MAP-21: PENSION FUNDING ERISA SECTION 408(B)(2) DISCLOSURES: RELIEF AND MUCH MORE NOW WHAT?

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1 MAP-21: PENSION FUNDING RELIEF AND MUCH MORE In this case, sponsors of defined benefit pension plans received the funding relief they had sought, but only because the added tax revenues will help pay for transportation projects and prevent student-loan interest rates from doubling. Continued on page 2 GRANDFATHERED STATUS FOR 2013 Grandfathered health plans that have not undergone significant changes since the Affordable Care Act (ACA) was enacted in March 2010 will once again have to assess whether the plan can and/or should try to retain such status for Continued on page 4 YEAR-END AMENDMENT DEADLINE UNDER CODE SECTION 409A In the last two years, the IRS has issued several pieces of guidance regarding the correction of deferred compensation arrangements that violate the requirements of Code Section 409A. Continued on page 5 MURDER VICTIM S MOTHER MAY RELY ON POST-AMARA EQUITABLE REMEDIES Here we have the latest episode in the sprawling saga of equitable remedies under ERISA. The question, as always, is whether a participant is entitled to something for which the plan document does not expressly provide. This time, the answer appears to be yes. Let s catch up. Continued on page 6 ERISA SECTION 408(B)(2) DISCLOSURES: NOW WHAT? By now, most retirement plan sponsors will have received a flurry of disclosures from vendors who provide services to their plans. Those disclosures (commonly known as 408(b)(2) Notices) should have been provided by July 1, Employers may think that, once received, these disclosures may simply be filed away with other plan documents but that could prove to be a costly mistake. Continued on page 9 UNINTENDED CONSEQUENCES OF INDIVIDUAL BENEFIT DISCUSSIONS It happens all the time: employees who are considering retirement ask HR staff about their post-employment benefits. If the answers those employees receive turn out to be incorrect, the responders may be accused of violating their fiduciary duties under ERISA, and the plans at issue may be required to pay unexpected benefits. Continued on page 11 A COSTLY MISTAKE: FAILING TO TIMELY OFFER COBRA COVERAGE Sponsors of self-funded health plans often fail to offer COBRA coverage on a timely basis to employees who are placed on a leave of absence. This mistake can lead to a most unpleasant result the denial of stop-loss coverage. Continued on page 12 1

2 MAP-21: PENSION FUNDING RELIEF AND MUCH MORE As we have now come to expect, the latest pension-related legislation to come out of Washington was largely designed to pay for items having nothing to do with pensions. In this case, sponsors of defined benefit pension plans received the funding relief they had sought, but only because the added tax revenues will help pay for transportation projects and prevent student-loan interest rates from doubling. These disparate provisions and many others were included in the Moving Ahead for Progress in the 21 st Century Act (or MAP- 21). In the pension arena, MAP-21 eases the negative effect of what the Joint Taxation Committee described as historically low interest rates. (Low interest rates produce higher pension funding obligations.) At the same time, MAP-21 increases the premiums that pension plans must pay to the Pension Benefit Guaranty Corporation (PBGC) and for those rare pension plans that are actually overfunded extends and broadens an existing provision allowing for tax-free transfers of excess pension assets to fund retiree welfare benefits. Pension Funding Relief The 2006 Pension Protection Act required the use of 24-month averages for each of the three segment rates (short-, medium-, and long-term) used to measure a pension plan s annual funding obligation. At that time, however, no one could foresee the 2008 Great Recession or that the Federal Reserve would attempt to stimulate the economy by holding interest rates at a nearzero level for many years. These low interest rates have substantially increased the minimum funding obligations of pension plan sponsors. While retaining the 24-month averaging concept, MAP-21 softens its impact by creating a corridor of permissible rates on either side of a 25-year average. Such a long-term average produces far less funding volatility. If a 24-month average would fall outside of this corridor (as is currently the case), a sponsor may use the 25-year average that is closest to the 24-month average but within the corridor. This corridor starts out being fairly narrow, with only a 10% variance on either side of the 25-year average for plan years beginning in However, the corridor then widens by 5% per year over the next 4 years. Thus, by 2016, each segment rate may be as low as 70% (or, far less likely, as high as 130%) of its equivalent 25-year average. The MAP-21 funding relief should be substantial, particularly for the 2012 and 2013 plan years. This is because 90% (for 2012) or 85% (for 2013) of each of the 25- year averages should still be substantially higher than the 24-month average. In fact, some have estimated that 2012 minimum funding requirements could be reduced by as much as 10 to 25%. This funding relief will be less significant in later years, however, as the corridor widens and the three segment rates could be as low as 70% of their 25-year averages. Note that these segment-rate corridors apply only for certain purposes. Aside from determining a plan s minimum funding obligation, they will apply when determining whether the funding-based amendment and distribution restrictions of Code Section 436 apply to a plan. They will not apply, however, for any of the following purposes: Calculating minimum lump-sum payments. 2

