and 40 stores, and the owner wanted to give free groceries for life to long term employee retirees, by getting them vouchers per month, out of the company’s general revenue. The business was sold and the recipients were notified that they no longer would get vouchers, then suing on the claim they had a vested pension voucher plan.
Whether the admitted “voucher plan" provided to retired employees constituted “retirement income" to which ERISA applied.
Reversed for ?.
The admitted “voucher plan" provided to retired employees constituted “retirement income" to which ERISA applied.
- Court broadly interprets “income" under the IRC to mean anything that can be valued as currency, and does so in this case.
- This plan gave the employees currency to pay for groceries.
- This is different from waiting for a seat on a plane, if one was open.
- Dillingham Construction does not apply since it is a preemption case.
Nationwide Mutual Insurance Co. v. Darden:
United States Supreme Court, 1992.
Trial court ruled Darden was an independent contractor, and thus not an employee. Appellate court reversed.
Darden worked for Nationwide as an insurance salesman paid on commission, and enjoyed an Agent’s Security Compensation Plan that stated he would lose his entitlement to the plan if within a year of his termination sold insurance for a competitor within 25 miles of his old office or got a Nationwide policyholder to cancel a policy. He was eventually fired, started selling insurance himself, was cut off from the pension, and sued, claiming that his benefits had vested and could not be cancelled.
Whether Darden, a commission insurance salesman, was an “employee" for the purpose of ERISA.
Judgment reversed for ?.
Darden, a commission insurance salesman, was an “employee" for the purpose of ERISA, since the definition is based on traditional agency law principles.
- Congress intended for an employee to fall under the conventional “master-servant" understanding of what an employee was, namely considering the hiring party’s right to control the manner and means by which the product is accomplished.
Curtiss-Wright Corp. v. Schoonjongen:
United States Supreme Court, 1995.
District Court ruled that the claim was a valid amendment to the plan, since it stated “The Company." Appellate court reversed, calling the clause too vague.
Curtiss-Wright maintained a postretirement health plan for employees who worked at certain facilities. In 1983, they amended the plan to state that when their old plant closed, the beneficiaries would no longer receive the benefits. They later announced that the ?s’ plant was closing, and they were being terminated from the plan.
Whether the standard provision in many employer-provided benefit plans stating “The Company reserves the right at any time to amend the plan" sets forth an amendment satisfying ERISA § 402(b)(3), which states that every employee benefit plan must provide a procedure for amending the plan, and identifying those who have authority to amend the plan.
Judgment reversed for ?s.
The standard provision in many employer-provided benefit plans stating “The Company reserves the right at any time to amend the plan" sets forth an amendment satisfying ERISA § 402(b)(3), which states that every employee benefit plan must provide a procedure for amending the plan, and identifying those who have authority to amend the plan.
- Everyone agrees that ? had the right to amend the clause, and the “company" is a valid person, and “any time" is a valid procedure.
- This clause is deceptively simple, as it eliminates tons of other options.
Glocker v. W.R. Grace & Co.:
United States Appellate Court, 1995.
Statement of the Case:
Policy holder’s widow, Mrs. Glocker, is suing the decedent’s former employer and Medicare plan provider, Grace, for failure to pay medical benefits, when Mr. Glocker’s doctor said he needed private nurses to perform custodial type functions for him, until his death from prostate cancer, and for a civil penalty, when Grace failed to provide “the whole policy" upon 16 requests by Mrs. Glocker’s attorney and well over a year in time, only providing it upon the filing of a motion to compel and amending the complaint to include a count for civil penalties under ERISA.
Trial court granted summary judgment on both issues to Grace, claiming “custodial nurses" were not covered by the insurance plan, and she was not prejudiced by the delay.
Whether an insurance company should reimburse the policy holder’s widow for medical benefits, when the holder’s doctor said he needed private nurses to perform custodial type functions for him, until his death from prostate cancer, and whether the plan provider should pay a civil penalty, when they failed to provide “the whole policy" upon 16 requests by the policy holder’s attorney and well over a year in time, only providing it upon the filing of a motion to compel and amending the complaint to include a count for civil penalties under ERISA.
Judgment affirmed in part, reversed in part, and remanded for determination of the due civil penalty.
The insurance company should NOT reimburse the policy holder’s widow for medical benefits, when the holder’s doctor said he needed private nurses to perform custodial type functions for him, since the plan specifically denies coverage for custodial nurses, BUT, the plan provider SHOULD PAY a civil penalty, when they failed to provide “the whole policy" upon 16 requests by the policy holder’s attorney and well over a year in time, only providing it upon the filing of a motion to compel and amending the complaint to include a count for civil penalties under ERISA,since prejudice is merely a factor to consider, not dispositive alone, when deciding whether to fine a plan provider.
- The plan states that no medicare is provided for custodial care, which is still covered as defined in the plan when the nurses are performing medical treatment which can reasonably be expected to substantially improve the individual’s medical condition.
- In this case, the nurses helped him with everyday activities, was custodial in nature, and because he was terminally ill, this help was not designed to help him improve his condition, but to comfort him.
Regarding the fine:
- Grace failed to provide “the whole policy" upon 16 requests by the policy holder’s attorney and well over a year in time, only providing it upon the filing of a motion to compel and amending the complaint to include a count for civil penalties under ERISA.
- No one factor is dispositive in determining whether to grant a civil fine under ERISA, and here, the factors indicate that one should be granted, since the only reason Grace said it couldn’t produce was because they “couldn’t find everything."
Civil Fine Factors Under ERISA: The fines average between $10 and $30 per day
- Bad Faith
- Prejudice to the plan holder
- Length of delay
- Time and expense incurred in trying to compel production
- Amount needed to suitably punish the plan provider
- Excuse from Fine Rule: ERISA 502(c)(1) excuses failure to comply with a request for information if it results “from matters reasonably beyond the control of the administrator."
