9th Circuit Clarifies Service Provider’s Fiduciary Duties When Negotiating Fees and When Withdrawing Fees from Plan Assets

The Ninth Circuit Court of Appeals has issued an opinion in Santomenno v. Transamerica LLC, clarifying the circumstances under which a retirement plan investment service provider  breaches (and does not breach) its fiduciary duties when negotiating its fees and when collecting the agreed fees from plan accounts.

The Case

The trial court in this case held that the plan investment service provider breached its fiduciary duties to plan beneficiaries first when negotiating with the employer about providing services to the plan and later when withdrawing predetermined fees from plan funds.

The 9th Circuit held that a plan administrator is not an ERISA fiduciary when negotiating its compensation with a prospective customer. The employer/plan sponsor doing the hiring is acting under a fiduciary duty when it negotiates these fees. Therefore, the prospective service provider did not breach its duties in negotiating for the fees it wanted to receive.

The Court also held that the service provider was not a fiduciary with respect to its receipt of revenue sharing payments from investment managers after it became a service provider to the Plan because the payments were fully disclosed before the provider agreements were signed and did not come from plan assets.

Finally, and most significantly, the Court held that the service provider also did not breach its fiduciary duty with respect to its withdrawal of the preset fees from plan funds. The Court concluded that when a service provider’s definitively calculable and nondiscretionary compensation is clearly set forth in a contract with the fiduciary-employer, collection of those fees out of plan funds in strict adherence to that contractual term is not a breach of the provider’s fiduciary duty. The withdrawal of its fees in such circumstances is a ministerial act that does not give rise to fiduciary liability.

The Take-Aways

This case highlights the importance of the fiduciary role played by the plan sponsor and administrator when hiring service providers to the Plan. Hiring and retention decisions are fiduciary acts on the part of the employer/plan sponsor, but are not fiduciary acts on the part of the service provider being hired.

In addition, while this case illustrates that it is not always a fiduciary act for a service provider to withdraw its fees directly from plan assets, that is not true in every case. For example, if the Plan sponsor or administrator disputed a charge before the service provider withdrew its fees, or if the fees withdrawn by the service provider were based on hours worked or some other non-ministerial measure of the service provided, the withdrawal may not be ministerial. This case therefore does not give service providers free reign to withdraw fees from plan assets without consideration of their fiduciary duties.

Santomenno v. Transamerica LLC

Supreme Court Rejects “Yard-Man” Inference of Vesting of Retiree Health Benefits

The United States Supreme Court has ruled in the case of CNH Indus. N.V. v. Reese, that courts cannot simply infer lifetime vesting of retiree health benefits from a collective bargaining agreement. Instead, lifetime vesting must be expressly written into the agreement.

The Case

The employer in this case provided health benefits to certain employees who were eligible for benefits under the employer’s pension plan, in accordance with a collective bargaining agreement (CBA). When the CBA expired in 2004, some retirees sued, arguing that their health benefits were vested for life.

While the lawsuit was pending, the Supreme Court decided M&G Polymers USA, LLC v. Tackett, which held that courts must interpret CBAs according to “ordinary principles of contract law.” The trial court in this case then ruled for the retirees, and the Sixth Circuit affirmed, relying on presumptions the 6th Circuit originally established in UAW v. Yard-Man, Inc., even though the Supreme Court had explicitly rejected those presumptions in Tackett. The Sixth Circuit’s decision turned on its holding that the CBA’s 2004 expiration date was inconclusive as to whether the retiree health benefits terminated in 2004 or were vested for life because (1) the CBA specified that certain benefits, such as life insurance, ceased at a time different from other provisions, and (2) the CBA tied health care benefits to pension eligibility. The court acknowledged that Tackett precluded it from inferring vesting based on these plan provisions, but concluded that the provisions nevertheless rendered the CBA ambiguous, allowing consideration of extrinsic evidence that supported lifetime vesting.

The Supreme Court reversed, stating that “inferences applied in Yard-Man and its progeny” do not represent ordinary principles of contract law and therefore cannot be used to generate a reasonable inference that then creates ambiguity. The Court acknowledged that, when a contract is ambiguous, courts can consult extrinsic evidence to determine the parties’ intentions—but a contract is not ambiguous unless it is susceptible to at least two reasonable but conflicting meanings. In this case, the Supreme Court held that the CBA contained a durational clause that applied to all benefits, with no exception for retiree health benefits, and that therefore there is only one reasonable interpretation of the CBA – that it does not vest retiree health benefits for life.