3 Adjusting the Code Section 415 limits. Determining a plan s variable-rate PBGC premium. Calculating an employer s maximum deductible contribution. Determining a sponsor s eligibility to make a tax-free transfer of excess pension assets to a retiree welfare account (as described below). Applying the PBGC reportable event rules of ERISA Section These MAP-21 funding rules are generally effective for plan years beginning in A sponsor may elect, however, to defer their application to 2013 either for funding and Section 436 purposes, or only for applying the Section 436 restrictions. Higher PBGC Premiums As noted above, MAP-21 s new segment rate corridor will not apply when calculating a plan s variable-rate premium obligation to the PBGC. As a result, a sponsor that takes advantage of the funding relief to defer making certain contributions may thereby increase the amount of its variable-rate premium. Quite apart from this indirect premium increase, however, MAP-21 directly increases PBGC premiums. It does so for both single-employer plans and multiemployer plans. Moreover, in the case of single-employer plans, it increases both the flat-rate premium and the variable-rate premium. These increases take effect at different times. As shown in the following table, these PBGC premium increases could be substantial particularly for underfunded, single-employer plans: Plan Years Beginning in... PBGC Premiums After Map-21 Single-Employer Plans Flat Rate Premium* Variable Rate Premium # 2012 $35 $9 $ $42 $9 $ $49 $13 $12~ 2015 $49~ $18 $12~ 2016 $49~ $18~ $12~ * Per participant. # Per $1,000 of unfunded liabilities. ~ As adjusted for inflation. Transfers of Excess Pension Assets Multiemployer Plans Premium* Under the law in effect before MAP-21, sponsors of substantially overfunded pension plans could transfer some of those excess assets to a separate account dedicated to the provision of retiree medical benefits. By complying with numerous constraints laid down in Section 420 of the Tax Code, such a transfer could be made on a tax-free basis. Although this transfer option was slated to expire at the end of 2013, MAP-21 extends it through the end of In addition, a Section 420 transfer may now be made to provide for retiree life insurance. The same restrictions that currently apply to 3

4 medical-benefit transfers will apply to these life-insurance transfers, and only $50,000 of each retiree s group-term life insurance may be funded in this fashion. Nonetheless, any employer lucky enough to sponsor a substantially overfunded pension plan may wish to consider these tax-free alternatives for funding retiree medical and/or life insurance benefits. Kenneth A. Mason, Partner GRANDFATHERED STATUS FOR 2013 As the 2013 annual enrollment period approaches for many calendar-year group health plans, sponsors of grandfathered health plans those that were already in existence when the Affordable Care Act (ACA) was enacted in March 2010 and that have not undergone significant changes since then will once again have to assess whether the plan can and/or should try to retain such status for As we explained in our February 2012 article, both grandfathered and non-grandfathered plans must comply with the new summary of benefits and coverage (SBC) rules that take effect in However, a grandfathered plan need not comply with the first-dollar preventive care requirements of the ACA, including the recent extension of the guidelines for women s preventive care benefits to include contraceptive coverage and certain breast-feeding equipment. See our August 2011 article for more information on these requirements. remember is that all of these criteria are measured against a static point in time: March 23, 2010 (the day that the ACA was enacted). Thus, incremental changes to a plan are cumulative, making it potentially harder for a plan to preserve its grandfathered status each year. For example, a plan will lose its grandfathered status if the rate of employer contributions to the plan (for any tier of coverage) decreases by more than five percentage points. Under this rule, the employer may not decrease the rate of its contributions by five percent each year. Instead, if the cumulative decrease in employer contributions over two or more years results in a decrease of more than five percentage points below the rate in effect on March 23, 2010, the plan will lose its grandfathered status. Thus, if an employer has already reduced its contribution rate by three percentage points in 2011 (say, from 65% to 62% of the total premium), and one additional percentage point in 2012 (to 61%) it may reduce its contribution rate by only one additional percentage point in 2013 if it wants to preserve the plan s grandfathered status. Similarly, a plan will ordinarily lose its grandfathered status if it increases its copayment by more than $5 (plus the medical inflation rate since March 23, 2010). Thus, a copayment increase of $4 effective on January 1, 2012 followed by a second $4 increase effective January 1, 2013 would trigger a loss of grandfathered status on January 1, Sponsors should also remember that the regulations condition a plan s grandfathered status on the sponsor taking the following affirmative steps: As we explained in our June 2010 article, there are several ways in which a plan can lose grandfathered status. The key point to Including in any plan materials provided to a participant or beneficiary that describe the benefits provided under the 4

