Feb
15
U.S. District Court
Chapter 9, Benefit Legal Compliance, ERISA, IRC, and More.
This Post Last Updated: August 5, 2010
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Add at page 263: Fiduciary duty to monitor 401(k) costs.
There has been a lot of discussion about the duty of a pension plan fiduciary to monitor and control administrative costs. See, for example, Hecker v. Deere & Co., (28 DLR AA-1, 2/13/09; 45 EBC 2761 (7th Cir. 2009). The Department of Labor has proposed some detailed guidance on this issue and it appears employer sponsors or plan fiduciaries will be required to scrutinize administrative costs of its providers so as to minimize the impact of excessive costs on plan participants. See U.S. Department of Labor rules on fee disclosure, effective January 1, 2009.
Fiduciary Duty and Investment Information
A related fiduciary issue involves the sponsor’s obligation to reveal more about the investment characteristics as well as the administrative costs of the investment choices provided in the Defined Contribution Plan. To give you a glimpse of legislative approaches to this issue can be found in a recent Congressional proposal to amend the IRC. New 401(k) fee transparency rules from Congress. See the American Benefits Council. What do you think? Are the disclosure provisions sufficient, understandable? Will they address the problem of informing the DCP participant?
What to do about retiree health care? (add at page 283)
Both Chrysler and General Motors are currently in bankruptcy court seeking approval of a structured reorganization of their debt. One of their biggest liabilities relates to retiree health care. The question is can such a liability be discharged or modified in bankruptcy? The answer is “yes,” provided the employer and its employees have attempted in good faith to arrive at some compromise before the bankruptcy was initiated. For details, see 11 USC 1114(f) and (g). For several interesting cases on retiree health care in the collective bargaining setting see the posts at Chapter 14.
Also at page 283: oral promises binding.
The U.S. Court of Appeals for the 3d Circuit has ruled that oral promises made by an employer to several employees that it would continue health care after retirement was binding, in spite of contrary representations made in the plan documents and SPDs. See: (Adair v. Unisys Corp. (In re Unisys Corp. Retiree Med. Benefits ERISA Litig.), 3d Cir., No. 07-3369, 9/2/09). What advice would you give an employer who has just read this decision and is concerned about its liability to extend retiree health care?
Defined Contribution Plans and Investment Advice - what can employer say? (Add at page 262)
Also, new U.S. DOL rules have established the parameters for investment advice that can be given to DCP participants by sponsors and their fiduciaries, and require providers of services to retirement plan to disclose their compensation and fee information to the plan sponsors. See: January 2009, U.S. Department of Labor, EBSA, 29 CFR 2550, “Investment Advice to Participants and Beneficiaries.”
Chapter 9 Errata: At page 269: first, read the Vignette concerning Mary and her lump sum. Can you find any errors concerning the factors related to her desired lump sum calculation?
Now, in the Vignette there are several sentences that need to be corrected: (1) At the top, “Mary would like to consider an annuity lump sum, but is unsure how it is calculated.” (2) Near the middle of the page as follows: “Next it calculates the lump sum value of this stream of annuity payments by determining theiraggregate future value. It then applies an assumed discount rate to the future value which results in a lump sum or “present value.” (3) Finally, just below this segment, the last sentence should be corrected as follows: “Obviously, she would argue that the company use a smaller, more realistic interest rate and assume a shorter longer life expectancy.” This would yield a higher future value.
Some Potpourri, updates, and new rules on retirement and ERISA and the IRC. (add at page 286)
Roll Overs - Effective January 1, 2009, non-spouse beneficiaries can roll over their inherited 401(k) assets into inherited IRAs. The law requires mandatory distributions from inherited IRAs, but they can be stretched out over the owner’s life expectancy.
RMDs - Congress also, as part of the Stimulus effort, has suspended for 2009 the Required Minimum Distribution rules for DCPs. It was thought the application of the rule would present a hardship to many whose DCPs have dropped in value due to the slide in capital markets.
In Brief: the IRS and DOL have issued some briefings on early withdrawals and hardship withdrawals from Defined Contribution Plans. The “newsletter” is an excellent and simplified description and includes the pertinent exceptions for such withdrawals. Go to: www.irs.gov/ep/ and check out “IRS Summer 09 Retirement News for Employers” found under “newsletters.” Did you know that in addition to levying income tax on the withdrawal the IRS can also levy a 25% penalty tax? The IRS lists the “7 Steps to Making a Hardship Distribution,” and also outlines the procedure when an employer fails to implement an automatic enrollment in a 401(k) or 403(b) plan.