Take-Aways

This case is re-assuring for employers offering retiree medical plans – that they are less at risk of inadvertently creating a vested lifetime retiree health benefit than if the Plantiffs had prevailed in this case. However, the long standing advice still stands: Employers should be explicit in their retiree health plan documents and SPDs that the benefit is not vested and that the employer retains full and unfettered discretion to amend or terminate the plan and the benefits at any time.

Supreme Court Rules ERISA-Exempt “Church Plan” Includes Plan Maintained by Church-Affilaited Organizations (like hospitals and schools)

The United States Supreme Court has held, in Advocate Health Care Network v Stapleton that a benefit plan maintained by a church-affiliated organization, whose principal purpose is to fund or administer a benefits plan for the employees of either a church or a church-affiliated nonprofit (a “principal purpose organization”) is a church plan under ERISA Section 3(33), regardless of who established the Plan. This is in accordance with the long-standing regulatory position adopted by the IRS, Department of Labor and PBGC.

Background on ERISA’s Church Plan Exception

ERISA generally obligates private employers offering pension plans to adhere to an array of rules designed to ensure plan solvency and protect plan participants. “Church plans” however, are exempt from those regulations.

From the beginning, ERISA  defined a “church plan” as “a plan established and maintained . . . for its employees . . . by a church.”  Congress then amended the statute to expand that definition in two ways:

  • “A plan established and maintained for its employees . . . by a church . . . includes a plan maintained by an organization . . . the principal purpose . . . of which is the administration or funding of [such] plan . . . for the employees of a church . . . , if such organization is controlled by or associated with a church.” (The opinion refers to these organizations  as “principal-purpose organizations.”)
  • An “employee of a church” includes an employee of a church-affiliated organization.

The Case

The Petitioners in Advocate Health Care Network v Stapleton were three church-affiliated nonprofits that run hospitals and other healthcare facilities, and offer their employees defined-benefit pension plans. Those plans were established by the hospitals themselves, and are managed by internal employee-benefits committees. Respondents, current and former hospital employees, filed class actions alleging that the hospitals’ pension plans do not fall within ERISA’s church plan exemption because they were not established by a church. The Supreme Court held for the hospitals, ruling that a plan maintained by a principal-purpose organization qualifies as a “church plan,” regardless of who established it. 

The Court reasoned that the term “church plan” initially “mean[t]” only “a plan established and maintained . . . by a church.” But the amendment provides that the original definitional phrase will now “include” another—“a plan maintained by [a principal-purpose] organization.” That use of the word “include” is not literal, but tells readers that a different type of plan should receive the same treatment (i.e., an exemption) as the type described in the old definition. In other words, because Congress deemed the category of plans “established and maintained by a church” to “include” plans “maintained by” principal purpose organizations, those plans—and all those plans—are exempt from ERISA’s requirements.

What Comes Next?

Advocate Health Care Network v Stapleton does not rule on what is or is not a “principle purpose organization”, and that is where we can expect future litigation to focus. The key question will be whether such organization is “controlled by or associated with a church.” Therefore, church-affiliated organizations, such as hospitals, schools, and social welfare agencies, that are relying on ERISA’s church plan exception ought to review their documentation and evidence of either control by or affiliation with a church.

Be Careful Before Denying COBRA to Employee Terminated for Gross Misconduct

The Ninth Circuit Court of Appeals has rendered a decision in Mayes v. WinCo Holdings that reminds employers to be very cautious about denying COBRA coverage based on the gross misconduct exception.

Facts
Defendant grocery store fired the plaintiff, who supervised employees on the night-shift freight crew, for taking a stale cake from the store bakery to share with fellow employees and telling a loss prevention investigator that management had given her permission to do so. The employer deemed these actions theft and dishonesty, and determined that the plaintiff’s behavior rose to the level of gross misconduct under the store’s personnel policies. Therefore, the employer fired the employee and did not offer COBRA coverage to her or her dependents. Plaintiff sued asserting gender discrimination claims under Title VII, a claim under COBRA, and wage claims.