5 plan (such as a summary plan description) a statement that the plan believes it is a grandfathered health plan; and Maintaining records that document the terms of the plan as in effect on March 23, 2010, along with any other documents necessary to verify, explain, or clarify the plan s status as a grandfathered health plan. (Such records must then be made available for examination upon request by a participant, beneficiary, or government agency.) Julia M. Vander Weele, Partner Fortunately, the IRS has also announced transitional relief for arrangements that violate the requirements of Section 409A. However, the transition period for this particular type of form defect expires at the end of Employers thus have only a few more months in which to determine whether any of their arrangements contain this type of form defect and, if so, take appropriate corrective action. IRS Notice provides transitional relief through December 31, 2012, for Section 409A documentary failures involving arrangements that condition a payment on the recipient s execution of a release (such as a terminated employee s execution of a release of claims). Under this transition relief, such a documentary failure may be corrected by either: YEAR-END AMENDMENT DEADLINE UNDER CODE SECTION 409A In the last two years, the IRS has issued several pieces of guidance regarding the correction of deferred compensation arrangements that violate the requirements of Code Section 409A either by their express terms or because of how they have been operated. This guidance makes clear that the IRS views an arrangement (such as an employment agreement or a severance pay plan) conditioning the payment of deferred compensation on an employee s execution of a release as creating the possibility that the employee could manipulate the year in which the payment is received (by accelerating or delaying the execution and delivery of the release). Such a provision therefore violates the Section 409A prohibition on allowing an employee to designate the calendar year of payment for any deferred compensation thereby triggering an automatic violation of the Section 409A form requirements. 1. Expressly providing for payment on a fixed date (such as on the 60th day following separation); or 2. Expressly providing that any payment that could be made during a release consideration and revocation period that begins in one taxable year and ends in a subsequent taxable year will in all cases be made in the subsequent year. Under either approach, the delivery of the executed release would not affect the timing of the payment. This transition relief also requires that any payments under an arrangement with a nonconforming release provision that are triggered between March 31, 2011, and December 31, 2012, be administered by paying in the later taxable year (if the applicable release period spans two taxable years). 5

6 Accordingly, any deferred compensation arrangement under which payments subject to Section 409A are contingent on the execution of a release of claims must be amended by December 31, 2012, to comply with the requirements of Section 409A (by adopting one of the two alternative provisions described above). Of course, only arrangements that are subject to Section 409A (and for which no exemption applies) are affected by these requirements. There is thus no need to modify arrangements for the payment of amounts that are exempt from Section 409A under either the short-term deferral rule (where the deferred compensation is paid shortly after it becomes vested) or the severance pay exception (where the circumstances triggering the severance pay, as well as the amount and timing of the severance payments, meet certain requirements set forth in the Section 409A regulations). Robert A. Browning, Partner MURDER VICTIM S MOTHER MAY RELY ON POST-AMARA EQUITABLE REMEDIES Here we have the latest episode in the sprawling saga of equitable remedies under ERISA. The question, as always, is whether a participant is entitled to something for which the plan document does not expressly provide. This time, the answer appears to be yes. Let s catch up. As explained in our August 2011 article, the Supreme Court s 2011 decision in CIGNA Corp. v. Amara demanded a new focus on participant communications. In Amara, the Court strongly suggested that certain remedies that courts had previously branded as off-limits under ERISA are, in fact, available to plan participants. These remedies can and almost certainly will subject plan sponsors and fiduciaries to significant new liabilities, including monetary damages. In ruling on a discrepancy between a pension plan document and its SPD, the Supreme Court mentioned the following remedies in particular: Estoppel (denying a plan sponsor the right to rely on the plan s terms when the sponsor has made contrary representations to participants about their benefits); Reformation (revising a plan's terms to conform to the terms of a defective SPD); and Surcharge (a form of monetary revenge against a trustee or other fiduciary for breaching its fiduciary duty to a participant). Our May 2012 article explained that the first federal appellate court to apply the Amara decision (the Ninth Circuit) rejected those remedies when a pension plan s SPD promised more generous benefits than the plan document itself. But in that case, Skinner v. Northrup Grumman Retirement Plan B, the facts were particularly weak for the plaintiffs. The facts were more favorable (and more dramatic) in the second appellate court decision to interpret Amara. And in McCravy v. Metropolitan Life Insurance Company, the Fourth Circuit not only approved those remedies, it gave them a ringing 6

