The Employee Benefits practice group is pleased to present the Benefits Developments Newsletter for the month of May, 2017.
Three More Post-Tackett Retiree Healthcare Vesting Decisions
On April 20, 2017, the U.S. Court of Appeals for the Sixth Circuit issued opinions in connection with three lawsuits pertaining to the vesting of retiree health care benefits under collective bargaining agreements with the United Auto Workers. The cases are United Autoworkers v. Kelsey-Hayes Co. (“Kelsey-Hayes”); Reese v. CNH Indus. N.V. (“CNH Industrial); and Cole v. Meritor, Inc. (“Meritor”). The court ruled in favor of the retirees in CNH Industrial and Kelsey-Hayes, and against the retirees in Meritor. The Sixth Circuit’s analysis in these cases was guided by U.S. Supreme Court's 2015 decision in M&G Polymers USA, LLC v. Tackett (“Tackett”) and its own post-Tackett opinion in Gallo v. Moen. Meritor was the only unanimous decision.
In Kelsey-Hayes, the court held that the company could not unilaterally terminate or restructure the retirees’ health care benefits. Having ruled that the collective bargaining agreement did not unambiguously address the issue of vesting, the court looked to extrinsic evidence (i.e., evidence outside of the four corners of the collective bargaining agreement), which suggested that vesting for life was intended. The court found that representatives of Kelsey-Hayes regularly informed retiring employees, including in letters to employees, that retiree health coverage would be maintained “for life.”
Like Kelsey- Hayes, the collective bargaining agreement at issue in CNH Industrial was determined to be ambiguous. Because the agreement was found to be ambiguous, the court in CNH Industrial as in Kelsey-Hayes, looked to extrinsic evidence. In this case, the court found that the company’s practice of determining retiree health benefits costs taking into account each retiree’s life expectancy was evidence of an intent to continue benefits for life. The court also found that company representations repeatedly told employees that retirees would have healthcare coverage for their lifetimes.
In Meritor, the court ruled that the collective bargaining agreement unambiguously provided that retiree benefits would not be vested. The agreement in Meritor contained an unambiguous general durational clause which provided that the insurance agreement and program “shall continue in effect until the termination of the Collective Bargaining Agreement of which this is a part.” The court ruled that language in the agreement to the effect that continued coverage upon retirement or termination after age 65 “shall be continued” did not override the general durational clause.
Court Rules that Posthumous QDRO is Valid for Pre-existing Interest in Pension
Garcia-Tatup v. Bell (D. Mass)
The U.S. District Court for the District of Massachusetts recently ruled that a posthumous Qualified Domestic Relations Order (“QDRO”) can validly award pension benefits to an ex-spouse whose interest in the participant’s pension benefits was established by a divorce decree entered before the participant’s death. The case was brought by the ex-wife of deceased former New England Patriots player, Mosiula Tatupu after the NFL Players Retirement Plan (the “plan”) denied her claim for pension benefits. The couple married in 1978, the year Tatupu’s NFL career began. Tatupu retired in 1991 and the couple divorced in 1997. Tatupu later died in 2010, after which his ex-wife obtained a domestic relations order (“DRO”) and claimed benefits. In examining the plan’s denial of benefits, the court concluded that the plan’s reasoning was essentially that the DRO, by virtue of being obtained after Tatupu’s death, provided increased benefits or rights not otherwise available under the plan, and was therefore not a QDRO. Briefly, to be a QDRO, a DRO must (1) clearly specify certain facts (names, addresses, amount/percentage of benefits to be paid, number of payments/period to which the order applies, and each plan to which the order applies) and (2) not alter the amount or form of benefits. The court examined existing case law on posthumous QDROs, and found that an ex-spouse’s interest can be established through a divorce decree entered before a participant’s death that sufficiently creates a right to benefits and the ability to obtain an order meeting the requirements to be a QDRO. Conversely, a post-death amendment to a divorce decree to retroactively create an interest in benefits to allow for a QDRO would not be valid. However, a pre-death decree that creates an interest in pension benefits but does not meet all of the criteria to be a QDRO, still gives rise to a right to benefits that can be enforced through a later issued QDRO. The court could not reach a ruling in this case on the facts because it had not yet been provided a copy of the 1997 divorce decree. In any event, its analysis and discussion of posthumous QDROs and conclusion that QDROs obtained after a participant’s death do not impermissibly alter the amount or form of benefits under the plan if the ex-spouse’s interest in the benefits is established before the participant’s death, is worth taking note of. Garcia-Tatup v. Bell (D. Mass).