The Law
Under COBRA, an employer does not have to offer COBRA coverage to an employee and their covered dependents if the employee is terminated for “gross misconduct.” Unfortunately, the COBRA statute does not define “gross misconduct,” and court decisions do not provide clear guidance on what that term means.

The Case
The trial court in this case initially ruled in favor of the employer, finding that theft and dishonesty can constitute gross misconduct under COBRA, regardless of the amount involved. The Ninth Circuit reversed, finding that there was sufficient evidence of the employer’s discrimination to allow the discrimination case to go to trial, and reasoning that if the employer fired the plaintiff for discriminatory reasons then that could not constitute termination for gross misconduct. Therefore, if the termination was discriminatory the employee and her dependents would be entitled to COBRA benefits and the employee could prevail on her COBRA claims.

Lessons for Employers
An employer terminating someone for violating company policy (such as theft), may be reluctant to offer them COBRA coverage, particularly where the employer’s plan is self-insured and, therefore, the employer sees the potential for large medical claims. However, denying COBRA coverage based on the gross misconduct exception is risky for a number of reasons.

First, if the employer is ultimately found to have denied COBRA incorrectly it is exposed to penalties for failing to offer coverage, and the employee and their dependents can get COBRA coverage retroactive all the way back to the initial termination of coverage. That scenario could happen in the Mayes case.

Second, if a terminated employee foresees having large medical claims, they will have a bigger incentive to sue to secure coverage. If they do file suit for COBRA coverage, they will invariably include other claims attacking the termination decision. Therefore, denying COBRA coverage increases the likelihood of a costly lawsuit challenging the termination decision.

Third, defending a case that includes a COBRA claim is also more difficult than a straight wrongful termination claim. It is easier for a judge to grant an employer summary judgment on a wrongful termination claim, which only affects the employee plaintiff, than it is to uphold a denial of COBRA, which directly affects the employee and her children, who are innocent bystanders. In most cases, therefore, an employer is better off defending a wrongful termination suit alone, and not also defending a claim that the employer failed to offer COBRA coverage.

For these reasons, in most cases discretion is the better part of valor and employers should not invoke the gross misconduct exception.

Some employers may be concerned that offering COBRA coverage after terminating someone for gross misconduct may undermine their defense of the termination decision (on the theory that offering COBRA means the termination must not have been for gross misconduct). This can be mitigated by including a self-serving cover letter on the COBRA offer indicating that while the reasons for termination most likely amount to gross misconduct, the employer is voluntarily choosing to offer the employee and their dependents COBRA coverage.

A Retirement Plan Established by a Church-Affiliated Organization is not an ERISA-Exempt Church Plan (at least in the 9th, 3rd and 7th Circuits)

The 9th Circuit Court of Appeals recently held that, to qualify for the church plan exception to the requirements of the Employee Retirement Income Security Act (ERISA), a church plan (i) must be established by a church or by a convention or association of churches and (ii) must be maintained either by a church or by a church-controlled or church-affiliated organization whose principal purpose or function is to provide benefits to church employees.

The specific holding in in Rollins v. Dignity Health, 2016 WL 3997259 (9th Cir. 2016) was that Dignity Health’s pension plan was subject to the requirements of ERISA and did not qualify for ERISA’s church-plan exemption because it was not originally established by a church, even if it was maintained by a “principal purpose” organization. The 3rd and 7th circuits have reached the same conclusion when confronted with this question. See Kaplan v. Saint Peter’s Healthcare Sys., 810 F.3d 175, 180–81 (3d Cir. 2015); Stapleton v. Advocate Health Care Network, 817 F.3d 517, 523–27 (7th Cir. 2016).

Background

  • 29 U.S.C. § 1003(b)(2) provides that a church plan is exempt from ERISA.
  • 29 U.S.C. § 1002(33)(A) provides that in order to qualify for the church-plan exemption, a plan must be both established and maintained by a church.
  • 29 U.S.C. § 1002(33)(C)(i) provides that a plan established and maintained by a church “includes” a plan maintained by a principal-purpose organization.

