Court Rejects Claim Over Elimination of Right To Transfer Balance

February 28, 2010 | Appeals | Insurance Coverage

The plaintiff in this case worked for Airborne Express, Inc., which was acquired by DHL Holdings (USA), Inc., now called DPWN Holdings (USA), Inc., in 2003. The plaintiff had been a participant in Airborne’s Retirement Income Plan (RIP) and Profit Sharing Plan (PSP). The RIP was a defined benefit plan whose benefit formula was based on a participant’s years of service and final average compensation, with an offset for any benefits earned under the PSP. The PSP was an individual-account defined contribution plan, under which a retiree would receive the amount the retiree had contributed over the years modified by any gains or losses on the investments in the account. Under both the RIP and the PSP, a participant could elect to receive benefits as a single life annuity or as a lump sum.

Furthermore, the RIP and the PSP contained complementary provisions under which a participant could transfer the balance from the participant’s PSP account into the RIP. Because the RIP used more favorable actuarial assumptions than the PSP, this transfer right could allow a participant to collect a larger combined total from the plans than if the participant elected to receive PSP and RIP benefits separately.

On December 31, 2004, DHL merged the PSP into the DHL equivalent, the DHL Retirement Savings Plan (Savings Plan). It also eliminated the right of participants to transfer their Savings Plan balance to the RIP, effective January 1, 2005. In 2006, DHL merged the RIP into the DHL equivalent, the DHL Retirement Pension Plan (Pension Plan).

After more than 32 years of service, the plaintiff retired on March 4, 2004. As of the end of 2003, his PSP balance was $370,338.22. At his retirement, he received a benefits estimate stating that his single life annuity under the RIP alone would be $4,775.90 per month, or $4,163.92 per month with the 100 percent joint and survivor annuity option, if he were to transfer his PSP balance into the RIP. The plaintiff selected the joint and survivor annuity option, to begin payments upon his request on or after October 1, 2008.

In April 2008, the plaintiff learned from Fidelity Management Trust Company, the trustee for DHL’s retirement accounts, that his expected monthly benefits were approximately $2,200.00, not $4,163.92. On July 22, 2008, DHL’s Retirement Benefits Appeals Committee confirmed Fidelity’s estimate, explaining that the 2004 figure was higher because it contemplated the plaintiff’s exercise of his transfer right – a right that had been eliminated after the plaintiff retired but before retirement benefits were to commence.

The plaintiff brought suit against the Savings Plan, the Pension Plan, the DHL Employee Benefits Committee, and the DHL Retirement Pension Plan Committee, claiming that the elimination of the right to transfer funds violated ERISA’s anti-cutback rule, which, with certain exceptions, prohibits any plan amendments that reduce or eliminate a participant’s accrued benefits. The defendants moved to dismiss, arguing that a Internal Revenue Service regulation specifically permits the elimination of such a transfer right, even when it results in a reduction of accrued benefits.

In its decision granting defendants’ motion to dismiss, the district court noted that the IRS regulation stated: “Provisions for transfer of benefits between and among defined contribution plans and defined benefit plans. A plan may be amended to eliminate provisions permitting the transfer of benefits between and among defined contribution plans and defined benefit plans.” The court pointed out that the defendants claimed that the regulation meant exactly what it said: elimination of the right to transfer funds between plan accounts did not violate the anti-cutback rule. The court also noted that the plaintiff responded that the regulation allowed the elimination of the right to transfer funds only so long as such an amendment did not reduce the monthly annuity benefit to which the plaintiff was entitled.

The court then explained that the anti-cutback rule itself empowered the Treasury Department Secretary to make exceptions to the statute: “The Secretary of the Treasury may by regulations provide that this subparagraph shall not apply to a plan amendment described in subparagraph (B) (other than a plan amendment having an effect described in subparagraph (A)).” It then found that the IRS regulation was one such exception. The court concluded that the regulation authorized the elimination of transfer rights in all cases, not just when such elimination would not reduce the participant’s accrued benefits, and it therefore dismissed the plaintiff’s claims based on the elimination of the transfer right. [Tasker v. DHL Retirement Savings Plan, 2009 U.S. Dist. Lexis 120937 (D. Mass. Nov. 20, 2009).]