Lorenzen v. Employees Retirement Plan of the S & H Co. (7th Cir. 1990, Posner):
Statement of the Case:
Widow of a deceased S & H employee is suing the company’s ERISA qualified retirement plan for violating its fiduciary duties to her husband and herself, causing a loss of retirement benefits, when her husband stayed on the job past his planned retirement date, at S & H’s request, to finish some loose ends, and then died before his defined benefits pension LUMP SUM distribution commenced, thus leaving his wife with only a Qualified Joint Survivor Annuity, which is 50% of what she would otherwise have inherited from him.
Lower court ruled for wife, for $192,000, but she appealed anyway, for prejudgment interest.
- Husband desired to take the lump sum, instead of annuity with 50% payments for his wife.
- He would have probably reached the date of his true retirement if wife had not unplugged him from life support after his heart attack.
Whether a wife is due the lump sum amount her husband planned to take, instead of a 50% QJSA, when he was asked to stay on for a few months and then died.
Judgment reversed for Employer.
A wife is NOT due the lump sum amount her husband planned to take, instead of a 50% QJSA, when he was asked to stay on for a few months and then died, since they were benefiting from the retirement income getting larger while the husband kept working.
- The husband voluntarily took a risk, not thinking he would die.
- The couple was benefiting from the retirement income getting larger while the husband kept working.
- There was no duty by the Company to advise the husband that if he died, the wife would only get a QJSA, or to the wife as to the repercussions of unplugging her husband’s life support.
Spousal Waivers of QJSA and QPSA Requirements (Treasury Department Regs)
- Spouse must consent to the substitution of any nonspouse beneficiary.
- Consent is personal only to that spouse, and is not binding on subsequent spouses.
- Cannot be waive by premarital agreement, either.
Dickerson v. Dickerson (US District Court, Tennessee 1992):
Statement of the Case:
Action is a demand by the divorcing wife, Janet Dickerson, for the immediate alienation and distribution to her of a portion of her former husband’s pension assets under the terms of the circuit court’s divorce decree, when the Southern Electrical Retirement Fund (SERF) contends that such a distribution of funds before the husband reaches the age of disbursement (55 years old – in 2013) violates ERISA § 206(d) and Code § 401(a)(13) and 414(p), and SERF seeks declaratory judgment that the divorce decree does not meet the Qualified Domestic Relations Order (QDRO) requirements.
Circuit court wrote the failing decree.
- Divorce proceedings divided the marital assets, including the wife being granted $8,000 to be paid from the husband’s pension benefits.
- Circuit Court wrote an alleged Qualified Domestic Relations Order, which provided that the money be disbursed from the fund “as soon as administratively possible." This was taken to mean, and meant to mean, now.
Whether the divorce decree is a QDRO within the meaning of ERISA § 206(d), when it entitles the wife to an immediate disbursement to her from her ex-husband’s pension plan, even though he is not at the age of disbursement.
Divorce decree is rejected.
The divorce decree fails to meet the QDRO requirements within the meaning of ERISA § 206(d), since it entitles the wife to an immediate disbursement to her from her ex-husband’s pension plan, even though he is not at the age of disbursement.
- ERISA contains a spendthrift provision that prohibits alienation or assignment of retirement benefits. § 206(d)(1)
- In order to protect women who may suffer inequities as the economic victims of divorce or separation from their wage earning husbands, the Retirement Equity Act of 1984 creates an express exception to the spendthrift provision, by allowing for a QDRO.
- Dickerson is not a plan participant, and is merely an alternate-payee / beneficiary.
- If the courts allowed divorce decrees to cause sudden, unanticipated, and immediate withdrawals from pension funds, it would be in contravention of the purposes of ERISA.
QDRO Rule: A domestic relations order is not a “qualified order" if it requires a plan to provide any type of form or benefit, or any option, not otherwise provided under the plan.
- Thus, this is not a QDRO, since it would require disbursement in a way not allowed under the plan.
QDRO Review Procedures:
Plan administrator is responsible for determining whether a domestic relations order issued by a state court satisfies the statutory requirements for a QDRO.
- Plan administrator is not required to look beyond the face of the order to ascertain its validity.
Administering funds incorrectly would violate both:
- IRC: Since it breaks the anti-alienation rule, it causes plan disqualification.
- ERISA: For the same reasons, but also is a breach of fiduciary duty, and triggering civil actions.
- To avoid problems, plan administrators generally have “model" QDROs for alternate-payees to use.
Income and Gift Tax Consequences of QDRO Distributions:
- Distribution to an alternate-payee is considered in that person’s gross income, UNLESS it is done as a direct rollover.
- If the alternate-payee is a dependent child of the participant, the income is counted as the participant’s own gross income.
Dividing Benefits Under QDRO:
Shared Payment Approach: Used for alimony or child support when participant has already begun to receive payments from the plan.
- QDRO requires an amount to be paid in each installment to the alternate-payee.
Separate Interest Approach: Divides plan benefits as part of a marital property settlement.
- The benefit for the alternate payee is turned into a separate account, which is independent in time and form from the participant.
Central States, Southeast, and Southwest Areas Pension Fund v. Gerber Truck Service, Inc. (7th Cir. 1989):
Statement of the Case:
Central States, Southeast, and Southwest Areas Pension Fund seeks payment to the fund in accordance to the collective bargaining agreement, when BOTH parties had agreed to only include 3 truck drivers in the multiemployer plan, but executed documents stating that either all drivers or all employees would be included, since that was what was available to them.
