ERISA Updates

Defense of Marriage.....Again

2011-08-19T09:36:00.000-07:00

The parents of Sarah Ellyn Farley, a partner at Cozen O'Connor, P.C., who passed away and left her estate to her wife are fighting both Pennsylvania law and the Federal Defense of Marriage Act which do not recognize same-sex marriage. The firm brought an interpleader action to determine who is entitled to the benefits under the Cozen O'Connor Profit Sharing Plan.

Ms. Farley had not submitted a beneficiary designation form to the firm prior to her death on September 13, 2010. After her death her parents presented an executed beneficiary designation form bearing the date September 12, 2010, a day prior to her death.

The Cozen O'Connor Profit Sharing Plan document provides that upon the event of death of a participant the account will be distributed to the designated beneficiary, and in the absence of such designation the account shall be paid to the participant's surviving spouse. The Plan document defines spouse as "the person to whom the Participant has been married throughout the one-year period ending on...the date of the Participant's death."

The Defense of Marriage Act defines "spouse" as a person of the opposite sex who is the husband or wife. However, the Act left open the ability of the employer to extend benefits to same-sex spouses and domestic partners. If state law does not prohibit extending benefits to same-sex spouses, there is a chance that the same-sex partner will be recognized as a spouse for purposes of an employee benefits plan. In this case, however, Pennsylvania law does not recognize same sex marriage. Therefore, this case is a challenge to both federal and state law regarding ERISA benefits for same-sex spouses.

This case was filed in January 2011 and is still in the preliminary stages. Amy Whelan of the National Center for Lesbian Rights is representing Jennifer Tobits, the surviving spouse, and Randal Luke Wenger subbed in on August 8, 2011, as counsel for the parents, David and Joan Farley. So far there has only been a complaint, amended complaint, and answer filed.

Ninth Circuit Rules Again that Cashed Out Participants Have Standing under ERISA

2009-09-02T07:30:00.000-07:00

In line with its 2008 decision in Vaughn v. Bay Environmental Management, Inc., 544 F.3d 1008 (9th Cir. 2008), the Ninth Circuit ruled that participants who voluntarily cash out their defined contributions plans have statutory and constitutional standing to assert breach of fiduciary duty claims under ERISA section 502(a)(2) even if relief is available under 502(a)(1)(B).

(Steve Harris, et al. v. Amgen, Inc. et al., 2009 U.S. App. LEXIS 15499)

The Eighth Circuit May be Next to Rule on 401(k) Plan Fees

2009-04-22T18:07:00.000-07:00

The Wal-Mart 401(k) plan is one of the largest plans in the U.S., with over 1 million participants and almost $10 billion in assets under the plan. The Eight Circuit will hear the issue of excessive fees after the case was quickly dismissed by the district court on a motion to dismiss. The appeal is focusing on the plans size in reviewing its ability to have negotiated the fees to the participants. The Wal-Mart 401(k) plan offers 10 mutual funds, a common/collective trust, Wal-Mart common stock, and a stable value fund. The opening brief sets forth that Merrill Lynch, the Plan's Trustee, had a revenue sharing arrangement with the mutual fund company it chose for the investment line up and, therefore, had "corrupted" the plan's fund selection process. The brief further argued that the mutual fund options were chosen based on the agreement to pay a kickback to the Trustee instead of choosing those options that would have better served the participants. The Department of Labor has filed an Amicus Brief urging the Eighth Circuit to reverse the District Court's dismissal.

(Braden v. Wal-Mart)

Tyco Fiduciaries NOT Shielded by ERISA section 404(c)

2009-04-22T18:01:00.001-07:00

The U.S. District Court fo the District of New Hampshire appears to be in line with the Department of Labor's position on the extent of protection offered by ERISA section 404(c). In a case against Tyco for offering company stock as an investment option in the plan, the district court held that Tyco could not used 404(c) as a defense for choosing poor investment options for the plan. The court in Tyco gave deference to the DOL's position.

(In re Tyco International Ltd. Multidistrict Litigation, D.N.H., No. 02-1335-PB)

Department of Labor Critical of Seventh Circuit Ruling

2009-04-22T17:47:00.000-07:00

The Department of Labor spoke out against the ruling in the Seventh Circuit regarding ERISA section 404(c) regulations. Timothy Hauser of the DOL said that he was disappointed in the Seventh Circuit to failure to give deference to the DOL's definition of the word "control" in ERISA section 404(c). The Seventh Circuit held that participants had "control" over the investments and, therefore, ERISA section 404(c) shielded the fiduciaries from liability. In a nutshell, the participants alleged that the fiduciaries breached their duties by failing to informt he participants of the fees associated with the investments in their accounts. The DOL stated that it is the employer not the participant who "controls"the investment menu. It appears to be the DOL's position that since it is the employer choosing the investment line up within the plan, ERISA section 404(c) cannot shield the employer from choosing investments that have excessive fees. The Seventh Circuit did not agree.

