The Employee Benefits practice group is pleased to present the Benefits Developments Newsletter for the month of July, 2017. Click through the links below for more information on each specific development or case.
Class Action Plaintiffs Target University 403(b) Plans
In June, an ERISA action – a proposed class action - was filed against Washington University in St. Louis alleging, among other things, that the University’s 403(b) plan recordkeeping and investment fees were excessive. Also named as defendants in the suit are the University’s Board of Trustees, the current and former Vice Chancellor for Human Resources, and the Director of Benefits and Compensation. Washington University is now the 15th major university to face this kind of lawsuit. Other prominent universities that must now defend their fees and investment process include the University of Chicago, Princeton, Yale, Vanderbilt, Columbia, Northwestern, and USC.
Specifically, the complaint filed in the suit against Washington University alleges, among other things, that:
the fees paid to the plan’s recordkeepers - TIAA and Vanguard – were unreasonable because they were based on a percentage of plan assets instead of the number of plan participants;
many of the investment funds offered to participants were “retail” investment class funds even though lower-cost versions of the same funds (i.e., institutional share classes) were available to the plan because of the size of the plan’s assets;
the plan’s multiple-vendor investment offering included “an excessive number of duplicative funds, including poorly-performing funds, ‘bundled’ into the Plan by TIAA and Vanguard mandates . . . ”, a structure that resulted in higher costs;
investment fund revenue sharing served as an incentive for the vendors to recommend higher cost funds, including proprietary funds; and
the plan’s investment fiduciaries should have favored funds that employ less costly passive investment strategies (i.e., index funds) over actively managed funds (which are typically more costly) in light of studies that show that index funds have outperformed actively managed funds over time.
The complaint contains case studies involving plans maintained by other prominent universities all of which have reportedly moved from multiple-bundled recordkeeping structures to single recordkeeping structures that exist alongside separately managed, open architecture investment platforms. The complaint alleges that by consolidating into a single vendor and separating the recordkeeping and investment management functions, a plan can secure more favorable fee terms, streamline administration, increase transparency, simplify participant investment decisions, and reduce costs.
It is important to understand that the allegations in the complaint against Washington University and the other universities should not be taken as true. As of this writing, none of the cases have been decided on the merits, and so it remains to be seen whether the acts and omissions alleged in the complaint constitute ERISA fiduciary breaches. In the meantime, employers should review plan recordkeeping and investment programs to determine whether they could face similar claims. One thing is sure: Plan fiduciaries are more likely to mount a successful defense if they can establish that they have engaged in an oversight process that includes periodic review of the plan’s investment funds and recordkeeping costs, and that they have made adjustments, when necessary, to improve performance and reduce costs. The complaint in the case against Washington University alleges that the University’s alleged failure to make any changes to the program over the course of several years “evidences a lack of independent due deliberation by the Plan fiduciaries.” This allegation, if true, is a cause for concern.
Well Drafted Plan Document Saves Self-Insured Medical Plan Over $350,000
University Spine Center, o/a/o Maria C. v. Horizon Blue Cross Blue Shield of New Jersey and Carefirst of Maryland (D.N.J. 2017)
Recently a New Jersey district court upheld the validity of a self-insured plan’s anti-assignment clause. In this case, a plan participant incurred approximately $374,000 in out-of-network medical expenses, of which the plan paid out only $9,100. In an attempt to recover the difference, the health care provider sued the plan on behalf of the plan participant. In support of its position, the health care provider relied, in part, on a statement signed by the plan participant assigning the participant’s rights to the health care provider. However, the self-insured medical plan included an anti-assignment provision that prohibited a health care provider from suing on behalf of a participant. The court found the anti-assignment clause to be valid and enforceable. This case highlights the value of a well drafted plan document. Employers sponsoring self-insured plans are encouraged to review their plan documents to ensure they contain such valuable language. University Spine Center, o/a/o Maria C. v. Horizon Blue Cross Blue Shield of New Jersey and Carefirst of Maryland (D.N.J. 2017).
