1 ALI-ABA Course of Study Pension, Profit-Sharing, Welfare, and Other Compensation Plans March 26-28, 2008 San Francisco, California What's New in Employee Benefits A Summary of Current Case and Other Developments By Michael R. Maryn Sonnenschein Nath & Rosenthal LLP Washington, D.C. The assistance of Mina Amir-Mokri, Katharina E. Babich, Richard O. Berge, Frank VanderPloeg, Kelli Toronyi, Andrew Dalin, Margaret McGrath, Beth Miller and Michael R. Stallworth in the preparation of this outline is gratefully acknowledged. Copyright 2008 Sonnenschein Nath & Rosenthal LLP ALL RIGHTS RESERVED
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3 TABLE OF CONTENTS Page TABLE OF CONTENTS... i I. SUPREME COURT CASES... 1 A. Plan Merger as a Means of Terminating a Single Employer Pension Plan... 1 B. Enforceability of Equitable Liens... 5 1. First Circuit Cases... 7 2. Second Circuit Cases... 9 3. Fourth Circuit Cases... 10 4. Fifth Circuit Cases... 11 5. Seventh Circuit Cases... 12 6. Tenth Circuit Cases... 13 7. Eleventh Circuit Cases... 13 8. Sixth Circuit Cases... 14 9. Ninth Circuit Cases... 14 10. Eleventh Circuit Cases... 15 11. State Courts... 15 C. Standing to Sue for Individual Relief for Breach of Fiduciary Duty... 17 D. Age Discrimination - Disability Retirement Benefits... 26 E. Standard of Review for an Administrator that Both Determine and Pays Benefit Claims... 28 1. Dual Status Administrators Structural Conflict Alone Requires Heightened Scrutiny... 30 2. How Conflicts of Interest Affect the Standard of Review... 34 II. FIDUCIARY RESPONSIBILITY... 37 A. Fiduciary Status... 40 1. Employers/Owners... 41 2. Plan Sponsors... 45 3. Third Party Service Providers... 46 B. Misrepresentation and Related Disclosure Claims... 51 C. Prudent Person Standard... 54 D. Stock Drop Cases... 55 1. Liability of Corporate Officers and Directors... 57 2. Duty to Disclose Non-Public Information... 62 3. The Duty to Diversify and the ESOP Presumption... 66 4. Liability of Fiduciaries Under a 404(c) Plan... 70 5. Selling Before a Stock Rise... 75 E. Administrative and Mutual Fund Fees... 77 F. Liability of Directed Trustees... 80 G. Prohibited Transactions... 81 H. Nonfiduciary Liability for Knowing Participation in a Fiduciary Breach... 84
4 I. Claims for Demutualization Proceeds... 85 J. Single or Multiple Plans... 86 III. ERISA LITIGATION... 87 A. Limitation of Actions (for Claims Other Than Breach of Fiduciary Duty)... 87 1. Statutory Limitations Periods Which Period of Limitations Applies... 87 2. Contractual Limitations Periods... 91 B. Standing... 92 1. Standing as a Plan Participant... 92 2. Standing as Plan Beneficiary... 97 3. Standing of Contributing Employer... 98 C. Standard of Review... 98 1. Conflicts of Interest... 98 2. Documents Considered in Determining the Standard of Review Plan or SPD... 110 3. Whose Decision Is Entitled to Deference... 112 4. Discovery in Cases of Arbitrary and Capricious Review... 113 5. Need for Remand Upon a Finding of an Abuse of Discretion... 114 D. Removal and Remand/Complete Preemption... 115 E. Exhaustion of Administrative Remedies Claims to Which the Exhaustion Requirement Applies... 117 1. Exceptions to Exhaustion Requirement... 118 2. Applicable Administrative Remedies... 120 F. Remedies... 123 1. Effect of Availability of Another Remedy on Relief Under ERISA Section 502(a)(3)... 123 2. What Constitutes Equitable Relief... 124 G. Releases... 132 H. Attorney-Client Privilege... 135 I. Production of Records Held by Third-Party... 137 IV. PREEMPTION... 137 A. Supreme Court Preemption Guidance... 138 B. Mandated Spending... 141 C. Participant Benefit Claims and Related Torts... 145 1. Misrepresentation, Fraud and Similar Claims... 145 2. Participant Claims Against Service Providers... 146 3. Relationship Regulated by ERISA... 147 4. Negligence Claims... 148 D. Insurance and HMO Regulation... 149 E. Minor s Rights... 151 F. Non-Qualified Deferred Compensation Constructive Trust Claim... 152 G. Marriage and Beneficiaries... 153 (ii)
