401(k) Plan Amendment Did Not Require Liquidation of Investment

An employee of R.J. Reynolds Tobacco Company, a wholly-owned subsidiary of RJR Nabisco Holdings Corp., brought suit against the fiduciaries of the company’s 401(k) retirement plan. He asserted that they had acted imprudently when they liquidated two of the plan’s investment funds at a loss. The defendants argued that the employee had failed to state a claim for breach of fiduciary duty because their liquidation was a non-discretionary act required by amendments to the plan that had been adopted pursuant to RJR Tobacco’s authority as plan sponsor or settlor.

The trial court granted the defendants’ motion to dismiss the employee’s complaint for failure to state a claim, but the US Court of Appeals for the Fourth Circuit reversed that ruling. According to the Fourth Circuit, the amendments to the plan did not require the elimination of the two funds from the plan. Accordingly, the Fourth Circuit found, the employee could bring suit against the plan’s fiduciaries on his claim that they had acted improperly. [Tatum v. R.J. Reynolds Tobacco Co., 392 F.3d 636 (4th Cir. 2004).]

Comment: A question not answered in this case is whether a plan fiduciary is freed from its fiduciary responsibilities if it simply implements the mandates of the plan document. Indeed, the US Secretary of Labor (as amicus curiae) in this case argued that even if the amendments to the 401(k) plan required the liquidation of two of the plan’s investment funds, the plan fiduciaries had the duty to ignore that plan requirement if it was imprudent to sell. The Fourth Circuit did not reach this question because it ruled that the plan amendment did not require the liquidation of the funds. As a result, fiduciaries facing a plan amendment that arguably requires that they take action that might be characterizable as imprudent may want to seek the advice of counsel before acting, or before refusing to act, even if their actions appear to be in accord with the terms of the plan.

Beneficiary May Not Be Awarded Compensatory Damages as “Appropriate Equitable Relief” Under ERISA Section 502(a)(3) in Suit Against Fiduciary

About a decade ago, Sandy Callery filled out a life insurance application for group life insurance that was sponsored by her employer. In addition to her own coverage and coverage for her children, she selected “Life insurance for spouse” in the amount of $100,000. She and her husband later divorced, but she continued to pay life insurance premiums for her husband’s coverage until his death. She then applied for the benefits, but the insurer denied coverage based on a policy exclusion providing for termination of a spouse’s eligibility for life insurance upon divorce. The insurer provided her with a copy of the policy, and refunded the premiums she had paid.

Callery filed suit against her employer, claiming that it had violated ERISA’s notice requirements and had breached its fiduciary duties by failing to provide her with a copy of the summary plan description (“SPD”). The complaint sought the face value of the life insurance policy as “appropriate equitable relief” under ERISA Section 502(a)(3). In response, the company argued that “appropriate equitable relief” under Section 502(a)(3) did not include the payment of $100,000, which would be the equivalent of the life insurance proceeds. The trial court agreed, and Callery appealed.

The appellate court stated that to the extent that Callery sought payment of the policy proceeds, it did not amount to “appropriate equitable relief” and thus was barred under Section 502(a)(3) of ERISA. Moreover, the appellate court continued, Callery’s claim might be most accurately construed as one for reliance damages, because she asserted that the lack of notice prevented her from obtaining life insurance on her former husband from another source. Regardless, the appellate court concluded, the relief Callery sought was compensatory and not available under this section of ERISA. [Callery v. The U.S. Life Ins. Co. in the City of N.Y., 392 F.3d 401 (10th Cir. 2004).]

Comment: The circuit court decision in Callery is supported by prior caselaw. Indeed, the US Supreme Court has addressed the meaning of “appropriate equitable relief” under Section 502(a)(3) in several opinions, including Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204 (2002), and Mertens v. Hewitt Associates, 508 U.S. 248 (1993). In both cases, the Court unequivocally rejected attempts to impose personal liability for a contractual obligation to pay money under Section 502(a)(3) of ERISA, holding that the term “equitable relief” in Section 502(a)(3) refers to “those categories of relief that were typically available in equity (such as injunction, mandamus, and restitution, but not compensatory damages).” Lower appellate courts have followed this reasoning. The US Court of Appeals for the Tenth Circuit, for example, has concluded that generally “monetary compensation for economic or other harm” is unavailable under ERISA. See, e.g., Moffett v. Halliburton Energy Servs., Inc., 291 F.3d 1227 (10th Cir. 2002); Millsap v. McDonnell Douglas Corp., 368 F.3d 1246 (10th Cir. 2004) (concluding that back pay was appropriately classified as legal relief). In other words, in a suit by a beneficiary against a fiduciary, most courts are likely to hold that compensatory damages are not “appropriate equitable relief” under Section 502(a)(3) of ERISA.