Finally, the PBGC has issued rules that prohibit lump sum distributions by DBP pensions if the fund is between 60%-80% funded.
Amendments to Table 9.4 (Chapter 9) at page 277: 2009 Contribution Limits - 401(k) and 403(b) limits are $16,500; catch up (over age 50) rise to $5500. Contributions for SIMPLEs rise to $11,500. DBP pension limits are now $195,000 and the annual compensation limit is $245,000. DCP total limits are $49,000.
Case reversed - make a note!
The case cited in Exercise No. 1 at the end of Chapter 9, Golden Gate Restaurant Ass’n. v. City and County of San Francisco, was reversed and remanded by the 9th Circuit Court of Appeals on September 30, 2008. The Court held that the City’s requirement that employers pay a certain rate per hour for health care coverage of its employees or, in the alternative to pay into a City fund designed to reimburse providers for indigent health care was not a “benefit plan” preempted by ERISA. The Court distinguished the 4th Circuit’s decision in Retail Industry Leaders v. Fielder that held a Maryland statute mandating health care for employers with more than 10,000 employees did violate the preemption clause. The only employer in Maryland with more than 10,000 employees was Wal-Mart and there was no alternative to providing health care, such as paying into a government fund. 475 F. 3d. 180 (4th Cir. 2007).
Exercise No. 11. Suppose the investment advisor of an ERISA covered benefit plan recommended to the plan administrator a series of loans made with plan funds to a start-up company. The advisor indicated to the plan administrator that the original loan to the company would be used as interim financing and would be repaid in part when the company secured long-term financing. He considered it a good investment. Despite the company’s failure to make repayment of the initial loan or to obtain other financing, the administrator, upon the recommendation of the advisor, approved five additional loans to the company. A subsequent audit revealed that all but one of the trust’s loans to the company were in default. The trust sued for repayment but there was no recovery. The company had filed for bankruptcy. Who should sue whom for what? What is procedural prudence? Are fiduciaries required to guarantee a good investment? What are the issues and how would you resolve them? See: De Costa v. Rodrigues, 2009 WL 1489637 (9th Cir. 2009) As reported in The Employee Benefits Institute of America (EBIA), Weekly Updates
Exercise No. 12: What should happen if an employer sponsor of a 401(k) included company stock as one of the investment options. Due to market conditions, the stock dropped precipitously in price. What if participants in the plan who chose the stock as an investment, sue the company for breach of fiduciary duty under ERISA. List several legal principles or guidelines relating to the fiduciary duty that you think should be relevant in deciding the case. The Groom Law Group has written a comprehensive analysis of this issue. See:
http://www.americanbenefitscouncil.org/documents/
Fiduciary_Stock_Drop_Litigation_Outline.pdf/
See also: Cavalieri v. General Electric Co., (ND of NY, Case No. 06cv315, August 5, 2009). Case can be found at: http://pub.bna.com/pbd/06cv315.pdf/. It was settled but the Court did issue an opinion about how class actions should proceed in stock drop cases.
Exercise No. 13: Suppose a retirement plan provides a participant with retirement documents that include a detailed statement of the monthly benefits he will receive. The participant, relying on the information, decides to retire early. Later, the plan says the amount calculated was wrong, future payments will be reduced, and the participant must reimburse the plan for the excess payments. What should be the result? What would be your rationale in ruling on the case? See: Bloemker v. Laborers’ Local 265 Pension Fund, 605 f. 3d. 436 (6th Cir. 2010).
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Chapter 10 ( Benefits and Metrics)
What is the actuarial value of a plan? (Add at page 318)
One way to measure the value of a health care plan for participants is to look at the actuarial value of the plan. This idea is to compare the value of a health care plan by calculating the percentage of health care costs paid by the plan versus the employee. So, for example, if a plan pays 90% of the total health care expenses then its actuarial value would be .9. Employees could compare among various plans to see which has the highest value. The problem with the valuation is that it does not include the premium paid by the employee. Theoretically, would you expect the premium paid by the employee to have an impact on the actuarial value? Explain.
