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IRS Issues Final Regulations Permitting Plan Sponsors to Eliminate Prohibited Payment Options

Under Internal Revenue Code (?Ç£Code?Ç¥) section 436, unless a defined benefit pension plan sponsored by a debtor in bankruptcy is fully funded, the plan may not make ?Ç£prohibited payments?Ç¥ (i.e., lump sum payments or payments in any other form that exceed the monthly amount under a single life annuity). Moreover, the anti-cutback rule in Code section 411(d)(6) prohibits a plan from being amended to eliminate an optional form of benefit. On November 8, the IRS issued a limited exception to the anti-cutback rules to permit a plan sponsor in bankruptcy to amend its plan to eliminate prohibited payments such as lump sums. The exception applies if the following four conditions are satisfied: first, the enrolled actuary certifies that the plan is less than fully funded; second, the prohibition on making prohibited payments arises because the plan sponsor is a debtor in bankruptcy; third and fourth, the bankruptcy court must issue… Continue Reading

Liability for Fiduciary Breach Not Dischargeable in Personal Bankruptcy

The Department of Labor (?Ç£DOL?Ç¥) sued the president of several related companies to establish his personal liability for more than $67,000 in employee contributions never remitted to the employer sponsored benefit plans and to prevent him from discharging this liability in his pending personal bankruptcy action. Over a nearly three-year period, the companies withheld but never remitted the employee contributions to the companies?ÇÖ group health and 401(k) plans (the ?Ç£Plans?Ç¥). The court concluded that, under ERISA, the president was a ?Ç£functional fiduciary?Ç¥ of the Plans because he exercised discretionary control over plan assets?Çöthe employee contributions?Çöwhen he retained those funds in the companies?ÇÖ general assets to pay other corporate debts, rather than timely remitting them to the Plans as required by ERISA. The president?ÇÖs conduct also violated several other ERISA provisions, including the duty of loyalty, exclusive benefit rule, and prohibited transactions rule. Accordingly, he was personally liable for the unremitted… Continue Reading

Eleventh Circuit Holds No Fiduciary Breach in ESOP Stock Drop Case

The U.S. Court of Appeals for the Eleventh Circuit affirmed dismissal of the claim by plan participants that The Home Depot had violated its fiduciary duties with respect to the ESOP by continuing to offer employer stock as an investment option after certain accounting adjustments caused earnings to be restated and the stock price to fall. Although ultimately the Eleventh Circuit upheld the district court’s decision, it overruled the district court on several points. First, the district court had determined that the plaintiffs’ prudence claim was really a diversification claim in disguise (ESOPs are exempt from the diversification requirement). Alternately, the district court had held that even if the claim were properly a prudence claim, the claim would fail because the participants did not allege that The Home Depot was on “the brink of financial collapse.” The Eleventh Circuit determined that this was a prudence claim, not a diversification claim.… Continue Reading

Federal District Court Holds Fiduciaries Liable for Breach for Excessive Fees and Imprudent Investments

The U.S. Federal District Court for the Western District of Missouri determined that plan fiduciaries breached their fiduciary duties by failing to monitor recordkeeping costs, negotiate rebates, and prudently select and retain investment options. This is a federal district court decision and it differs from positions taken by some federal circuit courts which are precedential, but whether this decision is judicial activism or a new trend will need to play out over time. It is a case worth noting in light of the U.S. Department of Labor?ÇÖs recent initiatives on plan fee disclosure whose compliance deadlines are rapidly approaching. The court considered the revenue sharing agreement with Fidelity for recordkeeping services, as assets of the plan grew, revenue sharing with Fidelity would also grow?Çöeven if Fidelity provided no additional services. If assets declined, Fidelity would request a payment to make up the loss of revenue. The fiduciaries never calculated the… Continue Reading

Bank Is Not Fiduciary and Prohibited Transaction Does Not Occur When Sweeping Funds from Employer Bank Account

The U.S. Federal District Court for the Southern District of Texas dismissed claims that a bank was acting as an ERISA fiduciary when it swept the corporate bank account of a financially distressed employer pursuant to its contract with the employer. The employer had failed to timely remit withheld employee deductions for the health plan to the third party insurer. When the employer entered bankruptcy, the insurer sued the bank under ERISA for the amount of the withheld deductions. The insurer claimed that the bank was a fiduciary and had engaged in a prohibited transaction. The court found that the bank was not a fiduciary because it did not have discretionary control over plan assets nor discretion over administration of the plan. The court further found that the bank did not engage in a prohibited transaction because it did not engage in any transactions with the plan. The transaction in… Continue Reading

NY High Court Holds Fiduciary Insurance Coverage Doesn?ÇÖt Cover Claims Against Employer as Settlor

The Court of Appeals of New York, New York?ÇÖs highest court, dismissed the claim IBM made against the carrier of its excess insurance coverage (an excess policy that covered claims in excess of its ERISA fiduciary insurance policy). A class of participants had sued IBM claiming that amendments IBM made to its pension plan were age discriminatory. Participants filed no ERISA fiduciary claims. IBM settled for $319 million. After exhausting the $25 million limit in its underlying policy, IBM turned to its excess policy with Federal which was a ?Ç£follow form?Ç¥ policy that conformed to the terms and endorsements of the underlying Zurich Policy. The excess policy covered ?Ç£any breach of the responsibilities, obligations or duties by an Insured which are imposed upon a fiduciary of [a plan by ERISA, other U.S. law or] ERISA equivalent laws in any jurisdiction, [ ] any other matter claimed against an Insured solely… Continue Reading

Fourth Circuit Remands Fiduciary Breach Case to District Court to Determine Damages

The United States Court of Appeals for the Fourth Circuit recently remanded a case to the district court, after the district court found that the trustees of a multiemployer pension plan were liable for a breach of fiduciary duty to investigate investment alternatives. On appeal, the trustees argued that the district court erred in holding them liable for a breach of fiduciary duty because, although the court found a breach of the duty to investigate, it made no finding that the trustees held imprudent investments, and ERISA fiduciaries are not liable for damages for a fiduciary breach in the absence of losses arising from the breach. The Fourth Circuit agreed, ruling that simply finding a failure to investigate or diversify does not automatically equate to causation of loss and liability. On remand, the district court must determine whether the trustees?ÇÖ failure to investigate alternatives caused them to make imprudent investments… Continue Reading

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