Employee Benefit Plan Review – From the Courts – May 2016

May 1, 2016 | Insurance Coverage

U.S. Supreme Court Holds That ERISA Pre-empts Vermont Law Requiring Health Plan Disclosures

The U.S. Supreme Court has ruled that a Vermont law that required disclosure to a Vermont state agency of payments relating to health care claims and other information relating to health care services was pre-empted by the Employee Retirement Income Security Act of 1974 (ERISA) as it applies to ERISA plans. Vermont had enacted its law – applicable by its terms to health plans established by employers and regulated by ERISA – in an effort to maintain an all-inclusive health care database.

Almost 20 other states had or were implementing similar databases, and now are not permitted to do so.

As the Court explained in its decision, Liberty Mutual Insurance Company maintained a health plan that provided benefits in all 50 states to over 80,000 employees, their families, and former employees. The plan was self-insured and self-funded, and it qualified as an “employee welfare benefit plan” under ERISA. Liberty Mutual, as the plan sponsor, was both a fiduciary and plan administrator.

The plan used Blue Cross Blue Shield of Massachusetts, Inc., as a third party administrator, managing the processing, review, and payment of claims for Liberty Mutual. In its contract with Blue Cross, Liberty Mutual agreed to “hold [Blue Cross] harmless for any charges, including legal fees, judgments, administrative expenses and benefit payment requirements, . . . arising from or in connection with [the plan] or due to [Liberty Mutual’s] failure to comply with any laws or regulations.”

In August 2011, Vermont issued a subpoena ordering Blue Cross to transmit to a state-appointed contractor all the files it possessed on member eligibility, medical claims, and pharmacy claims for Vermont members. The penalty for noncompliance, Vermont threatened, would be a fine of up to $2,000 a day and a suspension of Blue Cross’ authorization to operate in Vermont for as long as six months.

Liberty Mutual, concerned in part that the disclosure of confidential information regarding its members might violate its fiduciary duties under its plan, instructed Blue Cross not to comply. Liberty Mutual then filed an action in the U.S. District Court for the District of Vermont. It sought a declaration that ERISA pre-empted application of Vermont’s law and its governing regulation to the Liberty Mutual plan and an injunction forbidding Vermont from trying to acquire data about the Liberty Mutual plan or its members.

The district court granted summary judgment to Vermont. It concluded that Vermont’s reporting scheme was not pre-empted by ERISA. Although the Vermont law “may have some indirect effect on health benefit plans,” the district court reasoned that the effect was “so peripheral” that it could not be considered “an attempt to interfere with the administration or structure of a welfare benefit plan.”

The U.S. Court of Appeals for the Second Circuit reversed. It ruled that “one of ERISA’s core functions – reporting – [could not] be laden with burdens, subject to incompatible, multiple and variable demands, and freighted with risk of fines, breach of duty, and legal expense.”

The dispute reached the Supreme Court, which agreed with the Second Circuit.

The Supreme Court commenced its analysis by noting the “terse but comprehensive” ERISA pre-emption clause.  ERISA pre-empts “any and all state laws insofar as they may now or hereafter relate to any employee benefit plan.”  It decided that Vermont’s law was pre-empted by ERISA as a law that governed, or interfered with the uniformity of plan administration and that had an impermissible “connection with” ERISA plans. It reasoned that ERISA plans had to keep detailed records so compliance with ERISA’s reporting and disclosure requirements could be “verified, explained, or clarified, and checked for accuracy and completeness.” The records to be retained had to “include vouchers, worksheets, receipts, and applicable resolutions.” The Court observed that “reporting, disclosure, and recordkeeping” were “central to, and an essential part of, the uniform system of plan administration contemplated by ERISA.”

The Court noted that Vermont’s law governed plan reporting, disclosure, and, by necessary implication, recordkeeping. It said that these matters were “fundamental components of ERISA’s regulation of plan administration,” adding that differing, or even parallel, regulations from multiple jurisdictions “could create wasteful administrative costs and threaten to subject plans to wide-ranging liability.”

