The U.S. Department of Labor (DOL) and the Employee Benefits Security Administration (EBSA) just issued a “Fact Sheet” describing Fiscal Year 2014 civil and criminal enforcement activity under ERISA.
Here is a copy of the fact sheet.
Key Take Aways on DOL’s Enforcement Efforts:
- EBSA oversees about 684,000 retirement plans, 2.4 million health plans and a similar number of welfare plans. These plans cover about 141 million workers, plus their dependents.
- More criminal investigations, but fewer guilty pleas. In 2014, DOL closed 365 criminal investigations: that is about 30% more than 4 years earlier. It represents a continuing trend of more criminal investigations that started around 2000. They indicted 106 individuals and obtained 85 “guilty pleas or convictions”. This is lower.
- More civil investigations, focused on protection of plan assets and participants’ benefits. The DOL closed about 4000 civil investigations in 2014. This is up in more recent years, but in 2002 there were 25% more civil investigations. The DOL’s strategic plan through 2018 calls for increased civil enforcement.
- Monetary results lower. The Fact Sheet claims $599.7 million was restored through enforcement. This is low compared to more recent years.
- Compliance Assistance. EBSA provides incentives to fiduciaries who voluntarily report and self-correct ERISA violations. About 1643 applications were filed last year to disclose and self-correct violations.
- Late Filings. About 25,000 applications for the Delinquent Filer Voluntary Compliance Program were filed last year.
You already know that ERISA regulations require the plan administrator to render a decision on an administrative appeal within 45 days.
If more time is needed, the ERISA regulations require that the plan administrator notify the beneficiary before the 45 day period expires that more time is needed due to special circumstances.
BUT what should be in the plan administrator’s notice letter to the beneficiary indicating more time is needed?
Here’s the case of Dimery v. Reliance Standard Life Ins. Co., slip op. 12-17550 (9th Cir. March 11, 2015)(unpublished).
FACTS: Dimery sought disability benefits under Genentech’s ERISA-governed plan. Reliance notified Dimery that it wanted an independent medical evaluation, but did not expressly state it needed additional time beyond the 45 day period. On the 64th day, Reliance affirmed the decision terminating Dimery’s benefits.
Dimery sued for wrongful denial of benefits, and argued Reliance’s failure to provide a decision within 45 days required the court to apply de novo review, rather than “abuse of discretion” review.
ISSUE: Whether the plan administrator’s failure to provide adequate notice beyond the 45 day appeal period changes the standard of review to de novo review rather than “abuse of discretion” review?
NINTH CIRCUIT HELD: Abuse of Discretion Review Applied, Despite the Untimely Decision (Due to Inadequate Notice).
- 29 C.F.R. § 2560.503-1(i)(1)(i), (i)(3)(i) requires the plan administrator to render a decision on an administrative appeal of a denial of benefits within 45 days. Extra time is allowed if the administrator provides notice before the 45 day period expires that additional time is required due to special circumstances. Op. at 2.
- The court found that the plan administrator’s notice letter was insufficient. Op. at 3.
- However, “ERISA procedural violations do not alter the standard of review unless violations cause the beneficiary substantive harm.” Op. at 3. “‘[P]rocedural violations of ERISA do not alter the standard of review unless those violations are so flagrant as to alter the substantive relationship between employer and employee….’” Op. at 3.
- Also, there was no evidence the denial of benefits was “necessarily the mechanical result of a violation of the terms of the Plan.” The Plan did not state that a particular result would ensue from a failure to adhere to the time limits for reviewing the denial of benefits. Op. at 3
- Finally, Dimery failed to identify “any substantive harm resulting from Reliance’s untimely decision.” Op. at 3
KEY TAKE AWAY: The notice letter to the beneficiary should expressly state: (1) when the 45 day period expires, and (2) why more time is needed.
How about those Gonzaga University Bulldogs (Men’s Team and Women’s Team) in the Sweet Sixteen?
Does an arbitrary and capricious denial of ERISA governed disability benefits create a right to disgorgement of profits? NO.
The Sixth Circuit helps clarify the point in Rochow v. LINA, __F.3d__, 2015 WL 925794 (6th Cir. Mar. 5, 2015)(PDF)(En banc decision reverses trial court decision ordering about $3 million disgorgement of profits for arbitrary/capricious denial of disability benefits.)