The District Court of New Hampshire seems to be inline with the Department of Labor's view on this one. See next Blog regarding the Tyco Case.

Class Certified in Action against Lockheed Martin

2009-04-22T17:40:00.000-07:00

Continuing the long line of cases regarding excessive 401(k) fees, 100,000 employees filed suit against Lockheed Martin claiming breach of fiduciary duty for failure to ensure that the employees were not harmed by the excessive fees charged by the plan providers. The U.S. District Court for the Southern District of Illinois certified the class (Abbot v. Lockheed Martin Corp., S.D. Ill., No. 06-cv-0701-MJR). The court certified two of the three claims, the third being a claim for imprudently diluting the returns of the company stock funds. The court ruled there was a conflict between the parties in the class with regard to who had invested in the company stock funds.

Obama signs Lilly Ledbetter Fair Pay Act

2009-02-02T16:45:00.000-08:00

Obama signed the Fair Pay Act, which overrules the Supreme Court case of Ledbetter v. Goodyear Tire & Rubber Company, Inc., which limited the time for which pay discrimination claims could be brought. This new law is not just limited to salary, it also applies to payment under benefit plans. The full Bill can be found at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h2831ih.txt.pdf

Is a Same Sex Former Married Partner Entitled to Pension Benefits in a Dissolution?

2009-01-16T10:15:00.000-08:00

The Owens v. Automotive Machinists Pension Trust case below raises of question of whether the Ninth Circuit would recognize same sex married partners for purposes of dividing a qualified retirment plan in a divorce. If a same sex married partner, or former married partner, may be considered a "dependent" for purposes of meeting the definition of an Alternate Payee, perhaps a same sex married (or former married partner) would also be entitled to benefits pursuant to a QDRO in a partnership dissolution.

Owens v. Automotive Machinists Pension Trust, 551 F.3d 1138 (9th Cir. 2009). http://www.ca9.uscourts.gov/datastore/opinions/2009/01/12/0735253.pdf

Quasi-Marital Spouse Entitled to 50 percent of pension benefits

2009-01-16T09:59:00.000-08:00

On January 12, 2009, in the case of Owens v. Automotive Machinists Pension Trust, the Ninth Circuit court of appeals affirmed the lower court's ruling that a quasi-marital partner is entitled to pension benefits pursuant to a Qualified Domestic Relations Order ("QDRO"). Norma and Phillip Owens lived together for 30 years but never married. The couple separate in 2004, and Norma sought half of Phillip's pension. Under ERISA, a person must meet the definition of an Alternate Payee in order to receive a portion of benefits from a qualified retirement pursuant to a QDRO. A person is an Alternate Payee if he or she is a spouse, former spouse, child or other dependent of the participant. Although ERISA does not recognize Norma as a spouse or former spouse, under the definition of Alternate Payee, the Ninth Circuit agreed with the lower court that Norma was a "dependent" who lived in the household with the taxpayer, and, therefore, met the definition of an Alternate Payee.

See full opinion at: http://www.ca9.uscourts.gov/datastore/opinions/2009/01/12/0735253.pdf

Is your retirement plan protected from creditors?

2009-01-15T15:13:00.000-08:00

KRAVITZ Retirement Plan News had a great article in the January/February 2009 issue regarding when qualified retirement plan assets are not protected from creditors. These reasons include federal tax levy, qualified domestic relations orders, and participant loans. Interestingly enough, even though the feds can get to your 401(k) or other qualified plan assets, the assets cannot be touched by a third party for restitution of a criminal act. Read more at: http://www.lkravitz.com/pubsarticles/documents/Jan-Feb.pdf

Hartford Employee Class Actions

2008-12-22T17:44:00.001-08:00

This may be just the tip of the iceberg for class actions alleging breach of fiduciary duty under ERISA in stock drop cases. Two more employees have filed lawsuits alleging breach of fiduciary duty against Hartford for keeping the retirement plan invested in company stock despite its subprime mortgage exposure. Hartford is not the only company hit by employee suits for stock drop. Other defendants include: AIG, Bear Sterns, Washington Mutual, IndyMac, Lehman Brothers, Merrill Lynch, Morgan Stanley, Countrywide, Fifth Third Bank, Wells Fargo, and UBS.

Read more on the Hartford case at: http://www.planadviser.com/compliance/article.php/3319

2009 COLA Limits

2008-12-11T11:47:00.000-08:00

IRS Announces the 2009 Cost of Living Increases for retirement plan limitations. IR-2008-118.