District court held that Gerber’s obligations were limited to the Fat’s 3, that Gerber’s obligation ended in 1982 upon oral notice, and that liquidated damages for the fund were not in order.
- Gerber, a small trucking company, purchased another small trucking company, and assumed its 3 drivers (Fat’s 3), union employees, and its other employees.
- Fat’s 3 were close to retirement, and union workers, so Gerber approached the Teamsters Local and asked if he could joint the union’s collective bargaining agreement, and keep just the 3 under the multiemployer pension and welfare plans, since he didn’t want them to lose their retirement – so long as he had no other obligation under the plan. THEY AGREED.
Both Parties Signed Benefit Plan Agreements:
- The collective bargaining agreement that the parties signed specifically said that all “drivers, helpers, dockmen, warehousemen, checkers, powerlift operators, etc., were represented by the union", AND
- The participation agreement said that fixed sums needed to be contributed each week to the multiemployer plan for EACH “driver."
- The parties continued pursuant to their own agreement, with Gerber only contributing for Fat’s 3 until 1982, when Gerber merely stated it would no longer participate in collective bargaining, and the Union accepted. In 1984 they sent the plan a notice saying they would stop paying.
- When Fat’s 3 retired, and sought their money, the plans noticed the problems and audited Gerber, finding that they had 18 employees no contributions were made for. The plans sought those payments under ERISA, and Gerber refused.
- Whether, when an employer and union submit to pension fund documents on behalf of all employees, understandings and practices that would prevent the enforcement of the writings between employer and union also defeat the fund’s claims.
- Whether termination of participation in a fund is valid when notice is not given in writing.
- Whether the fund is entitled to liquidated damages and attorney’s fees, in addition to the fund payments, pursuant to ERISA § 502(g)(2).
District court reversed in favor of the funds. Remanded to determine whether all employees or just drivers are included in the plan.
- When an employer and union submit to pension fund documents on behalf of all employees, understandings and practices that would prevent the enforcement of the writings between employer and union DO NOT defeat the fund’s claims, as ERISA § 515 governs, instead of general contract law, and it states that an executed promise to pay a fund cannot be reneged upon due to policy reasons, like creating chaos through underfunding of retirement plans.
- Termination of participation in a fund is only valid when notice is given in writing, so termination did not occur here until 1985, and Gerber is responsible for all those contributions.
- Also, the fund is entitled to liquidated damages and attorney’s fees, in addition to the fund payments, pursuant to ERISA § 502(g)(2).
- ERISA § 515: “Every employer who is obligated to make contributions to a multiemployer plan under the terms of a plan or collective bargaining agreement shall, to the extent not inconsistent with the law, make such contributions in accordance with the terms and conditions of such plan or agreement."
- “To the extent not inconsistent with the law" is the problematic language, since under basic contract law, the fund’s requests would not be valid, since there was no intent to contract by the parties for what the fund seeks.
In multiemployer plans, if some employers do not pay, the other plans have to make up the difference through higher contributions, or give the workers less than promised.
- Trusts have an independent obligation to workers, and the funds cannot be allowed to default.
- ERISA’s legislative history makes it clear that the parties should not be allowed to back out of the agreements they signed: “Costs of litigation detract from the ability of plans to formulate or meet funding standards…[so] Federal pension law must permit trustees of plans to recover delinquent contributions efficaciously, and without regard for issues that might arise under labor-management relations law. Sound national pension policy demands that employers who enter into agreements providing for pension contributions not be permitted to repudiate their pension promises."
Multiemployer Plan Funding Rules:
- If the employer points out a defect in formation of the plan (like fraud or oral promises to disregard the text), it must still keep its promise to the pension plans.
- Pension plans believe that their obligations to employees stem from the terms of the participation agreements, and that employers’ failure to fulfill their promises is irrelevant.
- Here, ERISA § 515 prevents a court from giving force to oral understandings between unions and employers that contradict the writings.
Concurring and Dissenting in part:
- Enforcement of this holding is impossible, as it is to tough.
- ERISA does not repeal basic contract law.
- Gerber lived up to his commitment, but was punished anyway.
- ALL rules must admit for equitable exception and modification in appropriate cases, so the “tyrrany of theory over reality [does not] bring about obnoxious results."
Metropolitan Life Insurance Co. v. Massachusetts (US 1985):
Statement of the Case:
Attorney General of MA brought suit for declaratory and injunctive relief against Metropolitan for selling life insurance in MA to health benefit plans which does not provide mental health coverage, when Metropolitan contends that the law does not apply, since ERISA states that it preempts all State law “relating to any employee benefit plans" (§ 514(a)), but the Attorney General contends that it does not preempt the State law, since it provides for an “insurance saving clause (the “Deemer Clause")" that states ERISA “shall not be construed to exempt or relieve any person from any State law that regulates insurance, banking, or securities" (§ 514(b)(2)(A)).
MA Supreme Court ruled that the § was saved from ERISA preemption as a law regulating insurance.
Whether a State statute that requires insurance companies to provide mental health insurance when selling their insurance to health care plans in the State is preempted by ERISA, since ERISA states that it preempts all State law “relating to any employee benefit plans" (§ 514(a)), but provides for an “insurance saving clause (the “Deemer Clause")" that states ERISA “shall not be construed to exempt or relieve any person from any State law that regulates insurance, banking, or securities" (§ 514(b)(2)(A)).
Judgment affirmed for Attorney General.
A State statute that requires insurance companies to provide mental health insurance when selling their insurance to health care plans in the State is NOT preempted by ERISA, since ERISA states that it preempts all State law “relating to any employee benefit plans" (§ 514(a)), but provides for an “insurance saving clause (the “Deemer Clause")" that states ERISA “shall not be construed to exempt or relieve any person from any State law that regulates insurance, banking, or securities" (§ 514(b)(2)(A)). If a state law “regulates insurance," as mandated benefit laws do, it is not preempted.