Court Upholds Committee Decision That Retention Bonus Was Not Wages for Pension Plan Purposes

Wayne M. Wolberg brought suit against the AT&T Broadband Pension Plan and the AT&T Broadband Employee Benefits Committee alleging that the committee had wrongfully excluded $180,000 from the formula for calculating pension benefits payable to him. The committee had concluded that the $180,000 in question was not eligible for inclusion in Wolberg’s benefit calculation because it was a special retention bonus specifically excluded from the definition of qualifying compensation under the terms of the plan. Wolberg contended that it qualified as compensation in the form of either basic wages, a lump sum payment in the nature of a merit or performance award, a non-executive incentive, or incentive compensation.

The court pointed out that Wolberg had agreed, in writing, to the characterization of the money in question as a “retention bonus.” Furthermore, the court continued, Wolberg did not then dispute the accuracy of that characterization, and he never identified a contrary earlier description or even alleged that the company explicitly labeled the amount as one thing in negotiating with him and then called it something else, contrary to earlier assertions, when producing a written agreement for his review and signature. The court emphasized here that company records showed that the disputed $180,000 was not coded as wages for internal accounting purposes.

Concluding that the terms “retention bonus,” “merit performance award,” “non-executive bonus,” and “incentive payment” as used in the pension plan were not ambiguous, the court upheld the committee’s decision and rejected Wolberg’s arguments. [Wolberg v. AT&T Broadband Pension Plan, 2005 U.S. App. LEXIS 197 (10th Cir. Jan. 6, 2005).]

Comment: Companies should carefully draft their pension plans, as well as all contracts or other plans providing for compensation or benefits to their workers. Indeed, contracts and pension plan language should be consistent and clear.

Court Emphasizes Difference Between “Vesting” and “Eligibility to Receive” Benefits

Patricia Jackson brought suit against the retirement plan of her former employer, the Continental Corporation, alleging that its 10-year vesting requirement for early retirement benefits violated ERISA provisions that dictated a maximum five-year vesting requirement for retirement benefits. The plan asked the court to dismiss this claim, arguing that Jackson had confused the notion of “vesting” with eligibility to receive payments.

In its decision, the court pointed out that Section 1053(a)(2)(A) of ERISA provides that “an employee who has completed at least 5 years of service has a nonforfeitable right to 100 percent of the employee’s accrued benefit derived from employer contributions.” In other words, after five years of service, an employee’s right to receive his or her pension vests. The court found that Jackson’s argument was predicated “on the misconceived notion” that because early retirement benefits have been construed as “accrued benefits,” Section 1053(a)(2)(A) should be read to include early retirement benefits in its vesting requirements. In other words, because the statute uses the phrase “accrued benefits,” Jackson suggested that early retirement benefits should be nonforfeitable in all pension plans after only five years of service.

In rejecting Jackson’s argument, the court noted that Jackson was entitled to 100 percent of the benefits she accrued when she worked for Continental Corporation. “She is just not entitled to them until she reaches the normal retirement age,” the court declared. It found that the plan had not violated Section 1053. [Jackson v. The Retirement Plan For The Continental Corp., 2004 U.S. Dist. LEXIS 25298 (N.D. Ill., Dec. 14, 2004).]

Comment: Federal benefits legislation is exceedingly complex. Sometimes it is beneficial for all involved to take a step back to make certain that they have the basic concepts firmly in mind. As the court made clear in this case, “vesting” and “eligibility” are two different concepts, and should not be confused with each other.

Court Upholds SPD Requirement of Subrogation Agreement Before Plan Advances Accident-Related Payments

Paul Kress, a participant in his employer’s welfare benefit plan, was injured by a third party in an automobile accident away from work. Under such circumstances, the plan agreed that it would advance its participants their accident-related expenses. The summary plan description emphasized that such payments were in the nature of a “service” to the plan’s members, because “recovery from a third party can take a long time.”