Accordingly, the Court decided that Vermont’s reporting regime intruded on “a central matter of plan administration,” interfered with “nationally uniform plan administration,” and therefore, that ERISA’s express pre-emption clause required invalidation of the Vermont statute as applied to ERISA plans.  [Gobeille v. Liberty Mutual Ins. Co., 2016 U.S. Lexis 1612 (March 1, 2016).]

Courts Uphold Plan Administrator’s Ruling That Payment Was Not Includable in Employee’s Average Monthly Earnings

In 2006, Theodore Ingram was employed by Union Pacific Railroad and living in Los Angeles. On July 1, 2006, he was hired to be the Superintendent of Transportation of the Terminal Railroad Association of St. Louis, and he moved to St. Louis.

Ingram retired from Terminal at the end of 2010 and became eligible for retirement benefits under Terminal’s Pension Plan for Nonschedule Employees (the Plan).

At the time Ingram retired, Section 5.1(a) of the Plan provided that retirement benefits were calculated based on “1.5% . . . of the Average Monthly Earnings of the Participant,” defined in Section 2.6 as the average monthly earnings in the five consecutive calendar years in which Ingram’s earnings were the highest. Section 2.14 of the Plan excluded taxable “reimbursements or other expense allowances and fringe benefits” from the definition of Average Monthly Earnings.

The Plan rejected Ingram’s contention that his Average Monthly Earnings should include the July 2006 “Sign On Bonus” he received of $142,737.20 (the July 2006 payment), concluding that the July 2006 payment was an excludable moving expense allowance. Including that amount in the calculation apparently would have increased Ingram’s Average Monthly Earnings by 17.2 percent.

Ingram subsequently sued the Plan under the Employee Retirement Income Security Act of 1974 (ERISA), alleging that it had erroneously determined his pension benefits by excluding the July 2006 payment from his pension-qualifying earnings.

The U.S. District Court for the Eastern District of Missouri granted summary judgment in favor of the Plan, concluding that under an abuse of discretion standard of review, the administrator’s decision was reasonable. Ingram appealed to the U.S. Court of Appeals for the Eighth Circuit.

The circuit court affirmed.

In its decision, it noted that the administrative record included statements and affidavits by the persons who had negotiated the July 2006 payment: Ingram and Terminal’s president, Billy Broyles. According to the circuit court, Ingram stated that he initially had objected to Terminal’s job offer to him on two grounds: that it was a substantial “cut in pay” and because of the absence of relocation or moving expenses. The circuit court said that Broyles refused to offer more salary, said Terminal had no relocation expense policy, and asked what Ingram needed to accept the job offer, and that Ingram replied that he needed $83,000 after taxes “to make the move financially feasible.” The circuit court said that Broyles then instructed his team to determine a reasonable amount “to compensate [Ingram] for the costs of moving.”

The Eighth Circuit found that the resulting payment of $142,737.20 ($85,000 after taxes) was “no doubt intended to address both issues raised by Ingram, the cut in pay and the costs of relocating from California.” The parties could have agreed to classify the payment, for retirement benefit purposes, as taxable salary, a taxable relocation expense allowance, or some combination of the two, the circuit court said. In the absence of any agreement, it continued, the administrator for the Plan had to make the discretionary decision, some years later, whether to classify the payment as taxable salary or a taxable expense allowance under Section 2.14.

Because either interpretation was reasonable, the circuit court found that substantial evidence supported the Plan administrator’s decision that the July 2006 payment was a taxable expense and not taxable salary. [Ingram v. Terminal Railroad Ass’n of St. Louis Pension Plan for Nonschedule Employees, 2016 U.S. App. Lexis 1454 (8th Cir. Jan. 29, 2016).]

