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Inside Compensation

Developments in Employee Benefits & Executive Compensation

ERISA Liability Insurance: Know What’s Covered . . . And What Isn’t

Posted in Defined Benefit Plans, Defined Contributions Plans, ERISA Litigation

For sponsors and fiduciaries of employee benefit plans, the Amara case has presented many interesting and important issues that have been discussed at length in this blog and elsewhere. However, the most recent chapter in this long-running dispute has not garnered nearly as much attention as either the Supreme Court or Second Circuit decisions that came before it. Nonetheless, this latest decision, Cigna Corporation v. Executive Risk Indemnity, raises a critical issue for plan sponsors and fiduciaries: what is and, perhaps more importantly, what is not, covered by fiduciary and other liability insurance policies.

The facts of the Executive Risk case are relatively straightforward. Cigna sought a declaratory judgment that it was entitled to coverage under its fiduciary liability policies for claims asserted in the Amara case. The insurers denied coverage, relying on a policy exclusion for “deliberately fraudulent or criminal acts or omissions.” The trial court ultimately applied the exclusion and denied coverage.

Given the considerable amount at stake, the decision is undoubtedly important to Cigna, Executive Risk, and the other insurers who were defendants in the case. However, other plan sponsors and fiduciaries would be wise to understand the significance of this decision as well: insurance coverage cases often turn on the language of the insurance policies in question and there generally is not “standard” policy language on many critical issues.

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Risk Management Lessons from a Multi-Million-Dollar Class Action Award

Posted in ERISA Litigation

Not all benefits claims are created equal. At least, not from a risk management perspective. Benefits claims that reach issues applicable to a broad class of participants have the potential to exponentially increase liabilities.

Kifafi v. Hilton illustrates this risk. A recent court order quantified the cost of a judgment that Hilton Hotels and its retirement plan (“Hilton”) violated ERISA’s vesting and anti-backloading requirements. To date, Hilton has paid $33.3 million to more than 11,000 class members, approximately $22 million to Plaintiffs’ counsel, and provided notice of increased benefits to another approximately 5,600 participants.

A single individual’s claim for benefits was the genesis of this multi-million dollar award.

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Oral Misrepresentation Could Support Fiduciary Breach Claim, District Court Holds

Posted in Defined Benefit Plans, Defined Contributions Plans, ERISA Litigation

In Lees v. Munich Reinsurance America, Inc., a federal district court in New Jersey recently held that an oral misrepresentation could serve as the basis for a fiduciary breach claim.

The plaintiff in Lees worked for American Re-Insurance Company (a predecessor of the defendant), but was being paid by a related entity. Several years into his employment, the plaintiff was approached about transferring directly to American’s payroll. The plaintiff alleged that employees in American’s human resources department induced him to agree to the transfer by promising to treat his years with the related entity as pensionable under American’s defined benefit plan.   According to the plaintiff, he accepted this offer in lieu of a signing bonus. Many years later, the plaintiff was informed that the years with the related entity would not be counted. He sued, alleging, among other things, a fiduciary breach claim under ERISA § 502(a)(2). The defendants moved to dismiss.

The court rejected the defendant’s argument that an oral misrepresentation could not support a fiduciary breach claim under ERISA § 502(a)(2). The court’s reasoning focused on 3rd Circuit precedent for finding a fiduciary breach, under which a material, affirmative misrepresentation is required. The court found no requirement that the misrepresentation be written, and declined to impose such a requirement in this case. Despite the evidentiary concerns inherent to oral communications, this decision allows the plaintiff to move forward using alleged oral misrepresentations as the basis of his fiduciary breach claim.

Plan representatives should keep in mind that this is a district court decision at a relatively early stage of litigation. The sky is certainly not falling. However, plan representatives should be aware of what they say to participants and beneficiaries; if a case like this is successful, even inadvertent misstatements could come back to haunt them.

FMLA Protections for Same-Sex Spouses

Posted in Employment

Under a Final Rule recently adopted by the Department of Labor (“DOL”), legally married same-sex couples will be included in the definition of “spouse” under the Family and Medical Leave Act (“FMLA”) and will be eligible to use FMLA leave to care for their spouse or family member, regardless of whether their marriage would be recognized in the state where they live. The Rule is effective March 27, 2015, although at least one state Attorney General has filed an action seeking to enjoin implementation of the Rule.

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Supreme Court Ruling on Agency Flip-Flopping Affects Rules for Benefit Plans

Posted in Health Plans, Welfare Plans

A recent Supreme Court decision, Perez v. Mortgage Bankers Ass’n, highlights two important points about the authority of the U.S. Department of Labor, IRS, and other administrative agencies to interpret rules:

  1. U.S. courts will generally follow administrative interpretations of statutes and an agency’s regulations, except in rare circumstances. This deference extends to “sub-regulatory” guidance, like opinion letters, rulings, notices, amicus briefs, and probably even FAQs posted on a website; and
  2. Agencies have wide latitude to change their minds on interpretive guidance, without any obligation to consult with the public.