Insurer Cannot Offset Participant’s Disability Benefits by Settlement Proceeds – New York State Anti-Subrogation Law not Preempted by ERISA
Arnone v. Aetna Life Ins. Co. (2d Cir. 2017)
Salvatore Arnone, a New York resident, was seriously injured in an accident and began collecting long-term disability benefits under a plan sponsored by his employer and insured by Aetna. He sued those allegedly responsible for his injuries in New York state court and settled the lawsuit for $850,000. Following the settlement, Aetna drastically reduced Arnone’s disability benefits, citing a plan provision allowing the offset of “other income benefits.”
Arnone sued Aetna to recover the offset benefits, relying upon a New York state anti-subrogation law, N.Y. Gen. Oblig. Law §5-335 (“Section 5-335”), which provides that personal injury settlements are “conclusively presumed” not to include “any compensation for the cost of health care services, loss of earnings or other economic loss” that “have been or are obligated to be paid or reimbursed by an insurer.” Aetna’s defense consisted primarily of two prongs: (1) that ERISA preempted application of Section 5-335; and (2) that the plan’s choice of Connecticut law forbade the application of Section 5-355.
The Second Circuit reversed the district court’s judgment for Aetna. The panel held that Section 5-335 regulates insurance, and is saved from preemption by ERISA’s clause exempting from preemption, “any law of any State which regulates insurance.”
Finding Aetna’s choice of law provision “insufficient to bind this court to apply the full breadth of Connecticut law”, the Second Circuit limited its application to the interpretation of the language in the insurance contract. As no term of Section 5-335 purported to “construe” the plan, the panel held Aetna’s choice of law provision was inapplicable.
Ruling in Arnone’s favor, the Second Circuit held that “[S]ection 5-335 provides a legal rule of proof, external to any plan documents, regarding personal injury settlements…around which the parties cannot contract.” Section 5-335 prohibited Aetna’s offset action as a matter of law, thereby rendering its offset decision arbitrary and capricious. Arnone v. Aetna Life Ins. Co. (2nd Cir. 2017).
Individual Held Liable for Employer’s Delinquent Contributions to Multiemployer Plan
Electrical Workers IBEW Local 1249 Pension & Ins. Funds v. South Buffalo Elec., Inc. (N.D.N.Y. 2017)
Courts have ruled that unpaid employer contributions to a multiemployer plan generally are not plan assets unless the parties specify otherwise in the plan document, trust agreement or policies. There are important implications where a plan chooses to treat unpaid contributions as plan assets. In a recent New York case, an individual officer of a company was held personally liable for multiemployer contributions owed to a fund by his company on the grounds that, under the governing plan documents, the unpaid contribution were ERISA plan assets. Individuals who exercise control over plan assets are ERISA fiduciaries and can be held personally liable for failing to deal with those assets in accordance with ERISA (in this case, to promptly deposit the funds with the multiemployer plan). Employers who have discretion with respect to the payment of corporate expenses should carefully review fund documents to determine whether they are acting in a fiduciary capacity with respect to the obligation to make fund contributions (i.e., whether those contributions are plan assets) so that they can act accordingly to comply with ERISA fiduciary standards and avoid personal liability. Electrical Workers IBEW Local 1249 Pension & Ins. Funds v. South Buffalo Elec., Inc. (N.D.N.Y. 2017).
IRS Chief Counsel Advice Concludes PEO Doesn't Relieve Common Law Employer's Liability for Employment Taxes
A recent IRS Chief Counsel Advice opinion (“CCA”) addresses a common law employer’s liability for unpaid employment taxes, including FICA, FUTA, and income tax withholding. The employer at issue leased employees from a professional employer organization (“PEO”). However, the employer had responsibility for the day-to-day supervision and control of the leased employees and was the common law employer of the leased employees.
The contract between the PEO and the employer provided that the PEO would be responsible for processing and paying wages from the PEO’s own accounts to the leased employees, and that the PEO would be responsible for filing all employment tax returns. The contract also provided that the employer was required to pay the PEO, at least one business day in advance of the applicable payroll date, an amount equal to the compensation to be paid to the leased employees for the payroll date. In addition, the contract required the employer provide a security deposit or procure a letter of credit naming the PEO as beneficiary in an amount determined by the PEO. To the extent the employer failed to pay an invoice from the PEO when due, the PEO was entitled to terminate the contract immediately without notice.