FACTS: Rochow sued LINA claiming it had wrongfully denied ERISA-governed disability benefits. After the district court ruled that the denial of benefits was arbitrary and capricious, and entered judgment in 2005, LINA appealed. The 6th Circuit affirmed the decision in 2007. 482 F.3d 860 (6th Cir. 2007). Plaintiff then moved for an equitable accounting and disgorgement of profits. The district court granted that motion, and ordered LINA to disgorge about $3 million in profits it made on the benefits withheld. LINA appealed, again. This time a divided panel affirmed the disgorgement decision by the trial court. 737 F.3d 415 (6th Cir. 2013). The court granted LINA’s petition for rehearing en banc.
ISSUE: Is Rochow entitled to recover about $3 million in disgorgement of profits for LINA’s arbitrary and capricious denial of long-term disability benefits?
6th Circuit HELD: NO. (Majority 9 judges, Dissent 6 judges).
- The majority decision assumed that the trial court concluded that LINA had breached its fiduciary duty by arbitrarily and capriciously denying benefits. Op. at 6.
- The majority held that Rochow was made whole under § 502(a)(1)(B) through recovery of his disability benefits and attorney’s fees, and potential recovery of prejudgment interest. Op. at 9, 10.
- Allowing Rochow to recover disgorged profits under § 502(a)(3) would result in impermissible duplicative recovery. Op. at 10.
- The Supreme Court has established that “‘where Congress elsewhere provided adequate relief for a beneficiary’s injury, there will likely be no need for further equitable relief, in which case such relief normally would not be appropriate.’” Op. at 8. (emphasis in original).
- There is no cited “case that allowed disgorgement of profits under 502(a)(3) after the claimant recovered for wrongful denial of benefits under 502(a)(1)(B).” Op. at 9.
- Citing Supreme Court precedent, the majority opinion reiterates: equitable relief is available only for injuries caused by violations that § 502 does not elsewhere adequately remedy. Op. at 8.
- The underlying decision incorrectly presented a new measure of damages that would apply virtually every time a court decided benefits were denied on an arbitrary and capricious basis. This would be plainly beyond and inconsistent with ERISA’s purpose to make claimants whole. Op. at 9.
- The court remanded the matter to the district court to consider whether Rochow is entitled to prejudgment interest, cautioning that any interest awarded cannot be “at a rate so high that the award amounts to punitive damages.” Op. at 14.
- The dissent held that breach of fiduciary duty is a separate claim that by definition results in a distinct injury, and therefore supports a distinct remedy. Op. at 27.
KEY TAKE AWAY: With a deep split in the opinions, and vigorous argument on both sides, one should expect to see the disgorgement theory asserted in other cases. The better argument is the one presented by the majority, but there are arguments to make, as shown by the dissent.
You already know that employee benefit plans established by governmental entities are exempt from ERISA.
But ERISA might apply if the employee benefit for the government employee is established through an association. Moreover, you need to make sure the “governmental entity” is actually a “governmental entity” under ERISA. For example, plans that involve both public and private employers may result in ERISA application. See, e.g., South Cent. Indiana Sch. Trust v. Poyner, No. 1:06-cv-1053-RLY-WTL, 2007 U.S. Dist. LEXIS 78804, 2007 WL 3102149, at *5 (S.D. Ind. Oct. 19, 2007) [*5] (”[T]he Plan at issue involves both public and private employers for the benefit of their respective employees. It is therefore subject to ERISA regulation.”)
This issue is highlighted by the recent case of Raible v. Union Security Insurance Co., 2015 WL 746213 (W.D. Pa. February 20, 2015)(PDF) (Court applies very broad definition of “a plan established by government” to conclude government exemption from ERISA applies).
FACTS: Raible was employed as a school nurse in a school district, a government entity in Pennsylvania. Plaintiff also was a member of the Pennsylvania School Board Association (PSBA). PSBA is not a governmental entity. It provided disability benefits, insured by Union Security Insurance Company, to its members.
After her disability benefits were denied, Raible brought a breach of contract action.
Union removed to federal court, contending the claim was governed by ERISA. Union contended the governmental plan exemption did not apply because: (1) PSBA is the policyholder and is not a governmental entity, and (2) the school district did not sponsor the plan.
ISSUE: Is this government employee’s disability benefit governed by ERISA?
HELD: Claim is NOT governed by ERISA.
- “ERISA broadly applies to ‘any employee benefit plan if it is established or maintained by an employer…or by an employee organization…representing employees engaged in commerce.’” Op. at 4.
- “‘[G]overnmental plans’ are expressly exempted under ERISA[.] The term ‘governmental plan’ means a plan established or maintained for its employees by the Government ….” Op. at 4 (Emph. added).
- “[O]ther circuits have constructed [the term] ‘established’ broadly…. Op. at 5.