The 9th Circuit reasoned that “there are two possible readings of subparagraph (C)(i). First, the subparagraph can be read to mean that a plan need only be maintained by a principal-purpose organization to qualify for the church-plan exemption. Under this reading, a plan maintained by a principal-purpose organization qualifies for the church-plan exemption even if it was established by an organization other than a church. Second, the subparagraph can be read to mean merely that maintenance by a principal purpose organization is the equivalent, for purposes of the exemption, of maintenance by a church. Under this reading, the exemption continues to require that the plan be established by a church.”

The 9th Circuit then held that “the more natural reading of subparagraph (C)(i) is that the phrase preceded by the word “includes” serves only to broaden the definition of organizations that may maintain a church plan. The phrase does not eliminate the requirement that a church plan must be established by a church.”

More

Rollins v. Dignity Health, 2016 WL 3997259 (9th Cir. 2016)

Kaplan v. Saint Peter’s Healthcare Sys., 810 F.3d 175, 180–81 (3d Cir. 2015)

Stapleton v. Advocate Health Care Network, 817 F.3d 517, 523–27 (7th Cir. 2016)

Plan Administrator Bears Burden to Produce Key Information Regarding Claimant’s Service and Benefits Eligibility

The 9th Circuit Court of Appeals ruled on April 21, 2016 that where a claimant has made a prima facie case that he is entitled to a pension benefit, but lacks access to the key information about corporate structure, or hours worked, needed to substantiate his claim, and the defendant controls this information, the burden shifts to the defendant to produce this information. Estate of Bruce H. Barton v. ADT Security Services Pension Plan (9th Cir., 2016).

The Plan Administrator could not place the burden of producing records establishing which entities participated in the pension plan between 1967 and 1986, and the claimant’s service record, on the claimant where the Plan Administrator had no records of its own.

The Plan Administrator originally denied the claim on the basis of an absence of records establishing eligibility for plan participation, actual participation, or accrual of plan benefits.  This was wrong where the Committee rather than the claimant would likely be in possession of such records.

The lesson for Plan Administrators: keep plan documents,service records and contemporary records establishing benefit accruals forever -there is no practical document retention period for these documents.

The lesson for claimants: don’t be deterred from asserting a claim if you have enough evidence to state a prima facie case and the definitive documents or information ought to be in the Plan Administrator’s possession.

Estate of Bruce H. Barton v. ADT Security Services Pension Plan (9th Cir., 2016)

Fiduciaries Ultimately Prevail in Tibble v. Edison

On remand from the United States Supreme Court, which held in May 2015 that ERISA imposes on retirement plan fiduciaries an ongoing duty to monitor investments, even absent a change in circumstances, the 9th Circuit Court of Appeals recently affirmed the district court’s original judgment in favor of the employer and its benefits plan administrator on claims of breach of fiduciary duty in the selection and retention of certain mutual funds for a benefit plan governed by ERISA.

The court of appeals had previously affirmed the district court’s holding that the plan beneficiaries’ claims regarding the selection of mutual funds in 1999 were time-barred. The Supreme Court vacated the court of appeals’ decision, observing that federal law imposes on fiduciaries an ongoing duty to monitor investments even absent a change in circumstances.

On remand, the panel held that the beneficiaries forfeited such ongoing-duty-to-monitor argument by failing to raise it either before the district court or in their initial appeal. While the fiduciaries ultimately prevailed in this case, the lesson for fiduciaries remains clear: You have an ongoing duty to monitor the investment options in your retirement plans.

Tibble v. Edison International (9th Cir., 2016)

Full Text of the Supreme Court Decision in Tibble v. Edison International (2015)

7th Circuit Holds Only a Church Can Establish an ERISA-Exempt Church Plan

On March 17, 2016 the 7th Circuit Court of Appeals joined the 3rd Circuit in holding that a network of hospitals and health care locations that is affiliated with a church cannot establish an ERISA-exempt church plan. Stapleton v. Advocate Health Care Network (7th Cir. 2016).

In Stapleton, several current and former employees of the church-affiliated hospital claimed that the organization failed to comply with ERISA’s vesting, reporting and disclosure, funding, trust, and fiduciary rules. The 7th Circuit Curt of Appeals agreed.

This issue is bubbling up all over the country. District Court cases have decided the question both ways. There is a case pending before the Ninth Circuit that held at the District Curt level that an affiliate cannot establish a church plan. Rollins v. Dignity Health, 19 F. Supp. 3d 909, 917 (N.D. Cal. 2013), appeal filed, No. 15-15351 (9th Cir. Feb. 26, 2016). The employer in Rollins faces up to $1.2 billion in funding obligations if it loses the case.