To receive the advance, participants and their attorneys were required to execute a subrogation agreement to reimburse the plan “before all others” from any third-party recovery. Kress’s attorney refused to sign the agreement and his claim for the advance was denied. Kress brought suit, alleging that the plan improperly had denied benefits because of his attorney’s refusal to sign the agreement. The district court granted summary judgment to the plan, and Kress appealed.

The US Court of Appeals for the Fourth Circuit affirmed. It pointed out that the SPD said that the plan would advance funds “only as a service to you,” that reimbursement must come from “any recovery,” and that “acceptance of benefits” connoted an agreement to reimburse “in full” from “any settlement, judgment, insurance, or other payment” received, including payments “your attorney receives.” Additionally, the Fourth Circuit continued, the SPD “plainly requires both the attorney and the participant to sign” the agreement; the SPD’s meaning “could therefore hardly be clearer.”

The appellate court then observed that because third-party accident and sickness benefits were not even covered by the plan, nor required by ERISA, it did not make sense to argue that ERISA precluded imposing conditions on the receipt of these benefits. The appellate court then affirmed the trial court decision. [Kress v. Food Employers Labor Relations Ass’n and United Food and Commercial Workers Health and Welfare Fund, 391 F.3d 563 (4th Cir. 2004).]

Comment: Subrogation clauses requiring reimbursement are quite common, and ERISA allows plans broad discretion to draft such clauses. Plans can forego reimbursement unless and until the participant is “made whole.” They can provide for attorney fees to be paid in full before the plan is reimbursed at all. They can share the expense of legal fees in a pro-rata fashion, proportionally reducing their reimbursement to reflect the attorney fee. They can adopt a “reasonable fee” policy, meaning that they will subtract from the amount of the required reimbursement whatever they would have spent in legal fees to recover the advance they had paid. Or, they may require that attorney fees be paid only after the plan is reimbursed in full. See Sunbeam-Oster Co., Inc. Group Benefits Plan v. Whitehurst, 102 F.3d 1368 (5th Cir. 1996) (discussing different possibilities). Simply put, it is the language of the plan that determines the rules that apply in these situations.

Injuries from Alleged Malpractice Are Not an “Accident” for Policy Purposes

The plaintiff in this case had an accidental death and dismemberment policy with the Hartford Life Insurance Company pursuant to which Hartford agreed to pay benefits if an injury within the terms of the policy occurred. After the plaintiff’s wife died of complications from surgery, the plaintiff filed a “Proof of Loss-Accidental Death” form with Hartford. Hartford denied the claim, finding that it did not qualify as an “accident,” and the plaintiff brought suit.

The plaintiff alleged that negligence by the doctors during his wife’s operation resulted in her death. Thus, the plaintiff claimed that the alleged medical malpractice of his wife’s doctors constituted an “accident” under the terms of the policy. The court rejected that argument, holding that the plaintiff’s wife’s injuries from alleged medical malpractice were not accidents under the policy, and therefore the plaintiff could not recover under the policy. [Miller v. The Hartford Life Ins. Co., 348 F. Supp. 2d 815 (E.D. Mich. 2004).]

Comment: Courts have regularly held that medical malpractice is not an accident. For example, in one case, an insured man received a prescription for heart medication. The pharmacist gave him the wrong drug, and the man died. His wife sought benefits from the defendant insurance company, claiming that her husband’s death was an “accident.” The insurance company decided that the man’s death was excluded from coverage under language that read, “No benefits shall be paid if [the insured’s] loss directly or indirectly results from: . . . disease of any kind, or medical or surgical treatment for any such infirmity or disease.” The court held that the clear and unambiguous meaning of the contract indicated that policy did not cover this particular incident, since the drugs were given to the man as part of his medical treatment. The court stated, “every act of medical malpractice is to some extent an accident, if one equates ‘accident’ with ‘unintended,’ because it is outside the course of the intended medical treatment. . . . Such medical mishaps can only occur during the course of treatment; and that’s all the exclusionary provision here cares about.” Therefore, the court held that an accidental death and dismemberment policy did not cover loss from medical malpractice. Swisher-Sherman v. Provident Life & Ins. Co., 1994 U.S. App. Lexis 28768 (6th Cir. Oct. 13, 1994).