- The court holds that this plan was “established” by the government because: (a) the school district purchased the plan for the exclusive benefit of its employees through the PSBA Insurance Trust; and (b) The school district is listed as a “participating employer” under the policy. Op. at 6.
Can a participant designate a beneficiary merely with a phone call? You need to look at the plan documents.
But are beneficiary designation forms ERISA “plan documents”? It depends, and it makes a difference.
Here’s the case of Mays-Williams v. Williams, __ F.3d __ (9th Cir. January 28, 2015) (PDF).
The court addresses an issue of first impression: What documents are “plan documents”? The case also shows why that is such an important issue to resolve.
FACTS: Asa Williams divorced his wife, Carmen, in 2006. In 2007, 2008 and 2011 Williams “telephonically undesignated” his former wife, and named his son as beneficiary. Each time, however, Williams failed to return a signed beneficiary designation form. He died in 2011.
After his death his former wife, Carmen, claimed the benefits of the Xerox ERISA-governed benefits. The plan interpleaded the funds into the court.
TRIAL COURT: Because Williams failed to complete the beneficiary form, his former wife was entitled to the ERISA benefits.
NINTH CIRCUIT REVERSES:
- Asa Williams “telephonic undesignations” were valid because “[n]othing in the governing plan documents prevents unmarried participants from designating beneficiaries by phone.” Op. at 13.
- The beneficiary designation forms are NOT plan documents because these forms “simply confirm the participant’s attempt to change his designated beneficiary….” Op. at 9-10.
- “[W]hile the plan documents require written designations for married participants, they decline to impose any sort of writing requirement on unmarried participants.” Op. at 14 (Emph. in original).
- “[O]nly [documents] that provide information as to ‘where [the participant] stands with respect to the plan’, such as a [Summary Plan Description] or trust agreement might, could qualify as governing documents with which a plan administrator must comply in awarding [ERISA] benefits….” Op. at 9.
As you know, ERISA plan administrators must consider Social Security Administration (SSA) disability determinations when making the disability benefit decision.
ERISA plan administrators are not bound by the SSA’s determination. But the benefit denial letter should provide an explanation why the SSA determination was not followed. Failure to provide that explanation raises questions whether the adverse benefits determination was ‘the product of a principled and deliberative reasoning process.’
So, it is always worthwhile to see the latest trends in disability findings from the Social Security Administration.
Here’s the “Annual Statistical Report on the Social Security Disability Program” (SSA Pub. No. 1311826, December 2014):
A few highlights:
1. 35% of people getting Social Security disability benefits have been diagnosed with a mental disorder.
-Massachusetts and New Hampshire have the highest percentage of individuals with a mental disorder: 49.9%.
-Washington D.C. ranks in the top ten of jurisdictions where disabled beneficiaries have a mental disorder diagnosis.
-Alabama, Georgia, South Carolina, Arkansas and Louisiana have the lowest percentage of disabled with mental health diagnoses (28-30%).
2. The total number of SSA disabled beneficiaries has increased 49.7% since 2003.
3. The total number of SSA disabled beneficiaries has increased 14.3% since 2009.
4. 27.7% of disabled individuals have been diagnosed with musculoskeletal issues.
You already know that when a claimant brings suit alleging wrongful denial of ERISA-governed disability benefits, the first issue the court looks at is: what standard of review applies. If the plan or policy includes “discretionary review” language, then the court should affirm the claim decision absent an abuse of discretion. If the plan or policy is silent on the issue, the court applies de novo review.
In recent years, many state insurance regulators have issued regulations or legislation banning discretionary review in ERISA-governed claims decisions. Here in Washington, for example, the Insurance Commissioner issued a regulation banning abuse of discretion language in disability policies.
But other states, like Minnesota, have no such regulation banning discretionary review.
Consider the choice-of-law argument when assessing whether the claim will be reviewed under an abuse of discretion standard.
Here’s the case of Brake v. Hutchinson Technology, Inc., __ F.3d__, 2014 WL 7345692 (8th Cir. December 29, 2014) (Choice of law provision allows abuse of discretion review despite regulation banning discretionary review).
FACTS: Brake, who works in South Dakota, made a claim for ERISA-governed disability benefits provided by her employer, Hutchinson. Hutchinson is based in Minnesota and the long term disability policy was issued in Minnesota. The policy contained language requiring discretionary review, and the plan contained a choice-of-law provision requiring application of Minnesota law. South Dakota has banned discretionary review. Minnesota has no such regulation.