- Reason for the statute was to address a threat the MA legislature saw in MA.
- Mandated Benefit Statutes regarding insurance have existed in all 50 states for 30 years.
ERISA § 3(1): Plans may self-insure or purchase insurance for their participants (these are “Insured Plans").
- ERISA does not regulate the substantive content of welfare benefit plans.
- ERISA states that it preempts all State law “relating to any employee benefit plans" (§ 514(a)), but provides for an “insurance saving clause (the “Deemer Clause")" that states ERISA “shall not be construed to exempt or relieve any person from any State law that regulates insurance, banking, or securities" (§ 514(b)(2)(A)).
- Preemption may be either express or implied, and the term “RELATE TO" welfare plans was given broad meaning.
Nonetheless, the insurance saving clause still applies.
- We must presume that congress did not want to regulate areas of traditional state regulation.
- Presumption is against preemption, and we are not inclined to read limitations into federal statutes.
- Mandated benefit laws ARE TRADITIONAL insurance laws.
Whether a Particular Practice Falls within the “Business of Insurance":
- 1st: Whether the practice has the effect of transferring or spreading a policyholder’s risk.
- 2nd: Whether the practice is an integral part of the policy relationship between the insurer and insured.
- 3rd: Whether the practice is limited to entities within the insurance industry.
- All of these are met, so this is an insurance regulation.
- If a state law “regulates insurance," as mandated benefit laws do, it is not preempted.
FMC Corp. v. Holliday (US 1990):
Statement of the Case:
FMC, health care provider, sought declaratory judgment when the daughter of insured was injured in a car accident, the father/plan participant won recovery, FMC’s plan had a subrogation clause requiring reimbursement for the benefits paid when there is a claim recovery against a 3rd party, but there is a PA law making insurance subrogation clauses by a health care plan illegal. FMC claimed that ERISA preempted the PA law.
District Court and Court of Appeal granted the family’s MSJ.
- FMC operates a self-insured ERISA health care plan.
- It has a subrogation clause requiring reimbursement for the benefits paid when there is a claim recovery against a 3rd party, but there is a PA law making insurance subrogation clauses by a health care plan illegal.
- Daughter of insured was injured in a car accident, the father/plan participant won recovery, and FMC claimed the right to reimbursement.
Whether ERISA preempts a PA State law precluding employee welfare benefit plans from exercising insurance-type subrogation rights on a claimant’s tort recovery when the plan is self-insured.
Judgment reversed for the insurance company.
ERISA does not preempt a PA State law precluding employee welfare benefit plans from exercising insurance-type subrogation rights on a claimant’s tort recovery when the plan is self-insured, since a self insured plan falls under the Deemer Clause, specifically because ERISA states that a State law cannot regulate a health care plan by “deeming it" to really be an insurance provider.
Summary of Preemption Law Under ERISA:
- ERISA § 514(a): Preemption Law establishes an area of exclusive federal concern for every state law that “relates to" an employee benefit plan governed by ERISA.
- ERISA § 514(b)(2)(A): Savings Clause returns to the State the power to enforce those state laws that “regulate insurance," except for the deemer clause.
- ERISA § 514(b)(2)(B)): Deemer Clause states that an employee benefit plan under ERISA shall not be “deemed" an insurance company, insurer, or engaged in the business of insurance for purposes of state laws “purporting to regulate" insurance companies or insurance contracts.
This state law meets the preemption law, then the savings clause, but also falls under the DEEMER CLAUSE.
- 1) State laws directed towards the Employee Benefit Plans are preempted because they relate to an employee benefit plan, and are not “saved" because they do not regulate insurance.
- 2) Employee Benefit Plans that are insured are subject to indirect state insurance regulation.
- Court’s construction of the § draws a line that Congress would have made if it really wanted it in there.
- If Congress wanted this, they could have made the distinction, and not have had a “savings clause."
American Medical Security, Inc. v. Bartlett (4th Cir. 1997):
Statement of the Case:
Maryland employers, their Stop-Loss Insurance Company, and the Plan Administrator field for declaratory judgment that a Maryland law stating that the minimum attachment point for stop-loss insurance plans would be $10,000 violated ERISA, since the law’s stated purpose was to impose the state’s mandated health benefits on self-funded ERISA plans when they purchase certain types of stop-loss insurance that were the equivalent of making them insured health care plans (which would fall under ERISA).
District court granted SMJ for the Insurance Company and plan providers.
- MD employers that sponsor self-insured employee health benefit plans purchased stop-loss incurance from United Wisconsin Life, and hired AMS to administrate their plans.
- The MD State § requires 28 mandated benefits, and the self-insured plans did not provide all of these, but weren’t required to under ERISA.
- The Stop-Loss Insurance companies cut a deal with the employers’ plans so that the attachment point could be dropped really low.
- MD then, frustrated, created a law stating that the minimum attachment point for stop-loss insurance plans would be $10,000.
Whether ERISA preempts a MD insurance regulation that fixes the minimum attachment point for a Stop-Loss Insurance policy issued to self-funded employee benefit plans covered by ERISA, when the regulation is designed to prevent insurers and self-funded employee benefit plans from depriving plan participants and beneficiaries of state mandated health benefits.
Judgment affirmed for the plan providers and insurance companies.
ERISA preempts an insurance regulation that fixes the minimum attachment point for a Stop-Loss Insurance policy issued to self-funded employee benefit plans covered by ERISA,specifically because the regulation is designed to prevent insurers and self-funded employee benefit plans from depriving plan participants and beneficiaries of state mandated health benefits by imposing the state’s mandated health benefits on self-funded ERISA plans when they purchase certain types of stop-loss insurance, thus violating the DEEMER CLAUSE.
