Qualified Plans: House Committee Approves Bill on Disclosure of 401(k) Plan Fees

Susan Relland and Patricia Szoeke

On April 16th, the House Committee on Education and Labor approved the 401(k) Fair Disclosure for Retirement Security Act (H.R. 3185). In addition to impacting the investment options available under 401(k)-style plans, the bill increases the disclosures that plan administrators and service providers are required to make. Specifically, the bill provides for the following:

Plan Administrator Requirements

As passed, the bill requires plan administrators to disclose all fees assessed against participant accounts for services to the plan, with such fees broken down into the following four categories: administrative fees, investment management fees, transaction fees, and other fees. In addition, the bill requires plans administrators to (i) identify the name, risk level, and investment objective of each investment option available; (ii) list the historical returns for and fees assessed on each investment option; and (iii) specify where additional plan and investment information may be obtained.

Service Provider Requirements

The bill requires that service providers (i) disclose to the plan sponsor all fess assessed to the plan or its participants for services to the plan, with such fees broken down into the same four categories identified above and (ii) outline to the plan sponsor any financial relationships or potential conflicts of interest.

Investment Options Under a 401(k)-Style Plan

The bill requires that 401(k)-style plans include at least one index fund among the plan’s investment line-up if the plan administrator wants to take advantage of the liability protections in the fiduciary safe harbor.

Currently, it is unclear whether the House Ways and Means Committee, which shares jurisdiction over issues impacting pension plans, will consider the bill before full consideration by the entire U.S. House of Representatives. As for the Senate, although a few Senators have indicated interest in addressing 401(k) fee disclosures, no action has yet been taken.

The Department of Labor is also currently in the middle of a regulatory project to promote additional transparency in fees and potential conflicts of interest. In December 2007, the DOL issued proposed regulations requiring more comprehensive written disclosures by all ERISA plan service providers. (The legislation is limited to retirement plans.) Later this year, DOL expects to finalize those regulations and complete a regulatory project governing plan disclosures to participants. Presumably the DOL’s efforts would need to be coordinated with any fee disclosure legislation that is enacted.

Health & Welfare: 2009 Limits for HSA Deductibles, Out-of-Pocket Amounts, and Contributions

Susan Relland and Patricia Szoeke

Although the Department of the Treasury has not yet released the 2009 COLA-adjusted limits for HSAs (such release is required to be made by June 2008), the consumer price index (CPI) data released last month provides one means by which the anticipated 2009 limits on HSA minimum deductible, maximum out-of-pocket, and the single and family contribution amounts can be calculated. Thus, based on the CPI data for March 2008, the anticipated 2009 limits are as follows:

Exec Comp: Executives of a Bankrupt Company Denied Payment of Deferred Compensation From a Company That Was Not Their Last Employer

Gary Quintiere and Patricia Szoeke

A recent 8th Circuit case illustrates the need for clearly drafted plan documents and carefully worded plan summaries, particularly in the context of corporate restructurings. In such circumstances, if the intent is to make a single entity within the corporate family the sole obligor for payment, it is essential that this intent be provided for explicitly.

Last year the 8th Circuit Court of Appeals affirmed a lower federal court decision holding that executives of a bankrupt company cannot seek payment of their deferred compensation from an energy company that was the parent of a subsidiary that merged with their employer prior to its bankruptcy because the plan at issue provided that the benefits were to be paid by the executive’s last employer. (Bender v. Xcel Energy, Inc., 8th Cir., No. 06-2634, 10/29/07. )

The five executives who filed the lawsuit worked for NRG, which was a wholly-owned subsidiary of North States Power Co. (NSP) prior to June 2000, at which time it was spun off in an initial public offering (IPO). Two months following the IPO, NSP merged with another company to form Xcel Energy, Inc. (Xcel). In response to NRG’s experiencing financial difficulties following its IPO, Xcel offered to repurchase NRG’s publicly held stock, resulting in the conversion of NRG stock to Xcel stock. In 2002, following NRG’s subsequent merger with a wholly-owned subsidiary of Xcel, the five executives’ employment with NRG was terminated. About a year later, NRG filed for voluntary bankruptcy.

NRG had sponsored a deferred compensation plan (Plan), in which the five executives had participated during their employment with NRG. The Plan, which was first established by NSP in 1980 and had been restated in 1992 and again in 2002 upon formation of Xcel, had always provided that participants look only to “the Participating Employer which last employed” them for payment. After NRG filed for voluntary bankruptcy, each of the five executives requested payment of their deferred compensation from Xcel, which denied these requests on the basis that the 1992 and 2002 Plan restatements provided that only NRG (which was in bankruptcy) could pay amounts under the Plan. However, the executives claimed that a statement (the exact nature of which is uncertain) issued in 2000 that did not contain the requirement that Plan participants could look to only their last employer for payment of benefits was a restatement of the 1992 Plan and therefore effectively had eliminated the “last employer” requirement under the Plan. Upon rejection of their claims for benefits, the executives filed a lawsuit against Xcel. In May 2006, a U.S. District Court ruled that the Plan did not abuse its discretion in denying the executives’ claims, stating that the Plan restatements had made clear that only the last employer (in this case, NRG) would pay Plan benefits. In so deciding, the court held that the 2000 statement was a stand-alone plan that did not cover the plaintiffs, who were not employed by NSP or Xcel during the relevant period.

