Employer Law Report : Employment and Labor Relations Lawyer & Attorney : Porter Wright's Employer Law Report : Employment Litigation, Non-Compete, Trade Secrets

Concerning the DOL announcement of the Ohio action, DOL has sued the former president of a Twinsburg company, alleging that he was a fiduciary, and that he failed to timely forward participant elective deferrals to a 401(k) plan on a timely. Who is a fiduciary and what is timely? Therein lies the risk for other plan sponsors and administrators. The DOL regulations set forth “facts-and-circumstances” definitions for both of these determinations. Our experience is that DOL is being very aggressive in applying these vague standards in an effort to force “voluntary” compliance and corrective contributions from plan sponsors and administrators.

Under the regulations, participant contributions become plan assets “as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets” but in no event later the fifteenth business day of the following month for 401(k) plans (or 90 days for welfare plans). In our experience, DOL believes that, ideally, participant contributions would be deposited in trust the same day as the payroll withholding. Reasonable is somewhere between ideal and maximum, but where? The regulations recognize that circumstances can vary significantly from employer to employer, and common sense suggests that circumstances can vary from payroll period to payroll period. Our experience is that DOL is typically not so flexible or understanding during an investigation. 

What does all of this mean? DOL plays an important role in protecting retirement benefit assets, but you should know that it is not just criminals and embezzlers who need to be concerned about DOL enforcement. Every employer that sponsors or administers a benefit plan with participant contributions should be concerned about this grey area. If you are responsible for remitting participant contributions to ERISA plans, we encourage you to review your practices with legal counsel. If you are notified of a DOL investigation, legal counsel is especially important to help you defend against a DOL assertion that the contributions are untimely. Finally, it is much better to identify and correct any delinquent contributions through an internal review before DOL shows up at your door.

The Sixth Circuit restated the familiar rule from its Yard-Man line of cases that although there is no presumption that negotiated benefits vest, there is an “inference” that “it is unlikely that [welfare benefits] would be ‘left to the contingencies of future negotiations’” so long as there is either explicit contractual language or, in the event of ambiguity, extrinsic evidence of an intent to vest healthcare benefits. The Sixth Circuit found that the language in this case was sufficient to vest the healthcare benefits and make it unlawful for CNH to terminate the benefits. 

The Sixth Circuit next acknowledged that if a summary plan description contained unqualified reservation-of-rights language, to the effect that the employer had a unilateral right to terminate coverage, and if the union failed to grieve or object to such language, then such reservation-of-rights language “prevent[s] retiree benefits from vesting” even if the summary plan description was distributed after the effective date of the CBA. But in this case, while the summary plan description stated that the employer had the unilateral right to terminate benefits, it also stated that the CBA language controlled in the event of a conflict. Accordingly, the employer was prevented from making any unilateral changes in benefits.
 

However, because the CBA was silent as to changes in benefit offerings and because benefit levels and offerings for retirees had changed from CBA to CBA, the Sixth Circuit held that CNH was permitted to make reasonable changes to these benefits. The Sixth Circuit remanded to the district court for findings on the extent to which the CBA allows for reasonable modifications to the scope of healthcare benefits for retirees.
 

In Schreiber v. Philips Display Components Co., No. 07-2440 (6th Cir. Sept. 2, 2009), the Sixth Circuit held that language in the CBA providing that retirees “are entitled to purchase health insurance coverage on the same terms and at the same employee contribution levels as in effect for active employees” and “group insurance in force upon the signature date of this Collective Bargaining Agreement shall remain in full force and effect until September 28, 2003” was ambiguous as to whether the retiree benefits were limited to the duration of the CBA. Therefore, the Sixth Circuit ordered the court to review the plan document and other extrinsic evidence regarding the intent of the parties as to whether the durational limit applied to the retiree benefits, or just to the CBA itself.
 

These decisions provide a reminder to employers that agreeing to less than precise language about retiree health benefits in a collective bargaining agreement may result in obligations long into the future. In addition, these cases raise interesting questions about the extent to which carefully designed plan documents and summary plan descriptions may establish the right to amend and terminate retiree health benefits, notwithstanding ambiguous collective bargaining agreement provisions.