In another case, a man visited the hospital for treatment of ulcerative colitis. To prepare for a colonoscopy, he drank a solution; however, he was given the wrong solution, and died. The man’s insurance policy excluded coverage “if the individual’s loss shall directly or wholly result from: . . . (c) bodily or mental infirmity, disease of any kind, or as a result of medical or surgical treatment therefor.” The court held that the solution was given to the man in preparation for medical treatment, and hence was not covered by his accidental death benefit policy. “The clear language of the policy and the weight of authority suggest that the policy was meant to exclude this kind of mishap.” Pickard v. Transamerica Occidental Life Ins. Co., 663 F. Supp. 126 (E.D. Mich. 1987). See also Senkier v. Hartford Life & Accident Ins. Co., 948 F.2d 1050 (7th Cir. 1991) (holding that a patient’s death from a punctured heart caused by a wandering catheter tube was not an accident, since “medical treatment is often risky and when the risk materializes and the patient dies we do not call it dying in or because of an accident; it is death from sickness.”); Whetsell v. Mut. Life Ins. Co., 669 F.2d 955 (4th Cir. 1982) (holding that the use of an intravenous needle infected with bacteria was not an “accident” under an accidental death insurance policy); Krane v. Aetna Life Ins. Co., 698 F. Supp. 220 (D. Colo. 1988) (holding that an insured’s death during exploratory surgery was a result of surgical treatment, not an accident); Reid v. Aetna Life Ins. Co., 440 F. Supp. 1182 (S.D. Ill. 1977) (holding that a lethal drug inadvertently given to the insured while recuperating from surgery was not an “accident”).

Pre-Existing Condition Dooms Coverage Claim

The plaintiff in this case alleged that she had been denied disability insurance benefits to which she was entitled under an employer-sponsored benefit plan. The plan agreed that the plaintiff was disabled by degenerative disc disease, but argued that the disease was a pre-existing condition for which coverage was excluded. The plan defined a pre-existing condition as one for which “medical treatment or advice was rendered, prescribed or recommended” within 12 months prior to the employee’s effective date of insurance.

The plaintiff conceded that she had surgery on a herniated disc before the effective date of her policy but argued that her disabling condition was not the herniated disc but instead was “degenerative disc disease,” as diagnosed by her physicians after her coverage began. The plaintiff argued that condition meant the “specific” sickness or disease “as diagnosed by a physician,” and that the plan’s failure to address the diagnosed condition made its denial of benefits arbitrary and capricious.

The plaintiff’s theory was that the herniated disc repaired in the surgery and the degenerative disc disease at the same site were different conditions, but the court was not persuaded by this argument. It pointed out that an MRI of plaintiff’s lumbar spine taken during the pre-existing condition period showed “disc narrowing, disc desiccation . . . most apparent at L4-L5.” The doctor who reviewed the MRI found “Lumbar disc disease and spondylosis most apparent at L4-5 where there is a recurrent residual broad-based disc protrusion.” In the court’s view, these records undermined the plaintiff’s effort to confine the earlier condition to a “herniated disc” that had been repaired by the surgery.

The court also pointed out that another MRI, taken after the plaintiff’s coverage began, showed “lumbar disc disease and spondylosis at L4-5 with post-operative changes on the right side.” This MRI also indicated that certain changes “on the right side of the L4-5 disc and adjacent vertebral bodies are most likely due to degeneration and the previous surgery.” The court found that these were conditions for which the plaintiff had received medical advice and for which treatment was recommended during the one-year pre-existing condition period. Indeed, two physicians identified the degenerative disc disease that the plaintiff claimed as the basis of her disability as being located at the L4-5 level.

In light of these medical records, the court found nothing arbitrary or capricious in the plan’s conclusion that the disabling condition was an aggravation of the same condition that was examined before coverage began. Accordingly, it held, the plan had acted reasonably in finding that her disability was, in the terms of the plan’s pre-existing condition exclusion, “caused by, contributed to, or resulted from” the post-surgery lumbar disc disease, disc narrowing and desiccation at the L4-5 level for which she had received treatment and advice during the relevant pre-coverage period. The court granted the plan’s motion for summary judgment in its favor. [Atkinson v. Quorum Health Group, Inc., 2004 U.S. Dist. LEXIS 26430 (S.D. Ind. Dec. 16, 2004).]

Comment: It is important for plan administrators to carefully review all underlying facts relating to claims filed for plan benefits since different facts can lead to different coverage determinations.

Reprinted with permission from the Employee Benefit Plan Review – From the Courts.  All rights reserved.