Stop-Loss Insurance provides protection to the plan itself, not the participants or beneficiaries, for claims that go past the attachment point.
- Specific Attachment Points – define the level of benefits paid to individual beneficiaries beyond which the insurance company will indemnify the plan.
- Aggregate Attachment Points – define the total amount of benefits paid to all participants or beneficiaries beyond which the insurance company will indemnify the plan.
- By absorbing the risks involved with using Stop-Loss Insurance, the plans are allowed to circumvent the State health benefit requirements.
Here, the complications of the 2nd and 3rd Metropolitan Life Test factors, together with the DEEMER CLAUSE provide for the holding that the State’s regulation of stop-loss insurance should be barred by ERISA.
- While the state’s fear is udnderstandable, this is an area for Congress to change.
The State’s argument is flawed because:
- It overlooks the risks of liability if the stop-loss insurance company becomes involvement still assumed by the employer, OR
- The fact that unless the employer can pay up to the attachment point, the insurance company will not pay its part.
“Lasering" Individual Health Care Plan Participants under Stop-Loss Policies:
Lasering: Technique used by the insurance issuer policies to reduce the cost of coverage for high risk participants, by the carrier carving out an exception to the employer’s coverage for that particular person.
- Employer must pay this person’s bills alone.
- Person must be charged the same premium by the employer, under ERISA § 702.
Regulation of Multiple Employer Welfare Benefit Plans (MEWAs) Under State Insurance Laws and ERISA:
MEWA: An employee welfare benefit plan for more than one employer.
- Different from multiemployer plan because there is no collective bargaining agreement.
- Often used by industry trade associations to offer health care, but the plans often collapse.
ERISA § 516(b)(6) creates preemption rules for these:
- If fully insured, the MEWA is only governed by state insurance laws that govern financial standards.
- If not fully insured, the plan is subject to ERISA Title I and applicable state insurance laws that are consistent with ERISA.
Holford v. Exhibit Design Consultants (MI USDC 2002):
Statement of the Case:
Holford, terminated plan participant, seeks actual and statutory damages, and legal fees, alleging that her Company violated ERISA § 606 by failing to provide her with written notice of her right to continue health coverage upon termination of her employment under COBRA, since the notice was only in the Employee Handbook.
Whether a terminated employee’s Company violated ERISA § 606 by failing to provide her with written notice of her right to continue health coverage upon termination of her employment under COBRA, since the notice was only in the Employee Handbook.
Judgment for the Participant.
Terminated Employee’s Company violated ERISA § 606 by failing to provide her with written notice of her right to continue health coverage upon termination of her employment under COBRA, since the notice was only in the Employee Handbook, thus entitling her to actual damage payment of medical expenses, punitive statutory damages, and attorney’s fees.
COBRA Litigation Rules:
- Notification requirements of COBRA are clear that an employer must notify plan administrator of a termination within 30 days (606(a)(2)).
- Administrator then has 14 days to notify the beneficiary of her right to continue coverage under COBRA, and the participant has 60 days to accept (606(a)(4)).
Notice Under COBRA:
- § gives no direction on what constitutes notice.
- Mailed notice to the employee’s last known address is deemed “Good Faith Compliance" with COBRA’s notification requirement.
- Defendant’s claims that this is a windfall are unpersuasive because insurance is a contract where premiums are paid, and there is no duty to mitigate.
Notice was inadequate, since it was ambiguous and failed to explain the Terms of:
Thus, the Participant is entitled to:
- Actual damage payment of medical expenses
- Punitive statutory damages (can be raised or lowered, and lowered to $55/day/participant)
- Attorney’s fees and costs.
McGann v. H & H Music Co. (US Appellate Ct. 1991):
Statement of the Case:
McGann, H & H Employee, filed suit under ERISA § 510 against H & H, Brook Mays Music, and General American Life Insurance Company, the defendants, alleging that they unlawfully discriminated against him by reducing medical plan benefits available to H & H employees for the treatment of AIDS.
District court granted ?’s MSJ, on the ground that the employer has an absolute right to alter the terms of medical coverage available to plan beneficiaries, regardless of their intent.
- McGann discovered he had AIDS in 1987, and soon afterwards sought medical coverage to treat it.
- In March 1988 he met with company officials, and they discussed his illness and coverage, which provided lifetime medical benefits up to $ 1 million for all employees.
- In July 1988, the company informed their employees that their medical coverage was being changed in a few ways, but the main change was that AIDS medical assistance was only covered up to $5,000 for the whole lifetime. No other illness was limited.
- H & H also became self-insured under the new plan…
- By January 1990, McGann had exhausted his total coverage for AIDS.
Whether the alteration of an employee welfare benefits plan to reduce benefits available to AIDS victims violates ERISA § 510, when the change was prompted by the company finding out that one of its employees had AIDS.
Judgment affirmed for the Companies.
Under ERISA § 510, discrimination is only illegal if it is motivated by a desire to retaliate against an employee for taking advantage of benefits, or to deprive an employee of an existing right to which he may become entitled, neither of which occurred in this case.
- ERISA § 510: It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the employee benefit plan…or for the purpose of interfering with the attainment of any right to which the participant may become entitled to under the plan.
- ? contends that the reductions in coverage were made because of the knowledge gained through dealing with McGann, since he was the only beneficiary with AIDS, but it was intended to target anyone with AIDS, not just him.
In order for § 510 to apply, ? must show, which he did not do, that the ? had a specific intent to interfere with a right to which he may become entitled.