What CBA language is sufficient in the Sixth Circuit to establish that vesting of retiree medical benefits was not intended? No one knows. Since the seminal case in the early 1980’s, the Sixth Circuit has yet to find that a CBA did not vest retiree medical benefits. In UAW v. Yard-Man, 716 F.3d 1476 (6th Cir. 1983), applying the Labor Management Relations Act (LMRA) and disregarding the ERISA presumption that retiree medical benefits are not vested, the Sixth Circuit announced a rule by which retiree benefits are “status” benefits carrying an inference that they continue so long as the prerequisite status is maintained. When benefits accrue upon achievement of retiree status, there is an inference that the parties likely inferred those benefits to continue while the beneficiary remains a retiree. Extrinsic evidence is then reviewed if the CBA is silent about the duration of benefits, or ambiguous as to whether benefits are vested. With an inference of vesting, almost any CBA can be deemed to vest or to at least be ambiguous, thus shifting the burden to the employer to establish that it did not vest benefits. In Yolton v. El Paso Tenn. Pipeline Co., 435 F.3d 571 (6th Cir. 2006), the Sixth Circuit stated that the court “has never inferred an intent to vest benefits in the absence of either explicit contractual language or extrinsic evidence indicating such an intent.” Yet, in Yolton and subsequent cases, the Sixth Circuit has continued to find an intent to vest based on language that is not persuasive in other circuits. The Sixth Circuit did offer a glimmer of hope to employers in finding that the inference of vested lifetime retiree medical benefits did not extend to active employees who remained employed after a CBA expired, regardless of whether they were eligible to commence pension benefits. Winnett v. Caterpillar, Inc., 553 F.3d 1000 (6th Cir. 2009).
 

At issue in Tackett was a 2000 CBA that stated, “[e]mployees who retire on or after January 1, 1996 . . . [among other points-based eligibility requirements] . . . will receive a full Company contribution towards the cost of [medical] benefits.” (Emphasis in opinion.) The same paragraph of the CBA also outlined reduced employer contributions for retirees lacking the full number of points required for full retirement and stated, “[e]mployees will be required to pay the balance of the healthcare contribution.” At the time the CBA was signed, the employer did not require retiree contributions for retiree medical benefits. Several years later, however, the employer announced that it would require retirees to contribute to the cost of their medical benefits. Following the announcement, the retirees sued under Section 301 of the LMRA and Sections 502(a)(2)(B) and (a)(3) of ERISA.
 

The employer moved to dismiss the LMRA and ERISA claims, arguing that, among other things, the quoted CBA language did not establish a vested right to medical benefits. The district court agreed with the employer and dismissed.
 

The Sixth Circuit reversed. In so doing, the Court restated the familiar rule that medical benefits, as opposed to pension benefits, do not automatically vest upon retirement, but that employers and employees are free to vest them by agreement. The employer in Tackett argued that the “full Company contribution” language merely meant that the retiree would receive the full amount of the Company’s potential contribution to medical benefits, emphasizing that the employee was still required to pay the balance of the medical contributions for support. The retirees argued that the “full Company contribution” language suggests that the CBA conferred vested medical benefits. 

The Court agreed with the retirees that their complaint presented a plausible claim that the parties intended to vest medical benefits. The Court reasoned that it is unlikely that a union would agree to language that ensures its members a “full Company contribution,” if the employer could unilaterally change the level of contribution. Thus, the Court found the employer’s interpretation implausible because it would give the employer full discretion to set any contribution—including no contribution at all—rendering the promise wholly illusory.
 

The Court also agreed with the retirees that the language requiring employees to pay the balance of contributions can reasonably be interpreted to modify only the language regarding employees with less than the number of seniority points required for full retirement benefits. Finally, the Court applied another tenet of the presumption in favor of vesting, finding that because the CBA tied eligibility for medical benefits to the receipt of pension benefits, the parties must have intended the medical benefits to vest upon retirement. Consequently, the Court held that, for purposes of both LMRA Section 301 and ERISA Section 501(a)(1)(B), the CBA language suggests an intent to vest the medical benefits sufficient to withstand a motion to dismiss.

Finally, the Court affirmed the dismissal of the plaintiffs’ breach of fiduciary duties claims. The Court held that ERISA Section 502(a)(2)(B) provided full relief to the plaintiffs for their claims for benefits, making Section 502(a)(3)’s residual or “catchall” equitable relief unnecessary where, as here, the plaintiffs merely “repackaged” their benefits claims as breach of fiduciary duty claims. In affirming this dismissal, the Court only considered the plaintiffs’ complaint and declined to consider extrinsic evidence offered in support of their claims.
 

While we recognize that the negotiation of collective bargaining agreements is an art in and of itself, this decision should remind employers that the text of such an agreement can bind them to employee benefit obligations they may never have intended, for many years into the future. In the Sixth Circuit, at least, precise text appears to be required to specify that retiree medical benefits are not vested, to sever retiree medical benefit eligibility from pension benefit eligibility, to preserve the right to reduce or eliminate employer contributions, and to preserve the right to amend or terminate the retiree medical plan.
 