ERISA Claims Were Filed About 30 Years Too Late, Circuit Court Rules

Dennis Bond joined Marriott International, Inc., in 1973 as an assistant sales manager at the Airport Marriott in St. Louis and eventually rose to become the general manager of the Marriott Pavilion in St. Louis until his resignation in 1992. From 1976, when he was promoted to director of sales and marketing of the City Line Avenue Marriott in Philadelphia, until he left Marriott, Bond occupied positions eligible for “retirement awards” under Marriott’s deferred stock incentive plan (the Plan), a tax-deferred program it created in 1970, prior to the enactment of the Employee Retirement and Income Security Act of 1974 (ERISA).

Bond received retirement awards from Marriott in 1976 and 1977 (as director of sales and marketing), in 1978 and 1979 (as regional director of marketing), and in 1988 and 1989 (as general manager of the St. Louis Marriott). In total, Bond was awarded 1,344 shares of Marriott stock through retirement awards. He voluntarily resigned from Marriott on October 19, 1991, two years before his awards would have fully vested. In 2006, Marriott paid Bond all of his vested shares.

Michael Steigman joined Marriott in 1973 as an assistant restaurant manager for the Capriccio Restaurant at the Los Angeles Marriott and eventually served as the general manager of the Marriott in Bloomington, Minnesota, and of the Miami Airport Marriott. Steigman received retirement awards from Marriott in 1974 and 1975, both prior to ERISA’s effective date. In 1978 and every year thereafter, Steigman elected to receive pre-retirement awards under the Plan. Marriott granted Steigman 693 shares of Marriott stock under the retirement award program between 1978 and 1989. Shortly after he left the company in 1991, Steigman signed a release and Marriott paid him all of his vested shares.

In January 2010, Bond and Steigman sued Marriott, alleging that the Plan was subject to ERISA and that the Plan violated ERISA’s vesting requirements. The parties moved for summary judgment on whether the claims were barred by the statute of limitations.

The U.S. District Court for the District of Maryland decided that the claims of Bond and Steigman were timely because Marriott had never formally denied any of their claims. In so ruling, the district court apparently adopted their position that Marriott’s answer to their federal complaint had triggered the commencement of the limitations period.

Marriott appealed to the U.S. Court of Appeals for the Fourth Circuit. The circuit court agreed with Marriott that the district court had erred in finding the claims brought by Bond and Steigman were timely.

In its decision, the Fourth Circuit explained that, except for breach of fiduciary duty claims, ERISA contained no specific statute of limitations and that, as a result, it had to look to state law to find the most analogous limitations period. It then said that Maryland’s three year statute of limitations for contract actions applied.

The circuit court examined when the three-year statute of limitations had begun to run in this case. It explained that, in most instances, an ERISA cause of action did not accrue until a claim for benefits had been made and formally denied. In this case, however, the circuit court said that a different test had to be used because the “formal denial” rule was “impractical to use.”

Instead, the circuit court declared, the “clear repudiation” rule should be used, which made the claims by Bond and Steigman untimely. The circuit court pointed out that a prospectus in 1978 “plainly stated” that retirement awards did not need to comply with ERISA’s vesting requirements. It added that the prospectus explained that, “inasmuch as the Plan is unfunded and is maintained by the Company primarily for the purpose of providing deferred compensation for a selected group of management or highly compensated employees,” the Plan was a top hat plan “exempt from the participation and vesting, funding and fiduciary responsibility provisions” of ERISA.

According to the circuit court, this language “clearly informed” Plan participants that the retirement awards were not subject to ERISA’s vesting requirements – contrary to the assertion by Bond and Steigman that they were. This language, moreover, was included in prospectuses distributed in 1980, 1986, and 1991.

Because Marriott had informed Bond and Steigman in 1978 that the Plan was exempt from ERISA’s vesting requirements, and because they had waited more than 30 years to file suit, their action was untimely under Maryland’s three-year statute of limitations for contract actions and Marriott was entitled to summary judgment in its favor, the Fourth Circuit concluded. [Bond v. Marriott Int’l, Inc., 2016 U.S. App. Lexis 1499 (4th Cir. Jan. 29, 2016).]