Amendment To Plan Limiting Lump-Sum Payout To Highly-Compensated Employee Did Not Violate Anti-Cutback Rule, Circuit Court Decides

The plaintiff in this case began working at the Illinois CPA Society & Foundation in 1984 and participated in its retirement income plan, a defined benefit plan, throughout his employment. At the time of his retirement, the plaintiff was the society’s vice president of governmental affairs and qualified as a highly-compensated employee (HCE) under the terms of the plan. On the date that the plaintiff retired, the plan had 61 participants and approximately $2 million in assets. Section 5.02(d) of the plan provided that participants could select a “single sum cash payment” of their benefits.

The first and only HCE to retire under the plan prior to the plaintiff did so in 2002. At that time, the Society’s actuary permitted that HCE to take a lump-sum payout of his benefits without providing any security to the plan even though the plan was underfunded. The plan apparently did not find out about the 2002 lump-sum distribution until 2004, when it determined that such a lump-sum distribution was not permitted by applicable Treasury Regulations and therefore risked the plan’s tax status. In order to preserve the plan’s tax status, the plan’s board of directors amended the plan on June 24, 2004, to restrict lump-sum distributions to HCEs. When the plaintiff retired from the Society in 2006, he was notified that a lump-sum disbursement was unavailable due to the amount of the disbursement. He later sent a letter demanding that his benefits be rolled into an IRA in a lump sum without any security, but the plan denied this request, noting specifically that because the plan was underfunded, a lump-sum disbursement would violate Treasury Regulations and would cause the plan to risk its tax-qualified status. The plaintiff once again demanded a lump-sum distribution in June 2007, this time offering to post security.  The plaintiff rejected this demand as well.

The plaintiff brought suit, arguing that the amendment to the plan violated ERISA’s anti-cutback rules by eliminating a previously-available benefit. The district court granted summary judgment in favor of the plan, and the plaintiff appealed. On appeal, the plaintiff argued that the district court had erred in finding that the plan amendment did not violate ERISA’s anti-cutback provisions because it eliminated a pre-existing “optional form of benefit,” namely the ability to receive a lump-sum distribution. The appellate court explained, however, that, due to underfunding, HCEs never had the option of collecting lump-sum distributions even prior to the plan amendment. In other words, the plan amendment did not eliminate or affect any lump-sum option that was previously available to plan members. Instead, the amendment gave the plan a way of correcting the distribution made in 2002 that was not allowed under the Treasury Regulations at the time it was made. Because plan participants were not entitled, under the plan, to a lump-sum distribution, the plan amendment did not eliminate an “optional form of benefit” and did not violate ERISA’s anti-cutback provision, the circuit court concluded. [Wetzler v. Illinois CPA Society & Foundation Retirement Income Plan, 2009 U.S. App. Lexis 24592 (7th Cir. Nov. 10, 2009).]

Claimant Not Required To Exhaust Administrative Remedies Where She Did Not Receive Administrative Record And Other Documents She Had Requested

In this case, the plaintiff worked as a truck driver for J.B. Hunt Transport Services, Inc., and enrolled in Hunt’s employee welfare benefits plan. The plaintiff hurt her knee while working and made a claim for long term disability benefits under the plan. The Prudential Insurance Company of America awarded the plaintiff long term disability benefits after finding that she was “unable to perform the material and substantial duties of [her] regular occupation due to . . . injury.” The plaintiff was a lifelong trucker and her knee pain made it impossible for her to continue driving a truck.

More than a year later, Prudential discontinued the plaintiff’s benefits. It noted that the plan’s definition of “disabled” changed after the first year of payments, and determined that, even though the plaintiff’s knee pain prevented her from returning to work as a truck driver, there were other jobs she could perform.

Prudential informed the plaintiff that, “[b]ased on [its] clinical reviews, the medical documentation supports that [the plaintiff had] sedentary work capacity and [was] limited to lifting up to ten pounds, stooping and bending [was] generally to be avoided, and sitting and standing [could] be alternated as needed.” Prudential indicated one of its vocational rehabilitation specialists had determined the plaintiff was employable as a semiconductor bonder, a surveillance system monitor, a food checker, or an assembler.