7 endorsement. Plan sponsors and fiduciaries should therefore take note. McCravy v. Metropolitan Life Insurance Company Debbie McCravy was a participant in an accidental death and dismemberment plan sponsored by her employer and insured by Metropolitan Life Insurance Company ( MetLife ). The plan provided coverage for eligible dependent children through age 24. For a child to be covered beyond that age, the dependent coverage had to be converted to an individual policy. Ms. McCravy enrolled her 19-year-old daughter Leslie as her dependent. She paid premiums for Leslie s coverage as a dependent until Leslie was murdered at the age of 25. As Leslie s beneficiary, Ms. McCravy filed a claim for benefits with MetLife. Her claim was denied on the ground that Leslie, at the time of her death, no longer satisfied the plan s definition of an eligible dependent child. Instead, MetLife issued Ms. McCravy a refund of the premiums it had improperly accepted since Leslie turned 25. Ms. McCravy rejected the refund and instead sued MetLife in federal court. Although she advanced numerous federal- and state-law theories, the only ones relevant to this article are those she advanced under Section 502(a)(3) of ERISA. Section 502(a)(3) is a catch-all provision under which participants who cannot seek relief under ERISA s specific remedial provisions (or under the terms of the plan) may instead seek appropriate equitable relief. The legal saga we have been following (for over a decade now) centers on the Supreme Court s guidance as to what constitutes appropriate equitable relief. Ms. McCravy alleged that MetLife had violated its fiduciary duties by accepting her premiums when it knew that Leslie was no longer eligible for coverage. She argued, in several ways, that she was entitled to monetary relief for that violation. For example, she argued that the doctrine of surcharge entitled her to monetary relief in the amount of the denied benefit. She also argued that MetLife was equitably estopped from allowing her to convert Leslie s coverage, after Leslie s death, from a dependent-child policy to an individual policy. She also argued that the doctrine of equitable tolling (or reinstatement to the status quo ) allowed her to retroactively convert Leslie s coverage. The trial court, which issued its opinion well before the Supreme Court s decision in Amara, rejected all of Ms. McCravy s equitable arguments. It held, instead, that she was entitled to only a refund of the premiums she had paid after Leslie was no longer eligible to be covered as a dependent child. With respect to both her equitable estoppel argument and her tolling argument, the trial court pointed out that the remedy Ms. McCravy sought would require the plan to be administered contrary to its express terms. Specifically, estopping MetLife from denying coverage for Leslie would have required the plan to pay benefits on behalf of a person expressly excluded from coverage, and allowing her to retroactively convert Leslie s policy to an individual policy would have waived the plan s application requirement. The court held that neither course was permissible under ERISA. As for her surcharge argument, it simply held (citing previous Supreme Court and Fourth Circuit opinions) that ERISA did not contemplate such a theory. Tellingly, however, the trial court opinion reveals a frustration felt by many courts at the straightjacket imposed by the Supreme Court s narrow interpretation of ERISA s remedial provisions: 7