Failure to Exhaust Administrative Remedies Dooms Suit for Disability Insurance Benefits

Unum Group issued two disability insurance policies governed by the Employment Retirement Income Security Act of 1974 (ERISA) to James L. Moss, a urologist. Moss subsequently alleged that he suffered from osteoarthritis and that his condition prevented him from performing urological surgery. He filed a claim with Unum for total disability benefits under the policies.

Unum denied the claim on June 5, 2009. Unum’s denial letter notified Moss that if he wanted to appeal Unum’s denial of his claim, he was required to submit a written appeal within 180 days.

On June 30, 2009, Moss’s attorney called an Unum representative and verbally informed him that he disagreed with Unum’s decision. Then, on July 16, 2009, Moss’ attorney mailed copies of Moss’ paychecks to Unum. However, Moss did not file a formal written appeal.

On December 10, 2009, Unum sent Moss another letter reiterating its denial of his claim for benefits. The December 10, 2009 denial letter again informed Moss that he had 180 days to file a written administrative appeal.

Moss never filed an administrative appeal. Instead, Moss filed a lawsuit against Unum, in which he argued that attempting to exhaust his administrative remedies would be futile. The U.S. District Court for the Western District of Louisiana rejected Moss’ futility argument and dismissed the case without prejudice.

On April 16, 2013, after the district court dismissed his suit, Moss asked Unum to allow him to file an administrative appeal. Unum responded that it was unable to review the claim because Moss submitted his appeal request far beyond the 180-day deadline.

Moss filed a second suit against Unum on October 21, 2013. The district court ruled that Moss had failed to exhaust his administrative remedies by failing to file a timely administrative appeal and dismissed the case with prejudice.

Moss appealed the district court’s order dismissing his second suit against Unum to the U.S. Court of Appeals for the Fifth Circuit.

The circuit court affirmed the district court’s decision.

The circuit court explained that a claimant seeking benefits from an ERISA plan first must exhaust available administrative remedies under the plan before bringing suit to recover benefits. This included, the circuit court said, filing a timely administrative appeal. Because Moss had not filed a timely administrative appeal, the circuit court ruled the district court had properly dismissed his case.

The Fifth Circuit was not persuaded by Moss’ argument that he did not have to file an administrative appeal because Unum’s alleged bad faith in denying his claim for disability benefits constituted a “special circumstance” that excused him from that requirement. It said that if a claimant could avoid the exhaustion requirement simply by alleging that the plan administrator had denied the claim in bad faith, “then no claimant would ever be required to exhaust administrative remedies before filing suit.” [Moss v. Unum Group, 2016 U.S. App. Lexis 1789 (5th Cir. Feb. 3, 2016).]

Circuit Rejects Former Employees’ Bid for Lifetime Healthcare Benefits

Between 1983 and 2005, Moen Inc. and its predecessor corporation entered into a series of (usually) three-year collective bargaining agreements (CBAs) with the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America and its local affiliate. Each agreement offered two types of health-related benefits to individuals who retired from Moen’s plant in Elyria, Ohio: (1) hospitalization, surgical, and medical coverage, and (2) Medicare Part B premium reimbursements, which compensated retirees for the expenses of participating in the federal government’s medical insurance program.

Employees who retired between August 8, 1983 and March 1, 1996, along with their dependents, received “[c]ontinued hospitalization, surgical and medical coverage . . . without cost.” If the retirees were over age 65, the company also reimbursed the full cost of their Medicare Part B premiums, and it did the same for retirees’ spouses over age 65. Employees who retired on or after March 1, 1996, along with their dependents, received hospitalization, surgical, and medical coverage upon payment of a co-premium. “The co-premium amount for the retiree,” the CBAs provided, “will be frozen at the co-premium in effect at [the] time of retirement.” If over 65, these retirees (plus their over-65 spouses) received Medicare Part B premium reimbursements at specified rates.

The last CBA was terminated in 2008 when Moen shut down its Elyria operations. The union and its local affiliate entered into a “Closure Effects Agreement” with Moen, providing that healthcare coverage “shall continue” for retirees and their spouses “as indicated under the [final] Collective Bargaining Agreement.” The plant closed in December 2008.