At page 301, footnote 13, there is a cite to a Six Sigma source and its potential application to human resource benefit plans. Add: See also: http://www.sixsig.info/; and the six sigma blog at: http://bx.businessweek.com/lean-six-sigma/reference/
Add these Exercises at the end of Chapter 10:
Tools
No. 11 - The Health Care Value Proposition
You are the Benefits Manager for a Colorado school system that is operating under the staggering weight of ever-increasing employee health care costs. Your health plan is self-funded and self-managed and uses “carve outs” for best providers. You have been trying to introduce more and more employee cost sharing design features into the plan design, but this has been met with strong union resistance. As a consequence, in the last 2 years there have been 0% pay increases. The District is “inner city,” with the largest number of students eligible for “free lunches,” and the lowest proficiency scores in the State. Your employee demographics comprise a larger percentage of female employees (70%), a high incidence of chronic diseases, an average age of 50, and 6000 “lives” or covered persons.
Recently, you have examined some possible opportunities for lowering the expenses of certain medical treatments, specifically surgery. In a quick benchmarking review, you have discovered that a comparatively larger percentage of your employees’ surgeries were done on an in-patient basis and involved “open” and invasive techniques. You have decided to focus on this issue and to establish a program of increasing over time the proportion of minimally invasive, outpatient surgeries.
Reflect on the process of measuring health care “value,” and do the following: (1) What factors and information would you use to determine a reasonable goal for your program? (2) What steps would you take in effecting the transition from open surgeries to minimally invasive surgeries? (3) What will be the likely institutional, medical, and patient barriers and issues? (4) What baseline metrics would you take before the program? (5) What elements would you use to measure the effectiveness of your program and establish its financial value? (6) How would you measure the ROI of your program? (7) With respect to a health care issue, comment on the validity and utility of using this formula: Value (V) = Quality (Q) ÷ Cost (C).
This case is based upon the experiences of the Colorado Springs School System Program headed by Ken Detweiler, Director of Benefits during 2009-2010.
No. 12 - How does your 401(k) match up: This issue was briefly discussed in Chapters 4 and 5, but the U.S. DOL’s BLS has just come out with a methodology for participants in 401(k) plans to compare and evaluate the design features of their plan to other plans. What factors and design features would you include in your analysis? See Hilery Simpson’s May 26, 2010 paper in the BLS report, “How does your 401(k) match up?” See: http://www.bls.gov/opub/cwc/cm20100520ar01p1.htm/.
Chapter 11 (Equity Benefits)
At page 351 (Correction): the first sentence of the Vignette involving the Van Meter Company should read, “The Van Meter Company in Cedar Rapids, Iowa, is 100 percent employee owned. The sentence mistakenly refers to “company” owned.
Greed is now prohibited . . . . with the following exceptions!
Add to End of Chapter 11, Exercises at page 353: No. 6. The Troubled Asset Relief Program (TARP) enacted by Congress in 2009 contains restrictions on bonus and other incentive compensation plans offered by banks receiving assistance from the government. The Act, however, does permit awards of restricted stock. Suppose shareholder equity in a bank represents a small percentage of its capital structure as compared to the U.S. government’s investment, bonds, and preferred shares. How might bank executives’ with restricted stock possibly react to a large infusion of additional equity capital? Briefly explain. Would this reaction work counter to the bank’s overall best interests?
At end of Chapter 11, Exercise No. 7: Suppose 1000 Restricted Stock shares are issued to an employee with a strike price of $20.00 per share and a 3 cliff vesting requirement. On the 3rd anniversary of both grants, the current market price of the stock is $30.00 per share. What, if any, are the tax consequences to the participant on this date? What is the taxable amount of the grant, if any, and what type of tax applies? Note: check the “my stock options” website and briefly identify the reasons why many employers are using Restricted Stock Units (RSU) instead of Restricted Stock (RS). Also, should there be circumstances when the vesting or term (expiration) of RS or RSUs is accelerated? What should happen in this regard when an employee separates from employment, retires, dies, becomes disabled, gets divorced, or when there is a change in control of the company? What would make sense in each of these instances?
At end of Chapter 11, Exercise No. 8:
It is expected that tax rates for 2011 will increase due to the apparently forthcoming expiration of the Bush tax cuts. How would this affect your NQSO or RSU strategy? See: www.mystockoptions.com (July 14, 2010)
Last edited: August 5, 2010
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