This is not possible:
- The reduction applied to ALL employees with AIDS,
Welfare benefits are not something that VESTS into an entitlement, and McGann has not shown that there was any PROMISE that the benefits would not be eliminated.
- In fact, the plan reserves the right to amendment.
- This is not possible:
- ERISA does not require vesting of medical benefits.
§ 510 relates to discriminatory conduct directed against individuals, not actions involving the plan in general.
- An overly literal interpretation of the language would make any partial termination illegal.
- ERISA does not mandate that employers provide any particular benefits, and does not proscribe discrimination of those employee benefits.
- Absent a federal or non-preempted state law violation, a federal court may not modify a substantive provision of a pension plan.
- Automatic vesting of welfare benefits was rejected by Congress because the costs of such plans are subject to fluctuation and unpredictable variables.
- Unstable welfare variables not present in pensions prevent accurate predictions of future needs and costs.
Constraints on the Settlor Function Doctrine Imposed by Other Federal Laws:
- Other federal laws, since not preempted by ERISA, may constrain the employer’s ability to dictate the terms and conditions of the welfare plans.
- Americans with Disabilities Act (adopted after this case, in 1992) is one such law.
Cases where the Courts ruled against the fiduciaries for violating their duty of loyalty:
Brock v. Hendershott (6th Cir. 1988): High ranking union officials used their influence in the union to demand dental plan benefits from various employers and proposed a group they had personally started as the choice for these dental plans.
Donovan v. Mezzola (9th Cir. 1983): Union benefits fiduciaries authorized making loans from the pension fund to the convalescents fund that they also were fiduciaries for at below market interest rates and on terms that were not commercially reasonable.
GIW Industries v. Trevor, Stewart, Burton & Jacobsen, Inc. (11th Cir. 1980): Investment decision violated both the duty of prudence and duty of prudent diversification when 70% of the assets were put into US government bonds with a single maturity date, not anticipating future withdrawals.
The Duty to Follow (or Disregard) Plan Terms – ERISA 404(a)(1)(D): This duty arises in many areas:
Marshall v. Teamsters Local Pension Trust Fund (EDNY 1978): Court found a violation of this 404(a)(1)(D) when the trustees failed to follow the plan’s requirement that they must make a specific determination that any single investment exceeding 25% of the total value of the plan’s assets was prudent.
Herman v. NationsBank Trust Co.: Court found that the trustee of an employee stock ownership plan could not blindly follow the plan’s requirement that the trustee must vote unallocated shares of company stock in the same proportion as participants voted their allocated shares, rather finding that the Duty of Prudence should be applied.
Best v. Cyrus (6th Cir. 2002): Plan trustee also served as Treasurer of the Plan’s sponsoring employer. Employer was required to contribute 15.5% of the participants’ annual salaries to the plan, but allowed loans from this money. When the employer hit financial hardship, the trustee used the loan repayments for covering operating and payroll expenses of the employer, leading the trustee to be sued for fiduciary breach of duty for not reporting what he did, and the 6th Circuit held that the duties went beyond what was in the plan document, finding him guilty.
Duty to Inform:
Eddy v. Colonial Life Insurance (DC Cir. 1990): Participant was diagnosed as HIV positive and his health benefits were cancelled a week before his surgery. When trying to convert his policy to a private one, he was mistakenly told it could not be done, claiming he worded his question in a way they did not understand. The Court ruled for the participant saying it did not matter how he phrased his question, the participant was entitled to being informed.
Barrs v. Lockheed Martin (1st Cir. 2002): Divorce order only spoke about one of two life insurance policies when imposing a duty on Lockheed to inform ex-wife of the participant’s termination, and the other one never reached her because she moved and they mailed it to her last address. Court held there was no duty to find her or tell her the policy did not apply to her.
Berlin v. Michigan Bell Telephone Co. (6th Cir. 1988): Company offered 1st round of severance packages, and it became clear people were holding out, so the company made misrepresentations that it would be the only round – which proved untrue as several people were screwed when a 2nd round opened. Court ruled that when a “serious consideration" was given to potentially do something, the plan administrator then has an affirmative duty to not make misrepresentations.
Lowen v. Tower Asset Management, Inc. (2d Cir. 1987):
- 3 individual ?s owned an investment management company and registered securities broker-dealer. They invested investment management company money in risky security ventures through their other company and lost a ton.
- Court found ERISA 406(b)(1) prohibited the investment of plan assets into their other company and were found jointly and severally liable.
Commissioner v. Keystone Consolidated Industries, Inc. (US 1993): Employer contributed unencumbered real property to a defined benefit plan to satisfy the employer’s minimum funding obligation under Part III, Title I of ERISA.
Held: Because the employer’s property was contributed to the plan in satisfaction of the employer’s legal obligation under the minimum funding rules, it was a “prohibited sale or exchange under Code 4975.
- This would NOT have been invalid IF the employer did not have an outstanding funding obligation, and was making a discretionary decision.
- Today, the most common form of “voluntary" noncash contribution is qualifying employer securities, often in the form of matching 401(k) contributions, or discretionary contributions to a profit sharing plan…since they are exempt from ERISA minimum funding requirements.
Lockheed Corporation v. Spink (US 1996):
Statement of the Case:
Spink, a retired Lockheed employee, sued for monetary, declaratory, and injunctive relief against Lockheed for violating its duty of care and the prohibited transactions ERISA rules, under the theory that the payment of benefits through an early retirement program violate ERISA as a “prohibited transaction" when the retirement program is conditioned on the participant’s release of any employment-related claims.
District court dismissed it, and the 9th Circuit held that ERISA 406(a)(1)(D) prohibited a fiduciary from causing a plan to engage in a transaction that transfers plan assets to a party in interest or involves the use of plan assets for the benefit of a party in interest.