The 8th Circuit agreed with the rationale of the lower court’s ruling. In finding that the 2000 statement was not an amendment to the Plan, the 8th Circuit ruled that the 2000 statement was a separate, stand-alone plan established for the benefit of certain NSP executives. The court relied on documentary evidence that two separate deferred compensation plans were in fact merged in 2002 and that the 2000 statement for the NSP executives therefore did not apply to the five NRG executives who were seeking payment from Xcel. Because the 2000 statement did not apply to the five executives, they were bound by the language in the 1992 and 2002 Plan restatements, which included the “last employer” requirement.

Payroll Tax & Fringe Benefits: Volunteer Chairman of Nonprofit Hospital Board Liable for Unpaid Withholding Taxes

Michael Lloyd

One of the most painful lessons to those in key business positions, including volunteer board members for nonprofits, is that the failure to pay over withheld payroll taxes to the government can cost you personally. Corporate executives who serve in these positions for charities may need to be reminded about this exposure. In February, a U.S. District Court held that the volunteer Chairman of the Board of a tax-exempt hospital was personally liable for withheld payroll taxes that the hospital had failed to pay over to the government. See Verret v. United States, 2008 U.S. Dist. LEXIS 20454; 2008-1 U.S. Tax Cas. (CCH) P50,248; 101 A.F.T.R.2d (RIA) 1223 (E.D. Tex 2008). Stephen Verret served as the Chairman of Doctor’s Hospital, a volunteer role. When he and the rest of the board learned that the hospital’s payroll taxes had not been paid over to the government, Mr. Verret instructed the hospital’s Executive Director to pay them over and ultimately began a search to replace the Executive Director. Unfortunately, it was too little, too late. The hospital subsequently declared bankruptcy, and the IRS assessed Mr. Verret personally as a responsible person for over $400,000 under Code Section 6672.

After paying the full assessment, Mr. Verret sued for a refund, but the court found that he was indeed liable under the law as interpreted by the U.S. Court of Appeals for the Fifth Circuit (the appellate court in question). In ruling against Mr. Verret, the court pointed to his (i) long tenure with the hospital, (ii) familiarity and involvement in facilitating a lending transaction, (iii) signature on the hospital’s annual nonprofit information return, (iv) check signing authority (although rarely, if ever, exercised), and (v) inaction in the face of a deteriorating situation. The court also referenced the fact that Mr. Verret used a CPA to handle his personal affairs, and yet hired a CFO who lacked a college degree and took only one introductory accounting course. The court also rejected Mr. Verret’s argument that Section 6672(e) protected him as a voluntary board member because his knowledge and activities were significantly greater than those of typical voluntary board members.

ERISA Litigation: Recent Court Decisions Uphold Ban on Policy Language Giving Insurers Discretion to Interpret Plan Terms

Alan Horowitz and Josephine Harriott

Two federal district courts recently ruled that states can prohibit language in employee benefits policies that give insurers the discretion to interpret the plan terms, including benefits and eligibility determinations, even when those plans are covered by ERISA. Std. Ins. Co. v. Morrison, 2008 U.S. Dist. LEXIS 16579 (D. Mont. Feb. 27, 2008); Am. Council of Life Insurers v. Watters, 536 F. Supp. 2d 811 (W.D. Mich. 2008). Michigan and Montana are among the many states that have adopted some form of the National Association of Insurance Administrators model rule that prohibits the use of discretionary clauses in regulated insurance policies. The courts found that, although state regulation of ERISA plans is generally preempted, bans on discretionary clauses are permissible under ERISA’s so-called “savings clause” that permits state regulation of insurance.

In the Michigan case, national insurance trade associations argued that insurers are authorized to include discretionary clauses because of the Supreme Court’s 1989 decision in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101. In Firestone, the Supreme Court ruled that unless ERISA plan language gives the administrator discretionary authority to interpret the plan’s terms or to make eligibility determinations, courts review challenges to plan decisions de novo with no deference to the plan administrator’s decisions. Firestone thus apparently recognized that ERISA plans could include discretionary clauses that would allow courts to overturn plan decisions only upon finding an abuse of discretion, a much more deferential standard of review.

The Michigan district court found that the discretionary clause prohibition should be analyzed under the Supreme Court’s 2002 decision in Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355. In Rush, the Court held that ERISA did not preempt an Illinois law mandating de novo review for benefit denials under regulated insurance plans, reasoning that the law was a regulation of insurance that is permissible under the ERISA savings clause. In 2003, the Supreme Court upheld “any willing provider laws” on the same basis. Kentucky Ass’n of Health Plans, Inc. v. Miller, 538 U.S. 329 (2003). The district court held that the effect of the Michigan law prohibiting discretionary clauses is to preclude the application of the abuse of discretion standard and therefore essentially mandates de novo review. Therefore, like the statute in Rush, it is protected by the savings clause.

The Montana Court also based its decision on Rush and Miller, explaining that when Congress included the savings clause in ERISA, it “recognized the traditional role of states in regulating insurance on behalf of state citizens and in accordance with state public-policy objectives. The State Insurance Commissioner, in this role, has removed an advantage to ERISA plan providers and administrators doing business in Montana. This is the straight forward regulation of insurance, a matter ERISA expressly saves from preemption.”

Discretionary clause prohibitions do not apply to self-funded ERISA plans, which are not regulated by the states. The Supreme Court will determine a related issue this year -- the appropriate standard of review of plan determinations by an administrator that both determines and pays claims under an ERISA plan and thus might be considered to be operating under a conflict of interest. Metropolitan Life Ins. Co. v. Glenn, S. Ct. No. 06-923.

For further information, please contact any of the following lawyers:

Alan Horowitz, ahorowitz@milchev.com, 202-626-5839

Josephine Harriott*

Michael Lloyd*

Gary Quintiere*

*Former Miller & Chevalier attorney

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