ISSUE: What standard of review applies: South Dakota law and de novo review, or Minnesota law and abuse of discretion review?
8th Circuit Court of Appeals HELD: Minnesota law and the abuse of discretion standard applies.
- “’Where a choice of law is made by an ERISA contract, it should be followed, if not unreasonable or fundamentally unfair.’” Op. at 5.
- “We find nothing unreasonable or fundamentally unfair about enforcing the plan’s Minnesota choice-of-law provision.” Op. at 5.
- The South Dakota ban on discretionary review did not apply because Minnesota law controls.
You already know that the primary responsibility for providing medical proof of disability undoubtedly rests with the claimant.
But does the plan administrator sometimes have an obligation to obtain medical records and information? YES.
Here’s the case of Harrison v. Wells Fargo Bank, N.A., __ F.3d __ (December 5, 2014) (When there is no evidence in the record to refute the beneficiary’s theory of disability, claims administrators have a duty to obtain materially important records from treaters it knows about, or it must advise claimant what specific records are missing.)
HOWEVER: In cases where there is “sufficient evidence in the existing record to refute claimant’s theory of disability, then a plan administrator is not ‘under a duty to secure evidence [to the contrary]’ under such circumstances.”
FACTS: Harrison sought short term disability benefits under an ERISA plan. The plan granted her benefits during her recovery from a surgery, but denied benefits from September 10 to October 31, 2011 even though she had ongoing complications from surgery and also began experiencing depression. Harrison appealed the denial.
Wells Fargo had two peer reviews—one for her alleged physical disability, and one for her alleged mental disability. The peer review on the mental disability claim never contacted Harrison’s treating psychologist, despite being referred to him. The peer reviewer then concluded “in the absence of psychiatric/psychological records or a telephone conference with her psychologist, an opinion as to whether her psychiatric status limited her functional capacity cannot be provided.” Wells Fargo then affirmed the denial, and Harrison sued.
TRIAL COURT HELD: The Claim was properly denied because there was insufficient evidence of impairment, and Wells Fargo did not abuse its discretion in denying the claim.
ISSUE: Whether Wells Fargo had an obligation to obtain records from treaters it knew about, or should have advised claimant of what specific records were missing?
FOURTH CIRCUIT HELD: REVERSED.
- Wells Fargo failed to contact Harrison’s psychologist even though it was on notice that Harrison was seeking treatment from the psychologist, and had a medical release to obtain information from that treater.
- “While the primary responsibility for providing medical proof of disability undoubtedly rests with the claimant, a plan administrator cannot be willfully blind to medical information that may confirm the beneficiary’s theory of disability where there is no evidence in the record to refute that theory.” Op. at 12.
- “[A]dministrators [must] notify a claimant of specific information that they were aware was missing and that was material to the success of the claim.” Op. at 13.
- NOTE: In cases where there is “sufficient evidence in the existing record to refute claimant’s theory of disability, then a plan administrator is not ‘under a duty to secure evidence [to the contrary]’ under such circumstances.” Op. at 14-15.
- “Nothing in our decision requires plan administrators to scour the countryside in search of evidence to bolster a petitioner’s case…. “[T]here is no open-ended duty…to ‘look all over…for a doctor whose testimony might contradict the medical reports from reliable physicians that ha[ve] been submitted.” Op. at 14.
- In this case, Wells Fargo was “repeatedly put on notice that Harrison was seeking psychiatric treatment.” The record did not refute Harrison’s claim of disability. Op. at 16.
- It was “perfectly reasonable for Harrison to assume” that the plan, armed with the release to obtain records from Harrison’s treating psychologist would have obtained those records for consideration in the appeal. Op. at 18.
- Wells Fargo never made it clear to Harrison that records from her treating psychologist were missing and needed. Op. at 19.
KEY TAKE AWAY: This is an expanding trend in the circuits. When the record does not refute the claimant’s alleged disability, and you are on notice of a treater who may have information related to the claim, either: (1) obtain a release and secure the “readily-available” records, or (2) alert the claimant of what specific records are missing.
What happens when a claim denial letter was issued, but the claimant denies ever receiving it, and the administrator can’t produce it?
How does that affect the statute of limitations?
Here’s the case of Witt v. Met Life Ins. Co., __ F.3d __, 2014 WL 6655794 (November 25, 2014)
FACTS: Witt made a claim for ERISA-governed disability benefits in 1997. MetLife administered the claim and on May 1, 1997 issued a letter terminating benefits because Witt failed to provide adequate medical records.