8 [W]hile this Court is compelled to such a holding by the law of ERISA as interpreted by higher courts, it cannot ignore the dangerous practical implications of this application. The law in this area is now ripe for abuse by plan providers, which are almost uniformly more sophisticated than the people to whom they provide coverage. With their damages limited to a refund of wrongfully withheld premiums, there seems to be little, if any, legal disincentive for plan providers not to misrepresent the extent of plan coverage to employees or to wrongfully accept and retain premiums for coverage which is, in actuality, not available to the employee in question under the written terms of the plan. If the employee never discovers the discrepancy, the plan provider continues to receive windfall profits on the provision in question without bearing the financial risk of having to provide coverage. If the worst happens and the employee does file for the benefits for which he or she had been paying and seeks the coverage he or she believed was provided, the plan provider may then simply deny the employee s benefits claim, and have their legal liability limited to a refund of the premiums. Plaintiff s allegations in this case present a compelling case for the availability of some sort of remedy for the breach of fiduciary duty above and beyond the mere refund of wrongfully retained premiums. Despite the trial court judge s obvious frustration, the Fourth Circuit agreed with his holding that Ms. McCravy was entitled to nothing more than a small refund of premiums, and it therefore affirmed the trial court s ruling in favor of MetLife. Later that same day, however, the Supreme Court issued its decision in Amara. The Fourth Circuit immediately granted a rehearing based on this new guidance. In its second opinion in the case, the Fourth Circuit interpreted Amara as correcting a misimpression in the lower courts that the equitable remedies available under Section 502(a)(3) were extremely narrow. As explained in our earlier articles, Amara held that any of the remedies traditionally available in a court of equity are available under Section 502(a)(3), including what plaintiffs (and their lawyers) have for years viewed as the holy grail: monetary relief for losses sustained as the result of fiduciary breaches. The Fourth Circuit reversed its earlier decision (on surcharge and all of Ms. McCravy s other equitable theories) and remanded the entire case to the trial court. As noted above, the trial-court judge has already made clear how he would decide these issues absent the restrictions on equitable remedies that applied before Amara. And in remanding the case, the Fourth Circuit quoted the trial judge s entire lament (above) about his inability to award monetary relief to Ms. McCrary. In other words, the case on remand does not look particularly good for MetLife. What Does This Mean for Plan Sponsors? 1. Focus on Participant Communications. McCravy s first, and most important, message for plan sponsors is the same message we 8

9 announced when the Supreme Court handed down the Amara decision: clear, consistent, and accurate communication of the plan s terms to participants is indispensable for a sponsor seeking to limit its liability and its exposure to litigation costs. The more clearly the plan s terms have been communicated to participants, the harder it is for a participant to argue that he or she should be compensated for a discrepancy between what he or she expects and the terms of the plan. (In McCravy, of course, this focus would have been on communicating the plan s eligibility and enrollment rules.) 2. Coordination Between Benefits and Payroll Departments. McCravy also highlights the need for a sponsor s benefits and payroll departments to coordinate the plan s implementation, not only internally but also with outside service providers, trustees, and insurers. Had Ms. McCravy been timely notified, in a written communication, that her daughter was no longer eligible for coverage as a dependent, the case would have either turned out differently or never happened at all. 3. Periodic Audits. Periodic eligibility audits and routine communication with plan participants can not only discover and correct errors (before lawsuits occur), but also shield a sponsor from liability for errors when premiums continue to be withheld briefly-after eligibility has expired. Such an audit would have discovered that Leslie McCravy was no longer eligible for the coverage her mother was continuing to purchase. Lawrence Jenab, Partner ERISA SECTION 408(B)(2) DISCLOSURES: NOW WHAT? By now, most retirement plan sponsors will have received a flurry of disclosures from vendors who provide services to their plans. Those disclosures, which are required by regulations issued under Section 408(b)(2) of ERISA (and which are thus commonly known as 408(b)(2) Notices), should have been provided by July 1, (See our May 2011 and May 2012 articles for background on these disclosures.) Employers may think that, once received, these disclosures may simply be filed away with other plan documents. That approach, however, could prove to be a costly mistake. The Department of Labor expects plan fiduciaries to carefully review the 408(b)(2) Notices they receive and then make informed, affirmative decisions based on them. These disclosures are intended to give plan fiduciaries sufficient information concerning the services provided by the plan s vendors and the fees charged for those services to determine whether the services are necessary and appropriate for the operation of the plan, and whether the arrangement and fees are reasonable. If these disclosures are not provided or if the services are not appropriate or the fees are unreasonable the relationship will be a prohibited transaction under ERISA. Any plan fiduciary who permits the plan to engage in such an arrangement will have committed a breach of fiduciary duty. Who Must Provide Section 408(b)(2) Notices? Not all retirement plan vendors are required to provide 408(b)(2) Notices. Generally, employers should expect to receive these Notices from those entities that provide covered services to any defined benefit or defined contribution plan that is subject to ERISA. Covered services include: 9

