The Supreme Court decision on the health care reform law took center stage this year as the most significant case to affect benefit plan sponsors. And while it certainly was an important case, there were other legal decisions in 2012 that have considerable implications for plan sponsors. EBN asked four benefits attorneys - Dickinson Wright's Cynthia Moore, Seyfarth Shaw's Mark Casciari, McDermott Will & Emery's Todd Solomon and Proskauer's Howard Shapiro - for their views on some of the year's most important cases.
These cases primarily involve employee stock ownership plans, where the plan is holding employer stock. If there's a precipitous drop in the stock, employees will sometimes sue the employer claiming that, as an ERISA fiduciary, the employer should not have continued to offer the stock knowing it was no longer a good investment.
When it comes to ESOPs, there's a presumption of reasonableness - known as presumption of prudence - because the whole point of an ESOP is to invest in company stock.
In Pfeil v. State Street Bank and Trust Company (6th U.S. Circuit Court of Appeals), the court held that this presumption of prudence (adopted by the 2nd Circuit) does not apply at the pleading stage when plaintiff-participants allege that defendants were imprudent in holding company stock as a plan investment. This decision has been followed by the 6th Circuit in Griffin v. Flagstar Bancorp, Inc., and most recently in Dudenhoefer v. Fifth Third Bancorp.
The 6th Circuit's holding in Pfeil makes it much more difficult for defendants in a stock-drop case to have the case dismissed on a summary judgment motion. "It really creates a split between the 2nd and 6th Circuit Courts," says Moore. "The implications for employers, if they're involved in one of these stock-drop cases, is they may not be able to get out of a case based on a motion for summary judgment. They may have to get past the motions and go through discovery and trial prep before all the facts are finally fleshed out and the court can make a determination."
The Dudenhoefer case is also significant because it holds that the defendant acted as a fiduciary in incorporating Securities Exchange Commission filings into its summary plan description. As a fiduciary, it is liable for any affirmative misrepresentations made to participants through those incorporated documents.
Because of this decision, "it's not a good idea to incorporate SEC filings by reference into the SPD," says Moore.
TPAs/definition of a fiduciary
Guyan International, Inc./Pritchard Mining Company, Inc. v. Professional Benefits Administrators, Inc. held that a third-party administrator who commingled health plan monies and used plan funds for its own benefit was a fiduciary because of its control over plan assets - even though the administrative services agreement stated that it was not a fiduciary, and it argued that it exercised only ministerial duties for the plan.
Similarly, in Burroughs Corp. v. Blue Cross Blue Shield of Michigan, a third-party administrator who used employer money to pay health claims was found to be a fiduciary where it had control over plan assets. In this case, the TPA was found to have committed a breach of fiduciary duty where it determined and collected an administrative fee from plan assets.
These cases provide a cautionary note for any TPA that processes health plan claims. A TPA will not necessarily be shielded from liability merely because the administrative services agreement says that the TPA is not a fiduciary. If a TPA is handling plan assets and engages in what a court perceives as wrongdoing, it could be held to be a fiduciary and, as such, held to the high standard of care imposed on fiduciaries under ERISA.
"TPAs will routinely put in their administrative services agreements that they are not fiduciaries, they are only performing administrative duties, they're not handling plan assets," says Moore. "It's a cautionary tale to TPAs that the words in the contract are not going to control the functions they perform. If the court thinks they're self-dealing in plan assets, they're not going to honor any of those types of words in the contract that they are not a fiduciary."
For self-funded plan sponsors, these cases mean that even if you do your due diligence in hiring a TPA, and the TPA commits a wrongful act, "there can be a cause of action against that TPA as a fiduciary under ERISA," says Moore.
Retiree medical benefits
In Reese v. CNH America, LLC, the 6th Circuit expanded on its 2009 decision, where it held that a plan sponsor could make reasonable changes to vested retiree medical benefits. This plan involved unionized employees under a collectively bargained agreement. The 6th Circuit recognized that, unlike pension benefits, health benefits change over time, so a vested welfare benefit provides an evolving, and not a fixed, benefit. A plan sponsor can change those vested welfare benefits as long as the changed plan design provides a benefit that is reasonably commensurate with the original plan design.
In the 2012 decision, the 6th Circuit laid out a series of questions to be addressed by the district court in determining whether the proposed changes are "reasonable," and remanded the case for further review. This case is significant because it allows a plan sponsor to unilaterally make a certain level of changes even to vested retiree welfare benefit plans. This could include passing through modest increases in deductibles, copayments or other reasonably acceptable changes.