District court cases in several other states have help the other way – that affiliated organizations can establish a church plan.  The only two Court of Appeals cases to decide the question have ruled that the affiliated organization cannot establish a church plan. See Stapleton and Kaplan v. St. Peter’s Healthcare Sys., 810 F.3d 175 (3d Cir. 2015).

If you an organization affiliated with a church that is relying on the church plan exemption from ERISA’s vesting, reporting, disclosure, funding, trust, and fiduciary rules, you ought to review that decision with ERISA counsel.

Plan Imposed Limitations Period Must be in Benefit Denial Notice

The First Circuit recently ruled that it will not enforce a plan-imposed deadline for filing a lawsuit because the deadline was not set forth in the plan’s benefit denial notices. Santana-Diaz v. Metropolitan Life Ins. Co. (1st Cir. 2016).  This case reiterates the importance of including any plan specific limitations period for filing suit in the Summary Plan Description and in all benefit denial notices and appeal determinations.

Supreme Court Rules ERISA Equitable Relief Can’t Reach Nontraceable Settlement Proceeds

Employee benefits plans regulated by the Employee Retirement Income Security Act of 1974 (ERISA or Act) often contain subrogation clauses requiring a plan participant to reimburse the plan for medical expenses if the participant later recovers money from a third party for his injuries.

On January 20, 2016, the US Supreme Court held, in MONTANILE v. BOARD OF TRUSTEES OF THE NATIONAL ELEVATOR INDUSTRY HEALTH BENEFIT PLAN that if an ERISA-plan participant wholly dissipates a third-party settlement on nontraceable items, the plan fiduciary may not rely on a subrogation provision in their health plan to bring suit under ERSA §502(a)(3) to attach the participant’s separate assets.  Plan fiduciaries are limited by §502(a)(3) to filing suits “to obtain . . . equitable relief.” The Court previously held that whether the relief requested “is legal or equitable depends on [1] the basis for [the plaintiff’s] claim and [2] the nature of the underlying remedies sought.” Sereboff v. Mid Atlantic Medical Services, Inc., 547 U. S. 356, 363.  In Montanile, the Court held that the Plan was not seeking equitable relief because it sought to recover against the defendant’s general assets, not specifically traceable assets. The lesson for Plan fiduciaries wishing to assert subrogation claims is to (1) put participants on specific notice of the subrogation claim as soon as the Plan learns of a significant incident of a type that might give rise to a subrogation claim (such as an accident); and (2) pursue the claim diligently before the participant receives settlement proceeds.  We routinely include in our welfare wrap plan documents a vigorous subrogation reservation to protect Plans’ subrogation rights to the fullest extent practical.

More on the Montanile case…

Montanile was seriously injured by a drunk driver, and his ERISA plan paid more than $120,000 for his medical expenses. Montanile later sued the drunk driver, obtaining a 500,000 settlement. Pursuant to the plan’s subrogation clause, the plan administrator (the Board of Trustees of the National Elevator Industry Health Benefit Plan, or Board), sought reimbursement from the settlement. Montanile’s attorney refused that request and subsequently informed the Board that the fund would be transferred from a client trust account to Montanile unless the Board objected. The Board did not respond, and Montanile received the settlement.

Six months later, the Board sued Montanile in Federal District Court under §502(a)(3) of ERISA, which authorizes plan fiduciaries to file suit “to obtain . . . appropriate equitable relief . . . to enforce . . . the terms of the plan.” 29 U. S. C. §1132(a)(3). The Board sought an equitable lien on any settlement funds or property in Montanile’s possession and an order enjoining Montanile from dissipating any such funds. Montanile argued that because he had already spent almost all of the settlement, no identifiable fund existed against which to enforce the lien. The District Court rejected Montanile’s argument, and the Eleventh Circuit affirmed, holding that even if Montanile had completely dissipated the fund, the plan was entitled to reimbursement from Montanile’s general assets. The Supreme Cour reversed for the reasons explained above.

icon Supreme Court Decision in Montanile

icon Supreme Court Decision in Sereboff