But the Tackett case is not all bad news for employers—the Court’s refusal to consider extrinsic evidence supporting the Section 502(a)(3) claim for benefits suggests that plaintiffs may actually have to specifically plead their claims rather than relying on affidavits and other “evidence” to avoid a motion to dismiss on scantly-pled allegations.

The U.S. Court of Appeals for the Sixth Circuit affirmed. The Sixth Circuit held that a plant closure is actionable under Section 510 only when interfering with employees’ attainment of ERISA benefits is a “motivating factor” in the decision, as opposed to a mere “incidental” factor. Further, it held that there is no requirement under ERISA to transfer or recall employees near their vesting date for ERISA benefits. The Court declined, however, to create a rule that ERISA claims can never arise from plant closure decisions. In contrast, the Court explained that employees asserting such claims must show that the proffered business justification underlying the decision was “incredible or phony,” a difficult showing to make. 

In its analysis, the Sixth Circuit found that the employees made a threshold showing that the employer was, at least in part, motivated in its plant closure decision by a desire to reduce labor costs, which necessarily included the cost of retirement benefits. The Court also found that the employer articulated a legitimate, non-discriminatory reason for the plant closure by asserting that the Van Dyke facility was only 10 percent utilized. As a counter to TRW’s evidence, the employees introduced evidence that the Van Dyke facility was poorly run and that cost cuts could have saved the facility from closure. The Court, however, found that this evidence was insufficient as a matter of law to show that the overcapacity justification was a pretext to prevent pension vesting. In so holding, the Court found it critical that although the employees argued that the employer shut down the Van Dyke facility with employees close to obtaining the 30-year service mark, most of the employees needed more than five additional years of service to reach that mark. Only seven were within two years of attaining the mark, and two of the seven later reached the 30-year mark after being recalled on the basis of seniority under the collective bargaining agreement. The Sixth Circuit then suggested that employees must show that the employer “targeted” certain benefits or rights for interference to avoid dismissal. 

Further, the Court found nothing in ERISA Section 510, the collective bargaining agreement, or the pension plan terms that would support the employees’ contention that the employer was required to recall many of them back or transfer them to the Mancini facility. Rather, the ultimate inquiry hinged on whether the plant closure and resulting discharges were lawful, which the Court determined they were.

This Sixth Circuit decision provides employers with a timely reminder during difficult economic times.  TRW reminds employers considering plant closings or other discharges that where pension costs are involved that it may be fairly easy for discharged employees to establish a presumption of ERISA discrimination. Hence, during the planning stages, it is essential that an employer consider whether it will be able to produce evidence supporting a legitimate, non-discriminatory reason for the discharges. 

Distressed primarily by the fee levels, the participants brought suit. The participants claimed that Deere breached its fiduciary duties by failing to disclose the revenue sharing arrangement. They further alleged that both Fidelity companies were “functional fiduciaries” of the plan. Finally, they claimed that Deere and the Fidelity companies breached fiduciary duties by selecting funds with excessively high fees. The participants’ claims were dismissed by the trial court for failure to state a claim, and the participants appealed.

Fidelity’s Alleged Status as a Fiduciary.

The Seventh Circuit affirmed the district court’s dismissal. The Court reasoned that merely discussing the offerings with Deere did not cause the Fidelity entities to have sufficient control over the selection of funds as to confer “functional” fiduciary status. The Court characterized Fidelity’s role as that of furnishing professional advice, much like a lawyer or accountant. The Court found that Fidelity merely “played a role” in the process; it did not have the “final authority” over investment fund offerings necessary to establish a fiduciary role.

Claims Against Deere for Failing to Disclose Revenue-Sharing and for Limiting Investment Offerings to Fidelity Funds.

The Court similarly rejected the fiduciary duty claims against Deere. Deere did not breach its fiduciary duty by failing to inform participants that Fidelity Trust received a portion of the fees collected by Fidelity Research. The Court found that ERISA did not require disclosure of revenue sharing. “While Deere may not have been behaving admirably by creating the impression that it was generously subsidizing its employees’ investments by paying something to Fidelity Trust when it was doing no such thing,” there was no allegation of a fraudulent statement of a dollar amount. The Court held that it was sufficient for Deere to disclose the total fees for the funds and direct the participants to the prospectuses for information about fund-level expenses. The Court explained that the participants submitted evidence that Deere believed that Fidelity Trust’s services were free, and the decision may have been different if Deere had intentionally misled its employees.