The employer did not file any employment tax returns or pay any employment taxes for certain years, and the employer did not take any steps to confirm whether the PEO had filed any employment tax returns or paid any employment taxes for those years. In the course of an audit by the IRS, it was discovered that the PEO had not filed any employment tax returns or paid any employment taxes for the years at issue. During the audit, the employer asserted that, since it had paid the PEO in full, the employer should not be liable to the IRS for any unpaid employment taxes.
In general, the common law employer is responsible for paying any employment taxes. However, under Section 3401(d)(1) of the Internal Revenue Code, if the common law employer does not have control over the payment of wages, the person having control over the payment of wages is responsible for paying any employment taxes. The CCA concludes that, under the terms of the contract, the PEO did not have control over the payment of wages. In particular, the fact that (i) the employer was required to pay the PEO an amount equal to the compensation to be paid to the leased employees in advance of the applicable payroll date, (ii) the employer was required to provide a security deposit or letter of credit naming the PEO as beneficiary, and (iii) the PEO was entitled to terminate the contract at any time without notice if the employer failed to pay an invoice from the PEO when due, caused the IRS counsel to conclude that the PEO acted merely as a conduit for the employer making payroll.
The employer also argued to the IRS auditor that Section 530 of the Revenue Act of 1978 provided the employer with relief. Section 530 provides relief from employment taxes where (i) a taxpayer did not treat an individual as an employee for any period for purposes of employment taxes, (ii) the taxpayer must have filed all required Federal returns on a basis consistent with the taxpayer’s treatment of the individual as not being an employee, and (iii) the taxpayer must have a reasonable basis for not treating the individual as an employee. Because the employer conceded that the leased employees were its common law employees, the CCA concludes that Section 530 does not provide the employer with any relief.
Employers who have entered into similar arrangements with a PEO should review the terms of their contracts with the PEO to determine whether the employer remains responsible for the payment of any employment taxes under the Internal Revenue Code. To the extent there is any question as to whether the PEO has control over the payment of wages, employers are encouraged to contact their attorney or other advisor. (CCA 201724025).
New York District Court Enforces Forum Selection Clause Affecting ERISA-Governed Severance Plan
Tardio v. Boston Scientific Corp. (S.D.N.Y. 2017)
A former employee of Boston Scientific Corporation sued the company in a New York district court over a dispute regarding his benefits under a severance plan that was subject to the Employee Retirement Income Security Act of 1974 (“ERISA”). The company challenged the former employee’s choice of venue on the basis of a broad forum selection clause in his employment agreement, which limited jurisdiction for any employment-related claims to federal courts in Minnesota. While the forum selection clause was not part of the severance agreement, the New York district court found that it was applicable and enforceable with respect to the severance dispute because (1) it was clearly communicated to the former employee, (2) it was mandatory (i.e., it required suit to be brought in Minnesota, rather than making Minnesota an option), (3) it clearly applied to the claims and parties involved, rendering it presumptively enforceable, and (4) the former employee did not make a “sufficiently strong showing” that enforcement of the forum selection clause would be unreasonable or unjust, and therefore, did not rebut the presumption of enforceability. While the Department of Labor opposes forum selection clauses with respect to ERISA plans, this case follows the majority of courts considering the issue and finding forum selection clauses can be enforced as to ERISA plans. Plan sponsors may want to consider adding forum selection clauses to ERISA plan documents and summary plan descriptions to have some control over where plan-related litigation may occur and to prevent, or at least mitigate against, litigation over venue. A forum selection clause should be drafted in line with ERISA’s permissive venue provision, which allows for venue where (1) the plan is administered, (2) the breach at issue took place, or (3) a defendant resides or may be found. Tardio v. Boston Scientific Corp. (S.D.N.Y. 2017).