After the plant closed, Moen continued to provide the same healthcare benefits to its retirees for a while. In March 2013, the company decreased the benefits available for retirees in response to “recent Medicare improvements” and “more effective supplemental benefit plans,” as well as the federal government’s imposition of an excise tax on high-cost “Cadillac plans” through the Patient Protection and Affordable Care Act.

After the changes, Medicare-eligible retirees no longer received healthcare coverage or Part B premium reimbursements, and the company shifted non-Medicare-eligible retirees to a healthcare plan that required higher out-of-pocket payments.

Seven retirees and the union sued Moen in response. The retirees argued that their healthcare benefits had “vested” under the CBAs and the plant closing agreement, prohibiting Moen from changing their coverage.

The U.S. District Court for the Northern District of Ohio certified a class of “all Moen healthcare benefits plan participants” who had retired from the Elyria plant and who were not covered by an earlier settlement agreement. The class included about 200 individuals.

The parties filed motions for summary judgment, and the district court granted the plaintiffs’ motion. It concluded that the CBAs and the plant closing agreement required Moen to offer the same healthcare benefits to the retirees for life. The court also granted $776,767.19 in attorneys’ fees and costs to the plaintiffs.

Moen appealed to the U.S. Court of Appeals for the Sixth Circuit, which reversed. In its decision, the Sixth Circuit ruled that the CBAs did not provide unalterable healthcare benefits for life to the Elyria retirees and their dependents.   In so ruling, the circuit court relied on the recent Supreme Court decision in M&G Polymers v. Tackett, 135 S.Ct. 926 (2015), to “orient” the appeal.  In that case, the Supreme Court instructed the circuits to interpret collective bargaining agreements “according to ordinary principles of contract law” and directed the circuits not to “place a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements.”

The circuit court pointed out that the key provisions of the 2005 CBA, similar in relevant part to the earlier CBAs, stated:

Continued hospitalization, surgical and medical coverage will be provided without cost to past pensioners and their dependents prior to March 1, 1996.

 . . .

Effective March 1, 1996, future retirees will be covered under the new medical plan. The co-premium amount for the retiree will be frozen at the co-premium in effect at time of retirement.

. . .

Future retirees as of [January 1999] will be reimbursed for Medicare Part B for employee and spouse at Medicare Part B $45.50/$91.00.

It then declared that “nothing in this or any of the other CBAs” said that Moen had “committed to provide unalterable healthcare benefits to retirees and their spouses for life.”

The circuit court conceded that Moen offered retirees healthcare benefits and that it “may have wished that business conditions and stable healthcare costs (hope springs eternal) would permit it to provide similar healthcare benefits to retirees throughout retirement.” However, the circuit court ruled, the parties had never signed a contract to that effect.

The circuit court also said that not only did the CBAs fail to say that Moen committed to provide unalterable healthcare benefits for life to retirees, but that everything the CBAs said about the subject “was contained in a three-year agreement” – which, the circuit court observed, was “well short of commitments for life.” According to the circuit court, contractual obligations ceased, in the ordinary course, “upon termination of the bargaining agreement.”

The Sixth Circuit also noted that each of the last three CBAs had stated that “continued” healthcare benefits to “past pensioners” – that is, former employees who had retired under prior CBAs – would continue. In the circuit court’s view, there would have been no need to “continue” such benefits if prior CBAs had created vested rights to such benefits.

Finally, the circuit court rejected the plaintiffs’ argument that the plant closing agreement guaranteed lifetime healthcare benefits by stating that benefits “shall continue.” The Sixth Circuit reasoned that this argument ignored the context of the relevant language, which stated that healthcare benefits “shall continue . . . as indicated under the [2005] Collective Bargaining Agreement.” (Emphasis added.) Simply put, the circuit court concluded, the 2005 CBA did not provide for vested benefits. [Gallo v. Moen Inc., 2016 U.S. App. Lexis 2118 (6th Cir. Feb. 8, 2016).]