No Breach of Fiduciary Duty for Plan Committee and Stable Value Fund Manager
Barchock v. CVS Health Corp., D.R.I. 2017
In another recent example of qualified retirement plan participants suing for a breach of fiduciary duty involving the decision to invest plan assets in a particular investment fund, the federal district court in Rhode Island dismissed a lawsuit filed against an employer’s plan fiduciary committee (the “Committee”) and the investment manager of the retirement plan’s stable value fund (the “Fund Manager”). The plaintiffs in the case alleged that the Committee and the Fund Manager breached their ERISA fiduciary duties when the Fund Manager allegedly invested too much of the plan’s stable value fund assets in “ultra-short-term cash management funds that provided extremely low investment returns,” and the Committee failed to monitor and supervise the Fund Manager. In making the allegations with respect to the plan’s stable value fund (the “Plan Fund”), the plaintiffs relied primarily on comparisons in the investment characteristics of the Plan Fund versus other available stable value funds; however, the federal district court granted the defendants’ motion to dismiss the plaintiffs’ complaint. In reaching her decision in this case, the district court judge held that a hindsight comparison of the Plan Fund’s investment allocation with industry averages was not sufficient to show the Fund Manager failed to act with the level of prudence required by ERISA – it is the conduct of the fiduciary, and not merely the performance of the investment, that is determinative of prudence. The judge also held that the Plan Fund “was invested in conformance with its stated objective” of seeking to preserve capital while earning returns greater than money market funds provide. Barchock v. CVS Health Corp., D.R.I. 2017
IRS Provides Guidance Regarding Cash Balance Plans and Definitively Determinable Benefit Formulas
TE/GE Memorandum 04-0417-0014
The IRS has issued a memorandum to reviewers of determination letter requests for cash balance plans for and agents conducting audits of cash balance plans where the plan has not received a determination letter. The guidance deals with the issue of whether the cash balance plan formula meets the requirements of Treasury Reg. Section 1.41-1(b)(1)(i) which requires that a plan contain a definitely determinable benefit. The guidance is directed to cash balance plans where the compensation credit under the cash balance plan is not based on total annual compensation. For example, in situations where the pay credit is based on compensation for a particular month or is limited to certain compensation such as special bonuses or compensation in excess of a certain dollar threshold. The guidance finds that a formula that is based on partial compensation will be definitely determinable even if the employer has the inherent ability to determine that employee’s compensation outside of the terms of the plan. In other words, if the terms of the plan provide a formula by which the pay credit can be determined by looking at compensation information otherwise available, it is definitively determinable. If the plan terms give employer discretion to determine what compensation is, then the plan formula does not meet the requirement. In an example the IRS describes a formula that provides that the pay credit will be based on the compensation paid in the month of March will not meet the requirement if the employer can determine what constitutes “compensation” that is paid in the month of March. However, if the employer indicated that the formula was W-2 compensation paid in March, then it would be definitely determinable because the W-2 definition does not give the employer discretion. This is the case even though the employer would have the discretionary ability through the manner in which it pays compensation to either increase or decrease W-2 compensation payable within March.
Employers that maintain cash balance plans where the pay credit is determined on only a portion of compensation should review with their legal advisors whether the terms of the plan meet the definitely determinable requirement as described in the guidance. TE/GE Memorandum 04-0417-0014
Arbitration Clause In Collective Bargaining Agreement Regarding Pension Termination Enforceable
Prime Healthcare Services v. United Nurses and Allied Professionals, Local 5067 (1st Cir.)
Landmark Medical Center (“Landmark”) was a party to a collective bargaining agreement (“CBA”) with Allied Professionals, Local 5067 (“Union”). The CBA included a pension provision as follows:
The Employer and the Union agree that, if during the term of this Agreement the Employer sells more than fifty (50) percent of its assets, the Employer may terminate the Landmark Medical Center Retirement Plan for Union Employees in accordance with the requirements of ERISA. The Union acknowledges and agrees it is clearly and unmistakably waiving any and all rights it has or may have to bargain with the Employer over any aspect of the termination, provided such termination shall not reduce benefits accrued by any participant in the Landmark Medical Center Retirement Plan for Union Employees as of the date of termination.
The CBA also included a provision that any unresolved disputes concerning the interpretation, application or meaning of the CBA would be submitted to arbitration.
Landmark experienced financial difficulties and ceased making minimum funding contributions to the pension plan. As a result, the PBGC initiated an involuntary termination of the pension plan and ultimately took over the pension plan.
In addition, due to its financial woes, Landmark was placed under the oversight of a special master. After the PBGC involuntarily terminated the pension plan, Prime Healthcare Services (“Prime”) entered into an asset purchase agreement with the special master to purchase Landmark’s assets. Before entering into the asset purchase agreement, Prime entered into an agreement with the Union providing that Prime would recognize and continue to process any grievances or labor arbitrations pending at the time of closing. Prime and the Union also entered into a CBA that included the same grievance and arbitration provisions as the Landmark CBA.
Before the closing of the asset purchase by Prime, the Union filed a grievance, alleging that Landmark violated the CBA “when it changed the terms of the defined pension benefit provisions and ceased making contributions to employees’ pensions.” When Landmark denied the grievance, the Union filed for arbitration. In response, Prime sought an order staying the arbitration, asserting that ERISA preempted the CBA’s arbitration clause insofar as the pension provision.
The district court ruled in favor of Prime. On appeal, however, the First Circuit first held that the agreement between Prime and the Union clearly intended that the dispute be submitted to arbitration, rather than to the courts. The First Circuit explained that, notwithstanding parties’ contractual agreement, arbitration might be foreclosed if Congress did not intend for judicial remedies to be contractually waived. Although not asserted by Prime, the First Circuit noted that it was highly implausible that Congress intended for ERISA to preclude waiver of judicial remedies in the present circumstances.
In response to Prime’s assertion that only the PBGC could bring the claims brought by the Union and, therefore, the Union’s claims were preempted by ERISA, the First Circuit explained that the issue before it was not whether the Union could bring its claim, but who decides whether the Union may bring its claim – court or arbitrator. Prime Healthcare Services v. United Nurses and Allied Professionals, Local 5067 (1st Cir.).