The decision illustrates the practical importance of getting involved in the regulatory process, and advocating for important clarifications before regulations are finalized. Although agencies may change interpretive guidance unilaterally, unambiguous regulations generally cannot be changed without advance notice and an opportunity to comment.

Background.  This case involved whether mortgage-loan officers are eligible for overtime under the Fair Labor Standards Act. Continue Reading

Affordable Care Act Issues for U.S. Expatriates

Posted in Health Plans

By now most employers are beginning to come to terms with the Affordable Care Act coverage mandates and reporting requirements that apply to the group health coverage of their U.S. workforce. For global businesses, though, the problems do not stop at the U.S. border. These companies must also determine how ACA affects U.S. citizens and lawful permanent residents working abroad.

Most companies face four major questions concerning health coverage for U.S. expatriates:

  • Must they provide group health coverage to employees working abroad in order to satisfy the employer mandate?
  • Must their employees working abroad maintain a minimum level of health coverage in order to satisfy the individual mandate?
  • If an individual is covered by a foreign group health plan or insurance policy, does that coverage qualify as minimum essential coverage that satisfies the employer and individual mandates?
  • If an employer provides group health coverage to U.S. citizens or residents working abroad, is that coverage subject to the same requirements that apply to employer health coverage in the U.S.?

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Two Recent Cases Offer Cautionary Tale to Plan Sponsors Relying on IRS Guidance

Posted in Defined Benefit Plans, ERISA Litigation

Two cases decided in January—one by the Sixth Circuit and another by the District Court for the District of Columbia—offer a cautionary tale to plan sponsors who rely on a statute or regulation that allows retroactive amendments to tax-qualified plans. Both cases involved a change to the interest and mortality assumptions that pension plans use to calculate the minimum amount of a lump sum distribution. The change was expressly authorized by a statute, but the Pension Benefit Guaranty Corporation said “not so fast”—leaving the plan sponsors responsible for several million dollars in additional liabilities.

The cases offer a cautionary tale for plan sponsors: practices that are permitted in one context will not necessarily be accepted in other contexts. For this reason, it is important to conduct a thorough analysis before relying on agency guidance or accepted practice.

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SEC Hedging Disclosure Proposal Could Cause Companies To Review Trading Policies

Posted in Executive Compensation (US)

On February 9, 2015 the SEC proposed rules, as required by Section 955 of Dodd-Frank, that would require disclosure regarding whether directors, officers and other employees are permitted to hedge or offset any decrease in the market value of equity securities granted by the company as compensation or held, directly or indirectly, by employees or directors.  The purpose of the rules, according to the SEC, is to elicit disclosure regarding whether employees or directors are permitted to engage in transactions that mitigate or avoid the incentive alignment associated with equity ownership.  Companies may wish to review their trading policies in light of the proposed rules.

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Delaware Chancery Court Declines to Enforce Noncompete in California Despite Choice of Law Provision

Posted in Employment

In a recent Delaware Chancery Court case, the court declined to grant a preliminary injunction to enforce a noncompetition covenant against a California resident and former employee, finding the covenant would be unenforceable under California law, despite an explicit choice of law provision in the relevant contract designating Delaware law as the governing law of the contract.  This serves as a reminder that choice of law provisions cannot save otherwise unenforceable noncompetes.  For more information, please see our Covington E-Alert on the case, which is available here.

Lawsuit by Surviving Same-Sex Spouse Raises Windsor Retroactivity Question

Posted in ERISA Litigation

A complaint filed this month against FedEx Corporation and its pension plan asks a court to apply the Supreme Court’s decision in Windsor v. United States retroactively.  The case is Schuett v. FedEx Corporation.  The plaintiff is the surviving same-sex spouse of a FedEx pension plan participant who died six days before the Court issued its opinion in Windsor.

Case background.  The participant and the plaintiff began living as a couple in 1983.  The participant worked as a FedEx delivery driver for 26 years while the plaintiff stayed home to care for the couple’s two children.  The participant was diagnosed with cancer and learned on June 3, 2013, that her condition was terminal.  Already registered as domestic partners in California, the couple held a bedside wedding ceremony June 19, 2013, and the participant died the following day.

Six days later, the Supreme Court held in Windsor that the U.S. Constitution requires federal law to recognize state-sanctioned same-sex marriages.  The Court overturned section 3 of the Defense of Marriage Act (“DOMA”), which defined marriage under federal law to exclude same-sex couples.  The same day, the Court decided Hollingsworth v. Perry, a procedural ruling that effectively reinstated same-sex marriage in California.  The plaintiff obtained a marriage certificate and a judicial order declaring the couple’s marriage legally valid as of June 19, 2013. Continue Reading