Whether the payment of benefits through an early retirement program violate ERISA as a “prohibited transaction" when the retirement program is conditioned on the participant’s release of any employment-related claims.
Because a plan sponsor who amends a plan is not, by definition, acting as a fiduciary, payment of benefits to an amended plan, regardless of what condition the plan requires of an employee in return for those benefits, does not constitute a prohibited transaction.
- ERISA does not require the establishment of employee benefits, nor what type of benefits they had to provide if they did so.
- ERISA DOES, though, seek to ensure that employees will not be left empty handed once the employers guaranteed them certain benefits.
- § 406 applies to keeping fiduciaries from getting involved in certain types of business deals, so it is integral to determine whether the plan provider and amender was functioning as a fiduciary.
- Rule: Plan sponsor who alters the plan is NOT a fiduciary.
- Thus, Lockheed was acting as a settlor, and not a fiduciary when it amended the plan, so these fiduciary provisions are not triggered.
- The execution of release claims against he employer is functionally no difference from asking the employee to perform certain acts in return for benefits, which is legal.
Hughes Aircraft Co v. Jacobson (US 1999): Employer amended the benefit formula of its pension plan, and the employees claimed it violated ERISA’s fiduciary duties under § 406. The Supreme Court rejected this though, based directly on Spink’s decision that plan sponsors who alter the terms of a plan do not fall into the category of fiduciaries.
Varity Corporation v. Howe (US 1996):
Statement of the Case:
A group of misled beneficiaries of Varity Corporation’s welfare benefits plan sued the administrator of the plan, ALSO their employer Varity Corporation, claiming that the administrator, through trickery, led them to withdraw from their old plan and move to a new one, leading to the forfeiture of their benefits when the new plan was intentionally bankrupted.
District Court found that Varity, acting as ERISA fiduciaries, had harmed plan beneficiaries through deliberate deception, which gave the employees to right to relief, including the reinstatement to the old plan. The Court of Appeals affirmed.
- Employees all were participants in, and beneficiaries of, the ERISA compliant employee welfare benefit plan, that the employer administered itself.
- When certain divisions started losing money, Varity decided to transfer them to a separately incorporated subsidiary, Massey Combines.
Varity also persuaded the employees of the failing divisions to change employers and benefit plans, conveying the message that employees’ benefits would remain secure when they transferred.
- This “information session" assured them that it was the same exact thing as their current plan, and that their benefits would be completely protected, like the employees working in the old company.
- Ultimately, the employees lost their non-pension benefits, and filed an action under ERISA, claiming that Varity, through trickery, had led them to withdraw from their old plan and forfeit their benefits.
- Whether the Varity Corporation acted in its capacity as an ERISA fiduciary when it significantly and deliberately misled the beneficiaries.
- Whether Varity violates the fiduciary obligations that ERISA imposes upon plan administrators.
- Whether ERISA authorizes private lawsuits if these claims are found to be true.
Judgments affirmed for the plan participants.
- The factual context in which the statements were made, combined with the plan-related nature of the activity, engaged in by those who had plan-related authority to do so, together provide sufficient support to conclude Varity was acting as a fiduciary.
- Varity violated the fiduciary obligations that ERISA imposes upon plan administrators, by knowingly and significantly deceiving the employees as to the financial viability of the new entity and the future of the new entity’s benefits plan, in order to save the employer money at the expense of the beneficiaries.
- Whether ERISA authorizes private lawsuits if these claims are found to be true is discussed in a later chapter…
ERISA’s goals: Protect employee pensions and other benefits by:
- providing insurance (§ 4001)
- specifying certain plan characteristics in detail (§§ 201-211)
- setting forth certain general fiduciary duties applicable to the management of both pension and non-pension benefit plans (§ 404)
- The law of trusts is helpful in interpreting and determining ERISA’s fiduciary duties, but is only a starting point:
- Whether the Varity Corporation acted in its capacity as an ERISA fiduciary when it significantly and deliberately misled the beneficiaries:
- § 3(21)(A): A person is a fiduciary with respect to a plan to the extent that he exercises any discretionary authority or discretionary control regarding management of the plan, OR has any discretionary authority or responsibility in the plan administration.
What are “Administrative Duties"?
- Plan administration includes the activities that are “ordinary and natural means" of achieving the objective of the plan.
Under the specific factual circumstances, Varity acted in its capacity as an ERISA fiduciary when it significantly and deliberately misled the plan’s beneficiaries, thereby violating their fiduciary obligations imposed by ERISA
- They gave everyone pamphlets stating that “there will be no change in your benefits through" this transfer.
- The Company completely planned to screw these people over, and acted as a plan administrator through having this detailed information lecture regarding the rules and benefits of the Plan.
- ERISA’s general purpose of protecting beneficiaries’ interests also favors a reading that provides a remedy.
- Whether Varity violates the fiduciary obligations that ERISA imposes upon plan administrators.
- ERISA § 404(a): Requires a “fiduciary" to discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries.
- Varity violated the fiduciary obligations imposed upon the plan’s administrator by ERISA, by knowingly and significantly deceiving the employees as to the financial viability of the new entity and the future of the new entity’s benefits plan, in order to save the employer money at the expense of the beneficiaries.
Dissent (Thomas, O’Connor, Scalia):
- Congress understood that every business decision an employer makes can have an adverse impact on the plan, and a business could not be run properly if every business decision had to be made with the best interests of the plan participants.
- The STATUTORY LANGUAGE, not the law of trusts, should govern.
- These communications were not plan administration, as an employer will say anything to its employees to stop panic.
- No ERISA provision requires an employer to keep plan participants abreast of the sponsor’s future intentions regarding termination or reduction of benefits.