Prudential notified the plaintiff of her right to an internal administrative appeal of its decision “in writing . . . within 180 days.” Prudential required any appeal to state the reasons for disagreeing with its decision and to contain supporting evidence, including: “[c]opies of therapy treatment notes,” “[a]ny additional treatment records from physicians,” “[a]ctual test results,” and “any other written comments, documents, records, or information related to [her] claim.” Prudential informed the plaintiff of her concomitant right “to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to [her] claim.”

The plaintiff called Prudential and indicated she wanted to appeal. One of Prudential’s representatives told the plaintiff she needed to explain in writing why she disagreed with Prudential’s decision, but the plaintiff never did so. Instead, she requested a copy of the plan from Prudential and, through her attorney, sent Hunt and Prudential a series of letters requesting a wide variety of information. The plaintiff asked Hunt for copies of all employee welfare or pension plans in which she had enrolled and copies of all summary plan descriptions, annual reports, and amendments thereto. She asked Prudential for a copy of the plan and a complete copy of the administrative record. The plaintiff also requested Prudential provide her all plan documents, internal guidelines, and administrative precedents upon which Prudential had relied when deciding to discontinue her long term disability benefits, as well as the names and addresses of all individuals who reviewed her personal health information.

At Prudential’s request, Hunt sent the plaintiff a copy of the plan’s summary plan description and “Wrap” document, a description of the various benefits available to Hunt employees. Hunt also sent the plaintiff copies of summary plan descriptions and benefit booklets for every plan in which she had enrolled while working for Hunt. However, Prudential apparently otherwise ignored the plaintiff’s requests, failing to provide plaintiff with the administrative record. Thereafter, the plaintiff sent Prudential another letter through her attorney, in which she demanded a response within 10 days. Absent a response, the letter stated that the plaintiff would “assume [Prudential had] no intention of responding to [her] letter, and [would] take appropriate action.” Prudential apparently did not respond to the request for information.

The plaintiff then brought suit in the federal district court, seeking an order reinstating her benefits under the plan and awarding her back benefits. The district court dismissed plaintiff’s lawsuit, finding that the plaintiff had not filed a written administrative appeal of Prudential’s decision to discontinue her benefits and thus had not exhausted her administrative remedies. The plaintiff appealed to the U.S. Court of Appeals for the Eighth Circuit.

The circuit court explained in its decision that federal courts had universally required claimants to exhaust their remedies before bringing claims for wrongful denial to court. According to the Eighth Circuit, however, this exhaustion requirement was not absolute. For example, it stated that when an ERISA-governed plan failed to comply with its antecedent duty to provide participants with notice and review, aggrieved participants were not required to exhaust their administrative remedies before filing a lawsuit for benefits.

The appellate court then found that Prudential’s failure to comply with its duty under ERISA to provide the plaintiff with “a reasonable opportunity . . . for a full and fair review” of Prudential’s decision to discontinue her benefits excused the plaintiff’s failure to exhaust before bringing suit. Without the administrative record and other requested documents in hand, the circuit court ruled, the plaintiff “was unable fully and fairly to prepare her appeal.”

In the appellate court’s view, Prudential’s failures to respond deprived the plaintiff “of sufficient information to prepare adequately for further administrative review or an appeal to the federal courts.” The plaintiff “did not know the identity of critical persons, including the medical and vocational experts who determined she was not disabled and who calculated her residual functional capacity,” it added, pointing out that the plaintiff did not have access to Prudential’s methodologies or reports and had “no opportunity to challenge Prudential’s bald assertion she had the residual functional capacity to work as a semiconductor bonder, a surveillance system monitor, a food checker, or an assembler.”

The circuit court emphasized that the plan required the plaintiff “to do much more” than simply file a written notice of appeal to exhaust her administrative remedies. Prudential required the plaintiff to: (1) state the reasons why she disagreed with Prudential’s decision; (2) provide medical evidence or other information to support her position, such as copies of her treatment notes and medical test results; and/or (3) submit other written comments, documents, records, or information related to her claim. In other words, the Eighth Circuit found, the plaintiff was “required to mount a detailed challenge to Prudential’s decision at the moment she appealed.” Yet, it stated, Prudential deprived the plaintiff of meaningful information necessary to do so.

The Eighth Circuit found that Prudential had offered “no explanation for ignoring” the plaintiff’s repeated requests for information. Prudential suggested that the plaintiff may have possessed most of the documents in the administrative record, but the appellate court found that it was “undisputed” that the plaintiff did not have access to the entire administrative record or identification of the medical and vocational experts, and did not know the particular bases for Prudential’s decision to discontinue her benefits.