"For years and years, we assumed vesting meant no changes," says Moore. "In a pension plan, you retire, and you're eligible to get X dollars. Vesting makes sense in that context. Health benefits change frequently, so the court has said that just because this bundle of rights is vested, what is the scope of that promise? [Based on this decision], an employer is free - unilaterally, without bargaining - to make reasonable changes to retiree medical benefits. That is very welcome news for employers."
Reimbursement under ERISA
US Airways Inc. v. McCutchen raises the issue of whether a benefit plan administrator is entitled to full reimbursement for payments made to a plan participant injured in an accident where the participant sued and recovered damages from a third party. The Supreme Court has agreed to hear this case and will weigh in next year.
"If you get in a car accident, for example, and you incur $100 in medical expenses, and the plan pays you $100 for your medical expenses, if you recover $100 from the person who hit you, you pay that $100 back to the sponsor under a subrogation reimbursement right in the plan," explains Casciari.
The 3rd Circuit restricted that right of reimbursement to the plan under what's called a "common fund theory."
"And the question before the Supreme Court is: What is going to control? Is it going to be the way the sponsor drafted the plan? Or is it going to be the court's notion of unjust enrichment?" Casciari says.
The case raises the importance of the primacy of a plan document. "One of the core principals of ERISA is that the plan sponsor gets to draft the plan document the way it wants to," says Casciari. "There's no federal law now that makes subrogation of reimbursement illegal in a plan. This is an important decision for plan sponsors to pay attention to because if the courts start cutting back on the ability of the sponsors to draft plan terms based on judicial principles of unjust enrichment, for example, the job of the sponsor is going to get tougher, and the expenses associated with administering a plan are going to go up because you're going to have exceptions to what the plan sponsor expects to get back."
Summary plan descriptions
In another case dealing with financial remedies under ERISA, the 9th Circuit's decision in Skinner v. Northrop Grumman Retirement Plan B interpreted the Supreme Court's 2011 decision in CIGNA v. Amara to hold that employees who received a flawed summary plan description - which didn't adequately explain that their benefits would be offset - were not entitled to receive equitable remedies under ERISA.
"The 9th Circuit said the remedy is really rather limited," Casciari explains. "You have to show that you relied to your detriment on the misrepresentation, or you have to show that there was some mistake or fraud associated with the drafting of the plan that would allow the court to rewrite the plan."
The significance of the Skinner decision, he says, is that it's really limiting monetary recovery under ERISA - outside the plan terms - to those situations where deceit or fraud is involved. "It is a narrow reading of the Amara decision," says Casciari. "We have to wait and see what the other courts are going to do."
Defense of Marriage Act
In October, a federal appeals court in New York struck down the Defense of Marriage Act, finding that the law's denial of federal benefits to married same-sex couples is unconstitutional. It's the second time DOMA's been struck down this year; a federal appeals court in Boston made a similar ruling in May. The Supreme Court is expected to eventually take up the issue.
"From a benefits standpoint, nothing's really going to happen on that until the Supreme Court rules on it," explains Solomon, a partner with McDermott Will & Emery.
For now, Solomon recommends plan sponsors review their policies and make a decision about whether they want to cover same-sex couples. Once that's done, employers should look at their plans and ensure the definition of "spouse" is clearly crafted. Employers can also look at enrollment procedures and tax practices to make sure they're equitable. "For example, if an employer does not require a person married to an opposite-sex partner to provide a marriage certificate to enroll in the health plan, many employers are starting to question why they require so much documentation from same-sex partners," Solomon says.
Health care reform
And while everyone is familiar with the Supreme Court's decision to uphold the Patient Protection and Affordable Care Act, Shapiro, an attorney with Proskauer, believes we've not seen the last of litigation over PPACA.
"The Affordable Care Act will require independent review organizations to review denials or partial denials of claims. In the ERISA world, denials and partial denials are handled by a claims review procedure," he explains. "Are the IROs going to be making fiduciary decisions? Are they going to be fiduciaries? What will their liability be - with the plan, the plan's fiduciaries, the IRO? That's an issue coming down the pike."
Mandated benefits are also likely to be subject of litigation. Grandfathered plans, for instance, are able to delay implementing some of PPACA's provisions. "There will be some plans that thought they were grandfathered but were not," says Shapiro. "Will there be participant lawsuits as to the fact that starting in 2011, some of the plans that thought they were grandfathered, but in fact were not, should have provided certain mandated benefits under the act that they have not provided?"
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