Maximum Elective Deferral Limit (402(g)) -- $16,500

Maximum Catch Up Limit (414(v)(2)(B)(ii)) -- $5,500

Defined Contribution 415 Annual Additions Limit (415(c)(1)(A) -- $49,000

Annual Compensation Limit (401(a)(17)) -- $245,000

Defined benefit 415 Annual Benefit Limit (415(b)(1)(A)) -- $195,000

Highly Compensated Employee Definition (414(q)(1)(B) -- $110,000

Key Employee/Officer(416(i)(1)(A)(i) -- $160,000

Social Security Taxable Wage Base -- $106,800

October 2008 - Supreme Court Hears Issue of Ex-Spouse Waiver of Benefits in a Divorce

2008-12-11T11:32:00.000-08:00

Family Law attorneys, have you ever drafted a Marital Settlement Agreement and included a provision allowing the nonemployee spouse of a retirement plan participant to waive his or her rights to their interest in the plan? Did you ever wonder whether that provision was in compliance with the Employee Retirement Income Security Act of 1974, as amended ("ERISA")? The Supreme Court heard arguments on this question in October.

The Supreme Court heard the Fifth Circuit case Kennedy v. Plan Administrator for Dupont Savings and Investment Plan, regarding an ex-spouse’s waiver of retirement benefits in divorce. Limiting the grant of certiorari to the third question presented, whether the Fifth Circuit was correct in concluding that ERISA’s Qualified Domestic Relations Order provision, 29 U.S.C. §1056(d)(3)(B)(i), is the only valid way a divorced spouse can waive her right to receive her ex-husband’s pension benefits under ERISA. Petitioner, the estate of the ex-husband, argues that the divorce decree validly waived the ex-wife’s right.

Although the Court was originally expected to hear the issue of whether a QDRO was the sole means for waiving benefits in a pension plan, the Court focused on the issue of the plan document rule, for which the federal appeals courts are divided. Under the plan document rule, fiduciaries to the plan are only required to look at the plan document, which includes the beneficiary designations, when determining how benefits are paid upon death. The issue then became whether the Court could decide the plan document issue, because they hadn’t granted certiorari on that issue. The Court decided that it could hear the issue if the parties were given an opportunity to provide supplemental briefing.

On October 28, 2008, the Court issued an order requesting supplemental briefing on the plan document issue. If the Court rules in favor of the plan document rule, pension plan administrators will only need to look as far as the beneficiary designation to determine who the beneficiary is.

During oral arguments, in addressing the issue of whether the waiver under the judgment of dissolution was a valid waiver of benefits, Justice Scalia pointed out that a QDRO is a form for the assignment or alienation of benefits and since this was a waiver of benefits and not an assignment or alienation, the QDRO exception does not apply and the waiver is valid. The parties in support of QDRO’s as the only form to waive benefits, or the plan document rule, argue that a decision to allow waivers in judgements or marital settlement agreements (i.e. non-qualified orders) would increase the burden on the plans. It has additionally been argued that these are private plans and the Court needs to make the administration easy so that company’s will provide these benefits to employees. If plan administrators have to interpret the language of judgments from different states, the administrative burden will be overwhelming and could lead to wrong interpretations and increased cost of legal counsel to determine validity of waivers for each state specific document and state laws.

Divorce and the 401(k) Plan

2008-12-11T11:04:00.000-08:00

Divorce, Financial Difficulties, and Your 401(k)

With couples getting divorced during this recession, we are seeing more and more people tapping into their 401(k) plans to pay mortgages and prevent foreclosures, as well as to pay credit card debt through the use of QDROs (a Qualified Domestic Relations Order filed during a divorce which pays the nonemployee spouse his/her community share of the 401(k)). Before or even during the divorce though, one of the parties may have already tapped into his or her 401(k) assets through the use of a loan or a hardship withdrawal. When evaluating the worth of the 401(k), make sure you know the current value and whether any withdrawals were taken after separation.

Although taking a loan or a hardship withdrawal is a viable option when attempting to avoid foreclosure or other hardship circumstances, borrowing or withdrawing from the 401(k) plan can lead to problems for the nonemployee spouse. Although some plans require spousal consent to take a withdrawal or a loan from a 401(k), most do not. It depends on the employer and the plan document governing the 401(k). As soon as the divorce is pending, the participant’s spouse’s attorney should send a notice of adverse interest to the 401(k) plan to put a flag on the account so that the employee spouse cannot take any withdrawals or loans during the pendency of the divorce, since typically the amount accumulated in the 401(k) during the marriage is community property subject to division.