In sum, it concluded, Prudential had denied the plaintiff a reasonable opportunity for full and fair review, and she was not required to exhaust her administrative remedies under the facts of this case.

Importantly, the Eighth Circuit did not award benefits to the plaintiff. Rather, it remanded the case to the district court with instructions to remand to Prudential for an out-of-time appeal, expressing “no view” as to the merits of the plaintiff’s claim for benefits. [Brown v. J.B. Hunt Transport Services, Inc., 586 F.3d 1079 (8th Cir. 2009).]

Lawyer Holding Settlement Funds Must Pay Them To Insurer That Paid Medical Bills Following Auto Accident

In 2003, the dependent child of an employee of The Longaberger Company was involved in an automobile accident in which he was seriously injured. Longaberger’s self-funded plan covered the employee’s son, paying his medical bills in the sum of $113,668.31.

An attorney represented the employee and her son in civil tort actions against the drivers involved in the accident, reaching settlements with the insurance companies of the two drivers and receiving $35,000 from one carrier and $100,000 from the other carrier. The lawyer deposited the $135,000 from the two separate settlements into his Interest on Lawyer’s Trust Account (IOLTA). The attorney also sent a letter to Longaberger notifying it of the settlements, and stating that the employee’s son “would like to try to amicabl[y] satisfy his subrogation obligation to you. . . .”

The lawyer subsequently disbursed the majority of the settlement funds from his IOLTA, keeping $45,000 for himself as an attorney’s fee and disbursing (i) $1,750 to another attorney as compensation for his representation of the employee’s son in potential criminal proceedings, (ii) $86,082.18 to the employee’s son, and (iii) $1,000 to a third attorney in consideration for his representation of the employee’s son in bankruptcy proceedings. Accordingly, only $1,000 remained in the IOLTA.

Longaberger commenced litigation against the employee’s son and the lawyer, alleging causes of action for constructive trust, equitable lien, and unjust enrichment. Longaberger also sought a temporary restraining order and preliminary injunction to prevent the lawyer from disbursing, commingling, or transferring settlement funds that were in his IOLTA. The district court granted a “limited temporary restraining order” preventing the lawyer and the employee’s son from disbursing any further funds and requiring the preservation of “the identifiable settlement funds paid on claims arising out of” the automobile accident involving the employee’s son. The district court also enjoined the lawyer from dissipating the $1,000 he was still holding in his IOLTA.

After the parties filed cross motions for summary judgment, the district court granted Longaberger’s motion and held that Longaberger had “automatically acquired a valid lien on the tort recovery fund when the funds became identifiable.” Accordingly, the district court ruled in favor of Longaberger and against the lawyer in the amount of $37,889.44 and against the employee’s son in the amount of $75,778.87. The lawyer (but not the employee’s son) appealed, arguing that the district court had erred by awarding Longaberger equitable restitution against him. He maintained that because the majority of the settlement funds in his IOLTA had already been disbursed before Longaberger had initiated its suit, Longaberger was pursuing a claim for money damages rather than equitable relief against him, and such claims were outside the scope of ERISA’s permissible remedies.

The appellate court rejected the lawyer’s argument. It explained that the Longaberger plan contained “clear and unambiguous reimbursement provisions,” indicating that its “rights of reimbursement and subrogation are reserved whether the liability of a third party arises in tort, contract or otherwise. . . . [and] attach to any full or partial judgment, settlement or other recovery.” Moreover, the appellate court continued, the explicit terms of the plan stated that it “shall automatically have a first priority lien upon the proceeds of any recovery by you or your Dependent(s) from such party to the extent of any benefits provided to you or your Dependent(s) by the Plan.” In the appellate court’s view, the plan language thus identified a fund distinct from the beneficiary’s general assets (“the proceeds of any recovery by you or your Dependents(s)” from a third party), and identified a particular share of that fund to which the plan was entitled (“the extent of any benefits provided to you or your Dependent(s) by the Plan”). Accordingly, the appellate court decided, Longaberger’s equitable lien attached to the settlement fund when it was identified and received by the lawyer. It concluded that the fact that the lawyer “chose to disregard Longaberger’s first priority lien and commingle the settlement funds” did not defeat Longaberger’s claim for equitable relief, because Longaberger was free to follow the settlement funds into the lawyer’s hands – and that its lien took priority over any charging lien the lawyer may have had. The appellate court then affirmed the district court’s decision. [The Longaberger Co. v. Kolt, 586 F.3d 459 (6th Cir. 2009).]