10 Services provided as a fiduciary to the plan; Recordkeeping and brokerage services; and Other services, if the provider receives "indirect compensation" for those services (i.e., compensation from sources other than the plan or the plan sponsor). Covered service providers (CSPs) may include investment advisors, recordkeepers, brokers, and managers of asset allocation models (i.e., risk-based portfolios), managed accounts providers, and those who manage customized target-date or life-cycle funds. Next Steps for Plan Fiduciaries. Within the next few weeks, plan fiduciaries should carefully evaluate their vendor arrangements and the 408(b)(2) Notices they have received. This evaluation process is the obligation of the responsible plan fiduciary, which in most cases will be the administrative committee, investment committee, or trustees of the plan. Those fiduciaries should: Ensure that the plan receives a 408(b)(2) Notice from each of the plan s CSPs. o If a CSP does not provide a Notice, the plan fiduciary must formally request one and then report the CSP's failure to the Department of Labor if that failure is not corrected. Review and evaluate the Notices to determine whether they include the required information. o This step may require professional assistance. If a Notice does not provide the necessary information, or if the information is incomplete or difficult to understand, the plan fiduciary should ask for clarification. Identify the services that each CSP provides and make sure that those services are consistent with representations made in the plan's service agreement with the CSP. o Arrangements with CSPs must be documented in formal service agreements. Plan auditors have been advised by the Department of Labor to request copies of such agreements. Evaluate how, and how much, each provider is paid for its services (both directly and indirectly). o Often this information is not readily apparent from the 408(b)(2) Notice. Professional assistance may be required to interpret the Notice. Decide whether each CSP's services are necessary and appropriate, and whether the fees the CSP receives for those services are reasonable. o It may be necessary to benchmark the services and fees against those offered by comparable providers to determine whether the plan's arrangement is reasonable. Formally document this evaluation process and the responsible plan fiduciary's determinations. o This documentation will most likely be in the form of meeting minutes. The 408(b)(2) Notice is intended to force plan fiduciaries to evaluate their service arrangements and more formally comply with ERISA s prohibited transaction rules. In many cases, plan fiduciaries will conclude that the services being provided to the plan are appropriate and necessary, and that the fees being charged for those services are reasonable. In others, however, plan 10

11 fiduciaries may decide that a service arrangement should be modified or a new vendor hired. In either case, however, simply receiving a 408(b)(2) Notice and the information it provides is only the beginning of the analysis. In the Department of Labor s eyes, what plan fiduciaries actually do with this information is much more important. Gregory L. Ash, Partner UNINTENDED CONSEQUENCES OF INDIVIDUAL BENEFIT DISCUSSIONS It happens all the time: employees who are considering retirement ask HR staff about their post-employment benefits. If the answers those employees receive turn out to be incorrect, the responders may be accused of violating their fiduciary duties under ERISA, and the plans at issue may be required to pay unexpected benefits. This is why ERISA lawyers insist that on-line pension calculators and personalized benefit estimates include conspicuous disclaimers. A manufacturer in Ohio recently learned the value of those disclaimers after a federal court rejected estoppel and fiduciary breach claims asserted by a participant whose monthly retirement benefit turned out to be less than half of what she was told it would be. (Stark v. Mars, Inc., S.D. Ohio July 17, 2012) The employee in this case worked for a division of Mars, Inc., and participated in its cash balance pension plan. In August of 2008 she received a letter from Mars and the third-party provider that maintained an on-line website, estimating that her monthly retirement benefit would be $5,365. The employee then contacted the Mars benefit service center to ask about the amount, which she believed to be too high. The benefits specialist confirmed the estimate, however, based on calculations done by the third-party provider. The employee retired in March of After only four months, Mars contacted the employee and informed her that her benefit had been calculated incorrectly. Instead of a monthly benefit of $5,365, the employee was actually entitled to only $2,303 per month. The plan adjusted her benefit accordingly, and the participant filed suit. She first alleged that she was entitled to rely on the incorrect estimate and receive the greater monthly benefit a theory known in the law as promissory estoppel. In addition, she claimed that the erroneous on-line estimate and subsequent confirmation from the plan s benefits staff amounted to breaches of fiduciary duty under ERISA. From the employer s perspective, this story has as happy ending. The court rejected both of the former employee s claims, finding that she was entitled to only the amount actually determined under the plan s terms, which was the lower monthly benefit. Although the court acknowledged that plans or employers may sometimes be required to provide benefits that are not contemplated under the terms of the plan (if participants are given incorrect promises about those benefits), it found that the former employee in this case had failed to prove that she had justifiably relied to her detriment on the incorrect benefit estimate. Prominent disclaimers on the website and in the letter from Mars, along with the frequent use of the term estimate in the communications with the former employee, were persuasive to the court. In addition, the court concluded that the benefits specialist who confirmed the 11