Applying Five-Factor Test, Circuit Court Upholds Decision That Worker Was Independent Contractor

In 2009, John Ateeq and Mykhaylo Kalyn started Media Net, L.L.C., a contracting company that performed installation services for DirecTV. Media Net hired satellite technicians and installers to install satellite television systems and to perform repairs for DirecTV customers. Media Net classified these technicians and installers as independent contractors.

Steven Eberline alleged that he was an installer who had been improperly classified as an independent contractor and that he had received no overtime payments even though he was an employee who had worked more than 40 hours per week.

Eberline sued Media Net, asserting that he was entitled to recover lost wages under the federal Fair Labor Standards Act (FLSA). The U.S. District Court for the Southern District of Mississippi conditionally certified a collective class for discovery purposes. Following discovery, the parties moved for summary judgment. The district court found that genuine issues of material fact existed as to whether Eberline, and those similarly situated, were employees or independent contractors of Media Net.

The case proceeded to a jury trial. The jury ruled that Eberline failed to prove that he was an employee of Media Net.

Eberline appealed to the U.S. Court of Appeals for the Fifth Circuit, which affirmed.

In its decision, the circuit court explained that, in determining whether a worker qualified as an employee under the FLSA, it focused on whether, as a matter of economic reality, the worker was economically dependent on the alleged employer or, instead, was in business for himself or herself. The circuit court added that five factors guided this assessment:

  1. the degree of control exercised by the alleged employer;
  2. the extent of the relative investments of the worker and the alleged employer;
  3. the degree to which the worker’s opportunity for profit or loss was determined by the alleged employer;
  4. the skill and initiative required in performing the job; and
  5. the permanency of the relationship.

The Fifth Circuit ruled that a reasonable jury could conclude that the evidence on the first element weighed in favor of independent contractor status. It pointed out that there was testimony that installers were able to adjust their own work schedule based on customers’ needs; that there were no repercussions for late arrivals; that installers could determine how many days they worked, which days they worked, and what time slots they were available to work; and that they could refuse assigned installation jobs with no penalty.

The circuit court reached the same conclusion with respect to the second factor: the relative degree of investment. It pointed out that there was testimony that installers were required to provide their own vehicle and all of their installation tools and supplies and that Media Net owned only a couple of computers related to the installation business, rented its office space, and routed calls through two persons in the Ukraine. In the circuit court’s view, a rational jury could have concluded that Eberline’s individual investment outweighed that of Media Net.

The circuit court’s conclusion was the same with respect to the third factor: a worker’s opportunity for profit or loss. It pointed out that there was testimony that installers could determine the days and times that they were available to work; that there also was evidence that installation jobs were assigned based on an individual installer’s efficiency rate on previous jobs; and that installers could leave individual business cards and perform other services for customers at lower rates. A reasonable jury, the circuit court declared, could find that this factor weighed in favor of independent contractor status, too.

Next, it found that workers exhibited the type of skill and initiative typically indicative of independent contractor status, explaining that installers could receive more installation jobs, and thus more profits, based on their efficiency; that they could profit from performing custom work; that they could perform additional services for customers; and that they could control the days that they worked. Accordingly, it said, a reasonable jury could conclude that Eberline “exercise[d] significant initiative” as an installer, a finding weighing in favor of independent contractor status.

Finally, the circuit court looked at the “permanency of the working relationship” and noted that testimony indicated that the length of the relationship between Media Net and its installers was indefinite. As a result, it said, “no reasonable jury could have concluded that this factor favored independent contractor status.”

The Fifth Circuit concluded, however, that four factors favored independent contractor status and, accordingly, that the jury’s conclusion that Eberline was not Media Net’s employee was supported by legally sufficient evidence. [Eberline v. Media Net, L.L.C., 2016 U.S. App. Lexis 1030 (5th Cir. Jan. 21, 2016).]

Reprinted with permission from the May 2016 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.

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