Release Signed By Company And Its Former President To Resolve Their Issues Dooms His Claim To Plan’s Retirement Benefits

The plaintiff in this case served as the president of KDI Sylvan Pools, Inc., which created a Supplemental Retirement Plan designed to reward the plaintiff “for his loyal and continuous service” to the company “by providing supplemental retirement benefits.” As part of the plan, KDI created a trust and agreed to make periodic contributions to it. The plan stated that when the president reached the age of 65 and was no longer working for KDI, the company would “pay him an amount equal to the fair market value of the assets in the Trust as of such date.”

In October 1995, KDI terminated the plaintiff. The following month, the parties entered into an “Agreement and Release” designed to resolve all issues and disputes between them and sever their relationship amicably. In the agreement, KDI agreed to: (1) waive all claims, if any, it had against the plaintiff; (2) pay the plaintiff a lump sum of $33,333.33; (3) pay the plaintiff $3,846.15 per week for about nine months; and (4) pay the plaintiff’s health insurance expenses for a fixed period. In return, the plaintiff agreed to release KDI and its affiliated entities from any claims he may have had against them. The release specifically released KDI and its successors and affiliated entities from claims under ERISA.

Another section of the agreement stated that KDI would have no further obligation to make any additional contributions to the trust. The agreement also contained a provision advising the plaintiff to consult an attorney, stating that he had been given 21 days to consider the agreement, and giving him seven days to rescind the agreement after signing it.

After KDI had fully performed under the agreement, the plaintiff, who had not yet reached the age of 65, requested that KDI pay him the sums held in the trust. KDI’s attorney responded simply that KDI had “determined to continue administration of the Plan according to its terms.” Later, after the plaintiff turned 65, he again requested the sums held in the trust. The plaintiff’s request was denied, and he filed suit in the United States District Court for the Eastern District of Pennsylvania, alleging violations of ERISA and various common law claims.

KDI filed a motion to dismiss, which the district court granted. The district court found that the plaintiff had unambiguously released all his claims – including ERISA claims – against KDI, and the plaintiff appealed.

On appeal, the plaintiff argued that he had not relinquished his claims to the money held in the trust. In support of his position, he observed that the agreement released KDI from continuing to make payments into the trust and maintained that such a release would have been unnecessary if he no longer had a claim to the assets in the trust. He also pointed to KDI’s post-settlement letter stating that the plan would continue to be administered according to its terms, arguing that if, under the agreement, he had released his right to the assets in the trust and they had reverted back to KDI, then KDI would have said so in its letter. Instead, the plaintiff argued, KDI responded in a manner consistent with his claim that he had not released his right to the assets in the trust. Finally, plaintiff alleged that after the effective date of the agreement, KDI made an additional contribution to the trust of a sum that had accrued before the agreement was entered.  Plaintiff argued that KDI had no reason to make that contribution if he had released his interest in the trust and the assets in the trust had reverted to KDI. The defendants contended that the plaintiff had waived all his claims against them in the agreement, including claims brought under ERISA for proceeds from the plan.

The appellate court affirmed the district court’s decision, rejecting the plaintiff’s arguments, and finding that the plaintiff had “expressly released” KDI, the plan, and their affiliated entities, which included the trust and trustee, from all claims, including specifically ERISA claims. It ruled that the provision releasing KDI from its obligation to continue funding the trust was simply “the type of belt-and-suspenders provision that has become common in modern contracts” and did not change the “unambiguous nature of the release.” Likewise, it found, KDI’s post-agreement contribution to the trust was “a single event,” probably no more than a mistake but certainly not a course of performance. It did “not call into question the clearly expressed release.” Similarly, it decided, KDI’s letter stating that the plan would continue to be administered according to its terms did not imply that the plaintiff had any further interest in plan proceeds or any interest at all in the trust. [Calvitti v. Anthony & Sylvan Pools Corp., 2009 U.S. App. Lexis 24913 (3rd Cir. Nov. 13, 2009).]

Reprinted with permission from the March 2010 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.

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