12 erroneous benefit estimate was not an ERISA fiduciary, but instead was performing merely ministerial tasks. Thus, although the information she relayed was inaccurate, and could have amounted to a fiduciary breach if it had been communicated by a plan fiduciary, the absence of a fiduciary actor in this case doomed the employee s ERISA claim. This Stark case serves as a reminder for any employer whose HR staff fields questions about benefits that the manner in which those questions are answered, and who answers them, are very important. First, appropriate disclaimer language should be included in all communications with plan participants, both oral and written. And second, anyone who might be considered an ERISA fiduciary such as a member of the plan s administrative or appeals committee should be extremely careful about answering questions concerning benefits. Gregory L. Ash, Partner A COSTLY MISTAKE: FAILING TO TIMELY OFFER COBRA COVERAGE Sponsors of self-funded health plans often fail to offer COBRA coverage on a timely basis to employees who are placed on a leave of absence. This mistake can lead to a most unpleasant result the denial of stoploss coverage. This was recently illustrated in a decision by the Sixth U.S. Court of Appeals, CLARCOR Inc. v. Madison National Life Insurance Co. (For another recent example, see our March 2010 article.) CLARCOR sponsored a self-funded health plan. It maintained stop-loss coverage through Madison National Life, with a specific attachment point of $250,000. The stop-loss policy covered only eligible employees under the CLARCOR health plan. The plan document provided that eligibility was limited to full-time employees who were regularly scheduled to work a minimum of 40 hours per week. The only exceptions to this 40- hour requirement applied to (1) qualified retirees; (2) employees on leave under the Family and Medical Leave Act (FMLA); and (3) individuals receiving COBRA coverage. One CLARCOR employee incurred over $637,500 in health care costs. The employee s last regularly scheduled workday was October 20, She was placed on FMLA leave through January 12, Once the employee s FMLA leave had expired, CLARCOR placed her on short-term disability (STD) leave. During that STD leave, CLARCOR continued to make health care deductions from the employee s compensation and maintained her health coverage. On June 23, 2008, CLARCOR terminated the employee s employment. Only then did CLARCOR offer her COBRA coverage. CLARCOR submitted a claim to Madison under the stop-loss policy, seeking reimbursement for the employee s health care expenses above the $250,000 attachment point. Madison denied the reimbursement claim with respect to expenses incurred after the employee s FMLA leave had ended, on the ground that the employee was no longer eligible under the CLARCOR plan. CLARCOR then filed suit against Madison, alleging that Madison had wrongfully denied the reimbursement claim. Madison argued that the employee was no longer an eligible plan participant once the FMLA leave had ended. The employee s medical expenses were therefore not reimbursable under the stop-loss policy. 12

13 In support of its claim, CLARCOR presented evidence that it had a practice of allowing employees on STD leave to continue their health coverage as though they were active employees. However, this practice was not written into the plan document. The trial court agreed with Madison that the employee lost coverage under the terms of the plan on the termination of her FMLA leave. Moreover, she should have been offered COBRA coverage at that time, rather than at the end of the STD leave. Although the employee was eventually offered COBRA coverage, the stop-loss policy expressly excluded coverage for any expenses incurred after such an untimely offer of COBRA coverage. Accordingly, the appellate court agreed with the trial court that the employee s post-fmla medical expenses were not reimbursable under the stop-loss policy. Had CLARCOR timely offered COBRA coverage to this employee and had the employee timely enrolled in that coverage Madison would have been required to reimburse CLARCOR for the expenses the employee incurred during that coverage period. As it turned out, however, CLARCOR was forced to bear the full cost of the employee s medical expenses. Here are some suggestions for plan sponsors on how to avoid this all-too-common plan mistake: Review and understand the COBRA, FMLA, and other coverage continuation or leave-related provisions found in your plan document. Resist the temptation to make exceptions to or deviate from those provisions. If your practice does not conform to the terms of your plan, either change that practice or amend the plan document. If you amend the plan, communicate those changes not only to plan participants, but also to everyone involved in the plan s operations. Know what services the plan s third-party administrator (TPA) has agreed to provide. For example, if the TPA provides COBRA notices, confirm that those notices are being provided timely and in accordance with the terms of the plan. Chadron J. Patton, Associate 13