5 V. PLANS SUBJECT TO ERISA... 155 A. Group Insurance Plans Excluded from ERISA Under Safe Harbor Provision... 156 B. Ongoing Administrative Schemes... 159 C. Plans Covering Owner-Employees... 160 D. Pension Plan... 161 E. Transfer of Services or Property as a Pension Plan... 161 F. Top Hat Plans... 162 G. Payroll Practices... 165 VI. REPORTING AND DISCLOSURE... 167 A. Summary Plan Descriptions... 167 1. Failure to Distribute SPD... 167 2. Sufficiency of Content of an SPD... 169 B. Conflict Between the Plan and the SPD... 170 C. Failure to Provide Requested Information... 174 D. Notification of Denial of Benefits... 175 E. Claim for Equitable Relief... 176 VII. FEDERAL COMMON LAW OF ERISA - ESTOPPEL... 177 VIII. AMENDMENT OR TERMINATION OF WELFARE BENEFIT PLANS... 181 A. First Circuit... 181 B. Sixth Circuit... 182 C. Seventh Circuit... 186 D. Eighth Circuit... 187 IX. INTERFERENCE WITH RIGHTS (ERISA SECTION 510)... 187 A. What Is Protected/Prohibited by ERISA Section 510 Outsourcing, Claim Accrual and Tender Back/Ratification... 188 1. Health Benefits... 189 2. Pension Funding... 190 B. Remedies for Violation of ERISA Section 510... 192 X. TAX QUALIFICATION/ERISA REQUIREMENTS... 192 A. Anti-Cutback Provision of ERISA Section 204(g)/Code Section 411(d)(6)... 192 B. Cash Balance Plans Prohibition on Age Discrimination... 194 1. Whipsaw Calculation of Lump-Sum Distributions... 200 2. Anti-Backloading... 202 C. Accrued Benefits... 203 XI. BANKRUPTCY... 204 A. Exemption from the Bankruptcy Estate... 204 B. Administrative Priorities... 205 C. Exception to Discharge... 206 TABLE OF AUTHORITIES...follows page 206 (iii)
6 I. SUPREME COURT CASES A. Plan Merger as a Means of Terminating a Single Employer Pension Plan The Supreme Court, in a unanimous decision written by Justice Scalia, has overturned a highly criticized Ninth Circuit opinion, which had imposed liability on an employer for breaching its fiduciary duties to its single employer defined benefit plans by failing to consider an offer to merge the plans into a multiemployer plan as an alternative to annuitization of accrued benefit liabilities upon termination of the plans. Beck v. PACE Int l Union, 127 S. Ct. 2310 (June 11, 2007). The Court clarified that merger of a single employer plan into a multiemployer plan is an alternative to plan termination and not a permissible method of terminating a single employer plan. Moreover, the Court reiterated that the choice between terminating a plan or merging it into another plan is a settlor decision that is not subject to the fiduciary responsibility requirements of ERISA. Background The Ninth Circuit, in Beck v. PACE Int l Union, 427 F.3d 668 (9th Cir. 2005), rev d, 127 S. Ct. 2310 (June 11, 2007), had concluded that a debtor in bankruptcy breached its fiduciary duties under ERISA by effectuating the termination of its single employer defined benefit pension plans through the purchase of an annuity without adequately considering an offer to terminate the plans by means of a merger of the plans into a multiemployer plan. The debtor sought to terminate its pension plans as a means of dispensing with proofs of claims totaling millions of dollars filed by the PBGC for the liability it would have been forced to assume had it taken over the plans. The bankruptcy court viewed these proofs of claims as a stumbling block to confirmation of the debtor s plan of reorganization under Chapter 11 of the Bankruptcy Code. Id. at 672. At or about the same time as the debtor s board began to obtain quotes for the purchase of annuities as a means of accomplishing a standard termination of the plan under ERISA Section 4041(b), PACE International Union proposed a merger of the plans that covered the debtor s hourly employees into the PACE Industrial Union Management Pension Fund, a multiemployer pension fund for PACE union members. Id. During August and September 2001, the debtor and PACE met to discuss the merger and exchanged communications regarding the merger. Id. Late in September 2001, the debtor s board of directors met to review the bids for annuities and learned that the company would receive a reversion upon completion of the standard termination of the plans. The board was also advised of the PACE proposed merger. Id. The board agreed to compare the merger alternative to the termination alternative when final bids regarding the annuity contracts were received. Id. Notwithstanding that agreement, when the board met a couple weeks later to review the final annuity bids, it did not consider the PACE merger proposal. Id. Instead, the purchase of annuities was discussed, as was the fact that the PBGC had agreed to release the company if the plans purchased annuities to satisfy the entire benefit liabilities of the plans. The PBGC, however, did not agree to release the Company in connection with the proposed merger (presumably in part because the company did not pursue a release from PBGC for the merger). The board also noted that the company expected to receive a $5 million reversion after