For 12 years Witt did not challenge the termination of benefits. Then, in 2009 Witt wanted to know where his benefits were. He claimed he never received the termination letter. MetLife was unable to produce a copy of the denial letter and agreed to review Witt’s claim, and additional records from 1997-2009. For over a year Met Life heard nothing, and then received some additional records. On May 4, 2012 Met Life upheld its decision to leave Witt’s claim terminated because the newer records also failed to show functional impairment. Witt then sued.
ISSUE: Witt claimed he never received MetLife’s 1997 letter terminating benefits, so the limitations period should start as of May 4, 2012, when MetLife issued a final denial.
HELD: Claim was barred by the statute of limitations
- Congress did not specify a limitations period for ERISA claims. Alabama’s six year statute was applied. Op. at 8
- The limitations period begins when the cause of action accrues. Op. at 8
- “[A] cause of action accrues—and the limitations period begins to run—when the claimant has reason to know that the claim administrator has clearly repudiated the claim or amount sought.” Op. at 9.
- MetLife’s decision to cease providing benefit payments after April 30,1997, and for 12 years thereafter, constitutes “clear and continuing repudiation of Witt’s rights[.]” Op. at 10.
- MetLife clearly repudiated Witt’s benefits claim by May 1, 1998. “We reject Witt’s attempt to exploit MetLife’s failure to locate a 12-year-old document where Witt had reason to know of the acts giving rise to his cause of action, regardless of whether he received the 1997 letter.” Op. at 10, 13.
- By agreeing to review the terminated claim, MetLife did not waive the statute of limitations defense. “[R]equiring ERISA claim administrators to expressly base their reconsideration of a stale claim on timeliness grounds is likely to lead to plans declining to offer courtesy reviews, or any reopening of the administrative process—for fear of waiving a statutory timeliness defense.” Op. at 12-13.
Plan fiduciaries may create a fiduciary duty in stock drop cases by incorporating filings with the Securities and Exchange Commission into the Summary Plan Description.
We have been waiting for the Ninth Circuit to rule on a big case concerning stock drop cases.
Here’s the case of Harris v. Amgen, __ F.3d __ (October 30, 2014) (PDF)(Reversing dismissal of stock drop case: incorporation of the securities filings by reference into the Summary Plan Description created fiduciary duty that may be relied upon in ERISA-governed stock drop case.)
Current and former employees of Amgen participated in ERISA-governed retirement savings plans that qualified as “individual account plans.” The Amgen Common Stock Fund was included as an investment option. Participants brought an ERISA class action after they lost money in their retirement savings accounts when the value of Amgen’s common stock dropped.
DISTRICT COURT HELD. The district court dismissed the breach of fiduciary duty claim and the lawsuit relying on the presumption that offering company stock as an investment option is prudent (commonly known as the “Moench presumption”).
NINTH CIRCUIT PROCEDURAL POSTURE. There is a long appeal history. In 2013, the Ninth Circuit reversed the district court’s dismissal and held that the presumption of prudence did not apply because the plans did not mandate or require investment in employer stock, applying the presumption criteria applicable at the time. The U.S. Supreme Court then granted certiorari and vacated and remanded the case for reconsideration in light of the Supreme Court’s June 25, 2014 decision in Fifth Third Bancorp v. Dudenhoeffer.
NINTH CIRCUIT REVERSES/RATIONALE. The Ninth Circuit again reversed the district court’s dismissal.
- The U.S. Supreme Court held in Fifth Third Bancorp v. Dudenhoeffer, __ U.S. __ (2014) that there is no presumption of prudence for employee stock ownership plan fiduciaries, except in certain limited circumstances.
- Plaintiffs did not have to satisfy the criteria (under prior law) to show that the presumption of prudence was inapplicable.
- Plaintiffs properly stated a claim that the defendants failed to act prudently, and violated their ERISA fiduciary duties, by continuing to offer Amgen common stock as an investment option when they knew or should have known that the stock was being sold at an artificially inflated price.
- If defendants had disclosed adverse safety test results regarding its drug products, they would have concurrently satisfied duties under both the securities laws and ERISA.
- Fiduciaries are under no obligation to violate securities laws in order to satisfy their ERISA fiduciary duties.
- The Summary Plan Descriptions (SPD) incorporated Amgen’s securities filings, including its financial statements, by reference. Consequently, the Ninth Circuit rejected defendants’ argument that assertions made in documents filed with the Securities and Exchange Commission were not made in a fiduciary capacity. Defendants’ preparation and distribution of the SPDs, including the incorporation of the securities filings by reference, were acts performed in their fiduciary capacities, and could be used in the ERISA case.