Pegram v. Herdich (US 2000):
Statement of the Case:
HMO user, Herdich, sued her HMO, Carle, and her HMO employee doctor, Pegram, for state-law malpractice and breach of fiduciary duty under ERISA when the doctor found a lump in her abdomen, but in order to save money made her wait 8 days and travel 50 miles for an ultrasound, since the HMO had a policy of financially rewarding doctors who kept the cost of care down.
District Court granted Carle’s motion to dismiss on the ground that Carle was not acting as an ERISA fiduciary. The Court of Appeals reversed the dismissal.
Herdrich, after feeling an unusual pain in her stomach, was examined by Pegram, a physician affiliated with Carle.
- Carle functions as a health maintenance organization (HMO) organized for profit.
- Pegram then required Herdrich to wait eight days for an ultrasound of her inflamed abdomen, which was to be performed at a facility staffed by Carle more than 50 miles away.
- During that period, Herdrich’s appendix ruptured.
- Herdrich sued Carle, including Pegram, in State court for medical malpractice and two counts of fraud.
- Carle and Pegram, under ERISA, removed the case to federal court.
- Ultimately, Herdrich was only able to pursue one fraud count, which was amended to allege that Carle’s HMO organization provisions rewarding its physician owners for limiting medical care, entailed an inherent or anticipatory breach of an ERISA fiduciary duty, because the terms create an incentive to make decisions in the physicians’ self-interest, rather than the plan participants’ exclusive interests.
Whether treatment decisions made by an HMO, acting through its physician employees, are fiduciary acts within the meaning of the ERISA.
Appellate court reversed.
Treatment decisions made by an HMO, acting through its physician employees, are NOT fiduciary acts within the meaning of the ERISA, as holding otherwise, the Court would be acting contrary to the congressional policy of allowing HMO organizations if it were to entertain an ERISA fiduciary claim, allowing wholesale attacks on existing HMOs solely because of their structure
- ERISA § 409: Any person who breaches fiduciary duties under ERISA shall be liable to restore the injured party to whole, paying equitable or remedial relief.
HMOs are constructed in a way that requires giving less treatment, but Carle had a program for reducing the cost by offering the doctors financial incentives for keeping them down.
- No HMO organization could survive without some incentive connecting physician reward with treatment rationing.
- Herdrich’s remedy — return of profit to the plan for the participants’ benefit — would be nothing less than elimination of the for-profit HMO.
Mixed treatment and eligibility decisions to delay medical treatment by sending a patient to a HMO owned facility, with adverse consequences, made by a health maintenance organization through its physician, are not fiduciary decisions under ERISA.
- Eligibility and treatment decisions are made by the same person, and cannot be untangled because they are both judgment calls.
- Thus, it is not possible to separate a fiduciary thought from a doctor’s thought.
- Thus, Herdrich did not state an ERISA claim.
Metropolitan Life Insurance v. Taylor (US 1987):
Statement of the Case:
Taylor, fired General Motors (GM) employee, sued GM and Metropolitan Life, the plan insurer, for compensatory damages for money contractually owed, mental anguish for this contract breach, immediate reimplementation of his benefits and insurance, wrongful termination, and wrongful failure to promote him, BUT GM and Metropolitan removed to federal court alleging federal question jurisdiction over the benefits claims through ERISA, and pendent jurisdiction over the other claims.
Trial court found the case properly removeable and granted GM’s MSJ. Appellate court found that only state law causes of action were made, and the only federal part was a federal defense of preemption, and based on the well-pled complaint rule, a federal defense is not enough for removal.
- Taylor was injured in a job-related car accident in 1961, and went back to GM when he was ruled to no longer be disabled.
- He worked at GM between 1959 and 1980.
- In the midst of a messy divorce, he left work because of severe emotional problems, and, upon being examined by a phychologist, was ruled emotionally unable to work.
- 6 weeks later, the psychologist said he was ready to go back, but Taylor refused.
- GM then had an in-house physicial check him, ruled he was mentally fit, and when Taylor refused to go back to work, he was fired.
Whether state common law claims are not only preempted by ERISA, but also displaced by ERISA’s § 502(a)(1)(B) civil enforcement provision to the extent that complaints filed in state courts pleading state law claims are removable to federal court.
Appellate court reversed for GM.
State common law claims are not only preempted by ERISA, but are also displaced by ERISA’s § 502(a)(1)(B) civil enforcement provision to the extent that complaints filed in state courts pleading state law claims are removable to federal court, since they were meant to be necessarily federal in nature.
- These state common law contract and tort claims are preempted by ERISA § 514(a) because they “related to an employee benefit plan."
- The other claim is as a suit by a beneficiary to recover benefits from a covered plan, which falls directly under ERISA § 502(a)(1)(B), which provides an exclusive federal cause of action for resolution of these disputes.
Federal preemption is normally a defense to the ?’s suit, and is not enough for removal, BUT Congress may so completely preempt an area that any complaint in that area is necessarily federal in character.
- Ex. § 301 of the Labor Management Relations Act states that it is so powerful that it “displaces" any state cause of action.
- Supreme Court ruled that ERISA preemption does not make a claim arise under federal law, BUT said that if it arose under ERISA § 502, it would.
- Federal preemption is normally a defense to the ?’s suit, and is not enough for removal, BUT Congress may so completely preempt an area that any complaint in that area is necessarily federal in character.
This complaint only raises STATE causes of action, BUT:
- § 502(f): District courts have jurisdiction here based on § 502(a).
- § 502(a), Conference Report: All actions in Federal or State court are to be regarded as they would be if brought under the LMRA § 301.
- LMRA § 301 states that it displaces State causes of action, SO:
- This common law action was both preempted by § 514(a) and displaced by the civil enforcement provision of § 502(a).