The Court also quickly dismissed the participants’ other claim —that Deere imprudently agreed to limit the investment options to Fidelity Research funds and therefore offered only investment options with excessive fees. The Court held that Deere provided for a wide range of expense ratios and levels of risk in the investment offerings, and that it was of no consequence that the majority of these investments were Fidelity fund investments. (While there are pros and cons to allowing individual brokerage accounts in a retirement plan, in this case, the existence of those alternatives was helpful to Deere because it allowed participants to choose investments with lower fees.) The Court noted, however, “nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund” and that “if particular participants los[e] money or d[o] not earn as much as they would have liked, that disappointing outcome [is] attributable to their individual choices” rather than the actions of the fiduciary.

The Court also assumed, without deciding, that the ERISA Section 404(c) safe harbor applied to the selection of investment options. This safe harbor allows plan fiduciaries who permit participants to direct their own investments to be shielded from fiduciary liability for the decisions of the participants. The Court saw no plausible argument in the complaint that Deere had failed to comply with the requirements of Section 404(c).

What This Decision Means for Employers.

While the decision in Hecker v. Deere & Co favors employers, this case spotlights a hot topic, 401(k) plan fees, that requires ongoing employer attention. Employers need to consider their fiduciary responsibilities with respect to retirement plan investments, and take steps to minimize litigation exposure.

An employer that is allowing participants to direct investments needs to carefully assess the investment options it is providing, and the disclosure of fees and other pertinent information. As discussed in Hecker, in response to complaints regarding fee disclosure, the Department of Labor has proposed extensive fee disclosure regulations. Final regulations were anticipated to be effective January 1, 2009, but are on hold under the new Presidential administration. Employers will need to comply with these new regulations when they are finalized and become effective, and may also be subject to additional legislation that has been proposed. Further, maintaining a program for compliance with the safe harbor provisions of ERISA Section 404(c) will help protect fiduciaries from liability for the participants’ own choices.

The Glenn court extended that analysis to an insurance company that administers a claim and also funds the benefit. In determining that a conflict of interest exists when an insurance company acts as plan administrator, the court explored several bases for that conflict. First, it found that an employer’s conflict of interest may extend to its selection of an insurance company to administer its plan. That is, it may choose to purchase insurance based on low rates as opposed to a company’s accurate claims processing. 

Second, the court noted that ERISA imposes “higher-than-marketplace quality standards” on insurers, which requires it to “discharge its duties in respect to discretionary claims processing solely in the interests of the participants and beneficiaries of the plan”; requires it to provide a full and fair review of claims denials; and subjects its individual claim decisions to judicial review.

Third, the court concluded that it is reasonable to treat employers and insurers alike in deciding whether a conflict exists because the district courts may still consider the differences between an employer and an insurance company when determining the significance or the severity of the conflict on each individual case. 

Addressing the second question, the court rejected claimants’ invitation to “bring about near universal review by judges de novo—i.e., without deference—of the lion’s share of ERISA plan claims denials” and to create “special burden-of-proof rules, or other special procedural or evidentiary rules, focused narrowly upon the evaluator/payer conflict.” The court reiterated its earlier decision in Firestone that a conflict of interest must “be weighed as a factor in determining whether there is an abuse of discretion.” It does not change the standard of review from one of deference to de novo. Rather, it means that “when judges review the lawfulness of benefit denials, they will often take account of several different considerations of which a conflict of interest is just one.” 

The court highlighted both trust and administrative law that frequently “ask judges to determine lawfulness by taking account of several different, often case-specific, factors, reaching a result by weighing all together,” and that in such instances, “any one factor will act as a tiebreaker when the other factors are closely balanced.” The court distinguished those “cases where an insurance company administrator has a history of biased claims administration” and from those “where the administrator has taken active steps to reduce potential bias and to promote accuracy, for example, by walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decision making irrespective of whom the inaccuracy benefits.” 

While the court only provided examples relating to insurance-company administrators, it did not limit its elucidation of Firestone’s conflict-of-interest factor test to those instances when the plan administrator is an insurance company. In other words, Glenn suggests that these considerations must be taken into account when district courts evaluate a conflict of interest whether the claims decision is made by an employer who pays the benefit or by an insurer who pays the benefit.

What is significant abut Glenn is what the Court did not do. It did not change the standard of review where the plan grants the administrator discretion; it did not create “special burden-of-proof rules, or other special procedural or evidentiary rules” for the claims review process where this conflict exists; and it did not find that the mere existence of this conflict was sufficient to throw open the doors to discovery in a benefit claim review. 

So what does Glenn mean for employers? First, employers should anticipate that plaintiffs in benefits litigation may argue for more discovery based on an alleged conflict, even though discovery was not at issue in Glenn and the Court did not suggest that established precedent for limited discovery should be displaced. Second, while Glenn involved an insured benefit, an employer that self-insures a benefit plan may also want to consider establishing and documenting “active steps to reduce potential bias and to promote accuracy” of claims decisions.